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Dear ,
Welcome to the November 2011 issue of The Wealth Chronicle.
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The Risk of taking No Risk
The market volatility seen in 2011 has many investors longing for a return to a normalcy, one not marked by extreme swings of sentiment or security prices. Given the frequency and severity of financial and economic news in recent months, investors can be forgiven the temptation to succumb to headline fatigue and to shelter in cash. However, giving in to that temptation is not always in the investor's best interest.
We are currently in a negative real interest rate environment. Inflation is higher than most short-term interest rates and, for this reason, any liquidity beyond that which is required to fund near-term expenses should not be held "in case" because it loses purchasing power. To illustrate the point, consider this example:
- Put $100 in a Treasury money market fund yielding on average 1.78%, with inflation averaging 2.17%. What would be generated, in nominal and real terms, over the past five years?
- In nominal terms: when opening the statement after five years, the investor saw the investment grow to $106.21.
- The real value: adjusted for the corrosive effects of inflation, the real value was down to only $95.55 (a difference in value of roughly 10%).
- If we project forward using current money market rates (0.01%) the nominal value of that $100 five years from now will be $100.05 while the purchasing power (using 3.43%) will have fallen some 15% to just $84.51.
In conclusion, the markets today are picking the pockets of investors who hold excessive levels of cash, and investors are willfully participating in the theft.
Interest rates are likely to remain at current levels through 2013 so real interest rates are to remain negative for at least the next two years. Getting a positive real return is critical, particularly if investors are to avoid making small fortunes reduced down from larger ones. Unfortunately, the current interest rate environment forces investors to take on more risk in order to just preserve their capital. The key to successful investing in this environment, like every other, is to be clear about the risks taken and the return received. | |
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Last Minute Checklist
I recently mailed out the 2011 Last-Chance Financial Planning Checklist to all my friends, family, and clients. It is a quick way to determine if you need to take any actions before December 31st. It's a simple checklist that covers only those areas that need attention at year end: taxes, retirement savings, investments, insurance, and medical. It might take five minutes, tops, to complete.
The checklist can be downloaded electronically at: http://www.bautisfinancial.com/2011LastChanceFinancialChecklist.pdf
Once you look over the checklist, please feel free to contact me if you have any questions or if there is anything on it you would like to discuss.
Also, if you know someone who could use this checklist please let me know. I will make it available to anyone who could use the help. Just reply to this message with their name and contact information, and I'll be sure send the checklist to them. If you have not received it, please let me know and I'll be sure you get it. | |
| Offsetting Capital Gains and Losses One of the items on the 2011 Last Chance Financial Planning Checklist is to review realized and unrealized gains and losses. In order to achieve the desired goal of paying the least amount of income tax on your capital gains, you must determine which capital gains, and which capital losses, if any you will recognize before the end of the year. The basic netting procedure provides that short-term capital gains are offset by short-term capital losses, and long-term capital gains are offset against long-term capital losses to produce net short-term and long-term amounts. If you have any net capital losses they may be used to offset any capital gains, regardless of the whether they were short or long term. If your capital losses are more than your capital gains, then you can claim a capital-loss deduction against your ordinary income on your tax return. The maximum amount you can deduct is $3,000 per year. Due to the volatility in the stock market, a lot of people may be able to take advantage of this deduction. Let's look at an example of how the capital loss deduction works, including what happens if the loss is greater than $3,000: In 2011, Ted had a $4,000 capital gain, and a capital loss of $11,400. He used $4,000 of the capital loss to offset the capital gain, which left a net capital loss of $7,400. He claimed $3,000 of the loss on his 2011 return. The effect was to reduce his taxable income by $3,000. Ted was in the 28% bracket, so the loss decreased his 2011 income tax by $840. The remaining $4,400 of capital loss carried over to his 2012 return. Therefore, in 2012 he had a $500 capital gain and no capital losses except for the carryover. So he used $500 of the $4,400 carryover to offset the gain, leaving a capital loss of $3,900. Once again, Ted deducts $3,000 of the loss and carries over the remaining $900 to 2013. | |
Top Gun Real Estate Academy
Top Gun Real Estate Academy (http://www.topgunrea.com) is a newly approved school with locations in Hudson and Bergen Counties. The school will offer pre-licensure courses for salespersons and brokers as well as the newly required Continuing Education courses, both core and elective. The school will also offer workshops and retreats, all geared to the real estate industry, which will begin in early 2012.
I will be teaching Personal Finance classes at the Academy; my first workshop scheduled for January 27, 2012. Details of what will be covered in the class and instructions on how to register can be found at http://www.topgunrea.com/foundations_financial.html.
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Congratulations on my friend Louis Ricigliano on being featured on the Nasdaq jumbo  screen in Times Square and for ringing the opening bell on Nasdaq. Check him out here: http://finance.yahoo.com/news/NPS-Pharmaceuticals-Announces-bw-2801042800.html
Joe Paterno Estate Planning - On November 16th, the New York Times published an article (http://www.nytimes.com/2011/11/16/sports/ncaafootball/in-july-paterno-transferred-ownership-of-home-to-his-wife-for-1.html) about Joe Paterno transferring ownership of his residence to his spouse back in July 2011 for $1. Was it foreshadowing of legal troubles that Paterno saw coming, stemming from the victims of Jerry Sandusky? While Joe is not the subject of a criminal investigation, there is a good chance he will be named in a civil suit. Was the move simply good estate planning especially with Joe recently being diagnosed with lung cancer? Experts are divided on the motivation of the transfer. University of Pittsburgh law professor Lawrence Frolik was quoted in a New York Times story as saying that he thought the house transfer sounded "like an attempt to avoid personal liability", whileScott Martin from the Trust Advisor thinks the criticism is unjust and was a routine estate planning move http://thetrustadvisor.com/news/paterno
Buffet Invests in IBM - One person who does not seem concerned about the Euro Crisis or US debt problems is Warren Buffet. Buffet's company, Berkshire Hathaway recently accumulated a 5% stake in IBM worth over $10 billion. Buffet has a history of buying when the overall sentiment on the market is negative, but what makes this purchase interesting is that he usually shuns technology stocks. Read more here: http://abcnews.go.com/Business/wireStory/buffett-hints-us-stock-investments-14946993#.TsLK9MOBqU8
Post Office Losses - It's no surprise that the proliferation of email and a weak economy has hurt the business of the Post Office. What is surprising, however, is how bad the damage has been. The Post Office reported this week that they lost $5.5 billion last year and are on track for a shutdown next year if drastic changes are not made. My town, along with many others in NJ, are considering shutting down their Post Office branches, but I would expect additional changes including rate increases to be heading our way. Read more here: http://finance.yahoo.com/news/post-office-losses-mount-5-190632214.html
Where is the missing $1.2 billion? - It's bad enough that MF Global, the firm run by John Corzine, declared bankruptcy after a $6.3 billion trading bet on European bonds went bad. What's worse, it appears $1.2 billion from client accounts is missing. Regulators are investigating whether the firm moved money from its client accounts into its own to cover its losses. |
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Please contact me if you have any questions about the articles above or about your personal or business finances.
Sincerely,
Marc Bautis
Wealth Manager
office: 201-842-7655 cell: 201-221-6895 fax: 201-754-9760
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Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation. You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter
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 | | MEET MARC | |
Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts. He is committed and proud to deliver independent advice, always in the interest of his clients.
Marc is the creator of the Retirement Fitness Challenge™, a program designed to be sure his clients enjoy the retirement years as they have always envisioned them. Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.
Marc is a graduate of Seton Hall University. He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Hasbrouck Heights with his wife Katie and Old English Bulldog, Winnie.
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