Fagan Associates Newsroom

This time of year, we all have a lot on our minds.  If you are like us, you are still raking leaves and cleaning up the year.  For our family, it is certainly time (and perhaps a little past time) to begin to get ready for the holidays and unfortunately, it will soon be time to retrieve our snow shovels.  As calendar year 2011 draws to a close, it is also time to clean up your portfolio and begin to prepare for next year.  With this in mind, we have put together a small list of some “portfolio chores” that may put more bucks in your wallet in the form of tax savings.  Please note that some of these suggestions only pertain to investments in non-qualified or currently taxable accounts.

Despite the recent rally, as of this writing the Standard & Poor’s 500 remains approximately twenty percent below its record high set back in early October 2007.  For this reason, it is likely that many of our readers have stocks that are well below your purchase price.  However, you may also believe in the long term growth prospects of the investment.  Assuming the investment is in a taxable account (non-qualified), one might double up on the current share balance in an investment, wait thirty days, and then sell the shares he/she initially held.  The benefit would be a deductible loss on the shares you ultimately sold without losing your position in the security.  The risk would be that over the next thirty days, the stock declines thereby increasing your loss due to the additional shares.  Another risk would be that your portfolio becomes too heavily weighted in a particular stock or industry for those thirty days.  Nonetheless, the widely practiced strategy merits a look.  Here’s how it works.  Let’s assume that you purchased 100 shares of General Electric at $50.00 per share.  Despite the climb from its lows to its current prices of approximately $16.00, you have still lost $3,400 in this investment.  According to the “doubling up” model, you would purchase another 100 shares of G.E. at its current price, wait thirty days and then sell your initial shares.  This exercise would enable you to deduct the loss on G.E. up to a limit of $3,000.  It would also not compromise your investment in G.E. over the next thirty days, should the stock begin to move upward.

One thought regarding the above paragraph, take out your calendar year 2010 Federal Income Tax return, look at Schedule D and determine if you are carrying forward any losses beyond the $3,000 limit mentioned above.  If you are, include this in your year-end investment planning.

Call your mutual fund and ask them if they are planning any year-end distributions.  Do not add insult to injury by having to pay taxes on capital gain distributions despite the fact that you are losing money in the fund.  Remember, capital gains declared by mutual funds are taxable despite the fact that you, as an individual, may not have benefited from the investment, and may indeed be losing money.  Furthermore, that capital gain is taxable despite the fact that you may be reinvesting in additional shares.  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 paid.  This information will help you determine what steps need to be taken in order to minimize the impact.

Swap the mutual fund that you are losing money in for a similar fund.  Two thoughts pertain to this statement, the first being that, given the fact that there are over seven thousand mutual funds to choose from, there is always an appropriate alternative for your current fund.  The second thought is more of a reminder.  Remember that your basis for tax purposes in your investment consists of any out of pocket deposits you have made into the fund plus any dividends and/or capital gains that you have reinvested into the fund either during this calendar years or prior years minus any withdrawals you have taken from the fund.  Once again, given the length and depth of this bear market, many investors may be in a position that they are losing money when comparing the current market value of their fund versus their cost basis.

Don’t wait.  Take a couple of hours to clean up your portfolio.  Our guess is that it will be time well spent.  We will be touching on other tax-savings techniques regarding your investments in the coming weeks.

Contrary to what the Occupy Wall Street (OWS) movement is protesting, we believe that there is not enough capitalism in the United States and that all Americans would be better served if the OWS movement picked up and moved their camps to Washington, DC where cronyism is rampant.

Despite the above, let us also state that we believe in much of what the Occupy Wall Street movement initially stood for, which we understand to be a return of the focus of America to the middle class.  From our perspective, more and more, too much wealth and power has been concentrated in the top one percent and that all Americans would be better served if some of the wealth and power in American corporations would be distributed among the employees and shareholders and away from upper management and the Board of Directors.

We also believe that capitalism and Wall Street has many faults.  However, theoretically, these faults should be held in check via regulations a la the somewhat recently passed Dodd-Frank Legislation and Sarbanes-Oxley Act of 2002, as well as many others.  This oversight has been spotty at best, as it appears as if too many of our esteemed Senators and Congressmen have been busy enriching themselves rather than performing their duties.

In an exhaustive study that analyzed 16,000 stock transactions by U.S. House of Representative from 1985 to 1981, entitled “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,” it was determined that “a portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).”  Within other studies, it has also been determined that U.S. Senators beat the stock market by an average of 12% per year, results that are statistically unheard of when compared to those returned by professionals in the industry.

Despite the immorality of this practice that by the way is not limited to one side of the political aisle or the other, Congressional “insider trading” is not illegal as Congressmen are, in a legal sense, not working for publicly trading companies where they would hold a fiduciary responsibility to the shareholders.

Although undeniably the best system capable of unleashing the potential of its citizens as well as provide personal freedom, we recognize that capitalism is not perfect.  However, we rely on our elected officials to curb those imperfections, one of which is greed.  It is for this reason that we urge all participants in Occupy Wall Street to concentrate their efforts on Washington, DC and urge our political leaders to always act in the best interest of their constituents, putting themselves second.

The Congressional Debt Committee, which concludes this coming Wednesday with its’ recommendations, has that opportunity.  This committee has been charged with reducing the federal deficit by at least $1.2 trillion over the next ten years.  Anything less than that should bring a sell-off in stocks while anything greater should be celebrated.

THE BOTTOM LINE – As the title of a famous Bob Dylan song states, we do believe that “The Times They Are A Changin’” as many of our new elected political leaders, both Republican and Democrat, are dedicated to making changes for the betterment of America and Americans.  However, we urge them to avoid the temptations that we can assume are great and concentrate on the job at hand which is to right the economic and social course of our country and to live up to the oath that they take upon entering office.  Our corporate leaders would also be well-served to look inwards to see where they are letting their fellow citizens and shareholders down.  Oh, by the way, this will pave the way for a major bull market move.

An interview with Gary Ran from Telemus Capital Parntners appeared during late August in Barron’s, a popular financial weekly, who noted that during market turmoil it was “hard for investors to stay focused in times like this, just when you need it the most, because there seems to be so much information  But information isn’t knowledge.”

Do you mean that all the information that is thrown at us over the internet doesn’t amount to the knowledge necessary to manage our own portfolios?  In our opinion, if it is combined with the appropriate educational background, knowledge of how businesses operate, an ability to decipher financial data and the jargon that does along with it, a temperament that is conducive to dealing with turmoil and experience, it certainly does.  Otherwise, it may not.   The problem arises when an investor discovers that they do not have one or more of these qualities only after it is too late.

For example, let’s say that after coming home from work on August 23^rd you turned on your computer and logged on to the internet to check out how the stock market did that day.  You would have discovered that the Standard & Poor’s 500, the most widely followed stock index, had rebounded nearly 40 points, but over the past month it had declined from 1,345 to that closing day value of 1,162 for a decline of 13.60%, a drop that resulted in a loss of $34,000 on your portfolio of $250,000.

What do you do?  Perhaps you look for some perspective from a trusted source, CNBC and log onto their website.  You scroll down to an article entitled “It’s ‘Only Just Begun,’ S&P Fair Value 800-900:  Analyst.”  You read on and discover that Bob Janjuah, co-head of cross-asset allocation strategy at Nomura Securities, stated in a research note that the bear market “process has only just begun.  It will not be a straight line down, but the secular (bearish) trend for risk assets is, to me, now clear and, with hindsight, this bear leg began in Q2 2011.”

Furthermore, Mr. Janjuah notes that “in this world, and using the S&P 500 purely as a risk proxy, I see ‘fair value’ for the S&P down in the 800/900 area.  I think we will see these levels trade in the next 12/15 months.  And we may even undershoot to levels last seen at the lows of Q1 2009.”

You quickly do a mental calculation and conclude that this implies another 22.00% decline at best and nearly 43.00% at worst.  After picking yourself up off the floor you immediately call your advisor and immediately sell everything.

Was that the right action to take?  Forget about whether or not it has been profitable (and as of this past Friday it has not), was it the correct move.  In our opinion the answer is no.  It is not the timing of the stock market but rather the time in the market that has historically resulted in investors reaching their goals.

In addition, generally speaking, many investors tend to focus too much on the day-to-day fluctuations in the stock market and not enough on their goals and objectives.  Finally, some investors mistakenly make “all or nothing” moves.  They are either “all in or all out” depending upon the latest news report, earnings hit or miss, political event or analyst comment.  Our recommendation when it comes to investing is similar to life, everything in moderation.  If you are feeling a little skittish about the direction of stocks, raise a little cash.  If you are feeling bullish about the direction of stocks, then put some of that cash to work.

Quite often callers to our office or to our radio show on 810 WGY ask us the “rule of thumb” question that goes something like this.  “I’m XX years old, what percentage of my retirement money should I have in the stock market?”  Believe it or not there is no simple answer as there are many variables that influence our response.

One of those variables would include the length of time prior to when you will need to draw from your investments.  If you are 60 and planning on working until 62, all things being equal, you would have less a percentage of your assets invested in equities versus that same individual who planned on working until 65.  This assumes that this investor would need to draw upon their investments upon retirement.

A second variable would include your other sources of income.  If upon retirement, you will be receiving a Defined Benefit pension plan, one that guarantees a stated amount of monthly income for the remainder of your life and perhaps the life of your spouse and that income along with Social Security will be enough to maintain your standard of living, this investor should then commit a larger percentage of his/her assets into the stock market as compared to one without guaranteed income.

A third variable would be to identify other less risky options.  If only interest rates on Certificates of Deposit were 5.00% like they were three or four years ago or if only bonds were paying 5.00% like they were a few years ago then perhaps an investor, in order to maintain his standard of living, could take less risk.  However, interest rates are not 5.00%.  They are much closer to 0.00% so many individuals are going to have to consider shouldering some risk in order to reach their objectives.  That said, should interest rates begin to rebound a bit, take this risk off the table.  The economy evolves.  Your portfolio should revolve with it.

Do you own your own home?  This is a potential source of retirement income should you exercise a reverse mortgage.  Will you potentially receiving an inheritance?  This could provide a hedge for inflation down the road or provide supplemental monthly income.

Finally, what is your standard of living?  Also, how flexible is this standard of living.  Generally speaking, the more the cost of maintaining your standard of living can be covered by guaranteed sources of income, the larger percentage of your investment balance should be in equities.

These variables should not be considered independently, but in conjunction with each other.  They are also not meant to be a complete list, but provide food for thought and a starting point when considering your asset allocation.  Keep in mind that the goal of every investor is to maximize their return with as little risk as possible.  Unfortunately, given the current level of interest rates, investors must assume some risk.

THE BOTTOM LINE – Leaving long-term investment money in cash at zero percent also carries risk.  Investors today are caught between a rock and hard place.  If you investment in equities there is the potential for losses.  If you leave money in the bank, it will not grow.  The answer lies in an investor taking calculated risk according to his objectives and considering the variables above.