Peterson Wealth Advisory Blog

Increased Retirement Plan Contribution Limits

2011-11-02T08:57:00.003-04:00

For the first time since 2009, the IRS has raised the contribution cap on 401(k), 403(b), most 457 plans, and the government's Thrift Savings Plan in its cost-of-living-adjustment for 2012. Important changes include:

401(k) and 403(b) elective deferrals were increased to $17,000, up from $16,500 last year; the catch-up elective deferral limit remained at $5,500
Defined Benefit plan benefit limits moved higher to $200,000, up from $195,000 last year
Annual contribution plan limits rose to $50,000, up from $49,000 last year
Annual compensation limits were raised to $250,000, up from $245,000 last year
The threshold for highly compensated employees moved higher to $115,000, up from $110,000 last year
The taxable wage base for social security rose to $110,100, up from $108,600 last year
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011; for married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000; for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011; for singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000; for a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000
The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250

Managing Your Retirement - Part IV

2011-09-29T10:09:00.002-04:00

Prioritize Asset Withdrawals

As you require income, Peterson Wealth Advisory will guide you in choosing the order in which to sell assets.

When you start taking federally mandated RMDs from your traditional IRAs and employer-sponsored retirement accounts (with the possible exception of Roth 401(k)s), you’ll want to use these funds for your spending needs before you tap any other accounts. But until then, we will base recommendations on two important considerations:

• Maintain allocation targets and diversification; possibly use the withdrawal as an opportunity to bring allocations back into balance.

• Keep your assets growing at the highest degree possible and at a comfortable risk level.

These goals may appear to be conflicting at times, however, as a rule of thumb rebalancing is generally considered to be more important. Each retiree’s situation is unique, so there are exceptions.

Sell to Keep Your Investment Mix on Target

We may suggest you start withdrawing funds from the portion of your portfolio that has become over concentrated in one type of investment. For example, if the stock market has grown rapidly and your target mix of 60% stocks and 40% bonds has become a lopsided 65% stocks and 35% bonds, we may suggest selling stocks in order to adjust your investment mix, reduce the portfolio’s risk level, and produce income.

Sell to Maximize Asset Growth

The next best thing to not paying taxes is paying as little as possible for as long as possible. Consequently, we may recommend withdrawing your assets in this order:

• Taxable assets.

• Tax-deferred assets in traditional IRAs and employer-sponsored plans.

• Tax-free assets in Roth IRAs.

Here’s the reasoning: In taxable accounts, you’re paying tax each year on the dividends interest, and capital gains that your assets produce. You also may pay taxes on the withdrawals themselves if your assets have appreciated in value. In tax-deferred accounts, you pay tax only when assets are withdrawn, even on gains. In Roth IRAs, you pay no taxes provided certain conditions are met, including holding the account for at least five years and being 59 ½. You can even pass the assets on tax-free to your heirs.

If you’re participating in the new Roth 401(k), you can avoid taking RMDs by rolling your money in the Roth 401(k) over into a Roth IRA. Otherwise, you’ll be required to start making withdrawals from the Roth 401(k) in the year after you reach age 701/2.

Fine-Tune Your Withdrawals

Withdrawals can be fine-tuned further, either to gain as much tax efficiency as possible or to help you meet specific financial goals. Some examples of withdrawal tactics include:

• Sell taxable assets that have lost money.

• Sell taxable assets you’ve held longer than a year.

• Sell tax-deferred assets when conditions are right.

Peterson Wealth Advisory will check your investment mix after you sell assets and will rebalance your portfolio if necessary. However, if your primary goal is to maximize the amount you leave to your heirs, a different approach may be advised. In this case, you may want to continue to hold taxable assets that have risen significantly in value.

What about the equity in your home?

More and more retired homeowners are considering reverse mortgage loans, which let you tap the value of your house without selling it. Here’s how they work: A lender grants you a loan against the equity in your home, which is repaid when your house is sold—usually after your death.

A reverse mortgage loan offers several advantages: You don’t have to repay the loan while you live in your house; you can’t be evicted; and you owe no income tax on the loan. Reverse mortgage lenders, however, charge steep up-front fees—as much as 10% of the loan value or more. The loan must be repaid before the property can passed on to another individual.

Managing Your Retirement - Part III

2011-09-29T10:05:00.002-04:00

How much can I live on this year?

Continuing with the third installment of the “How to Manage Your Retirement” series we consider the amount of money you can take out each year. This key step helps guard against overspending and increases the longevity of your assets. Click here for Part I and here for Part II in the series.

PLAN YOUR ASSET WITHDRAWALS

To prevent exhausting your savings it is important to calculate your monthly/annual withdrawal amount. There are two generally recommended withdrawal methods both requiring you to sell a portion of assets to produce retirement income. Your assets include the interest, dividends, and capital gains you’ve reinvested, along with your principal.

It may make sense to sell assets once or twice a year and place the funds in a money market account that has check writing privileges. For convenience, you could also deposit ongoing income payments, such as Social Security and pension, in this account.

Choosing Your Withdrawal Method

There are two basic methods for turning your assets into income, and each has advantages and disadvantages. As you consider the two methods, keep in mind that the income produced by Method 1 isn’t tied to market conditions and the annual income produced will be predictable. However, the income produced by Method 2 is directly tied to the performance of financial markets every year and will fluctuate.

Method 1: Dollar-Adjusted Withdrawals

Using this method, you withdraw 3% to 4% of your portfolio the first year. Each subsequent year the dollar amount of your withdrawal increases by the previous year’s inflation rate. The initial withdrawal will be based on what you’ll need in order to cover the differences between your income and expenses.

With this method, withdrawals are relatively predictable and generally keep pace with inflation. However, if the market should undergo a prolonged downturn during the first few years of retirement, your assets could be substantially depleted. That’s because as your portfolio value shrinks, you’ll be spending a larger percentage of your portfolio than you had originally intended. In this situation, it may be wise to recalculate your withdrawals so that you do not continue to overspend.

Here’s a three-year example of the dollar-adjusted method for a retiree, Sarah, who has a $500,000 portfolio and decides on a 3% withdrawal rate:

•First year. Sarah withdraws $15,000: 3% of the portfolio balance.

•Second year. Sarah withdraws $15,600: the previous year’s amount ($15,000) increased by an amount to take into account a 4% inflation rate ($600).

•Third year. Sarah withdraws $16,380: the prior year’s inflation-adjusted withdrawal ($15,600) bumped up by a 5% inflation rate ($780).

Method 2: Percentage Withdrawals

Using this method, you withdraw the same percentage annually from your portfolio.

Annual withdrawals aren’t increased for inflation; instead, this method counts on long-term portfolio growth to take care of adjusting for inflation. Recent studies and analysis indicates that an annual withdrawal rate between 4% and 5% is reasonable. The recommended percentage will be based on the amount you’ll need to cover the difference between your income and expenses.

Here’s how a retiree, Liberty, would use the percentage-withdrawal method over a three-year period. Liberty starts out with a $500,000 portfolio and chooses a 5% annual withdrawal rate:

•First year. Liberty withdraws $25,000: 5% of her portfolio balance.

•Second year. The portfolio has grown to $530,000: Liberty withdraws $26,500 (5%).

•Third year. The portfolio has declined to $450,000: Liberty withdraws $22,500 (5% but 15% less than in the second year).

Liberty has to discipline herself to spend less during periods when her portfolio balance drops. For example, if after the third year shown in the example, the portfolio declines again, say by 10%, her income would drop to $19,238—about 23% lower than the first year’s withdrawal.

Method 2 is easier to use and can mean your assets will last longer. But your income stream will fluctuate—significantly at times. This means during periods when your income drops you’ll have to discipline yourself to spend less. On the other hand, during years when the market is performing well, you’ll have the enviable task of deciding whether to withdraw the amount that exceeds your spending needs or leave it in the portfolio to potentially grow for future needs.

Managing Your Retirement - Part II

2011-09-29T10:00:00.002-04:00

Organize, Share, Simplify

Your plans for retirement involve more than just financial calculations. You also need to make sure that those you care about understand your plans and have access to important information.

Here are a few steps to consider:

• Periodically update your beneficiary designations. These will supersede instructions in your will.

• Make sure important documents and records are easy for your family to locate. These should include your will; trust documents; insurance policies; a detailed listing of your assets, including account numbers and dollar amounts; and a durable power of attorney.

• Involve your family. Because your financial decisions affect your spouse and other family members, you should prepare them to assume responsibility if necessary. Discuss your plans with them and make sure they are familiar—and comfortable—with your decisions.

• Simplify your finances. It may be beneficial to consolidate your assets with a single company. This can lower your expenses and make it easier to track your financial situation and calculate your Required Minimum Distributions (RMD) each year. It can also reduce your paperwork at tax time. In addition, it can ease the transition should a family member have to take charge of your finances.

ADJUST YOUR PORTFOLIO

Before you begin drawing income from your investment portfolio, it is prudent to adjust your investment mix so it is more appropriate for your current circumstances.

Here are some common misconceptions regarding retirement portfolios:

Myth #1: Stocks are too risky for retirees.

Not necessarily. If you were comfortable with a certain proportion of stocks in your portfolio before you retired, chances are that you’ll be comfortable with that same proportion for some time during your retirement. Although we may recommend reducing the proportion of stocks as you move further into retirement, you may still want to maintain the growth potential that stocks can provide.

Myth #2: Bonds are the best investment for retirees because they produce income.

The interest that bonds generate can be an important source of income (possibly tax-free), and bonds can provide the balance and diversity critical to all portfolios. But you may also need stocks in the mix. Although past performance doesn’t guarantee future returns, retiree portfolios usually need the kind of inflation-beating growth that stocks have historically delivered.

All investing is subject to risk. Bond investments are subject to interest rate, credit, and inflation risk.

Myth #3: For safety, stick with short-term reserves.

Short-term reserves, including money market funds, bank certificates of deposit, and U.S. Treasury bills, do offer stability and relative safety. As a result, they can be a great source of liquidity or a place to store cash temporarily. But historically, short-term reserves have barely kept ahead of inflation and typically yield far less than other types of investments. Most retirees should not keep a significant portion of their assets in these kinds of accounts.

Maintain Some Liquidity

When you have unexpected expenses, a small liquid account—usually a money market account—can help you avoid having to sell portfolio assets at an inopportune time. Depending on your circumstances a cash cushion equivalent to one year of living expenses can help ease your mind and allow you keep your other assets invested for future retirement needs.

Plan For Inflation

It is very important to consider the impact of inflation on your financial plan. Too many times this silent stealer of money and purchasing power is overlooked or ignored. Even at a moderate 3% annual inflation rate, you’ll need income of about $270,000 in 20 years to buy what $150,000 buys today.

A Balanced, Diversified Portfolio is Important

Inflation is only one factor we will consider in evaluating your investment mix. One type of investment alone—stocks, bonds, or cash—is not likely to maximize a portfolio’s success. A mix of investments can provide the balance of growth, income, and stability that allows a portfolio to better withstand the fluctuations in financial markets.

We will aim to create a balanced and diversified investment mix and control risk as much as possible, rather than concentrate solely on producing the highest portfolio returns. But keep in mind that diversification does not ensure a profit or protect against a loss in a declining market.

Managing Your Retirement - Part I

2011-09-29T09:56:00.001-04:00

Planning now will make a difference later. Whether retirement is on the horizon or you’re already retired, now is the time to work closely with Peterson Wealth Advisory to develop a plan for financing the years ahead.

You've worked hard, you've saved, and you've planned but it can be overwhelming trying to figure out how to make your money last 25 or 35 years. That’s why it’s important to create a financial plan designed to achieve that objective.

Parts of your plan will be familiar because the same principles you used to build your wealth—balanced, diversified, low-cost, long-term investing—also dictate how you should invest during retirement.

You will also face some new decisions that will call for guidance and advice from a financial expert: What kind of investment mix will suit your risk tolerance while still allowing your assets to keep up with inflation? How much can you safely withdraw from your portfolio each year? How do you minimize the impact of taxes on your wealth?

Careful advance planning and ongoing consultation can help you answer these questions and enjoy the kind of retirement that you've always considered desirable. As part of a four part series I will be discussing how to manage your retirement. This month’s issue will help examine present circumstances and adjusting your investments.

EVALUATE YOUR CURRENT SITUATION

For many people, retirement can last a long time. According to the U.S. Department of Health the current life expectancy for men in the United States is 75 years and 80 for women. But these averages understate an important fact: As cited in one of my previous newsletters, life expectancy increases as you grow older.

A 65-year old man has a 41% chance of living to age 85 and 20% chance of living to age 90.
A 65-year old woman has a 53% chance of living to age 85 and a 32% chance of living to age 90.

There’s a reasonable possibility that your retirement could last 25 to 30 years. That’s why it’s critical to make sure you’re prepared.

Keep an eye on cash flow: Once you’re retired, it’s essential to watch your cash flow and estimate your income and expenses each year. This practice can help us spot potential financial problems and make adjustments that will help keep your retirement plan on track.

Estimate your income and expenses: When you estimate your expenses, it can be helpful to separate them into nondiscretionary and discretionary categories.

• Nondiscretionary: These are basic expenses, such as food, mortgage payments, insurance premiums, taxes, gasoline, and utilities.

• Discretionary: These are optional expenses, such as travel, hobbies, gifts, and charitable contributions.

When considering your sources of income, include such things as Social Security benefits, pensions, veterans’ benefits, royalties, real estate contracts, rents from investment properties, dividends, and interest.

Depending on your age, you may also need to include the required minimum distributions (RMDs) that you must take from your traditional IRAs and qualified retirement plans such as a 401(k)’s. Federal law mandates that you generally must start making withdrawals from these accounts by April 1 in the year after you turn age 70 1/2. Remember that withdrawals made from a tax-deferred plan before age 59 1/2 may be subject to ordinary income tax, plus a 10% federal penalty tax.

Using your estimated expenses and sources of ongoing income, we can determine approximately how much you will need to withdraw from your investment portfolio each year.

REVIEW YOUR INSURANCE COVERAGE

Large, unexpected expenses can damage the best-laid retirement plans, but adequate insurance coverage can help protect you against many of these expenses. That’s why you’ll want to make sure your coverage is sufficient on all your policies.

Medicare: During your retirement, you also may incur insurance costs specific to retirees. For example, retirees age 65 and older qualify for Medicare health insurance, but must pay a monthly fee for the coverage. And because Medicare doesn’t cover all health care costs, most people purchase Medigap insurance to fill the holes in Medicare coverage.

Many states offer a Medicare managed care plan as an alternative to regular Medicare coverage. While these plans may cover some expenses that Medicare doesn't, they limit participants to certain doctors and hospitals.

Medicare Part D: Prescription drug coverage through Medicare was introduced on January 1, 2006. Known as Medicare Part D, the program gives recipients a choice of drug plans, provided by private companies, which are designed to suit a variety of medical and financial needs. Visit the Medicare website (www.medicare.gov) for details about the plans and tools to help you determine which one suits your needs. Read the fine print – most policies limit many medications to generic prescription medications.

Long-term care: Medicare provides little help if you require long-term assistance with everyday activities. Consequently, many retirees purchase long-term care insurance to try to prevent having their savings devastated, should they require such care. Long-term care insurance can be complicated and expensive but we are here to help evaluate the coverage appropriate for you.

Life insurance: While providing for the needs of a spouse or immediate family, life insurance can also be a valuable estate-planning tool. Depending on your level of wealth and the type of capital, a life insurance policy can be used for buy-sell business agreements, estate taxes, and liquidity needs.

There is also the scenario where you may not require a life insurance policy any more. It depends on factors including the amount of assets you have saved, pension or other income that would cease when you die, or major debts such as a mortgage or loans for children in college.

If you own a cash-value life insurance policy, you have several choices: Cash it out and incur taxes; exchange the cash value of the policy, tax-free, into an annuity; or keep the policy for estate planning purposes.

Annuities: These are insurance products designed to pay income as long as you live. Certain annuities allow you to name a recipient of the income after your death. Many retirees purchase annuities to provide ongoing income that supplements Social Security and pensions.

Some annuities make fixed payments, while others make payments that increase over time. Some generate variable income based on the performance of the underlying mutual funds you select. Keep in mind that variable annuities are subject to market risk.

The trade-off for many annuities is that, upon your death, any remaining principal stays with the company issuing the annuity and is not available to your heirs. The upside is that, if you live long enough, you may exhaust the principal. Annuities can be complicated, expensive, and restrictive. Consider these as a last resort.

REVIEW YOUR LIVING SITUATION

Retirement is also a time to look at your living situation. Begin by asking yourself how well your current home works for you. Things to consider include: size, upkeep, physical limitations and accessibility, property taxes, insurance, etc.

Downsizing to a smaller home allows you to free up cash. In addition, capital gains of up to $250,000 ($500,000 for a married couple) from the sale of your house are free of federal income tax. Your savings may be even greater if you relocate to an area with lower living costs and low (or no) state and local income taxes.

Expat: Foreign Job - Foreign Rules

2011-09-26T12:05:00.005-04:00

Taking a new position overseas may be bring career growth opportunities and offer a fun change but it also brings many financial planning challenges. Generally, people go overseas for three- or five-years. During that time, they will work with other expats or foreign citizens and talk about how they invest. This is just one of the reasons why U.S. citizens with jobs and money outside the U.S. need additional financial advice.

Most countries tax only the income earned within its borders - but not the United States. Federal law requires that U.S. citizens and legal residents declare any foreign account and pay taxes on the income it generates. Fines for not filing a Report of Foreign Bank and Financial Accounts disclosure form can total $100,000 per year for each account, or half an account's balance on the June 30 filing deadline for each year a violation occurred, if the IRS concludes that the failure to file was deliberate. On top of the penalties, account holders must pay the taxes due, plus interest.

Some account holders don't think they could owe U.S. taxes because they don't live in the U.S. They are wrong. Among the laws on foreign accounts held by U.S. taxpayers: Account holders must pay taxes on all income, regardless of its source. Also, taxpayers who have more than $10,000 in an account any time during the year must file a disclosure form each June 30, even if an account generated no income.

Decades ago, people may never have learned about delinquent tax bills. But the IRS has gotten much better at finding all kinds of foreign accounts and their owners.

Employers often include tax preparation in contracts to comply with U.S. law, and some will equalize or pay your foreign taxes. Make sure all local taxes and filings in the foreign country are in by there due dates. This may require you to hire a local tax expert. Expats may be eligible for foreign tax exclusions, deductions or credits to protect against being taxed twice on the same income.

Americans who go abroad for work often have international accounts. Some of these investments may be investments outside the United States but these investments don't have the same tax reporting requirements. For instance, you will not receive a Form 1099 to use when filing a tax return.

Since foreign investments are an area of concern it makes sense to avoid them or when possible to repatriate your money. Some overseas accounts, particularly those in passive foreign investment companies, may have surrender fees of up to 50% and may require you to keep contributing until retirement.

Foreign country laws may void legal documents and asses higher taxes on estates. To protect your estate plan expats can specify in their wills that U.S. law should govern their estates. In any case, you should consult an attorney specializing in the area of expatriate law.

It is also wise to make sure your insurance will be accepted in the country where you will be living.

Beneficiary Designations

2011-09-20T15:18:00.004-04:00

Who do you want your money to go to? What are your intentions and wishes for your money should be spent? These are just two of the questions that can and should be answered by your designated beneficiaries.

You as the account owner choose one or more beneficiaries to receive all or a portion of the accounts assets upon the your death. The beneficiary can be an individual or entity (trust or charity) and is split in specific percentages determined by you.

It is important to consider the designated beneficiary for tax, estate, and probate reasons. There are specific rules and wording that is required to make sure your wishes are enacted in a timely and smooth manner. Here are some key considerations when filling out your beneficiary forms for company retirement plans, life insurance, IRAs and other assets.

When you name a beneficiary, those assets go directly to the designated person and do not go through probate court. This is helpful to surviving family members so that they can keep paying bills and won’t be forced to sell prized or depressed assets.

Beneficiary designations have a higher standing than instructions in your will. For instance, if your life insurance policy names your daughter as beneficiary but for some reason you have in your will that your son will receive the life insurance, the money will go to your daughter. So, make sure your beneficiary forms are up to date and match your wishes at that time. With that in mind, it is important to review beneficiary designations at least annually or as major life events occur. Changes or additions to testamentary trusts, relocating, change of job, etc. all can require updates to your beneficiary forms.

Taxes: Right now, the federal government charges taxes on estates above $5 million for individuals or $10 million for married couples. As of right now, this tax law is only in place through 2012. Individual states have their own estate tax rules that you have to be mindful of. If you designate a beneficiary other than your spouse to receive assets, that amount will be included in your estate. Once distributed, the beneficiary will pay taxes in the same manner (either capital gains or interest income) as the previous owner.

Retirement Plans

With all retirement plans it is best to have a primary and contingent beneficiary. This way you will direct who receives your assets instead of having a judge determine the outcome. If you have minor children, it is wise to set up a testamentary trust. To make sure the trust is funded with your money, ask your attorney for the specific phrasing to write on your beneficiary form.

Roth IRAs: At death, IRA minimum distribution rules apply and the Roth IRA must be distributed within 5 years of the owner’s death if no beneficiary is designated. However, if there is a designated beneficiary, distributions may be over the life expectancy of the designated beneficiary and must commence before the end of the calendar year following the year of the owner’s death. If the sole designated beneficiary is the owner’s surviving spouse, the spouse may treat the Roth IRA as his or her own and not take distributions.

401(k): By law, the current spouse is to receive assets inside a 401(k) upon death. If you wish to have someone other than your living spouse be the beneficiary of your account, they will have to sign a form allowing someone else to be the beneficiary. If you remarry and want your kids from the first marriage to receive the money, your second spouse will need to sign the release form.

Spousal IRA

2011-09-06T15:51:00.003-04:00

Stay-at-home parents or those taking a sabbatical can still save for retirement through a Spousal IRA. Just like any other IRA, the account and contributions are the property of the of the non-working spouse. Here's what you need to know to take advantage of yearly contributions and stay on the right path to retire comfortably.

Traditional IRA
A nonworking spouse can make a deductible IRA contribution of up to $5,000 for 2011 ($6,000 if age 50 or older as of 12/31/11) as long as the couple files a joint return, and the working spouse has an equal or larger amount of earned income. Nonworking spouse contribution's for 2011 are deductible up to specific limits and if the working spouse is an active participant in an employer qualified plan (401(k), SIMPLE IRA, etc.). The deduction phases out for couples with adjusted gross income (AGI) between $169,000 and $179,000. The working spouse's may make a deductible IRA contribution for 2011 if AGI is between $90,000 and $110,000.

Roth IRA Contributions

Non-working spouses also have the option of contributing to a Roth IRA. Roth account earnings along with the contributions can be withdrawn tax-free after age 59 1/2, provided the account has been open at least five years. Eligibility to contribute to a Roth IRA for 2011 is phased out between AGI of $169,000 and $179,000 for couples filing jointly, and between $107,000 and $122,000 for singles.

Other IRA Rules & Qualifications

When neither spouse participates in a qualified retirement plan, both the nonworking and the working spouse can each make deductible contributions of up to $5,000 ($6,000 when age 50 or above in that taxable year) to traditional IRAs regardless of AGI.

Similarly, when both spouses work but neither participates in a qualified retirement plan, both can make deductible IRA contributions of up to $5,000 in 2011 regardless of the couple's AGI. The only limitation is that they must have at least $10,000 of earned income between them.

If both spouses work, and both participate in qualified retirement plans then AGI-based phase-out range of $90,000 to $110,000 applies to both spouses.

When both spouses work but only one is a participant in a qualified retirement plan, the participant spouse's ability to make deductible contributions for 2011 is limited by the $90,000 to $110,000 phase-out range. The nonparticipant spouse is covered by the $169,000-to-$179,000 phase-out range explained earlier. This allows the non-participant spouse to contribute and deduct up to $5,000.

Wash Sale Rule

2011-08-04T10:39:00.004-04:00

A loss on the sale of stock or other securities is not recognized for tax purposes if a purchase of a similar stock or security puts the taxpayer in the same investment position. This rule applies to any sale where the taxpayer acquires substantially identical securities during the 30 days after before or 30 days after the sale. The rule will also apply to purchases of options to buy substantially identical securities during the same period.

The definition of substantially identical depends on the facts of the situation. For individual stocks, it's a simple affair not to run afoul of the wash sale rule. You simply need to sell your stock for a loss, and then if you want to continue market exposure, you just need to make sure that you're in a different stock. With mutual funds and exchange-traded funds, it gets trickier to book your loss in one fund and redeploy into another. For example, in the case of index funds, don't switch out of one family's fund and into another fund company that tracks the same index.

If you're trying to keep exposure to a particular size or style of stocks, there are different indexes that can help you accomplish your goal, such as the capitalization weighted S&P 500 Index versus an equal-weight index.

Also, if you thought you might be able to get around the wash sale rule by replacing the sold security with the same or substantially identical one in your IRA, think again. In 2007, Revenue Ruling 2008-5, the IRS explicitly said this would run afoul of the wash sale rule.

Take Control

2011-07-27T09:13:00.007-04:00

Some people can't sit in the living room without holding the TV remote. Others find it hard to be the passenger in a vehicle. Investing for some can be just as unnerving because they are releasing control of their money. It's important to realize you are not relieving all your influence over money when buying stocks, bonds, and other types of assets

As an advisor and investor, we can control three major factors:

1. Costs

2. Taxes

3. Asset Allocation

Costs are controlled by using low expense index funds and trading infrequently. Index funds are passively managed meaning the investments inside the fund stay the same over long periods of time. This keeps brokerage costs low and a fund manager does not have to be paid to actively maneuver your money. According to Lipper, the average cost of actively managed funds is 1.18%. Vanguard index funds average 0.16%. An added benefit to using index funds is that they perform better than about 70% to 80% of active managers in a given year.

Taxes can be minimized and or avoided by using different types of investments and accounts. Index funds, with their low turnover, give little to any capital gains distributions. Capital gains are only realized when an investment is sold, giving the owner the flexibility to decide when to pay taxes. Using IRAs, a 401k, and other tax sheltered accounts allows you to avoid paying taxes on income, dividends and capital gains.

Asset Allocation controls how much risk you are taking with your investments. By owning different investments such as stocks, bonds, and commodities allows an advisor and investor to limit potential losses. Allocating across sub categories controls risk and return to a higher degree. In fact, academic studies have shown asset allocation determines over 90% of a portfolios return.

While we can't control everything when it comes to investing, some areas can still be managed to your benefit.

We All Fall Down

2011-07-19T05:40:00.008-04:00

Lately, I have been getting many questions about what is going to happen if:

#1 the U.S. loses its AAA credit rating?

#2 the debt ceiling isn't raised by August 2nd?

#3 law makers can't agree to a budget?

I tell them it is best to be cautious at this moment because we have never had to deal with this issue and there are a lot of bad ideas being floated around.

In most instances, stocks go up when treasury bonds go down and vice a versa. This provides diversification to your investments and can help avoid wild swings in your account balances from month to month.

So far, the bond market doesn't seem to be worried as interest rates on the 10 year Treasury Note have been moving down over the past 4-months (when rates go down, prices go up). Bond prices are moving higher by European problems and the belief that an agreement will occur over the debt ceiling/budget.

Meanwhile, stocks have been about even with swings up if investors hear news that a deal is imminent and go down if the two sides stop talks. Earnings by corporations have been uneven for the 2nd quarter adding to the gyrations in the market.

What happen's if we go past the arbitrary August 2nd deadline and there is no solution? First, there is no consensus among economists, politicians, or financial analysts as to what will happen to stock and bond prices because we have never had this scenario of not increasing the debt ceiling. There is a lot of scare tactics going on right now to try to push one side to an agreement.

That being said, my biggest fear is that stocks and bonds will go down in tandem and stir up panic across the world. One would be wise to approach these events by being cautious, cutting back on the amount of stock investments, having short-term bonds and keeping some extra cash. Gold is a good hedge against this uncertainty. If a big sell-off happens one will have money to buy at temporarily lower prices. I say temporary because a deal will certainly be reached by Congress and the President in short order pushing prices on investments back up.

Long-term, the AAA rating will remain an issue because unfunded entitlement programs are enormous and will put future financial strain on our economy. Slow economic growth is not raising the necessary tax revenue to pay for current government spending. The idea of raising tax rates is akin to what politicians did in the mid-1930's helping to prolong the Great Depression. How our current budget problem is solved and over how many years will determine if we keep the AAA rating.

No one knows exactly what will happen so it is prudent to remain cautious during these one of a kind economic events.

Apps for Personal Finance and Purchases

2011-06-22T13:23:00.012-04:00

Choosing personal finance applications or "apps" to use on your smart phone or tablet computer can be time consuming and at times confusing. To help you save time and money, I used my iPad and iPhone to compile a list of the best reviewed apps to help manage your finances. Other devices using the Android operating system may offer the same or similar apps.

Pageonce (Cost: Free for ad supported; 12.99 for Pro) Pageonce automatically organizes and tracks your money and bills. You can see your banks, credit cards, bills and investment accounts in one centralized place. This application also allows you to track other activity, such as your Amazon.com account, cell phone usage and real-time updates on flights. Pageonce is shielded by 256-bit encryption, and the company sends you an e-mail alert of suspicious activity if "you" spend above your usual levels.

Mint.com (Cost: Free) Similar to Pageonce, Mint's app allow you to manage your finances on the go allowing you to see all your accounts on one page. Mint automatically pulls in and categorizes your transactions daily. It will also create a budget based on your spending habits or you can customize your budget. Another nice feature is email or text alerts for payment due dates, low balances, and unusual activity. Mint is protected by a unique 4 digit PIN and your account can be deactivated if you lose your phone.

Loan Calculator Pro (Cost: $0.99) This is an easy to use financial calculator enabling you to calculate monthly payments for fixed rate loans such as home mortgages, car loans and credit cards. You can also see how additional payments will help you increase equity and save you money.

CNBC RT (Cost: Free) This has breaking news updates, interactive charts and real time quotes for stocks, indexes, and commodities. Navigation is simple and easy to understand between news, indexes and pre-market opening prices. You can also create a "My Stocks" list for funds or individual stocks you are tracking.

Amazon.com (Cost: Free) I tried Red Alert, a scanning application that allows you to take a picture of the bar code on a product which then looks up competitors prices giving you the best deal. It was hard to line up the bar code or keep the phone steady enough for Red Alert to work properly. Instead, I use Amazon.com to input the product and model number to look up prices. Amazon offers great prices, no sales tax (most of the time), and free shipping. Customer service is also very good.

Grocery IQ (Cost: Free) Either type or scan the barcodes for products you are running low on. You can create lists for multiple stores, add product details, and share your list. Because you need to enter only a few letters of any word, drawing up your list is incredibly quick. Even better, you can check off each item as you buy it — and if you tell Grocery IQ about the layout of your neighborhood market, it will sort the list according to aisle number.

Index Investing

2011-06-17T08:56:00.003-04:00

Indexing is an investment approach that seeks to track the performance of a specific benchmark, or index. Index funds do this by holding all (or a sample) of the securities in the index being tracked. This “passive” investment approach emphasizes broad diversification, limited trading of the securities held in the portfolio, and low costs. The emphasis of indexing is on broad areas of the market and not individual securities.

THE BENEFITS OF INDEXING

Diversification

Maintaining a well-diversified portfolio is an essential part of a solid investment plan. Indexing can be an ideal way to achieve diversification. It’s difficult for actively managed funds to compete with index funds when it comes to diversification because index funds generally hold most or all of the securities in their target indexes. An actively managed fund typically holds a much smaller selection of securities that the fund manager believes will outperform its benchmark index. Although the diversification that index funds offer can’t protect you against broad market declines, it can reduce the risk posed by a dramatic decline in any one security or economic area.

Low Costs

Index funds have a return advantage from the beginning compared to actively managed fund and that is much lower costs. There are two main reasons that indexing costs less:

• Lower management fees: It costs less to manage and operate an index fund. That’s because index funds don’t have to employ highly paid fund managers and their staffs to analyze and select stocks.

• Lower transaction costs: Index funds use a fundamental buy-and-hold approach, which means that index fund managers generally turn their portfolios over far less often than active fund managers. This reduces the brokerage, commission, and other expenses associated with trading securities, and results in lower trading costs. You get to keep more of your money when using index funds.

Competitive Performance

Thanks to their diversification and low costs, index funds can be an effective way to achieve competitive returns over the long run. Depending on the asset class, various studies have shown 80% to 90% of index funds beat actively managed mutual funds in a given year.

Potential Tax-Efficiency

As noted earlier, index funds typically have much lower portfolio turnover than actively managed funds. Therefore, most index funds tend to realize and distribute only modest capital gains. This is particularly important if you hold index funds in taxable accounts.

Simplicity

The investments inside of an index fund are transparent and easy to compare. They have a precise, easily understood objective—to track the performance of a specific index. With index funds, you always know how your money is invested.

What are the risks?

As with any investment, it’s important to remember that mutual funds (including index funds) are subject to risk, including possible loss of principal. In addition, diversification does not ensure a profit or protect against a loss in a declining market. Finally, investments in bond funds are subject to interest rate, credit, and inflation risk. That’s why index investors should make a long-term investment commitment.

Common Indexes

2011-06-17T08:56:00.001-04:00

Below are common indexes used by Exchange Traded Funds and other investment products.

The Dow Jones Industrial Average: The oldest barometer of the U.S. stock market and the one most often quoted in the media. The Dow tracks the stocks of 30 major companies from a variety of industries.

Standard & Poor’s 500 Index: Synonymous with the “U.S. stock market,” the S&P 500 tracks the stocks of 500 leading U.S. companies.

Dow Jones U.S. Total Stock Market Index: A measure of the entire U.S. stock market, the Dow Jones U.S. Total Stock Market. Index includes large, midsize, and small companies.

Russell 2000 Index: The Russell 2000 represents the smallest two-thirds of the 3,000 largest U.S. companies.

The Nasdaq Composite Index: The Nasdaq Composite Index includes the stocks of more than 3,000 companies listed on the Nasdaq Stock Market, including the stocks of many widely followed technology companies.

Morgan Stanley Capital International Europe, Australasia, Far East Index: Designed to measure developed markets equity performance outside North America, the MSCI EAFE Index tracks more than 1,000 stocks traded on 21 exchanges in Europe, Australasia, and the Far East.

Barclays Capital U.S. Aggregate Bond Index: A measure of the taxable, investment-grade U.S. bond market, including U.S. Treasury and corporate bonds, the Barclays Capital Aggregate Bond Index excludes low-quality bonds whose issuers are considered more likely to default.

401(k) & Other Retirement Account Rollovers

2011-06-09T09:39:00.011-04:00

Rolling over your 401(k) and other qualified retirement accounts into IRAs has many benefits:

Provides maximum investment choices to help you create a portfolio moreappropriate for your specific situation. Customize a highly diversified portfolio to hopefully provide more consistent returns.
Rolling over to an IRA can lower your costs by using low expense ETFs. Many 401(k) providers charge custodial and administration fees and the mutual funds choices probably have high internal expenses.
Allows you to keep on earning high interest on your retirement savings under tax-deferred conditions.
It can allow you to avoid income taxes and penalties. An additional 10% penalty on withdrawals before age 59 1/2.

There are two ways to move your retirement money to another retirement account:

1. Rollover: A rollover occurs when an employee physically receives the check in their name and then deposits the amount in a rollover IRA or, sometimes, into another qualified plan or another SIMPLE. This is treated as a cash out transaction and your employer will be required to withhold a 20% tax amount. A rollover of distributions from qualified plans, IRAs, 403(b) plans, SEPs, and SIMPLEs can be made tax-free if the rollover is made within 60 days of the receipt of the distribution. Only one rollover is permitted per year.

2. Direct Transfer: The direct rollover or transfer is accomplished by the financial institution making payment directly to another qualified plan or rollover IRA. The money will be electronically transferred or sometimes a check will be mailed to you. If the check is mailed to you, it has to be payable to the financial institution where your new retirement account is held. Again, you have 60 days to deposit the check into your new account. Any number of transfers can be made in a year. If a direct rollover or transfer is used, the distribution is not subject to a 20% federal tax withholding.

The 20% withholding is mandatory for a rollover in the event of the employees death. But, there are two exceptions:

Distributions due to the minimum distributions requirement rules
Distributions that are part of a series of substantially equal payments.

These distributions can not be rolled over.

A rollover of a SIMPLE IRA may be made only to another SIMPLE IRA during the first two years of an employee's participation in the plan.

Be Consistent

2011-06-01T10:29:00.004-04:00

With the ups and downs in investing over the past three plus years, many investors tolerance for risk has changed. Unfortunately, their attitudes towards risk usually are in the wrong direction depending on the trend of stock prices.

Many work up the courage to buy what has done well recently and ignore what has performed poorly. This is evident in numerous studies of what investor’s returns are compared to the index returns. A 2011 Dalbar study found that for the twenty-year period, equity investors earned 3.83% and asset allocation fund investors earned 2.56% compared to the S&P 500 return of 9.14%. For the same period, fixed income investors earned 1.01% compared to the Barclays Aggregate Bond Index return of 6.89%.

When answering a risk profile questionnaire, it is easy to pick answers based on your current feelings and what has recently happened with stocks. This is a poor way to determine your risk profile because it doesn’t produce a true reflection of how much risk you are willing to take.

Here is a typical scenario: An investor lost 40% or more during the financial crisis in 2007 and 2008 and was worried sick. They decided to become more conservative by selling stocks and buying more bonds. Then the market bottomed in the beginning of 2009 and stocks went up 100% in two years. The investor looks at their relatively lower returns during that period and decides to buy stocks again. They don’t realize that stocks move in cycles and to buy now means buying when stocks are much more expensive than they were in 2009. Now is the time to be defensive and wait for opportunities to buy discounted prices.

A more appropriate way to make purchasing decisions is to maintain a consistent risk profile that takes into account a maximum loss in one year’s time. Rebalance to your stock, bond, and alternative asset targets once or twice a year and reap the benefits of buying when prices are low.

Loyal to the Client - Fiduciary Responsibility

2011-05-26T10:58:00.005-04:00

Many people have heard the word "fiduciary" but don't know what it means or how it can affect them personally. In the context of financial planning, a fiduciary is an advisor who puts their clients interests ahead of their personal interests. It is a legal or ethical relationship of confidence or trust regarding the management of money and the advisor must not profit from his fiduciary position unless authorized by the client. A fiduciary is expected to be extremely loyal to the client and must make clients aware of any and all conflicts of interest.

Peterson Wealth Advisory is a Registered Investment Advisor (RIA). All RIAs have a fiduciary duty their clients. RIAs are regulated by the Securities and Exchange Commision (SEC) or by the states in which the advisor is located. Brokers, Registered Reps, Stockbrokers, etc. are self-regulated by the Financial Industry Regulatory Authority (FINRA).

Brokers have been blurring the lines between themselves and RIAs for a number of years. One way has been through fee based accounts. RIAs are compensated strictly on a Fee-Only basis. The client pays the advisor directly for hours of service or a flat percentage of the assets under management. Broker fee-based accounts charge a percentage fee of the assets managed and the advisor can receive monies from the products they sell. They can get 2% kick backs on structured notes and revenue sharing from mutual fund and insurance companies.

In fact, as of July 22, 2005, any brokerage firm that offers fee-based accounts must prominently disclose the following, among other things:

• “Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours.

• We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons’ compensation may vary by product and over time.”

Be aware of the differences between a RIA and a broker. The RIA is loyal, works on your behalf and their compensation is clear and understandable. On the other hand a broker can sell products first and worry about their suitability for you second.

10 No-No's Between You & A Financial Advisor

2011-05-18T10:01:00.006-04:00

NO-NO #1: NEVER WRITE A CHECK MADE PAYABLE TO YOUR ADVISOR, OTHER THAN FOR THEIR FEE.

When investing money, your checks should only be made out to brokerage firms, the custodian, or insurance companies.No legitimate advisor would ever allow a client to write a check for investments or insurance payable to them personally or his firm.

NO-NO #2: NEVER ALLOW YOUR ADVISOR TO LIST THEMSELVES AS A JOINT OWNER, BENEFICIARY, OR TRUSTEE ON YOUR ACCOUNTS.

This money is yours, not your advisor's. There is no legal or procedural reason why the advisor should be listed.

NO-NO #3: NEVER LEND MONEY TO YOUR ADVISOR. 

There are rules and regulations against loans to an advisor. Also, you don't want to complicate the relationship.

NO-NO #4: NEVER LET YOUR ADVISOR SIGN YOUR NAME TO ANY DOCUMENT. 

Many transactions and documents require your signature. If you need to transfer money or need to submit another form you might be tempted to bend the rules. Don't. Forgery is a felony.

NO-NO #5: NEVER LET YOUR ADVISOR ALLOW YOU TO SIGN A BLANK FORM OR CONTRACT.

It is a violation of securities regulation rules and not a smart thing to do. You need to know what your putting your signature on at all times.

For privacy considerations, it is common for an advisor to send documents that omit account numbers and social security numbers. It's fine to sign such forms. Your advisor will fill in the missing information after you return the forms. This step is designed to reduce the risk of identity theft.

NO-NO #6: NEVER LET YOUR ADVISOR LIST THEIR FIRM’S ADDRESS TO RECEIVE ACCOUNT CORRESPONDENCE. 

You should receive monthly or quarterly statements and tax documents directly from the custodian, brokerage firm, or insurance company. Never let your advisor arrange for the statements to go to his office instead of you.

NO-NO #7: NEVER LET YOUR BROKER OR ADVISOR SELL YOU AN INVESTMENT THAT ISN’T AVAILABLE FROM OTHERS. 

Some advisors sell in-house or proprietary investment products. There's only one reason they do that and that's because they earn higher compensation for doing so. All investments your advisor recommends should be available from numerous sources.

NO-NO #8: NEVER LET YOUR ADVISOR RECEIVE A SHARE OF YOUR PROFITS. 

The advisor isn't going to reimburse you for losses so, why should they share in your profits.

It's your money so you should keep all of it.

NO-NO #9: NEVER LET YOUR ADVISOR ASSIGN ANY AGREEMENT WITH YOU TO ANOTHER ADVISOR. 

At some point, your advisor will retire or sell their practice. When it happens you are relieved of any and all contractual obligations you may have had with him or her. You are not obligated to work with their successor or their firm. This is also a violation of security law.

NO-NO #10: NEVER LET YOUR ADVISOR INVEST YOUR MONEY IN SOMETHING YOU DON’T UNDERSTAND OR OVERLY COMPLEX.

If you don’t understand an investment or a strategy, don’t invest in it. Investments that are complex, with numerous layers are generally high risk and can have big losses. These types of investments were a big problem for institutions and individuals in 2008.

Long Term Care Quick Facts

2011-05-03T16:07:00.001-04:00

Life expectancy at birth is now age 78

People in the fastest growing age group in this country are those over 85

If you and your spouse both reach age 65, one of you can be expected to live to age 90

90% of all the people in world history who ever reached age 90 are alive today

More than half the women and about one-third of the men who reach age 65 will spend some time in a nursing home

Seven out of 10 couples can expect at least one partner to use a nursing home after age 65

The average cost of a nursing home is about $73,000 per year

Half of all older Americans who live alone will spend themselves into poverty after only 13 weeks in a nursing home

56% of couples spend their income down to the poverty level after one spouse has spent six months in a nursing home

Two out of five people 65 and over will need long-term care. Half will stay in a facility six months or less, while the other half will stay an average of two and a half years.

Estate Planning in 2011

2011-04-12T09:55:00.003-04:00

Tax laws passed by Congress made significant estate tax changes for 2011 and 2012. Although the laws are temporary, one should adjust their estate plan appropriately to take advantage of the higher limits.

One of the new laws allows each individual the opportunity to transfer up to $5 million during life or at death to our children or other heirs, tax-free. The law still allows one to give an unlimited amount to your spouse, during life or through your estate plan (U.S. citizenship required) with no tax bill due.

Starting this year, a surviving spouse can add any unused estate tax exclusion of the spouse who has just died to his or her own $5 million exclusion. This change enables spouses together to transfer up to $10 million tax-free. This new spousal portability applies only to deaths in 2011 and 2012. It will expire, as will the $5 million exclusion, on Dec. 31, 2012, if Congress doesn't act before then.

Starting in 2011 it is possible to use the $5 million exclusion to transfer assets through gifts during your life, at death, or through a combination of the two. For example, if you have used $1 million of the exclusion to make taxable lifetime gifts, the unused exclusion when you die will be $4 million, rather than $5 million.

Portability is not automatic and can pose problems if not executed properly. The personal representative (PR) handling the estate of the spouse who died needs to transfer the unused exemption to the survivor. This is done by filing an estate tax return when the first spouse dies, even if no tax is owed. The return is due nine months after death with a six-month extension allowed. If the PR doesn't file the return or misses the deadline, the surviving spouse loses the right to portability.

Wrap Accounts

2011-03-01T06:55:00.004-05:00

Recently, I met with someone who had a "fee-based" wrap account with a financial advisor/broker. Wrap accounts charge a flat annual fee on all the accounts an individual or household has at a broker. The idea is that they make it easier for the client to understand the cost of doing business and brokers tell people you don't have to worry about commissions. The amount of the wrap account fee is usually based on assets under management and normally tops out at 3%.

Many people believe the wrap fee covers all expenses including the investments inside the accounts. That is not the case. Mutual fund companies and Exchange Traded Funds have their own internal costs that are independent of brokerage fees. I have seen people pay a wrap fee of 2.25% and had mutual funds that charged anywhere from 1.25% up to 2.25%. Their total cost for investing was around 4% every year! That is a high hurdle to leap to make a profit investing. Also, around 80% of actively managed mutual funds do not beat their benchmark index. So, these people are losing on two fronts.

What should a person do? At Peteson Wealth Advisory, we invest in ETFs that have low expense ratios. Vanguard, SPDR and iShares offer ETFs with expenses around 0.1% to 0.2%. PWA does comprehensive financial planning which includes investment management, estate planning, tax planning, insurance, and retirement planning. Our annual fee is at most 2% on $100,000 or less of assets under management (AUM) and the fee goes lower as AUM grows. We receive no commissions or revenue sharing from mutual funds or other financial institutions.

Its your money. Keep more of it!

Always Going Up

2010-07-01T14:28:00.003-04:00

Whenever you see or read comments from analysts or economists that work directly on Wall Street, the vast majority say the stock market is going up. These people are from the "Sell Side" of the industry meaning they sell products. So, they have an incentive to say stocks are going up because they make more money when they do.

Recently, with each additional 5% decline in stocks, I kept hearing, "It's time to buy. Stocks are undervalued. Get in now." These are the same people who said the exact same thing in 2007 through 2008. If you followed their advice you would have lost a bunch of money.

Avoid listening to these "Sell Side" sales people and get unbiased advice on where to invest your money.

Structured Notes

2010-05-20T11:54:00.003-04:00

One of the more popular products to come out of financial institutions over the past 4 years is Structured Notes. These products are underwritten by a financial company like Merrill Lynch, J.P. Morgan, etc. and their performance is tied to market index. Depending on the note, they can provide principal protection, multiples of the index performance either up or down, or guaranteed returns.

There are many downsides to these instruments but the least talked about negative is the fact that the brokers selling them get paid twice. Say you have a broker who comes to you with an S&P 500 3x's upside capped at 20% over 5 years. You buy the note for $100,000. The broker receives a 2% up-front fee. Then, say the same broker has you in a fee based account charging 1.5% a year, you pay 1.5% again on the $100,000 for a total of $3,500 of fees in the first year. Each year there after you still pay the annual fee.

You never see the 2% commission because it is taken off the top of the note not to mention fees charged by the issuing financial institution. So, if you earn 10%, the note actually earned 12% or more. When I worked at one of the big wirehouse brokers, they were pushing brokers to sell these as much as possible so they can earn the 2% "kicker" as they called it.

Also, keep in mind, that structured notes are only as good as the institution underwriting them. The issuer must have sound financial backing and risk controls in place.

Investing for Long Haul

2010-03-31T15:31:00.004-04:00

Here is something I read recently in a financial planning publication that has stuck in my mind:

"The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low it assures the clients money will not last."

Lets spell this out. The money you are saving, that is money that is going to be spent at some point. To make sure you always have enough money, you need to invest it in a way that your account grows by more than what you take out. One of the strategies that has worked in the past is to put good a portion of your money in stocks. Owning stocks can be scary for some people because they don't like to loose money. However, over the last 84 years, stocks made money in 70% of them. The number of years where stocks lost money is 30%. Those are pretty good odds in your favor.

Investing is one of the great opportunities for all people in our society. Its open to everyone and it is a way for people to rise above their current circumstances, better themselves and grow wealth.

The question is what are you going to do with your money? Are you going to be so scared that you keep all your money in cash and CD's that earn a pittance and forces you to set your standards low. Or, are you going to take advantage this great opportunity to grow the amount of money you have in order to live and do what you want.

There are ways to invest your money that limit risk but still enable you to grow your money at rates better than CD's. Financial advisors, like myself, can help you figure out an investment strategy that meets your needs and goals.

2010 Retirement Contribution Limits

2010-02-05T10:52:00.003-05:00

IRA, traditional and Roth
Under age 50__________________ $5,000
Age 50 and older_______________ $6,000

401(k), 403(b) and 457 plans
Under age 50___________________ $16,500
Age 50 and older________________ $22,000

SIMPLE plans
Under age 50____________________ $11,500
Age 50 and older_________________ $14,000

Social Security Wage Base________ $106,800

End of 2009 Tax Planning

2009-11-19T09:42:00.001-05:00

With the end of 2009 comes tax planning opportunities for individuals and business owners. Here is a list of tax issues to consider:

Generally, if you owe a debt to someone and they cancel or forgive that debt, the cancelled amount may be taxable.
Required Minimum Distributions (RMD's) for retirement accounts are not mandatory this year.
The estate tax for 2009 is 45% on anything over $3.5 million. The tax is set to go to 0% for one year in 2010 but democrats are expected to change that law.
Job hunting expenses such as miles driven, parking, tolls, long distance calls and other costs may be deductible.
Home buyer tax credit is expanded to first time buyers and buyers who have been in their primary residence for five consecutive years out of the last eight.
If you have capital losses you can carry them forward to offset capital gains you may have in 2009. The current capital gains rate is 15% for most tax filers.
Even if you don't have capital gains you can use up to $3,000 of capital losses to offset ordinary income.
Annual Gift Tax Exclusion is $13,000 per individual. This amount can be given to an unlimited amount of people.
Sales tax and excise tax deduction on the first $49,500 for new vehicles purchased from February 17th to the end of 2009. Of course, there are income phase outs.
Energy efficient tax credits which allow up to 30% of the cost of energy improvements to your main residence. The credit maxes out at $1,500 for a combined two year period.

ERISA Rule On Who Can Provide Investment Advice For Retirement Plans

2009-11-05T14:53:00.003-05:00

There is confusion by employers and participants of who can legally provide investment advice to their 401k or other qualified retirement plans.

In September of 2009, the Department of Labor kept in tack the rule that only allows independent registered investment advisor's with a fiduciary responsibility to provide investment advice to plan participants. The reason for this rule is to separate product salesman (brokers, mutual fund and insurance companies) from providing advice because conflicts of interest may exist and they may steer plan sponsors and participants towards affiliated funds.

Registered investment advisor's (RIA) are regulated under the Investment Advisor's act of 1940 which requires RIA's to always act the client's best interest (fiduciary duty) and to disclose all conflicts of interest. RIA's are also paid directly by the client and do not receive commissions.

Plan sponsors and participants may believe they are getting one on one service but words mean things and brokers/insurance companies call the service they provide as "guidance" or "education." They know they can't give specific instructions to buy or sell a particular investment or provide asset allocation recommendations because they will run afoul of ERISA and internal compliance rules.

Many people including human resource managers and employees are realizing they are not receiving the advice they need to make their retirement plans successful. According to Hewitt & Associates, in 2007 twenty-nine percent of employers offer one-on-one financial counseling, up from 22% in 2005. I would venture to guess that this number has increased after last years financial meltdown and subsequent losses in clients retirement plans.

Credit Score: The Factors Affecting It

2009-10-27T13:57:00.003-04:00

Credit scores are an important piece of your financial life. They affect the interest rate you pay on a car loan, home mortgage, and whether or not you are approved for a credit card.

Your particular score will depend on the credit bureau providing the FICO score. Equifax, Experian, and TransUnion are the three credit bureaus and they each have their own formula for calculating your score. Your score will range from a low of 300 to a high of 850 with a higher number being better.

The reason credit scores are tabulated is to predict your future credit success or failure on that specific date. Your score is not dependent on your income, employment or your assets. The bureau's look at the amount you owe on your most recent statements, making your available credit the most important factor. Having a lot of credit cards is not detrimental to your credit score as long as the total balance on all credit cards is low. In fact, about 30% of your FICO score is based on the total debt outstanding.

The most important factor in determining your score is timely payments. One late payment will stay on your credit report for up to one year, very late payments stay for two or three years, and collections and bankruptcies can last up to seven years.

Some people worry about opening checking accounts or looking at cars because they think their credit scores will drop. Some may look into your credit history so it is better to ask if they will do so and proceed from there. If you are looking for a new car or buying a house and have multiple inquiries, as long as they happen within a few weeks of each other, they will only count as one credit check. These credit checks will stay on your record for up to a year.

Index Funds Win Again

2009-10-27T08:44:00.003-04:00

In October, Morningstar Inc. released a study between actively managed mutual funds and passively managed (index) mutual funds. The study found that active management loses on a risk adjusted basis.

Here are the details: Over the past three years, while nearly half of actively managed funds beat their benchmark index, only 37% beat the benchmark on a risk, size, and style basis. The results are similar when covering five and ten year returns.

Explanation: Managers take on greater risks with the purchases they make. Some risk comes in the form of buying stocks that are speculative or holding concentrated positions in a stock. When a manager takes on those risks the investor should receive a greater return. This is how bonds work where lower rated bonds with a higher risk of default pay a higher interest rate than high grade bonds with low risk of default. The study showed that investors are not receiving a higher return for the added risks on their money.

Another part of the Morningstar study emphasizes the benefit of using passively managed index funds. In absolute returns, over the past five years only two out of nine Morningstar style boxes had more than 50% of active managers beat their indexes.

Time To Buy?

2009-09-17T12:39:00.002-04:00

Should I buy? Should I sell? Right now, many people are wondering if they should buy stocks since the S&P 500 is up 57% since the lows in March.

The stock market is a barometer for future economic activity. Expectations by economists and financial analysts are 3.5% growth in the 3rd quarter and 4% over the next year. One has to ask, what has changed? and where will this growth come from?

Think of: cash for clunkers, first time home buyer credit, $1 trillion added to the national debt, etc. This is government steroids that can not go on forever.

The personal savings rate is at levels not seen since the 1950's. Unemployment is going up. Businesses are cutting prices and keeping inventories lean. People are fearful and that is why gold is over $1,000.

Fundamentally, economic data is not good. The U.S. dollar is losing value, bonds prices are rising and yields are falling, unemployment is going up, and wages are falling. History tells us that returns like we are experiencing today happen when the economy has been growing for a number of quarters and jobs are being added.

In the 2000 to 2002 recession, we had a 21% up move from September 2001 to January 2002 because investors felt we were out of the recession. Over the next 10 months, the S&P 500 fell 31.7%.

Their is a lot of hope and not much data to support the current stock market rally.

College Student Insurance Options and Savings

2009-09-01T09:49:00.003-04:00

Many children have headed off to college over the last couple of weeks. If you are parent who has a child in college be sure to review your various insurance policies to protect your child and possibly save you money.

Auto Insurance: If the campus your child attends is at least 100 miles away and their car stays at home you should qualify for a discount on your premium. How much will depend on how much your premiums increased when you added your child to your policy.

Student Housing: A student's dorm room qualifies as an additional room on your home owner's insurance. Coverage is usually limited to 10% of the amount of your total insured possessions. As an example, if your home is worth $500,000 and you have 50% coverage for the contents of your house, the insurer will pay up to $250,000 for the contents of your home. Anything in your child's dorm room would be covered up to $25,000. If the student lives off campus you will need to purchase a separate renter's policy to cover the child's personal items.

Health Coverage: Full time students are covered under a parents policy until age 23 or possibly older. Some states have extended the age limit so check your state's rules. Individual policies for 18 to 24 year old students cost an average of $1,284 according to eHealthInsurance.com

What Peterson Wealth Advisory Provides

2009-08-25T09:25:00.004-04:00

When deciding whether or not to work with Peterson Wealth Advisory individuals should remember what we do and what we don't do.

What we do:

Provide advice that is in the client's best interest. This means that if a client comes to me with an idea that doesn't make sense for their situation I have a duty to tell them so and not follow them blindly.
The heart of what we do is create and implement comprehensive financial plans so client's are prepared to handle all of life's financial needs.
Challenge you to think about and answer tough financial questions.
Have you complete a budget.
Invest your money in low cost exchange traded index funds.
Use highly diversified asset allocation models with the goal of managing risk and providing returns without extreme ups and downs.
Evaluate all of your insurance policies to make sure you are protected and possibly save you money.
Look for ways to limit taxes.
Consult with the client's CPA, estate planning attorney and other advisor's to make sure we are trying to accomplish the clients goals.
Be your advocate
Remind you when you are straying from your goals.
Help you allocate all your investments including 401(k)
Meet with client's children and grandchildren to teach them about money.
Help you make decisions about home financing, car purchases, business succession.
Set up individual and business retirement plans.
Establish 529 college savings plans.
Disclose all conflicts of interest.
Disclose all costs.
Free to use investments that we believe are best for the client.
Fee-only compensation paid directly by the client.

What we don't do:

We don't offer hot stock picks.
We don't sell insurance or products.
We don't deviate from our chosen investments. If we are evaluated based on performance then we are going to invest in what we believe in.
We don't day trade.
We don't work for a brokerage firm or a bank.
We don't hide fees.
We don't receive kickbacks.
We don't work with one fund company.
We don't buy stocks or funds based on TV personalities recommendations.

Bonds: Index Funds beat Active Managers

2009-08-24T07:34:00.003-04:00

Mutual Fund companies spend millions of dollars trying to convince you that they have the smarts to beat the market and earn more money for you. Another blow to active fund managers performance was announced last week, this time to bond fund managers.

A study by Standard & Poor's found that on an asset-weighted basis (calculated on a equal money basis) index returns beat beat actively managed fund returns in all 13 fixed income categories over one and three year periods, and in 11 of 13 categories over five years.

Over five years, average annualized returns for investment grade long term bond funds lost to the benchmark index by 2.7%. Similarly, each year high yield bond funds lost to the benchmark index by 1.9%.

For mortgage backed securities funds, 98% lagged the benchmark over five years. Long term investment grade corporate bond funds lost to the benchmark index 92% of the time over 5 years.

Importance of Long-Term Care Insurance

2009-07-23T12:34:00.003-04:00

As the average life expectancy of individuals has increased over the years so has the importance of long-term care insurance.

Consider these stats:

The average life expectancy of a child born today is 78 years.
If you and your spouse both reach age 65, one of you should expect to live to age 90.
The U.S. senior population (65 and older) is expected to increase 40% in the next 5 years.
52% of all current senior citizens in the U.S. have a disability.
For people age 80 or older, the disability rate is 71%.
Female in the senior population are 11% more likely to have a disability than senior males.

Modern medicine and changes in lifestyle have contributed to the overall increase in life expectancy. However, advances in science will only do so much before we all will need help. Many people do not realize how likely they are to need assistance completing daily activities nor do they understand the expense in acquiring these services.

more than half the women and about one-third of the men who reach age 65 will spend some time in a nursing home
seven out of 10 couples can expect at least one partner to use a nursing home after age 65;
the average cost of a nursing home is about $73,000 per year
half of all older Americans who live alone will spend themselves into poverty after only 13 weeks in a nursing home
56% of couples spend their income down to the poverty level after one spouse has spent six months in a nursing home
two out of five people 65 and over will need long-term care. Half will stay in a facility six months or less, while the other half will stay an average of two and a half years.

Rebalancing

2009-06-24T16:28:00.003-04:00

Investors build diversified portfolios to take advantage of the varied returns of different assets/investments. One risk in diversification is that over time, better performing assets will become a larger portion of the portfolio and change the risk of the portfolio.

As an example, starting in 2000 a portfolio with 50% in the S&P 500 and 50% in the Lehman U.S. Aggregate Bond index would have had just under 60% in bonds at the end of 2007.

One way to avoid this drift is to periodically rebalance a portfolio back to its target asset allocation. Rebalancing helps reduce risk and reduce the severity of fluctuations in account value.

It is wise to set a schedule for rebalancing, say on your birthday or semi annually. This helps take the emotion out of when to buy or sell. Or set percentage ranges, say up or down 5% from your desired allocation.

The strategy you choose should be based on the type of account and how the changes will be made. Taxable accounts should be rebalanced with new money or with offsetting gains and losses. This is done to limit or avoid paying taxes and limit trading costs. In retirement accounts, rebalancing is easier because you don't have to worry about taxes but you still have to consider trading costs.

U.S. Dollar Lower = Higher Gas Prices

2009-06-02T08:32:00.002-04:00

Now that the U.S. Government owns 60% of GM and making decisions for the company expect higher gas prices and a weak U.S. dollar.

The Obama administration and its environmental ilk want drivers to burn less gas because they believe it causes global warming. To burn less gas Obama will have GM build small, less safe but more fuel efficient cars. The only problem is people do not want to buy those types of cars.

The only way the purchase of GM by the government can be successful is if the small cars they produce sell. And, as we know from high gas prices last year, people only buy small cars when gas prices are above $3 a gallon. So, how does the Obama administration raise gas prices without raising fuel taxes or putting price controls on oil? Weaken the value of the U.S. dollar.

The price of oil is denominated in dollar terms so the price is not only affected by the supply and demand of oil but also the value of the U.S. dollar. When the dollar loses value it takes more dollars to purchase the same amount of oil and, as you know, when the price of oil goes up the price of gas goes up.

Expect high gas prices and a weak U.S. dollar for the foreseeable future.

Is Your Legacy Plan in Order?

2009-05-13T11:04:00.004-04:00

Who do you trust to distribute the assets you have accumulated throughout your life? A judge, or a close relative/friend? If you do not have proper legal documents, a state judge will make those decisions for you. One of the most important and often ignored aspects of financial planning is what I call legacy planning. This deals with how your estate (the things you own and your well being) is handled and distributed while alive and after your passing. When meeting with new clients, I often find they have no legacy plan or instructions in place for such issues as the handling of their assets, medical decisions, or guardianship for their minor children.

If you do not have a will, the state in which you live will provide one for you. They call this “dying intestate,” which means you gave up the opportunity to distribute your assets as you want. Instead, you have essentially hired the state to figure it out for you. Laws vary from state to state, but they all have one thing in common: without a will all of your assets may not pass to your spouse and children.

Wills are just the first step. You also need a medical directive and a durable power of attorney. These documents apply if you become disabled and cannot make decisions on your own. A power of attorney (POA) gives authorization to act on someones behalf in a legal or business matter. The person you designate POA will do such things as pay your bills, make financial decisions, and medical decisions. If your condition is so severe that you can be kept alive only by artificial means, or if you need an operation but cannot make that decision because you are incapacitated, your medical directive allows another person of your choice to act on your behalf, honoring your preferences.

Without proper planning, your heirs will have to contend with probate court, possibly in several states. The process involves extensive time delays and high legal fees, and the release of private information to the public. Another potential problem of not having a comprehensive legacy plan is higher tax obligations to federal and state governments.

I know that it may seem costly to hire an estate planning attorney create a will and other legacy planning documents. However, having proper legal structure will cost you less in legal fees, shield more of your assets, lessen the stress on those left behind, and give you peace of mind that your wishes will be fulfilled.

10 Most Common Personal Finance Questions

2009-03-27T10:16:00.005-04:00

Throughout my years of working with and managing peoples financial matters I have fielded many questions related to finance. Surprisingly, many of the questions and concerns people have are similar. Here are the top 10 questions/statements I hear and my response to each.

1. “Putting my money in the stock market is like gambling.”

Really? If you went to the casino everyday for 70 years, your money would have grown an average of 12% a year? I don’t think so. The S&P 500 had average returns of 12.17% from 1926 to 2007. Sure we are in a down cycle now but give it a little time and you will wish you were invested in stocks.

2. “Why should I buy bonds, they are so boring?”

Bonds have had positive returns in each of the last 9 years, even before interest payments are added and bonds have beaten stocks in 5 of the last 9 years. If you add in the yield, bonds have outperformed stocks in 6 of 9 years. Everyone should own bonds in their portfolio because they help your portfolio with steady returns.

3. “Even though the individual stocks I own are down 60 to 70%, why should I sell?”

It is hard to admit your decisions were wrong but they were. The stocks you own are crap and you shouldn’t wait to see if they turn around. Take advantage of the tax losses, which you can use to offset future gains and put together a portfolio that is less likely to have huge losses.

4. “I plan on putting all this extra cash (equity) from selling my house into a down payment on my next house.”

Locking up all your cash in an illiquid asset like a house is a bad idea because you should have access to a certain amount of cash for when times get tough or an unforeseen event happens. Plus, the government provides a huge deduction for mortgage interest, which effectively lowers your interest rate therefore giving you the potential to earn higher returns in other assets when you invest that money.

5. “I put all my money back into my business.”

Again, a business is illiquid and though putting some of your earnings back into it is wise, some of the money should be invested in a diversified mix of assets including equities, bonds, and cash. This will give you flexibility in later years if you want to slow down but not yet sell, the timing to sell is not favorable, or your business is no longer viable or relevant.

6. “What do you think the market is going to do?”

I honestly don’t know and anyone who says they do is a liar and you should not listen to them.

7. “Are you like Bernie Madoff?”

No. I use an unaffiliated third party custodian to transact trades and hold all client money and securities. No client money is held in my name or my company’s name.

8. “I only invest in real estate, it never goes to $0.”

True, land has not gone to $0. But real estate is not the be all end all asset. A lot of people thought home prices would continue to climb 20% forever and there was no risk to building more and more homes. Again, liquidity and diversification is important and as we are experiencing real estate is not a sure thing.

9. “What do you think about xyz stock?”

Individual stocks are a hard to evaluate and determine the level of risk in one company. No one thought GE would fall 70% in the last year or that the largest banks in the world would need billions from the government to survive. In order to limit the risk you are taking with your money buy diversified funds spread out among many asset classes.

10. “I want to live life and not worry about saving.”

Instead of looking to the government or other family members to pay your bills in retirement you should be taking the responsibility yourself. Say you save $1,000 each year for the next 40 years instead of buying a whole new wardrobe or going out to eat 3 days a week. That $40,000 (40 years times $1,000) will grow to $487,852 if you have average investment returns of 10% a year. Denying yourself little pleasures now and saving for long periods of time will allow you to accumulate wealth so you may live a rich life in the future.

Relative Return versus Absolute Return

2009-03-19T15:28:00.000-04:00

When evaluating the performance of your investment portfolio, first you need to decide what is important. Are you trying to outperform an index by using actively managed funds or buying individual stocks? Or, do you have a specific rate of return you want each year? Deciding between the two will help you determine the type of investments to use, and if you need to use different fund managers or a different strategy.

Relative Return

Say you use actively managed mutual funds because you think they can do better than the market/index. Those managers are trying to beat a “benchmark index” which is comparable to their fund strategy. Through February 28, 2009 the Fidelity Magellan Fund was down 51.75% while the benchmark it compares itself to, the S&P 500, was down 43.32%. So, the relative return of Fidelity Magellan is negative 8.43%. The manager’s goal is to always beat the benchmark, not necessarily to have positive returns.

Many brokers focus on relative return because they have big egos and want to be the “best.” This can be in conflict to what clients want because the broker may take more risk than the client wants in the form of concentrated asset classes, active trading and chasing past performance.

Absolute Return

Hedge funds, college endowments at Yale and Harvard and certain financial advisors use absolute return to measure their performance. They start with a target rate of return to meet objectives, say 8%, then allocate assets in a way they believe will accomplish this goal. The return received in a specific period of time is absolute return. Ultimately, the goal is to always have positive returns.

Absolute return is most often accomplished by using a highly diversified mix of asset classes. Asset classes include stocks, bonds, commodities, currencies, private equity, and real estate. By inputting average returns over long periods of time a person can manage the risk they take and the amount they will accumulate over time.

I Can’t Retire Yet. What do I do?

2009-02-26T12:28:00.001-05:00

Many of the people I come into contact say, “I wish I would have started saving a long time ago. Then I could retire.” Or they say, “We should have been working with you earlier.” There are many factors which may have caused people’s nest egg to be too small to maintain their ideal retirement lifestyle: didn’t save enough, unexpected adversity, bad investment choices, started too late.

Going forward, you might be able to help your situation by seriously following this short list of strategies:

SAVE, SAVE, SAVE: This is so basic it should go without saying but you won’t have money to retire unless you sock money away. The golden rule was to save 12% of your monthly income but if you fell short of that amount for a number of years it is going to take more to catch up. Many of you are in your prime earning years and if you have kids they should be at an age that you shouldn’t be supporting them anymore (Older than college age is old enough). Discipline yourself to put money into your savings first (401(k), IRA’s, Taxable accounts), pay your bills, and then if you have extra money put it into your savings. An easy way to accomplish this is by setting up automatic deductions so you never have the money in your hands.

WORK A FEW MORE YEARS: Reality check. You don’t have enough money to retire so the only way to save more is to work more. The fact is, for every extra year you work that is one less year you will have to take money from your savings to live. On top of the extra savings you are accumulating, you should also be receiving supplements from your employer for health insurance, matching retirement contributions, and other perks that you won’t receive in retirement.

TAKE A PART-TIME JOB IN RETIREMENT: You have worked all these years and gained a high level of knowledge in your field. Use it to your advantage. Many companies allow employees to in a similar role but on a part time basis and by remote locations. Another factor to consider is that many people who go straight to retirement don’t know what to do with all of their spare time, become bored, and drive their spouses crazy. Working part time will supplement your income, help pay monthly expenses, prolong your savings and provide a transition period between full time work and full time leisure.

RETIRE SOMEWHERE CHEAP: At the front of this idea is avoiding taxes. There are 7 states without income taxes (Washington, Florida, Texas, Wyoming, Alaska, Nevada, and South Dakota). There two other state which only tax dividends and interest income (Tennessee and New Hampshire). Your yearly income will go farther in states that don’t tax it.

LIVE IN A SMALLER HOUSE: The idea here is to sell your larger house, take a portion of the proceeds to buy a smaller house which will have less upkeep, lower expenses (property taxes, energy, utilities, insurance) and put the left over equity into your retirement investments/savings.

KEEP A MORTGAGE: Locking up a large portion of your assets in a house is a bad idea. Because it is hard to pull money out of a house (and expensive to carry a line of credit) you should maintain a mortgage even in retirement. The advantages of having a mortgage are greater liquidity, tax leverage (federal tax credit for mortgage interest) and investment flexibility/diversification.

PROPERLY MANAGE YOUR INVESTMENTS: There is so much to know about managing an investment portfolio that you should use a qualified independent Registered Investment Advisor (RIA). They are compensated for the advice they provide and do not push products or charge exorbitant commissions. You are taking great risks by either being too aggressive or too conservative with your investments/savings. As an RIA, I will help you determine the optimal level of risk for your money, develop your personal investment plan and work with other professionals to make your plan efficient.

Length of Past Recessions

2009-02-11T10:41:00.002-05:00

I wanted to know how long each recession/depression lasted in the U.S., which started in the 1900’s. There have been 21 periods of contraction in our economy, the first starting in 1902. All together they averaged 14.4 months in length. The longest downturn was 43 months (August 1929 to March 1933) and the shortest was 6 months (January 1980 to July 1980)

Every contraction is different in length and cause but the one thing that they all have in common is that they all ENDED. In fact, the recovery/expansion lasted an average of 43.2 months. That is 3 times as long as the recessions.

With all the layoffs and poor economic data coming out everyday it is natural to think it will never get better. We will recover, but the problem is no one knows exactly when and there will not be one thing that causes it to happen. Little positives will start to show up, like increased home purchases (already happening), consumer sentiment goes up, etc. Do not use the unemployment rate because history has shown the stock market starts to move up long before the unemployment goes up.

Invest your money in the stock market now so you won’t miss out on the growth.

Recession Data from http://www.nber.org/cycles.html

As an aside: I have been reading the book “FDR’s Folly” where Jim Powell looks back at the policies of the New Deal and how they prolonged the depression. I just started reading it because I think there are many similarities to what the government did during the Great Depression and what Obama is doing now. I will share some thoughts on the book after I am finished.

What Does Chris Read?

2009-02-02T14:15:00.003-05:00

Staying informed and up-to-date with financial planning, business and economic issues is an important part of my job. I continually draw from what I read now and what I have read over the past 18 years to provide the best advice to my clients.

If you read what I read, this will help you be as informed as I am. So, either take the time to read what is on this list, or rely on me to stay current and pass the information onto you.

Magazines:

Financial Planning

Financial Advisor

Inc.

Fast Company

Wall Street Journal

Florida Today

Space Coast Living

Space Coast Business

Forbes

Fortune

Worth

Robb Report

Research

Investment Advisor

Registered Rep

Wealth Manager

On Wall Street

Index Universe

Money

Books:

Basic Economics

Good To Great

The Future For Investors

The Black Swan

Values Based Estate Planning

Essential Buffett

Hermanisms

The Millionaire Next Door

Against the Dead Hand

Who's Afraid of Adam Smith

Millionaire Mind

The Art of War

Websites:

Seattle Times

KVNews

Florida Today

WSJ

Heritage Foundation

Hoover Institute

ETF Connect

Google Finance

Bloomberg

Journal of Financial Planning

Young Money

Vanguard

iShares

PowerShares

10 Basic Investment Principles

2009-01-29T18:44:00.002-05:00

10 Basic Investment Principles

Having an understanding of fundamental investment concepts is important for a number of reasons. Knowledgeable investors are more likely to follow their investment plan, are better able to evaluate investment choices, and stay rational in up and down market cycles.

Here are the basic principles everyone should know:

Invest to Create Wealth

Saving is different from investing. Putting cash in a bank account is saving. Investing involves buying an asset in order to give you the opportunity to earn higher returns while assuming a certain level of risk. History has shown that overtime, investing in stocks can be beneficial because the average return has been 12%.[1]

The Longer the Better

Investing on a regular basis over a long period of time is the best way to accomplish your long-term financial goals because of compounding interest. Compounding occurs as you reinvest your returns, those returns generate their own returns and increasing your wealth. If you invest $1,000 every year for 30 years (a total of $30,000), earning 8% every year, you will accumulate $330,240.

Diversify

Dividing your money among various asset classes such as stocks, bonds, commodities, and cash allows you to limit losses in any given period of time. Each asset class has different risk characteristics and the amount you put in each will influence your gains or losses over time. Include as many broad asset classes as possible to help make your returns more predictable.

Pay attention to Fees and Taxes

Investment costs reduce your returns. The average annual cost of an actively managed mutual fund is 1.5%. Add on the 1% fee to pay your financial advisor and you are in the hole 2.5% every year. Problem is the mutual fund is not outperforming the index and all the buying and selling they do creates taxes that you have to pay.

A better alternative are exchange traded funds (ETF’s) which offer low costs (Vanguard’s averages 0.16%) and little to no capital gains (Vanguard ETF’s had zero distributions in 2008).

Rebalance Often

When your asset allocation moves from its original plan the risk you could be more or less. In order to keep your investments aligned with your goals, your investments should be rebalanced at least annually. Either use new money to buy the asset that is low or sell some of the winners and use the proceeds to buy the laggards.

Frequent Buying and Selling Hurts

A 2004 Dalbar Study found that over the last 20 years the average investor earned only 3.51% per year while the S&P 500 averaged 12.98%.[2] This doesn’t account for the commissions for doing all the trades. The same rule applies to using actively managed stock mutual fund managers, 75% underperformed their benchmark in 2008 and 80% of bond fund managers underperformed their benchmark.[3]

Create a Plan and Follow It

Your plan will give you confidence when times are bad and when times are good. It will be comprehensive in addressing all your financial matters, spell out all the things you want to accomplish, risk profile, asset allocation, and specify dates/milestones.

Be a Contrarian

When things are up slow down your purchases. When things are down buy more.

You Decide if You Are a Long Term Investor

Be honest with what you want to accomplish and how the amount of money you are willing to lose. Nothing is worse than buying stocks, losing half of your money and then deciding you can’t handle that much risk. You worked hard for your money and you want to invest it wisely and in a way that makes you comfortable. Instead of making your decisions based on percentages, convert it into dollar figures. Losing $10,000 has a different feeling than losing 10%.

Work Only With a Registered Investment Advisor

Stockbrokers are not financial advisors. The SEC says so. Stockbrokers are salespeople, not advisors, says the Securities and Exchange Commission. If you want genuine financial advice that is in your best interests, work only with a Registered Investment Advisor.

[1] Average return of the S&P 500 from 1926 to 2007

[2] http://www.dalbarinc.com/content/showpage.asp?page=2004040101&r=/pressroom/default.asp&s=Return+To+Press+Releases

[3] Wall Street Journal, January 8, 2009 by John Bogle

So Many Things Are On Sale!

2009-01-27T09:20:00.003-05:00

When you go to the mall, would you buy a sweater at full price or would you buy the exact same sweater for 40% off? Do you drive a mile or two farther to buy gas that is a penny cheaper?

With everyone looking for deals and bargains these days, it is time for investors to put some money to work in stocks and other investments. The S&P 500 is down 46% from its all time high, the NASDAQ is down 47%, a diversified ETF for commodities is down 65%. The list goes on and on of assets priced well below their highs of a little over a year ago.

No one knows where the bottom is and most people wait until it's too late and the majority of the gains have already occurred. Going back to 1900, if you took away the ten best days on the Dow Jones Industrial Average, two-thirds of the cumulative gains over the last 109 years would disappear.

Things are scary right now and many people have lost faith in investing. History has shown that we have experienced up and downs before and that average returns over time are positive. If you have 5+ years before you will need to use the money, you really should consider buying a group of diversified index funds.

Buy while its on sale!

10 Financial Planning Principles for Singles

2009-01-21T11:31:00.006-05:00

1. Create an Emergency Fund. Just because you are single does not mean you won’t have unexpected bills or won’t retire one day or have future responsibilities. You will have to pay for things married people do like health care, everyday living costs, etc. Save enough in your savings account to cover at least 8 months worth of monthly expenses.

2. Set a Budget. Because you are single, you have an opportunity to save more than your friends who are married with children. Use that extra money to speed up the accomplishment of your short term and long term retirement goals. Instead of retiring at 65 or 70 you may be able to stop working at 50 or 55.

3. Stay Out of Debt. Accumulating even small amounts of credit card debt can derail your long-term financial plans and keep you working for many more years. If you carry a balance of $5,000 with 18% interest and pay the minimum of 2% of the outstanding balance, it will take you 46 years to pay off the credit card.

4. Invest in Passive Exchange Traded Funds (ETF’s). These are low cost (average Vanguard internal cost is 0.167%), tax efficient (Vanguard ETF’s had zero capital gains in 2008), and diversified investments.

5. Stay Away from Actively Managed Mutual Funds. The average internal cost of a managed mutual fund is 1.50%[1]. In any given year 75 to 80% of actively managed mutual funds under perform their benchmark[2].

6. Buy Disability Income Insurance. Often provided by your employer, it should provide you with 60% of your income if you become disabled and cannot work.

7. Buy Long Term Care Insurance. You will need this to pay for home caregivers or nursing home care. Because you are single, you do not need to buy life insurance.

8. Find an Estate Planning Attorney. They will help you draft a will, establish durable powers of attorney, and determine who will inherit your assets.

9. Don’t Pay Your Mortgage Off Early. By keeping your mortgage you get a tax deduction, a lower payment thereby allowing you to invest more and grow your wealth.

10. Stop Getting a Tax Refund. Basically, you are giving the government an interest free loan for money that is yours. Instead, talk to a tax expert on the number of exemptions to claim on your W-4 and try to make it so you neither owe the government money nor will get money back.

[1] http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp

[2] http://www.reuters.com/article/pressRelease/idUS183834+13-Nov-2008+PRN20081113

10 Things to Do Before You Retire

2009-01-19T08:24:00.001-05:00

1. Establish Your Monthly Budget. Include all expenses including gifts, vacations, taxes, cars, and emergencies.

Accumulate 12 months of cash to cover monthly expenses. You never now what may come up (job loss, major house repair, medical problem). You want to have a cushion built up so if something bad happens you are prepared to deal with it financially.
Buy Long Term Care Insurance. Middle age can be the best time to buy because you have the highest likelihood of being eligible for the policy and the premiums can be much lower than if you wait until you are in your 70’s or 80’s.
Predict the Cost of Health Care. As everyone knows, health care costs are rising faster than inflation. In 2008, health care costs rose 1.6% faster than consumer inflation.* Since 1970, health care costs have risen about 2.4% faster than GDP.
Refinance Your Mortgage. Most people in retirement cannot borrow money from in traditional forms. Especially now with new mortgage standards, it will be harder to finance major purchases without a job.
Determine Your Sources of Income. Make sure you and financial advisor know exactly how much and where all of your dividends, interest, and other income will originate.
Revise Your Investment Allocation/Strategy. What you did to accumulate your wealth while working will be different from how you spend it in retirement. You will need to adjust your investments to have less risk, more income, and be liquid.
Review Your Will and Trusts. These documents are very important because they can protect you and your assets so that you can leave a legacy behind. Get all beneficiaries up to date and make sure all documents reflect your wishes.
Set a Plan for Your Time. How will you spend your days? How often will you do your hobbies? Will this make you fulfilled or will you get bored after a month? Your kids may enjoy your company but not everynight.
Make Sure You Really Want to Retire. Just because you are 65 does not mean you have to retire. Many people are taking on new challenges whether they be with the same company, a new company, or going back to school. Consider part time work to keep your mind fresh and some extra income coming in.

Retirement should be an enjoyable time where you get to do what you want, when you want. By evaluating and planning now, you can make “retirement” the best 30+ years of your life.

*http://www.healthinflation.com/

We will survive

2009-01-14T17:26:00.001-05:00

I was sitting in my office today and started to think about the bad economy and what is to come. Suddenly I noticed cars were driving by, the power was still on, and there was still food in the frig.

For all of the negative news and proclamations about how bad the economy is and will continue to be, people are still working, playing and living their lives. Sure, things aren't humming like they were two or three years ago but things are never as bad as they seem. Just like things are never as good as they seem.

Realize, you live in the best country in the world with unlimited opportunities to succeed. You don't have to participate in the recession. and you don't have to accept the same fate as the negative people surrounding you.

Smile, be positive, and work a little harder. You will be that much better and happier.

http://PetersonWealthAdvisory.com

chris@PetersonWealthAdvisory.com

Business Academy Stock Project

2009-01-12T16:37:00.000-05:00

Today, I was a guest of the Melbourne High School Academy of Business and Finance where the students presented the results of their stock project. They researched and picked 10 publicly traded companies on the NASDAQ and/or NYSE to invest a hypothetical $50,000. They tracked the price of their stocks from the middle of November and concluded in the middle of December, and 2 groups of students that I saw made money.

The goal of the project was to introduce the students to the stock market, how to research publicly traded companies, and sell an investor on their recommendations. They learned how to look up stocks, quotes, ticker symbols, diversification, how the state of the economy will effect certain stocks.

Each group did a great job of diversifying amongst the different sectors and allocating their money depending on the perceived risk of a stock. Obviously, I would have liked to see them invest in index funds, but that will be in another lesson.

I am encouraged that the markets will thrive now and in the future because people are learning at younger ages about stocks, bonds, and other investment choices and how they can benefit their long term financial goals. I was proud to have helped these Mel High students learn some basics about investing.

Expire = Taxes Are Going Up

2009-01-08T08:59:00.000-05:00

Yesterday, Mr. Obama said that he will let the current tax rates "expire" in 2010. "Expire" is code for tax increases and no one should be fooled.

With this pronouncement, we will see people will hoard there money because of the expectation they will have less in the future. People are rational and when they know they will have less money in the future they make adjustments today.

My question is why wait to 2010? If it is okay to keep tax rates low now, while the economy is bad, why wouldn't he keep them low forever? The answer is he knows low taxes stimulate the economy and give businesses and entrepreneurs incentives to innovate and grow their business. By saying the taxes you pay now will be higher in the future, he effectively erases any benefit of our current lower rates.

Another point to think about is, when new tax cuts are proposed, don't put a life expectancy on the tax rates. Liberals are using the 2010 "expiration" and acting like lawyers and twisting words to their liking. Any movement up is an increase. In 2011 the following will take place:

The top income tax rate WILL go from 35% to 39.6%. THAT IS A TAX INCREASE.

The Capital Gains rate will go from 15% to 20%. THAT IS A TAX INCREASE.

The Estate Tax rate will go from 0 to 55%. THAT IS A TAX INCREASE.

A parting thought on taxes rebates. They give out rebates to make you think the government is paying you money from their own coffers. Remember, government exists because they take money away from working people through taxes and fees. If you receive a tax rebate and don't pay taxes, you aren't getting a tax cut. You are taking money from your fellow citizens who were forced to pay it to the government and then the government decides who should receive that money. It's called social engineering and it is detrimental to economic growth and capitalism.

Single stock purchases don't make sense.

2008-12-31T09:08:00.000-05:00

2008 was a year to easily illustrate why you shouldn't buy individual stocks. Some of the largest and so called "fundamentally strong and well ran companies" saw their stock prices dwindle to almost zero and some even did go to zero.

This came as a surprise to some investors and they subsequently lost a lot of money. They didn't believe advisors when they told them to diversify or remember the tech bust of 2000 or the heartache Enron and Tyco shareholders experienced. It is hard to believe that so many people forget what happened less than 8 years ago.

AIG. Largest insurance company in the U.S. and was thought to be on sound financial footing. Stock dropped 97% this year.

Merrill Lynch. One of the largest wealth management firms in the world. Established 94 years ago. Before being saved by B of A stock fell 88% from its peak in 2007.

Lehman Brothers. Established in 1844. Went bankrupt in 08. Stock all time high $86 now worth $0.

Citigroup, the largest bank in the world, down 77% in 2008.

Research in Motion maker of blackberry phones down 65%.

Google down 55% this year.

Do yourself a favor. Don't buy anymore individual stocks. No one is smart enough to know which individual companies are going to be good now or in 20 years. The market, as a whole, has shown that if you stay invested you will earn more on average than any other investment.

Stay diversified amongst different assets and use index funds.

Personal Finance Rules

2008-12-29T11:27:00.000-05:00

With a new found on saving and living within your means, here are a few financial rules to guide you to prosperity.

Have enough cash to cover 6 months of living expenses: Give yourself a cushion of cash so you are prepared if you lose your job or have an unexpected expense. With more and more layoffs, you want to make sure you have money saved to help until you land your next job.

Owe less than 30% of your allowable credit line on any one credit card: Card "utilization" is the second biggest factor in your credit score (payment history is #1). If you have an credit card with an available line of $11,000 the most you should charge on it is $3300. Any more than that and you risk having your credit score fall. Even if you pay off your balance every month, the amount you charge on your card counts toward your credit score. To get around the utilization issue, call or login to your credit card company and ask for an increase in your credit line.

Monthly mortgage should not exceed 28% of your monthly income: The federal government formulated this percentage when they started insuring mortgages after the Great Depression. The historical home foreclosure rate in the U.S. was less than 1%. People and lending institutions started getting in financial trouble after they deviated from the 28% figure and as you know foreclosures are a national problem. (Check my previous post titled "Your Home is Not an Investment")

Amount you need to retire on equals 25 times your desired income: Many academic study's have finding the optimal amount a person should withdraw each year in retirement. The recommended rate of withdrawal in retirement has been 4%. If you want to live on $120,000 a year, you will have to save $3,000,000. If you want to take more money out or retire with less saved up you with have to take more investment risk which can lead to higher losses in short time periods.

Keep auto loans to 60 months or less: If you extend a car loan past 5 years, you will have a much higher interest rate and the loan will be higher than the value of the car even after paying on it for at least 4 years.

PetersonWealthAdvisory.com

2009 Retirement Plan Contributions

2008-12-22T09:47:00.001-05:00

Now is the time to start planning your retirement contributions for 2009. Here are the contribution limits for 2009.

Remember you are able to make contributions to your Traditional and Roth IRA's for 2008 up to April 15th, 2009.

CONTRIBUTIONS LIMITS 2009

401(k): $16,500

age 50 or older: $22,000

SIMPLE IRA: $11,500

age 5o or older: $14,000

SEP: Up to 25% of compensation, maximum contribution of $49,000.

Traditional IRA: $5,000

age 50 or older: $6,000

Roth IRA: $5,000

age 50 or older: $6,000

Consult with your accountant for more information.

Do Better with Index funds

2008-12-17T10:32:00.000-05:00

On CNBC this morning, John Vogel, the founder of Vanguard and index mutual funds had two very interesting statistics.

1. The performance of the Total Stock Market Index is better than 80% of actively managed stock mutual funds.

2. The performance of the Total Bond Market Index is better than 85% of actively managed bond funds.

Why are you wasting 2.5% to 5.75% of your hard earned money on managers who can't beat an index?

If you have not done so already, switch to low cost, tax efficient index funds.

How Millionaires & Billionaires lose money

2008-12-15T08:07:00.000-05:00

Last week, wealthy people throughout the world saw large amounts of their money disappear. Bernard Madoff, owner of a financial services company which acts as the middle man for stock trades, started an unregistered advisory business which took money from one client to give to another.

Madoff was able to swindle some of the wealthiest and so called brightest minds in the world to invest their money with him. He provided no background information or details about his advisory business to his clients and if they asked too many questions he would tell them to leave.

There are many lessons to be learned from the money these wealthy people lost.

Transparency- Work with a registered investment advisor (RIA), make sure you receive their Form ADV II and look up their records online. They have to be registered with individual State(s) or the SEC. Receive an updated Form ADV II. This is a disclosure document and includes information such as services provided, fee schedule, background information of the advisor(s), etc.
Keep it Simple- Stay away from complex products be they funds, structured notes, hedge funds, funds of funds. These types of securities are not easy to understand, have layers of details, and can not be sold easily. No gimmicks.
Ask Questions- Do your homework on the person advising you. When you meet with them treat it like an interview. Find out their background, their values, and how they do business. Work with someone who shares your ideals.
Anyone who says they never lost clients money is lying- Mr. Madoff showed investors 12% annual returns for 15 years. Other fund managers ran tests of his investment style/decisions and could not replicate his returns.
Passive investing will keep you out of trouble- Once again, an active management style lost clients money. Stick with a diversified mix of index funds with low expenses, low taxes, and transparent holdings.

http://petersonwealthadvisory.com

Treasuries and Cutting Costs

2008-12-12T12:10:00.000-05:00

Investors are so scared that they are willing to give their money to the government and receive nothing or even lose money in return.

This week, 3 month U.S. Treasury Bills had an interest rate less than 0%. This is the first time rates have gone below 0% since the U.S. started selling the debt in 1929. The reason for the 0% rate is investors have lost confidence in other types of investments and see Treasuries as the safest place for their money.

All of this is happening while the Treasury is increasing supply which should be producing higher interest rates. Fundamentally, prices should be falling and rates should be going up. At some point, the trend will reverse and Treasury bond prices will fall either because there are too many bonds, investors believe the economy is getting better, or international bond holders sell U.S. Treasuries to fund their own economies.

The economy will not stay in the doldrums forever. Start your search now for areas that are beaten down and that offer higher interest rates. The stock market will turn around before the economy does (See post from December 10th).

Cutting Costs

Many people are looking for ways to cut costs. One thing to consider is raising your deductible on your car insurance. If you have a $200 deductible on your policy, raising it to $500 could reduce the cost of collision and comprehensive coverage by up to 30%. Raising your deductible to $1,000 could lower your premium by 40% or more, according to the Insurance Information Institute. Just make sure you have enough money put aside to cover the higher deductible amount in case you're in an accident.

If you are in the market for a new car consult your insurance agent before you buy a car or truck. Premiums vary significantly from one type of car or truck to another. Insurers review several factors, including repair costs, the likelihood the vehicle will be stolen and the model's safety record.

Past is repeating itself

2008-12-10T13:54:00.000-05:00

Companies are failing. Layoffs are spreading. Businesses are cutting expenses.

These are familiar responses to recessions. I remember the stock market reaction to the recessions of 1990-91 and 2000-02 and was confused at the time. I came to learn valuable lessons that could help us going forward.

In 1990, I was 13, and I started investing with summer job money. George Bush, the 41st President, was in office and the economy was in a recession. The S&P 500 went down 6.56% for all of 1990. Unemployment started going up in 1989 and peaked in 1992.

Businesses started to cut costs, jobs, and became more efficient and the stock market rewarded them for the changes they made. Starting in November of 1990 the stock market had 7 straight months of positive returns. I remember wondering why the stock market was going up in the face of all the bad news. I learned that stocks are forward looking and investors knew that the actions companies were taking in the present will bring profits in the near future.

The S&P 500 gave investors positive returns from 1991 to 1999. If you left the market at the bottom in October of 1990 after losing 16.25% you really messed up. The S&P 500 went up 383% from November 1990 through December 1999.

After years of expansion in the 90's, the U.S. economy suffered another recession in 2000-2002. The recession started while Bill Clinton was in office and followed George W. Bush into office. The events of 9/11 created further instability in the economy and made it last longer.

Once again, businesses made tough decisions. They cut costs, laid off workers, and became more efficient. Unemployment peaked in the last half of 2003. The low in the S&P 500 came in February 2003 at 841.15, down 43.87% from December 31st, 1999. In March of 2003, the market turned around and had 5 years of positive returns. From the bottom in February 2003 to December 2007, the S&P 500 grew 74.57%.

Companies are now cutting costs, laying off workers, and becoming more efficient. No one nows when the market will turn around, maybe it already has. If you are not buying more stocks now or you are completely out of stocks, you will not participate in the the gains to come in the future. This is a mistake that can be avoided by looking back at the past and learning from history.

www2.standardandpoors.com/spf/xls/index/MONTHLY.xls

http://caps.fool.com/blogs/viewpost.aspx?bpid=117070&t=01004553487438585767

Car Purchase

2008-12-08T13:23:00.000-05:00

Next time you are out looking for a car, what car dealership will you head to? Ford, GM, Dodge or Honda, Toyota, or Hyundai?

My wife and I are looking for a new car right now. Our situation is changing and we will need more room to haul around more people. The first 3 manufacturers, the so called "domestic" automakers, are losing sales, closing facilities and asking for a government bailout. At the same time, the other 3, the "foreign" manufacturers, are convincing more consumers to buy their cars and building more manufacturing facilities here in the U.S. For me, the definition of a domestic car is: it is built here in the U.S. and is uses American workers.

At first, we considered the GMC Acadia. It looks nice and has the 3 rows we are looking for. The price for a new basic Acadia with leather is about $35,000. We test drove it and it handled nicely and was comfortable. But, Consumer Reports recently put the Acadia on its "Unreliable" list of new cars. Also, if we wanted to finance it through GMAC, the GM unit that provides loans to GM car buyers, the interest rate is 13%. Granted, you can find better financing at a bank, but GM was offering 0% financing just this year.

We started doing more research on what car to purchase and came across the Honda Pilot. Motor Trend, Car and Driver, Consumer Reports give the 2009 Pilot great reviews. So, we took it for a test drive. We loved the car. It ran smooth, felt secure and stable, and had plenty of room to fit 8 and luggage. The Pilot has more standard features than the Acadia and MSRP is about $1,000 less than the Acadia. On top of that, Honda Financing is offering 1.9% or 3.9% financing depending on the length of the loan.

Running the numbers, the monthly payment on the Acadia would be $938 for 48 months. The Honda Pilot monthly payment would come to $767. Total savings of $171 a month. Take those savings and invest them for 4 years in a 60% stocks, 30% bonds, and 10% cash allocation. This has an average return of 9.41% and would give you an extra $10,000.

For those 4 years, we drove a car that more than likely did not have any major mechanical problems, provided a pleasurable driving, and Honda is almost certainly here to service the warranty. Plus, we saved a substantial amount of money to use on other priorities.

www.PetersonWealthAdvisory.com

Your Home is Not an Investment

2008-12-03T13:19:00.000-05:00

I have recently heard people saying they are looking at buying a house. Some want to move up to something bigger and others are first time home buyers. Mortgage rates have fallen substantially over the last week and look to be heading lower. With all of the foreclosed homes adding to too much inventory, there are many great deals for buyers.

Many home purchases look at their primary residence as an investment that will return outsize returns over time. However, when you run the numbers, home owners should come back to reality.

After researching the true costs and returns of housing, there are definite short comings to thinking your house as an investment similar to stocks. The following is the average cost of owning a home from 1977 to 2007.

The Cost of Homeownership Over 30 years (1977-2007)

Mortgage: $50,000 (Median Home Price in 1977 $48,800)

Down Payment: $10,000

Interest: $50,000 (average rate in 1977 = 8.72%; includes tax deduction for 33% bracket)

Taxes & Insurance: $90,000 ($3,000 a year)

Maintenance: $54,000 ($150 a month)

Major Repairs & Improvements: $150,000

Total Costs: $394,000

Estimated Value in 2007: $290,500

Loss = $103,500

Remember these numbers assume you stay in the house for 30 years. The average homeowner moves within 7 years. This raises the cost of homeownership significantly because of realtor costs, higher taxes because of increased assessed values, multiple repair/improvements, and moving costs.

House Appreciation

According to the S&P Case-Shiller home-price index, since 1890, home prices have increased between 2.5% and 3.0% a year. This increase is adjusted for inflation. Various researchers project average prices will increase between 1% and 4% per year after inflation over the next 20 years. These numbers reflect an increase in value and not the total cost of owning a home. If you include those costs you are likely to be slightly if at all ahead.

Stock Appreciation

From 1926 to 2006, a diversified mix of 50% stocks, 40% bonds, and 10% cash would have returned 5.61% after inflation. If you take 1% off for expenses you are left with a return of 4.61%.

Stocks vs. Home Ownership (1977 to 2007)

Earlier we discovered a home bought for $50,000 in 1977 would be worth $290,500 in 2007.

Take $50,000 and invest it in a mix of 50% stocks, 40% bonds, and 10% cash. From 1977 to 2007 this mix returned an average of 10.33% giving you $945,505.

We all need a place to live but realize that putting money in a mortgage is not investing.

Source for Costs of Ownership from Office of Federal Housing Enterprise Oversight

Market Return information from Ibbotson Associates.

Lessons on Investment Choices

2008-12-01T09:35:00.000-05:00

CMO, CDO, CDS, ARS. Confused? Well, you are not the only one. These are just some of the "engineered" products firms on Wall Street produced to help put the economy in its current doldrums. They also caused many investors portfolios to explode and suffer huge losses. Instead of investing in complex investments which have no history, stick with the following:

Buy from established, well regarded fund companies - Vanguard and iShares are two of the biggest in the industry with sound reputations.
Buy passive index mutual funds or Exchange Traded Funds (ETF) - Index funds over low cost investing and perform better than 80% of actively managed mutual funds.
Stay Diversified - Do not look for the hot stock, sector, or country. Broad diversification amongst Growth, Value, U.S., Euro/Pacific, Emerging Markets, and a couple others will serve you well.
Keep costs low - Index funds charge investors the least amount while actively managed funds charge the most. What do you get when compared to index funds for the extra cost: underperformance, higher taxes, and less transparency, less money for you. Vanguard Large Cap Value ETF (VTV) charges 0.10% while American Funds Value Fund (AMECX) charges 0.58% plus 5.75% upfront sales charge. Excluding costs, over the past 5 years VTV performed 1% better than AMECX.

Time to look at Corporate Bonds

2008-11-26T09:32:00.000-05:00

Without knowing when the stock market or bond market hits bottom and a significant drop in prices, know is the time to look for bargains. One area of interest is investment grade corporate bonds.

Over the last year, investment grade bonds (Baa-/BBB- and better) have been beaten up due to investor uncertainty of getting their money back on their bond purchases. Corporate earnings are falling, dividends are being cut, and some companies are defaulting on their loans. Prices for bonds have adjusted accordingly and corporations have increased their cash reserves to the highest level in 15 years, $675 billion.

Year to date, iShares Investment Grade Corporate Bond (LQD) ETF is down 13.66%. Over the last 5 years it is down 18.62%. With falling bond prices comes higher yields. As of 11/24/08, LQD is yielding 7.52%.

Meanwhile, the iShares U.S. Government Treasuries 7-10 year maturity (IEF) ETF is up 8.14% year to date. Over the past 5 years it is up 10.24%. However, it is only yielding 3.75%. The iShares 1-3 year Treasuries (SHY) is yielding 1.24%.

There are advantages to buying corporate bonds over stocks. First, the corporation is paying you interest to hold their paper while you wait for the bond to appreciate in price. Also, buying corporate bonds also offers more security than buying stocks. When a company files for bankruptcy protection, bondholders will be repaid before stockholders.

The likelihood that Treasuries will continue to outperform corporate bonds is less likely because the Government is selling more bonds to cover new debt, thereby increasing supply. Also foreign governments are less likely to buy U.S. Treasuries because they are using their money to stimulate their own economies.

As soon as investors become more confident that the worst is over, they will start to look for higher returns than the 1% short term Treasuries offer. Look for corporate bonds to benefit from changing investor attitudes.

Lost your job? What You Should Do with Your Retirement Account

2008-11-25T09:24:00.000-05:00

First, let me say I am sorry to hear about your job loss. I know you lost your job because you are reading about your options for your retirement plan. For further explanation or to discuss what option is best for you please contact Peterson Wealth Advisory.

Traditional 401(k). Options are listed in order most preferred to least preferred:

Rollover into IRA- This gives you the most flexibility for your investments. The advantage of rolling over your money to an IRA is that you have control over how the money is invested and have many more investment options. A rollover IRA allows you to transfer money from an employer-sponsored retirement plan without incurring any tax or early withdrawal penalties. You may have to sell some or all of the funds inside the account depending on who you roll the money over to but there will not be any penalties or taxes. Also, you have the option of transferring the money in the rollover IRA to your new employer's retirement plan provided that you do not make any contributions to your rollover IRA.

Rollover into your new company's retirement plan- You are allowed to roll over pre-tax contributions and any earnings in the fund into your new employers tax deferred retirement savings plan. You are not allowed to roll over after-tax contributions. Your new employer may require that you work for them for a specified period of time before you are eligible to contribute or receive matching contributions in their pension plan.

Keep it where it is- If you meet the criteria listed in the retirement plan document, you have the option of keeping your money in the plan. If you decide to leave your money with your former employer, you may not have the flexibility to decide what happens to that money. You may want to consider leaving the money with your former employer if you are happy with the investment vehicles you have selected and you are able to direct how your money is invested. You should consider rolling the money over if the employer limits access or restricts the plan because you are no longer an employee.

Cash out- This is a costly option because of the taxes and penalties incurred, and 45% of people choose this option. Here is why it is a bad idea. There is a 10% penalty for withdrawing money before the age of 591/2 plus payment of ordinary income taxes. Exceptions to the 10% penalty include:

The employee's death
The employee's total and permanent disability
Separation from service in or after the year the employee reached age 55
Substantially equal periodic payments under section 72(t)
The distributions were required by a divorce decree or separation agreement
You paid for medical expenses exceeding 7.5% of your adjusted gross income.

Also remember, that a minimum amount is required to be distributed by April 1 of the year following the year the participant reaches age 70 ½.

Distribution Rules for Roth 401(k)

10% penalty plus income taxes on earnings (appreciation above contributions) withdrawals before age 59 1/2. Example: If you contributed $100 into the Roth 401(k) and it grew to $110, you would pay a 10% penalty plus income tax rate on $10.
No penalty or taxes taken if distribution is after having the account for 5 years and the person is age 59 1/2 or older.

Distribution Rules for SIMPLE IRA

A minimum amount is required to be distributed by April 1 of the year following the year the participant reaches age 70 ½.
A withdrawal is taxable in the year received.
If a participant makes a withdrawal before he or she attains age 59 ½, generally a 10% additional tax applies.
If this withdrawal occurs within the first 2 years of participation, the 10% tax is increased to 25%.
SIMPLE IRA contributions and earnings may be rolled over tax-free from one SIMPLE IRA to another.
A tax-free rollover may also be made from a SIMPLE IRA to an IRA that is not a SIMPLE IRA, but only after 2 years of participation in the SIMPLE IRA plan.

Plan Now for the Turnaround

2008-11-24T09:06:00.000-05:00

What should you be doing now to your portfolio?

Here is a checklist of things to evaluate right now:

Costs- Evaluate the internal costs of the funds you use. Depending on the share class, actively managed funds have internal expenses ranging from 0.75% to 2.35%. What do they provide for the cost? Underperforming funds. Over the past 5 years, 74% of actively managed funds underperformed their benchmark index.* I advocate the use of index funds (ETF's or Mutual Funds) with low expenses 0.3% or less. Part of the money you save from your investments can be used to employ an independent financial planner who will get to know you, understand your goals, and create a plan to meet those goals.
Taxes- This is the time of year where actively managed mutual funds distribute capital gains to shareholders based on the buying and selling inside the fund. The amount that is distributed reduces the overall price of the fund and you are taxed on the amount distributed. This is unfortunate because in all likely hood you will be paying taxes when your fund has lost money. Avoid taxes by buying index funds which rarely distribute capital gains because the stocks inside the index rarely change.
Revisit the goals of your plan- How has your portfolio performed in this market? Have you lost more than you feel comfortable losing? Will you be delaying retirement? How has your situation changed?
Reallocate- With all the movement in the market most asset allocations are out of whack. After you determine your updated goals and risk profile, look at your current allocations and make adjustments. This can be done in two ways: When new money is brought in buy assets that you want more of. Or sell the asset you want less of and buy the asset you want more of. Be aware of tax consequences when doing selling.
Set up a dollar cost averaging plan- There are huge sales on stocks and certain bonds. This is a huge opportunity that disciplined people will take advantage of. Sure, times are bad and a turnaround does not seem on the horizon but we will come out of this. And it probably will happen without anyone knowing. Don't try to time the bottom. Buy in pre-determined increments of diversified assets. The adage is buy low sell high. Well, it looks like things are low to me.

Be patient, save as much as you can, and and have someone like me, a fee only, independent investment advisor help you.

*http://biz.yahoo.com/prnews/081113/ny45959.html?.v=1

Grasshoppers didn't prepare

2008-11-21T09:54:00.000-05:00

Yesterday, I thought of an old fable, The Grasshopper and the Ant, and its relevance to today's economic problems. Aesop's story has become a cliche but in times of uncertainty, it helps to go back to basics and think in simple, understandable terms.

The Grasshopper and the Ant

The Grasshopper, so blithe and so gay,

Sang the summer time away.

Pinched and poor the spendthrift grew,

When the sour north-easter blew.

In her larder not a scrap,

Bread to taste, nor drink to lap.

To the Ant, her neighbor, she

Went to moan her penury,

Praying for a loan of wheat,

Just to make a loaf to eat,

Till the sunshine came again.

"All I say is fair and plain,

I will pay you every grain,

Principal and interest too,

Before harvest, I tell you,

On my honer - every pound.

Ere a single sheaf is bound."

The Ant's a very prudent friend,

Never much disposed to lend;

Virtues great and failings small,

this her failing least of all,

Quoth she, "How spent you the summer?"

"Night and day to each new comer

I sang gaily, by your leave;

Singing, singing, morn and eve."

"You sang? I see it at a glance.

Well, then, now's the time to dance."

We can debate whether or not the grasshopper should be helped. It is compassionate to offer a helping hand to the grasshopper. However, if you provide help with no consequences, what incentive is there to change. This story is analogous to so many situations right now: government spending, individual spending, corporate spending, corporations asking the government for money, individuals asking the government for money, the government TAKING more money.

Learn from these times.

Create a "rainy day fund" with at least 6 months of cash/Certificates of Deposit.
Buy more stocks NOW. If you bought the S&P 500 at the end of 1932 during the Great Depression, 5 years later you gained 86%; in 10 years 120%; in 20 years 926%.*
With prices of goods expected to continue falling, the money you save now will buy more next year.
Stop asking and expecting the government to help you.
If you ask the government for anything ask them to lower your taxes.
But only if you actually pay taxes.

You will be so much happier when you rely on yourself and control your own path.

*Data from WSJ article by James B. Stewart October 29th, 2008