Posts Tagged ‘Investing’

Shaping an Investment Portfolio for The Coming Year

Monday, January 15th, 2018

We enter 2018 in the midst of what has been reported as the second-longest running bull market ever. Accordingly, many investors are wondering how they should adjust their investment strategies. After all, given the age of the bull market and the high equity valuations it has produced, it would not be surprising to see it turn in a more bearish direction.

A CNBC report highlights the trend toward passive investment and away from actively managed funds. While passive index fund investment has always been a good way to collect gains as the overall economy grows, the strategy has been particularly effective in these recent years of high correlations (the tendencies of stocks to rise or fall in sync). As correlations fall, however, active management may make a comeback.

Don’t pay attention to the panic

While there is some expectation that current valuations will eventually have to lead to corrections and lower expectations, it is not necessarily inevitable that this is the case. For one thing, conditions such as “an oncoming recession, a hostile Fed, dangerous inflation, investor exuberance, speculative valuations, or a geopolitical shock” that predict declines do not appear on the horizon. Accordingly, the typical duration of past bull markets do not have to be seen as absolute limits on this or future markets.

Take heed of the GOP tax bill

The tax reform bill expected from President Trump and the Republican Congress is likely to have benefits for stock investors. This legislation has left existing rules for both traditional and Roth IRAs as well as 401(k) plans largely intact. Roth IRAs, which allow after-tax dollars to be contributed toward future tax-free earnings, may become more attractive due to lower overall income tax rates. Moreover, the planned corporate tax cuts obviously constitute projected boosts for business profitability and valuation.

The bottom line from these considerations is that there is a good reason to blend both passive and active investments in your portfolio. Passive investments remain viable options, especially for new and long-term investors, and they will continue to provide broad market exposure. However, it is perhaps wise to consider adding some active management back into your strategy as we are likely entering a period when gains will not be shared as broadly across the market as they have been in recent years.

Get diversified

Diversification remains a staple of investment, and investors may want to consider working a self-directed IRA into their portfolios. A self-directed IRA allows investors to get the benefits of an IRA with investments outside of stocks and bonds. Allowable alternate investments include real estate, private tax liens, precious metals like gold and silver, lending notes, and even cryptocurrency. Protecting your money means getting strategic about where it’s invested, and having a say in what assets are in your portfolio is up to you in 2018.

While pending tax reform may end up being a drag on it, real estate, according to Investopedia, remains a good way to balance out the volatility of the stock market. Tellingly, the wealthiest investors tend to include real estate in their portfolios.

Choosing The Right Asset Type for your First Investment

Tuesday, January 2nd, 2018

Investing can seem like a double-edged sword. Most people have heard about the importance of it, yet the options and risks sound impossibly intimidating. Too often, confusion and fear lead to doing nothing, because doing nothing at least feels safe from loss. However, as Money Under 30 explains, the apparent safety of doing nothing is deceptive because, once the power of time and compounding interest are considered, much more money is lost by not investing than by taking on investment risk. Once it’s accepted that loss cannot be avoided by staying on the sidelines, it becomes clearer that the safer choice is to choose the best baby steps forward.

Asset allocation

One of the keys to sound investing is to have the proper asset allocation. Among other things, this means that novice investors should not jump right into purchasing individual stocks when they almost certainly do not have the information they need to make good buying choices. Mutual funds consist of multiple securities (primarily stocks and bonds), and they are preferable due to the risks being diffused by diversification. Also, expenses are reduced by paying just one commission for each fund purchase.

Make it automatic

The other key to sound investing is to make it automatic. This prevents getting sidetracked by the emotions of the news cycle. Among the many options for doing this is an app called Acorns. Acorns allows investors to choose one of five diversified portfolios according to their goals and risk tolerance. Accounts can be funded with a one-time lump sum or regular recurring withdrawals from a checking account. A unique feature of Acorns is that it allows users to link to a credit or debit card, and it then rounds up purchases. Once the difference exceeds $5, it applies the amount to the chosen investment.

Tangible investing

Real estate is a popular investment that has value both for the long-term and for immediate cash flow. Of course, many people do not have the massive capital often required to buy their own properties outright. Fortunately, modern innovation has provided more flexible options. With crowdfunding, it is possible to buy shares of real estate like you would buy shares of mutual funds. RealtyShares, for example, allows investments of as little as $5,000 in various selections of residential and commercial real estate.

Individual retirement accounts

Selecting the right investment account is as important as choosing the right assets and portfolios to go in it. Certain retirement accounts provide tax benefits as long as established rules are followed. A traditional IRA allows savers to deduct the amount they invest from their taxable income. Taxes are paid when distributions are taken in retirement. In contrast, money invested in a Roth IRA is after-tax money, but the distributions are tax-free.

Money in these accounts is typically invested in fund options offered by brokers. However, a self-directed IRA allows the flexibility to choose from a broader range of investments such as real estate and lending notes. Assets in these accounts must still be held by a custodian or trustee.

Shaping Your Investment Portfolio for 2018

Tuesday, December 26th, 2017

We enter 2018 in the midst of what has been reported as the second-longest running bull market ever. Accordingly, many investors are wondering how they should adjust their investment strategies. After all, given the age of the bull market and the high equity valuations it has produced, it would not be surprising to see it turn in a more bearish direction.

A CNBC report highlights the trend toward passive investment and away from actively managed funds. While passive index fund investment has always been a good way to collect gains as the overall economy grows, the strategy has been particularly effective in these recent years of high correlations (the tendencies of stocks to rise or fall in sync). As correlations fall, however, active management may make a comeback.

Don’t pay attention to the panic

While there is some expectation that current valuations will eventually have to lead to corrections and lower expectations, it is not necessarily inevitable that this is the case. For one thing, conditions such as “an oncoming recession, a hostile Fed, dangerous inflation, investor exuberance, speculative valuations, or a geopolitical shock” that predict declines do not appear on the horizon. Accordingly, the typical duration of past bull markets do not have to be seen as absolute limits on this or future markets.

Take heed of the GOP tax bill

The tax reform bill expected from President Trump and the Republican Congress is likely to have benefits for stock investors. This legislation has left existing rules for both traditional and Roth IRAs as well as 401(k) plans largely intact. Roth IRAs, which allow after-tax dollars to be contributed toward future tax-free earnings, may become more attractive due to lower overall income tax rates. Moreover, the planned corporate tax cuts obviously constitute projected boosts for business profitability and valuation.

The bottom line from these considerations is that there is good reason to blend both passive and active investments in your portfolio. Passive investments remain viable options, especially for new and long-term investors, and they will continue to provide broad market exposure. However, it is perhaps wise to consider adding some active management back into your strategy as we are likely entering a period when gains will not be shared as broadly across the market as they have been in recent years.

Get diversified

Diversification remains a staple of investment, and investors may want to consider working a self-directed IRA into their investment portfolio. A self-directed IRA allows investors to get the benefits of an IRA with investments outside of stocks and bonds. Allowable alternate investments include real estate, private tax liens, precious metals like gold and silver, lending notes, and even cryptocurrency. Protecting your money means getting strategic about where it’s invested, and having a say in what assets are in your investment portfolio is up to you in 2018.

While pending tax reform may end up being a drag on it, real estate, according to Investopedia, remains a good way to balance out the volatility of the stock market. Tellingly, the wealthiest investors tend to include real estate in their own investment portfolio.

What you Didn’t Know was Possible with your IRA

Tuesday, November 7th, 2017

It’s not difficult to imagine that the majority of U.S citizens have heard of an IRA. It’s equally imaginable that most have not heard of a self-directed IRA. A self-directed retirement account gives you the ability to invest in non-traditional investments. In all reality, though a self-directed IRA is the same thing as a regular account. Because they are the same thing and the only real difference is what your custodian allows I wanted to explain a few things that you need to know about an IRA that you may not have known.

You can invest in so much more

Most retirement accounts are invested in stocks and bonds, but they don’t have to be. What most don’t know is that a self-directed IRA is really just a custodian that allows you to take full advantage of your retirement account and invest how you want with you. Most custodians only allow for certain types of investments, like stocks and bonds. Why is that? More than likely it is because they make more money by pushing other investments. Or it could simply be because it is not in their wheelhouse. The truth is though with an IRA you can invest in just about anything. You can invest in real estate, gold or even private placements.

You can pay for college

You can without penalty withdrawal funds from your IRA to cover the cost of tuition. There are a few issues to be aware of when doing this though and that is why it is important to talk to a tax attorney or CPA when dealing with this.

Whether this information is new to you or not you can gain from this knowledge. What you can gain from this is that you can do more with your individual retirement account than you probably are doing. If that means using your funds for things like education or if it means investing in things other than stocks and bonds. You can find a way to maximize your IRA for what works for you.

It’s Tax Season: Avoiding Big Taxes on Your Investments

Monday, January 25th, 2016

tax season

Since tax season is in full swing, now is the appropriate time to do a mini series of tax-related articles, right? That’s what we thought, so over the next few weeks, that’s what we’ll be doing. To kick things off, let’s go over taxes on your investments. Taxes can eat into your investment performance in ways that you can’t imagine, and definitely don’t anticipate. Thankfully, there are ways to improve your returns while keeping Uncle Sam at bay.

Developing a “tax-efficient” investment strategy should be on the top of your money resolutions this year if you don’t already have one in place. It’s relatively easy to do once you identify some problem spots.

First off, where you hold your investments makes a big difference in how your investments will be taxed. For long-term savers, 401(k)s, 403(b)s, Roths and 529 college savings plans all allow you to compound your money tax deferred.

While you’ll pay taxes on contributions to Roth 401(k)s and IRAs, you can take withdrawals tax free, but they are subject to certain conditions. If you hold money in the account at least five years and you’re 59 1/2 or older, there’s no tax on what you take out.

Here’s where it gets troublesome. Anything held outside of a qualified retirement account can trigger capital gains, dividend, or ordinary income taxes. That’s what I mean by “tax efficiency.” If you can keep money in a retirement or 529 account, you don’t have to worry about funds you plan to leave alone for a while.

The act of keeping money outside of tax-deferred accounts can cost you plenty, and there are an array of taxes that may apply:

  • Ordinary dividend and net short-term capital gain distributions—on sales of securities held 12 months or less—are taxed at the investor’s ordinary income tax rate, currently a maximum of 39.6%.
  • Long-term capital gain distributions—on sales of securities held more than one year—are taxable as long-term capital gains.
  • The maximum tax rate on “qualified dividend” income and long-term capital gain distributions for most investors is 15%, but increases to 20% for high-income individuals.
  • In addition, high-income taxpayers are subject to the 3.8% health care tax on “net investment income.”

For those who also invest in taxable accounts— about 47% of bond and stock mutual fund assets are held in such accounts— should consider their asset location strategy as well as their asset allocation strategy. This approach should enhance tax efficiency (which measures the difference between pretax and after-tax returns) and potentially improve after-tax returns.

What can you do to save on taxes outside of deferred accounts? Keep in mind that vehicles paying dividends or long-term capital gains are taxed at a lower rate than investment returns taxed at ordinary income.

If buying mutual, or exchange-traded funds, also consider the funds’ “tax efficiency ratio”. Generally the higher the ratio, the lower your tax bill from owning that fund. As a rule, passive index funds, which buy and hold a basket of securities, will have a higher tax-efficiency ratio than an actively managed fund.

Make sure to consult with a registered investment advisor or a certified financial planner before making big changes to your tax strategy, or if you have questions on what to do with your portfolio to lower taxes.