After a period of growth and semi-stability where many hoped that the worst of the market volatility was behind us, last month we experienced dramatic downturns not seen since the dark days of 2008. Some will blame the Dow’s freefall on Standard & Poor’s decision to downgrade U.S. Government debt from its AAA to a lesser AA+ credit rating. (See the “S&P Downgrades the U.S.: Five Things” for details.)
While the downgrade is unprecedented, in my view, it is not responsible for the profound market volatility we’re experiencing. More likely, the steep decline reflects the market’s broader frustration with the difficulty our elected officials had striking a debt ceiling compromise and the fact that Washington’s solution is a temporary fix. Congress and the President ultimately agreed to a budget cut of $2.1 trillion, half of the figure initially debated.
Standard & Poor’s has grabbed all the headlines, but it’s important to note that the other two major credit agencies, Moody’s and Fitch, elected not to downgrade U.S Treasuries. Although sticking with their top rating of Aaa, Moody's Investors Service did assign a negative outlook on United States government bonds on August 2. The firm noted that it could take “further action if: (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected.”
Regardless of being on a kind of watch list, U.S. debt still remains among the world's safest investments. In fact, we’ve seen a rally in the Treasury market with the traditional “flight to quality” that occurs when we experience dramatic market downturns. It’s also worth noting that the downgrade to AA+ does not apply to short-term Treasury securities. Accordingly, money market funds, which generally hold a lot of short-term Treasury securities, should be unaffected by the downgrade. There may be long-term negatives, however. China and other foreign countries could demand a higher interest rate to hold U.S. debt. Additionally, consumers could face higher rates for mortgages, car loans, and student loans. Stay tuned.
Showing posts with label Debt Downgrade. Show all posts
Showing posts with label Debt Downgrade. Show all posts
Monday, September 12, 2011
Monday, August 15, 2011
Brokerage Firms Must Report Investment Gains; Plus S&P Downgrade
In an effort to ensure everyone pays their fair share of taxes, on January 1st of this year, the Federal government began requiring brokerage firms and other custodians to calculate and report gains or losses on certain customer trades to the IRS. This requires knowing not only the cost basis (the amount paid for the security), but also establishing the method to calculate gains. Most custodians use the “first-in, first-out” method for equities and the average cost method for mutual funds to determine cost basis.
You should consult your custodian to determine what methods are available to you and to determine how your portfolio is setup. For our clients we utilize a hybrid of the "high cost" method. We first try to determine if there are any trade lots that can be sold at a loss. Once that has been done we sell the lots with the highest cost basis that are over 12 months old first. This gives us the maximum tax efficiency on any trading in our client accounts.
Our portfolios’ tax-efficiency has always been a major concern. While many give up on tax loss harvesting in years when investors have not registered significant gains, the exercise is never a waste of time. Remember, harvested losses can offset any gains and up to $3,000 of net capital losses can be deducted from their ordinary income on their tax return for the year. Net losses above that $3,000 can be carried over to future years until they've all been used up by future portfolio gains.
As we expect capital gains tax rates to increase in the future, the tax loss harvesting approach makes even more sense. Simply, losses you book today mean gains that are otherwise likely to be taxed at a higher tax rate in the future could be tax free.
Utilizing “tax swaps” whereby we sell a losing position and simultaneously purchase a similar security (mindful of wash sales rules which prohibit selling and then buying the same security within 30 days) allows us to maintain exposure to the asset class while we harvest losses.
S&P Debt Downgrade:
Unrelated to this blog topic is the subject of Standard & Poor's downgrade of the U.S. credit rating from AAA to AA+. This will be brief but as I mentioned to many, I felt investors and the media made more of this matter than what it deserved. The U.S. dollar is still the global reserve currency and Standard & Poor's and others don't exactly have a pristine record when it comes to making accurate credit ratings.
On the lighter side, I wanted to share the formula below that a friend shared with me. I don't know where he got it, and I am unable to give credit to the person who created it. If someone knows who created it, I will gladly give them credit. In the meantime, I hope you can enjoy the humor of it:
No offense is intended to be directed at the POTUS, Senate Democrats, House Republicans, Tea Party or Wall Street. Just enjoy it!
You should consult your custodian to determine what methods are available to you and to determine how your portfolio is setup. For our clients we utilize a hybrid of the "high cost" method. We first try to determine if there are any trade lots that can be sold at a loss. Once that has been done we sell the lots with the highest cost basis that are over 12 months old first. This gives us the maximum tax efficiency on any trading in our client accounts.
Our portfolios’ tax-efficiency has always been a major concern. While many give up on tax loss harvesting in years when investors have not registered significant gains, the exercise is never a waste of time. Remember, harvested losses can offset any gains and up to $3,000 of net capital losses can be deducted from their ordinary income on their tax return for the year. Net losses above that $3,000 can be carried over to future years until they've all been used up by future portfolio gains.
As we expect capital gains tax rates to increase in the future, the tax loss harvesting approach makes even more sense. Simply, losses you book today mean gains that are otherwise likely to be taxed at a higher tax rate in the future could be tax free.
Utilizing “tax swaps” whereby we sell a losing position and simultaneously purchase a similar security (mindful of wash sales rules which prohibit selling and then buying the same security within 30 days) allows us to maintain exposure to the asset class while we harvest losses.
S&P Debt Downgrade:
Unrelated to this blog topic is the subject of Standard & Poor's downgrade of the U.S. credit rating from AAA to AA+. This will be brief but as I mentioned to many, I felt investors and the media made more of this matter than what it deserved. The U.S. dollar is still the global reserve currency and Standard & Poor's and others don't exactly have a pristine record when it comes to making accurate credit ratings.
On the lighter side, I wanted to share the formula below that a friend shared with me. I don't know where he got it, and I am unable to give credit to the person who created it. If someone knows who created it, I will gladly give them credit. In the meantime, I hope you can enjoy the humor of it:
No offense is intended to be directed at the POTUS, Senate Democrats, House Republicans, Tea Party or Wall Street. Just enjoy it!
Subscribe to:
Posts (Atom)
Posts
