by autumnweave

An item Board Game:

Sesame Street Fair

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Gamestorm 14 – Another year another adventure

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It’s almost February and many of us have already let our new year resolutions fall by the wayside. Luckily, there’s still time to get your investing smarts on track for 2012.

Here are some themes to keep in mind to help you become a better investor this year:

1. Be News Agnostic — Avoid being swayed by the news of the day, whether it’s good or bad. Focus on trends versus headlines. Expose yourself to thoughtful interpretation of what’s going on by following analysts, journalists and bloggers you trust.
2. Cash is Not Necessarily King — You may sleep better at night if you are invested in cash and thus avoiding the ups and downs of the market. However,  cash has a price since it isn’t returning enough to cover even our current low inflation rate—so you are actually losing money when you are overly invested in cash.
3. Prudence is Queen — A diversified portfolio, modified for current economic, political and global circumstances, is the best approach. Make sure you are not over-invested in your company’s stock and that you have a good mix of various types of investments, including cash.
4. Time for Generosity — If your assets exceed million as an individual or million as a couple, you can reduce estate taxes in the future by making some strategic gifts to heirs now.  The million per person estate/gift tax exemption is going away by the end of 2012.
5. Give Plans Another Go-Around — Many experts are projecting lower returns on investments in the coming years.  So this is a good time to get a financial plan—or refresh your last one—and assess whether you are still on track to meet your retirement goals.

Advisor Intelligence

The Merriam-Webster dictionary provides the following definition for the word anomaly; “something anomalous: something different, abnormal, peculiar, or not easily classified.”

Looking back at the economic, political and market activity of 2011 one would think it could be described as an anomaly. I hesitate to label a market’s action as odd or unusual because markets by their nature will always be independent, potentially odd and unusual.  Be that as it may, 2011 certainly goes down as a rare year.

A major cause for this anomalous market activity was the rarely seen occurrence, at least in modern times, of a large portion of an entire continent–Europe–running the risk of sovereign debt default.  More and more investors are finding themselves bewildered by political decisions and the associated investment market activity.

Chart 1- 2011 S&P 500 Index/13 Counter-trend Moves of Approximately 7% or Greater

How bewildering was 2011? I thought it good to note two specific market anomalies:

1. The S&P 500 Index started the year at 1,257 and ended the year at 1,257, with the actual return being -0.003%. The S&P 500 Index has never had such a small calendar year price change–basically zero change without including dividends.  Major international equity markets fared much worse, with returns ranging from -5% to -22%.
2. Even though the S&P 500 Index finished where it started, it experienced 13 counter-trend moves of approximately 7% or greater, with the average absolute move equal to 9.33%, as shown in Chart 1 above and table 1 below.  The average duration of these counter-trend moves was five weeks.  Our review of the history of the S&P 500 Index could not find a similar high counter-trend volatility period.

Table 1 – 2011 S&P 500 Index / 13 Counter-trend Moves of Approximately 7% or Greater

• Average Number of Days between Each Countertrend Move = 26 days
• Average Absolute Percentage Countertrend Move = 9.33%

Here is a brave prediction–I expect this market activity not to repeat in 2012!

Click here to get a New Special Investment Report From Forbes’ Top Gurus: 50 Best Ideas for 2012.

What are investors and their advisors to do?  Continue to seek investment solutions that are non-correlated to the volatility displayed in the above chart and table.  This means true diversification in portfolios, not just diversification achieved by having “many” investments in a portfolio.

Advisors and their clients must ask, “Am I truly diversified?” Do my investments all head in the same direction, or do they vary in direction depending on the then-current market conditions, with all of them ultimately set up for gains over the long-haul?

Some assistance in answering the diversification question is to see if your portfolio has any tactical asset allocation strategies, alternative investments and more.  As the New Year begins, this is an opportune time to contact your advisor and schedule a time to discuss your account(s), personal information and any changes that may have occurred to your time horizon and investment objectives.  Ask, “Am I truly diversified?”

Let’s hope the word anomaly is not used to describe 2012 at this time next year–unless of course it is anomalously a great one.

Advisor Intelligence

by bkunes

Related Item: Memoir ’44

I’d like M44 to be at the top of my list!

RftG only climbed my list #2, 31x due to finally introducing my wife to it in Dec and she surprisingly really liked it and we played a boat load in a few days time.

I got Space Alert for my birthday and enjoy it, the challenge (similar to M44) is finding others to play.

Summoner Wars is on my want to play/buy in 2012 list!

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Image by pasa47 via Flickr

If you’re in a relatively low tax bracket and have funds in a traditional IRA or Qualified Retirement Plan, chances are you might be in a position to set yourself up with tax-free income via a Roth Conversion.  One method that can work in your favor is the “fill up the bracket” technique, and if you want to do this for 2011, you’re running out of time, it must be done by December 30 (December 31 is a Saturday and you probably would have a tough time getting anything accomplished on that date).

The way this works is that you determine what your regular income is, and then look at where you are with regard to your tax bracket.  If there’s still some “headroom” in the current bracket, you could convert an amount, equal to or less than your “headroom”, from your traditional IRA to a Roth IRA.  This way you are controlling the tax rate at which your conversion occurs, keeping it in the lower tax bracket.  By doing this, you are reducing the value of your traditional IRA and therefore the size of your future Required Minimum Distributions (RMDs) while increasing the amount you have in Roth IRA accounts for future tax-free growth.

Well that was clear as mud, right?  Let’s work through an example.

Fill Up the Brackets Example

Let’s say your taxable income (before any conversion) is ,000.  This puts you in the 15% tax bracket, and (for 2011) this leaves ,000 of headroom in the bracket, up to ,000 in taxable income for a married couple filing jointly.  Given these facts, you could convert as much as ,000 from your traditional IRA, assuring that you’d only pay 15% on the additional income – assuming that the increase in ordinary income doesn’t have an adverse impact on your deductions and/or credits.

If you did this over the course of several years, it could significantly reduce the balance in your traditional IRA, thereby reducing the amount of your future Required Minimum Distributions (RMDs) from the traditional IRA(s).  Then you’d have significant money set aside in the Roth account which could grow tax-free for the rest of your life.

Additional Concerns

Of course, as with all Roth conversions you need to project into the future what your tax rate will likely be in order to make sure this is a proper move.  If your projected future tax rate will be equal to or more than the bracket you’re in today, then the Roth Conversion makes sense.  This requires you to make assumptions about the future tax rates, and so if you’re pessimistic (realistic?) you’ll assume that the rates in the future will increase.

Generally, unless you expect your income to decrease in the near future, it might work best to convert at least small amounts now, paying the tax when you have the ability.  This will provide you the option of controlling (at least somewhat) your tax burden in the future.  Every person’s situation is going to be different, and as such there is no rule of thumb to determine if the conversion makes sense for you.

One way that this could work in your favor is if you’ve been let go from your job early in the year, thereby reducing your overall income for this tax year.  If this happens you might be in a much lower tax bracket than you normally would be, providing you with lower tax bracket headroom in order to employ this tactic.

One other thing you need to keep in mind with this tactic (and all IRA distribution tactics, including all Roth Conversions) is the tax impact to your Social Security benefits (if you’re receiving them currently).  If your nominal income is low enough to allow for less than the full 85% taxation of your Social Security benefits, recognizing additional income via a Roth Conversion could bump you up over the limit.  This would cause additional income from the Social Security benefit to be taxed, increasing your tax hit on the conversion as well.  You can find out more about this in An IRA Owner’s Manual.

Advisor Intelligence

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There is some good economic news for 2011: merger and acquisition activity will rock.

Here’s why: Corporate balance sheets in the U.S. contain a whole lot of cash these days, and the companies want to do something with it to make shareholders happy. Expect more businesses  to use that cash toward expanding, stock buy-backs, dividend increases or to jumpstart some M&A activity.

Given the many economic headwinds facing the U.S. economy (high unemployment, low consumer spending, increasing commodity prices and the fear of tightening credit given the ongoing sovereign debt crisis in Europe to name a few) prospects for increased corporate earnings stemming from increased sales seem difficult. Instead companies will consider increasing shareholder  through strategic mergers and/or acquisitions.

“The absolute best way for us to create value for shareholders is through acquisitions,” and further, “As pessimistic as I am about the economy, I’ve never been more optimistic about the M&A Environment,” James Craigie, CEO of Church & Dwight (CHD); a consumer products company known for such household brand names as Arm & Hammer, Trojan, Aim, Close-up and Oxi Clean, recently told Bloomberg News.

That sentiment is not necessarily unique to Craigie or Church & Dwight but may very likely be felt by many corporate leaders in the U.S. across various sectors and industries. Accordingly, recognizing the tougher regulatory environment that appears to be permeating around larger mergers and acquisitions, it would not surprise us, at Hennion & Walsh, to see a spike in M&A activity during the final four months of the year recognizing that 2011 in already on track to be a historic year for M&A activity.

In the first five months of 2011 there were 1,276 announced transactions with a total value of 4 billion, representing a 39 percent increase in value over the same period in 2010, which saw 1,336 deals worth 7 billion, according to Pricewaterhouse Coopers LLP (PwC).

“An increase in total deal value in the last twelve months ending May 2011 indicates a sustained M&A cycle, and as confidence continues to build, markets stabilize and businesses look towards growth, we expect the acceleration of the M&A market to continue in the second half of 2011,” says Martyn Curragh, U.S. Transaction Services Leader with PwC.

The U.S. economy still needs to see an increase in consumer spending (which accounts for over 70% of GDP in the U.S. but is clearly impacted by the status of the U.S. labor market) to help build a sustainable economic recovery. But this type of M&A activity can help to provide for some stock market growth in an economy that is struggling to provide any growth on its own.

Disclosure:  Neither the author, nor Hennion & Walsh Asset Management, currently hold any positions in the publicly traded common stock of Church & Dwight.

Advisor Intelligence

by jadseah4

An item Board Game:

Sleuth

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It’s That Time of the Year Math Trade

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