Fixed income Alternatives: What's going to be in this Sunday's paper

When I was thinking about my column for the Times Argus and Rutland Herald this week, I could not help but think back to something that happened to me many years ago.

I was working at a brokerage firm and a woman called. I was still in college and answered the phone because everyone else was on the phone. The woman told me that she had a number of Certificates of Deposit and one was about to mature. The interest rate on her CD was 14%. “I need to renew my CD and want one paying 14%,” she told me. I looked at the rates on what was then a green computer screen and tried to explain to her that CD rates were in the 7% range and we did not have any 14% CDs without paying more than $1,000 (par value) for them. “But I need the 14% return. I depend on that for my living expenses. Please put someone on the phone who can get me some 14% CDs,” she pleaded.

I got her someone who explained the situation and I could hear the woman’s frustration and the sadness just from listening to the broker’s responses. It’s been years since that conversation took place and yet I still remember it. Her pain of having to face a much lower return on her money resonated with me then and continues to today.

We have the same situation today. Low interest rates are great for first time home buyers but are lousy for someone living off a fixed income who is dependent on their investments for their living expenses. In this week’s Sunday paper, I listed a few investment alternatives that will boost your portfolio’s return without causing your sleepless nights. What follows is a brief synopsis of what will appear in Sunday’s paper. Please read the paper before you run out and make changes and always consult with an investment or financial professional for further and more specific recommendations as they relate to your personal situation.

1. Diversify your fixed income holdings with high-yield bonds, some corporate bonds that are paying a higher return and mortgage-backed bonds which again pay a higher yield.

2. Consider venturing into dividend paying stocks. Please keep in mind that the companies that pay dividends are usually mature companies who have the predictable cash flow to pay regular dividends.

3. Lastly, it may be well worth your time to look into annuities. They pay good rates of return , some allow for growth of your initial investment and they are secure and predictable payment vehicles. Do not attempt to purchase this kind of investment without first finding a insurance or investment professional who really understands the nuances of this kind of investment.

That’s all for now. Please pick up a paper on Sunday for more details.

Market got you down or sideways?

At least for now, the market isn't soaring to higher heights or nosediving into a deep abyss. Not with any purpose that encourages one to think that a solid trend is highly predictable and we can all take the market for granted. In actuality, we should never take the market for granted. 1999 and the years previous were great; along came 2000 and 2001.

While most of us were either not yet born or old enough to remember, in 1966, the Standard and Poors 500 Index hit 100. In 1978, the index was again at 100 with four more years of a secular bear market to go.

In 16 years, the index went through numerous bull and bear markets, but at the end of the period, the index value was almost exactly where it started. That's just in numbers and does not take into account inflation and loss of purchasing power caused by inflation. So does this mean that investors made nothing?

While some investors made nothing, some may have done just fine and earned an acceptable return given the risks they took. It all depends on whether you invested with an investment strategy that took dividends and dividend reinvestment into account.

If you invested at the beginning of the 1966-1978 stagflationary period or during the March 2000 to May 2007 bursting and recovery of the tech bubble and reinvested your dividends, the difference is remarkable. By 1978, your return would have been 60% higher with dividend reinvestment than without. By 2007, your return would have been 18% higher. Despite much lower returns today than in decades past, dividend yields are still attractive when compared with other yielding investments.

Wharton School professor Jeremy Siegel noted in his recent book "The Future for Investors," that "from 1871 to 2003, 97% of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3% comes from capital gains." Bottom line: dividends matter. They may seem small but they add up and can increase your bottom line even when the market seems on a slow road to nowhere.

Capital gains rate may never be better

Even though it’s only March, in just a few months, the sun may set on the almost total “freebie” many taxpayers are getting on long-term capital gains from the sale of securities. While it’s not a total freebie, 15% is a great deal. It’s never going to be any lower than it is today.  And there’s a chance it could go higher when the Bush tax cuts expire in 2013.  

Right now, if nothing changes, the rate on long-term capital gains would increase to 21.2%  and the rate on short-term gains would rise to 40.8% from its current 35% in 2013.  

Also, keep in mind that beginning in 2013, the new federal health-care program imposes a 3.8% tax on the investment income (including capital gains) of high-income taxpayers.

These two changes would result in a combined 66 2/3% increase in the maximum federal income tax in the long-term capital gains rates on the sale of stock in 2013 compared to a sale in 2012.  In other words, the rate will go from its current 15% to 25%.

Additionally, if President Barack Obama’s proposed “Buffett Rule” is enacted, millionaires could face a minimum tax rate of 30% on their long-term capital gains as early as 2013. 

Putting aside the Buffett Rule, for many Americans seeing a long-term capital gains rate increase from 15 to 25% is no small potatoes.  Capital gains are not just a problem for the very wealthy.  The recently retired who are selling their family home; the young couple selling some stock they have accumulated from an employer or on their own who are buying their first home and need a down payment; the parents selling some investments to pay for a child's wedding -- these are people with hard-earned incomes who have saved and no have to pay much more to sell the long-term investments they have made to pay for life goals.  

The likelihood for significant increases in the long-term capital gains rates would suggest that taxpayers recognize their long-term gains in 2012 and hold off on selling their losers until 2013. Don’t bother worrying about selling your under water stocks in 2012 to balanc them against your gains.  It looks like you might as well wait until 2013. 

Just a word to the wise well in advance of the end of 2012.  On second thought, maybe I will post this blog entry again around Thanksgiving…just in case we all could use a reminder.

 

All Greek to you? Time for some interpretation

Good news on Wall Street last week. The market, which had been hovering around 13,000, broke through. For a time and then retreated back to just under what for many people is a magic number. The market has not closed above 13,000 since May 19, 2008. Milestones tend to be that way. Round numbers bring out the statistician in people and we all take comfort in the market making record highs.

The market had a good week because of Greece. A last minute round of austerity budget cuts coupled with more funds pouring in from the European Union have averted a debt implosion that would have sucked other countries in Europe into further economic decline. Some feel that this recent reprieve is only that. Just like all band-aid approaches, eventually the world is going to have to come to the realization that Greece will default on its debt and those who hold Greek debt will find themselves with significantly devalued assets. If they are able to recoup any of their investment at all.

For most of us reading this column, Greek debt is pretty much well, Greek to us. We don’t own it, know anyone who owns it and we don’t worry about it. But we should. Greek debt may be a half a world away but the global currency and bond markets are all interconnected and one debacle has
repercussions on all other global economies.

The US stock market began the year on a high note. That song continued into February until the market started getting the shakes about uncertainty in Greece. The EU has more than a vested interest in saving Greece. All their economies depend on one another. The strong are picking up the slack for the weak but that can’t go on forever.

Any uncertainty could send the US financial markets into a tailspin. We are just trying to recover out of a recession ourselves. And this recovery is challenging a best. I read recently that in 2011, corporate profits hit their highest level since 1950 but unfortunately, these record corporate gains have not trickled down into workers’ pockets; workers’ wages and purchasing power has been largely stagnant. Corporate CEOs and others at the top are doing better than they have in 60 years.

We are an interdependent global world and we must acknowledge that when an economy is in crisis. We saw what happened to the financial global world during 2007 and 2007 when our financial giants faltered. The US markets fell as did the European and Asian markets.

Don’t get me wrong. I am happy that the stock market is going up. Sure beats it going down. But, please don’t be sucked in by what may well be an illusionary and temporary jump in stock prices. Hedge your money, have funds in bonds and diversify yourself broadly in the stock market.

Where has all the snow gone?

Actually, the better question is where did winter go? We had the cold weather and we have had some ice but snow? The white stuff that piles up on our sidewalks, roadways and on our roof. The stuff we shovel and plow away. The stuff that creaks when we walk on it and the temperature is hovering around zero or below. You know. That stuff.

More importantly, it's the stuff that people ski on, shoe on, and ride on. And it's one of the mainstays of the Vermont economy. I recently came across a research study that had been done back in 1999 on Vermont's tourism industry and specifically on the ski sector. The paper was co-authored by Kathleen LIang. I recently took a course with her on financial and data management so I can attest to her ability to work with numbers and her straight-forward approach to getting to the bottom of things.

The study states: There are only a few states in the United States in which state income relies heavily on tourism, and Vermont is one of them.

The study continues: "The ski area output multiplier of 1.94 means that for every dollar spent in ski areas, an additional 94 cents of spending is generated. In terms of the employment multiplier, for ski areas, every million dollars of sales generates 45 jobs in total. The personal income multiplier is 0.66 and the indirect business tax multiplier is 0.10, meaning that every dollar sales of ski area will generate 66 cents in personal income and 10 cents in indirect business taxes in Vermont."

In other words, even though the statistics are 12 years old, skiing is big business here.

Back on January 19, 2012, Tom Kavet, an economist hired by the State, said that "Despite ongoing uncertainties -- such as a slow start to the ski season due to poor snow cover, the state of Vermont is doing relatively well compared to most of the rest of the country."

That was a month ago. Since then, we haven't been overrun with snow.

We will know more when the quarterly tax figures come out for the first quarter of 2012. That won't happen until mid or late April. In the meantime, winter isn't over yet!

 

Happy Valentines' (er, Florist's and Hallmark) Day!

This morning, something got in the way of my normal ritual of coming into the kitchen at 6:30 to make my requisite school lunches. While headed to the kitchen, a vase with a dozen roses blurred my vision, brought a smile to my face and I was taken back for a moment to the first time my then-boyfriend and now-husband bought me roses on Valentines Day. It was 20 years ago and I remember knowing that this was the man I would love forever, roses or no rose; though at the time, the no roses option wasn't really an option. After all, if you are dating and you don't get roses, where will you be in the roses department in 20 years!

When our kids were really small and we were saving for a home, there were a few lean years when we jointly decided that paying three times the price for roses around Valentines Day was something we could live without. When the kids got older, roses would come in three little handfuls and we'd all open our cards together. This year, we will open our cards tonight...after basketball practice, swimming, a student council meeting, schoool and work...and end the evening with all of us going out for dinner.

There are times, in between the hearts and cupids, when I can get a bit cynical and think of how all the florists in town are making off like bandits and Hallmark is laughing all the way to the bank. Holidays have become very commercialized over the years and we all spend too much money on things we really don't need. LIke roses that will wilt in a few days and cards that we will look at for a few minutes and will soon disappear from view.

And yet, it's Valentines Day. Live in the moment, be present, eat, pray, and love. The roses are beautiful and the love after 20 years is not only there, it's stronger than it was on the day we said "I do." Sure, we could spend the money on groceries or clarinet lessons. In the end, even I can't put a price on memories. And maybe that's the way it should be.

Smell the roses. Happy, happy Valentines Day.

A tax strategy (or two) you may be overlooking

We are in the heart of tax season for 2011.  Other than making retirement contributions some of which you can do until the zero hour in April, there isn't a whole lot you can do at this point to save yourself tax dollars for 2011.  But, there are money moves you can do in 2012 to make your tax bill for this calendar year more palatable when  you write the dreaded check to the IRS in April of 2013.

Truth is that we are all caught so much in the present that we don't plan for our short-term future.  So here's a few quick suggestions:

The next time you want to donate to a charity, consider donating highly appreciated stocks.  Don't give cash.  You accomplish two goals: you give to the charity and you don't have to pay capital gains on stock appreciation that you would have otherwise paid.  Whether you are talking about a donation of $100 or $10,000, depending on your tax situation, avoiding capital gains and taking the charitable deduction may make this tip work for you.

If you are 50 and over, please consider taking advantage of the catch-up provision that allows you to put more money away for retirement than the under 50 crowd.  In a 401(k), you can contribute an additional $5,500 and some employers will match that dollar for dollar.  In some cases, that additional pretax money going into your retirement plan could effect your tax bracket or at least your overall tax liability.

Last tip. See your accountant early enough so ask about other tax savings.  The world of taxes is constantly evolving and it's important to stay in touch with your tax preparer early enough in the year that you can take advantage of tax savings strategies.  Calling in late December is often too late.  Wait until after April 15 and when the snow is really gone (for sure), make the call and ask if there are any changes you can make that will benefit your tax picture.

Enough about taxes.  For now. 

My team did not win...but my investments should

So, it's all over but the ticker tape parade.  Sadly, the Patriots could not get it together in the slim minute that remained last night to rush 80 yards for a touchdown and pull off what would have been called the greatest Hail Mary pass of the century.  Not to say that anyone could have done it but unfortunately, it was not Tom Brady and Company's night.  Honestly, and I am no football commentator, the Giants played better and deserved to win.  Shhh, I would not dare utter such words in my house!

A Giants win  may not make my husband and sons happy but it should make our investments happy. When a former NFC team wins the Super Bowl, the stock market, around 80% of the time, goes up for the year.  At least if the Pats could not win, there is some solace in the market going up!

So far, the Super Bowl indicator isn’t looking so super.  I realize it's only one day (and the day isn't even over) but the Dow Jones Industrial Average fell in mid-day trading Monday.  As of an hour ago,  the Dow was down 36 points to 12,825.

The Super Bowl indicator, first popularized by Yale Hirsch, says that a Super Bowl victory by a team from the NFL’s National Football Conference means the Dow will likely finish the year up.

Yale Hirsch, a market watcher who writes the Stock Market Almanac, found that the Super Bowl indicator works roughly 80 percent of the time.

80 percent means that 20 percent of the time the indicator is wrong.  The last time the Giants won the Super Bowl was in 2008.  We all remember 2008.  The Dow ended the year down 33.8 percent.

Still, 80 percent is compelling.  Time will tell.  In the meantime, all you Giants fan rejoice. But remember...there's always next year!

Seeing more clearly on a clear day

Yesterday, I went online to book a flight on Jet Blue.  My husband and I decided a trip to the Big City would be a good break from our normal daily druggery so I went online to make reservations for a February overnight.  

When I got to their website, the following message greeted me:

"Please be advised that, in accordance with recent Department of Transportation (DOT) mandates, all JetBlue flight fares and Getaways vacation package prices displayed on jetblue.com, or in any other JetBlue advertisements, promotions or published listings now include all government taxes and fees applicable to airfare. This new DOT requirement applies to all U.S. and foreign air carriers, ticket agents, and tour operators that advertise in the United States for air transportation or for tours with air transportation within, to or from the United States."

What a concept!  Actually telling us average air travellers how much we are really paying for  plane ticket upfront.  What a great day for air travel and the American public.  You know, I'll admit that going online and seeing a $49 airfare to NYC is alluring but by the time I was ready to press the "spend" button, my bottom line was about 20% higher than my beautiful bargain price of $49.  

Well, the fine print is no longer fine.  It's out there in black and white in plain view from the get-go.  

From now on, the skies just got a little clearer.  I am not sure if they are friendlier but at least you can see more clearly even on a cloudy day.  Happy flying (or "jetting" in JetBlue-speak.) 

 

 

Turning over a New Leaf...

Yup, that's right. I am turning over a new leaf. To give this blog the justice it deserves. You will be reading more from me in 2012.

I'll admit I am not a big fan of Stephen Colbert. I like the Late Night Snack much better than Americone Dream (not that crazy about Jimmy Fallon but he is amusing if I am up at that hour.) But Mr. Colbert brought attention to a political issue, a red hot election button, that bears our attention.

Last week, Colbert announced that he’s thinking about a run for the presidency. Yes, of the United States. He's too late to get his name on the ballot for the South Carolina primary that is this weekend. And for whatever reason, write-ins are not allowed on South Carolina primary ballots. I guess that means there is no line to write in a name.

In typical Colbert fashion, being told no did not stop Colbert from announcing that his exploratory committee is working to "lay the groundwork for my possible candidacy for the president of the United States of South Carolina.” Ok, but seriously. But seriously, there's little comedy in Colbert's real reason for his announcement. Like many of us, he's fed up with the Super PACs, these political action committees that donors can pour cash into in unlimited amounts.

These are the deep pockets that are responsible for the pitbull attack ads on the candidates. Never mind if anything they say is true. What difference does that make? Obviously not a lot if you listen to the candidates and after all, the candidates must disavow their allegiance to a Super PAC. In other words, Romney can't give a ring to his Super PAC and tell them to get off Newt's back. That would be illegal.

So, what does all this have to do with money and finance? I was runinng some numbers to address the question: Does the economy fare better when a Democrat is in office or a Republican? The answer is: it depends to some degree on what else is going on and who came before the new President.

More on that in a later blog. In the meantime, Colbert ended his remarks by saying “Clearly my fellow South Caroliniacs see me as the only Mitternative.” Good for a few laughs and maybe a dose of reality.