With just a week left in 2006, there's still time to make some last-minute moves to shore up your finances and to consider your money strategy for the year ahead.
December 23, 2006 (Press Release) --
With just a week left in 2006, there's still time to make some last-minute moves to shore up your finances. And, as many of you are enjoying the week off (or a slow spell at the office), it's also an ideal time to consider your money strategy for the year ahead.
Here are a few suggestions:
1. Take losses to offset gains.
Before year-end, consider taking any capital losses (i.e., sell your losers) to offset any gains and large capital gains distributions from mutual funds.
"We project this will be the largest capital gains distribution year since the market peak a few years ago," says Doug Flynn, financial planner with Flynn-Zito Capital Management in New York. "People are in for a big surprise come tax time if they do nothing."
Meanwhile, if you're rearranging your portfolio and considering buying a fund, check the fund's distribution calendar to make sure it's not about to distribute a capital gain. You don't want to pay capital gains on a fund you've owned for a week.
2. Make charitable contributions in stock.
If you're planning to write a check to a charity before year-end, consider donating stock instead, says Jim Sonneborn, wealth manager with Regent Atlantic Capital in New Jersey.
"If an individual has appreciated securities of any sort, make the charitable contribution with that and eliminate the capital gains," he says.
3. Create a budget for the new year.
No successful company would establish a profit goal without estimating its operating costs in advance. The same goes for individuals: If you want to free up enough cash to save the recommended 10 to 15 percent of your pay in 2007, you have to control costs.
"Your number-one goal should be to do a budget," says Charles Farrell, financial consultant and former tax attorney in Ohio. "Run your numbers and keep track of expenses for a couple of months. Everyone knows what their mortgage costs, but it's the stuff that slips through cracks -- vacations, clothing -- that are hard to keep track of. Before you know it, there's not a lot left for savings."
Top priority: Eliminate high-interest debt, such as credit cards, auto loans, or that home equity line of credit that's escalated with rising rates. "It's very tough for anyone's investments to outpace the interest they're paying on high-interest debt," says Farrell.
Second, focus on paying yourself first -- moving money automatically from your paycheck into savings, whether it's an online savings account for short-term goals, or an individual retirement account or 401(k) plan for retirement.
Make sure you're contributing enough to get any employer match on a 401(k). If you get a raise at the end of the year, earmark a percentage of it for savings.
4. Understand your risk tolerance, and stick with a strategy.
Many analysts are expecting the S&P 500 to post double-digit gains this year. Of course, if your portfolio is evenly split between stocks and bonds, your return will be lower. It may be tempting to boost exposure to stocks, but don't forget that your asset allocation provides insurance in a down market.
"It's tough right now -- being a balanced investor will test patience, because bond yields were low in 2006," says Sonneborn. "But don't abandon your discipline -- understand what you invested in, why you invested in it, and the basic parameters of risk you're taking."
Flynn agrees. "Don't chase hot performers, or only buy five-star Morningstar funds," he says, adding that 85 percent of managers who receive a five-star rating deteriorate in performance during the next three years.
"Remain invested, and continue to systematically invest through the ups and downs of the market through dollar-cost averaging," he adds.
5. Review fund performance and rebalance.
Examine how your investments have performed using an appropriate time horizon. If retirement is 30 years away and one of the funds in your 401(k) underperformed its peers over the last two quarters, don't be in a hurry to sell it. Consider where it fits within your overall allocation.
"If your entire portfolio is up, you're probably not diversified properly," says Flynn. "Investigate the ten-year future potential and future merits of each individual investment before selling."
Do look at what you're paying for your investments, and consider a switch if the costs are significantly above similar funds (check your fund's expense ratio on Morningstar and compare it to the average for its peer group).
"There are three major influences on your investment portfolio -- return, risk, and cost. Pay attention to the things you can control," says Catherine Gordon, principal and head of Vanguard's Advice Services Group. "You can't control return, because don't know what markets are going to do.
"You can do a reasonable amount to control risk by diversifying across multiple sectors and companies in the stock market," she says. "And you can definitely control costs by deciding what expense ratio you are willing to pay for a fund."
Controlling costs generally does lead to better returns. Consider the performance of all large-cap mutual funds through the end of the third quarter, ranked from lowest to highest in expense ratio.
Those in the lowest-cost quartile had a median expense ratio of 0.78 percent, and a median year-to-date return of 8.08 percent, according to Lipper data. Those in the most expensive quartile had a median expense ratio of 1.94 percent, and a median return of 5.94 percent, according to Lipper data. The benchmark -- the Russell 1000 Index -- was up 8.75 percent as of the end of the third quarter.
Another reason to sell: Your portfolio is out of whack with your target asset allocation. If an asset group has swung more than 5 percentage points (i.e., you were 60/40 in stocks and bonds and are now 65/35), you need to rebalance.
6. Think about how goals and milestones in the year ahead may affect your money strategy.
Do you expect a major life change next year -- marriage, children, divorce, retirement, selling a business? It may be time to increase your emergency fund, review your insurance coverage, or update the beneficiaries on your accounts.
"I don't think people realize if something were to happen, the beneficiary who has been designated overrides instructions in your will," says Gordon. "It's one of those easily overlooked issues that can have huge implications."
Dream Value
All of the above assumes that you've already taken the most important step: Identifying the people, qualities, experiences, and things you value most in life, and setting goals based on those values.
Knowing what you value, you can use money as a tool to facilitate your goals. As they say, it all starts with a dream.
Author: Laura Rowley
Source: http://finance.yahoo.com/
Here are a few suggestions:
1. Take losses to offset gains.
Before year-end, consider taking any capital losses (i.e., sell your losers) to offset any gains and large capital gains distributions from mutual funds.
"We project this will be the largest capital gains distribution year since the market peak a few years ago," says Doug Flynn, financial planner with Flynn-Zito Capital Management in New York. "People are in for a big surprise come tax time if they do nothing."
Meanwhile, if you're rearranging your portfolio and considering buying a fund, check the fund's distribution calendar to make sure it's not about to distribute a capital gain. You don't want to pay capital gains on a fund you've owned for a week.
2. Make charitable contributions in stock.
If you're planning to write a check to a charity before year-end, consider donating stock instead, says Jim Sonneborn, wealth manager with Regent Atlantic Capital in New Jersey.
"If an individual has appreciated securities of any sort, make the charitable contribution with that and eliminate the capital gains," he says.
3. Create a budget for the new year.
No successful company would establish a profit goal without estimating its operating costs in advance. The same goes for individuals: If you want to free up enough cash to save the recommended 10 to 15 percent of your pay in 2007, you have to control costs.
"Your number-one goal should be to do a budget," says Charles Farrell, financial consultant and former tax attorney in Ohio. "Run your numbers and keep track of expenses for a couple of months. Everyone knows what their mortgage costs, but it's the stuff that slips through cracks -- vacations, clothing -- that are hard to keep track of. Before you know it, there's not a lot left for savings."
Top priority: Eliminate high-interest debt, such as credit cards, auto loans, or that home equity line of credit that's escalated with rising rates. "It's very tough for anyone's investments to outpace the interest they're paying on high-interest debt," says Farrell.
Second, focus on paying yourself first -- moving money automatically from your paycheck into savings, whether it's an online savings account for short-term goals, or an individual retirement account or 401(k) plan for retirement.
Make sure you're contributing enough to get any employer match on a 401(k). If you get a raise at the end of the year, earmark a percentage of it for savings.
4. Understand your risk tolerance, and stick with a strategy.
Many analysts are expecting the S&P 500 to post double-digit gains this year. Of course, if your portfolio is evenly split between stocks and bonds, your return will be lower. It may be tempting to boost exposure to stocks, but don't forget that your asset allocation provides insurance in a down market.
"It's tough right now -- being a balanced investor will test patience, because bond yields were low in 2006," says Sonneborn. "But don't abandon your discipline -- understand what you invested in, why you invested in it, and the basic parameters of risk you're taking."
Flynn agrees. "Don't chase hot performers, or only buy five-star Morningstar funds," he says, adding that 85 percent of managers who receive a five-star rating deteriorate in performance during the next three years.
"Remain invested, and continue to systematically invest through the ups and downs of the market through dollar-cost averaging," he adds.
5. Review fund performance and rebalance.
Examine how your investments have performed using an appropriate time horizon. If retirement is 30 years away and one of the funds in your 401(k) underperformed its peers over the last two quarters, don't be in a hurry to sell it. Consider where it fits within your overall allocation.
"If your entire portfolio is up, you're probably not diversified properly," says Flynn. "Investigate the ten-year future potential and future merits of each individual investment before selling."
Do look at what you're paying for your investments, and consider a switch if the costs are significantly above similar funds (check your fund's expense ratio on Morningstar and compare it to the average for its peer group).
"There are three major influences on your investment portfolio -- return, risk, and cost. Pay attention to the things you can control," says Catherine Gordon, principal and head of Vanguard's Advice Services Group. "You can't control return, because don't know what markets are going to do.
"You can do a reasonable amount to control risk by diversifying across multiple sectors and companies in the stock market," she says. "And you can definitely control costs by deciding what expense ratio you are willing to pay for a fund."
Controlling costs generally does lead to better returns. Consider the performance of all large-cap mutual funds through the end of the third quarter, ranked from lowest to highest in expense ratio.
Those in the lowest-cost quartile had a median expense ratio of 0.78 percent, and a median year-to-date return of 8.08 percent, according to Lipper data. Those in the most expensive quartile had a median expense ratio of 1.94 percent, and a median return of 5.94 percent, according to Lipper data. The benchmark -- the Russell 1000 Index -- was up 8.75 percent as of the end of the third quarter.
Another reason to sell: Your portfolio is out of whack with your target asset allocation. If an asset group has swung more than 5 percentage points (i.e., you were 60/40 in stocks and bonds and are now 65/35), you need to rebalance.
6. Think about how goals and milestones in the year ahead may affect your money strategy.
Do you expect a major life change next year -- marriage, children, divorce, retirement, selling a business? It may be time to increase your emergency fund, review your insurance coverage, or update the beneficiaries on your accounts.
"I don't think people realize if something were to happen, the beneficiary who has been designated overrides instructions in your will," says Gordon. "It's one of those easily overlooked issues that can have huge implications."
Dream Value
All of the above assumes that you've already taken the most important step: Identifying the people, qualities, experiences, and things you value most in life, and setting goals based on those values.
Knowing what you value, you can use money as a tool to facilitate your goals. As they say, it all starts with a dream.
Author: Laura Rowley
Source: http://finance.yahoo.com/
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