Growing federal debt, record deficits, loose monetary policies and high fuel costs have many investors concerned about the impact of inflation on their portfolios. While some have looked to gold as a potential hedge against rising prices, fears of another bubble have many people hesitant to invest in precious [...]]]> By James T. Barker, ChFC, CLU

Growing federal debt, record deficits, loose monetary policies and high fuel costs have many investors concerned about the impact of inflation on their portfolios. While some have looked to gold as a potential hedge against rising prices, fears of another bubble have many people hesitant to invest in precious metals.  So, what other options do you have?

Treasury Inflation-Protected Securities, or TIPS, specifically designed to protect against inflation, may provide an answer.

TIPS provide inflation protection by linking the principal value of the security with the consumer price index.  As prices rise or fall, so does the principal of your security.  When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.  Moreover, TIPS pay interest twice a year, at a fixed rate which is applied to the adjusted principal.  If the consumer price index rises, the interest payments, like the principal, will also rise.

The U.S. Treasury has been providing TIPS since 1997. Today, investors may acquire these assets direct from the government, on the secondary market, or with mutual funds and exchange traded funds (ETFs.)

The clear advantage of TIPS over other fixed income investments is the protection of your spending power against rising prices.  And TIPS, like T-Bills and Treasury Bonds are essentially a risk-free investment since they are backed by the full taxing authority of the federal government.

TIPS are a fixed-income asset and should be positioned in your portfolio as such.  They can provide an element of protection against one of the greatest risks to any fixed-income allocation – Inflation.  And because TIPS have a slightly negative correlation to equities, they have proved to be a good portfolio diversifier of equity risk, helping to improve long term portfolio performance.

When considering TIPS as part of an overall strategic allocation, it’s important to understand how they are treated for tax purposes.  Although they are not subject to state and local taxes, both the principal adjustments for inflation and the interest payments are subject to ordinary income taxes at the federal level even though the bonds do not pay out the principal adjustment until maturity.  Paying taxes on income before it is actually received is sometimes referred to as “phantom income” and can be an issue.  Because of this, many investors prefer to hold TIPS in tax-deferred accounts such as 401(k)s or IRAs.

Depending on your particular situation, Treasury Inflation-Protected Securities can play an important role in a properly constructed investment portfolio designed to meet your specific goals.  TIPS offer a good diversifier with your equity positions  as well as a hedge against future inflation.  As always, consult with your financial professional with questions on TIPS and other investment strategies.

In today’s low-interest rate environment, investors relying on bond yields for steady cash flow may be tempted to look for alternatives to boost income.  One direction many investors are heading is toward dividend stocks.

As of this writing, the dividend yield on the S&P 500 [...]]]> By James T. Barker, ChFC, CLU

In today’s low-interest rate environment, investors relying on bond yields for steady cash flow may be tempted to look for alternatives to boost income.  One direction many investors are heading is toward dividend stocks.

As of this writing, the dividend yield on the S&P 500 is roughly the same as the yield on a 10-year treasury note, slightly under 2%.  And in many instances, yields on investment grade bonds are actually lower than the dividend yields offered by the same companies. 

Beyond current yield, dividend stocks look attractive on a couple of other fronts.  With the economic recovery seemingly underway, stocks have the potential for growth, boosting total return. Moreover, a look at the balance sheets of many dividend paying corporations reveals significant cash positions.  With so much cash sitting on the sidelines, there is a potential for larger dividends in the future.  In comparison, historic low interest rates have bond investors concerned that rising interest rates will decrease the value of their fixed income assets in the future.

You should think carefully, however, before substituting dividend stocks for fixed-income assets in your portfolio.  Even though yields and total return my look attractive, dividend stocks are still equity assets and as such, they are an inherently riskier asset.  Overweighting in equities will change the risk profile of your portfolio and may increase the volatility of your investments.

Diversification should also be considered when adding dividend stocks to your portfolio.  Many of the attractive dividend yields can be found with large, value-oriented  companies and they tend to be concentrated in industries such as energy and consumer goods.  Without careful planning and execution, you may find yourself less diversified and at greater risk.

When considering the potential impacts of risk, asset allocation and diversification to your portfolio, you should also look closely at the individual companies in which you plan to invest.  Adding companies with stable earnings and strong balance sheets may minimize volatility in these very volatile markets.  As always, if you have questions, consult your financial professional for guidance.

A trust is created when a person (Trustor or Grantor) transfers a property interest to another person or corporation (Trustee) to be held for the benefit of himself or others [...]]]> by James T. Barker, ChFC, CLU

When preparing your estate plan, a revocable living trust may be a fundamental element to consider.

A trust is created when a person (Trustor or Grantor) transfers a property interest to another person or corporation (Trustee) to be held for the benefit of himself or others (Beneficiary.) 

The grantor of a revocable trust typically retains the right to revoke the trust at any time prior to his incapacity or death. Revocable trusts are commonly used to avoid probate and provide management of the grantor’s assets should he become incapacitated.

When an individual creates a revocable trust and transfers his property to the trust, the disposition of the trust property at death of the grantor will be governed by the terms of the trust and will not become part of the grantor’s probate estate. Upon the grantor’s death, the trust becomes a separate legal entity from the grantor. The grantor’s will does not control the disposition of the property because the property is not included in the grantor’s probate estate.    The use of revocable trusts is important in states that have high probate costs which are typically determined as a percentage of the value of the probate estate.

Regardless of the costs associated with probate in a decedent’s will, the use of a revocable trust can provide a degree of privacy for the decedent and his family. To probate a will, the will must be submitted to the probate court, and the will is open for public inspection.

With a revocable living trust (also known as a revocable inter vivos trust or grantor trust), your assets are put into the trust, administered for your benefit during your lifetime and transferred to your beneficiaries when you die—all without the need for court involvement.

Most people name themselves as the trustee in charge of managing their living trust’s assets. By naming yourself as trustee, you can remain in control of the assets during your lifetime. In addition, you can revoke or change any terms of the trust at any time as long as you are still competent. (The terms of the trust become irrevocable when you die.)

In your trust agreement, you will also name a successor trustee (a person or institution) who will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die.

Estate planning can be a very complext process. When considering the elements of your estate plan, you should generally consult with an estate planning attorney.

But individual investors have [...]]]> By James T. Barker, ChFC, CLU

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Real estate as a wealth generator is hardly a new idea. People owned property long before the advent of stock exchanges and other capital markets. In more recent times, large corporations and institutions have held commercial real estate in their portfolios.

But individual investors have not traditionally had ready access to a professionally managed, diversified real estate portfolio. This has changed in the last few decades with the development and growth of real estate investment trusts, or REITs. Now individuals can add a real estate component to their portfolio to improve overall diversification.

A REIT is a company that owns, operates, and/or finances real estate property.  Equity REITs manage different types of income-producing properties, such as hotels, office buildings, industrial facilities, apartments, and shopping centers. As commercial landlords, equity REITs typically generate dividend income from the rent paid by tenants. Since REITs have to pay out a large fraction of earnings as dividends, they tend to offer higher-dividend income than equities, and this may benefit certain income-oriented investors. Total return of the shares is tied to income and change in market value.

Publicly traded REITs offer liquidity, as they can be bought or sold whenever the stock market is open for business. The availability of market-determined share prices can reveal information about the market’s assessment of the company’s prospects, including the ability of the firm’s management team.

Publicly traded REITs offer investors several potential benefits:

• Real estate exposure
• Diversification
• Higher yield, regular income, and capital appreciation
• Distinct asset class due to their low long-term correlation with stocks
• Liquidity and transparency
• Favorable tax treatment – REITs operate as “pass-through” corporations and therefore pay little or no taxes on corporate earnings.

A REIT mutual fund that manages a portfolio of REITs typically offers more diversification than owning a single REIT. Most REIT funds are either actively managed or indexed. 

We prefer REITs that follow a structured strategy. Rather than trying to replicate an index, a manager may choose securities based on risk-return characteristics, diversification benefit, and favorable price negotiation. By keeping costs low and trading efficiently, a structured REIT strategy seeks to generate improved returns over time. Advantages of this approach include broader, more systematic exposure to the REIT universe at a lower cost.

Adding a real estate component to a portfolio may be a good diversification move. But strategy and implementation are crucial, and before investing, you should consider how a real estate strategy and the REIT you select may affect your portfolio.

Tax-loss harvesting is the selling of securities to realize portfolio losses [...]]]> by James T. Barker, ChFC, CLU

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As we enter the final quarter of the fiscal year, it’s time to start thinking about strategies for reducing your income taxes. Capital loss or tax-loss harvesting can be an effective way to help.

Tax-loss harvesting is the selling of securities to realize portfolio losses from your taxable accounts. Once the losses are realized, the investor then  uses these losses to offset capital gains, lowering the overall income tax liability.  Realized capital gains not only occur when you sell assets above your cost basis, but potentially from owning mutual funds that realize gains through active portfolio management.

With current tax law, there is no limit to the amount of realized capital gains that can be offset with realized capital losses.  Alternatively, if capital losses are greater than capital gains during the year, the capital losses can be carried forward until death to offset future gains. Moreover, up to a maximum annual $3,000 deduction from ordinary earned income (married, filing jointly)  is available to further reduce the tax liability.

When utilizing a tax-loss harvesting strategy it is important to understand the wash-sale rule.  Essentially, the wash-sale rule disallows any capital loss deductions when the investor engaged in buying and selling the same (or substantially identical) asset 30 days prior or 30 days after the transaction date.  For example, If an investor bought AT&T stock on November 30th and then sells it on December 15th for a loss, he cannot recognize the loss for tax purposes because the transactions occurred within 30 days of each other.  Likewise, if the investor sells AT&T stock on December 15th for a loss and then buys it back on January 1st he cannot recognize the loss for tax purposes.  If he really likes AT&T and wants the security in his portfolio, he must wait until January 16th or later in order avoid a wash-sale and claim the loss for tax purposes.

Often times, investors don’t want to miss out on market opportunities during the wash-sale rule black out period.  One strategy to “stay in the market” is to invest in similar companies in the same industry as the security being harvested.  For example, if selling AT&T for the tax-loss deduction, one might consider adding Verizon stock to the portfolio to replace AT&T stock.

It is important to note that tax-loss harvesting only considers the tax implications of the investment and not the appropriateness of the investment itself.  Prudent investors should consult with investment and tax specialists to help weigh the benefits and costs of a capital loss harvesting strategy.  These professionals can then help identify appropriate securities from which to harvest the losses.