PWM - Financial & Investment Advisors in New Jersey | Private Wealth Management - Registered Investment Advisor, RIA | NJ, NY, PA, FL http://www.pwm-nj.com Wed, 25 Feb 2015 18:41:19 +0000 en-US hourly 1 http://wordpress.org/?v=4.1.1 A Closer Look at Several Strategies to Hedge Concentrate/Low Cost Basis Positions. http://www.pwm-nj.com/knowledge/investment/strategies-to-hedge-concentratelow-cost-basis-positions http://www.pwm-nj.com/knowledge/investment/strategies-to-hedge-concentratelow-cost-basis-positions#comments Wed, 25 Feb 2015 14:00:32 +0000 http://www.pwm-nj.com/?p=10124 more]]> image of waterfall

| Featured Author: Monica Jalife and Jim Ferrare |

Part II: Solutions for Concentrated and Low Cost Basis Stock Position

In the previous article we highlighted the potential risks of holding concentrated positions with large unrealized gains (low cost basis stock). In this article we present an overview of the potential options for an investor with low cost basis/concentrated equity positions:

1) Utilize options to increase income generation or reduce downside risks of the low cost basis positions (sell calls, initiate collars). The investor who writes or sells a covered call is typically more interested in generating income than in paring the low cost basis position. However, it is important to note that the additional income will also serve to partially limit the concentrated position’s downside risks. On the other hand, investors who utilize collars (the act of buying puts while simultaneously selling calls) are primarily looking to hedge their concentrated positions and can structure the collars to be zero cost or income producing. If the premium from the sale of the call received offsets the cost of the put, the collar has a zero cost whereas if the premium received exceeds the cost of the put it is deemed to be an income-producing collar. In this strategy, the calls will allow appreciation up to the strike price of the call, while the puts provide downside protection. Alternatively, investors who are only interested in minimizing downside risks without regard to the cost of protection and not willing to give up any upside in the stock can simply buy puts.

2) Enter into a pre-paid forward sale contract. In a pre-forward sale the investor makes a promise to deliver shares of the concentrated position to a counter party at a predetermined date in the future. In exchange, the investor receives an upfront payment of up to 90% of the market value of the shares promised. When the contract matures the investor has the option of delivering shares or cash. This strategy is for investors who are looking to use their concentrated position to create tax-deferred liquidity.

3) Gift low cost basis stock to charities. This strategy has the benefit of accomplishing three things: making a charitable donation, eliminating capital gains and obtaining a tax deduction. There is, however, based on current tax law, a limitation on the tax deductibility of appreciated securities one can gift to a public charity in a calendar year -As of 2014 this limit stands at 30% of adjusted gross income if fair market value is used to value the position or 50% of adjusted gross income if using cost basis. If the amount of the donation exceeds this number, the investor can deduct the remaining amounts over a five year period. Please bear in mind that current tax laws are subject to change.

4) Gift stock to a family foundation, a donor advised fund, Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT). In addition to the benefits mentioned above, these strategies allow the investor to create a charitable legacy that can be passed down to future generations. While there are some similarities with these strategies, each approach has its own set of pros and cons that should be considered before implementing A family foundation has more restrictions than a donor advised fund, is more expensive and time consuming and lacks the privacy of a donor advised fund. With a donor advised fund, the investor gets an immediate tax deduction for the current market value of the assets. The income or growth of the assets are not subject to tax, nor are they subject to estate taxes. In addition, investors could consider a charitable remainder trust (CRT) which allows an investor to make a contribution to charity while retaining an interest in the transfer and receiving a charitable deduction for the assets which ultimately pass to the charitable organization. Another vehicle usually thought of as the inverse of a CRT, a grantor charitable lead trust (CLT) donates a portion of the trust’s income to charities and then transfers the remainder of the trust back to the donor or to a designated beneficiary after a certain period of time. The tax benefits of a CLT vary depending on its precise form. A grantor CLT can take an immediate deduction for the value of the interest passing to charity, but not for the entire contribution.

5) Gift low cost basis positions directly to another individual or a trust for the benefit of a specific individual. This strategy allows the investor to shift the tax burden and any future appreciation of the stock out of his estate. This strategy works best when the position is transferred to a person in a lower tax bracket or a tax sensitive trust. Unfortunately, gifting is not as straightforward as it seems. There is a limit to what you can gift annually and the recipient retains the holding period and cost basis of the position. To avoid any unintended tax consequences, investors should speak with a qualified professional to fully understand and navigate the intricacies of the current tax code.

As you can see, there are several options for investors with low cost/concentrated positions ranging from the use of options for protection or income generation, to charitable vehicles. As we progress through this article series we will dig a little deeper into each specific strategy. As always, we strongly encourage you to coordinate with your professional advisors before implementing any strategy as laws and regulations are subject to change.

Stay tuned for our next installment on covered call writing!

Important Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group. [“PWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM. Please remember to contact PWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. PWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the PWM current written disclosure statement discussing our advisory services and fees is available for review upon request. Photo Credit: Photovision62

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]]> http://www.pwm-nj.com/knowledge/investment/strategies-to-hedge-concentratelow-cost-basis-positions/feed 0 Home Price Growth Returning to a More Sustainable Rate http://www.pwm-nj.com/knowledge/investment/home-prices http://www.pwm-nj.com/knowledge/investment/home-prices#comments Tue, 24 Feb 2015 14:00:03 +0000 http://www.pwm-nj.com/?p=10134 more]]> image of grass

Case-Shiller Index is Showing That Home Prices are Growing

It is certain that, after a series of fast-paced increases that peaked in late 2013, the rate of home price increases is moderating. As of November, the Case-Shiller Index is showing that home prices are growing at 4.3% year-over-year, which is a much slower rate compared to nearly a 14% pace reported in 2013. The prices recovered about 82% of the previous high, and 14 states are currently either above or close to the previous 2006 peak. Nonetheless, Nevada, Florida, Arizona, and a few other states still remain 20% or more below the peak, and it will certainly take many years for those prices to return to their pre-recession level. On the positive side, slower-growing prices are good news for prospective buyers and for the health of the housing market in general, as they should improve housing affordability, providing an essential boost to this so far anemic housing recovery.

 

This presentation was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. ©2012 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. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Photo Credit: Didgeman

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]]> http://www.pwm-nj.com/knowledge/investment/home-prices/feed 0 Solutions for Concentrated and Low Cost Basis Stock Position http://www.pwm-nj.com/knowledge/investment/solutions-for-concentrated-and-low-cost-basis-stock-position http://www.pwm-nj.com/knowledge/investment/solutions-for-concentrated-and-low-cost-basis-stock-position#comments Wed, 11 Feb 2015 14:00:30 +0000 http://www.pwm-nj.com/?p=10091 more]]> image of darts

| Featured Authors: Jim Ferrare & Monica Jalife |

PWM Announces: Article Series on Solutions for Concentrated and Low Cost Basis Stock Position:

Many investors have one or more concentrated positions and often leave them as is for a number of reasons: they feel sentimental about them; they feel they have performed okay; they do not fully understand the risk of holding a concentrated equity position; or they realize they should diversify but are averse to paying capital gains taxes.

There are potential risks associated with holding onto concentrated stock positions, especially if they constitute a large portion of your investable net worth. Unfortunately most individuals ignore these risks until it is too late. It is important to keep in mind though, even the most stable companies can be drastically affected by unforeseen events. Examples include:

  • Discovery of previously unknown accounting issues (Tyco, Worldcom, Fannie Mae, Lucent Technologies)
  • Untimely loss of senior management (Frank Wells-Disney, Steve Jobs-Apple)
  • An accident (BP Gulf oil spill),
  • Claims related to product liability/negligence (Wyeth-Phen Phen, Johnson & Johnson-baby Tylenol, Hooker Chemical-Love Canal)
  • Global competitive pressures, unfair or not (US auto industry, US Steel industry) have driven former blue chip companies into or near bankruptcy
  • Undue business risk/poor internal controls leading to write downs and destruction of shareholder capital (Wachovia, Washington Mutual, Citigroup, Bank of America-2007 great recession, MF Global-2011)
  • Technology/innovation disrupting legacy business models (Kodak, Hewlett Packard, Sony, AOL, newspaper industry).

Adverse circumstances or competitive pressures can impact slow growth, presumed “safe” companies just as easily as high fliers. If the affected stock represents a large percentage of an investor’s assets, a significant decrease in wealth can occur very quickly.

Clearly, investors with concentrated positions that do not have large unrealized gains (or are held in tax deferred accounts) should give consideration to diversifying out of those positions. On the other hand, those who hold concentrated positions with large unrealized taxable gains (low cost basis) in taxable accounts are often paralyzed into doing nothing. Two factors often cited for an inability to act are 1) concern about incurring capital gains taxes and 2) a lack of understanding on how to effectively mitigate some of the tax consequences.

Many investors will choose to “roll the dice” and do nothing, letting their heirs inherit the position(s). The inherited positions may include a partial or complete step-up basis upon death thus eliminating/mitigating any built in capital gains issues. While this possibly solves the capital gains problem, it does nothing to protect an investor from the risk of holding an over-weighted position. This course of action may be appropriate for investors who are of an advanced age or have a short life expectancy but it is not by default the best strategy for everyone.

A sensible thing investors can consider is paring the position and incurring some capital gains taxes. Optimally they should harvest whatever losses are available in their portfolio to offset the gains realized after trimming the concentrated position. This middle- of-the-road strategy does somewhat reduce the risk of an over-weighted position but results in current year tax consequences.

Another alternative is to contribute low cost basis stock to an exchange fund or limited partnership to which various investors contribute different low cost basis positions. After a number of years, the investor generally receives positions in at least ten securities for their contributed investment. At this point, the cost basis of the contributed shares is transferred to the shares received. The investor has thus converted a concentrated position into diversified holdings without incurring capital gains taxes. While this may seem to make some sense, it is an expensive alternative which has many restrictions and still leaves the investor with low cost stock.

Pairing the position and contributing to an exchange fund or limited partnership are just two of many strategies that could be used to diversify the risk of holding a concentrated position. Ultimately the most appropriate strategy for each investor depends on his/her specific circumstances.

  • Is this one of many low cost basis positions?
  • What percentage of an investor’s total assets does each security represent?
  • How old is the investor?

All alternatives need to be considered in the context of an individual’s overall financial plan.

To further elaborate on this topic, PWM presents this series on Solutions for Concentration and Low Cost Basis Stock Positions. Subsequent articles will provide more detailed descriptions of each alternative, as well as the relative benefits and drawbacks of each. We hope you find this series of articles informative and that it generates some interest in evaluating what to do with the concentrated and/or low cost basis securities in your portfolio(s). As always, we strongly encourage you to coordinate with your professional advisors before implementing any strategy as laws and regulations are subject to change.

Important Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group. [“PWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM. Please remember to contact PWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. PWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the PWM current written disclosure statement discussing our advisory services and fees is available for review upon request. Photo Credit: 15299

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EUR/USD “Parity” is Different from Purchasing Power Parity http://www.pwm-nj.com/knowledge/investment/eurusd-parity-is-different-from-purchasing-power-parity http://www.pwm-nj.com/knowledge/investment/eurusd-parity-is-different-from-purchasing-power-parity#comments Mon, 26 Jan 2015 13:43:41 +0000 http://www.pwm-nj.com/?p=10073 more]]> image of dollar strength

 | Featured Author: Jake Rue |

Euros for Dollars, Not a “Fair Value” Exchange Rate

In anticipation of the European Central Bank (ECB) embarking on extensive Quantitative Easing, the Euro weakened significantly against the major currencies, particularly the US Dollar. Some media commentators, talking about the strength of the Dollar Barron’s – ECB and QE: What It Means for the U.S., are pronouncing “parity” to be the target. They may be right but they are talking about a 1:1 exchange of Euros for Dollars and not a “fair value” exchange rate for the currencies which is more telling if a currency is strong or weak.

Purchasing Power Parity (PPP) is a theoretical concept that takes the same basket of goods in two countries, compares their local currency prices and determines the “fair jake-160-130value” exchange rate. Yes, there are some discrepancies in determining that perfect basket of goods but the concept provides a pretty good benchmark as to where currencies, in theory, should be trading.

As of November 2014, Bloomberg estimated that the EUR/USD PPP was around 1.2000 (and around 1.1000 at the time the Euro was introduced in January 1999) shown as the blue line in the chart below. For the first few years of its existence, the Euro traded below its PPP (that is, the Euro was weaker and the Dollar was stronger than their theoretical values against each other.) Since 2004, the Euro traded above its approximate PPP indicating it was stronger and the Dollar was weaker than they should have been. Only in recent weeks has the exchange rate pierced the 1.2000 level suggesting the Euro is now “weak” and the Dollar is now “strong”. (You may notice how the blue PPP line serves as a classic support & resistance level from technical analysis charting which is interesting because currencies frequently return to their PPP value but EUR/USD has spent very little actual time there.)

bloomberg-chart

 

So the media can now rightly proclaim, when viewed properly through the lens of PPP, that the Dollar is strong against the Euro having only recently corrected its weakness. But should EUR/USD trade down to 1.00, that “parity” would suggest that the Dollar is overvalued by about 16% compared to its Purchasing Power “Parity” – a considerable difference.

Chart: Source: Bloomberg

Important Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group. [“PWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM. Please remember to contact PWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. PWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the PWM current written disclosure statement discussing our advisory services and fees is available for review upon request. Photo Credit: geralt

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Employment Continues to Grow at a Slow, Steady Pace http://www.pwm-nj.com/knowledge/investment/employment-growth http://www.pwm-nj.com/knowledge/investment/employment-growth#comments Wed, 21 Jan 2015 14:00:54 +0000 http://www.pwm-nj.com/?p=9997 more]]>

trees

Employment Growth Progressing

Media and financial news sources often report that the economy added an “x” number of jobs for a particular month. These monthly payroll numbers are polled by the Bureau of Labor Statistics and are published in a report called “Employment Situation” that is typically released on the first Friday of each month. The monthly headline numbers tend to be quite volatile and are often difficult to interpret. In the past two years alone, the number of jobs added varied between as few as 88,000 jobs in June of 2012 to as many as 280,000 in February of 2013. Wide fluctuations in the monthly payroll data occur because the monthly hiring and firing process itself tends to be unpredictable, and seasonal factors that aim to stabilize the data are extremely difficult to measure accurately.

Looking at these figures can usually create more confusion than insight, and that is why Morningstar’s Department of Economic Analysis looks at employment growth through a slightly different lens. When the same volatile monthly jobs data is analyzed not as a monthly net job addition or loss but as a year-over-year 3-month moving average growth rate, a different picture emerges. All of a sudden, it becomes clear that the U.S. jobs market has been incredibly stable despite its monthly ups and downs. As the chart shows, total nonfarm employment has been growing at around 1.7% since early 2011 and has picked up modestly to 1.9% in recent months. Excluding the poorly performing government sector, which constitutes around 16% of total employment, private-sector jobs have been growing at an even higher 2.0–2.1% rate. Combine these results with efficiency and productivity gains and it should come as no surprise that the U.S. economy, on average, grew 2.2% since 2011 based on full-year estimates.

Despite the rock steady growth, the pace of employment recovery has been slow and disappointing to say the least. Considering that the U.S. economy lost over 8.5 million jobs between 2008 and 2010, most economists expected a much faster recovery of the labor market. Instead, it took more than four years to get back the number of jobs lost during the crisis. Seeing those numbers bounce back to their pre-recession level is great news, but it is important to point out that the make-up of the new post-recovery labor force has drastically changed. Unfortunately, the growth in high-paying, long-hours jobs such as construction and manufacturing has been all but robust, and due to efficiency improvements, especially in manufacturing, many of these jobs may never come back. A majority of the labor market recovery has been made in the lower-paying sectors such as retail and leisure and hospitality, which has certainly contributed to slower consumption growth and to the near-anemic pace of the economic recovery in general.

 

This presentation was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. ©2012 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. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Photo Credit: Hans

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Investment Outlook – Fourth Quarter in Review (Winter 2014) http://www.pwm-nj.com/knowledge/investment/investment-outlook-q4-2014 http://www.pwm-nj.com/knowledge/investment/investment-outlook-q4-2014#comments Tue, 20 Jan 2015 13:26:44 +0000 http://www.pwm-nj.com/?p=10045 more]]> image of mountains

Fourth Quarter in Review – 2014

Key Points

  • Divergence to be the theme of early 2015 as the US economy expands while countries overseas struggle
  • While the Federal Reserve moves towards monetary policy normalization, Central Banks around the world are likely to further expand their balance sheets which should help to support financial assets
  • The anticipated Fed rate hike is likely to pressure US equities – temporarily
  • The oil price drop is not all good news for the markets

2014’s Major Theme: Divergence

As 2014 drew to a close, the international economic indicators were strikingly different:

image of chart 1

These divergences are likely to continue through the first quarter of 2015 as the US economy enjoys its current momentum, the Fed is close to hiking rates for the first time in 7 years and US assets maintain their potential for reasonable appreciation.

Central Bank Balance Sheet Expansion to Continue Modestly

In the wake of the 2008 Financial Crisis, the response of the central banks was to purchase distressed debt by “expanding their balance sheets” with the benefit of adding fresh liquidity to the market. This liquidity, called quantitative easing (QE), helped to heal the financial system and encouraged the purchase of both real and financial assets. The Fed embarked on 3 distinct quantitative easing programs; each time that the Fed announced and implemented a program, equities, bonds and other risk assets traded well. Six years on, with the US economy showing improved signs of growth, the Fed has halted its balance sheet expansion with the ending of its third round of quantitative easing QE3, the purchase of long-dated US Treasurys and mortgage backed securities. Concerns have been expressed that the lack of additional liquidity will have a significant impact on the financial markets.image of chart 2

While the Fed does not intend to further expand its balance sheet, it does not intend to contract it significantly over the near term – that is, the liquidity that it has added will remain in the system as the proceeds of maturing bonds are reinvested in similar securities. And while the Fed and the Bank of England (BoE) have halted their expansions, the Bank of Japan (BoJ) and the People’s Bank of China (PBoC) continue theirs. The European Central Bank (ECB), to counter the deflationary concerns of its languishing economy, is preparing a quantitative easing program of its own, likely to be implemented in early 2015. Hence, on a global basis, the central banks are still active with expanding their balance sheets.

Implications of overall global balance sheet expansion:

  • Worldwide financial markets are likely to continue to be supported by the liquidity being added to the system.
  • Overseas equity markets may end their relative underperformance versus the US as their respective central banks become more aggressive with their own quantitative easing (e.g., the Bank of Japan buying Japanese equities.)
  • Bond yields are likely to remain at low levels as the liquidity from quantitative easing seeks a home and inflation is not yet a concern.
  • The US Dollar is likely to benefit from both higher anticipated US interest rates and the flow of international funds as Europe and Japan buy US assets.

BOTTOM LINE: Global financial assets will likely remain attractive as other countries’ qualitative easing programs replace the Federal Reserve’s stimulus. Based on each individual’s long term goals and risk tolerance, an allocation to international equities and bonds might be appropriate. In those instances, we believe currency hedged instruments are worth a closer look as they can provide the international exposure while reducing the effects of a strengthening Dollar.

Fed rate hike to pressure equities?

While history doesn’t repeat itself but often rhymes, recent experience suggests that the immediate reaction to the first Fed hike of the cycle is a mild short-term equity correction. Looking at the preceding three Fed hiking cycles, this correction has been followed by a relatively quick recovery and subsequent additional gains as the market digests the official higher rates and corporations continue to benefit from increasing revenue growth.image of chart 3

While we don’t think the market will follow this script exactly, it does offer some insight as to how the market may behave once the Fed takes the first step.

Bottom line: Increased market volatility, price corrections and consolidations should be anticipated as the Fed moves from its zero interest rate policy approach towards “normalization.”

image of chart 4

Oil Price Drop: The Good, The Bad, and The Ugly

The Good

  • Headline inflation should dampen in the developed and emerging world keeping prices low for consumers
  • Oil-importing countries should benefit as lower input costs allows them to more competitively price their exports.
  • Low gas prices will leave more money in the consumers pockets. This could motivate consumers to increase discretionary spending.

The Bad and The Ugly

While we all have been enjoying the lower prices at the pump, there are some downside consequences to lower oil prices:

  • The energy sector accounted for approximately 424,000 new, well-paying jobs over the past four years. Increased layoffs in the energy sector are likely to take the luster off the monthly US jobs reports.
  • The high yield (junk bond) market has been the funding mechanism for many energy projects which will likely be unprofitable at current oil prices. This increased default risk has hit the high yield and MLP markets.
  • Innovation will be delayed. The incentive to invest and develop renewable energy sources is reduced while efforts towards improved efficiencies are abandoned.
    Projections of the US becoming energy sufficient may be too optimistic as domestic off-shore wells and fracking projects are shutdown at considerable expense.
  • Geopolitical strains are likely to increase as the producers (Saudi Arabia, Russia, Iran, Iraq) — with the reduced oil revenues — may face domestic turmoil which could lead to political upheavals. It would also take some time to see if the Saudi’s intention of driving high-cost producers out of the market is effective.image of chart 5

BOTTOM LINE: While we will never be so bold to predict a bottom in the oil market, we will look for tactical opportunities to add to allocations in the sector through individual names, high yield bonds and MLP (Master Limited Partnership) investments.

Important Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group. [“PWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM. Please remember to contact PWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. PWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the PWM current written disclosure statement discussing our advisory services and fees is available for review upon request. Photo Credit: sabrinaschlich

 

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Did the Devil Make You Do It? http://www.pwm-nj.com/knowledge/investment/did-the-devil-make-you-do-it http://www.pwm-nj.com/knowledge/investment/did-the-devil-make-you-do-it#comments Mon, 05 Jan 2015 14:00:13 +0000 http://www.pwm-nj.com/?p=10026 more]]> hands-holding

8 Retirement Miscues

We’re all human, and we all make mistakes. Yet some errors are worse than others, and it’s important to try to avoid the kinds of miscues that could derail your retirement.

What sort of mistakes? Of course, these will vary from person to person, but here are eight common foul-ups that often bedevil soon-to-be retirees:

Mistake #1 – You have no financial plan for retirement.
Although your plan doesn’t have to be carved in stone – and in fact it needs to be flexible – it at least should provide some basic guidelines for your future. A bare-bones plan will look at your potential sources of retirement income and approximate what you can expect to spend – and rough estimates are better than no estimates at all. Figuring out what it may take to live comfortably during retirement is the first step toward getting there.

Mistake #2 – You have too much debt.
Perhaps nothing can be more damaging to successful retirement than crushing debt. Avoiding high-interest-rate credit card charges can help you head off the problem. If you spend within your means and borrow judiciously you’ll be able to save more for retirement and won’t be burdened by the need to pay off compounding debt.

Mistake #3 – You sacrifice retirement planning for education planning.
Saving money for your children’s college education is obviously a lofty and worthwhile goal, and starting early can help ease your financial burden when tuition bills come due. But you may not want to make education saving your primary financial priority. Often, parents are able to help pay college bills while still putting away money for retirement, and your kids can help by taking low-interest loans to cover part of their costs.

Mistake #4 – You don’t keep an emergency fund.
Even if you’ve been diligent about saving for retirement, remember to expect the unexpected. You might lose your job or face another financial or medical emergency, and having a cash cushion to fall back on can help you avoid dipping into retirement funds – an option that could have short- and long-term tax and financial consequences. The usual rule of thumb is to try to set aside at least six months worth of salary in a rainy day fund.

Mistake #5 – You don’t have a long-term investment strategy.
You’re likely to fare better if you establish a long-range investment plan for retirement rather than trying to boost your portfolio by chasing hot stocks. Time-tested principles such as asset allocation and diversification can help you make steady progress toward your goals, whereas playing investment hunches is likely to produce more losers than winners. And taking a smart, deliberate approach is as important for investing the assets in tax-sheltered retirement plans, such as 401(k)s and IRAs, as it is for taxable accounts.

Mistake #6 – You underestimate health-care costs.
As people live longer and longer – and as growth in health-care costs continues to outpace overall inflation – you’ll need to allocate a healthy portion of your savings to personal care. Often, health insurance plans and Medicare will cover much less than you’ve counted on and you’ll need to use your savings to make up the difference. What’s more, an extended stay in a nursing home could destroy your retirement nest egg. Consider buying long-term-care insurance to help ward off future disasters.

Mistake #7 – You don’t factor in taxes.
People often disregard the impact that federal and state taxes can have on their retirement savings. For instance, if you’ve been accumulating funds in a 401(k) plan and traditional IRAs, when you withdraw money from those accounts to pay your retirement expenses those distributions normally will be taxed at ordinary income rates. In addition, whether you want to or not, you’ll have to start taking money from those accounts after you turn age 70½. Your long-term plan for retirement needs to take these taxes into account.

Mistake #8 – You count too heavily on Social Security benefits.
After you’ve paid into the Social Security system during your working career, it’s only fair that you reap the benefits. But those monthly payments usually aren’t enough to live on comfortably, not by a long shot. It’s important to view Social Security as only a supplement to other sources of retirement income – from your investments, company retirement plans, and IRAs.

Making any of these mistakes could cause trouble when it’s time to retire. But if you know what to look out for you may be able to avoid problems – and the best time to start fixing things is now.

Please note that various factors such as changes in tax laws, inflation, and the uncertainty of social security can have a significant impact on the results of the study discussed in this section.This presentation was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. ©2012 Advisor Products Inc. All Rights Reserved. Photo Credit: debowscyfoto

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A Disciplined Approach to Investing and Why it Works http://www.pwm-nj.com/knowledge/investment/timing-the-market http://www.pwm-nj.com/knowledge/investment/timing-the-market#comments Wed, 17 Dec 2014 14:00:43 +0000 http://www.pwm-nj.com/?p=9999 more]]> watch

| Featured Author: Laura Ferguson |

Time in’ the Market vs. ‘Timing the Market’

The verdict is in. ‘Time in’ the market is more efficient at building wealth than ‘timing the market’. Investors do not like to lose money. Not ever. We all have an emotional attachment to wealth. We worked hard for it so who could blame us? With that in mind, if someone told you market timing was the best defensive strategy, we would beg to differ. Timing the market is difficult and based on predictions. The problem with predictions is that none of us truly know what will happen tomorrow. And each buy or sell will require a future sell or buy making market timing nearly impossible. By timing the market, you are more likely to miss an opportunity to then capitalize on market volatility.Photo of Laura Carcich

Investors tend to allow emotions to drive many of their investment decisions. Therein lies the main culprit for drastic changes in a portfolio when patience will generally provide the best long term outcome. “Corrections are part and parcel of the investment process, they come and go, and it is imperative to take a deep breath and realize that what is most important for building wealth is not ‘timing’ the market but rather ‘time in’ the market,” David Rosenberg, chief economist and strategist at Gluskin Sheff, said on October 14.

The key is to have a plan and stick with it.

We believe it is beneficial for clients to stay invested. Trying to time the market is extremely difficult to do consistently. Market lows often result in emotional decision making. Investing for the long-term while managing volatility can result in a better outcome.

As the chart below illustrates, a $10,000 investment made December 31, 1993 grew to $58,332 for the investor that remained invested at all times, and to $29,111 for someone attempting to time the market, and missing the top 10 days over a 20-year period. This represents a reduction in average annual returns from 9.2% to 5.5%!

markets-chart-of-the-day

On October 28th Barrons published an article, “The Timeless Allure of Stock Market Timing.” The article denotes the use of market timing as an unpredictable method to manage a portfolio. More importantly, the article highlights the use of asset allocation and other contributing factors, such as lifestyle circumstances, as the best method to methodically manage a diversified portfolio. By building out the portfolio with long term goals in mind, investors are better prepared to endure the market volatility. By focusing on your long term goals, time horizon and risk tolerance during the most volatile times, you more effectively protect your future wealth. You cannot avoid the market swings, but staying invested offers a greater chance you will not miss the best days in the market.

The allure of possibly missing the “ten worst days” of the market will encourage many investors to attempt to time the market. From our experience, an individual investor is more likely to harm then help themselves while attempting to time the market. Therefore, we continue to support a disciplined approach to investing while focusing on your long term goals, time horizon and risk tolerance.

For educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Broadridge Investor Communication Solutions, Inc. Copyright 2013.Photo Credit: SplitShire

 

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Inflation Can Vary by Category http://www.pwm-nj.com/knowledge/investment/inflation-can-vary-by-category http://www.pwm-nj.com/knowledge/investment/inflation-can-vary-by-category#comments Tue, 16 Dec 2014 13:53:57 +0000 http://www.pwm-nj.com/?p=9995 more]]> image of a hot air balloon - LFitts

Keep Inflation in Mind When Planning Your Investment Goals

The general inflation number (the “All items” category) may be a good measure for the economy at large, but the cost of certain goods and services could rise much faster than the average cost of living.

For the past year, tuition, food, housing, and medical care have all experienced much higher inflation rates than the headline number. Gasoline prices, on the other hand, have been declining and are now near four-year lows.

People who need to focus on savings for college or medical care may be left short, as the cost for such items often tends to rise at a faster rate than the average cost of living. Those investors might not be able to keep pace with rising costs if they do not take their real inflation rate into account when planning their investment goals.

This presentation was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. ©2012 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. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Photo Credit:  LFitts

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Want to Donate but Don’t Want the Hassle? Consider a Donor Advised Fund http://www.pwm-nj.com/knowledge/investment/donate-daf http://www.pwm-nj.com/knowledge/investment/donate-daf#comments Tue, 18 Nov 2014 14:00:58 +0000 http://www.pwm-nj.com/?p=9970 more]]> image of seagulls

| Featured Author: Alyssa Monush |

An Easier Way to Donate to Your Favorite Charities

A donor-advised fund (DAF) is a philanthropic account established through a public charity. It offers you an easy way to make charitable gifts over an extended period of time while receiving an immediate tax benefit. A donor-advised fund is much like a charitable savings account where you can contribute as much as you want, when you want with the ability to make ongoing recommendations regarding charitable grants.

When you contribute to a donor-advised fund, you are making an irrevocable image of Alyssa Monushcontribution that must be used exclusively for charitable purposes. You receive an immediate tax deduction and can recommend grants to your favorite charities at any time. A donor-advised fund also creates a perfect opportunity to pass down charitable values to future generations.

Under current tax laws (2014), donor-advised fund participants can take a federal income deduction up to 50% of adjusted gross income for cash contributions and up to 30% of adjusted gross income for appreciated securities.* Furthermore, by contributing appreciated securities with unrealized capital gains, you can avoid capital gains taxes on the sale of the securities and use that money to increase your donation. Plus, any additional investment growth in your donor-advised fund is tax-free, and you can take your time choosing the charities you want to support.

 

daf flow chart

 

 

A donor-advised fund is similar to a private foundation but requires less money, time, legal assistance, and administration to establish and maintain. Because donor-advised funds are public charities, they also enjoy greater tax advantages than private foundations and allow for greater privacy of your personal information.
Setting up a donor-advised fund is a cost effective way for you to receive tax benefits while supporting your favorite charities.

  • Some advantages to having a DAF:
    • Low contribution minimums
    • Easier and less costly to set up and maintain than private foundations
    • Donors may receive immediate income tax deductions
    • Can reduce or eliminate capital gains and estate taxes
    • No excise tax or payout requirements
    • Donations can be personalized or donors can give anonymously
    • Accounts may be transferable to the next generation
  • Contributions to DAF are not limited to cash and publicly traded securities. On a case by case basis, it could receive other appreciated assets such as privately held and restricted stock, real estate, collectibles to name a few:
    • Restricted and controlled stock
    • Privately-held stock
    • Real estate
    • Proceeds from life insurance or from a full-paid policy
    • Private foundation grants or terminations
    • Bequests
    • Named beneficiary of charitable remainder trust
    • Named beneficiary of an IRA, 401(k), or other retirement account
    • Tangible personal property

Interested in setting up a Donor-Advised Fund? Give us a call today at 732-450-0147.

For further insight into donor-advised funds, check out the posts listed below from Charitable-nation.com:

* Tax deductibility limits are different by asset type. Contributions that exceed AGI limitations may be carried forward and deducted for five years. Your ability to claim itemized deductions may be subject to further limitations depending upon your specific tax situation. Please consult your tax advisor. Keep in mind tax law is subject to change.
For educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Broadridge Investor Communication Solutions, Inc. Copyright 2013.Photo Credit: Andre_Rau

 

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