Wealth advisory firm urges investors to keep the faith in equities, seek out risk-managed investments and exploit tax-planning opportunities.
Brinton Eaton, a national wealth advisory firm based in New Jersey, announced its eight moves investors should make to preserve and grow wealth. These include keeping the faith in equity investing, holding your emotions in check as markets gyrate daily, and incorporating risk-managed investments. The firm also urges investors to be alert to planning opportunities in advance of potential tax legislation in 2013.
“Our resounding message is to invest for the long term,” says Robert J. DiQuollo, chief executive officer of Brinton Eaton. “It’s a troubling time in terms of geopolitics and global economic change, but be strong in your investment convictions.”
1. Stick to your guns
Research shows that typical investors will let their emotions rule their financial decisions — letting fear or euphoria prompt them to exit and enter the markets at precisely the wrong times — severely impairing their results.
“History has shown that investors who shift their investment strategy based on market behavior do significantly worse than those who make a choice — whatever it is — and stick with it,” says Jerry A Miccolis, chief investment officer at Brinton Eaton.
ith market and geopolitical uncertainty continuing to roil equities, it’s more important than ever to stick to your guns, maintaining a well allocated and balanced portfolio that reflects sound investment principles and your long-term needs — not your gut reaction to every market whipsaw.
2. Beware of investments that prey on investor fears
Investors are looking for the silver bullet that will protect them when markets collapse.
“Buyer beware,” warns Miccolis. “Many investment vehicles that are popular during volatile times are expensive and complex, and sold predicated on fear.”
While there are quite a few products that offer risk protection — such as black swan funds, puts and collars — many are limited in the benefits that they provide, and some can have significant adverse effects on portfolios during normal market environments.
3. Diversify, diversify, diversify
Be diversified in your investments. A proper asset allocation combined with opportunistic rebalancing, to ensure your allocations stay true, continues to be the best way to reduce risk. A well-diversified portfolio that invests across a range of equity sectors, fixed income and alternative investments is always a good choice. A plethora of mutual funds and exchange-traded funds (ETFs) offer exposure to a wide variety of asset classes.
4. Invest in equities
Ideally, you should be invested in equities up to your personal risk tolerance level. Remember that you are in it for the long term: Don’t be distracted by the daily news, and don’t let election-year politics and potential gridlock alter your long-term investment strategy. Focus on the fundamentals, such as corporate earnings.
Investing in equities is the best defense against the biggest threat to your financial future: inflation. Even if you’re already retired, inflation will likely double or even triple your living expenses over the rest of your life.
5. Consider investments that incorporate portfolio protection and exploit volatility
Volatility is omni-present in today’s market. One way to combat this is by investing in volatility itself. The trick is to invest in volatility in such a way that the investment does not lose its appreciation when markets and volatility return to normal.
6. Read the fine print before purchasing an annuity
Although fixed annuities promise a steady income stream for life, you are paying a hefty cost for the privilege. By locking up a sizable sum of your money until the day you die, you are restricting your ability to use those funds to participate in any future equities rally or other attractive investment. And, a fixed annuity won’t serve you well in the face of inflation. Variable annuities, which are marketed as investment vehicles, are rarely a good alternative to investing the money in other, lower-cost vehicles.
7. Take advantage of Roth IRA re-characterization rules
If you converted your IRA to a Roth IRA during 2011, you may want to consider a “re-characterization.” One of the main reasons people re-characterize is a market decline.
Let’s say you converted your IRA to a Roth IRA and at the time, the IRA was worth $50,000. If you decided to pay all the tax up front, you paid tax on $50,000. If the account is now worth $40,000, due to a drop in the stock market, it may make sense to re-characterize to a traditional IRA and get back the tax you paid on the conversion. You can always re-convert back to a Roth at a later date and pay tax on the lesser amount.
8. Proactively prepare for the possible change in estate tax in 2013
In 2013, unless Congress intervenes, estate tax law will revert back to a $1 million exemption and a 55% tax rate. Thus 2012 presents a valuable opportunity to structure your estate plans accordingly. Consider leveraging historically low interest rates to provide low-interest loans to adult children; as well as funding grantor retained annuity trusts (GRATs).
“Individuals who fail to plan in advance may wind up giving more money to the IRS than they have to, rather than to their loved ones or favorite charity,” says DiQuollo. “This should be a component of anyone’s financial plan.”
Other proactive risk management strategies include momentum-based sector rotation. Any risk management product should work in concert with, not in place of, any carefully designed asset allocation.