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The End of QE2: What Does It Mean for Investors?

2011-06-30T00:52:00.000-04:00

The End of QE2: What Does It Mean for Investors?

Silver Still Heading for $50, Bartels Says: Technical Analysis

2011-05-12T11:14:00.000-04:00

Silver Still Heading for $50, Bartels Says: Technical Analysis

Investment Risks

2009-12-05T07:13:00.001-05:00

What Investment Risks Should I Know About?

Taken by itself, the word "risk" sounds negative. But broken down into what it really stands for in terms of investing, it begins to be a little more manageable. By understanding the different types of risk and keeping an eye on your investments, you may be able to manage your money more effectively. Remember, strategic investing doesn’t mean "taking chances" so much as "making decisions." Long-term investing and diversification may be some of the most effective strategies you can use to minimize investment risk.

Inflation Risk

The main risk from inflation is the danger that it will reduce your purchasing power and the returns from your investments. If your savings and investments are failing to outpace inflation, you may wish to consider investing in growth-oriented alternatives such as stocks, stock mutual funds, variable annuities, or other vehicles.

Interest Rate Risk

Bonds and other fixed-income investments tend to be sensitive to changes in interest rates. When interest rates rise, the value of these investments falls. After all, why would someone pay full price for your bond at 6 percent when new bonds are being issued at 8 percent? Of course, the opposite is also true. When interest rates fall, existing bonds increase in value.

Economic Risk

When the economy experiences a downturn, the earnings capabilities of most firms are threatened. While some industries and companies adjust to downturns in the economy very well, others — particularly large industrial firms — take longer to react.

Market Risk

When a market experiences a downturn, it tends to pull most of its securities down with it. Afterward, the affected securities will recover at rates more closely related to their fundamental strength. Market risk affects almost all types of investments, including stocks, bonds, real estate, and others. Historically, long-term investing has been a way to minimize the effects of market risk.

Specific Risk

Events may occur that only affect a specific company or industry. For example, the death of a young company’s president may cause the value of the company’s stock to drop. It’s almost impossible to pinpoint all these influences, but diversifying your investments will help manage the effects of specific risks.

This material was written and prepared by Emerald Publications.© 2007 Emerald Publications

Growth Stocks vs. Value Stocks

2009-12-03T09:15:00.001-05:00

Investors are often confused about the differences between growth stocks and value stocks. The main way in which they differ is not in how they are bought and sold, nor is it how much ownership they represent in a company. Rather, the difference lies mainly in the way in which they are perceived by the market and, ultimately, the investor.

Growth stocks are associated with high-quality, successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. The P/E ratio is the market value per share divided by the current year’s earnings per share. For example, if the stock is currently trading at $52 per share and its earnings over the last 12 months have been $2 per share, then its P/E ratio is 26. The price-to-book ratio is the share price divided by the book value per share. The open market often places a high value on growth stocks; therefore, growth stock investors also may see these stocks as having great worth and may be willing to pay more to own shares.

Investors who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value), rather than dividends. Although dividends are sometimes paid to shareholders of growth stocks, it has historically been more common for growth companies to reinvest retained earnings in capital projects. Recently, however, because of tax-law changes lowering the tax rate on corporate dividends (through 2010), even growth companies have been offering dividends.

At times, growth stocks may be seen as expensive and overvalued, which is why some investors prefer value stocks, which are considered undervalued by the market. Value stocks are those that tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). Value stocks generally have good fundamentals, but they may have fallen out of favor in the market and are considered bargain priced compared with their competitors. They may have prices that are below the stocks’ historic levels or may be associated with new companies that aren’t recognized by investors. It’s possible that these companies have been affected by some problem that raises some concerns about their long-term prospects.

Value stocks generally have low current price-to-earnings ratios and low price-to-book ratios. Investors buy these stocks in the hope that they will increase in value when the broader market recognizes their full potential, which would result in rising share prices. Thus, they hope that if they buy these stocks at bargain prices and they eventually increase in value, they have the ability to make more money than if they had invested in higher-priced stocks that increased modestly in value.

Growth and value are styles of investing in stocks. Neither approach is guaranteed to provide appreciation in stock market value; both carry investment risk. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments seeking to achieve higher rates of return also involve a greater degree of risk.

Growth and value investments tend to run in cycles. Understanding the differences between them can help you decide which may be appropriate to help you achieve your specific goals. Regardless of which type of investor you are, there may be a place for both growth and value stocks in your portfolio. This strategy may help you manage risk and potentially enhance your returns over time.

This material was written and prepared by Emerald Publications.
© 2009 Emerald Publications

Investors Flock to Bond Funds

2009-12-03T09:08:00.002-05:00

Investors Flock to Bond Funds, But What Happens When Rates Rise?

The amount of money flowing into bond mutual funds hit a dizzying pace this year. If the trend continues, bond funds will attract more than twice as much new money as they did in 2008 and a stunning 11 times more than investors are putting into stock funds this year.1

Although bond funds don’t ordinarily enjoy greater inflows than stock funds, this sometimes occurs during periods of stock price volatility. This development is not surprising, but it is alarming nonetheless. Here’s why.

Interest rates are low and the Federal Reserve is likely to keep them low for the foreseeable future. As long as joblessness remains a problem, the Federal Reserve will be reluctant to raise interest rate targets and, in fact, may have little reason to do so. It has been the Fed’s habit to raise rates when the economy is growing too fast and is at risk of high inflation. But an economy with high unemployment is not likely to suffer from too-rapid growth. Plus, job creation would probably suffer from higher interest rates.

But interest rates will inevitably go up, and when interest rates rise, the value of existing bonds typically falls, which can adversely affect a bond fund’s performance. Of course, the pain will not be evenly spread because bond funds will react differently depending on their objectives, but the effect on the bond market could be pronounced.

Many investors may have piled into bond funds thinking they were a “safe” alternative to stock funds. The S&P 500 lost 37% of its value in 2008, and investment-grade corporate bonds gained 7%.2 Investors who were smarting from their losses may have soured on stocks and decided the conservative return potential in the debt markets might be more appealing than the chance of suffering further losses in the equity markets. In the financial world, these investors are “chasing performance,” but they could be setting themselves up for yet another round of losses.

Bonds vs. Bond Funds

It’s important to note the distinction between bonds and bond funds. An investor who buys individual bonds is typically interested in generating income and preserving principal. This is considered a fairly conservative strategy, and it could help insulate bond investors from fluctuations in interest rates until their bonds mature. Investors who are careful to stagger the maturity dates in their bond portfolios may be able to further reduce the risk of having to reinvest a large percentage of their principal when rates are low.

Bond funds, on the other hand, may employ a less conservative strategy by trading bonds before they mature in order to pursue gains by taking advantage of fluctuating interest rates. This may allow them to offer greater return potential, but usually with higher risk. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with the underlying bonds in the funds.

Bond funds can play an important role in an investment portfolio, but they shouldn’t be thought of as a safe harbor to park money until the stock market settles down. Any decision to purchase a bond fund should be made based on your personal circumstances, such as your time horizon, risk tolerance, and personal goals.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 20092) Thomson Reuters, 2009, S&P 500 Composite Index (total return) and the Citigroup Broad Investment-Grade bond index for the period 12/31/2007 to 12/31/2008. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2009 Emerald.

Getting the Right Mix

2009-12-03T08:59:00.003-05:00

Almost one-third of investors say that none of their retirement savings is going into stocks, according to a recent online poll.1 Some of the respondents cited the current economic climate as a reason for the dearth of equities.

It can be difficult to avoid emotional reactions to changes in the market, but a carefully considered long-term asset allocation strategy may help your retirement portfolio better endure volatility. After all, research suggests that over 90% of a portfolio’s performance is a direct result of how its assets are allocated.2

Asset allocation is the process of dividing your investment dollars among asset classes that often behave differently in different market cycles. An asset allocation strategy may help reduce your exposure to risk and possibly enhance your portfolio’s performance over the long term.

Consider the Factors

The appropriate percentage of equities, debt instruments, and cash equivalents in your portfolio will depend on some key factors:

Financial goals. Are you saving for retirement? Your children’s education? A second home?

Time horizon. When will you need the money: 10, 20, 30 years? How old are your children? When do you want to retire?

Risk tolerance. How comfortable are you with exposure to risk? Do market fluctuations make you nervous? Are you young enough to recover from losses?

These three variables make the appropriate allocation potentially different for everyone. A 55-year-old nearing retirement will have different needs than a 40-year-old with two children preparing for college.

Moreover, investments can be diversified within each asset class to further reduce a portfolio’s exposure to risk. For example, the stock portion of a portfolio can be divided into small/large cap, value/growth, and other categories.

Asset allocation and diversification do not guarantee against investment loss; they are methods used to help manage investment risk. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
After developing an appropriate asset allocation strategy, it is important to periodically revisit and revise your strategy. Over time, outperforming assets may grow and skew your percentages. You may need to rebalance your portfolio in order to maintain your percentages. Also, you may need to make changes to your allocation as you near retirement or as your investing goals change. Be aware, however, that rebalancing may result in taxes owed.

Although current market conditions may warrant re-examining your asset allocation, be careful not to abandon a carefully considered strategy in favor of an emotional reaction.

1) Money, July 20092) Brinson, Singer, and Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May–June 1991

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2009 Emerald.

Hot Topic: Roth Conversions

2009-12-03T08:48:00.006-05:00

2010: The Year of the Roth IRA Conversion?

The number of Google searches for information about Roth IRA conversions has increased dramatically recently. In fact, search data reveals that the number of people searching for the phrase “Roth IRA conversions” more than tripled between January and November 2009.1

This surge in interest about Roth IRA conversions is hardly surprising considering that starting in 2010, all taxpayers, regardless of income, are eligible to convert tax-deferred retirement assets to a Roth IRA. Prior to the change, the law prevented taxpayers with household incomes above $100,000 from converting assets to a Roth IRA.

If you are among the nearly 50% of Americans who believe their own taxes are going to increase, you may be interested in the possibility of a tax-free income that a Roth IRA conversion can bring.2

A Roth IRA is a retirement savings vehicle that differs from tax-deferred retirement accounts such as traditional IRAs and most employer-sponsored retirement plans. With a Roth IRA, you make contributions with after-tax dollars, but qualified withdrawals after age 59½ are tax-free. Furthermore, a Roth IRA does not require minimum annual withdrawals after age 70½. It should be noted that there are still annual income limits in place for determining eligibility to contribute to a Roth IRA. The income limitation was eliminated only for conversions.

To qualify for the tax-free and penalty-free withdrawal of earnings and amounts converted to a Roth IRA, the account must be in place for at least five tax years and the distribution must take place after age 59½ or as a result of death, disability, or a first-time home purchase ($10,000 lifetime maximum).

Taxing Choices

When you convert tax-deferred assets from a traditional IRA and/or a former employer’s 401(k), 403(b), or 457 plan, the amount you convert in a given year needs to be declared as income on your tax return. If you are younger than age 59½ and pay the taxes from money that is not in the tax-deferred account (the recommended option), you can avoid a 10% federal income tax penalty.

Fortunately, you have options when it comes to paying the taxes on a Roth IRA conversion. In 2010 only, you can convert eligible retirement assets to a Roth IRA without having to claim the amount as income on your 2010 tax return. If you elect to do this, you must declare half of the converted amount as income in 2011 and the other half as income in 2012. In this way, you wouldn’t have to start paying taxes on a 2010 Roth IRA conversion until April 15, 2012.

However, by deferring the taxes on a 2010 conversion, the converted amount will be taxed at the income tax rates in effect in 2011 and 2012. As it stands, tax rates are scheduled to increase in 2011. Unless Congress acts to avert the tax rate increase, the taxes on Roth IRA conversions will be higher after 2010.

Also consider whether converting a sizable amount to a Roth IRA could move you into a higher tax bracket. If so, you may decide to convert smaller amounts over a period of several years.
If you have IRAs into which you have made both deductible and nondeductible contributions, the tax implications of a Roth IRA conversion can become complicated. It may be prudent to consult a tax professional.

You Can Change Your Mind Later

If you change your mind after utilizing a Roth IRA conversion, you can elect a “do over,” called a recharacterization. The assets would be converted back to tax-deferred status and you can file an amended tax return seeking a refund of the income taxes you paid on the conversion. In order to qualify, you must recharacterize the funds before October 15 of the year following the year in which you converted.

Roth IRA conversions offer the potential for tax-free income in retirement for taxpayers at all income levels. If you want more information about converting to a Roth IRA, call today. It’s critical to review your individual situation before making a decision about moving important assets.

1) InvestmentNews, November 16, 2009
2) Rasmussen Reports, September 3, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2009 Emerald.