Brighton Bulletin
Issue: #16 December 2009
The end of 2008 was quite a shock to investors as almost all markets declined substantially. And things only got worse during the first three months of this year before the markets found a bottom in late March. The rally since then has been extraordinary and has helped many investors recover somewhat. Yet markets remain well below their peaks. For example, on December 3, 2007, the S&P 500 was at 1,472. It closed November 30, 2009 at 1,096.

The point of the opening paragraph is to remind you keep your investments in perspective. We all have a tendency to "anchor" our perspective. For example, to look at our 401k performance from the "peak" to the present, rather than from when we opened the 401k to the present. Anchoring can lead to being overly optimistic or overly pessimistic, neither of which is healthy when managing your finances.

Year end is always a good time to review your financial situation. Look at your spending habits over the past year and compare to prior years. Review your portfolios as well. Is the overall asset allocation consistent with your risk tolerance and investment objectives? Has anything changed in the portfolios - managers departed, funds acquired, etc. This review is the financial version of a "Spring Cleaning". Maintain a long-term perspective during your review and avoid being overly optimistic because you've gained so much since March or overly pessimistic because you're still so far below your 2007 peak. There's no need to be 100% in equities or 100% in fixed income!

Moving forward, managing your investments with a balanced perspective will, hopefully, enable you to ride out the inevitable ups and downs we'll experience. No one has perfect clarity as to what the new year will bring. So, focusing on managing volatility should be a priority. As someone once said - "Making money is the easy part, keeping it is what's hard"!
Do You Know What
You're Really Worth?
It's always difficult to know where you want to go, if you don't know where you are. In the context of your finances, if you don't know what you have, you can't adequately plan for the future. If you're like most investors you probably have multiple investment accounts - you have a 401k at your current firm, if your spouse is working, then he/she probably has one as well. There may also be various IRAs rolling around as the result of rolling over 401k's from prior firms. You probably have accounts for your children as well - maybe an odd UTMA or UGMA or a 529 for each child. Maybe a variable annuity or two. Finally, possibly a taxable investment account from years of saving bonuses and/or converting stock options/restricted stock.

Rolled together, you may have a half dozen or more accounts at various locations. You probably have at least one advisor involved but that advisor is not managing all of the accounts. So, you haven't tied them all together in any way and, thus, don't have a clear picture as to the overall asset allocation. More than likely, you're over-allocated to equities and probably assuming more risk than you need or want.

Beginning in January, we will be able to help you gain clarity on your full investment picture. We will be able to tie all of your accounts together and provide ongoing portfolio reporting and analysis on an advisory basis. This means you don't need to move the accounts from their current locations or replace advisors with whom you're comfortable.

The process is called account aggregation and involves you logging into a secure website and entering the log-in information for the accounts you want us to monitor (we can also do this for you if preferred). Each night, the website will aggregate the information from your accounts (transactions, price changes, etc). Each morning, we will import the data into our portfolio accounting system. We will provide you with aggregate portfolio reporting and analysis and advice regarding asset allocation on a quarterly basis.

The value lies in having all of your investable assets linked to provide a full picture of your investment net worth and gaining a greater understanding of the risks you may be taking with these assets. It also relieves you of some of the burden for managing all of these disparate accounts.

If we're already managing assets for you we can integrate the aggregation into our existing mandate. If we're not already managing assets, we can work with you on an advisory basis for a flat annual fee.

We don't ordinarily "sell" in the monthly bulletin but this is a service we're very excited to be offering. It is unique and we believe will prove invaluable to clients.

Knowing where you are makes it possible to know where you want to go.

Click here for more information or to schedule a meeting
Winter Cleaning



Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and
investing decisions before December 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you'll owe next April.
 
The first step in your year-end investment planning process
should be a review of your overall portfolio. That review can
tell you whether you need to rebalance. If one type of investment has done well--for example, large-cap stocks--it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after December 31 for tax reasons. Diversification and asset allocation don't guarantee a profit or insure against a possible loss, of course, but they're worth reviewing at least once a year.
 
Now is the time to consider the tax consequences of any capital gains or losses you've experienced this year. Though tax considerations shouldn't be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions. If you have realized capital
gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as "harvesting your losses."

If you're selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a "wash sale," and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale. If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies
you might think about. If you want to sell but don't want to
be out of the market for even a short period, you could sell
your position at a loss, then buy a similar exchange-traded
fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You'd end up with the same position, but would have captured the tax loss.
 
If you're buying a mutual fund in a taxable account, find out
when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you'll owe taxes this year on that money, even if your own shares haven't appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.
 
Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it's generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments' typically lower returns. Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that
distributions from a tax-deferred retirement plan don't qualify for the lower tax rate on capital gains and dividends.
 
If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold--for example, those bought at a certain price. Which stock or fund shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares. As a reminder, don't forget to discuss tax considerations with your accountant prior to making any transactions.
 
As we mentioned earlier, now is a good time for a "Winter Cleaning" as you prepare for 2010.
Thank you for your continued support! As always, please let me know if I can be of service. Feel free to forward this bulletin on to anyone who may find it interesting. I'm always looking for new subscribers!
 
Sincerely,
 

John P. Middleton, CFA, CAIA
Brighton Financial Planning, Inc.
john@brightonfinancial.com
908-892-5958 (cell)
908-730-7000 (office)
In This Issue
Do You Know
Winter Cleaning
Investor Behavior
Quick Links
Is Investor Behavior Pre-determined?
November 30, 2009 (from PlanAdviser.com) --- Investor behavior is largely determined by nature rather than nurture, according to a new study by finance professors at Claremont McKenna College and the University of Washington. ---
By studying twins and their financial behavior, researchers found that genetics account for one-third, on average, and as much as 45% of investor behavior, according to a release of the study results. When combined, other factors previously studied, such as age, gender, education, wealth and home ownership, explain only 5% to 10% of investor behavior, according to the research.


"We found that genetics explains differences in investor behavior much more than everything else that people have proposed," said Stephan Siegel, assistant professor of finance at the University of Washington's Foster School of Business.

The researchers cross-referenced nearly 38,000 twins in the Swedish Twin Registry with comprehensive personal financial data-stocks, bonds, real estate, cash-collected by the Swedish government. To separate genetics from environmental drivers of financial behavior, the researchers compared each twin pair's stock market participation, asset allocation, and portfolio risk.

In all three measures, the data showed a significantly higher correlation between identical twins than non-identical twins. Correlation of a random sample of the population is close to zero. The researchers said this stark difference between the identical and non-identical twins relative to the general population is strong evidence that investing behavior is, in significant part, hereditary.

In addition, the researchers considered 716 twins from the Swedish registry who were raised apart and found their average correlation in investing behavior to be virtually identical to those raised together, adding more evidence that genetics drives investor behavior.