A beneficiary form for an IRA sounds pretty straight forward.  You fill out the application, write down your beneficiaries and you are done, right?  Wrong.   Mistakes on beneficiary forms are one of the least understood and least paid attention to areas of financial planning. Yet, they can be very costly if mistakes are made or the custodial provisions in the contract are not understood.  Last month we talked about how to stretch an IRA into a Multi-Generational IRA and the benefits of doing so.   This month we wanted to dive into the details of whether a Multi-Generational IRA is right for you.

Two questions you want to consider are:

1. Do you have a substantial retirement account that you want to leave to your children or even grandchildren?
2. Do you want to mitigate or even eliminate taxes on your IRA or 401k?

If the answers to either one of these are yes, please fill out a beneficiary review checklist if you haven’t done so already (call our office if you haven’t received one) and send it back to us so we can see if a Multi-Generational IRA is an appropriate next step for you.

Lone Ranger -

10 Wall Street equity strategists forecasted where the S&P 500 would finish 2011.  9 of the 10 prognosticators predicted the S&P 500 would end the year at 1325 or higher (note that the index ended 2010 at 1258).  Douglas Cliggott of Credit Suisse was the lone dissenter from the majority belief, forecasting a 1250 year-end value for the S&P 500.  The stock index finished 2011 at 1258.  (The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.) (source: 12/20/10 issue of Barron’s).  

Big Surprise -

13 Wall Street bond market forecasters predicted on 12/20/10 where the yield of the 10-year Treasury note would be on 12/31/11.  12 of the 13 strategists believed the yield, which was 3.29% as of 12/31/10, would be at least 3.50% as of 12/31/11.  The actual 12/31/11 yield was 1.88% (source: Barron’s). 

Humble Pie -

Bill Gross, portfolio manager of the world’s largest bond fund, said on 2/15/11 that “inflation will go up and bond prices go down.”  As of 2/28/11, Gross had sold all of his fund’s holdings in US Treasury debt in anticipation of rising interest rates.  The yield on the 10-year Treasury note was 3.42% on 2/28/11.  The yield on the 10-year Treasury note was 1.88% on 12/31/11.  The yield on the 30-year Treasury note was 4.42% at the start of last year and 2.89% at the end of 2011.  (source:  Financial Times). 

Never is a Long Time -

Treasury Secretary Tim Geithner was asked on 2/07/10 whether the USA could ever lose its top credit rating.  Geithner responded “that will never happen to this country.”  S&P downgraded the United States from AAA to AA+ on August 5th , 2011.  The USA had been AAA-rated for 70 years (source:  ABC News).    

So what impact does this have on our investments you might ask?   Since we invest in US Treasury bonds and certain segments of the S&P 500 from time to time, we thought you might be interested in how the “expert’s” forecasts turned out.   Funds around the world continue to buy US debt (source: Wall Street Journal) and overall the stocks ended up about where they began.   We have made ETFs the core of your portfolio so we can have the flexibility to adapt to what is happening in the economy and the world markets based on what you need, not what the experts are predicting.    We also continue to execute our Advance and Protect strategy for you so that we focus on protection and our disciplined sell strategy rather than just buy and hold and hope for the best.   I heard from an investment advisor that “the market will do the opposite of what the majority of people think it will do at any one time,” and that’s what we have to be prepared for today.

YES, IT’S AN ELECTION YEAR….

As you may know by now, we are in a Presidential election cycle and voters are going to be asking themselves “Am I better off economically than I was four years ago?”  While there are many factors and issues that go into voter preferences, this is the major determinant in how Americans will vote in 2012.   During the last cycle, it looked like the economy was slipping but there was no incumbent running for reelection.  Towards October and November of 2008 it dived into a full power slide which in turn may have impacted the election significantly.  This time, employment and growth figures seem to be picking up momentum so we will see where that leads us.

We wish you and your families all a very Happy New Year and look forward to seeing and talking to you as we review your 2012 budgets and plan ahead for the year.

“Much Ado About Nothing” is one of Shakespeare’s famous comedies and, surprisingly, the title succinctly summarizes the U.S. stock market in 2011.

There was “much ado” during 2011 as we experienced one of the most volatile years on record. For example, regarding the S&P 500 index stocks, Bloomberg said, “Individual stocks were more volatile than in 2009 and 2010, with 55 losing more than 30 percent this year compared with a total of 13 in the prior two.”

On top of that, “Stocks swung at a daily rate of twice the 50-year average after the S&P 500 reached a three-year high in April.” After hitting that high in April, the S&P 500 then plunged 19 percent over the next five months. Continuing the whiplash, the market staged a remarkable comeback and that’s where the “about nothing” comes in to play.

By the time the final trades were placed on December 30, the S&P 500 ended the year exactly where it started – and we mean exactly! It started the year at 1,257.6 and it ended the year at 1,257.6. Yet, during that time, it moved up or down a total of 3,240 points when you sum the absolute daily changes on a closing basis, according to The Chart Store via Ritholtz.com. So, after all the volatility, after all the worrying, the market ended the year right where it began. Whew!

Despite the year ending in a push, here are 10 newsworthy items that hit the headlines.

1. Europe reached crisis mode. Several European countries experienced severe budget problems including Greece and Italy while the dithering of European politicians kept markets on edge. The three main causes of the crisis were 1) excessive government spending leading to 2) excessive government debt coupled with 3) slow economic growth.
Source: Anthony Sanders, Professor of Real Estate Finance at George Mason University, December 15, 2011

2. Interest rates continued to fall. The 10-year Treasury ended the year yielding below 2 percent and the 30-year yielded below 3 percent. On a total return basis, the 30-year Treasury jumped 35 percent in 2011, which is higher than every stock in the Dow Jones Industrial Average!
Sources: The Wall Street Journal; Barron’s

3. The Middle East rose in protest. Mass protests swept the Middle East, governments were overthrown, and the political landscape was dramatically reshaped. The reverberations will last for years.
Source: The Economist

4. Apple and Steve Jobs were everywhere. Apple was 90 days away from bankruptcy in the late 1990s, but through the magic of Steve Jobs, the company briefly became the world’s most valuable company in 2011 – surpassing Exxon! The iPhone was the #1 most searched term on Yahoo! for the year. And, yes, Steve Jobs passed away from cancer at the much too young age of 56.
Sources: Bloomberg; Yahoo! News

5. Japan was rocked with a massive earthquake and tsunami. The devastating power of Mother Nature claimed more than 15,000 lives, shocked financial markets, and disrupted business around the world. The pain and scars of this tragedy will remain for many years.
Source: Bloomberg

6. The U.S. credit rating got “dinged.” In August, Standard & Poor’s downgraded the AAA credit rating of the United States due to political bickering and unsustainable budget deficits. The stock market promptly fell yet, surprisingly, interest rates ended the year at extremely low levels.
Source: Bloomberg

7. Gold kept its luster. Despite weakness at the end of the year, gold prices finished the year in positive territory for the 11th consecutive year. In times of uncertainty, investors have shown a preference for the yellow metal.
Source: The Economic Times

8. Foreign stock markets took it on the chin. Unchanged in the U.S. looks good compared to China, which fell 22 percent; Hong Kong, down 20 percent; Brazil, down 18 percent; Germany, down 14.7 percent; and Britain, down 5.6 percent. There’s no place like home!
Sources: Associated Press via Yahoo! News; Bloomberg

9. Burgers and banks were bookends. The best performing stock in the Dow Jones Industrial Average in 2011 was McDonald’s, which rose 31 percent. At the other extreme, Bank of America was the worst performer dropping 58 percent. Looks like a lot of people ordered an extra fry with that Big Mac.
Source: Associated Press via Yahoo! News
  
10. “Planking” became a worldwide phenomenon. Traced back to a 20-something Australian, planking involves lying face down on the ground with your arms at your side. The “trick” is to do it in unusual places or atop peculiar objects. The unrelated “fitness” version of planking also made headlines in 2011 when a 71-year-old Wisconsinite named Betty Lou Sweeney set a new Guinness World Record by holding an abdominal plank for an incredible 36 minutes and 58 seconds. What’s even more incredible is in 2009 she was “severely overweight and nearly died from complications from an infection that went septic and shut down her kidneys.” Two years later and 100 pounds lighter, she set the world record. Yes, there’s hope for all of us!
Source: Yahoo! News

Returns

Notes: * This newsletter was prepared by Peak Advisor Alliance. * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Past performance does not guarantee future results.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.

Weekly Focus – Think About It

“The bad news is time flies. The good news is you’re the pilot.”
–Michael Altshuler, speaker, entrepreneur

How the Three-Act Drama Unfolding in Egypt

May Affect Your Money

After 30 years in power, it took only 18 days to topple Egyptian President Hosni Mubarak. He capitulated to the demands of the protesters and resigned as President. Now comes the hard part.

Since the glory days of ancient Greece, we’ve had the three-act play. You know how it goes. Act I sets the stage, introduces the characters and identifies the main problem. Act II is the most important act because the main problem becomes much more dangerous and difficult and the protagonist of the story looks like they will lose. Act II usually ends on an emotionally-charged cliffhanger so you’ll be compelled to come back from intermission. Act III pulls it all together and the story wraps up with the protagonist (usually) winning and everybody (usually) living happily ever after. Ah, if only real life was so neat and tidy!

What’s happening in Egypt could follow this script—or not.

We’ve just completed Act I as the protesters were able to chase Mubarak out of office. Act II is now starting as the country tries to move toward a democratic society. However, with parliament dissolved, the constitution suspended and elections for a civilian government still about six months in the future, it could be rocky. As one of the protesters said in a Wall Street Journal article on the day of Mubarak’s resignation, “It’s easy to throw stones at the aggressor but it’s not easy to chart a new course. Our hard work begins tomorrow.” As today’s youth would say, “True that.”   

While it’s too early to know the outcome of Act II or Act III, it may make sense to look at two potential extreme outcomes. These bookends give us a sense for a possible worst case and best case.

Extreme Outcome One

If Egypt is not able to pull a democracy together and internal squabbling spills into neighboring countries, it could be a serious problem for the world. The Middle East can be a powder keg and with its strategic importance in the oil market, any disruption there could send the world economy into a tailspin. Neighboring countries are also experiencing unrest among their people so the call for reform in the region is strong and certainly not over yet.

Extreme Outcome Two

On the positive side, the changes occurring in the Middle East could usher in a new era of democratic reforms that lead to faster economic growth and rising stock prices. Remember the fall of Eastern Europe’s Soviet satellite states and the toppling of the Berlin Wall in 1989? The decade that followed was a strong one for worldwide economic growth and stock prices. If the fall of Eastern Europe is a blueprint, then there could be some rocky, but survivable times ahead followed by a long period of growth.

The Impact of Technology and Social Media

One of the big differences between the fall of Eastern Europe’s dictators back in the late 1980s and the situation in the Middle East is the rise of the Internet, and, in particular, social media. The educated, Internet-savvy young adults who helped fuel the protests in Egypt reportedly used Twitter and Facebook to mobilize their followers. While the fax machine was the technology of choice back in 1989, the tools of today are exponentially more powerful.

Victor Hugo said, “An invasion of armies can be resisted, but not an idea whose time has come.” For the Middle East, that idea is political and economic freedom. Our interconnected world enables the far reaches of the globe to see how the politically free and economically prosperous countries enjoy a relatively high standard of living. The people in these emerging countries see it on TV. They read about it on the Internet. They travel to our country and become educated in our universities. They like what they see and now they want it for their home countries.

A few months ago, nobody was predicting the imminent downfall of Hosni Mubarak. His swift decline is another example of how we live in a “speeded up” world of instantaneous communication and a desire for immediate gratification. That potentially dangerous combination means the ultimate denouement of this unfolding drama is anybody’s guess.

As your advisor, though, we’re not in the guessing game. Instead, we are actively monitoring the start of Act II and its potential implications for your investments. Regardless of how this drama unfolds, we will do our best to try and meet your goals and objectives.

In the meantime, please let us know if you have any questions or concerns.

2010, “The Year of the Roth IRA”

While the cap on who is permitted to convert a traditional IRA to a Roth IRA has been permanently repealed, a special provision that allows conversions to be split into each of the next two tax years will expire on December 31st.  Among other benefits, Roth IRA conversions can be an especially powerful retirement and tax planning tool for those that feel they may end up in a higher tax bracket in retirement and have extra liquid funds to “prepay” their taxes on retirement accounts.

Don’t Forget those RMDs

In 2009, those age 70 ½ or older who were subject to an RMD (Required Minimum Distribution) were given a year’s holiday from taking a distribution from their IRA and qualified retirement plans.  That holiday has come and gone and it’s important to resume those RMDs in 2010.

Reviewing Your Investment Plan

Each year your investments should be reviewed to ensure your holdings are appropriate for your risk tolerance and return expectations so that you have the highest likelihood of accomplishing your financial goals.  Within your overall investment plan, an end-of-year investment review should allow you to position your holdings so that you can benefit from the current economic cycle.

Allocating Income and Investments to Minimize Taxes

Many of the Bush Era tax cuts are set to expire or sunset at the end of 2010 and tax rates across most fronts will be changing.  It’s important to review which changes will most affect your financial situation and develop a tax strategy for your current and future income and investments before the year is over.

Avoiding Capital Gains Tax Increase

One area in particular that is changing for 2011 will be how capital gains are taxed.  In all tax brackets, except the lowest, capital gains taxes will be increasing for the first time in 17 years, rising from 15% to 20%.  This means that if you’re planning on selling property with a gain, it might make sense to do so this year instead of waiting.  If however, you have net losses this year (after netting your short-term and long-term gains and losses) you still have a deductable limit of $3,000 from your ordinary income.

Charitable Giving

There are no changes this year or next on types of charitable deductions or deduction limits, but it’s important to note that charitable deductions must be made before the end of the year in order to realize them in 2010.  However, with top tax rates increasing by almost 5% next year, the traditional tax strategy of accelerating deductions and deferring income into the next year may not apply to regular deductions, like charitable contributions, for top income tax filers this year.

Green Home Improvement Credit

Over the last few years, the government has encouraged the public to make investments and improvements in green energy efficiency by handing out tax credits of upwards of $1,500.  These credits are set to expire at year end.

Retirement Savings

Unlike IRAs where you have until April 15th of the following year to make contributions, qualified retirement plans like 401(k)s and 403(b)s require that you make your final contributions before the end of the year.  Once December 31st comes and goes, you won’t be able to bring your contribution up to the maximum of $16,500 for 2010.

We look forward to reviewing these points for each one of our clients as this year winds down and the New Year begins.  If you know of anyone that might benefit from having a year-end review, we’d be happy to meet with them before the end of the year.