PWM - Financial & Investment Advisors in New Jersey | Private Wealth Management - Registered Investment Advisor, RIA | NJ, NY, PA, FL http://www.pwm-nj.com Fri, 01 May 2015 15:43:18 +0000 en-US hourly 1 http://wordpress.org/?v=4.1.4 A Closer Look at Several Strategies to Hedge Concentrated/Low Cost Basis Positions http://www.pwm-nj.com/knowledge/investment/a-closer-look-at-several-strategies-to-hedge-concentratedlow-cost-basis-positions http://www.pwm-nj.com/knowledge/investment/a-closer-look-at-several-strategies-to-hedge-concentratedlow-cost-basis-positions#comments Wed, 22 Apr 2015 13:00:52 +0000 http://www.pwm-nj.com/?p=10236 more]]> image of clouds

| Featured Author: Monica Jalife and Jim Ferrare |

Part 3: A Closer Look at Several Strategies to Hedge Concentrated/Low Cost Basis Positions

Let’s continue our series of articles on several strategies to hedge concentrated (low costs basis) positions by focusing on covered call writing strategies.

Covered Calls

Many people like to say there is no free lunch when it comes to investing. True. However, a covered call strategy can be appealing if you would like additional portfolio income and have a concentrated position that you would not mind selling for the right price.

First, let’s look at what a covered call strategy is and is not. From an execution standpoint an investor sells a call option on a security he owns. Think of this strategy as granting someone the right to purchase one of your investments at a predetermined price. In exchange, the seller of the call option receives a payment and assumes a potential obligation to deliver the stock at an established strike price sometime in the future.

The income received for granting an “option buyer” this right is referred to as the option premium. There are many factors that influence the price of premiums received, most notably the time until expiry and the implied volatility of the underlying stock: longer time periods and more volatile stocks typically generate higher premiums.

It is important to note that the covered call strategy offers investors only minimal downside protection-to the level of the premium received from the call sale-and is primarily meant to generate supplemental portfolio income.

There are three possible outcomes associated with selling covered calls which will be described later. Keep in mind under all scenarios you “pocket” the income derived from the premiums sold.

As an illustration lets use Pear Corp as the underlying security in which covered calls are written against. While this is a fictitious company, these numbers are meant to highlight how the strategy could enhance portfolio income for investors.

The following is an example of a covered call strategy for a concentrated holding:
For the entire article, we will use Pear Corp shares as our example. Assume today is April 15th and the current Pear Corp price is $100.

An investor currently own 5000 shares of Pear in a portfolio valued at $1 million (about half of the portfolio value is in Pear Corp stock).

The investor sells ten option contracts granting the buyer the right to purchase 1000 shares of Pear Corp, at any time until option expiration, at $105 (the strike price) per share.

The option expires in 60 days.

For illustration purposes we assume the theoretical probability of the stock trading above $105 in 60 days is 30% (numerous factors impact this calculation including time to option expiration and implied volatility of the underlying security).

Assumed premium paid to the option seller is $2.17 per share.

Option contracts trade in units of 100 shares. Therefore the premium received for selling 10 covered call contracts on Pear stock is $2,170 ($2.17 premium x 100 shares x 10 contracts). This amount is collected on the day the option is sold.

The annualized return on this transaction is slightly above 13%* and is in addition to any potential capital appreciation/depreciation associated with owning this position up to the strike price of the option, provided the position is not called away prior to expiry.
Covered calls can be continuously “rolled” depending on market conditions. Each time subject to one of the three outcomes reviewed below.

Let’s go back to our example. Three things can happen:

1) The shares of Pear trade in a relatively flat zone and settle near the current price of $100.The option expires worthless and the investor “pockets” the premium (minus any transaction related costs). In this scenario income has been successfully generated and the long Pear Corp position maintained.

2) The shares of Pear fall and settle below the current price.
Once again the option expires worthless and the investor receives the option premium. Covered calls are not downside protection vehicles but do serve to reduce the breakeven point of the position, in this case by $2.17 per share or $2,170.

3) Pear Corp shares settle above the strike price of $105.
The option would most likely be exercised and the upside potential would be capped at $105, plus the option premium of $2.17. Under this scenario it is very possible the strategy underperformed a straight long position. It is important to note the call option can be repurchased in the open market at any point prior to expiration and could allow the investor to realize a short-term loss (based on the value of the options) instead of a taxable gain.

If an investor wrote covered calls on a select group of securities with varying expiration dates they could potentially increase income, which is particularly attractive in today’s low rate environment. To the extent positions are called away it would be at prices higher than current market values.

This investment approach can be labor intensive but could also be a good complimentary strategy for investors with one or more large concentrated positions.
Before implementing any investment strategy consideration must be given to many factors, including those not mentioned in the above article, such as life expectancy and risk tolerance which can meaningfully impact the merits of such a strategy.

Stay tuned for our next article on this series that will focus on puts, collars and prepaid variable forward contracts.

*Calculation for determining annualized return:
Premium ($2.17) is divided by the current price ($100) and then multiplying by the number of days in the year divided by number of days to expiration: $2.17/$100 = 0.0217x 365/60 = 13.2% annualized return

 

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: Unsplash

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Austin Hagaman on The Tim McLoone Radio Show http://www.pwm-nj.com/knowledge/pwm/austin-hagaman-on-mcloone-radio-show http://www.pwm-nj.com/knowledge/pwm/austin-hagaman-on-mcloone-radio-show#comments Wed, 22 Apr 2015 13:00:27 +0000 http://www.pwm-nj.com/?p=10210 more]]> image of young girl

The Tim McLoone Radio Show 

Austin Hagaman recently appeared on The Tim McLoone Radio Show , AM970 to promote Covenant House, a multi-national charitable organization serving homeless youth, and their local Associates Board. Hagaman, who was newly appointed to Chair Of The Board, spoke about the boards growth over the past year and their recent success with a fundraiser that raised just under a half a million dollars. The fundraiser, coined “Sleep Out: Young Professional Edition”, included over 270 professionals between the ages of 22 and 39 who slept out on a street in New York City for a night in March to raise money and awareness for Covenant House’s mission.

The show was taped in front of a live audience at Tim McLoone’s Supper Club in Asbury Park, New Jersey. The day of taping also included interviews with Mario Gallucci from the USA reality series “Partners in Crime”, Quincy Mumford, a contestant on NBC’s “The Voice”, and local artist, Bob Bandiera.

Listen to the show: https://soundcloud.com/tim-mcloone-radio-show/sunday-4-5-15-show

Learn more about Covenant House: https://www.covenanthouse.org/

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Photo Credit: Pezibear

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6 Common Estate Planning Myths http://www.pwm-nj.com/knowledge/investment/estate-planning-myths http://www.pwm-nj.com/knowledge/investment/estate-planning-myths#comments Wed, 01 Apr 2015 13:00:27 +0000 http://www.pwm-nj.com/?p=10187 more]]> image of seagulls

Here’s the Reality

Some people avoid estate planning at all costs. But putting aside the inevitable emotions involved in looking ahead to your own demise, it’s crucial to understand the process. A good place to start is by debunking these six common but potentially damaging myths:

Myth #1: My estate is too small to need an estate plan.

Reality: You don’t need a small fortune for your heirs to benefit from estate planning. For instance, what if you decide to divide your assets among several beneficiaries, instead of designating just your spouse or another person? That could be very important if you’re in a second or third marriage and have children from a previous marriage. In addition, you might want to leave some of your estate to charity. Wanting to help your family avoid the delays of probate, seeking to reduce estate taxes, and choosing who will administer your estate also call for estate planning.

Myth #2: I don’t need an estate plan because my spouse will inherit everything.

Reality: This is closely related to the first myth. Just because you have left everything to your spouse under your will — and your spouse has returned the favor — doesn’t mean you won’t benefit from estate planning. What happens if your spouse dies first at a relatively early age, or if you die together in an accident? What then? There might be complications because of how assets are titled, who are named as beneficiaries of your life insurance policies and your retirement plans, or the estate laws of your state.

Myth #3: If you’re wealthy, there’s no way to avoid estate taxes.

Reality: That’s simply not true. On the federal level, your estate can benefit from a generous $5.43 million exemption for those dying in 2015 (and that amount is indexed for inflation and will rise in future years). What’s more, because you or your spouse can use the other’s leftover exemption, the effective amount the two of you can shield from estate taxes is almost $11 million. Trusts and other tax-saving vehicles can further reduce estate tax exposure. Although state inheritance tax rules aren’t always as generous, professional guidance may help there, too.

Myth #4: Everything is covered in my will so estate planning isn’t necessary.

Reality: While a will is a good starting place for an estate plan, it’s not likely to be enough on its own. There may be numerous other loose ends to tie up. In addition, depending on your state’s laws, your heirs may have to go through a lengthy probate process that can be even more drawn out if you owned property in several states. A revocable living trust can help you pass some assets to your heirs without probate, and your will probably also should be accompanied by a durable power of attorney authorizing a family member or a professional to act on your behalf if you’re incapacitated.

Myth #5: I don’t have to worry about life insurance and retirement plan designations.

Reality: This is overstating the case. Although the beneficiary designations you’ve made for life insurance and retirement plans, as well as for your IRAs, are a good start, you still need to coordinate those choices with other aspects of your estate plan. You might want to revise your designations, for example if you get divorced or a spouse dies, or you could need to add secondary or contingent beneficiaries. Also, while the proceeds from life insurance generally are excluded from estate tax, there are exceptions that could direct that money back into your taxable estate.

Myth #6: Once my estate plan is complete, I don’t have to do anything else.

Reality: Nothing could be further from the truth. Your family and financial circumstances almost certainly will continue to evolve, and your estate plan needs to reflect significant changes. Marriage, divorce, or the birth of children or grandchildren all could have an impact. And the best-laid plans could be affected by a disability or unexpected death of a spouse. Finally, your plan may have to be fine-tuned to take other events into account, especially if the estate tax laws are revised again. So be sure to review your plan periodically and revise it when necessary.

 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 CreditScreamenteagle

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When Should Millennials Start Retirement Saving? http://www.pwm-nj.com/knowledge/investment/millennials-retirement-saving http://www.pwm-nj.com/knowledge/investment/millennials-retirement-saving#comments Tue, 31 Mar 2015 13:00:55 +0000 http://www.pwm-nj.com/?p=10200 more]]> image of converse

Better Late Than Never.

This is a true story about Jane X, who graduated from a prestigious university five years ago. She’s on her third job, but she’s now communications director at a private foundation and finally earning decent money.

Jane’s student loans are paid off, and her good salary leaves her some money to invest. However, like many of her millennial friends, she doesn’t know a lot about investments or the differences between various retirement plans. But she is thinking about her future and wonders when she should start saving for retirement.

There’s a short, simple answer: NOW.

The best time to begin saving for retirement is as soon as you can. Granted, relaxing on the deck of a retirement cottage overlooking the ninth green isn’t first and foremost in the minds of most 20-somethings. But you can’t ignore the sheer weight of the saving numbers. Let’s go back to Jane, who’s 27. If she manages to save $5,000 a year in a 401(k) for the next 40 years – until she’s 67, the Social Security full retirement age for her generation – and she earns an average annual return of 7%, she will end up with $1,035,632. But if she waits 10 years to start saving, when she’s 37, her accumulated savings will be just $490,027.

If you’re convinced that now would be a good time to get started, consider these seven steps that could help you reach your goals:

1. Budget and save. It’s difficult to be diligent about setting aside money for retirement when you’re young and have a million things you’d rather do with your money. But if you’re able to set objectives for saving and you do your best to stick to them, it could pay off beautifully down the road. Try to train yourself to live within your means while you move ahead in your career and your personal life.

2. Take advantage of employer retirement plans. Your company probably offers a tax-deferred retirement plan – a 401(k) or a 403(b) – and your employer may provide matching contributions (for example, up to 3% of your compensation) to go alongside the pre-tax earnings you put into the plan. With all of that money invested for the long haul, it can grow and compound and you won’t be taxed on the growth until you pull out funds during retirement.

Interested in opening a 401(k) today? Contact Carmine D’Avino at 609-987-2223.

3. Don’t forget about IRAs. Regardless of whether you participate in an employer-sponsored retirement plan, you also can set up an IRA. With a traditional IRA, the money you put in may be partly or wholly tax-deductible, if your salary is relatively low. But here, too, you’ll be taxed on withdrawals during retirement. Another option, a Roth IRA, doesn’t give you a tax deduction on money going in but may provide 100% tax-free distributions in retirement.

4. Invest wisely. This is good advice not only for money in tax-advantaged retirement accounts but also for money you invest in taxable brokerage accounts. We can help you find the investment balance that best suits your personal needs, objectives, risk tolerance, and other circumstances. Although there’s no foolproof method, you should have more leeway to be aggressive now than you would when you’re nearing retirement or already retired. Of course, past performance is no guarantee of future results, but you can use historical stock market trends to help shape your investment strategies.

5. Expect the unexpected. Even the best-laid plans of retirement saving can be derailed by an emergency such as a hospital stay or the loss of a job. Try to leave enough wiggle room within your budget to account for some unforeseen financial trouble. Rather than put yourself in a position to have to skip or slash retirement plan contributions, remember to put aside cash in a “rainy day” fund. Most experts recommend building up enough to sustain you for at least half a year during which you may have no other income.

6. Avoid debt like the plague. One of the biggest impediments to retirement saving is a crushing debt load. You’re not doing yourself any favor by deferring part of your salary to an employer plan at the same time that you’re charging luxury items on a credit card with sky-high interest rates. That’s not to say that borrowing isn’t warranted at times – perhaps to help buy a home or car – but make sure it fits into your overall plan.

7. Educate yourself. Finally, you can improve the chances for a secure, comfortable retirement by learning all of the rules of the road, including the nuances of investments and the tax differences between various accounts. Knowledge is your friend. Rely on us to give you a solid foundation for going forward.

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: Greyerbaby

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Seven Steps After A Spouse’s Sudden Death http://www.pwm-nj.com/knowledge/investment/steps-after-a-spouses-sudden-death http://www.pwm-nj.com/knowledge/investment/steps-after-a-spouses-sudden-death#comments Wed, 11 Mar 2015 12:51:35 +0000 http://www.pwm-nj.com/?p=10153 more]]> image of woodland road

What To Do Now?

The funeral is over, the mourners are gone, and now you’re left with the rest of your life after the unexpected death of your beloved spouse. What’s a devastated widow or widower to do? For starters, DON’T do anything rash, such as selling the homestead or cashing in all of your stock holdings right away. It may be difficult, especially from an emotional standpoint, but you can pick up the pieces slowly and get your finances in order. Here are seven steps for moving forward:

1. Meet with your professional advisors. One of the first steps – if not the absolute first – should be to contact your attorney, accountant, and financial advisor. These professionals can provide guidance for handling all of the legal, tax, and financial matters relating to you and your deceased spouse. Their counsel will be valuable as you work your way through the remaining six steps on this list.

2. Get the will probated. Assuming your spouse had a valid will and you’re the executor – typically the case with married couples – you must begin to probate the will by filing a petition with the appropriate county office. Depending on the particulars, it can take as little as a few weeks or as long as a few years for the process to be completed. Keep your attorney in the loop the entire way.

3. Apply for benefits. Normally, you’ll be entitled to Social Security benefits, including a one-time death benefit, plus Veteran’s Administration (VA) benefits if your spouse was a military veteran. A surviving spouse over age 60 at the time of the other spouse’s death may claim survivor benefits from Social Security. But don’t continue to cash Social Security checks for a deceased spouse; you’ll likely have to pay those back. It may be necessary to visit the local Social Security office and to contact the VA when appropriate. Also, don’t forget to inquire about benefits from your spouse’s employer if your spouse was still working.

4. Collect life insurance proceeds. Once reality sets in, you have to go about the regular business of making payments on the mortgage, the car loan, and other debts. Life insurance proceeds could be needed sooner rather than later. Examine your records to determine what you’re entitled to receive through any private and employment-based policies. Your insurance agent can help, and your financial advisor can consult with you on how best to deploy any insurance benefit.

5. Review the books. Once you’ve had a chance to catch your breath, make a comprehensive review of your financial affairs. Go over your checkbooks, files, and online ledgers covering living expenses, loans, and other financial obligations. Separate accounts according to whether they’re in your spouse’s name, your name, or were held jointly. Then let banks, insurance companies, and other entities know about your spouse’s death. And keep copies of these communications and verifications.

6. Change account titles. Begin the tedious process of re-titling accounts at banks, brokerage houses, and the like. Generally, you automatically will be granted a change on accounts owned as joint tenants with rights of survivorship (JTWROS), but the financial institution may require documentation. Contact each institution and comply with its procedures. Make sure you have enough death certificates to meet all of the obligations.

7. Start planning for the long term. Last, but not least, after you’ve addressed all of the issues requiring prompt attention, look to the future. It’s time to circle back to the advisors who helped you at the outset. Reevaluate your investment portfolio, taking your evolving circumstances into account. Update your estate plan with an emphasis on passing wealth to your heirs, such as children and grandchildren, with minimum tax erosion. An estate tax return generally has to be filed within nine months of death. Finally, make those lifestyle choices – perhaps selling a home, heading off on extended travel, or both – that suit your changing needs.

Also make cancellation notices. Your review may reveal gym and club memberships and magazine and journal subscriptions that you can cancel right away. Re-titling your financial accounts will take precedence over this type of bookkeeping, but try not to let this linger, either. Usually, a phone call or a quick note will be enough to take care of things.

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: uniquedesign52

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Austin Hagaman Pledges to Sleep on NYC Streets for Homeless Youth http://www.pwm-nj.com/knowledge/pwm/austin-hagaman-pledges-to-sleep-on-nyc-streets-for-homeless-youth http://www.pwm-nj.com/knowledge/pwm/austin-hagaman-pledges-to-sleep-on-nyc-streets-for-homeless-youth#comments Tue, 10 Mar 2015 12:47:56 +0000 http://www.pwm-nj.com/?p=10144 more]]> image of central park

Austin Hagaman Participates in Fundraiser for Homeless Youth

On March 20th, Austin Hagaman is leading a group of professionals who have pledged to sleep on a street in New York City. The event, which is hosted by Covenant House, aims to raise money and awareness for homeless youth in New York City and New Jersey. With just over a week before the event, Austin and his fellow teammates have already raised over $10,000.

Join the effort. Sponsor Austin with a tax-deductible donation: http://covhou.convio.net/goto/Austin_Hagaman

Learn more: PWM’s Community Involvement

Photo Credit: tpsdave

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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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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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