Savvy Mutual Fund Tax Moves

Year-end is always hectic, but it’s well worth taking the time to consider a few investment moves that could have positive tax ramifications.

First, think about tax-loss harvesting, or selling some of your losing positions at a loss in order to offset capital gains elsewhere in your portfolio. Also you need to manage mutual fund distributions. Remember, mutual funds must pay out at least 90% of their net capital gains and income to shareholders every year. Therefore, funds typically issue shareholder distributions toward the end of the year. If you’ve registered a loss in a fund that’s set to make a distribution, you might consider selling it before the distribution is issued. Not only can you use the loss to offset other gains, but you avoid taxes on the distribution.

Similarly, you might consider putting off until next year the purchase of a new fund poised to make a distribution. That is, if you buy the fund now, you will owe taxes on any distributions you receive by the end of year even though you did not participate in the fund’s growth over the course to the year.

You might think that the market’s negative performance this year would mean a lack of gains to distribute. However, it’s always worth checking to be sure. Your fund company's website should have estimates for year-end distributions.

However, if you own mutual funds in your 401(k), IRA or other tax-advantaged retirement account, you don't have to worry about these fund distributions because they will not be taxed until you begin withdrawing your money in retirement.

Feeling Squeezed?

Call it the middle-class squeeze. According to Paul Taylor, executive vice president of the Pew Research Center, income is shifting to the top tier of American households, especially those in the top 5% who earn more than $181,000 annually.

Just how much of American income has shifted to the top wage earners? The Pew Research Center found that in 2010, the top 20% of U.S. households collected 50.3% of the nation's income, up from 49.9% in 2006. The lowest-earning one-fifth of households collected just 3.3% of the nation's income, down from 3.4% in 2006. Three-fifths of households, or 60% collected just 46.3% of the income last year, down from 46.7% in 2006.

These increases for top tier households and decreases for the middle class may seem relatively minor, a percentage point here and there. However, according to Heidi Shierholz, an economist with the Economic Policy Institute, in the 1970s, 53% of the nation's income went to the middle class. She notes that middle class households began losing significant ground in the early 2000s and that the downward trend has been exacerbated by the recent recession and our difficult employment market.

With record unemployment, a struggling housing market, and continued market volatility, it is unlikely the middle class squeeze will cease anytime soon. That makes it that more crucial than ever to tend to your financial plan. Now’s a great time for an annual review to construct your balance sheet, evaluate your goals and ensure that your investment strategy properly aligns with your short- and long-term goals and your risk tolerance.

CDO Chief Daddy Officer

Many of you know that Bernhardt Wealth Managment has two traditions during the Holiday Season.  One is that we make contributions to charities in honor of our clients and the other is that we send our clients and strategic relationships a book.  This year is the 14th year we have sent a book, and we were pleased to send CDO Chief Daddy Officer: The Business of Fatherhood by Christos Efessiou.

Chris told me about the book when I first met him last year. As soon as he described the premise of CDO, I knew it would be an outstanding candidate for our gift book. My instincts proved correct when I had the opportunity to read a draft this summer.

I recommend this book to business owners, executives and employees; parents and grandparents; and teenagers, college students and recent graduates. There are lessons that every reader can apply to his or her life. One lesson we can apply is to leverage our business skills to the business of life.

Chris signing books in my office

One reason I like the book so much is that it confirms the reason I started my own independent, fee-only firm to give objective, conflict-free advice to our clients. My passion is to touch each client’s life in a way that allows them to lead the life they want to lead. For some clients hiring us as their personal chief financial officer means they have more time to spend with their family. For others it means they have more time to focus on their business/profession. And for others it means they have more time to give back to their communities or charities that are important to them.

Money is a tool. Peace and contentment do not increase as our net worth increases. Peace and contentment are the byproducts of realizing what is important to you and spending more energy on those things. I don’t think Chris will look back at any point in his life and say “I wish I spent less time with my daughter and more time day trading.”

Chris signing books in my office

I encourage you to get his book (if you don't already have it) and hope you find it inspirational and motivational.  I also invite you to contact me to let me know what you liked about the book.  And finally, I hope you consider writing a review of the book on Amazon.

The entire Bernhardt Wealth Management team and I wish you a happy, safe and rewarding Holiday Season! Please let us know if we can leverage our skills and knowledge to help you or someone you know achieve and pursue what is important to you or them.

Chris and me holding one of the books he signed

If It Sounds too Good to Be True, You Can Bet That It Is

A recent article in the Washington Post, “Children’s Charity Victim of Ponzi Scheme,” caught my eye. Looking to protect its endowment in 2008’s difficult market, the DC-based Hillcrest Children’s Center invested in what Garfield Taylor of Gibraltar Asset Management Group described as a “can’t lose” investment strategy. By mid 2009, the $8 million Hillcrest invested had evaporated in a Ponzi scheme, severely compromising their ability to help orphans and families in need.

Stephen L. Cohen, an SEC official, notes in the piece that this sad story should serve as a reminder to investors. “There really isn’t any such thing as an investment that has zero risk with a high reward,” Cohen said. I wrote an article “A Tragic Case of Misplaced Trust” in the wake of Bernie Madoff’s crimes that outlines steps investors should take to protect themselves. Briefly, investors should choose to work with an independent Registered Investment Advisor who is bound by a fiduciary duty to clients and who uses an independent custodian. Also, it’s crucial not to put all your eggs in one basket and to understand what you invest in.

Above all, however, question the impossible. When an investment manager claims to always beat the market, be skeptical. Simply, when evaluating potential investments, remember the old adage: “If it sounds too good to be true, it probably is.”

Sports Illustrated: In My Tribe

Most of the people who know me know that I love college football and, more specifically, the Nebraska Cornhuskers.  I never attended the University of Nebraska but I grew up on a farm in Nebraska.  There was always work to be done on the farm but on a Fall Saturday I would never be far away from a radio so I could hear the radio broadcast of my beloved Nebraska Cornhuskers and the opponent I hoped they would defeat that day.

My pride for my Nebraska Cornhuskers is about to come forth and I wanted to share with you the first paragraph and last section of an article, In My Tribe, written by Terry McDonell in the November 28, 2011, issue of Sports Illustrated.

First Paragraph:  In the fall of 1980, when SI senior writer Lars Anderson was nine years old and living in Lincoln, his father took him to the Florida State-Nebraska game. With less than a minute left in the fourth quarter, the highly favored Cornhuskers had the ball on the Seminoles' three-yard line, trailing 18-14. That's when heartbreak visited Nebraska: Quarterback Jeff Quinn fumbled. Florida State recovered. Game over. Then, as Seminoles coach Bobby Bowden and his team walked off the field, the crowd rose to its feet in appreciation of the underdogs' hard-fought victory. At first it was just polite clapping, the kind you hear at a golf tournament, but then fans started cheering for Bowden and his players, building to one of the loudest roars of the day. Tears of disappointment ran down Lars's cheeks as his father put his arm around him, pointed to the red-clad fans in full throat and said, "Lars, this is as good as sports gets."

Last Section:  The rearview mirror has always been the best oracle when it comes to sports. More than 30 years after Lars Anderson saw that Florida State-Nebraska game with his father, he was reporting a story about the history of spring football and had lunch with Coach Bowden in Birmingham. Near the end of the conversation, Anderson mentioned that he was from Lincoln. The coach's eyes lit up. Without prompting, he recalled that day three decades earlier when the fans of Nebraska cheered him off the field.

"What a moment," Bowden said, a grin spreading over his face. "Wow."

And then these two men, two generations apart, just looked at each other until Bowden spoke again.

"The classiest thing I ever experienced."

Thanks for indulging me for a few moments to share my love of Nebraska football.  Go Huskers!  Go Big Red!

Could Black Friday Spark a Rally?

Black Friday sales may be the harbinger of a significant surge in consumer confidence that could fuel our economic recovery. According to the National Retail Federation (NRF), Black Friday retail sales were up 16% over last year. The NRF notes that 226 million shoppers hit the stores and online sales over Thanksgiving weekend and spent $52.4 billion.

In more good news, an NRF pre-holiday poll found that shoppers are more optimistic this year than they were last year. Based on that survey, the NRF forecasted that total holiday sales would be up 2.8% to $465.6 billion. However, the wildly successful Black Friday may result in sales beating that estimate. Interestingly, over the last ten years, we’ve seen a 2.6% annual average increase in holiday spending. However, over the course of the previous decade, the average annual increase was 3.4%.

Retailers have a huge incentive to get you to shop until you drop this season. As the NRF notes, about 20% of their sales occur in the less than 30 days between Black Friday and Christmas. For some retailers, such as jewelers, that percentage could be as high as 40%. To resist the holiday message to spend, spend, spend, think of other economies that stress the merits of saving. Over the past three decades, Germany, France, Austria, Belgium, and Sweden have maintained household saving rates between 10 and 13 percent. Conversely, saving rates in the United States dropped to nearly zero in 2005 before inching up to 5% during the credit crisis of 2008. Most recently, our savings rate has fallen to less than 4%, far less than half of what many Europeans save. Think about that as you head to the mall….