Steps to a Balanced Portfolio


Year-end is a great time to take a close look at your finances. Because volatile markets can skew the percentage of stocks, bonds and cash in your portfolio, it’s important to give your portfolio an annual check-up to make sure your allocation remains aligned with your situation and goals.

It’s easy to do in three simple steps:

Step one: Develop a target asset allocation

Given your individual financial circumstances and goals, what percentage of your portfolio should be dedicated to each asset class? For example, if you’re close to retirement, you may want the majority of your portfolio in income investments such as cash and bonds, with a smaller percentage in stocks to protect your portfolio against inflation. If you’re younger, and can tolerate the fluctuations of the stock market over time, you may want to put the majority of your investments in stocks.

Step two: Evaluate your portfolio

Next, determine if your actual investments match your target asset allocation. If they do, your portfolio is in good shape. If they’re off, consider just how far off they are.

Since making frequent changes to your portfolio can have tax consequences, you may only want to alter the asset mix if it’s off by more than five percentage points.

Step three: Rebalance

If your asset allocation has drifted significantly away from your target, you can rebalance your portfolio in a variety of ways.

For example, you can shift funds out of the asset class that exceeds its target into the other investments, or you can simply add funds to the asset class that falls below its target percentage. You can even direct dividends from the asset class that exceeds its target into the ones that are below their targets.

This will bring your portfolio back into balance, but because of tax implications, it’s important to talk to your advisor before making any significant changes to it.

Tempted to Sell: Don’t get Trapped by the ‘Wash-Sale’ Rule


In today’s volatile markets, you may be tempted to buy and sell some securities. If you do, you’ll want to keep in mind the so-called “wash-sale” rule.

According to the Security and Exchange Commission (SEC), a wash sale occurs when you: “sell or trade stock or securities at a loss and within 30 days before or after the sale you buy substantially identical stock or securities; acquire substantially identical stock or securities in a fully taxable trade; or acquire a contract or option to buy substantially identical stock or securities.”

Why would an investor do this?

Mainly to take a capital loss while retaining the security.

The Internal Revenue Service (IRS) frowns on this, but many investors try to find ways around the rule, especially in today’s market environment. Many others just may not understand how wash-sale rules work.

For example: You buy a stock and hold it. A few years later, you purchase additional shares of the same stock. A few days later, you sell the initial shares at a loss. You then deduct the loss.

This seems to meet the wash-sale rule requirements – but it doesn’t.

Many investors mistakenly assume the rule applies only when you buy back a security 30 days after the sale, but as the SEC definition explains it applies before a sale as well.

Some areas of the law are fuzzy. For example, the definition of “substantially identical” is unclear.

So be sure to consult your advisor before buying and selling any stocks, bonds or mutual funds.

Are Rent-to-Own Programs Right for You?


For those who, for whatever reason, aren’t yet qualified to purchase a home, there are options.

One way to realize your dream of home ownership is through purchasing a home on a rent-to-own basis.

Here are some things you should know about this option:

Rent-to-own programs generally appeal to two types of people:

The first includes people who have a down payment, but also have credit challenges.

The second is the reverse, where potential buyers may have good credit and can qualify for a mortgage, but have little or no money to put down on a purchase.

Through the rent-to-own program, the potential buyer is allowed to pay rent to live in the home he or she wants to buy, according to terms established in a rent-to-own agreement.

A certain percentage of rent goes towards the purchase and, at the end of a specified period of time, the buyer theoretically will have enough to enable him or her to purchase the home.

The renter/buyer also can expect to pay some type of deposit, and at the end of the rental term he or she will either purchase the property using the deposit and rental credits, or forfeit the deposit and vacate the premises.

Rent-to-own may also offer a seller relief from a mortgage they can’t pay on a home they can’t sell.

Just as in a sale, the seller and the renter/buyer negotiate a sales price for the home and a term, usually three years.

As you can imagine, all parties will benefit from an ironclad contract, drawn up by lawyers experienced in this type of agreement.

As compared to a straight-forward property rental, there is definitely more of a risk in a rent-to-own situation.

Be sure you know what you’re getting into; talk to your mortgage professional about rent-to-own programs and see if they are right for you.

Green Mortgages Help Cut Your Energy Costs


Whether you are planning on purchasing, refinancing or rehabbing a property to make it more energy efficient, you will definitely want to look into energy-efficient or green mortgages, as they are often called.

This program applies to the property you call your primary residence. Generally this means a single unit, but Freddie Mac offers Energy Efficient Mortgages (EEMs) for principal residences from one to four units. Second homes are excluded from EEM programs.

How it works

With an EEM you are able to finance the cost of improvements that will make your home more efficient, and therefore lower your overall monthly energy expenses. EEMs are available through a variety of mortgage programs from Fannie Mae, Freddie Mac, FHA and VA.

The cost of the improvements can be rolled into a new loan, or it can be a stand alone mortgage separate from your existing one. Buyers can benefit from EEMs if they are purchasing a new energy efficient home.

To participate in the program you first must work with a certified energy consultant who will determine your proposed energy savings by using what is called a Home Energy Rating System (HERS). These consultants, or raters, must be certified by the Residential Energy Services Network (RESNET). There are fees associated with working with the consultant, and they can often be rolled into the cost of the loan.

Contact your mortgage professional for more details on this program, which can help you save money on your energy bills each month.