| February 18, 2010 |
| |
|
Brian R. Carruthers, CFP®, CMTSM
|
First Quarter 2010 |
|
|
|
We had a great 2009 with all three
portfolios gaining over 30%. After
such a terrific rally, it's normal for
the markets to correct their
gains (decline) and instill a sense of
fear back into the markets. Today, we
are going through such a process which
normally takes about 3 - 6 months to
complete.
We are now playing defense in all our
portfolios, which means in our opinion
there is too much risk in the near
term. As such we have a 100%
allocation in money markets. This can
change at any time and I'm monitoring
the markets closely for clues. I'll
keep you posted. The bottom-line is we
are long term bullish, but near term
cautious.
Sincerely,
Brian R. Carruthers, CFP, CMT
|
|
Benefits of
Active Management Acknowledged
The last few months have seen the
publication of several studies that are
restoring a bit of sanity to what passes
for investing knowledge. For years,
investors have been told that they can't
beat the market so there is no use in
trying. The "right" investment is an index
based mutual fund with the lowest expense
ratios maintained many investment
"authorities."
To many of us, this seemed equivalent to
saying all education/cars/etc. are the
same, so there's no reason to purchase
anything but the very cheapest. Now
recognition is beginning to filter out
that perhaps there is a difference in the
results of the truly good investors.
From the New York University Stern School
of Business comes a study released in
November 2009 finding that "fund managers
who invest based on macroeconomic trends -
and are willing to adjust their portfolios
as those trends change - are the managers
most likely to add value for investors."¹
The study identified the top 25% of
actively managed equity mutual funds by
analyzing data from January 1980 through
December 2008. This group showed
proficiency in their ability to select
stocks during expansionary economic
periods as well as recessions.
D. Bruce Johnsen, a professor of law at
George Mason University in Arlington, Va.,
has published a recent study, Myths About
Mutual Fund Fees: Economic Insights on
Jones v. Harris in which he concludes:
"Lower advisory fees don't necessarily
benefit investors." What matters is not
how much the fees are, but how the fund
performs.²
A study conducted by Robert Isbitts, chief
investment officer with Emerald Asset
Advisors, of 34 categories of mutual funds
found that the ten best performers were
also among the most expensive. The results
of the study are summarized below:
- Of the 34 mutual fund categories
studied, the 10 that produced the highest
10-year alpha had an average expense ratio
rank of 28, placing them among the most
expensive.
- The top 10 alpha rankings (alpha is a
measurement of the value added by the
manager beyond the gains of the market)
were dominated by small and midcap fund
categories. These managers in general were
able to maneuver better than their
large-cap competitors, who could not
distinguish themselves from investing in
an index.
- World allocation funds ranked eighth
in alpha (and 29th in cost). This is
likely due to a combination of manager
skill in this area and the long slide in
the U.S. dollar, which has lifted non-U.S.
investments.
- The long-short category of mutual
funds ranked seventh in alpha, despite
being the highest-cost fund group by a
wide margin.³
- "If you want skill, don't be afraid to
pay for it," concludes Isbitts.
1
" Market timing trumps buy-and-hold
strategies during market swings, says NYU
study" by David Hoffman, InvestmentNews,
November 10, 2009
2 "Mutual fund fees fight may be much ado
about nothing," Sheryl Nance-Nash, Daily
Finance, an AOL money and investing site.
Nov 5, 2009.
http://www.dailyfinance.com/2009/11/05/mutual-fund-fees-fight-may-be-much-ado-about-nothing/
3
"Dispel the low-cost mutual fund mixup,"
Boomer Market Adviser, Published 11/1/2008,
http://www.boomermarketadvisor.com/Issues/2008/11/Pages/Dispel-the-low-cost-mutual-fund-mixup.aspx
|
2010
Window Opens for Roth IRA ConversionS
In 2010, anyone, regardless of income level,
may open or transfer funds from an IRA
account to a Roth IRA, thanks to the Pension
Protection Act of 2006. Prior to this year,
only taxpayers with an Adjusted Gross Income
of $100,000 or less have been allowed to
convert funds from their IRA into a Roth
IRA.
With a Roth IRA, all contributions are
after-tax (i.e. non-deductible), however,
earnings from the account can be withdrawn
free of federal income taxes once the
individual reaches retirement. Earnings from
assets transferred from a IRA account, are
not available for tax free withdrawal until
five years have passed since conversion and
the account holder is at least 59½ years
old. There are no minimum distribution
requirements for a Roth IRA.
To convert existing IRA funds to a Roth IRA,
taxes must be paid on any pre-tax IRA
contributions, but there's another benefit
to converting in 2010. For funds converted
in 2010, the tax liability can be paid one
half in tax year 2011 and half in tax year
2012. Convert in 2011, and taxes will be
due on the full conversion amount for tax
year 2011.
Before you opt to convert to a Roth,
however, you need to run the numbers.
Although all earnings from a Roth IRA are
exempt from federal income taxes, by paying
taxes on all contributions in advance you
lose the earning power of those funds. You
may also be paying taxes at a higher rate
than you might if you held your IRA into
retirement when your tax rate might be less.
Typically, a Roth conversion will make the
most sense for individuals with years to go
before they retire. The closer you are to
retirement, the less value a Roth might have
unless your goal is to pass on the IRA to
your heirs. There are no distributions
required from a Roth IRA during your
lifetime and by converting to a Roth and
paying the necessary taxes, you will shrink
your taxable estate. That could mean
bequeathing a pool of income-tax-free money
to your heirs.
If you have an IRA in which after-tax
contributions have been made, you only need
to pay taxes on accumulated earnings to
convert to a Roth IRA.
|
Investing in
Gold ... Taxes and Other Cautions
With gold prices exceeding $1,200 per ounce
in December, many investors are looking for
ways to add exposure to gold to their
portfolios. But investing in gold comes with
its share of hazards, from taxes to
volatility, that investors need to be aware
of before, not after, they invest.
With respect to taxes, gold is considered a
collectable and gains on gold held for over
one year are currently taxed at 28% versus
10% and 15% for equities (in 2011, capital
gains rates will revert to pre-2003 rates,
generally 20%). Short-term gains from buying
and selling gold, like short-term gains on
equities, are taxed at the individual's
personal income tax level.
Collectible gold includes gold coins and
bullion as well as ETFs and other
investments that hold actual gold in their
portfolios. Buy gold directly or indirectly
and it becomes a collectible. If you choose
to hold your own gold, you have additional
issues of storage and security.
One way to get around the collectible issue
is to buy stock in companies that mine gold
or provide services to gold mining
companies. But this adds new variables to
the value of the investment including
management abilities, quality of reserves,
extraction costs, etc.
Volatility is another consideration. Gold
is gold. It does not generate income or
increase in value because of the growth of
the underlying asset. Its value reflects
the emotions of the market, with its rise
generally signaling very nervous markets and
at the worst the potential for a major
market crash. As a result, gold is more
volatile when the price is rallying. With
equities the reverse is typically true. This
volatility is reflected in the spread
between high and low prices each year in the
chart below.
Historical
London Spot Gold Prices
If you had invested in gold at its last high
in 1980, 25 years would have gone by before
it came back to its earlier high. This is
why professional traders consider gold a
short-term investment. With that said,
adding gold to a portfolio needs to be done
as an active investment strategy with the
awareness that gold will have to outperform
other assets to make up for its high tax
rate |
|
| |
Brian R.
Carruthers, CFP®, CMTSM
Brian R. Carruthers & Associates
Your Conservative Advisory Firm Since 1990
301 Forest Avenue
Laguna Beach, California 92651-2115 USA
Telephone: 1-949-464-1900
www.gobcafunds.com
brian@gobcafunds.com |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFP®, Certified Financial Planner™ and 
are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board's initial and ongoing certification requirements.
