Author: production

When the U.S. Federal Reserve (Fed) raises or lowers interest rates, as it did in December for the first time since 2006, it sets in motion a chain reaction, and that reaction can affect you.

By raising and lowering interest rates, the Fed is trying to maintain a healthy economy. Lowering interest rates can stimulate a slowing economy, while raising them can rein in an economy that’s overheating.

The rate the Fed adjusts is the federal funds rate, which is the interest rate banks charge each other on overnight loans. But adjusting that rate has a domino effect. When the Fed changes the federal funds rate, most banks follow by changing their prime rates – the interest rates they charge their best customers.

That can affect rates for consumer loans, and therefore impact consumer spending in a big way. To illustrate: if interest rates on home mortgages increased from 2% to 10%, would you be as likely to take out a mortgage or buy a car?

A change in interest rates can also cause confusion in the financial markets, as investors try to determine how the change will affect the economy.

When the Fed raised interest rates last December, the move had been so well advertised in advance that the market reaction was muted. Stocks, in fact, performed well the day of the announcement.

The takeaway: interest rates do matter when it comes to the market and your investments, but so do other factors, such as the price of oil, the upcoming presidential election, and global events.

It’s an election year in the United States, and the 2016 presidential race has already offered up a number of surprises.

But the important question is, what might it mean for the markets, and as a result, your investment portfolio?

Looking to history, there appears to be evidence that the markets respond better to election processes whose outcomes are predictable, and, of course, that’s not the case in 2016.

First, the current president isn’t running for reelection, and departing presidents can create a void that financial markets find worrisome.

Having crunched the numbers, Merrill Lynch Global Research found that the S&P 500 Index declines by an average of 2.8% in presidential election years in which a sitting president is not seeking reelection.

Compare that to years in which the sitting president is seeking reelection: according to Merrill Lynch, the S&P 500 Index averages returns of 12.6% in those years, compared to the average annual return in nonelection years of 7.5%.

Second, in 2016, additional uncertainty in the form of intense geopolitical worries and a historically wide primary race must be factored in.

The inevitable conclusion: markets could be in for a bumpy ride all the way through to the November 2016 election. But there’s light at the end of the tunnel in the form of a so-called relief rally. According to Merrill Lynch, the first year of a new presidential term sees the markets rise by an average of 6%.

It’s also important to remember that statistics based on previous elections can’t predict with certainty what will happen in 2016, so for investors, the best way to prepare for possible market volatility in 2016 is to take a long-term perspective: work with your advisor to develop a portfolio that is focused on your individual financial goal(s).

While there may be market ups and downs this year, staying the course is almost always your best option.

Value stocks and growth stocks tend to take turns leading the market. It’s easy to get caught up in the vagaries of the market, but investing is not about which asset class is ahead at one point in time; it’s about the long-term ride.

You may recall that in the late 1990s and early 2000s, growth stocks-particularly technology – and Internet-related issues-dominated the market. Value stock managers were considered to be dinosaurs by pundits shouting that a “new paradigm” had replaced long-standing investment valuation techniques. In March 2000, however, the bubble burst, and value stocks began outperforming their growth counterparts.

Value and growth are countercyclical

We see this time and time again, as value and growth are typically countercyclical. That means they tend to outperform during different phases of an economic cycle: In a struggling economy and in the early stages of recovery, value stocks have historically outperformed growth stocks. It isn’t until late in the recovery cycle that growth has typically dominated.

Knowing this, many investors try to time the market, shifting their assets from value to growth and back again when they think the time is right. But timing the market this way is difficult. A better option may be ensuring that your equity portfolio is balanced. Investing in a combination of both value and growth stocks gives you the best odds of success. This is because a portfolio containing investments in both stock types weathers the ups and downs of the markets better than an all-growth or an all-value portfolio does.

If the income from your individual retirement accounts (IRAs) turns out to be more than you actually require in retirement, and you’re looking for ways to pass on some or all of your IRA assets to your heirs, you’ll need to make some choices.

The first required minimum distribution from your traditional IRA must be taken by April 1 of the year following the year you reach age 70½, and annual distributions must continue to be made by December 31 of that year and in each following year.

The calculation to determine the required minimum distribution can be based on your single life expectancy or the joint life expectancy of you and your beneficiary (either spouse or non-spouse). So first, consider and designate a beneficiary.

The single life expectancy method generally provides for the largest distributions and highest potential taxable income. In general, it is most appropriate if you plan to withdraw most of your IRA during retirement, because it increases the potential that you will deplete the account during your lifetime.

The joint life expectancy with a spouse beneficiary method can reduce your required minimum distribution and current taxable income, and can increase the potential for tax-deferred growth. Also, when you die, your spouse generally has more options for timing distributions.

The joint life expectancy with a non-spouse beneficiary method may reduce your required minimum distributions even more than when your beneficiary is a spouse-but because the beneficiary may be a child or grandchild, it may be most appropriate if you wish to maximize tax-deferred growth and leave a legacy for your heirs.

The choice you make will affect the size of the distributions, your taxable income, the amount left in the account to continue growing tax-deferred, and the amount the IRA holder or beneficiary may leave to heirs. Your advisor can help you decide which choice is best for you.

NOTE: The legal and tax information contained in this article is merely a summary of our understanding and an interpretation of some of the current tax laws, and is not exhaustive.

Good or poor performance of one or more components of your portfolio can provide a drastic change in the allocation of your assets and create dangerous imbalances that result in inadvertent risk-taking. As a result, your financial advisor will recommend regular checkups. Don’t wait for spring; why not do it now?

The first step your financial advisor will take is to evaluate your portfolio. Do your actual investments match up to your target investments? If they do, your portfolio is in good shape. But if they’re off, your financial advisor will want to determine how far off they are. He or she might not recommend altering your asset mix unless the discrepancy is significant, but every situation differs.

If your portfolio is seriously off balance, your financial advisor may rebalance it. After all, the ultimate goal is to keep your portfolio’s overall risk level under control. To do that, he or she may shift funds out of the asset class that exceeds its target into other investments, add funds to the asset class that falls below its target percentage, or direct dividends from the asset class that exceeds its target into the ones that are below their targets.

Your advisor may also want to determine if the investments in each asset class are still appropriate. That doesn’t mean he or she will recommend selling poorly performing investments and adding investments that may deliver better performance; they may be doing just fine for the type of investments they are.

Despite market volatility, 2015 was a good year for many investors.

As a result, you may find that the start of a new year is a good time to get together with your financial advisor to review your investments and make any necessary changes.

Here are five questions to ask your advisor to help you start 2016 off right:

1. How can I make capital gains long term? The tax rate on long-term capital gains is lower than the tax rate on short-term capital gains, so your advisor may suggest you wait until you’ve held certain appreciated investments for a year before selling them.
2. Should I own more stocks? Stocks have more appreciation potential than bonds, but there are a variety of risks associated with investing in them; your advisor, who knows your situation, can help you decide if you can tolerate these risks before making an investment decision.
3. Should I contribute more to tax-deferred accounts? If you’re not yet retired, tax-deferred savings accounts are a great way to keep your assets growing tax free, potentially compounding their value year after year. Ask your advisor how best to participate; for example, by increasing your contributions to a company-sponsored retirement plan, a SEP IRA, a traditional IRA, or a Roth IRA.
4. Would giving the gift of stock or mutual fund shares benefit me? If your portfolio has appreciated and you don’t need the money, your advisor can explain some options. For example, you may want to consider gifting appreciated assets to charitable organizations, your children, or your grandchildren.
5. Am I subject to the alternative minimum tax (AMT)? The AMT applies to all people who take relatively large deductions, including deductions for state and local taxes. Ask your advisor if you are subject to it, and if so, he or she can help you plan ahead during the year to minimize your exposure.

The U.S. Federal Reserve (Fed) has refrained from raising interest rates, but eventually it will do so, perhaps even by the time you read this. And whatever the timing, a hike will affect millions of Americans in many ways.

The Fed cut its target for interest rates to zero in December 2008 to help stimulate the economy as it struggled in the depths of the Great Recession.

But the economy is in much better shape now, and keeping interest rates low for too long can cause other problems. So many expect the Fed to act soon.

A rate hike won’t affect you overnight, but eventually, it will – particularly if you use a credit card, have a savings account, invest in the markets, or want to buy a home or car.

Consider mortgages. The average interest rate on a 30-year fixed-rate mortgage has been hovering around 4 percent, down from 6 percent 10 years ago and 7.5 percent 20 years ago, according to the St. Louis Fed. So if you’re in the market for a mortgage (or other kind of loan), you may want to act sooner rather than later.

Bondholders may also be disappointed. As interest rates rise, new bonds will be issued with higher interest rates, making older bonds with lower interest rates less valuable. Of course, if you hold your bonds to maturity, you’ll still get face value.

Stock markets also may be more volatile. In many cases, a rate hike will cause investors to pull their investments out of developing economies and put their cash in what they perceive to be safer assets such as U.S. government bonds.

So if you own stocks or stock funds, the months around a rate hike could be turbulent.

Savers, however, may have reason to smile. If you’ve worried about low interest rates on your savings accounts and certificates of deposit (CDs), these will begin to move in a more positive direction.

Investing always necessitates balancing risk and return, and that challenge becomes even greater as you near retirement: you have to invest aggressively enough to build a nest egg that can support you for the rest of your life, but also insulate yourself from market turbulence that could set you back years. How do you choose a mix of investments that will deliver comfortable returns while offering the downside protection you need?

There’s no right answer, as different investors will tolerate different trade-offs. But you may want to start by determining your actual risk tolerance: think seriously about how low the value of your nest egg can drop before you exit the stock market.

To do that, consider how different asset allocations would have performed from 2007 to 2009 (market high to market low). Without rebalancing, a portfolio of 70 percent stocks and 30 percent bonds would have lost around 40 percent; a portfolio of 50 percent stocks and 50 percent bonds, 26 percent; and one with 40 percent stocks and 60 percent bonds, 19 percent.

Once you’ve determined an appropriate asset allocation based on risk tolerance, you can move on to part two: developing a stock-bond mix that has a good chance of delivering the returns that will enable you to maintain your preretirement standard of living throughout your retirement. You can do this with a retirement income calculator.

Of course, if the portfolio you’re comfortable with in a market downturn doesn’t provide the growth you need, you’ll need to reevaluate. And this is where your advisor can be a great support.

International markets can offer high potential returns, but it’s important to remember that more return potential means more risk potential: as we’ve seen in recent months, China’s currency and production challenges have had negative repercussions around the world.

Currency fluctuation is a significant risk. The value of foreign currency fluctuates with changes in the supply of and demand for both the foreign currency and the U.S. dollar. If your investment in a European security appreciated and at the same time the euro strengthened relative to the U.S. dollar, for example, your actual return would reflect both the appreciation of the investment and the strength of the euro. The strengthening of the euro is caused by changes in the supply/demand ratio for the euro, the U.S. dollar, or both. On the flip side, if the euro weakened relative to the U.S. dollar, your investment return would be affected adversely, even though your investment appreciated.

Compounding this problem is the fact that in some foreign markets, particularly small ones, it’s difficult to trade certain securities. For any number of reasons, you may experience difficulty finding buyers for a foreign security you wish to sell. You are thus forced to accept the price offered, which may wind up being less than your initial investment.

Although the risks involved with foreign investments cannot be completely eliminated, there are ways of managing those risks. Mutual funds are one: in addition to providing professional management, mutual funds enable you to diversify by investing in a portfolio representing various regions, countries, and industries (though, of course, this varies by fund.)

Investing with a long-term horizon is another way to manage risk. Overseas companies need time to adjust to rapid changes in international political and economic conditions, the pace of technological development, and global competition. Because short-term fluctuations are typical when investing abroad, it’s especially important to maintain a long-term perspective.

If you have a substantial individual retirement account (IRA) balance and intend to leave some or all of the IRA to your beneficiaries, you may want to consider splitting it into several different accounts, each with its own beneficiary.

For example, let’s say you have three children, ages 25, 20, and 15, and one grandchild, age 5, and want to name them as the beneficiaries of your $100,000 IRA. Depending on your IRA plan rules, unless you specify otherwise, the account would typically be divided equally among the four beneficiaries. But if you divide the IRA into four separate accounts, each with a different primary beneficiary, you can give half to your children and the other half to your grandchild.

Splitting an IRA into multiple accounts is advantageous if there’s a significant age difference between beneficiaries because you can enable younger beneficiaries to maximize the potential for tax-deferred growth. Upon the IRA holder’s death, each beneficiary can calculate required distributions based on his or her own life expectancy, instead of on the life expectancy of the oldest beneficiary, which would be the case with only one account. Younger beneficiaries could take smaller distributions and reduce their current taxable income, leaving more in their accounts to potentially grow tax-deferred.

You can also select different investments for each account-perhaps a more aggressive stock fund for younger beneficiaries, who can afford greater risk, and more conservative funds for older beneficiaries, who need income. Your advisor can help you decide the best way to divide your accounts.

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This Month’s Smile: Making a Great Cat Video Cat videos have the highest traffic ratings on the Internet. Maybe it’s because watching cats de-stresses us. Or it could be because cats are stubborn. Whatever. But if you want to go viral, you need to remember that your cat is the star, producer, and director of the show. You’re just the mildly entertaining human with a camera. To get your video, you’re going to need to remember these three tips inspired by Peter Gerstenzang’s How-to on catchannel.com:

1. Improvise. Your story line will be what your cat wants, not the other way around.
2. Forget linear time. See #1.
3. Shoot now, edit later. See #1 again.

Maybe cat videos go viral because getting a cat to do anything long enough to get the camera and record it is totally newsworthy!