May 2011 wesletter
- 1. Wesletter May 2011 No. 1 Investment and Planning Insights from Wesban Chasing Performance Investors often endure poor timing and planning as many chase past performance. They buy into funds that are performing well and initiate a selling spree following a decline. This becomes evident when evaluating a fund’s total return compared with the investor return. Overall, the investor return translates to the average investor’s experience as measured by the timing decisions of all investors in the fund. The image illustrates the investor return relative to the total return for a given fund. Over the short term, both the total and investor returns were positive, with the investor return ending slightly lower. Over a 10-year period, however, total return greatly exceeded investor return. Investors who attempted to time the market ran the risk of missing periods of exceptional returns. About Wesban The Wesban Team [email protected] Wesban provides financial 205-995-7778 planning and conservative www.wesban.com investment management designed to help families and small businesses grow, protect, and transfer wealth.
- 2. Investment and Planning Insights from Wesban May 2011 2 Tax Law Changes for 2011 with this) and watching out for private-activity municipal bond funds, which aren't taxable under the conventional tax system but are for the purposes of AMT. A good mantra, for investing and for the rest of your life, is “Focus on what you can control.” Dividend Tax: Through 2012, the tax on qualified While most people are inclined to put taxes into dividends remains at zero for taxpayers in the 10% the "out of my control" bucket, that doesn't have and 15% tax brackets, and is 15% for all other to be the case. Where taxes are concerned, it is taxpayers. always a good idea to consult with a tax professional. This article is intended only as a Long-Term Capital Gains Tax: Through 2012, starting point to help you become informed about taxpayers in the 10% and 15% brackets will not tax-law changes; it does not constitute tax advice. owe capital gains tax on the sale of assets they've Some of these changes have an impact only on owned for more than one year. Long-term capital those in very high tax brackets, while others affect gains tax rates remain at 15% for all other individuals of all income levels. taxpayers. Short-term capital gains are taxed as ordinary income. Social Security Payroll Tax Holiday: Social Security payroll taxes have dropped from 6.2% to Estate Tax: Although the federal estate tax was 4.2% for 2011, giving an effective boost in pay to set to jump to 55% for estates of more than $1 all workers. (As in the past, you won't pay Social million in 2011, last-minute Congressional Security tax on any earnings over a certain level-- maneuvering resulted in a much less onerous rate currently $106,800.) This provision is designed to for people who die with a lot of assets. The top get people out there spending, but a better idea, estate tax rate is 35% for 2011 and 2012, and it assuming you can afford it, is to divert that money only affects those who have amassed estates of to another retirement fund: your own. Increase more than $5 million. Those who inherit assets your 401(k) plan contribution as close as you can will also once again receive a step-up in the cost to the annual limit; in 2011, that limit remains basis of those assets, meaning that the inherited $16,500 for those under 50 and $22,000 to those assets are valued at their fair market value as of the over 50. And if you're already funding your decedent's death. 401(k), 403(b), or 457 plan to the max—or if you would rather save outside the confines of your company plan—you can direct that money to an Given the more generous estate-tax limits, you IRA instead. IRA contribution limits are also may be assuming that a visit to your estate- unchanged from 2010: $5,000 for individuals planning attorney isn't necessary, but even if you under 50 and $6,000 for those over 50. don't anticipate that you will ever amass $5 million in assets, there's more to creating an estate plan than sidestepping taxes. A properly crafted Alternative Minimum Tax: Toward the end of estate plan will detail how you would like your 2010, Congress put in place a so-called patch to assets distributed after you are gone. Gift Tax: keep a new group of taxpayers from having to pay The annual gift-tax exclusion stays the same as it the alternative minimum tax, a parallel tax system was in 2010: $13,000. That means you can gift that disallows many of the credits and deductions $13,000 apiece to an unlimited number of people that taxpayers are entitled to under the this year without having to worry about a gift tax conventional tax system. That's good news, but if or even fill out the gift-tax paperwork. you've fallen into the AMT zone in the past, the latest patch isn't likely to keep you out of it. However, by taking steps to control your AMT- subject income and managing your deductions, you may be able to reduce your AMT tax hit. Some key strategies that you can employ include carefully managing the exercise of stock options (a well-versed tax advisor should be able to help
- 3. Investment and Planning Insights from Wesban May 2011 3 Three Reasons to Consider Exchange- many can be used effectively if approached with discipline and a long-term view. It can take time Traded Funds for some undervalued corners to produce, so impatient investors need not apply. There is one terrible reason to invest in ETFs: Despite all the buzz surrounding exchange-traded fads. Many investors think of them as vehicles for funds (ETFs) these days, many investors are making a quick buck on a hot corner of the confused about how best to use them. ETFs are market. However, by the time one catches your versatile investment vehicles that can be eye, it's about to cool down. Unfortunately, ETF effectively incorporated into a portfolio. They are providers have a bad record of launching new essentially index funds that invest in a ETFs in faddish pockets of the market, which representative sample of securities in the index tends to encourage an investor’s worst instincts. they seek to imitate. Unlike mutual funds, So watch for fads, and before investing in an ETF however, ETFs are traded on an exchange, just in this area (or any ETF, really) speak with your like stocks. As of November 2010, Morningstar financial advisor. estimates there are approximately 1,099 ETFs in the United States, with a total of about $942 billion in assets. Keep in mind that diversification does not eliminate the risk of experiencing investment losses. Investors should read the prospectus and There are at least three good reasons for investing carefully consider a fund’s investment objectives, in an exchange-traded fund: lump sums, tax risks, fees, and expenses before investing. It is efficiency and undervalued corners of the market. important to note that ETFs are not immune from capital gains distributions; ETFs may make Lump sums: If you have a lump sum you are capital gains distributions if changes in the looking to invest, consider an ETF. Why? Well, underlying index occur. International investments you pay a brokerage commission each time you involve special risks such as fluctuations in buy and sell an ETF, so commissions can add up currency, foreign taxation, economic and political very quickly with every trade. You can bypass risks, and differences in accounting and financial these costs with a lump-sum investment. (If you standards. Keep in mind that concentrated plan to make periodic investments over time, your investments are narrowly focused investments overall costs will be lower if you go with a no-load that typically exhibit higher volatility than the mutual fund.) market in general. These investments will fluctuate with current market conditions and may Tax efficiency: Equity ETFs are among the most be worth more or less than the original cost upon tax-efficient vehicles around. The way they’re liquidation. structured, ETFs rarely make taxable capital gains distributions, those payments to shareholders of security-sale profits. So you'll typically owe taxes only on any capital gains you incur when you sell the ETF. Investors can easily build a low- maintenance, tax-efficient, broadly diversified portfolio with only three ETFs. There are a number of ETFs that offer domestic-equity exposure and others that cater to those looking to take their investment overseas. There are also many fixed-income ETFs to consider. Undervalued corners of the market: In addition to these ETFs, there are others that track practically every market segment there is. While some of the narrowly focused ETFs are better than others,
- 4. Investment and Planning Insights from Wesban May 2011 4 How to Choose a Financial Advisor Securities and Exchange Commission—ask to see it. It will show the planner’s professional history and any legal problems their practice has had. Choosing a financial advisor is a process that must Once you ensure an advisor's legitimacy, you can be conducted with the utmost care and only after start the interviewing process. The National meticulous planning. After all, this will be the Association of Personal Financial Advisors' Web person managing your life’s savings, your site has an excellent questionnaire called “The retirement portfolio, or your children’s college Comprehensive Financial Advisor Diagnostic” money. While referrals from trusted friends or that you can use to interview potential planners. loved ones are usually one of the safest ways to find Ask about track record, past performance and a good advisor, that path might not be available to experience, fees, and commissions. everyone. Those looking for a financial advisor might want to follow the steps below. Also, ask the financial professional what type of clients he or she sees most often to determine if the First of all, beware of investment gurus who other clients' financial situations are similar to promise that by using their “secret method” you yours. You can ask to speak with some of these will be able to beat the market by some ludicrous clients as well—are they satisfied with the way the amount. If it sounds too good to be true, it probably advisor handles their finances? Your financial is. Look for reliable credentials, such as the advisor will have to be someone you can trust and Certified Financial Planner (CFP), Chartered whose skills are a good fit for your financial needs. Financial Analyst (CFA), or Chartered Financial Consultant (ChFC) designations. These certifications require passing a series of exams and a certain number of years of experience in the financial field. A Registered Investment Advisor (RIA) must file Form ADV with their state or the ©2011 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. The Wesban Team 1800 Providence Park [email protected] Tel:205-995-7778 Suite 200 www.wesban.com Birmingham, Alabama 35242