CG Financial Services

Market Commentary: January 2012

admin — Fri, 03 Feb 2012 16:07:19 +0000

January 8, 2012

The Bureau of Labor Statistics (BLS) reported that December U.S. non-farm payrolls increased by 200,000, ahead of estimates of a rise of 155,000 with the unemployment rate falling to 8.5%, from 8.6% in November and better than expectations of a rise to 8.7%. In 2011, nonfarm payroll are estimated to have risen by 1.6 million. The largest employment gains in December were found in transportation and warehousing which gained 50,000 positions, retail trade where 28,000 positions were added and manufacturing where payrolls expanded by 23,000. Government positions were little changed during December but were down by over 280,000 during 2011. The number of long-term unemployed which is defined as those jobless for 27 weeks or longer was little changed at 5.6 million or 42.5% of the total unemployed on a seasonally adjusted basis. Participation in the labor force in December remained unchanged at 64.0%, slightly above the 27-year low reached in June of 63.9%. Average hourly earnings increased by 4 cents to $23.24, which is 2.1% above levels of a year ago.

The Federal Open Market Committee (FOMC) released its minutes from the December 13, 2011 policy meeting. In the minutes, several FOMC members backed additional easing with Fed members also saying that they were likely to soon alter their language about keeping rates at near-zero levels through the middle of 2013. Beginning in January, the Fed will begin releasing each FOMC member’s individual forecasts of the appropriate level on the target federal funds rate in the fourth quarter of the current year and the next several years. The shift in communication strategy by the FOMC is designed to provide additional clarity to financial markets about when the Federal Reserve thinks it might change policy. In its first sign of increased transparency, the Fed for the first time released the results of its monthly survey of primary dealers from a month earlier. The results showed that 60% of primary dealers believed that it would be 2014 before the FOMC increased the Federal Funds rate with just 3% anticipating a rate hike before the end of 2012. St. Louis Federal Reserve President Bullard said that he anticipates that the Federal Reserve could introduce an inflation target this year as well as announcing an official line on where the natural rate of unemployment would be which is below where inflation targets would rise.

Economic releases were generally in-line to better than expected during the first week of January. The December Institute of Supply Management (ISM) manufacturing index showed a climb to 53.9, beating expectations of a rise to 53.5 from 52.7 in November. The headline 53.9 reading in December ISM was the 29th consecutive month of a greater than 50 reading signifying manufacturing growth in the United States. Within the index, the pace of growth in manufacturing employment rose to 55.1 from 51.8 and in new orders rose to 57.6 from 56.7 while prices declined at a slower rate in December with a reading of 47.5 from 45 (readings above 50 signal growth) in November. The Census Bureau reported that November construction spending rose by 1.2% to $807.1 billion per year which beat expectations of a rise to 0.5%, meanwhile the October reading was revised to a 0.2% decline from a 0.8% increase. The 1.2% increase in construction spending was the largest monthly rise since August. The Commerce Department reported that November factory orders rose by 1.8%, slightly missing economist expectations of a 1.9% rise. The vacancy rate of apartments fell to 5.2% in the fourth quarter, their lowest rate in more than a decade and below the 5.6% rate in the third quarter, according to Reis. Average monthly rents rose 2.3% in the fourth quarter to $1,009 per month. In a separaterelease, Reis reported that the U.S. office vacancy rate fell to 17.3% in the fourth quarter from 17.4% in the third quarter and 17.6% at the conclusion of 2010. A record low 12.3 million square feet of new office space came on to the market in 2011. According to a report from Bank of NewYork Mellon, the average funded status of U.S. corporate pension plan dropped to 72.4% at the end of 2011 from 84.3% a year earlier with assets rising by 2.7% but liabilities jumping by 20%. Meanwhile, December U.S. auto sales were generally strong led by greater than 30% sales gains at Chrysler, Volkswagen and Kia while Honda was the only major manufacturer to report U.S. sales declines on a year over year basis.

In Europe, the Eurozone December Purchasing Managers Index (PMI) compiled by Markit, which measures manufacturing activity in the region rose to 48.3, from 46.4 in November. Despite the improvement in Eurozone PMI, Markit economist Chris Williamson remarked, “Worryingly, new orders are falling at a far faster rate than manufacturers have been cutting output, meaning firms have been reliant on orders placed earlier in the year to sustain current production levels.” In the U.K., the December PMI climbed to 49.6 from 47.7 in November. Eurozone unemployment was unchanged in November at 10.3%

The Almighty Dollar?

admin — Fri, 03 Feb 2012 16:06:00 +0000

Over the last decade, the value of a dollar has fallen about 35%, cutting deeply into Americans’ buying power. Why is the dollar in decline? And how does a depreciated dollar impact investors?

To explain where the dollar stands today requires some historical background of the monetary system.

The World’s Reserve Currency

America emerged after World War II in a position of economic power – dominant in trade and in possession of the world’s largest stockpile of gold. So the U.S. dollar came to replace gold and the British pound as the world’s reserve currency – the standard governments use to pay one another. The post WWII monetary system pegged the dollar to gold at $35 an ounce and fixed major exchange rates to the dollar.

In 1971, President Nixon ceased to allow foreign governments and central banks to convert dollars to gold, ending the gold standard of valuation. In the new monetary system that followed, currencies of emerging economies were pegged to the dollar at undervalued exchange rates. As these new economies grew and built up a reserve of dollars, they could loosen up capital controls, permit freer cross-border investment and allow exchange rates to be set by the market.

This informal monetary system benefits the U.S. since it can print money to purchase imports in a trade deficit – something no other country can do without risking devaluation of its own currency. The U.S. also became the recipient of the savings held by other nations who fix their currencies to the dollar; this extra capital kept U.S. interest rates lower than they would have been otherwise.¹

The Financial Crisis

Under a loose monetary system that enabled persistent trade deficits, diminished savings and increased borrowing, the U.S. federal deficit ballooned. Banks, flush with overseas capital, issued riskier loans. American savings rates fell below zero. Then, the U.S. housing market burst, pushing the country into the worst downturn since the Great Depression.

The government’s economic remedy to reverse the crisis has included continued deficit spending, ultra-low interest rates and an expansion in the money supply. While these strategies do seem to have stabilized the U.S. economy, they also have a negative impact on the dollar’s value.

A Shift in Power

Some economists, analysts and money managers foresee a day where the dollar may not be the king of all currencies. Pointing to the decline in the percentage of global GDP, the burgeoning federal deficit and growing foreign-exchange reserves, they suggest that economic power could be shifting away from the U.S. In their paradigm, as emerging nations like Brazil, China and India, generate a greater and greater share of the global GDP, developing domestic markets and exporting their products, a similar shift in the balance of power will follow. Within 25 years, S. Mackintosh Pulsifier, chief investment officer of Fiduciary Trust Co., predicts that major commodities like crude oil and copper, which are traded in dollars today, will be purchased and sold in multiple currencies, decreasing the demand for dollars.²

Other financial experts believe the dollar will hold onto its status as the world’s reserve currency. They argue that a depreciating dollar is not in the best interest of countries holding large foreign-exchange reserves. And, given the size and transparency of U.S. financial markets, they discount that any other country has the capacity to absorb the world’s savings.¹

Global Diversification

One point that financial experts can agree upon is that we are seeing an increasingly inter-related world economy, and that investors can benefit from diversifying their portfolios to reflect that fact. Consider this: In 1970, U.S. stocks made up 69% of the world market capitalization. Today, that percentage has fallen to 42%. Yet, most U.S. investors have 10% or less of their portfolios in foreign stocks.³

In the long run, an appropriate percentage of foreign-currency exposure, based on your asset allocation, may help investors balance risk against a falling dollar. Ask your financial representative to review your current portfolio to determine if you are globally diversified.

Sources: 1) "The Dollar’s Down Decade," Anthony Mirhaydari, msn.money.com. 2) "Dollar Doubts," Suzanne McGee, Financial Planning Magazine, Feb. 2011. 3) "Are You Ready for the New Global Economy?" cnn.money.com "The Rise of the State: Profitable Investing and Geopolitics in the 21st Century," (FT Press). Yiannis G. Mostrous, Elliott H. Gue and David Dittman. Census.gov, FederalReserve.gov.

This information is general in nature and should not be construed as tax or legal advice. INVEST Financial Corporation does not provide tax or legal advice. Please consult your tax and/or legal adviser for guidance on your particular situation. The information in this report has been obtained from sources considered to be reliable but we do not guarantee that the forgoing material is accurate or complete. This article is not an offer to sell or a solicitation of an offer to buy any security, and may not be reproduced or made available to other persons without the express consent of INVEST Financial Corporation. Securities, advisory services and insurance products offered through INVEST Financial Corporation, member FINRA, SIPC, a Registered Broker Dealer and Federally Registered Investment Adviser, and affiliated insurance agencies. 0812-84177

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

Making the Most of Your 401(K)

admin — Fri, 03 Feb 2012 16:05:48 +0000

Get Your 401(K) Back On Track

How is your 401(k) fairing since the market downturn? Many investors who continued to contribute and kept a mix of stocks and bonds in their portfolios have watched their nest eggs grow again. If you have not seen a significant rebound in your 401(k) balance, here are some steps you can take now to potentially increase your returns.

Take Advantage of Your Employer’s Match

Employer matching contributions vary by plan, but a common match is 50 cents to every dollar contributed, up to a maximum of 6% of your pay. If your employer offers a match, make sure you contribute at least the full percentage to be matched. Otherwise, you’re essentially forfeiting "free money."

Increase Your Contributions

Aim to save at least 10% of your salary annually (not including your employer match). IRS rules allow you to contribute up to $16,500 this year; those 50 or older can make an additional catch-up contribution of $5,500 for a total of $22,000. If saving 10% of your pay is not feasible this year, increase your contributions by 1% each year until you reach your goal. Remember… any 401(k) contributions reduce your tax liability since they are drawn before taxes are withheld, and your savings grows tax-deferred, compounding more quickly than if it was taxed each year.

Revisit Your Asset Allocation

Your asset allocation should take into account your financial goals, time horizon (or time to invest) and risk tolerance. If you abandoned your original allocation when the market took a downturn, it may be time to correct that now. Reassess your investment alternatives carefully, and ensure your choices support your long-term financial goals. Schedule a review with your investment professional to help you evaluate the funds available in your plan.

Limit Company-Owned Stock

Basing your livelihood and your retirement savings on the success of one company is too risky. As a rule of thumb, any one stock should not comprise more than 10% of the total value of your portfolio. If you own more than that, consider acting to bring your holdings under the 10% threshold.

Don’t Borrow From the Till

Resist the urge to take a 401(K) loan. Even though you borrow from and pay interest back to yourself, there are hidden costs you incur in the long run. When you make a loan, some of your investments are sold off. As long as your loan is outstanding, you miss out on any capital gains or income those investments would have earned. If you leave the company while a loan is outstanding, you must be prepared to repay the entire balance quickly, or the amount owed will be considered a distribution, subject to income taxes and a 10% early withdrawal penalty if you are under age 59 ½.

Rebalancing Your Portfolio

Rebalancing brings your mix of investments back in line with your original asset allocation. Over time, one asset category will perform better than others, skewing the percentage invested in that asset category. For example, let’s say you determined that your portfolio should be allocated 60% in stocks, 25% in bonds and 15% in cash investments. If the stock market made significant gains over time, stocks could end up comprising 80% of your total portfolio, exposing you to a much higher level of risk. To realign your asset allocation, you would need to sell off some of your stocks and invest the proceeds in bonds and cash until you achieve the original mix, or alter your contributions so more is invested in the underweighted categories until the portfolio is rebalanced. The act of rebalancing follows a fundamental investment principle – to buy low (any investments that are underperforming) and sell high (those investments that are performing well). And most importantly, it forces you to stick with your long-term investment strategy.

When to Rebalance?

As a rule of thumb, you should rebalance when your assets drift more than 5% away from their original allocation. This can occur naturally over time, or with a sharp rise or decline in one or more of the asset classes. Investors who don’t regularly monitor their funds may choose to rebalance once or twice a year as part of their annual or semi-annual portfolio review.

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

Charitable Giving: Planning to Make a Difference

admin — Fri, 03 Feb 2012 16:05:36 +0000

Despite economic hardship, giving remains a core American value. In 2010, American donors gave more than $290 billion to charities, and our country consistently leads the world in charitable contributions.¹

Though many Americans give generously to charity, the majority donate through "checkbook philanthropy," writing checks or giving small cash donations to a variety of charities – often in response to solicitations. While every contributor makes a difference, regardless of the size of gift that is given, taking such a spontaneous approach is often not in the best interest of the donor or the charity. ²

Through planned giving, donors take a more deliberate approach to giving that considers their personal values, select the non-profits and gift-giving methods that best honor those values, and maximize the financial and tax benefits of their gifts.² Whether your gift is in the hundreds of dollars or the thousands of dollars, a planned approach to charitable giving can help your donations go farther and make a greater impact.

Evaluating Charitable Causes

Before you donate, take some time to be proactive and intentional about your giving. To create a charitable giving plan, give some thought to these questions:

What causes are important to you and your family?
What are your specific goals for giving? What changes would you like to affect?
How much do you want to give?
How much involvement do you want to have with the charity?
Is maximizing tax benefits an important consideration?
Would you like to make charitable provisions in your estate?

Online tools at CharityNavigator.org and GuideStar.org can help you begin the vetting process by searching charities that meet your criteria and support your goals. ³

Once you create a short list of potential charities, contact them and ask each for a copy of last year’s audit findings. The reportmay be more detail than you need; but it goes to show that the agency performs yearly audits, and they are willing to share financial information. The most efficient charities are able to grow their revenue at or above the rate of inflation, continue investing in their programs and save some funds for lean times.⁴

Also request results of a few independent evaluations of the charity’s work; look for evidence that the organization is actively reviewing and improving its practices. Rather than blindly earmarking your donation for a specific purpose, ask for the charity’s needs assessment to help determine where your donation is most needed. ⁴

Reducing Income Taxes

If you itemize deductions, your cash gift to a qualified non-profit may entitle you to a charitable contribution deduction on your income taxes. If you’re in the 33% tax bracket, the actual cost of a $100 donation is $67 ($100 less the $33 in tax savings). The real cost of acharitable contribution decreases as the income tax bracket increases, providing the wealthy with the most incentive to donate. There are limits to how much you can deduct, but the limits are very high. If you contribute to a public charity, your deduction maximum is 50% of your adjusted gross income.⁵

Making a Difference

Charities need monetary donations to do their good work, but they also need willing volunteers. Plus, volunteering with an organization is a great way to familiarize yourself with an organization’s programs.

As we approach the season of gratitude, consider giving your time or resources to help your community or a cause that’s close to your heart.

Contact me if I can help with your charitable planning.

Sources:

1) GivingUSAreports.com, GivingUSA 2011 – Executive Summary
2) The Financial Planning Association, "The Benefits of Planned Charitable Giving."
3) The Wall Street Journal, "Charities: Tough Times Call for Smarter Giving," May 2009.
4) GoodIntents.org, "Bad Donor Advice Perpetuates Bad Aid Practices," May 2009.
5) CharityNavigator.org, "Tax Benefits of Giving."
6) GuideStar.org, "Tips for Choosing a Charity."
7) CharityNavigator.org, "Top 10 Best Practices of Savvy Donors."

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

When Baby Boomers Become Caregivers

admin — Fri, 03 Feb 2012 16:05:24 +0000

As Baby Boomers age and prepare for retirement, some are facing an unexpected challenge that will stress them financially, physically and emotionally. Nearly 10 million adult children over the age of 50 have assumed the role as caregiver for their aging parents.¹

Over the past 15 years, the percentage of adult children providing personal care and/or financial support to a parent has more than tripled. Baby Boomers, in their prime earning years (when they should be focused on planning and saving for their own retirement) are leaving the workforce or scaling back their work hours to take care of elderly parents who can no longer live independently.

In a recently released study, MetLife examines this issue and the impact that caregiving can have on an adult child’s earnings and lifetime wealth.

Profile of a Caregiver

This study specifically focuses on the caregiver’s work status and gender to evaluate how caring for parents is impacting the Baby Boomer generation. Overall, sons and daughters provide comparable care, but daughters are more likely to provide basic care (like dressing, feeding, and bathing) and sons are more likely to give financial assistance.²

Both working and non-working adult children are about equally as likely to provide care to parents in need. But caregivers who do work while providing care to a parent are more likely to say they are in fair or poor health than adult children who are not caregivers.²

Lost Wealth

When it comes to the financial costs, caregiving may negatively impact working daughters more than sons, both in terms of their ability to work and the hours they log at work. More than one-third of caregivers end up leaving the workforce or reducing their work hours, and women are more likely to leave their jobs once they begin caring for a parent than to reduce the hours they work.³

When workers cut back on hours or quit working, they lose more than just wages on the job; they’re also missing out on the Social Security and pension benefits they would have accrued had they kept working at the same rate of pay.

Estimates of the total combined lost wages, pension and Social Security benefits for adult children caregivers is staggering – amounting to nearly $3 trillion dollars. When defined by gender, on average, a female caregiver loses more than $324,000 in lifetime earnings, and a male caregiver loses about $284,000.^{2, 4, 5}

Opportunity Costs

Beyond providing financial support and basic care, adult caregivers help their parents with chores, errands, household paperwork and bill paying, all at the expense of their own personal and leisure time.

Caregivers may find they have less time to spend with their children and grandchildren, and fewer resources available to help their children as they start college, plan weddings or buy their first home.

Some caregivers actually suffer physical and psychological effects from the stress they experience, including chronic disease and depression.²

Implications

Adult children should consider long-term care options for aging parents before the need arises. Before employed caregivers decide to change their work status, they need to think about the average potential loss of over $300,000 to their retirement funds.²

If Baby Boomers understand the financial and life implications of caregiving, they may be better prepared to balance their role as caregivers – and still meet their own needs for retirement.

Sources: 1) Data from HRS Survey and 2008 Census. 2) The MetLife Study of Caregiving Costs to Working Caregivers: Double Jeopardy for Baby Boomers Caring for Their Parents, June 2011. 3) Evercare and National Alliance for Family Caregiving. Family Caregivers: What They Spend, What They Sacrifice. Minnetonka, MN: Evercare & Bethesda, MD: NAC, 2007. 4) Johnson, RW, Lo Sasso AT, The Impact of Elder Care on Women’s Labor Supply at Midlife. Inquiry 2006: 43(3):195-210. 5) Pavalko EK, Henderson KA. Combining Care Work and Paid Work: Do Workplace Policies Make a Difference? Research on Aging. 2006; 28:356-74.

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

When You Say “I Do” — Couples & Money Matters

admin — Fri, 03 Feb 2012 16:05:10 +0000

As we head into wedding season, couples around the country are busy making final preparations for their big day. Still, most will neglect to address a significant issue that could have long-standing repercussions in their marriage – the "money talk." Having a serious talk about money matters with your spouse-to-be is essential, financial experts and marriage counselors agree. But the majority of couples put it off or avoid the subject altogether.

"So much of marriage stress is created unnecessarily because of a reluctance to discuss money," said Barry Paperno, consumer education manager for FICO, the credit scoring company. "Knowing and understanding each other’s financial histories, spending patterns and current credit status, is going to determine much about your future together."

Considering that money is among the leading causes of marital discord and divorce, preparing for the financial aspects of your union could be well worth the time and effort. If you’re already married, and finances cause tension in your relationship, this article may help start the dialogue that brings about a workable solution.

Talking about Money Issues

Start with some personal reflection. How was money discussed and handled in your family? Many of our financial habits and attitudes about spending and saving are shaped in childhood. What was beneficial, and what would you like to do differently in your marriage?
Take a "financial compatibility" quiz online (www.debtsmart.com or www.calcpa.org). Use the exercise not to argue, but to identify potential hotspots you will need to work on.
Be open about your financial situation. Before the merge, it’s important to fully disclose your current financial standing: how much you earn, the balances of your checking and savings accounts, retirement savings and any other investments. Then, be forthright about any financial obligations and debts. Order copies of your credit reports and review them together. If the reports uncover any issues, work to find solutions that boost your credit scores.
Set goals for your partnership. Define your short and long-term financial priorities. Do you want to buy or renovate a home? Pay off debts? Build your retirement savings? Visit an exotic location? Create a plan to achieve these goals and revisit it at least once a year.
Create a household budget together. Consider using an online budgeting tool (like mint.com) to simplify the process. Once you enter your joint monthly income and subtract your fixed monthly expenses, you need to agree upon how you will divvy up the remaining funds. Decide how much to allocate for the extras (like dining out, entertainment and clothing) and set a limit on what each spouse can spend freely without informing the other.
Decide how you will merge funds. Will you have joint or separate accounts? Some couples find it is easier to pool all funds. Some like to manage a joint account with each spouse contributing a set amount to cover shared household expenses, and separate accounts for small, personal purchases.
Appoint a money manager. Defer to one another’s financial strengths. Decide who will take charge of the day-to-day financial activities, like paying bills and monitoring accounts, and who will manage the savings, investments and tax returns.
Conduct a financial review. Report in regularly on your financial status. This is especially important if one partner handles all the money matters. Both spouses need to be kept in the loop on the state of your financial union.
Retain credit in each spouse’s name. Maintaining your credit files individually is in the best interest of both partners should your path together end unexpectedly.
Vow to resolve any financial conflicts. Even if you begin on the same page financially, at some point, you may butt heads over money matters. Communicate your feelings openly and work to find a compromise. If you reach an impasse, consider seeking mediation.

Following these tips will help you develop healthy habits, communicate effectively about money matters and enhance your marital bond as you work together toward reaching your financial goals.

Sources: "Personal Finance: Money Discussions Help a Marriage Thrive," The Sacramento Bee. "Marriage and Money Issues: The New Rules for Couples," GoodHousekeeping.com. "Men & Women Still Can’t Make Cents of Each Other," Business Wire. "Men, Women and Money," Money Magazine survey, Money.CNN.com.

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

2012: The Year for Tax-Free Gifting

admin — Fri, 03 Feb 2012 16:04:48 +0000

Through the end of 2012, Americans have an exceptional window of opportunity to pass wealth to heirs, give to family and friends and donate to favored causes, while avoiding the federal gift tax. This time last year, with the Bush administration tax policies due to expire, President Obama and Republican lawmakers struck a deal to extend the Bush Tax cuts.

The Middle Class Tax Relief Act of 2010 included provisions to raise the estate tax exemption from $1 million to $5 million ($10 million for married couples) and to reduce the tax rate for gifts above that threshold from 55% to 35%.¹

The Lifetime Gift Tax Exemption

As part of that legislation, Congress unified the estate and gift tax laws, allowing individuals to make a gift of up to $5 million – either during their lifetime or at death – tax-free. ²

An additional perk makes the $5 million exemption portable between spouses, so any unused portion can be transferred to the surviving spouse when a husband or wife passes away. ¹

For America’s wealthiest families who might face paying a significant estate tax in 20 or 30 years, this is a chance to move assets (and the appreciation they may gain from those assets) out of their estates while they’re still living. ³

With proper planning, strategic gifting can benefit both the recipient, who gains assets free of gift taxes, and the giver, who reduces his exposure to estate taxes.⁴ But it’s important to understand the federal exemptions that apply to gifts, especially before adopting any gifting strategy into your overall estate plan.

For example, a caveat of the current unified tax rules is that a gift amount applied toward your lifetime gift tax exemption may reduce your estate tax exemption. So, using $3 million of your lifetime gift exemption decreases your estate tax exemption from $5 million to $2 million.⁴

The Annual Tax Exemption

The IRS allows you to make annual tax-free gifts of up to $13,000 to as many people as you wish. You can choose to give cash, property, or some type of income producing asset like stocks or bonds that could appreciate in value.

Some gifts are not subject to the tax, including direct payments for tuition costs or medical expenses, donations to qualified charities, or gifts to your spouse.

If you’re married, both you and your spouse can take advantage of the exemption and give a combined total of $26,000 to each recipient. The $13,000 exemption amount is not part of the temporary tax measures that expire in 2012, and the exemption amount is adjusted each year for inflation.

Under the annual gift tax exclusion rules, over an extended period of time, someone could potentially give more than the $5 million lifetime exemption without triggering any gift taxes.⁴

Consider this example: A family patriarch could give $13,000 each to his four children and ten grandchildren annually over a 20 year period, transferring a total of $3.64 million tax-free without ever tapping his $5 million unified gift and estate tax exemption. A husband and wife could double that gifting amount.

Potential Gifting Strategies

Here are some options to consider that allow investors to benefit from the current tax provisions:²

Parents who may be anxious about giving their children large sums of money now can set up a trust structured to distribute assets in a controlled way.
Grandparents can establish a generation-skipping trust, setting aside funds for their grandchildren.
Small business owners can transfer ownership of their business to their heirs in a tax-efficient way.
Discuss your objectives with your financial professional, tax attorney or estate planner to ensure your gifting strategy works in concert with your overall estate and financial plans.

Sources: 1) Amy Fried, "Estate and Gift Rules: Some Clarity for Now," NY Times, February 12, 2011. 2) Andrew Osterland, "A ‘Perfect Storm’ for Estate Planning," November 6, 2011, Investment News. 3) Amy Feldman, "The U.S. Gift-Tax Gift: a $5 Million Exclusion," Reuters, February 28, 2011. 4) Fidelity Viewpoints, "A Tax Smart Way to Gift to Heirs," March 2, 2011.

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

Diversifying Through Growth and Value Investing

admin — Fri, 03 Feb 2012 16:04:32 +0000

Deciding how to allocate the money in your portfolio is one of the most imperative tasks for an investor, considering that as much as 90% of a portfolio’s return is determined by the way the monies are divvied among the major asset classes of stocks, bonds, and cash. ^{1, 2}

Once you establish how much of your portfolio to place in stocks, what is the best approach for picking stocks under these volatile market conditions?

While there is no "one suits all" approach, following a defined strategy can help simplify investment decisions, providing guidelines and a basis for selecting one stock over another.

Two predominant investment strategies are growth investing and value investing, and there is much debate about which should be favored over the other. The fact is, they both have their merits, and many strategists suggest using them in combination to build a robust and diversified portfolio, with the goal of maximizing profits, balancing risk and combating market volatility.³

About Growth Investing

Thomas Rowe Price, founder of T. Rowe Price and Associates, pioneered the method of growth investing. His strategy focused on well-managed companies in developing industries whose earnings and dividends were expected to grow faster than inflation and the overall economy.⁴

Growth investors are more concerned with a stock’s future growth prospects than they are with its current stock price. Companies whose earnings grow the fastest see their stocks appreciate the most in the short-term – since the market tends to reward growth.

Companies potentially achieve accelerated growth in many ways: through superior technology, higher quality products and more innovative marketing. Or, a company might gain advantage by being first-to-market in a new business niche, or by enjoying other efficiencies its competition does not. Often, a successful growth company benefits from more than one of these advantages.

How do you spot a growth stock? The general characteristics of growth stocks are:

Low dividend yields (since young companies tend to reinvest earnings),
high price-to-earnings ratio, and
high market price-to-book ratio.

About Value Investing

The principles of value investing were conceived by Columbia University professors Benjamin Graham and David Dodd. Modern day value strategists, like Warren Buffet, search for bargains – high quality companies with strong fundamentals and earnings potential that the market may have underestimated. They seek stocks that have fallen out of favor and are currently trading below historic averages or below industry peers. For example, if a company is restructuring or experiencing earnings problems, value investors may view a downturn in its stock as a temporary situation that will correct itself when current conditions improve.

This is where the concept of value comes in — value investors consider whether a stock is a good buy, based not only on its future prospects but also on the price being paid for it. To value investors, the key to recognizing an undervalued stock is to determine its intrinsic value – which is its fair value based on underlying observations of the business. To start, they examine company fundamentals, looking at both qualitative measures (business model, target market, regulation) and quantitative measures (financial statements and ratios) to gauge if the company may be worth more than its current valuation.

To analyze intrinsic value, value investors rely on a core principle known as the "margin of safety," which is the difference between what is determined to be a stock’s intrinsic value and the actual stock price as set by the market. In concept, a high margin of safety would reduce risk of the investor overpaying for the company’s stock and allow for a greater profit margin. In practice, the stock price upon sale may be higher or lower than the actual purchase price.

To single out potential value stocks for a closer look, watch for these general characteristics:

low market price-to-book ratio,
low price-to-earnings ratio and,
high dividend yields.

Growth and Value Strategies in Action

Looking back over 30 years, growth stocks and value stocks have performed cyclically, taking turns outperforming one another. Cumulatively, the difference between the two strategies amounts to less than one half of a percent over that time period.⁵ The styles generated similar returns when implemented as a long-term investment strategy. Used in combination, growth and value investing may provide the benefit of diversification — as the value portion of a portfolio zigs, the growth portion can zag and vice versa. Over time, investors may achieve the same returns either strategy might produce independently, but with potentially less volatility and anxiety along the way.

Sources: 1. Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, "Determinants of Portfolio Performance II: An Update," The Financial Analysts Journal, 47, 3 (1991). 2. Roger G. Ibbotson and Paul D. Kaplan, "Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?" Financial Analysts Journal, Jan/Feb 2000. 3. Mark Biller, "Why You Want Both Growth and Value Investments," Sound Mind Investing, August 2009. 4. John Train, The Money Masters, Harper Business, 1994. 5. Cambridge Associates and Morningstar Principia, "The Cyclical Nature of Growth vs. Value Philosophies."

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

Teaching Kids About Money

admin — Fri, 03 Feb 2012 16:04:23 +0000

As parents, we want our children to grow up to be financially self-reliant. But are we teaching our kids the skills they need to be responsible with money?

One of the primary ways kids learn about finances is through modeling their parents. Your children observe how you handle money, listen to what you say about money and internalize the experiences they have about money.¹ Beyond setting a good example, take advantage of opportunities to talk with them about your values and what it means to be financially responsible. Here’s how to turn day-to-day activities into learning experiences.

Pre-School (Ages 3 – 5)

Start Them Saving Early

Start young to help children develop positive savings habits. Consider helping divide their money into three groups – SAVE, SPEND, and DONATE. Kids will learn about the value of money, as well as the concepts of delayed gratification and philanthropy.

Play Money Games

As a play activity, help your child set up a storefront in your home. Stock it with items from your pantry, price the goods, and then give your child a certain amount of play money to spend. While she plays, she’ll learn that shopping is making choices based on what you have to spend.²

Take a Trip to the Bank or ATM

Explain to your child in simple terms how a bank works. If you spend all the money in your piggy bank, it is empty until you put more money in it. An adult’s bank account is just like that. We have to put money in to buy the things we need and pay our bills. When we use the ATM, we are taking out money that we have already put into the bank.

Early Primary Years (Ages 6 – 9)

Pay an Allowance. An allowance is a great way to start teaching your child to manage money. Start out with a small amount and gradually increase it as your child gets older.

Open a Savings Account

Many banks offer no-fee and no-minimum balance accounts for kids. To encourage your kids to save, offer to match a percentage of what they save, like 50 cents for every dollar. Explain how the bank pays people back for saving their money. Use monthly statements to teach the concept of compound interest.

Set Limits

Establish boundaries when it comes to spending. Setting a limited budget and allowing kids discretion to make their own choices helps teach financial discipline. Kids need to learn they can’t always have whatever they want whenever they want it.

Make Them Smart Shoppers

Take school-aged kids grocery shopping to teach them lessons in being thrifty: explain why it’s financially smart to choose the package that costs less per pound, to purchase a generic brand over a brand name, and to stock up on items you use when they’re on sale.

Tween/Middle School Years (Ages 10 – 14)

Teach the Ins and Outs of Credit

Stress the importance of being cautious with credit. Explain that using a credit card (if the balance is not paid in full before the end of the billing cycle) is essentially like taking out a loan that must be repaid at a high rate of interest. Discuss when you might use your credit card instead of paying cash – for security reasons, as a convenience, or to earn award points toward airline tickets or other incentives.

Set Savings Goals

If there is something your child really wants, explore ways she can save the funds needed to reach that goal. Give your child some examples of goals you have set, like saving for a family vacation or buying new bedroom furniture.

Provide Earning Opportunities.

Beyond any regular chores, give your child a chance to do extra jobs to earn money toward a savings goal. Kids learn to appreciate the value of a buck when they have to work for it.

Older Teens (Age 15 – 18)

Buy a Stored-Value Card

Purchase a buying card for your teen to help teach financial responsibility. Parents can preload the card with cash, then allow teens to budget their own spending. Some cards carry annual fees, but it may be worth the cost if your teen learns to manage his own money.²

Create a Portfolio

Teach your teen about stocks through a family friendly competition. First, show your teen how to follow stocks in the paper or on financial websites. Have family members choose stocks to create an imaginary portfolio and see whose investments are worth more at the end of the year. ²

Promote Part-Time Work

Encourage your teen to get a job, if not during the school year, then over the summer. Working teaches teens important life skills, like discipline, time management, and balancing work with academics or social activities. As a condition of their employment, require that they save a percentage of their earnings.

Helping our kids become financially literate may be one of the best long-term investments parents can make.

Sources: 1) The Ultimate Allowance, "Three Keys to Raising Money-Savvy Adults," Elisabeth Donati, 2008. 2) Parents.com, "Teaching Kids about Money: An Age-by-Age Guide." 3) Kiplinger’s Personal Finance, "6 Key Questions Before You Teach Your Kids About Money," Janet Bodnar, April 2011. 4) FamilyEducation.com, "Teaching Kids About Money: Goals by Age."

Changing market conditions and other events impacting the economy may leave you feeling a little less than comfortable with investment decisions. You can always call on us to help explain how these conditions may affect your long-term goals. We will carefully evaluate your situation and help you determine a proper investment strategy. Contact us today.

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE

Roth IRA: The Versatile Nest Egg

admin — Fri, 03 Feb 2012 16:04:10 +0000

Roth as an Estate Wealth Tool

You may be familiar with the Roth IRA’s benefit of providing tax-free growth for your retirement nest egg. But did you know the Roth can also be an effective estate wealth tool? Here is how the strategy works.

No Required Withdrawals

Unlike a traditional IRA, the Roth is not subject to the same rules that force you to begin taking withdrawals after you turn 70 1/2. You are free to leave the balance of your Roth IRA untouched to accumulate as many tax-free dollars as possible for your estate.

Paying the Taxes

Of course, you will have to pay taxes up front on any accumulated earnings and tax-deductible contributions when you convert funds from a traditional IRA. Ideally, you’ll want to pay the taxes out of non-IRA assets, so the full balance can grow tax-free. The good news is that by paying the conversion tax, you essentially are prepaying the income taxes for your heirs, without owing any gift tax or expending any of your federal estate-tax exemption. Plus, by prepaying the income taxes, you’ll be reducing the size of your taxable estate.

After Death

When your heirs inherit your Roth IRA, they won’t owe any income tax on withdrawals; but, the account will then fall under the same minimum-withdrawal rules that apply to the traditional IRA. If your inheritors aren’t in need of the money right away, they can stretch out the withdrawals and have an extra source of income for many years to come. All the while, the balance remaining in the Roth account will continue to earn tax-free income.

Sample Strategy

To illustrate the strategy, consider this example. A husband converts his regular IRA when he is 67 years old. He lives six more years, never drawing any funds from his Roth account. After he dies, the Roth goes to his 71-year-old wife, named as the account beneficiary. She assumes account holder status and need not take any minimum withdrawals; she names their son as beneficiary of her account. Upon her passing at age 87, the son inherits the Roth account. Now the minimum withdrawal rules apply, so the son (age 49) must start taking annual withdrawals over 30 years. If he takes only the minimum withdrawals, the tax-free earning power of the Roth is preserved for as long as possible. In all, that one Roth IRA, will have spanned across three lives and survived more than fifty years.

Considerations

In order for this strategy to work as described, two assumptions must apply: First, the account owner must be fairly confident that he will not need to tap the Roth assets during his lifetime, and the heirs must leave the account intact, only drawing what is required annually to meet tax guidelines. And second, tax rules for the Roth IRA would have to remain in place.

Depending upon your personal financial situation and family circumstances, the Roth IRA could be an effective estate wealth tool, enabling you to set loved ones up with future tax savings and an income source that could extend over many years.

Roth for Young Professionals

Tax Advantage

The fact that the Roth IRA provides for tax-free withdrawals at retirement makes it a good nest egg option for young professionals at the start of their wage-earning years. Presumably, as we gain experience, we command higher salaries and gradually move up higher on the tax scale. With a Roth IRA, since taxes are paid at the front end (when you’re in a lower tax bracket and the balance is at its lowest), you would assume a smaller tax liability. As the account grows, earnings accumulate tax-free.

Qualified Withdrawals

While it’s best not to disturb your nest egg, under certain circumstances the IRS will allow premature distributions without tax or penalty, after you’ve held the account for five tax-years.

First Home Exemption

You can use up to $10,000 (a lifetime limit) toward the purchase of a first home for you, your spouse, children, grandchildren or parents. You must use the funds to close the deal within 120 days after you receive the distribution.

Higher-Education Expenses

Funds can be used toward qualified education expenses for you, your spouse, or offspring to attend an accredited college or university; qualified costs include tuition, fees, books, supplies, and room and board if the student is enrolled at least half-time.

NOT FDIC OR NCUA INSURED | NO BANK OR CREDIT UNION GUARANTEE | MAY LOSE VALUE