Mid-Year Tax Planning Strategies

June marks the mid-point in the year and is a good time to pause and do some income tax planning for 2011. Step one is to decide what to do with your income tax refund if you are one of the more than fifty-seven million taxpayers receiving a refund. The average tax refund this year is $3,036. Too often people think of this as ‘found money’…a bonus of sorts and will spend it frivolously so that six months from now they have no recollection of what happened to the money. A smarter choice is to realize that any refund is part of your hard-earned earnings and use it to get a step ahead financially. Here are a few ideas:
  • Contribute to a Traditional or Roth IRA for 2011. Yep, it’s early in the year which means your money starts working for you tax-deferred quicker.
  • Pay down credit card debt. Credit cards typically charge double-digit interest rates. Realize this money fundamental: paying off a credit card that’s charging 18% interest is the same as ‘earning’ 18% on an investment.
  • Invest in your child’s education. A 529 college savings plan allows your investment to grow shielded from current income taxes and withdrawals, when used for qualified education expenses, are 100% tax-free. For residents of Alabama, we now have one of the best plans in the nation through the Vanguard Group. In addition to low investment costs, you’ll receive a state income tax deduction for contributions of up to $5,000 per year ($10,000 for couples filing jointly). For more information go to www.collegecounts529.com.
  • Make home improvements. The summer heat wave is on the way. This is a great time to up the energy efficiency of your home with added insulation, heat-shielding window treatments and servicing your air conditioning system. This is an investment that keeps on giving through reduced bills for years to come. Be sure to check for tax credits that are available with many energy improvements.
  • Seed your holiday gift fund. Blink your eyes and the holiday season will be upon us. Consider using your tax refund as seed money for holiday spending. Then, based on how much you plan to spend, add a little each month so you’ll be ahead of the game.
  • Give to charity. I can’t remember a time when folks were in more need of financial help than now, especially the hundreds of Alabamian’s that lost everything to the recent tornados. If you feel blessed, share the blessing! You’ll be doing a lot of good for families who are in great need and you’ll receive a tax deduction as a small bonus!
Step two is to do a little planning for the 2011 tax year. I’ve noticed that a lot of people get excited about receiving a tax refund. However, clearly all you’ve done is to make the government a tax-free loan. A better strategy is to calculate your taxes as close as you can to the actual amount you will owe and have your employer adjust your paycheck. Use this extra income to fund one of the strategies discussed above or to increase contributions to your employer’s retirement plan.

2 Minute Market Update

“Earnings Drive Stocks Higher”
April 25, 2011
Up to date in less than 2 minutes:
U.S. stocks rose, halting a two-week drop for the Standard & Poor’s 500 Index, as companies such as Intel Corp. (“INTC”) and Apple (“AAPL”) posted earnings that exceeded estimates and housing starts increased. On the week, the Dow, S&P 500, NASDAQ, and Russell 2000 were all up +1.3%, +1.3%, +2.0%, and +1.3%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+1.3%
+8.0%
+11.6%
S&P 500 (Large Caps)
+1.3%
+6.3%
+9.9%
NASDAQ (Technology)
+2.0%
+6.3%
+11.5%
Russell 2000 (Small Caps)
+1.3%
+7.9%
+14.0%
International Stocks (EAFE)
+2.0%
+5.9%
+11.1%
Dow Jones Total Stock Market (Broad Market)
+1.4%
+6.5%
+11.0%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Rising; Long-Term = Rising
90 T-bill Rate
0.05%
90 Day LIBOR
0.27%
TED Spread
0.22%
30-Year Mortgage Rate
4.78%
15-Year Mortgage Rate
4.00%
5-Year Adjustable Mortgage Rate
3.32%
30-Year Treasury Yield
4.47%
10-Year Treasury Yield
3.39%
5-Year Treasury Yield
2.11%
2-Year Treasury Yield
0.66%

 

 

Notable Recent Dividend Increases – 2011
Lockheed Martin (“LMT”)
19.1%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Colgate Palmolive (“CL”)
9.4%
Intel Corp (“INTC”)
14.3%
McDonalds Corp (“MCD”)
10.9%
Kimberly Clark (“KMB”)
6.1%

 

Now, all the details……………………
The S&P 500 advanced +1.3% to 1,337.38 last week.  The index is up +0.9% in April.  The Dow Jones Industrial Average rose 164.16 points, or +1.3%, to 12,505.99. The gain sent the Dow to the highest level since June 5, 2008. Per a Bloomberg interview, “It’s going to be another strong quarter of earnings,” said Jeffrey Lindsey, a portfolio manager at BlackRock Inc., which oversees $3.65 trillion as the world’s largest asset manager.  The market is cheap, he added. “It could be that people are surprised with the strength of the stock market, despite clearly important macro concerns just because the starting point is still inexpensive.” The S&P 500 has risen +6.3% in 2011, and is up +6.4% since reaching 1,256.88, the low for the year, on March 16th.  Corporate earnings are exceeding projections by 9.8% so far this season, while economic reports from housing to manufacturing are boosting investor confidence this month.  The index is trading at 13.7 times the estimated operating earnings of its companies, compared with an average of 18.1 times reported profit over the last decade.
Intel Corp. (“INTC”), the world’s biggest chipmaker, helped lead technology stocks higher after forecasting second-quarter sales that may top analysts estimates, evidence of booming demand for machines that deliver computing over the Internet.  First-quarter earnings and sales both surpassed estimates and the Santa Clara, California-based company rose +8.7% this week, the biggest weekly advance since July 2009.
Technology shares added +3% last week as Intel (“INTC”), Apple Inc. (“AAPL”) and International Business Machines Corp. (“IBM”) all posted results that exceeded estimates. Apple Inc. (“AAPL”) climbed +7.1%, while Yahoo! Inc. (“YHOO”) advanced +1.4%, after they reported better-than-forecast results.
S&P 500 financial firms are posting the best results so far in the first-quarter reporting season, exceeding estimates by +14%, according to data compiled by Bloomberg.
Per a Bloomberg interview, “We are seeing excellent results thus far,” said David Kostin, Goldman Sachs Group Inc.’s chief U.S. equity strategist. “You have an expanding economy, strong earnings growth and you have positive flows” of money into the market.
Commerce Department figures showed last week that work began on 549,000 houses at an annual pace, up +7.2% from the prior month and exceeding the 520,000 median forecast of economists surveyed by Bloomberg News.  Starts fell -19% in February to the lowest level in almost two years.
Stocks fell one day last week — on April 18th, when the S&P 500 lost -1.1%, the biggest daily slide since March 16th, as Standard & Poor’s Ratings Service put a “negative” outlook on the nation’s AAA credit rating, assigning a one-in-three chance of a ratings cut in the next two years, because of rising budget deficits and debt. Under President Barack Obama’s fiscal year 2012 budget, released in February, the total amount subject to the debt ceiling would be $20.8 trillion in 2016.  The plan House Republicans approved April 15, written by Budget Committee Chairman Paul Ryan of Wisconsin, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.
“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013,” New York-based S&P said in a report last week.  “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
The MSCI EAFE Index (broad international index) was up +2.0% last week. The Americas were up +1.5% with Brazil up +0.6%, Mexico down -0.5%, and Canada up +1.3%. Europe was up +1.0% with Germany up +1.6%. Asia-Pacific was up +2.1% with Australia up +1.3%, China down -1.3%, Hong Kong up +0.5%, India up +1.1%, Taiwan up +2.9%, and Japan up +1.0%.
Treasuries rose on the week with the 10 year yield dropping from 3.41% to 3.39%.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,254, down from the prior week’s level of 1,296. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index reached a recent peak of 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 22 basis points. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The spread has been widening lately due to concern about the quality of banks’ collateral amid the euro-region’s financial crisis.
Last week, oil was up +1.9% and closed at $112.29 per barrel. Year-to-date oil is up +22.9%. The average price of unleaded gasoline rose +0.8% last week to end at $3.863 per gallon per April 24th data provided by AAA. Year-to-date, unleaded gasoline is up +25.7%. Natural gas was up +5.0% last week and closed at $4.412/MMBtu. Year-to-date, natural gas is up +0.2%.
Last week, gold rose +1.2% closing at $1,503.20 per troy ounce. Year-to-date, gold is up 5.8%. The dollar was down -1.1% last week as measured by the U.S. Dollar Index with that index closing at 73.995. Year-to-date, the U.S. Dollar is down -6.4% as measured by the Dollar Index. The Euro was stronger against the dollar closing at $1.46/Euro. Year-to-date, the Euro is up +8.9% against the U.S. Dollar.
In the coming week, look for a slew of earnings from the likes of Kimberly Clark (“KMB”), Express Script (“ESRX”), Coca Cola Co. (“KO”), Lockheed Martin (“LMT”), United Parcel Service (“UPS”), Amazon.com (“AMZN”), 3M (“MMM”), and Microsoft (“MSFT”), to name a few. Look for economic reports on new home sales, consumer confidence, manufacturing, 1st Quarter GDP, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.
Hug Smith, The Welch Group www.WelchGroup.com

 

Weekly Market Update in less than 2 Minutes

“Earnings Disappoint at Alcoa, Google, and Bank of America”
April 18, 2011

U.S. stocks dropped last week, giving the Standard & Poor’s 500 Index its second straight weekly decline, as companies from Alcoa Inc. (“AA”) to Google Inc. (“GOOG”) and Bank of America Corp. (“BAC”) reported quarterly results that missed estimates. On the week, the Dow, S&P 500, NASDAQ, and Russell 2000 were all down -0.3%, -0.6%, -0.6%, and -0.7%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-0.3%
+6.6%
+12.0%
S&P 500 (Large Caps)
-0.6%
+4.9%
+10.7%
NASDAQ (Technology)
-0.6%
+4.2%
+11.4%
Russell 2000 (Small Caps)
-0.7%
+6.6%
+16.8%
International Stocks (EAFE)
-1.1%
+3.8%
+10.4%
Dow Jones Total Stock Market (Broad Market)
-0.6%
+5.1%
+12.2%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Rising; Long-Term = Rising
90 T-bill Rate
0.06%
90 Day LIBOR
0.27%
TED Spread
0.21%
30-Year Mortgage Rate
4.83%
15-Year Mortgage Rate
4.03%
5-Year Adjustable Mortgage Rate
3.41%
30-Year Treasury Yield
4.47%
10-Year Treasury Yield
3.41%
5-Year Treasury Yield
2.12%
2-Year Treasury Yield
0.70%

 

 

Notable Recent Dividend Increases – 2011
Lockheed Martin (“LMT”)
19.1%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Colgate Palmolive (“CL”)
9.4%
Intel Corp (“INTC”)
14.3%
McDonalds Corp (“MCD”)
10.9%
Kimberly Clark (“KMB”)
6.1%

 

Now, all the details……………………
Last week, the S&P 500 declined -0.6% to 1,319.68. The index has fallen -1% since April 1st.  The Dow average declined 38.22 points, or -0.3%, to 12,341.83. Alcoa (“AA”) slumped -7.8% to $16.52.  The largest U.S. aluminum producer reported first-quarter sales that missed analysts’ estimates as the dollar weakened.  The company’s sales of $5.96 billion compared with the average forecast of $6.06 billion, according to data compiled by Bloomberg. Google (“GOOG”) tumbled -8.2% to $530.70.  A first-quarter hiring binge and increased marketing led to the biggest jump in operating expenses in three years at the operator of the world’s biggest Interest search engine. Bank of America (“BAC”) dropped -4.9% to $12.82.  The largest U.S. lender by assets reported first-quarter profit excluding some items of $0.17 a share, missing the average analyst estimate by 35%.
Per a Bloomberg interview, “It’s going to be a scattered picture when you look from company to company,” said James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, which oversees $108 billion. “It’s not that it will be a bad earnings season.  It’s just that we’re going to have more disappointments based upon what the last couple of quarters were.  That doesn’t change my view on the fact that the economic recovery is sustainable.”
The S&P 500 has risen +4.9% in 2011.  While total income for the index has topped the average analyst projection for eight straight quarters, the proportion of companies beating forecasts has fallen three straight quarters, the longest streak since 2000, according to data compiled by Bloomberg.  Among the 11 earnings reports last week, the data showed profit trailed the average forecast by -3.5%.
The S&P 500 Index rose during the last three trading days last week as reports showed sales at U.S. retailers rose in March for a ninth consecutive month and industrial production increased more than forecast.  Confidence among U.S. consumers climbed in April from a 16-month low.  Stocks also rose over that period as the House approved a spending bill that will avert a U.S. government shutdown.
Per a Bloomberg interview, “This market had a pretty generous run,” said Keith Wirtz, who helps oversee $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati.  “We’re coming into earnings season.  The simple math suggests that comparisons are going to be tougher year over year. Any kind of pullback in stocks could be an opportunity to restructure portfolios. There’s nothing that suggests that this bull market is over.”
Cash flow among S&P 500 companies set a record in 2010, surging to $1.15 trillion from the previous high of $1.12 trillion in 2006.  Free cash flow (operating cash flow minus capital expenditures) also hit a record: $495 billion last year, versus $302 billion in 2009.  Healthy free cash flow can be used to enhance shareholder value, which is what Dow industrials Procter & Gamble (“PG”) and United Technologies (“UTX”) did last week. P&G increased its dividend by +9% and United Technologies increased its dividend by +12.9%.  We expect more companies to enhance shareholder value by increasing their dividends in 2011.
The MSCI EAFE Index (broad international index) was down -1.1% last week. The Americas were down -1.0% with Brazil down -3.0%, Mexico down -1.3%, and Canada down -2.9%. Europe was down -1.4% with Germany down -0.5%. Asia-Pacific was down -0.4% with Australia down -1.8%, China up +0.7%, Hong Kong down -1.6%, India down -0.3%, Taiwan down -2.0%, and Japan down -1.8%.
Treasuries rose on the week with the 10 year yield dropping from 3.58% to 3.41%.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,296, down from the prior week’s level of 1,376. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index reached a recent peak of 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 21 basis points. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The spread has been widening lately due to concern about the quality of banks’ collateral amid the euro-region’s financial crisis.
Last week, oil was down -2.8% and closed at $109.66 per barrel. Year-to-date oil is up +20.0%. The average price of unleaded gasoline rose +1.7% last week to end at $3.833 per gallon per April 17th data provided by AAA. Year-to-date, unleaded gasoline is up +24.7%. Natural gas was up +4.0% last week and closed at $4.204/MMBtu. Year-to-date, natural gas is down -4.6%.
Last week, gold rose +0.8% closing at $1,485.30 per troy ounce. Year-to-date, gold is up 4.5%. The dollar was down -1.0% last week as measured by the U.S. Dollar Index with that index closing at 74.832. Year-to-date, the U.S. Dollar is down -5.3% as measured by the Dollar Index. The Euro was stronger against the dollar closing at $1.45/Euro. Year-to-date, the Euro is up +8.2% against the U.S. Dollar.
In the coming week, look for a slew of earnings from the likes of Eli Lilly & Co. (“LLY”), Halliburton (“HAL”), US Bancorp (“USB”), McDonalds (“MCD”), International Business Machines (“IBM”), Goldman Sachs (“GS”), Stryker (“SYK”), Intel (“INTC”), Apple (“AAPL”), and United Technologies (“UTX”), to name a few. Look for economic reports on housing and weekly jobless claims data.
On Monday, April 18th, Standard & Poor’s put a “negative” outlook on the long-term AAA credit rating of the United States, citing a “material risk” the nation’s leaders will fail to deal with rising budget deficits and debt. The stock market is off approximately -1.5% with this news while the dollar increased and 10 year US Treasury yields declined. The market is telling us based on this news that the negative outlook may prompt our leaders in Washington to do more austerity which will help both the dollar and bonds by keeping yields low. However, with more austerity measures comes lower growth which normally would slow the economy and corporate earnings, hurting stocks.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

 

New Opportunities Under New Estate Tax Law – Part 1

It’s hard to imagine that Abraham Lincoln, Michael Jackson and Pablo Picasso have anything in common but it turns out that they do…each of them died without having a properly executed last will and testament. One was an attorney and president of the United States, one was a musician whose estate has produced over $200 million in revenue since his death and one was an artist who left a fortune in artwork and whose estate ultimately cost his heirs over $30 million to settle.

This year and next, you have an opportunity to revisit your own estate plan in light of a recently passed estate tax law that offers many opportunities for business owners, wealthy families as well as the ‘not yet wealthy’. The reason your ‘opportunity’ is time-sensitive is that this new law is set to expire December 31, 2012. Here’s a quick review of the major provisions of the new law as well as several planning strategies worth considering:
  • Up to $5 million exempt from estate taxes. The amount that you can leave a non-spouse (including a trust) without paying estate taxes is $5 million. If you are married, you can each leave $5 million for a total of $10 million. If congress doesn’t make any changes, this exemption amount will drop to $1 million beginning in 2013. Planning point: Many wills use a formula that states that the maximum amount allowed under law first goes to fill up the family trust with the balance going either outright or in trust for the surviving spouse. With this higher limit, it means that in many cases all of the assets will go to the family trust and none to the surviving spouse either outright or in the marital trust. For many families, this is an unintended consequence. Have your attorney review your documents to determine if changes are warranted.
  • Portability of Exemption Amount. If your spouse dies without using his or her full exemption amount, any unused exemption is transferred to the surviving spouse. In the old days, the unused amount was simply lost. To solve this problem under the old law, advisors would direct clients to transfer assets from the name of one spouse into the name of the other in order to ‘equalize’ their estates. This was often a challenge particularly if one spouses’ assets were largely held in a retirement account. Planning point: Theoretically, this activity of equalizing the estates between spouses is no longer necessary since the surviving spouse now ‘inherits’ the deceased spouses’ unused exemption. However, if the surviving spouse were to remarry, the exemption of the deceased spouse would be lost forever. When you review your estate documents, decide if assets need to be transferred between spouses to make certain the full exemption is available to both of you. Transfers between spouses during life or at death are not subject to either gift or estate taxes.
Next week I’ll complete my discussion of the new law and the planning opportunities it presents. Specifically we’ll look at opportunities for small business owners; families with large estates; as well as strategies for folks with smaller estates.

 

Will Your 401K Be Enough?

Research that was spearheaded by the Federal Reserve suggests that those pre-retirees, ages 60-62 are significantly unprepared for retirement. Here are some of the basic facts:
The median income for couples in this group is $87,700 with a median 401-k account of $149,400. If we assume a retirement income need of 85% of pre-retirement income, they’ll need about $75,500 per year plus annual increases for inflation. Social Security may provide $30,000-$35,000 of their need leaving the 401-k to make up the balance. Using a 5% withdrawal rate from the 401-k produces an additional $7,500 per year leaving an annual short-fall of $33,000-$38,000 or about 50%.
How did this happen? Americans have been under-savers for decades. Until recently, historical savings rates varied from zero to about three percent annually. In the days of old, people counted on company pension plans to provide the foundation for their retirement. But, in the eighties, companies began to abandon pension plans in favor of 401-k plans as a way to cut future costs. While 60% of this age 60-62 group has a 401-k plan, most under-contributed while many more failed to participate. Couple all of this with a decade where the stock market produced virtually no returns and you have created the perfect storm.
What’s the solution? There are no easy solutions for this group because the most important element, that being time, cannot be retrieved. However the first step is to assess the size of your problem by doing a retirement analysis. It may be that you can comfortably live on a lot less than 85% of your pre-retirement income. Other possibilities include downsizing your home to retrieve some equity that can be invested for additional cash flow. You could also tap your home equity with a reverse mortgage. Another strategy would be to use your 401-k money to buy a lifetime annuity. Based on current rates, you’d increase your cash flow by about $3,000 per year but part of this added cash flow represents a return of your principal and there will be nothing left of your 401-k for your heirs. Another choice, one that many people are making, is to simply work longer either on a full-time or part-time basis. If you fall into this age 60-62 group and would like a free retirement analysis, email me at stewart@welchgroup.com and put ‘Retirement Analysis’ in the subject line. We’ll run a report and give you a quick assessment of strategies that might be helpful.
Lessons for the next generation: Unfortunate circumstances, lack of planning and less-than-optimal decisions have left many of the Baby Boomer generation in a difficult position regarding their retirement plans. This doesn’t have to be the case for the next generation. A few simple changes can turn a retirement nightmare into an early retirement dream:
  • Start early. Save a minimum of 10% of your gross income. If you are in your thirties and haven’t created significant savings, up this percentage to 12%-15%. If you’re just getting started and you’re in your forties, target a savings program of 15%-20%.
  • Capture the match. If your company offers to match a portion of your 401-k contributions, be sure to invest enough to capture the entire match.
  • Invest in stocks. Just because the last decade produced poor stock market results, don’t give up on the stock market. American free enterprise is alive and well and I expect the stock market to return to more normal historical returns (8%-12%) in the decades ahead.

 

Become A Banker, Save the World

How would you like to become a banker and help save the world?  It used to be that we thought of bank CEO’s as pretty smart people.  But after the financial debacle of 2008 it became clear they were very smart about stock options and hitting bonus targets…but not so smart about the derivatives where they invested the bank’s money.  The result was that the world was brought to the brink of financial implosion.
Well, today you can try your hand at banking for as little as $20 and help save the world one loan at a time.  How?  By investing through one of the many microfinance organizations all across the globe.  Let’s begin by putting things in perspective.  Here in America, many of us start our day with a $2 latte.  However, there are billions of families whose daily income is not more than $2!  The economic crisis that swept through America where millions of workers got laid off from their jobs also swept through virtually every other country.  Literally billions of people are out of work with few prospects for rehiring.  Many of these people are hard-working folks who want nothing more than to provide the basics for their family.  Many are would-be entrepreneurs but with no access to traditional sources of lending.  As a result, organizations have formed to fill the void by offering ‘micro’ loans…loans of $50 to several thousands of dollars. In all cases, the borrower’s are expected to repay the loans, typically with interest.  Some organizations return your money without interest while others offer modest interest.  I made a loan through MicroPlace, a micro bank owned by eBay.  The interest rates paid to the investor on these types of loans are a modest 1%-3%.  For me, it gives me the feeling of ‘seeing’ my money at work.  While the default history for these loans are very favorable, you could lose part or all of your money.
I love the idea of helping someone launch or expand an entrepreneur enterprise where they can take control of their own destiny.  If you’ve ever been an entrepreneur, you know the desire to succeed is very strong and instills a determined work ethic.  Take 32-year-old single mom, Christina Guantero from the Philippines.  She owns and operates a small grocery store and is seeking a $475 loan to allow her to expand into produce.  These are the type of people who don’t mind hard work and who are driven by the desire to raise themselves out of poverty.
According to the U.S. Census Bureau, the average American donates to charity only $195.  I believe this paltry figure is not because American’s have no heart for giving, but rather that they too are struggling to pay bills and save for retirement.  Many would welcome an opportunity to ‘invest’ in the eradication of poverty around the world.  Well, here’s your opportunity.  For more information on MicroPlace, visit <a href=”http://www.microplace.com”>www.microplace.com</a>.  Another big player in this field is Kiva, <a href=”http://www.kiva.com”>www.kiva.com</a>.

How would you like to become a banker and help save the world?  It used to be that we thought of bank CEO’s as pretty smart people.  But after the financial debacle of 2008 it became clear they were very smart about stock options and hitting bonus targets…but not so smart about the derivatives where they invested the bank’s money.  The result was that the world was brought to the brink of financial implosion. Well, today you can try your hand at banking for as little as $20 and help save the world one loan at a time.  How?  By investing through one of the many microfinance organizations all across the globe.  Let’s begin by putting things in perspective.  Here in America, many of us start our day with a $2 latte.  However, there are billions of families whose daily income is not more than $2!  The economic crisis that swept through America where millions of workers got laid off from their jobs also swept through virtually every other country.  Literally billions of people are out of work with few prospects for rehiring.  Many of these people are hard-working folks who want nothing more than to provide the basics for their family.  Many are would-be entrepreneurs but with no access to traditional sources of lending.  As a result, organizations have formed to fill the void by offering ‘micro’ loans…loans of $50 to several thousands of dollars. In all cases, the borrower’s are expected to repay the loans, typically with interest.  Some organizations return your money without interest while others offer modest interest.  I made a loan through MicroPlace, a micro bank owned by eBay.  The interest rates paid to the investor on these types of loans are a modest 1%-3%.  For me, it gives me the feeling of ‘seeing’ my money at work.  While the default history for these loans are very favorable, you could lose part or all of your money.  I love the idea of helping someone launch or expand an entrepreneur enterprise where they can take control of their own destiny.  If you’ve ever been an entrepreneur, you know the desire to succeed is very strong and instills a determined work ethic.  Take 32-year-old single mom, Christina Guantero from the Philippines.  She owns and operates a small grocery store and is seeking a $475 loan to allow her to expand into produce.  These are the type of people who don’t mind hard work and who are driven by the desire to raise themselves out of poverty.  According to the U.S. Census Bureau, the average American donates to charity only $195.  I believe this paltry figure is not because American’s have no heart for giving, but rather that they too are struggling to pay bills and save for retirement.  Many would welcome an opportunity to ‘invest’ in the eradication of poverty around the world.  Well, here’s your opportunity.  For more information on MicroPlace, visit www.microplace.com.  Another big player in this field is Kiva, www.kiva.com.

Why Choose the Alabma 529 College Savings Plan?

I am often asked the question, “What’s the best way to save for my child’s college education?” My answer is invariably the same, “Your best strategy is a 529 College Savings Plan.” Here’s why:

College funding costs a lot of money. If you plan to pay for college for your child, the costs can be staggering so one of your greatest allies is to start early. For a four-year-old who will attend private college, the average costs of tuition, books, transportation, room and board is about $400,000. At seven percent earnings, you’d need to save $1300 per month for the next fourteen years. If your child attends an in-state public college, you’ll cut those costs by about half but we’re still talking about a lot of money.
Federal tax benefits. While you don’t receive a tax deduction for contributions to a 529 plan, all earnings grow tax deferred and distributions that are used for qualified expenses are federally tax free.
You maintain control of the money. As the person funding the 529 plan, you can maintain both ownership and control of all the funds.
529 plans are highly flexible. So if you’ve overfunded one child but underfunded another, transferring funds is not a problem. Funds can also be to pay for graduate school expenses, even if those expenses are for you. You can even take back the money for your own use. However, any earnings will be taxed as ordinary income and a 10% federal penalty will be imposed.
Large contributions are allowed. Everyone is eligible to make contributions to a 529 plan without tax consequences or restriction up to the annual free gift amount…currently $13,000 per person per year. So parents could contribute up to $26,000 in any one year. But it gets even better than that. The law allows you to give up to five years of annual gifts. That means you could front-load college funding with up to $65,000 as an individual or $130,000 as a couple. Note that these ‘gifts’ use up your allowed annual gifts for the respective years.
Simple investing strategies. Most plans offer an ‘age-weighted’ investment strategy whereby the mutual fund manager automatically becomes more conservative as your child approaches college age. This takes a lot of the guesswork out of investing.

All states offer their own version of the 529 plan so how does the Alabama plan stack up against the competition? In August 2010, Alabama revamped their plan to make it one of the most competitive in the country. There are a number of investment options but I recommend that you stick with the low-cost Vanguard mutual funds which offer age-weighted investment strategies as described above. In addition to low fees, for Alabama residents, the Alabama plan allows a state income tax deduction for your contributions and waives the $12 administrative fee.

In prior years, many Alabamians invested in other states plans because they were more competitive. Well, now’s the time to bring that money back to Alabama. All plans allow you to transfer funds between plans once every twelve months. So come on folks, here’s an opportunity to fully support Alabama with pride! For more information on 529 plans go to the “Resource Tab” on my website www.GetRichOnPurpose.com

5 Tips for Successful Investing

Stewart Welch III

In earlier posts, I’ve suggested that 2011 is likely to be a year of superior returns for the stock market. Now is the time to review your investments and reset your strategy for success. Too often investors allow themselves to be frozen by the fear of what has transpired over the recent past and wait to shift to a more stock oriented allocation until it is obvious to everyone that stocks are in a bull market. Here are six tips to help you be more successful:

1. Develop a concise investment strategy. I find that many people invest like a ‘leaf blowing in the wind’…first this investment, then that one, with no strategy or decision-making process. You should be able to articulate your strategy in just a few sentences. What is your overall allocation between equities (stocks and stock mutual funds) and fixed income (money markets, CDs, and bonds)? Are you going to use a mutual fund strategy or use individual securities?

2. Diversification is still in vogue. I’ve seen an awful lot of people get enamored with a single stock to the point where the bulk of their wealth was in a highly concentrated position only to have disaster befall that security. Many people learned this lesson the hard way when they allowed bank stocks to dominate their portfolio. My preference is that no single stock should exceed five percent of your portfolio. If you’re investing in individual stocks, make sure you have a minimum of twenty different companies across a number of different sectors.

3. Include a rebalancing strategy. Make sure that your investment process includes a methodology for rebalancing your portfolio. Rebalancing periodically forces you to take some of your profits and invest in underperforming securities. Realize that for the long-term investor, the ‘dogs of today, will be the stars of tomorrow’ and you’ll have systematically bought more shares at lower prices. A simple approach is to rebalance once a year. For taxable accounts, pay attention to tax consequences. If you sell a profitable position within twelve months, you could owe taxes at rates as high as 35%. By waiting twelve months and one day, you receive long-term capital gains tax treatment which is taxed at a maximum federal rate of 15%.

4. Expenses do matter. Commissions, trading fees, mutual fund management fees can all add up fast. I recently reviewed an annuity that had annual fees of nearly 3%. That’s a lot of expenses coming straight out of returns. Low cost alternatives include using discount brokers such as Charles Schwab or Scott Trade when buying individual stocks or using index mutual funds and exchange traded funds.

5. Invest systematically. I was recently visiting with a very successful fitness trainer who asked me, “Stewart, is investing $500 or $1,000 per month enough to really make a difference?” Not only was my answer a resounding ‘yes’, systematic investing is one of the keys to wealth accumulation. My wife is fond of saying, “Bloom where you are planted”, meaning no matter what your situation is, start there. I know one lady who was dead broke but committed to saving one dollar per week while systematically increasing her savings. She got so hooked on saving and investing that she managed to become financially free within three years!

Where to Invest in 2011

Last week I offered my prognosis of things to come in 2011. This week I’ll discuss where to invest now to take advantage of opportunities or avoid pitfalls in the year ahead.

Stocks. The stars appear to be aligned for double-digit returns in the stock market over the next twelve months. Retirees seeking cash flow and more conservative investors should consider investments in blue chip dividend-paying stocks. Companies such as AT&T, Southern Company, McDonalds, Con Edison, Royal Dutch Shell, Kimberly Clark and Paychex offer robust dividends while you wait for stock prices to move up. Make sure that you have a minimum of twenty different companies that are spread between a minimum of six different industry sectors.

An approach requiring less effort would be to invest in a basket of dividend-paying stocks using an Exchange Traded Fund (ETF). Two to consider are iShares Dow Jones Select Dividend Fund (symbol DVY) or Vanguard Dividend ETF (symbol VIG).

U.S. small cap stocks should also excel as America bounces out of the recession. Because these smaller companies are also more volatile, buy big baskets of stocks through mutual funds or ETFs. For low fees, consider Vanguard Small Cap Index Fund (NAESX) and iShares Russell 2000 Index ETF (IWM).

Emerging market stocks are another category that I expect to perform well this year. Many of these countries managed to side-step the financial crisis that hit the U.S. and Europe. Your best bet is to invest using mutual funds or ETFs. Two to consider are Vanguard Emerging Index Fund (VEIEX) and iShares MSCI Emerging Index ETF (EEM).

Bonds. The bull market in bonds appears to have run its course. Now’s the time to become more cautious. I expect short-term interest rates to remain relatively flat this year while longer term rates move up. To protect yourself from falling bond prices, consider shortening your maturities to five years or less. One excellent choice is Vanguard Short-Term Investment Grade (VFSTX). It has low fees, average maturity of its holdings of less than three years and currently yields just over three percent.

There is a lot of concern about the tax free bond market. Some states like Illinois and California and many municipalities are in deep financial trouble where their financial obligations (pension funding, etc) far outpace their revenues. Solutions include federal or state bailouts, extreme cost cutting measures or bankruptcy. Review any municipal bonds or bond funds you own and make sure they are of very high quality. One fund to consider is Vanguard Limited Term Tax Free (VMLTX).

Inflation. Inflation has been benign for years. In fact, for the past two years Social Security recipients have not received a cost-of-living increase. That should begin to change this year although I do not expect for inflation to significantly ramp up for eighteen to twenty-four months. Conservative investors who want to build some inflation protection into their portfolio should consider TIPS bonds. As inflation rises, the principal value of these bonds rises also. You can learn more or buy them directly from the U.S. Treasury at www.treasurydirect.gov. You could also buy a basket of TIPs bonds using an ETF such as the iShares TIPs (TIP).

Next week, I’ll discuss investments in real estate, gold, and commodities. Be sure to seek advice from your own professional advisor before acting on these suggestions.