You Are Invited to our 1st Fireside Chat of 2011 on Thursday, February 10th

Please join us at Pinnacle Financial Concepts, for our first Fireside Chat of 2011. This is a great opportunity to join us in a very relaxed atmosphere to ask questions, and get prepared for filing your tax return. On Thursday, February 10, from 7:30 to 9:00 a.m. our topic will be “There’s No Such Thing as a Stupid Investment Question” with a bonus (apologies to David Letterman) of “The Top 10 Things to Think About During Tax Season”. We’ll have a basic overview of investment definitions and things to know about investments to spur a discussion on the topic.

Please call 260-9800 x2 to reserve your spot at this chat. There is no charge, but we will limit the number of available seats and schedule an overflow date if needed.   Free coffee and donuts will be served and, as always, this is purely educational, no selling!!

Don’t Be Alarmed by the Financial Scaremongers

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Jane M. Young, CFP, EA

About once a week a client asks me about the latest prognostication from some famous so called “financial expert/alarmist.” They are either predicting the demise of the world as we know it or predicting a triple digit increase in the stock market. Maybe I am exaggerating, just a little, but we’ve all experienced those who think they can forecast the future and lead us to “Financial Paradise.” I remind my clients of two things with regard to these “miraculous forecasters.” The first is that most of the TV hosts, radio shows, magazines, and financial authors are in the business of making money by selling magazines, books, and ad space. They are not in the business of providing the consumer with the best possible advice. They want to entertain, tantalize, and terrorize you. This is what gets and keeps our attention. Let’s face it! Good solid investment advice is really boring. It doesn’t change much and doesn’t sell magazines! Secondly, they cannot predict what the market is going to do tomorrow much less six months from now. Historically, no one has ever been able to consistently predict the future of the financial markets. Sure, when you have thousands of people making forecasts a few are bound to get lucky. As a good friend often says, even a blind man eventually hits the bull’s eye.

Develop a solid plan to meet your unique situation and stick with it. Don’t let the financial hype throw you off course. Below are a few quotes that help emphasize the fallacy of placing too much faith in financial forecasts.

“We’ve long felt that the only value of stock forecasts is to make fortune tellers look good. Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children” (Warren Buffett).

“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window” (Peter Drucker).

” We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know” (J.K. Galbraith, US Economist and diplomat).

To Convert or Not Convert – Looking Beyond the Roth IRA Conversion Calculator

Jane M. Young, CFP, EA

As I mentioned in the previous article on Roth IRAs, with a Roth IRA you pay income tax now and not upon distribution. With a traditional IRA you defer taxes today and pay income taxes upon deferral. When you convert a Traditional IRA to a Roth IRA you must pay regular income taxes on the amount that is converted. The advisability of converting to a Roth depends on the length of time you have until you take distributions, your tax rate today and your anticipated tax rate upon retirement and your projected return on your investments.

When you run your numbers through one of the numerous calculators available on the internet you may or may not see a big savings in doing a Roth Conversion. However, there are several other factors that may tilt the scale toward converting some of your money to a Roth.

• Income tax rates are currently very low and there is a general consensus that they will increase considerably by the time you start taking distributions. With a Roth conversion you pay the tax now at the lower rates and take tax free distributions when the tax rates are higher.

• The stock market is still down about 25% from where it was in August of 2008. There is a lot of cash sitting on the sidelines waiting to be invested once consumer confidence is restored. You can pay taxes on money in your traditional IRA while the share prices are low and take a tax free distribution from your Roth down the road when the market has rebounded.

• You may have a sizable portion of your portfolio in tax deferred retirement accounts on which you will have to take required minimum distributions (RMD). This could put you into a much higher tax bracket. By converting some of your traditional IRA into a Roth you can get some tax diversification on your portfolio. This will lower your RMD– because there is no RMD on a Roth IRA. Diversifying your portfolio between a traditional IRA and a Roth IRA enables you to take your distributions from the most appropriate pot of money in any given year.

For more information on Roth IRAs and the new tax laws for 2010 please review the articles previously posted under Roth IRAs.

10 Investment Principles that Never Go Out of Style

Jane M. Young CFP, EA

Frequently people talk about how everything is different and we should change the way we invest. Yes, we have just experienced a very difficult year with some major changes in our economic situation. However, every time we go through a major market adjustment if feels like “this time is different”. We could take numerous comments made at the end of the last bear market and insert them into today’s headlines without missing a beat. I call this the “recency effect”; bad times always feel more desperate while we are experiencing them. We need to step back and look at the big picture; don’t throw the baby out with the bathwater. Good, sound investment fundamentals are still valid. Some people may reassess their tolerance for risk, start saving more money or cut back on their discretionary spending – but the following investment principals are good, time tested guidelines that everyone should follow in any market.

1. Don’t time the market – The stock market is counter-intuitive. Generally, it may be better to invest when things seem most dire and sell when everything is rosy. It is impossible to predict the movement of the stock market and history shows that those who do frequently miss out on big upswings.

2. Dollar Cost Average – This enables you to invest a set dollar amount every month or every quarter regardless of what the market does. As a result you buy more shares when the price is low and fewer when the market is high. Dollar cost averaging helps you mitigate risk because we don’t know what the stock market is going to do tomorrow.

3. Maintain at least 3 to 6 months of expenses in an emergency fund – This is especially important in difficult financial times when stock market values are low and unemployment is high. Unless you have a very secure job I currently recommend a 6 month emergency fund.

4. Don’t invest in anything you don’t understand – If you just can’t get your head around something after it’s been explained or you have done a reasonable amount of research don’t invest in it. If an investment opportunity is overly complicated something may be rotten in Denmark.

5. Don’t Chase Hot Asset Classes – Today international funds may be skyrocketing and tomorrow it may be small cap domestic stock funds. Don’t forget what happened to the stock market after the dot.com bubble burst.

6. Diversify, Diversify, Diversify – Everyone needs to diversify with a mix of fixed income and equity investments that is consistent with their own unique investment goals and objectives. Although most stocks dropped in unison over the last year, I still think there is value in diversifying between different types of stock mutual funds. I believe we will see some categories of stocks outpace others as the market rebounds. Depending on your risk tolerance, a small allocation in commodities and real estate may be advisable.

7. Don’t Make Emotional Decisions – Many investment decisions are triggered by fear and greed and they are equally damaging. Don’t make rash decisions based on emotion. Remember the stock market is counter-intuitive.

8. Don’t put more than 5% of your assets in one security – Any given company can go bankrupt as we have seen with many financial and automobile firms over the last year. I encourage the use of mutual funds over individual stocks to help mitigate this type of risk. If you do invest in individual stocks don’t put too much faith in any one company. If you are investing in your own company and you have a strong understanding of the firm’s performance you could go up to 10%.

9. Be tax smart – Take advantage of tax advantaged retirement plans such as Roth IRAs and 401k plans. Consider tax consequences when re-balancing your portfolio. Use a bear market to harvest some tax losses and off-load some bad or inappropriate investments.

10. Be aware of fees and surrender charges – When selecting investments be aware of high fees and commissions. Tread cautiously with anything that contains a contingent deferred sales charge. Many clients have come to me with a desire to sell or transfer previously purchased investments, usually annuities, only to find they have a 5-10% surrender charge if they sell within ten years of purchase. A surrender charge can have a big impact on your flexibility. If you really want a variable annuity buy one with low fees and no surrender charges.

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