Welcome Back!
Quite a lot has happened in markets during the last month which I'll review below. I'll also discuss UTMA/UGMA accounts vs custodial 529s and close with suggestions regarding what to do with your 401ks held with former employers. Don't forget to check out my blog - Brighton Perspective.
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Is That a Light?
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 I read an interesting white paper this month that discusses a tactical asset allocation process utilizing a
simple moving average (SMA). For those unfamiliar with a moving average, if you have 20 numbers and want to calculate a moving average of 10 numbers, you average numbers 1-10, then 2-11, then 3-12, and so on. This gives you a moving average of the 10 numbers. It is used in finance to smooth performance returns and provide a comparision to more traditionally reported performance returns. When the reference index level moves above
the 200 day SMA it's time to invest in equities. When it moves below the
200 day SMA it's time to sell. Unless you invest in an ETF that replicates your
preferred benchmark this isn't easy to implement. However, it can be used as an input into the decision process regarding how and when
to increase/decrease your equity allocation. As the chart below shows:
the
approach has some merit. It's also clear the spread between the S&P
index value and its 200 day SMA was at its largest recently and is now
closing. As a piece of the mosaic, it would suggest now is not the time
to increase your allocation, however, if as I've mentioned before,
you're dollar-cost-averaging, or are considering doing so, now may be
an appropriate time to start. If the spread continues to improve you're
averaging through the buy signal. If it weakens, you can suspend
contributions until an appropriate time. If you happen to be completely
out of equities, you can average in or simply wait for the spread to
turn positive. Keep in mind though, that the chart shows several
periods in the 04-07 where the all or nothing approach would have
required multiple trades. Know your risk tolerance, all or nothing if
you can handle it otherwise cautiously average in to equities.
April is looking like a good month for equities and a continuation of solid performance that began in late March. However, very strong headwinds remain. Financials have been very volatile for quite a while and with good reason. Much of the economic and financial news surrounds the general well-being of these institutions. It is still not clear that banks are out of the woods despite positive first quarter results. There are still many steps remaining for banks to demonstrate true financial health. Further, we continue to see weak consumer spending globally. Until either spending picks up or inventories decline further, we'll continue to see weak global GDP. This is basic economics - supply exceeds demand. This imbalance is corrected as producers stop or slow production until inventories draw down, prices fall (deflation) or a combination of both. When we get to a point where existing supply meets demand we can begin growing again. That hasn't happened yet.
The end result is that equities while are not fully attractive conditions are improving. I continue to suggest averaging your way back to your equity target allocation by investing on a periodic basis - say every 2 weeks over the next 2 to 3 months. This will give you equity exposure and help manage the inevitable volatility we'll see going forward.
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UTMA/UGMA vs custodial 529
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 Many parents with children born prior to 2000 set up Uniform Transfers To Minors or Uniform Gifts to Minors accounts for their children as a way to save for college expenses. UTMA/UGMA accounts provided tax benefits which were appealing to parents - a substantial amount of income and gains were taxed at the childs rate if at all. The downside,however, to these accounts is rather large. When that child reaches a specified age, frequently 18, the assets in that account belong to the child and can be spent as they so desire. A trip around the world rather than a semester a college suddenly becomes very appealing!
529 plans were introduced in 1998 and really came into their own a few years later. These plans offer tax deferral and parental ownership of the assets ensuring, from the parents perspective, that the money is spent wisely. Both features made 529s more attractive, in most cases, than UTMA/UGMA accounts. Furthering the attractiveness was the fact that the FAFSA - the government college financial aid application - counts the 529 as a parental assets and not student assets. In many cases, this improves the chances of winning some form of financial aid.
Now, what if you have an UTMA/UGMA account and want to convert it to a 529? You're hoping to regain control of the assets and gain the tax and FAFSA benefits, right? Well, you can accomplish the later objective only, unfortunately. There is a way to convert an UTMA/UGMA to a 529 by opening a custodial 529 account. This option is not available with all 529 providers so check the documents when opening your account. This will provide you with the tax deferral benefits and improve the FAFSA possibilities. However, once you opened and funded the original UTMA/UGMA account you passed ownership of those assets to your child. That can't be reversed. At age 18, that child still has the ability to withdraw the assets (and pay penalties and taxes if not used for college). They can, if so desired, name another beneficiary and pass the assets on to another person so the intended objective can still be met.
Consider leaving the UTMA/UGMA as is until it reaches a high enough value that taxation changes (speak with your accountant ahead of time and get an estimate of what that value might be) or until the child is a Sophomore in high school. At the appropriate time, move the UTMA/UGMA to a custodial 529. The rationale is that you have greater investment flexibility in the UTMA/UGMA account than in the 529, so you can manage the assets as you desire during this period. Further, it may be possible to use the UTMA/UGMA accounts to finance such expenses as a private high school or tutoring services. That can't be done with a 529. Once in the 529, select the appropriate age based portfolio and let the 529 manager take it from there.
This is a great site for additional research.
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As always, if you find this bulletin useful, feel free to forward on. I'm always happy to add new subscribers. And, as always, if I can be of service please don't hesitate to contact me.
Sincerely,
John P. Middleton, CFA, CAIA
Brighton Financial Planning, Inc.
john@brightonfinancial.com
908-892-5958
908-730-7000
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Featured Article
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Most of us have worked for more than one company during our careers. Surprisingly, many of us leave the assets held in 401ks at these old firms. There are several reasons why this is not a good practice. First, as these companies are themselves acquired and merged into other companies the original 401k can get lost in the shuffle. This can make it difficult to track down when the time comes to draw on those assets. Second, the investment options are often constrained by the legal requirements pertaining to qualified retirement plans. The preferred option is to rollover the 401k balance held at the prior firm to an IRA. The IRA resolves the two issues noted above. You have possession of the assets and thus know where they are and you have greater flexibility regarding investment strategy. So, if you have 401ks still residing at prior firms, consolidate them now into a single IRA. You'll be thankful down the road.
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