Even a broken clock is right twice a day

Look at predictions this way:  It’s everyone’s chance to put their hat in the ring in the game of “I told you so.”  That’s all.  Somebody is going to get bragging rights at the end.  I often tell my clients that my crystal ball is as good as theirs.  I might be more educated or more experienced or more articulate about it, but it’s really just as good as anyone else’s.   Remember, past performance is not a predictor of future results.  Just because someone’s gotten it right in the past doesn’t mean that person gets it right this time around.

There are many folks out there saying the S&P is going to be up substantially within the next two years.  Time to throw all your money into the stock market, right?  Not so fast.  The last “secular bear markets”—that is, those extended periods of time since 1906 in which the market has ultimately been down from the beginning of that period to the end—have averaged about 15 years.  We’re about 10 years into this secular bear market.  Understand that even within secular bear markets, there are years that are “up” and there are opportunities to make money.  So, yeah, the markets might be up the next two years, but that doesn’t mean we’ve entered an official “secular bull market”—that is, an extended period of time in which the markets are up.  And we won’t know that until we’re officially into it, which takes 20/20 hindsight years from now.

What almost all bear markets have in common is volatility.  You have to manage volatility.  It’s a silent killer on portfolios.  Go back to your plan.  Make adjustments according to that plan.  Do your best not to lose money and don’t be greedy.  You don’t need to capture the top of the market to meet financial planning goals at risk of a significant drop.  Balance your allocations, reduce your volatility, and even out your returns so that you ultimately meet those financial goals over time.

If you’re wondering if your taxes will go up…

Here’s a short list of what expires on January 1, 2011:

1. Personal income taxes will increase:  10% to 15%, 25% to 28%, 28% to 31%, 33% to 36%, and those in the 35% bracket move up to 39.6%.   Remember, that’s just a federal hike. State taxes get put on top of that.
    
2. The “marriage penalty” will start from the first dollar earned.
    
3. The child tax credit drops from $1,000 to $500 per child.  The dependent care and adoption tax credits are reduced.
    
4. The marriage deduction reverts to the single deduction amount.
    
5. The “death tax” returns, with the top tax rate on estates over $1 million going to 55%.
    
6. The capital gains rate increases from 15% to 20%.
    
7. The dividends tax increases from 15% to 36.9% (and another 3.5% increase in 2013 for healthcare reform).
    
8. If you make an early, non-medical withdraws from a Health Savings Account, the tax increases from 10% to 20%.
    
9. Tax benefits for education tuition and fees will not be available.  Tax credits for education will be limited.
    
10. Teachers can no longer deduct classroom expenses.
     
11. Employer-provided educational assistance stops.
     
12. Many families will no longer be able to deduct student loan interest payments.

With Medicare and Social Security in trouble, a war on terror, and an aging population, I can’t see taxes going lower. What does this mean for you?  Maybe it’s time to start looking at saving strategies that allow for tax-free growth and tax-free access.

What does this mean and why do you care?

Warning:  Remember, this is a blog.  The goal here is to present the big picture on sometimes complicated subjects. By design, I oversimplify.

First, it will likely mean higher rates.  Mortgage-backed securities have bond-like quality.  They sell with a price (what they cost) and a yield (what they earn).  The law of supply and demand drives price and yield.  Sorry to haunt you with Economics 101. If prices are high, the yield goes down (which generally drives people to sell).  If prices are low, yield is high (driving people to buy).  If the Fed stops buying those securities and there is no other buyer, prices will drop to attract those buyers, yields will go up as a result, and those yields are directly correlated to mortgage interest rates, which means—you guessed it—that interest rates on mortgages have to go up as well.  Got it?

Second, understand that just a few years ago, the Fed owned no MBSs.  None.  By March, it will own $1.5 trillion.  Trillion with a T.  This means that $1.5T is now in the marketplace.  Too much money in the marketplace can mean greater inflation (too much money chasing the same amount of goods).  Now, so far, we haven’t seen greater inflation.  It’s the Fed’s job to keep that in check.  Someone also has to pay for these purchases, meaning that the American taxpayer is likely going to have to pony up money to cover it.  That may mean higher taxes—higher income taxes, higher capital gains taxes, and the list goes on.

We can’t predict the future, but we can do our best to anticipate what might be coming around the blind curves in the road.  This might be a good time to consider refinancing into that 30-year fixed-rate loan if you haven’t already.  This might be a good time to consider a loan modification.  This might be a good time to consider retirements and education funding plans that provide a tax-free component.

As a member of the Estate Planning Team, I can work with clients to implement a tax strategy called the Deferred Sales Trust, which just got its private letter ruling from the IRS this summer.  This strategy allows owners of highly appreciated assets—real property, businesses, private stock—to sell those assets and defer the capital gains taxed owed. Those clients can then earn money on the money they owe the government and can come out ahead financially with proper planning.  Even in a down economy.

How the DST works

The process starts with a property owner transferring ownership of the property to a dedicated trust, which promises to pay the client with an “installment sales contract.”  The trust then sells the property, stock or other capital asset to the buyer. The contract promises payments to the owner or their trust and those payments can be structured to continue to future generations with additional estate planning.  The tax code does not require payment of the capital gains tax until the seller starts receiving installment payments.  The DST is not unlike a no-risk “seller carry-back” financing structure.

The Deferred Sales Trust has the ability to generate substantially more money over the long run than a direct and taxed sale. It is also superior to a direct installment sale as the concerns of a defaulting buyer are eliminated.  Check it out:  www.mydstplan.com/jlanning