When to Sell Your Mutual Funds
Sometime after the dog days of summer in the stock market, you wonder about the dogs in your portfolio. How do you know when to take them for a walk and sell a fund? Vern Hayden, president of Haden Financial Group, Westport, Conn., a fee-only financial planning firm, and author of Getting an Investing Game Plan, makes three suggestions:
Is a Living Will Necessary?
The case of Terri Schiavo underscores the importance of having your final wishes in writing in the form of a living will. Yet two-thirds of Americans, or 67 percent, lack one, according to a recent survey by legal Web site, FindLaw.com. A living will, a.k.a. an advance directive, gives your caregivers the expressed authority to fulfill your final wishes when you can no longer speak for yourself. 'Perhaps the single biggest benefit is it takes a very difficult decision out of the hands of your loved ones,' says Bob Doyle, president of Doyle Wealth Management in St. Petersburg, Fla.
An advance medical directive typically includes both a health-care proxy and a living will. The living will portion basically spells out what care you want to receive and what care you do not want. Some specify whether a person would want specific life-prolonging treatments, including ventilators, artificial nutrition, kidney dialysis and artificial resuscitation.
Each state has legal guidelines for living wills. None stipulate that they must be written by an attorney, but it's a good idea to check with one before you sign it. On average, an attorney will charge round $150 to $300 an hour to prepare a living will, which takes from 1 to 3 hours to prepare, says Doyle. The National Hospice and Palliative Care Organization has all state forms at www.careinfo.org. .
Fund Disclosure Via the Web
Keep your fingers crossed. It may soon be possible to click on a brokerage's Web site and download a summary document giving crucial information about that mutual fund you're eyeing. No fuss, no muss
The so-called 'Profile Plus' document is intended to demystify arcane prose often contained in a fund's prospectus, and in straightforward language provide investors information about a fund's strategy, risks, and performance, costs and any potential broker conflicts. At least that's what a task force composed of fund officials from the National Association of Securities Dealers (NASD) has proposed. The brokerage industry's Securities and Industry Association trade group supports the goals in the task force's report, including Web-based delivery and access to information equaling delivery.
For its part, the SEC, which has to sign off on any such proposal, has frowned on the Internet as the primary way to distribute point-of-sale disclosures. Instead, the agency has proposed paper delivery and during broker-client discussions over the phone, suggests resolving possible conflict information orally. Meanwhile, the Investment Company Institute (ICI) , representing the fund industry, supports 'a thorough consideration' by the SEC of the NASD task force's recommendations, says James Doyle, an ICI spokesman. . 'We share the task force's interest in making more visible the costs and potential conflicts associated with fund distribution,' the ICI said in a statement.
So far, it's a work in progress.
Exemptions to the rule
If you were among the many people this year who received a hefty tax refund of several hundred dollars or who had a big balance due, you probably should revise the number of exemptions on the W-4 withholding form you submitted at work. Do it accurately or it could be to your disadvantage and you might lose out.
The easy way is to simply file a revised W-4 with your employer, on which you claim withholding 'allowances' (exemptions). Generally, one allowance equals one exemption on a 1040 form. Each allowance cuts the wages subject to withholding by $3,200 for 2005 - up from $3,100 for 2004, notes tax attorney Julian Block of Larchmont, N.Y.
Some other tips:
Sales and Use Taxes Can Now Be Deducted
Under new federal law for 2005 - and not beyond at this point -- you can deduct state and local sales taxes in place of deducting state and local income taxes. The change helps taxpayers in no-income tax states such as Texas and Florida, giving them a deduction they did not have before. According to Berdon LLP, residents of high-income tax states like New York and New Jersey, on the other hand, will usually be better off continuing to deduct state and local income taxes. However, if you have made significant purchases during the year (a boat, a car, etc.), you should carefully check the amount of sales tax paid to see if a greater deduction would result. You may be entitled to an additional benefit since deducting sales tax on a federal return may also result in a sales tax deduction on the state return. Make detailed federal and state calculations to determine the best alternative.
Taking Stock of Options
Need help in determining when best to exercise your stock options? You're not alone. Millions of people who own stock options in their companies face the same problem. Steve O'Hara, a CPA and principal of Financial Strategy Network, LLC, in Chicago, suggests these simple rules to follow:
When to exercise:
Timeshare: Is It For You?
You buy a week or two and furnished space in a resort property (e.g. a condominium) from a developer like Marriott or Hilton. As the 'owner' you can vacation with your family or swap for another space at another location. It's a way to have a guaranteed vacation somewhere. And you don't have to be a millionaire. Timeshare, or vacation ownership, is a booming business today with millions of users worldwide, according to the American Resort Development Association (ARDA).
You make a one-time purchase of furnished accommodations, paying only for the amount of time you want in weekly increments. These costs can range from a few thousand dollars to over $30,000; maintenance fees average about $400 annually per week, according to ARDA. Additionally, you can rent or purchase a timeshare on the secondary market, often for substantially less. There are dozens of resale Web sites (eBay, www.TUG2.net,. etc.) If you wish to sell a unit, you get some of your initial purchase price back, depending on current market conditions. A word of caution: Investigate the timeshare before jumping in. Be sure you're dealing with a reputable company, not a scam operation. The best advice you can get is from current owners. To find a timeshare and learn about different types of vacation products, go to ARDA's Web site, www.arda.org.
DRIPs: Buying Socks Without a Broker
Hundreds of companies sponsor dividend reinvestment plans (DRPs or DRIPs), which allow you to buy shares directly from them or their transfer agent. Because you invest through the DRIP you don't have to contend with brokers or their commissions. You can buy shares and/or reinvest the dividends through the company.
There's more. DRIPs allow you to invest small amounts and accumulate shares over a period of time - instead of making lump-sum payments on stock purchases. When's the last time your broker offered less than a round lot (100 shares) of anything? And even if he/she did, if you were to make small, regular investments in a diversified portfolio of stocks through a broker, commissions might amount to more than the stock itself. As a result of bypassing brokerage commissions, you can engage in two risk-reducing strategies - dollar cost averaging and diversification of assets. Among big-name companies offering DRIPs: General Electric (conglomerate); Whirlpool (appliances); General Motors (autos); Exxon/Mobile (energy).
Time for Treasury Inflation-Protected Securities
Need income? Worried about stocks? What will your money be worth in 20 years? Why not set your alarm clock to Treasury inflation-protected securities (known as TIPS) or their bond fund counterpart. They could be a good option for income-oriented investors, particularly as we've begun to experience a whiff of inflation.
As the name suggests, TIPS are fixed-income instruments issued by the U.S. Treasury and sold at auction, that afford a measure of protection against inflation. Their interest payments coincide with the movements in the Consumer Price Index. While the interest rate on the bonds remains fixed, the amount of your total return changes with adjustments tied to inflation. When TIPS mature, you get back the original value of the bond - plus an additional sum to account for inflation. The principal, incidentally, is backed by the U.S. government. There are risks. If interest rates continue to rise without a corresponding increase in inflation, the prices of TIPS would fall along with most ordinary bonds, according to Don Cassidy, senior research analyst at Lipper.
Investors can purchase TIPS solo directly at TreasuryDirect.gov or in a fund. Funds with TIPS have grown in popularity. As of June 1, 2005, there were 28 such funds, according to Lipper, with total net assets over $35 billion - up from $475.4 million in 2000. For more information on TIPS, visit publicdebt.treas.gov.
Strategic Income Funds Limit Your Volatility
Strategic income funds allow investors to reduce their risk by investing in a wide variety of bonds. In a sense, they're a hybrid of different sectors of the bond market. Sometimes called flexible income funds, they provide built-in diversification and enable investors to span different sectors around the world in one investment. Their three main components are U.S. Government, junk, and foreign bonds. Several hold a sprinkling of U.S. Government agency bonds, such as Ginnie Maes. Strategic income funds permit the portfolio manager to change the mix as conditions warrant. Thus, when one sector is down, another may be up.
Most started as junk, or high-yield, bond funds. They began diversifying in the mid-to-late 1980s. Since then, they have generated fairly consistent income over the long term, eschewing options, futures, and derivatives. They were down 0.34 percent for the first five months of 2005, they gained 6.19 percent through May 2005, according to Lipper. 'We're in the middle of a time period when equity returns are going to be historically below norms,' notes Kent Rinker, portfolio manager of Diamond Hill Strategic Income (DSIAX). 'But with the strategic income component, you ought to be able to generate a return that's competitive with equities without the same amount of risk.'
Among the major players in this universe besides Diamond Hill's fund: MFS Charter Income Trust (XMCRX); MFS Strategic Income (MFIOX); Putnam Master Intermediate Income (XPIMX); Putnam Premier Income (XPPTX); Zweig Total Return (XZTRX); and Franklin Multi-Income (XFMIX).
Grow (stocks) trend probable
Since the bull market ended 5 years ago, and growth stocks tumbled, led by tech shares, investors have favored value stocks, those in which the perceived value is not reflected in the share price. But now the pendulum appears to be shifting back to growth stocks, according to many Wall Street pros. Among them, Bob Turner, chief investment officer of Turner Investment Partners in Berwyn, Pa., a money management firm, observes, 'Ultimately, stocks and assets classes revert to the mean, and at this point, the natural bias is up for growth stocks.'
Growth companies, usually found in such sectors as consumer staples, health care and technology, traditionally deliver superior earnings and outperform when the economy slows, which is currently the case in the United States. As Bill Wilby, director of equities at Oppenheimer Funds Inc., New York, recently told shareholders: 'The slowing of the economy associated with the middle of the economic cycle is often associated with growth outperformance.
Turner believes some of the classic growth stocks, such as Intel, General Electric, Johnson & Johnson, and Microsoft, offer compelling value now. The Oppenheimer Global Fund, which Wilby co-manages, counts E-Bay, Sirus and Infosys (IT consulting and services) in technology, and Reckitt-Renckiser, a global leader in consumer staples, among its current top-10 holdings.
Is a Living Will Necessary?
The case of Terri Schiavo underscores the importance of having your final wishes in writing in the form of a living will. Yet two-thirds of Americans, or 67 percent, lack one, according to a recent survey by legal Web site, FindLaw.com. A living will, a.k.a. an advance directive, gives your caregivers the expressed authority to fulfill your final wishes when you can no longer speak for yourself. 'Perhaps the single biggest benefit is it takes a very difficult decision out of the hands of your loved ones,' says Bob Doyle, president of Doyle Wealth Management in St. Petersburg, Fla.
An advance medical directive typically includes both a health-care proxy and a living will. The living will portion basically spells out what care you want to receive and what care you do not want. Some specify whether a person would want specific life-prolonging treatments, including ventilators, artificial nutrition, kidney dialysis and artificial resuscitation.
Each state has legal guidelines for living wills. None stipulate that they must be written by an attorney, but it's a good idea to check with one before you sign it. On average, an attorney will charge round $150 to $300 an hour to prepare a living will, which takes from 1 to 3 hours to prepare, says Doyle. The National Hospice and Palliative Care Organization has all state forms at www.careinfo.org. .
Fund Disclosure Via the Web
Keep your fingers crossed. It may soon be possible to click on a brokerage's Web site and download a summary document giving crucial information about that mutual fund you're eyeing. No fuss, no muss
The so-called 'Profile Plus' document is intended to demystify arcane prose often contained in a fund's prospectus, and in straightforward language provide investors information about a fund's strategy, risks, and performance, costs and any potential broker conflicts. At least that's what a task force composed of fund officials from the National Association of Securities Dealers (NASD) has proposed. The brokerage industry's Securities and Industry Association trade group supports the goals in the task force's report, including Web-based delivery and access to information equaling delivery.
For its part, the SEC, which has to sign off on any such proposal, has frowned on the Internet as the primary way to distribute point-of-sale disclosures. Instead, the agency has proposed paper delivery and during broker-client discussions over the phone, suggests resolving possible conflict information orally. Meanwhile, the Investment Company Institute (ICI) , representing the fund industry, supports 'a thorough consideration' by the SEC of the NASD task force's recommendations, says James Doyle, an ICI spokesman. . 'We share the task force's interest in making more visible the costs and potential conflicts associated with fund distribution,' the ICI said in a statement.
So far, it's a work in progress.
Exemptions to the rule
If you were among the many people this year who received a hefty tax refund of several hundred dollars or who had a big balance due, you probably should revise the number of exemptions on the W-4 withholding form you submitted at work. Do it accurately or it could be to your disadvantage and you might lose out.
The easy way is to simply file a revised W-4 with your employer, on which you claim withholding 'allowances' (exemptions). Generally, one allowance equals one exemption on a 1040 form. Each allowance cuts the wages subject to withholding by $3,200 for 2005 - up from $3,100 for 2004, notes tax attorney Julian Block of Larchmont, N.Y.
Some other tips:
Sales and Use Taxes Can Now Be Deducted
Under new federal law for 2005 - and not beyond at this point -- you can deduct state and local sales taxes in place of deducting state and local income taxes. The change helps taxpayers in no-income tax states such as Texas and Florida, giving them a deduction they did not have before. According to Berdon LLP, residents of high-income tax states like New York and New Jersey, on the other hand, will usually be better off continuing to deduct state and local income taxes. However, if you have made significant purchases during the year (a boat, a car, etc.), you should carefully check the amount of sales tax paid to see if a greater deduction would result. You may be entitled to an additional benefit since deducting sales tax on a federal return may also result in a sales tax deduction on the state return. Make detailed federal and state calculations to determine the best alternative.
Taking Stock of Options
Need help in determining when best to exercise your stock options? You're not alone. Millions of people who own stock options in their companies face the same problem. Steve O'Hara, a CPA and principal of Financial Strategy Network, LLC, in Chicago, suggests these simple rules to follow:
When to exercise:
Timeshare: Is It For You?
You buy a week or two and furnished space in a resort property (e.g. a condominium) from a developer like Marriott or Hilton. As the 'owner' you can vacation with your family or swap for another space at another location. It's a way to have a guaranteed vacation somewhere. And you don't have to be a millionaire. Timeshare, or vacation ownership, is a booming business today with millions of users worldwide, according to the American Resort Development Association (ARDA).
You make a one-time purchase of furnished accommodations, paying only for the amount of time you want in weekly increments. These costs can range from a few thousand dollars to over $30,000; maintenance fees average about $400 annually per week, according to ARDA. Additionally, you can rent or purchase a timeshare on the secondary market, often for substantially less. There are dozens of resale Web sites (eBay, www.TUG2.net,. etc.) If you wish to sell a unit, you get some of your initial purchase price back, depending on current market conditions. A word of caution: Investigate the timeshare before jumping in. Be sure you're dealing with a reputable company, not a scam operation. The best advice you can get is from current owners. To find a timeshare and learn about different types of vacation products, go to ARDA's Web site, www.arda.org.
DRIPs: Buying Socks Without a Broker
Hundreds of companies sponsor dividend reinvestment plans (DRPs or DRIPs), which allow you to buy shares directly from them or their transfer agent. Because you invest through the DRIP you don't have to contend with brokers or their commissions. You can buy shares and/or reinvest the dividends through the company.
There's more. DRIPs allow you to invest small amounts and accumulate shares over a period of time - instead of making lump-sum payments on stock purchases. When's the last time your broker offered less than a round lot (100 shares) of anything? And even if he/she did, if you were to make small, regular investments in a diversified portfolio of stocks through a broker, commissions might amount to more than the stock itself. As a result of bypassing brokerage commissions, you can engage in two risk-reducing strategies - dollar cost averaging and diversification of assets. Among big-name companies offering DRIPs: General Electric (conglomerate); Whirlpool (appliances); General Motors (autos); Exxon/Mobile (energy).
Time for Treasury Inflation-Protected Securities
Need income? Worried about stocks? What will your money be worth in 20 years? Why not set your alarm clock to Treasury inflation-protected securities (known as TIPS) or their bond fund counterpart. They could be a good option for income-oriented investors, particularly as we've begun to experience a whiff of inflation.
As the name suggests, TIPS are fixed-income instruments issued by the U.S. Treasury and sold at auction, that afford a measure of protection against inflation. Their interest payments coincide with the movements in the Consumer Price Index. While the interest rate on the bonds remains fixed, the amount of your total return changes with adjustments tied to inflation. When TIPS mature, you get back the original value of the bond - plus an additional sum to account for inflation. The principal, incidentally, is backed by the U.S. government. There are risks. If interest rates continue to rise without a corresponding increase in inflation, the prices of TIPS would fall along with most ordinary bonds, according to Don Cassidy, senior research analyst at Lipper.
Investors can purchase TIPS solo directly at TreasuryDirect.gov or in a fund. Funds with TIPS have grown in popularity. As of June 1, 2005, there were 28 such funds, according to Lipper, with total net assets over $35 billion - up from $475.4 million in 2000. For more information on TIPS, visit publicdebt.treas.gov.
Strategic Income Funds Limit Your Volatility
Strategic income funds allow investors to reduce their risk by investing in a wide variety of bonds. In a sense, they're a hybrid of different sectors of the bond market. Sometimes called flexible income funds, they provide built-in diversification and enable investors to span different sectors around the world in one investment. Their three main components are U.S. Government, junk, and foreign bonds. Several hold a sprinkling of U.S. Government agency bonds, such as Ginnie Maes. Strategic income funds permit the portfolio manager to change the mix as conditions warrant. Thus, when one sector is down, another may be up.
Most started as junk, or high-yield, bond funds. They began diversifying in the mid-to-late 1980s. Since then, they have generated fairly consistent income over the long term, eschewing options, futures, and derivatives. They were down 0.34 percent for the first five months of 2005, they gained 6.19 percent through May 2005, according to Lipper. 'We're in the middle of a time period when equity returns are going to be historically below norms,' notes Kent Rinker, portfolio manager of Diamond Hill Strategic Income (DSIAX). 'But with the strategic income component, you ought to be able to generate a return that's competitive with equities without the same amount of risk.'
Among the major players in this universe besides Diamond Hill's fund: MFS Charter Income Trust (XMCRX); MFS Strategic Income (MFIOX); Putnam Master Intermediate Income (XPIMX); Putnam Premier Income (XPPTX); Zweig Total Return (XZTRX); and Franklin Multi-Income (XFMIX).
Grow (stocks) trend probable
Since the bull market ended 5 years ago, and growth stocks tumbled, led by tech shares, investors have favored value stocks, those in which the perceived value is not reflected in the share price. But now the pendulum appears to be shifting back to growth stocks, according to many Wall Street pros. Among them, Bob Turner, chief investment officer of Turner Investment Partners in Berwyn, Pa., a money management firm, observes, 'Ultimately, stocks and assets classes revert to the mean, and at this point, the natural bias is up for growth stocks.'
Growth companies, usually found in such sectors as consumer staples, health care and technology, traditionally deliver superior earnings and outperform when the economy slows, which is currently the case in the United States. As Bill Wilby, director of equities at Oppenheimer Funds Inc., New York, recently told shareholders: 'The slowing of the economy associated with the middle of the economic cycle is often associated with growth outperformance.
Turner believes some of the classic growth stocks, such as Intel, General Electric, Johnson & Johnson, and Microsoft, offer compelling value now. The Oppenheimer Global Fund, which Wilby co-manages, counts E-Bay, Sirus and Infosys (IT consulting and services) in technology, and Reckitt-Renckiser, a global leader in consumer staples, among its current top-10 holdings.