Fagan Associates Archive for November, 2008

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio.

Year-End Tax Planning for Shareholders of Mutual Funds!

Friday, November 28th, 2008

This article is the second of a four part series that pertains to year-end financial planning. The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared last week, this article, “Year-End Charitable Bequest Planning; and “Investment Portfolio Re-Balancing for the New Year.” Following this series, we will immediately provide readers with a Review of 2008 and our Investment Outlook for 2009.

November 28, 2008 …Prior to identifying those areas that can help you reduce your taxes regarding your mutual fund holdings, it is prudent to briefly review the IRS rules surrounding capital gains and losses, in general. If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income. The balance can be carried forward, indefinitely. An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss. Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are taxed at either five percent for taxpayers in the ten or fifteen percent bracket or at fifteen percent for taxpayers in any higher bracket. Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.

Number one, call your mutual fund and ask them if they are planning any year-end distributions. Keep in mind that capital gains declared by mutual funds are taxable regardless of whether you receive them in cash or reinvest in additional shares. Furthermore, there is no economic benefit to the distribution. It is the same as getting four taxable quarters in return for your non-taxable one dollar bill. Upon calling, should you learn that your mutual fund is intending to declare a capital gain, find out how much it will be on a per share basis and on what date it will be declared. This information will help you determine what steps, if any, need to be taken in order to minimize the impact of this declared gain.

Second, swap the mutual fund in which you have a taxable loss for a similar fund. Please note that your adjusted tax basis consists of your initial contribution to the fund plus any subsequent out-of-pocket contributions as well as any reinvested dividends or capital gains declared during prior calendar years less any withdrawals. Regardless of what others might say to the contrary, given the fact that there are over eight thousand mutual funds to choose from, there is always an appropriate alternative to your current fund. Do not think that your fund is “the best” or “one of a kind.”

Be certain to check with your tax advisor prior to making any year-end portfolio transactions.

Good luck, pruning your portfolio for tax savings makes dollars and cents!

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Year-End Tax Planning for Shareholders Of Individual Stocks and Bonds!

Sunday, November 23rd, 2008

This article is the first of a four part series that pertains to year-end financial planning. The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, this article, “Year-End Tax Planning for Shareholders of Mutual Funds”; “Year-End Charitable Bequest Planning” and “Investment Portfolio Re-Balancing for the New Year.” Following this series, we will provide readers with a Review of 2008 and our Investment Outlook for 2009.

November 23, 2008 …One of the least time consuming and most profitable tasks one can assume during December as it pertains to their investment portfolio is to attempt to offset realized capital gains with capital losses in your portfolio. Given the fact that 2008 has “blessed” us with one of the worst bear markets on records, investors that buy and sell individual securities, no doubt, have some that have declined in market value relative to their purchase price. Assuming that the shares of the depreciated security are held in a non-qualified taxable account (not an IRA or pension plan), one might sell these shares and claim the loss on Schedule D of Federal Filing Form 1040.

Please note the following important IRS regulation that pertains to Capital Gains and Losses. If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income. The balance can be carried forward, indefinitely.

An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss. Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are taxed at either five percent for taxpayers in the ten or fifteen percent bracket or at fifteen percent for taxpayers in any higher bracket. Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income. For most taxpayers, the rate is twenty-eight percent for the Federal Government. In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

One final consideration prior to executing a stock or bond trade for tax purposes would be to determine if, by executing this trade, a wash sale would result. A wash sale exists when the transaction results in a loss and a “substantially identical security” is purchased within thirty days. If this should occur, the tax loss created by the sale would not be deductible. Please note that should the wash sale result in a gain, the gain is taxable.

As an aside, never forget that it is always prudent to consider the impact of selling a stock upon your portfolio. Simply put, it is seldom wise to make a transaction solely for the purpose of saving money on your tax return!

A sale or sales of appreciating and/or depreciated securities represent only one tactic an investor can deploy when tax planning at year end. Furthermore, please note that this decision must be made in conjunction with and in full knowledge of the resulting impact on your other investments, such as mutual funds. Be certain to check with your tax advisor prior to making any year-end portfolio transactions!

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Commentary for November 17, 2008

Monday, November 17th, 2008

Good Morning!

Stocks remain under pressure this morning after dropping nearly 400 points over the last hour of trading on Friday. As we have noted many times (too many than we would have liked), do not try to catch the bottom allocate assets to help meet your longer-term (three plus years) objectives and remain in cash for all needs shorter than this time frame.

We liken this crisis as an economic version of World War II. Budget deficits ran up to 30% of GDP during World War II and even if the U.S. runs a $1 trillion deficit, that still amounts to less than 7.5% of GDP. That said, once we get past this mess, the government must use fiscal restraint.

Bottom line for investors, buy on weakness in the market, not the kind of which may be a day or two, but when fear is elevated, even from these levels. High yielding stocks with solid balance sheets and payout ratios (dividends as a percentage of earnings) below 60%. Look also for opportunities in the corporate fixed income markets and preferred stock.

Dennis Fagan
Chris Fagan

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Bonds Offer Attractive Investment Opportunity

Sunday, November 16th, 2008

Given the current uncertainty surrounding the economy and the job market, many individuals continue to shy away from stocks, but are looking for opportunities elsewhere. May we suggest bonds and bond funds, which by any measure currently offer valuations relative to U.S. Treasuries, the likes of which we have not witnessed since the Great Depression. Consider the fact that investment grade corporate bonds yield more than eight percent while the ten-year U.S. Treasury Note hovers somewhere below four percent. This is true for bond funds as well. Also, consider the fact that high grade National Municipal General Obligation and reliable Revenue Bonds also are paying more than the above-referenced U.S. Treasury Note and are tax-exempt at the Federal and in many instances the state level as well. With this in mind, we thought that a briefing on the mechanics of bonds would be appropriate.

Let us begin by first stating that there are many different criteria to take into account when considering the purchase of an individual bond or bond fund. Some of these criteria are applicable to both and some only to bond owners. These include who the issuer is; the time period between the date or purchase and the date of maturity; whether or the bond is callable or non-callable; whether the bond is trading at a premium or a discount to par; what the interest rate will be and how often it will be paid. A final determining factor on the suitability of a bond purchase is, quite often, the most important. That is, the taxation of the income received from the bond and upon the sale of the security. It is this topic that we will address.

The vast majority of issuers of bonds can be classified into one of three categories. They include Corporations, the United States Government and its Agencies; and State or Local Municipalities.

When you buy an individual bond issued by a Corporation or purchase shares in an open-ended Corporate Bond Fund, the interest you receive is taxable as ordinary income in the year in which it is paid. Additionally, should you sell a bond that you originally purchased at a discount to par value (the price at which the interest rate equals the current yield), at or above the purchase price you would pay capital gains taxes on the difference. Conversely, should you sell the bond for a loss, that loss would be a capital loss.

Should you purchase an individual bond issued by the United States Government or one of its Agencies or an Open-Ended Mutual Fund that invests in these bonds, there is a difference in the taxation as compared to a Corporate Bond or Corporate Bond Fund. A Government Obligation, issued as U.S. Treasury Bills, U.S. Treasury Notes and U.S. Treasury Bonds are taxable at the Federal level, but exempt from State Income Tax. This also holds true for Open-Ended Mutual Funds. In addition, the treatment upon the sale of the bond or bond fund is exactly the same as a Corporate Bond or Corporate Bond Fund.

The final class of bond that we wish to discuss is one that is issued by a Municipality. A bond issued by a municipality is tax-exempt at the Federal level as well as in the State in which the bond is issued. This also holds true with a Municipal Bond Fund. The income is tax-exempt at the Federal level and tax-exempt for the proportion of the income derived from bonds issued within your state of residency. For example, should you own a Municipal Bond Fund that invests in bonds of other states as well as New York State (your assumed state of residency for income tax purposes), only the income from the bonds issued by New York Municipalities is tax-exempt at both the Federal and state levels. All other income is tax-exempt at the Federal level, but taxable at the state level.

Therefore, when deciding what type of bond bests suits your needs, you must first determine your Federal and State income tax brackets. Generally speaking, those in the 28% Federal income tax bracket would be well served by a Municipal Bond or Municipal Bond Fund. Your State income tax bracket would determine whether to invest in a New York State Municipal Bond/fund or one that invests nationally. Conversely, should you be in a 15% Federal income tax bracket, a Corporate or Treasury bond would be appropriate. Either way, check with your Financial and Tax Advisor for the bond that best suits your objectives. Remember, when investing in bonds, what counts is not what you earn but rather what you keep after taxes!

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Commentary for November 14, 2008

Friday, November 14th, 2008

Good Morning!

Stocks rebounded sharply yesterday after mildly piercing their mid-October lows. As we have noted time and time again, if you are inclined to purchase equities here, make certain that you BUY ON WEAKNESS rather than on strength. Given the daily price swings in the market, you might be able to pick up an investment several percentages below where they close at the end of the day. That said, we have met with many of our clients, reaffirming their goals, objectives as well as easing their concerns by evaluating their complete financial picture, including defined benefit pension plans, Social Security, and Real Estate holdings, among other issues. We suggest you do the same.

As we have noted within past commentaries, we believe that “generational” opportunities exist in the fixed income markets.

Dennis Fagan
Chris Fagan

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CBS 6 Answers Team

Thursday, November 13th, 2008


CBS6 WRGB

Excerpt from
http://www.cbs6albany.com/

Below are some of the questions sent to CBS 6 Answers Team member Dennis Fagan during Wednesday’s live web chat:


CBS 6 Viewer: Hi there. My husband currently contributes 17% of his pay into his 401K at work. We are steadily losing money - my question is this: would we be better off lowering the contribution (to the 5% needed for company match) and putting the rest into something like a CD? Thank you.
Dennis Fagan: Do not lower the contribution as you are receiving a tax deduction and perhaps a company match on each dollar your husband contributes. If you wish to become more conservative, select a guaranteed option within the 401(k). That said, you should evaluate your objectives and your time horizon before you sell anything or reduce contributions to the stock market AFTER it has already fallen more than 40%

CBS 6 Viewer: I have about $18,000 with mutual funds with Key Bank. I am recently retired. Should I ride the market out, or take the money out now?
A-Team DF: It depends upon what mutual funds they are and whether or not you need the money (or income from it) within the next three to five years.
CBS 6 Viewer: Franklin Templeton Funding. I really do not need the money now.
A-Team DF: As long as you don’t need the money, the vast majority of the Franklin Templeton funds will work. However, you should have a thorough understanding of what fund you are in, what the objectives are and how much risk you are assuming. If you know the name of the specific fund, I can help.
CBS 6 Viewer: The only info I have on my statement is: Franklin Templeton Funding Funds Allocation CL A. Does that help? Should I talk to my agent at Key Bank?
A-Team DF: That does help. This is a balanced fund with about an equal distribution between stocks and bonds. Hang in there.
CBS 6 Viewer: Thank you for your help.

CBS 6 Viewer: I’m not sure if I selected the correct option. We run a small trucking company that contracts with USPS and employs 60 people. In your opinion, do you feel that our company is recession proof? I know this is a tough question to answer and may not have a yes or no answer. One would think that dealing with the government it should be some what recession proof? Hmm, maybe not. LOL.
A-Team DF: I don’t know if this is the correct option… Let me just say that I would assume that NO company is recession proof if this is a DEEP recession. I would assume that this is going to be one. Look at your sources of revenue as well as trying to cut your expenses now before you have to.

CBS 6 Viewer: Who should a person contact to invest a small amount of money - about 10k - in the stock market? Most financial groups are looking for people with at least 50k.
A-Team DF: You can establish a discount brokerage account if you are comfortable investing on your own - or look for a fee-based advisor that accepts these minimums. That said, we would be happy to meet with you.

CBS 6 Viewer: My husband has been offered (I would say is being pressured) an opportunity to buy into Rockwell Energy Management, LLC; Rockwell Energy Acquisition Fund, LP. At first he was offered one “share” for $100,000. They then offered him a half-share at $50,000. Now they are down to a quarter share at $25,000. They sent a book about their company and talked about the natural gas project… If they happen to get the offer down to something we can afford, is this a good idea? I am retired and my husband will retire within five years.
A-Team DF: No, stay out of partnerships where there is no liquid market (meaning you cannot see the value of the account and/or redeem the shares upon demand). This is not the time to speculate.

CBS 6 Viewer: My husband and I are state retirees without debt and we do own our home. We are still in NYS Deferred Compensation Plan. Should we take some distributions at this time and invest in CD’s or should we leave the funds in the Stable Income Fund?
A-Team DF: Continue to leave it in the Stable Income Fund. Generally speaking, it is better to continue the tax deferred growth than removing it now only to have to pay taxes.

CBS 6 Viewer: I am 62 years old, a retired teacher, collecting retirement and still working part time earning 30,000 this year and 25,000 next year when I will stop working. My husband is 59 years old and still working until Dec, 2009. I have an IRA which has decreased from 350,000 to about 200,000. I have a financial planner who says I should keep my money where it is and ride it out. Do you agree with that plan?
A-Team DF: Don’t be patient any longer. You need to review your account, reevaluate your positions, objectives, tolerance to risk and learn about the history of how bear markets run their course. After that, assume a “worst case” scenario (within reason) for your investment portfolio and then act. Also, when considering your financial position, don’t just look at your investment portfolio. Also consider your pension and social security income.

CBS 6 Viewer: I may be interested in finding an new financial advisor. Any advise on how to go about that to get a good fit for my situation?
A-Team DF: Fee only. Experienced. Track record. Funds custodied at a major discount brokerage firm. Referrals.
CBS 6 Viewer: What is your advice about applying for Social Security? Is it financially better to apply at 62 or 66?
A-Team DF: It depends upon your income needs as well as your health. If you need the income from SS to retire, then go ahead. However, the break even period is approximately 12-15 years depending upon your investment returns.

CBS 6 Viewer: My wife and I are 12 to 15 years from retirement and have one child in last year of college. Our only debt is $335 a month for a small addition on the house - college has been paid for until this point. Our combined IRAs (traditional and Roth), annuities and small 401K have plummeted from $193,000 to $102,000. We have small savings for emergencies and CD - about $50,000 worth. If we withdraw our IRAs and annuities, I believe we will pay a 10% tax right off the top. If we were to do this, the balance would go into the CD and slowly return it to the market. Is this a good or a bad idea? If it’s a bad one, can we roll these into another type of vehicle without penalty?
A-Team DF: Bad idea. You do not have to remove your money from an IRA in order to put it into CD’s. You can have a CD that is also an IRA. That said, are you certain that you want to get out of the stock market AFTER it has already declined 40%? There have been 11 bear markets of more than 40% with ten of those ending before the stock market dropped 50%. The one time that it went further than that was during the Great Depression. Given this, unless you believe that we are entering a depressionary period, we are much closer to the bottom of this bear market (nightmare) than the top.

CBS 6 Viewer: The company I work for has a $2,000 403b match yearly in my money with American Funds. I also have my own side, business, where I’ve made about $30,000. Is one way that I can offset the total income from both jobs be that I increase my 403b contribution from my first job to lower my gross income since I don’t yet have a separate IRA for myself? Also, can’t I open an IRA with a single distribution at the end of the year for the same reason? If so, is there a max that I can put in?
A-Team DF: Yes, you can increase your contributions to your 403(b) or, if you wish or if you exceed the limits on your 403(b) open an IRA.
CBS 6 Viewer: Is there a max or min amount I can put into my own IRA? Is the max for the (b) $15,000 a year so I could only put in 13 plus their match?
A-Team DF: For 2008, the rules are up to 100% of earned income or $5,000 for those under age 50 and up to $6,000 for those above 50.

CBS 6 Viewer: For people in their mid to late 50’s who were planning on retiring in the next couple of years - how long do you think it will take to recoup the paper losses that we’ve incurred this year?
A-Team DF: The S&P 500 has dropped about 40% from its high. Assuming a rate of return of 8% per year, from these levels, it will take close to 7 years because you are working from a lower level. You might want to revisit your entire financial picture. Perhaps things are not as grim is my response.
CBS 6 Viewer: When you say revisit the financial picture, do you mean meet with a financial advisor to get into more conservative funds? Also, when is this stimulus package going to stop this downward spiral of the stock market?
A-Team DF: No, I do not necessarily mean move to more conservative funds. I do mean that you should look at exactly where you are financially at the current time, what your goals and objectives are, what sources will be available to utilize for income after retirement and then set a plan. Perhaps the decline in the market has set back your goals.

CBS 6 Viewer: Can I have too much GE stock in my retirement account?
A-Team DF: Certainly. Try to keep it under 10% of your investment assets. That said, now may not be the time to lighten up. Come up with a strategy to reduce your exposure.

CBS 6 Viewer: How do I get out of the stock market quickly without losing my shirt?
A-Team DF: The S&P 500 is down 40% from its October 2007 high. That said, if a company is publicly traded, you can sell it at 9:30 tomorrow morning and after a 3-day settlement, receive a check.

CBS 6 Viewer: I have come into some money through an inheritance, and it has enabled me to pay off my credit card debt. It is a bit bittersweet because I lost my wife, so at this point my home is supported by my salary alone. I am lucky enough to have a reasonable mortgage that I refinanced a while back and have streamlined my bills, so basically I am living paycheck to paycheck. On occasion I have to dip into this inheritance just to pay for things such as taxes or the unpredictables that I would probably otherwise have to put on a charge card. The money is in a savings/checking account receiving very little interest. Is there a better approach to earn a better interest rate but still leave a bit around in case of emergency?
A-Team DF: Please accept my condolences for the loss of your wife. Regarding your question, there are many vehicles that may help you receive more interest from your inheritance. Certificates of Deposit are offering up to 5% and there are other options as well - although some of which you shoulder some of the risk.
CBS 6 Viewer: The CD avenue sounds like the way to go. I have about 150K in this inheritance and I have been chipping away at it at about 10K a year. So that’s what I lack in my paycheck in order to live in what I consider a pretty reasonable life style. How should I break that up and invest it? Obviously the more I put into a CD, the more I can make on it but I am a bit paranoid to lock too much up.
A-Team DF: Stagger (ladder) the maturities on the CD’s in the following fashion, excluding what you wish to keep out for emergencies, etc… 1/4 three months; 1/4 six months; 1/4 9 months and 1/4 twelve months. Then when one matures, just renew it for a year. This strategy would change if interest rates change drastically.

CBS 6 Viewer: Is there any end in sight for what the market is going through?
A-Team DF: I hope so! Historically, there have been eleven bear markets (this one included) of more than 40%. Ten have stopped prior to 50%. The only one that did not was during the Great Depression that fell 89%. With this in mind, there is a good chance we are nearing the bottom. However, DEFINITELY review your current investment strategy to make certain that you can handle whatever comes.

CBS 6 Viewer: What would you tell a 24-year-old young man who has $30,000 sitting in his checking account to do with his money? He has no credit card debt or auto loans - he does have a 125k mtg and a two-year-old child.
A-Team DF: Begin to save through your company sponsored 401(k), deferred comp or 403(b) plan first.
CBS 6 Viewer: He was putting in 5% but then he stopped. He was not happy with the lack of growth.
A-Team DF: Tell him that he is 24 and saving for when he is 64 so that it doesn’t matter where the stock market goes over the next 1, 2,3, 5 or even ten years! In fact, he accumulates more shares as it stays low. Furthermore, he gets a tax deduction on each deposit! He is being shortsighted.

CBS 6 Viewer: For students such as myself in college - should we be looking to cut our college trip shorter or change colleges, due to the increase in tuitions?
A-Team DF: Do everything you can to finish college! Unfortunately you are going through college at a very trying time for our nation’s economy. I graduated from SUNY Albany in 1983, a recession similar to this. Hang in there.

For more information, go to the Weekly Report

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Commentary for November 12, 2008

Wednesday, November 12th, 2008

Good Morning!

Stocks look to head lower again as investors are increasingly anxious that this economic malaise may last WELL into 2009. What have we done to try to make certain that our clients come out the other end of this bear market and are in a position to prosper at that point? We have continued to move up the food chain to high quality companies with strong balance sheets and/or have maintained a high level of cash. We have used some of this cash to lock in Certificates of Deposits and short-term U.S. Treasury Securities. We have also looked at alternatives to common stock and stock only equity funds such as corporate bond/bond funds and preferred stocks, some of which yield over seven percent.

We are aware that this is a time of extreme concern and share that concern. Should you wish to get together to discuss your account, please don’t hesitate to contact us.

Dennis Fagan
Chris Fagan

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Commentary for November 5, 2008

Wednesday, November 5th, 2008

Good Morning!

Regardless of the which side of the political aisle you reside, we feel confident that a new President, President-Elect Obama, will breathe a breath of fresh air into the United States. This morning, we arise with great hope that the efficiency demonstrated by President-Elect Obama during the campaign can be duplicated in his Presidency. That said, we strongly believe that, due to his intelligence, his vision, his charisma and his apparent ability to bring opposing sides together, President-Elect Obama will transform the economy into the likeness of President Clinton rather than President Carter.

Only in America can an individual rise from modest means to the pinnacle of political power. Most importantly, it is a great day for America. That said, we sincerely hope and also believe that it will ultimately be viewed as a new dawn for our economy, our respect from other nations and our citizens.

Now for the nitty-gritty. The presidential election could not have gone better for your investments. Not only will there be a change at the top, but there will also remain checks and balances from the House of Representatives and Senate. We will watch with great anticipation as President-Elect Obama names his cabinet members, hoping that this will be done in an expeditious, but well thought out manner.

Once again, congratulations to President-Elect Obama. We hope and pray for his success. God bless America!

Dennis Fagan
Chris Fagan

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