Well the numbers are in and the Money Bus (www.yourmoneybus.com) served over 100 people in two days in the Chicago area. The Money Bus was sponsored by the NAPFA Consumer Education Foundation, Kiplingers, TD Ameritrade, and FiLife/WSJ. The bus travels the country and at each stop local NAPFA advisors provide free advice (no product sales!!) to consumers. We answered questions about retirement planning, 401ks, credit card debt, college savings, emergency funds, layoffs, foreclosures, mortgages, etc.
Archive for the ‘News’ Category
Money Bus Serves Over 100 People in Chicago
Tuesday, April 27th, 2010Tax cut expiration makes Roth conversion more advantageous in 2010
Friday, February 5th, 2010With the Bush tax cuts expiring at the end of this year and unlikely to be renewed, taxpayers in the highest income brackets that are considering a Roth IRA conversion should think about doing it this year.
The highest federal tax bracket next year will go from 35% to 39.6% meaning the taxes on a $1,000,000 conversion will increase by $40,600 in 2011. If you will turn 59 and ½ next year you may want to consider waiting because the penalty for early withdrawal will expire for you next year lowering the tax on your conversion form 45% in 2010 (35% + 10% early withdrawal penalty) vs. 39.6% next year.
Young tax payers in any tax bracket with small IRA balances may also want to convert this year. That is because by converting now they will be able to shelter any future gains on their current IRA from taxes, and for a young person those gains could be substantial. For example the future gain on $10,000 for a 30year old could be $310,000 by the time the person reaches 70. In addition if your current IRA contributions were not tax deductible because your income was too high, most or all of your Roth conversion could be tax free.
One last benefit for converting in 2010 is that you are able to spread any taxes you do owe over a 3-year period vs. paying them all this year.
When Index Funds Perform the Best
Monday, November 2nd, 2009I read an interesting article in today’s Wall Street Journal about when index funds do the best vs. actively managed funds. Index funds do the best in the asset classes that are seeing the strongest returns. The study was based on a 10-year period from 1997-2007. The reason for this is active managers tend to deviate from their primary asset class (e.g. Large-Cap manager buying Mid and Small Cap stocks) when the primary asset class has performed poorly and then miss the quick run up when the primary asset class recovers.
Does this mean that you should use active managers for poorly performing asset classes? No. The problem with this conclusion is not that actively managers are picking better stocks in their primary asset class but they are moving outside their designated asset class to try and improve performance. When they do this they change your overall asset allocation and risk/return profile without telling you. If you wanted to you could do the same thing with index funds but at least you would be aware of the changes you were making.
The article also did not address if they active managers’ performance was after all fees and expenses. Actively managed funds have management fees that average 6x higher a low cost index funds. In addition if you buy an actively managed fund through a broker you load fees in addition. There is also the issue of taxes. An actively managed fund turns its stock portofilio over about 3x/year which could generate signficiant short-term capital gains on which the mutual funds shareholders are taxed on lowering their overall retrun. An index fund may only turn over 20% or less of its portfolio generating much lower taxable gains.
My advice: Stick with low-cost index funds, for superior long-term performance.
Mortgage Rates Headed Up?
Thursday, October 22nd, 2009According to the Wall Street Journal mortgage rates could be headed up now that the Federal Reserve is wrapping up its mortgage purchase program. The Fed bought large amounts for mortgage debt to stabilize the mortgage market and keep rates low during the recession. Without that support some are speculating that rates for a 30-year fixed mortgage could rise to 6% by next spring
Consumer Reports Updates its Homeowner Insurance Ratings
Wednesday, August 12th, 2009The September 2009 issue of Consumer Reports Magazine has a report rating homeowners’ insurance. The three top rated companies were Amica, USAA, and Chubb. USAA is limited to people who have a connection to the military. All three carriers were rated highly for paying claims in a timely matter and the amount of the settlement.
Popular carrier State Farm was rated mid-pack and Allstate was near the bottom of the rankings.
The article has some great advice about raising your deductibles to save money, avoiding small claims which could raise your rates or get your dropped, and checking rates every few years.
You can read the article at www.consumerreports.org/ (online subscription required)
Index Funds Make Even More Sense in a Downturn
Monday, August 3rd, 2009According to the Wall Street Journal many large institutional investors are turning too index funds after finding that actively managed mutual funds have not performed well during the downturn.
They would rather have the guaranteed lower cost of an index fund vs. the unfulfilled promise of better performance through an actively managed fund.
This is the strategy that I use with my clients. Although some actively managed funds will out perform an index fund the percentage that do is actually less than chance would predict. It is also difficult to predict which managers will outperform and index fund year after year. This is especially true for bond funds. According to Morningstar the Vanguard Total Bond Market Index Fund has outperformed 83% of its peers over the last 10-years.
Index funds charge substantially less than their actively managed peers. A low cost index fund costs about 1% per year less than its actively managed peer. That means that the actively managed fund would have to outperform the index fund by 1% per year just to be equal. That is very difficult to do for almost all managers.
Asset Allocation is Like Democracy
Wednesday, July 15th, 2009
The Wall Street Journal says that asset allocation has “failed miserably” as an investment strategy. That is like saying democracy is a failed political system because it allowed the severe recession to happen. The problem with the WSJ analysis is that neither asset allocation nor democracy is a perfect system. Far from it; but the real measure of success of either is evaluated over the long-term not on a single year. In addition, no one has come up with an alternative strategy that has stood the test of time.
What I have seen from many new clients whose portfolios were managed by large brokers was no asset allocation strategy but just a random collection of stuff that the brokerage houses were trying to push on their clients. For clients who did have a semblance of an asset allocation strategy their broker had not explicitly explained the downside risk of their investment portfolio.
Here are two questions that you should always ask your advisor:
* What is my potential percentage loss on this portfolio (1%) chance?
* What is my potential dollar loss on this portfolio (1%) chance?
If she can’t answer those questions then you should find another advisor.
Long & Associates Clients Featured in the WSJ
Tuesday, April 7th, 2009Recently two Long & Associates clients were featured in an ongoing series in the Wall Street Journal called “Savings Strategies”. In December, 2008 Mike Casner and John Stryker were featured, and on April 7, Jody Feczko and Rob Lukens were featured.
I’d like to publicly thank these clients and the many others who have been willing to open up their financial lives so that others can learn from their experiences.
Good News About Illinois Bright Start 529 Plan!
Thursday, December 28th, 2006According to the Chicago Sun-Times the Illinois Bright Start 529 Plan fees will be lowered significantly in 2007. The total fees for the program will range from 0.14% to 0.64%. This is a significant reduction from the 0.99% current fee.
In the past I recommended the Utah plan to some clients due to its low fees. In some instances the lower fees overcame the IL state income tax deduction. Now with the lower fees in the Bright Start 529 plan I strongly recommend this plan to all clients. Clients who are in the Utah plan should transfer their assets to the Bright Start 529 Plan. This is something we will be working on during the first quarter of 2007.