Author: production

For many of us, a portfolio of investments is like a junk closet: It starts out organized, but gradually collects random stuff until it needs some serious cleaning.

But unlike cleaning a closet, cleaning your portfolio can save (or even earn) you money.

The first step is to look at the number of accounts you have. Over our lives, we tend to accumulate accounts as we move and change jobs, leaving us with many we don’t need. So, go through your accounts, and consolidate.

First, close down all but one brokerage account for taxable assets. Putting investments in one account makes it easier to monitor your asset allocation, which is your mix of stocks, bonds, and cash.

Additionally, doing so could lower fees. Ensure you are dealing with a stable brokerage that is or will quickly become familiar with your financial situation.

Then, roll all of your tax-deferred retirement assets into one plan. In addition to allowing you (or your advisor) to better monitor your asset allocation, consolidating 401(k) and Individual Retirement Accounts (IRAs) will make it easier to calculate the required minimum distributions you must take from those accounts once you pass age 70 1/2.

Once your accounts are consolidated, you’ll want to look at your investments, asking if they align with your long-term goals. At this point, it’s important to discuss your objectives with your advisor, particularly when you’re thinking about selling, as doing so can result in capital gains and losses, and a potential tax impact.

If you’re retiring, taking a position with a new employer, or have decided to leave your job for a wide variety of other reasons, you’re faced with a major financial decision: What should you do with the money in your retirement plan?

One option is taking your savings as a lump-sum distribution, and not investing them in another tax-deferred plan. If you need cash immediately, this will certainly work. Some investors’ do just this, reasoning that it’s better to pay taxes now rather than later.

Major tax ramifications

But if you take your savings as a lump-sum distribution and don’t invest them in another tax-deferred plan, you’ll pay the price: Uncle Sam is waiting to take your money. Twenty percent of your savings will be withheld immediately to pay federal income tax, and you’ll have to pay any remaining federal tax, as well as state and local taxes, when you file your annual income tax return.

Additionally, if you’re under age 59½, you may be subject to a 10 percent early-withdrawal penalty. Then, whatever is left won’t continue to grow tax-deferred.

Hypothetical example: $112,803 versus $181,940

For example: Let’s say you decide to take $100,000 as a lump-sum distribution and invest it in a non-tax-deferred investment. You pay a $10,000 early-withdrawal penalty and (if you’re in the 28 percent tax bracket) another $28,000 in federal taxes. That leaves you with just $62,000 to invest. Assuming an investment return of 6 percent compounded monthly, you would have $112,803 in 10 years.

But, if you keep the $100,000 in a tax-deferred plan, and the money grows at the same 6 percent compounded monthly, you’d have $181,940 in 10 years, significantly more than if you had taken a lump-sum distribution and paid taxes.

Of course, these examples are hypothetical; please consult your advisor for help in determining the course of action that’s best for you.

You’ve probably noticed that your mutual fund account statement shows two sets of figures for average annual total returns: one is adjusted and the other, unadjusted. What does this mean?

Unadjusted performance figures: Unadjusted performance figures show the performance of a fund during the time periods indicated, taking into account changes in share value, and assuming reinvestment of all income and capital gain distributions. They do not adjust for sales charges.

Adjusted performance figures: Adjusted performance figures use the same calculation as for unadjusted figures, but also factor in the effects of the maximum sales charge that can be applied to a certain share class. This might include the front-end sales charge, or a contingent deferred sales charge that applies when shares are redeemed within the first year of investment.

Which figure should you use? The Securities and Exchange Commission (SEC) mandates that mutual funds show both figures to allow investors a fair and accurate comparison between funds, or between a fund and a market index. But many shareholders wonder which number they should use to assess the performance of their individual investment.

The truth is that because both unadjusted and adjusted performance figures are standardized, you may find that neither precisely reflects your own investment experience. For example, front-end sales charges are sometimes reduced, so a figure adjusted for the maximum sales charge wouldn’t apply to you, nor would a figure that was totally unadjusted for sales charges.

Other relevant factors: Additionally, a number of other factors, not just performance, are relevant when you’re deciding whether to hold or sell a mutual fund. A fund that doesn’t have a high current return, for example, may still play an important role in your portfolio as a diversifier. If you are trying to decide, your best option is to seek advice from your advisor, who understands your individual financial circumstances and goals.

Most Americans are eligible to receive Social Security benefits as early as age 62, and many assume they must automatically begin receiving benefits as soon as they are eligible. But taking Social Security benefits is never mandatory, and you have some flexibility as to when you begin taking them.

Most people believe they should start taking benefits when they reach their retirement age. What that age is depends on when you were born. For many years, everyone’s “full retirement age” (also called “normal retirement age”) was 65. But beginning with people born in 1938, it started increasing. For people born after 1959, full retirement age is 67. (Find your full retirement age using Social Security’s calculator at http://www.ssa.gov/retirement/ageincrease.htm )

However, you don’t have to wait until your full retirement age to start taking benefits. You can begin receiving them as early as age 62. But, in this case, the benefits will be reduced.

Alternatively, you could defer receiving Social Security benefits until after your full retirement age. In this case, your benefits will go up; the increase is a certain percentage for each month past your full retirement age.

So, should you start collecting benefits as early as age 62, wait until your full retirement age, or delay? The answer depends on several factors, but generally speaking, your best option is to seek advice from a professional. Discuss your choices with your advisor or contact your local Social Security office. (Call Social Security Administration at (800) 772-1213 to find an office near you.)

The Affordable Care Act (ACA) has insurance companies, medical businesses, health-care providers, employers, and individuals scrambling to process new information relating to our changed health care system. But that doesn’t mean you should overlook the health care industry as an investment.

The case for health care as a potentially profitable investment relates to our aging population. According to 2010 U.S. Census figures, there were more people 65 years and over in 2010 than in any previous sampling. In fact, between 2000 and 2010, the population aged 65 years and older increased at a significantly faster rate (15.1 percent) than the general U.S. population (9.7 percent). According to the latest figures, the 40 million Americans over the age of 65 comprise around 13 percent of the U.S. population.

A growing population segment

The Administration on Aging (AOA) projects that this group will more than double in the next 36 years, reaching 88 million by 2050. That means that we can expect consistent demand for health-care products and services. Indeed, according to the Centers for Medicare & Medicaid Services (formerly the Health Care Financing Administration), health-care spending is expected to increase at an average rate of 5.8 percent between 2012 and 2022, one percent above the projected average annual growth in the gross domestic product.

An investment opportunity?

The aging of the population and its need for health care has fueled growth among health-care companies, which include medical-device manufacturers, pharmaceutical producers, and home-health-care services, to name just a few. As a result, now might be a good time to look into adding health-care exposure to your portfolio.

Before jumping in, however, you should understand the risks and rewards of investing in this sector, especially at this tumultuous time in the sector’s history. Your financial advisor can help you determine if health-care investments are right for you based on your individual financial circumstances and goals.

Adding real estate to your portfolio can provide greater diversification, plus a potential for growth, but it can be tricky. That’s why some investors choose real estate investment trusts (REITs) instead.

REITs are securities that invest primarily in income-producing real estate or make loans to persons involved in the real estate industry. Investors earn income derived from rents or profits from the sale of properties in the REIT’s portfolio. REITs generally trade on a major stock exchange.

Many investors consider REITs for their historically low correlation with other asset classes. That is, they tend to perform differently from stocks, bonds, and cash.

For example, year-to-date through June 30, 2014, the MSCI U.S. REIT Index has returned 16.78 percent compared to 7.14 percent for the S&P 500 Index (U.S. stocks), 3.93 percent for bonds (Barclays U.S. Aggregate Index), and 1.4 percent for cash (Barclays U.S. Treasury Index).

Another option is a global REIT. The U.S. is not the only country with a REIT market, and many investors interested in REITs are looking overseas. Global REITS, as measured by the FTSE EPRA/NAREIT Developed Index, returned 12.21 percent year-to-date through June 30, 2014.

Of course, investing in foreign securities presents unique risks, such as currency fluctuations, political and economic changes, and market risks. These factors may result in greater volatility, so it’s a good idea to consult an advisor before investing in an alternative product such as REITs. He or she can help you determine if REITS are right for you based on your individual financial circumstances and goals.

It’s easy to feel that your mutual fund is underperforming, but determining whether that is actually the case is a complicated equation that must take several factors into account. These include the following:

Is the fund “underperforming” relative to other funds? Different securities perform differently because they have different investment objectives, strategies, and risks. Before concluding that your fund is performing badly relative to another fund, be sure you’re comparing apples to apples.

Is the fund “underperforming” relative to what it has returned in the past? Markets fluctuate. Sometimes there are periods of exceptionally high performance, and sometimes the bubble bursts. You can’t expect a certain level of return based on what your fund did in the past.

Is the fund “underperforming” relative to the goals you set – and if so, how did you set those goals? Many investors assume that a fund that has returned 10 percent over a certain period is better than a fund that has returned 5 percent, and they invest in the better-performing fund. But the better-performing fund may have obtained higher returns by taking on greater risk. At another time under different market conditions it may perform less well than the one that previously returned 5 percent.

Is the fund “underperforming” relative to an index? You can’t compare your fund to just any index. There are many indices, each of which is designed to benchmark a certain type of fund. So, if the Dow Jones Industrial Average, (which is the average value of 30 large industrial stocks) is up 10 percent for the year, and your fund is only up 5 percent, before you label your fund as “underperforming,” ask if it makes sense to compare your fund to the Dow.

Before you cash in your “underperforming” shares, ask yourself the questions above, because your fund may not really be performing as badly as you think.

When volatility strikes the stock market, some investors take refuge in bonds. But while bonds are generally less risky than stocks, they, too, have risks.

Perhaps the greatest is the risk that a rise in interest rates will cause the value of your bond investments to decline. Unfortunately, you can’t eliminate interest-rate risk, but you can take steps to protect yourself.

• One such step is investing in bond mutual funds instead of individual bonds. Although a fund’s net asset value (NAV) will drop when interest rates rise, the fund will replace maturing bonds with higher-yielding bonds. So, higher interest rates can actually help you achieve a higher total return from a bond fund in the long run.
• Another step is thinking about when bonds mature. If the bonds in a fund mature when interest rates are rising, the fund will have to purchase new bonds at a higher price. As a result, the fund’s NAV may drop, but because interest rates are rising, the fund’s yield may rise. The opposite is also true. Generally, the longer a fund’s “average maturity,” the greater the NAV change when interest rates move.
• Finally, you may want to consider a bond fund’s duration, which indicates how much a fund’s price will rise or fall for a given change in interest rates. For example, if rates rise by 1 percent, the NAV of a fund with a 10-year duration would drop by about 10 percent; if rates fall by 1 percent, the NAV of the same fund would increase by about 10 percent.

Investors saving for retirement often avoid international stocks because of their perceived risk, but going global could actually reduce your portfolio risk. Why? International stocks may offer better value.

Over the six months ending April 30, the U.S. stock market, as measured by the S&P 500 Index, was up more than 8 percent and had surpassed its pre-recession highs. Overseas, the story is different. Some regions, such as Europe, have recently performed well, but others, such as Japan, have not.

As a result, the Wall Street Journal, using data from FactSet, reports that the U.S. stock market is now among the world’s most expensive. For example, U.S. stocks trade for 16 times their per-share earnings forecasted from May 2014 to May 2015; non-U.S. stocks, 13 times.

Diversify to benefit your portfolio

Another benefit of international investing is the potential it offers for diversification. When some markets are performing poorly, others may be performing well. If you invest in a number of markets, your chances may increase of achieving an overall return you’re comfortable with.

How much to invest in international stocks is a personal choice, but the conventional wisdom may be outdated: It used to be that investors were encouraged to invest 20 percent of their portfolios in international stocks – but this was in the days when the U.S. played a much more significant role in the global economy. Today, the U.S. represents roughly 20 percent of the global economy. It might make more sense to invest more of your portfolio abroad than in the past.

Risk exists

Keep in mind that international investing can add risk. Foreign markets may be less transparent, and if foreign currencies weaken against the U.S. dollar, the value of your investment could fall.

Your advisor can help you decide if adding international stocks to your portfolio is a good idea based on your individual financial circumstances and goals.

Most people like the idea of getting a tax refund, seeing it as a form of forced savings or a windfall for a much-anticipated splurge. But a tax refund is actually a no-interest loan to the government. As a result, if you get a refund annually, it may be time to reconsider your withholdings and take action.

As of May 9, 2014, the IRS had received more than 136 million individual income-tax returns, according to the Wall Street Journal, and the average refund was $2,693, up 1.6 percent. Granted, an extra $2,693 in your pocket isn’t usually considered a bad thing, but certain taxpayers may want consider whether they should have that money earlier in the year.

For example, many people making estimated-tax payments – on self-employment earnings, interest, dividends, and rental income – are overpaying. Others simply have their paycheck withholdings set too high. If you fall into one of those categories, you may want to consider whether there are better ways to use the money you’re loaning to the government.

Could you pay off debt, for example? Could you bolster your savings account and let the earnings accrue interest? Could you invest in bonds or stocks that have the potential to appreciate? Could you contribute to an Individual Retirement Account or 401(k) plan?

It’s easy to file your return and forget about your taxes until next April 15, but now is the best time to review your tax situation. Your advisor can help you determine the appropriate amount to withhold.

Note: This article is not intended to give legal or tax advice.