There's been much debate in investing circles over the last year about whether inflation or deflation represents a more likely threat to the future of the U.S. economy. With a recovery that's still tentative compared to previous recessions, measures designed to stimulate the economy or cut spending to rein in the budget deficit provoke warnings about their potential to create one or the other. The case for inflation As the economy has begun to recover, worries about the potential for future inflation have become widespread. The Fed has undertaken extraordinary measures to make sure there is plenty of money in circulation, but some experts worry that the increased money supply will eventually cut the dollar's purchasing power, especially if interest rates are kept at historically low levels for too long. They cite the easy availability of money as contributing to the late-1990s tech bubble and the mid-2000s housing bubble, and fear that another could be on the way. The Federal Reserve Board's monetary policy committee maintains that inflation currently is too weak to support normal economic growth, let alone launch an inflationary spiral. However, those who see inflation in our future watch for warning signs such as increased Treasury yields, particularly on longer-term bonds. Higher yields when bonds are auctioned suggest that investors are increasingly wary of tying up their money for long periods at a fixed interest rate if they feel that inflation is going to erode the buying power of those fixed payments over time. Wholesale prices also are watched closely; higher prices at the wholesale level can be a precursor of higher prices at retail (that is, if retailers are able to pass those costs along to buyers, which is not always the case). The case for deflation At first blush, the falling prices that characterize deflation [...]
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Everyone knows the stock market has its ups and downs, but just what’s involved in recovering from a serious down? If you lose 10% one year but your portfolio returns 10% the next year, are you even again? The short answer: no. The math of recovering from a loss isn’t quite that symmetrical. You have to gain more than you lost to recoup all your losses. To understand why, let’s look at a hypothetical example. Say you have a $100,000 portfolio. In Year 1, you suffer a 10% loss and are down $10,000. That leaves your portfolio worth only $90,000. In Year 2, the market rebounds and your portfolio rises by 10%. However, that 10% increase is based on a $90,000 portfolio, not $100,000. That means a 10% return adds only $9,000 to your portfolio not $10,000, leaving you still down $1,000 from where you started. You would actually have to earn a return of a little over 11% to get back to your original $100,000. The bigger the loss, the bigger that rebound needs to be to get you even. For example, if that $100,000 portfolio had taken a 40% hit, as many did in 2008, you’d need almost a 67% increase to offset that $40,000 loss. That could take several years even if stocks perform well. The challenge is compounded by investor psychology. Adjusting your asset allocation to aim for a higher return is one way to try to recoup losses faster. However, many investors find it difficult to take on additional risk after having watched their investments take a hit. And there’s no guarantee that more risk will necessarily produce the desired result—at least not within the desired time frame. The lopsided nature of recovery from market losses underscores why risk management is such a key component [...]
I recently re-read a few chapters of a good introductory book on investing called “The Art of Investing & Portfolio Management.” I think one of the best chapters for individual investors to read is the chapter on what to look for when selecting a financial advisor. Here are the bullet points (I’ve given you some expanded excerpts on the first two as I feel these are of critical importance): 1) The Advisor Is a Registered Investment Advisor (RIA) “We strongly encourage you to work only with professionals who… are RIA’s. The reason: RIA’s have a legal fiduciary responsibility to provide their clients with the highest possible standard of care. As a fiduciary, an RIA is required by law to always look out for your best interests and to completely and objectively disclose all important information in his or her dealings with you. By contrast, a stockbroker is not legally required to always work in your best interest.” 2) The Advisor Uses a Fee-Based Compensation Structure “You’ll pay a fee-based advisor a percentage of your portfolio’s assets each year, as opposed to a commission on each transaction. As a result, a fee-based advisor’s interests are aligned with you own: The advisor does well only if your portfolio does well.” 3) The Advisor Is Consultative 4) The Advisor Incorporates Superior Capabilities at All Stages of the Process 5) The Advisor Is Someone with Whom You Feel Comfortable Working Note: I am an Investment Advisor Representative (IAR) of KMSFinancial Services, Inc., a federally Registered Investment Advisor(RIA).
Assets in a Traditional IRA or 401(k) grow tax-deferred and distributions are taxable at ordinary income tax rates. A Roth IRA grows tax deferred and distributions are tax free. By converting your assets to a Roth IRA, you'll be paying your tax liability now - at a potentially lower rate-in exchange for tax-free growth and tax-free distributions in the future. If you make the conversion in 2010 you can spread the tax bill out equally over two years (your 2011 and 2012 tax returns). This special two-year provision is only available to conversions made in 2010. Unlike a traditional IRA, the government does not mandate you take required distributions from a Roth account. Therefore, you can let the entire account grow tax-deferred for as long as you wish. If you have enough wealth to be concerned about estate taxes, converting to a Roth may provide an additional benefit to you. There are other issues to consider before deciding if converting is right for you. A good place to start the conversation is to talk with your financial advisor. If you do not have an advisor or are thinking about hiring a new one, I’d love the opportunity to visit with you.