Financial Planning Archives January 2010

Welcome to my annual tax post. I’m feeling pretty confident heading into this year’s tax season as it appears the average person will pay less tax and have more credits/deductions than last year. I wish I could say that trend is likely to continue in the future but it’s quite clear at this point that tax rates will be rising in 2010. The government must take action to counter the massive spending binge it’s been on of late. With Obama in the hot seat its pretty clear tax rates will be moving up, particularly for higher income earners. Combine that with the expiration of Bush’s tax cuts and future tax seasons start to look real ugly. In light of that, let’s focus on the positive for now.

On the upside, the personal exemption has jumped in 2009 to $3,650, up $150 from 2008. For married couples filing joint tax returns the personal exemption amount is $7,300. The standard deduction (used by those who don’t itemize deductions) has jumped $250 to $5,700 for single individuals or $11,400 for married couple filing joint tax returns.

We’re also seeing an upward adjustment (roughly 5%) in tax rates from 2008. What that basically means is that you may not jump into a higher bracket if you earned slightly more income in 2009. For a person who earns $100,000 per year, they would pay roughly $258 less in 2009 than they did in 2008. I like this change because it benefits all taxpayers, not just those with low adjusted gross incomes.

What won’t help some wealthier individuals is the increase on the exemption for the alternative minimum tax. This will subject more people to this nasty tax. What will help low and moderately-low income earners is that more people will qualify for the earned income tax credit in 2009. Those with three or more children will also see an additional credit.

What could help a variety of taxpayers is the plethora of new credits, ranging from cash-for-clunkers to the popular homebuyer credit and the credits related to energy efficiency in the home. Education credits have also been expanded with the American Opportunity Credit expanding upon the Hope and Lifetime Learning credits.

All things said this year won’t be that different from last year. Most people will probably save a few bucks but like most things in the financial world, it varies on a case by case basis.

If you have any questions about your individual tax situation please don’t hesitate to contact me. Attached is a list of new limits and changes for easy reference: Download file

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc.
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

The opinions expressed are for general information only and are not intended to provide specific tax advice for any individual. To determine which tax strategies may be appropriate for you, consult with your financial or tax adviser.

Posted by Russell Bailyn at 03:59 PM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )

Some baby boomers still think of smart investing as buying and holding a portfolio of blue chip stocks. Such investors, lost in their memories of stable dividends and low volatility, cringe at the idea of trading in their blue chips for index investments. They also cringe at the inclusion of commodities in newer, diversified portfolio models. The reality is that the past decade, plagued by high volatility and market scandals, has changed the investment landscape, quite possibly forever. The recession of 2008-2009 has also caused a major attitude change for investors. Whereas capturing big gains was the priority during most of the past decade, many investors I’ve been speaking with are now more focused on asset conservation and risk avoidance.

First, I think the traditional view of buying and holding individual stocks for growth and dividends have changed, probably forever, by the emergence of low-cost index products. Transitioning from individual stocks to index products has dramatically improved the averaged investor’s ability to diversify and has also more than likely reduced their trading costs. This months’ issue of Journal of Indexes magazine concludes that a happy medium is emerging in which traditionally passive investors are becoming slightly more active. Actions such as portfolio rebalancing and index optimization create activity in portfolios, even when they don’t require any action on behalf of investors.*

In terms of risk reduction, I think an initial step to reducing a client’s exposure to risk is explaining that merely including stocks in one’s portfolio does not guarantee long-term gains within a portfolio. A well diversified portfolio should include the basic asset classes of stocks, bonds and cash. Within each of those asset classes should be a considerable amount of micromanagement.

Because so many investors utilize packaged products to gain instant diversification and active management, that industry is jumping on the risk reduction bandwagon as well. In the past year a plethora of new financial products have been introduced which are “market neutral” or “balanced-risk.” These products do a number of things which stray from the traditional 50/50 or 60/40 stocks/bonds portfolios. They tend to hold larger allocations at cash, hold commodities, short (bet against) securities, and employ other non-traditional strategies. The goal for these products is to thrive in environments where stocks and bonds can’t do all the work. Most of these products also try to avoid the wild volatility found within stocks and commodities. As a result, they hold more bonds and cash equivalents which lead to underperformance during bull markets. As far as these managers are concerned that isn’t such a big deal since the primary goal is to avoid excessive losses and the secondary goal is performance.

Financial intellectuals including Robert Arnott and Jeremy Siegel believe updating the way indexes are calculated can also help reduce risk and improve portfolio diversification. Major indexes such as the S&P 500 weight their index by market cap, which means larger firms achieve more exposure in the average investor’s portfolio. According to Arnott, a portfolio comprised of equally (fundamentally) weighted indexes which includes exposure to domestic stocks, international stocks, corporate and government bonds, real estate, and commodities would have dramatically outperformed a domestic stock-only portfolio over the past 10 years.** While fundamental indexing critics will point out that this is simply a glorified value-investing strategy, Arnott would surely argue it’s more than a trend.

Can updating our traditional investment philosophies improve our portfolio performance? Time will tell but many suggest it will.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc.
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

*Portfolio Rebalancing involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider one’s ability to continue purchasing through periods of low price levels. Portfolio Rebalancing does not ensure a profit or protect against loss in declining markets.

**For 2009 performance figures regarding fundamental indexing, please visit www.researchaffiliates.com. Under Performance, the FTSE FAFI Index has outperformed the S&P 500 index by 15.52% over the past 12 months ended 12/31/2009.

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