Two expert money managers offer up their Top 11 financial moves investors should make in the coming year to preserve and grow wealth, and adapt to changing income-tax and estate-tax policy.
Avoiding cash investments, re-evaluating your investment portfolio for risk and maxing out tax-advantaged savings plans are just a few of the Top 11 financial moves recommended by wealth-management experts at Brinton Eaton of Madison, N.J.
“Next year offers investors great opportunities, but the risks are real and haven’t diminished,” said Brinton Eaton President Robert DiQuollo, CFP, CPA. “We expect volatility to continue; smart investors will look to maximize upside potential by exploiting that volatility, while taking measures to protect their downside,” says principal and Chief Investment Officer Jerry Miccolis, CFA, CFP, and co-author of "Asset Allocation For Dummies." At the same time, they say, investors must keep a sharp eye on how changes in tax law affect their situations.
Here are Brinton Eaton’s Top 11 moves investors should make in 2011 to preserve and grow wealth, and adapt to changing income tax and estate tax policy.
1. Dump Your Cash Investments.
Low interest rates punish savers. If you’re sitting on excessive amounts of money-market funds or CDs, you are earning almost nothing and most likely will fall behind inflation over the long term. Get invested, but do it according to a well thought out asset-allocation plan. Keep only a few months’ (typically, no more than 12) worth of spending needs in cash, or run the risk of seeing your portfolio lose purchasing power over time.
2. Make Sure Your Portfolio Is Risk-Managed.
Putting all your eggs in one or two baskets is never smart, especially today as more geopolitical and other risks proliferate. The May 2010 “flash crash” was just another stark reminder of the need to combine a traditional, scientifically based asset-allocation model -- that includes true alternative investments, such as commodities, real estate, and managed futures -- with new risk-management techniques, such as cost-efficient portfolio protection.
3. Keep an Eye Out for “Contagion.”
The biggest problem in the market collapse of late 2008 and early 2009 was that asset classes which traditionally “zigged” as others “zagged” all tanked together — there was nowhere to hide. This phenomenon is called “contagion,” and it is rare but devastating. In late 2010, markets started to show signs of modest contagion again, as everything but the safest of bonds tended to move in lockstep. Investors should keep a close eye out for this phenomenon, as it renders even the best-designed diversification temporarily ineffective. It is for these times that risk-management techniques are necessary.
4. Hedge Fund-Type Investments Are Going Mainstream, but Caveat Emptor.
More investment managers are now providing hedge-fund style investments via mutual funds. These investments use the same strategies as hedge funds, but offer greater transparency, third-party custody, daily liquidity, and lower costs. This trend will bring the “chasing alpha”-type investment style to the masses, but fees will still be higher than most traditional mutual funds or exchange traded funds. “And many of these funds could be very risky if investors do not fully understand the underlying strategies,” Miccolis says.
5. Prepare for Possible Changes in Tax Rates.
If Congress doesn’t act, Bush-era tax cuts will expire in 2011. Consult your financial advisor and tax professional to plan your taxable income for 2011 -- especially if you are self-employed or have executive compensation options to consider. The maximum long-term capital gains tax rate could go from 15% in 2010 to 23.8% in 2013, and the top rate on ordinary income could go from 35% in 2010 to 43.4% in 2013. The estate tax is also scheduled to come back with a vengeance after 2011. High earners would be wise to consult an estate planner and tax expert to try to mitigate the short-and long-term impacts of these changes.
6. Max Out Tax-Advantaged Savings.
Employees, regardless of income level, should take full advantage of their 401(k) plans, particularly those with matching contributions from their employers. However, some highly paid employees do not realize that they may fail to get their full employer match if their contributions are too “front-loaded,” i.e., condensed into the first few months of the year. Max out your 401(k) plan contributions, but do it over 12 months to make sure you get your full match by spreading payroll deductions evenly. All 401(k) plans are different, so read your plan documents carefully.
7. Determine Whether Long-Term Care Insurance Is Right for You.
It’s estimated that 70% of the population will need long-term care at some point. If you have to put a spouse in a long-term care facility, you would need enough funding to essentially run two households. Long-term care insurance can offer valuable protection. “Evaluating your needs and purchasing the right policy while you’re relatively young (in your 50s, for example) can save you money in the long run, and secure benefits that might not be available in the future as insurers grow more cautious and cut back on policy options,” DiQuollo says.
8. Annuities: Weigh the Benefits Against the Additional Costs.
Could living longer be a source of worry? It could be if you run out of retirement savings. According to the latest actuarial tables, a couple at age 65 have a 50% chance that at least one spouse will survive to age 92, and a 25% chance that one will survive to age 97. If this is a concern, you may want to look into annuities. However, annuities come at a significant cost. Ask a financial advisor for the pros and cons.
9. Take Advantage of Low Interest Rates.
If Congress doesn’t act, the estate-tax exemption will revert to $1 million, causing more estates to be subject to tax; but low interest rates provide superb planning opportunities. The low interest-rate environment can be used to your advantage, for example, by allowing you to provide low-interest mortgages to adult children and using grantor retained annuity trusts to pass tax-efficient asset appreciation to your heirs. “Unprepared individuals will provide unnecessary funds to the IRS -- wouldn’t you rather make sure that your family is the beneficiary of your legacy?” DiQuollo says.
10. Consider a Roth IRA Conversion.
A Roth IRA conversion can be a sensible move for someone who wants to see assets grow tax-free and be able to withdraw funds in retirement with no tax consequences or penalties. It’s also ideal for taxpayers who want to keep their savings in a tax-free environment indefinitely. Although your non-spouse heirs are subject to withdrawal requirements, it is a great vehicle for inheritance because it can provide your heirs a stream of tax-free income. However, to do the conversion, you must pay taxes now on the amounts converted, which can have a hefty price tag; it’s best to consult a financial planner and/or a tax advisor. Roth conversions are an option in 2010 and beyond; however, after 2010, there is no special rule to report the conversion income over two years.
11. Complete a Due Diligence Review of Your Advisor.
The end of the year is always a good time to reassess those you are trusting to invest and manage your assets. Good questions to ask are:
• Where are my assets custodied? Be wary of an advisory firm that acts as its own custodian, and be sure your assets are housed with an established third party.
• Does my advisor use the lowest-cost suitable alternatives for each investment?
• Does the firm receive any compensation from any parties other than their clients?
• Does my advisor have me protected against severe market declines?
Brinton Eaton of Madison, N.J., is an advisory firm with a long history of serving individuals and their families across multiple generations. The firm helps its clients protect, grow, administer, and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton's clients tend to be corporate executives, professionals, entrepreneurs, retirees, and multi-generational families. For more information, visit www.brintoneaton.com.