Tuesday, December 20, 2016

A Holiday Reminder: Harvest Your Tax Losses

Another year has come and (almost) gone. While your spirits may be full of holiday cheer (and egg nog), this is no time to forget about your financial goals. Depending on what part of the year you did your investing, you could have some losses in your taxable accounts that you can harvest for a tax break. (For related reading, see: Tax-Loss Harvesting: Reduce Investment Losses.)

Take Advantage of Tax-Loss Harvesting

When you sell a stock, bond or mutual fund, the difference between what you paid to purchase it and your net earnings is considered a gain if the amount is positive or a loss if the amount is negative. In most cases, you would certainly hope for gains, not losses. However, some investors strategically use losses to negate the effects of capital gains taxes. Capital gains are taxed at 15% on long-term gains (anything held over one year); short-term gains (held less than one year) are taxed at your ordinary income tax rate. (For related reading, see: What You Need to Know About Capital Gains and Taxes.)
Any gains realized during the year can be offset by selling losers. This is what we call tax-loss harvesting. Regardless of whether the gain is short-term or long-term, the loss will counteract the gain. What’s more, if you are able to realize more losses than gains this year, you are able to carry forward up to $3,000 of losses to next year, which can save you on taxes. Note: if you are planning on doing this, please consult your CPA or a tax professional to make sure this strategy makes sense in your specific situation.
During the year, perhaps you sold a security to have the extra cash to replace your hot water heater, for example. Often when the money is needed, capitals gains are disregarded, which is why the holidays are a perfect time to review all transactions from the year and see where you stand on gains taxes. Most brokerages offer a convenient way to view this: in your accounts, there should be a tab that shows “Realized Gains/Losses.” Make sure to look at the “Realized” tab rather than “Unrealized.” That ensures you’re looking at the investments you sold during the year instead the “what ifs.” (For related reading, see: How Are Realized Profits Different From Unrealized or So-Called "Paper" Profits?)
So, what do you do after you sell, you may be wondering?


Be Aware of the Wash Sale Rule

There are a few options, depending on whether you plan to re-deploy the capital elsewhere or hold it in cash. For example, it is possible to use the newly freed funds to re-balance back into underperforming funds according to your asset allocation. However, what you certainly want to keep in mind is something called the wash sale rule. If you sell securities at a loss, in order to get a tax benefit from that loss, you cannot invest in a substantially similar investment for at least 31 subsequent days. 
The keywords are "substantially similar." Arguably, there are funds that perform similarly, but are not exactly the same, where you can park the money for a bit. You don’t have to re-invest the money at all (you could leave it in cash), but some investors like to keep their money working for them in the market for as long as possible. Each situation is unique, and what’s important to know are the different options you have.
Regardless of what you decide, be aware of how you classify any tax-advantaged dividends, as reinvesting of any kind back into the fund you sold out of at a loss will flag it as a “wash sale.” It doesn’t matter if you sold VTSAX in your taxable account and accidentally had dividends reinvested in your VTSAX holding in your 401(k) within 30 days. That will negate the tax benefits of harvesting the loss.
At the end of the day, there are plenty of things to do around the holiday season. Most of them cost money. Why not add something to your list that could potentially save you money? (For related reading, see: Wash Sales and Substantially Identical Securities.)

As originally seen at http://www.investopedia.com/advisor-network/articles/121216/holiday-reminder-harvest-your-tax-losses/#ixzz4Swg1EgkO

Thursday, December 15, 2016

6 Cash-Saving Tips for the Holiday Season

 It is beginning to look a lot like the holidays. Lights, parties, shopping, presents, family, credit card debt… 
Whether it’s student loans, credit card debt or a car loan, hopefully one of your goals is to pay off your debt in 2017. But why wait? There is still time to start on that goal in 2016. No need for a New Year’s resolution. Although it can be a useful Jedi mind-trick to pick an arbitrary day in the future to start working toward your goals (i.e., January 1), the truth behind debt is: the sooner you start, the better. So why not start today? Right now. Tomorrow never comes anyway, right?
Here are some tips to ramp up your debt payoff strategy during the holidays:
  • Make handmade Christmas gifts  Contrary to popular belief, the holidays don’t always have to be about spending money. Making your own Christmas gifts rather than buying them at the store can save you boatloads of cash. A lot of adults end up buying what they want for themselves anyway. There are plenty of recipes and craft ideas on Pinterest and Instagram. What’s more, a handmade gift can be even more meaningful to the recipient, since they know you took extra time and care in making their gift. (For related reading, see: Tips for Avoiding a Holiday Spending Hangover.)
  • Draw names from a hat – If you have a big family or a lot of friends that you typically buy present for, perhaps you can each pick a name from a hat and just get something for that person. It can be really expensive to buy things for everyone you know.
  • Find seasonal holiday jobs – Since most of America will be busy spending money, businesses will likely be hiring in order to keep up with the increased demand. Many retailers, customer service providers and gift shops will be looking for seasonal employees, which could be a great opportunity to make some extra money. You could even be a pet sitter for those who leave town over the holidays. (For related reading, see: Best Time of the Year to Look for a Job.) 
  • Have friends over for a potluck – For holiday get-togethers with friends, rather than meeting up at a restaurant, suggest a potluck instead. Everyone brings a dish to share, and the total cost for everyone is how much it costs to make their dish. Plus, an added benefit is you can stay as long as you’d like and nobody will think you are rude if you are being too loud!
  • Don’t pay for a gym membership – While it may be tempting to join a gym during their holiday promotional period, there is plenty of nature out there to explore without needing to pay money. The added benefit of working out outside is breathing fresh air and allowing nature to lift your spirits—things that can’t really be recreated inside a gym.
  • Focus on an experience instead of gifts – Experiences are some of the best gifts given and received. Start a new tradition this year with whomever you’re spending the holidays with. Family football game? Scavenger hunt? Check out the local arts/music scene? Volunteer? The time together will surely prompt some stories and save everyone money at the same time. It will also set a good example for the kids.
It is beginning to look a lot like the holidays. It can be a fun time of year if we don’t get distracted by all the shiny objects. There is no need to wait until after the holidays to start paying down debt. Remember, tomorrow never comes. Start today. Have fun. Be safe. (For related reading, see: A Holiday Reminder: Harvest Your Tax Losses.)

As originally seen at http://www.investopedia.com/advisor-network/articles/121316/6-cashsaving-tips-holiday-season/#ixzz4SwfRxkhR

Friday, December 9, 2016

Asset Allocation Part 1


The financial services industry has done a great job of confusing just about everyone. There are no less than a million TLAs (three letter acronyms), not to mention thousands of research papers and enough noise from talking heads to make your own head spin. In previous series, we discussed basic investing and financial planning. Now we are going to build up the foundation of your financial literacy house a bit more and discuss asset allocation.
Why is asset allocation important?
Good question. Thanks for asking. It is important to understand why you should keep paying attention before learning about something. According to a 2010 research article from Morningstar (the premier research firm in the industry), nearly 100 percent of return levels come from asset allocation. Even after accounting for general market movements, the study determined that about half of return variations come from asset allocation decisions and about half come from how they are managed.
What does all that mean? Long story short, research shows that asset allocation has a significant impact on long-term returns.
What is asset allocation?
To start, asset allocation is a term mainly used by financial advisors. Often times, we make the mistake of assuming you understand what it means. Then we describe it by saying it is how you allocate your assets. (Um… rrrriiiiigggghhhhttttt… thanks for clearing that up.)
Asset allocation is simply the mix of your investments as they relate to your total portfolio. My grad school professor will roll his eyes when I say this, but the easiest way to think about it is with a pie chart. My professor hated pie charts, but in this case, it works. Your overall portfolio is the pie. Each of your investments – or assets (cash, bonds, stocks, funds…) – represents a piece of the pie, or an allocation.
Having a mix of various investments is a way to diversify your portfolio to ensure that you don’t have all your eggs in one basket. When done properly, it should give you exposure to a variety of industries and sizes of companies – some more conservative, and some more aggressive. At the end of the day, nobody knows which asset class inside which industry is going to perform best next year, over the next five years, or the next 10 years. Diversification helps reduce your risk by spreading your investments out, but still provides exposure to growth potential.
Ideally you would have a strategy to how you plan to allocate your assets based on your risk tolerance, time horizon, and goals. Finding the right mix for you between safer and riskier investments will help you (and your advisor) come up with a plan to achieve your goals. Everyone is different. What your neighbor does for his or her allocation should not impact how you allocate your investments. The ultimate goal is to minimize the impact of down markets and still participate in the upside.
It is also important to periodically keep up with your investment mix to ensure it is on track with your risk tolerance and goals, while still aligning with your strategy. Over time, allocations can drift from their targets, as investments will gain (and lose) at different rates. When you reallocate your investments to the target mix, it is called rebalancing.
What are some common asset allocation strategies?
It seems as though every time I turn around, there is an infomercial for the next great “sure-thing” investment strategy that will make me rich this afternoon. It can be mine for just $1999.99 if I order today! (Pause while Nick orders multiple copies.) I plan to invest the money I get from my long-lost cousin, the Nigerian prince.
What?! Dang! Those weren’t good strategies at all! I digress. Back to common (and real) asset allocation strategies…
There are a lot of different strategies out there. Picking the right one for you comes down to your personality, how involved you want to be, and finding a good advisor to guide you. The most common asset allocation strategies are:
  • Strategic asset allocation – This is a long-term approach that balances risk and reward. Boring, but pretty effective. More passive. Doesn’t change philosophy based on economic changes.
  • Dynamic asset allocation – While similar to strategic asset allocation, this strategy changes with economic conditions.
  • Tactical asset allocation – This is a more active approach. It is constantly evaluating positions and moving in and out based on what is believed to have the most short- or long-term potential. Use caution here. If you were really as good of a day trader as you think, you’d be managing a $5 billion hedge fund from your yacht in the Caymans.
  • Core-satellite asset allocation – This is a hybrid approach. There is a core strategic element that makes up the foundation of the portfolio with satellite tactical approaches to fill it out.
We will go into more detail about various asset allocation strategies in part two of our asset allocation 101 series. Remember, just because your neighbor is investing a certain way doesn’t mean it is a good fit for you. For now, hopefully you at least have an understanding of what asset allocation is and why it is important.
originally appeared on http://centsai.com/asset-allocation-101-part-1/