With a traditional IRA, your contributions may be tax-deductible and can grow tax-deferred. In retirement, traditional IRA distributions are taxable as ordinary income. With a Roth IRA, your contributions are non-deductible, but have the opportunity to grow tax free. At retirement age, distributions from a Roth IRA are tax free.

Here is a list of some of the primary differences:

Although the above table highlights some of the major differences between a traditional IRA and a Roth IRA, there are a number of other nuances not reflected. Please feel free to contact us to discuss which makes the most sense for your financial situation.

This philosophy is contrary to the typical buy-and-hold approach that investors have been persuaded to embrace.  Many people are convinced the proper way to invest is to simply leave their money in the market and hope for a decent return.  We believe there is a better way!  We feel investors should emulate the large, institutional investors by taking a more sophisticated, tactical approach to investing. 

At Willamette Investment Advisors, we maintain a forward-looking investment process that is focused on long-term trends in the financial markets.  So, depending on what is taking place in the financial markets, we adjust our clients’ mix of investments to both mitigate risk and take advantage of investment opportunities.

With record low interest rates and extreme stock market volatility, how are your investments positioned for what lies ahead?  Give us a call; we’d love to discuss it with you.

1)   That asset allocation is the most important decision in investment management.

2)   That changing financial markets require continuous monitoring and tactical flexibility.

This post focuses on asset allocation and we’ll address the second core belief in the next post.

Asset Allocation is simply the term we use in the financial industry to describe how your money is invested in all of the various investment options available, and in what proportion.  For example, if you have a financial advisor making the asset allocation decisions for you, they are deciding how much you should be investing in US Large company stocks, how much in bonds, international stocks, etc.

An important study by two Nobel Prize winning researchers highlights the importance of asset allocation in investment returns.  They found that over 90% of the variance in an investment portfolio is determined by how the assets are allocated.  Other factors such as stock selection and timing, while still important to consider, only represent a small portion of an investor’s return. 

For example, back in 1999 when the stock market was up over 50%, it didn’t matter if you owned Microsoft, General Electric, or IBM, you still made a lot of money.  But, in the crash of 2000/2001, owners of those investments lost money while even a mediocre bond fund had a positive return.  So, rather than spending the majority of your time deciding between two similar stock investments, it is much more important to figure out whether you should invest 30% or 60% of your portfolio in stocks (or any stocks at all for that matter).

We help our clients with these important asset allocation decisions and closely monitor and adjust their asset allocation as the financial markets change.

Our new office is in a more visible and well-travelled location on the corner of 9^th Street and Oak Avenue, just south of Walnut Boulevard in Corvallis.  The new address is 520 NW Oak Ave, Suite A, Corvallis, Oregon, 97330. 

If you are in search of a financial advisor to discuss your retirement plan or other investments, give us a call or stop by our new office!

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 don’t sound like such a bad thing. Who wouldn’t like to be able to buy things for less than they cost now, especially when times are tough? The problem is that those falling prices can harm the economy in several ways, as Americans were reminded during the recent recession. When prices are dropping, people tend to postpone purchases, hoping to pay less in the future (consider what’s happened with real estate since 2007). Delayed spending puts pressure on corporate profit margins and companies tend to cut spending themselves, creating financial difficulties for companies that rely on business spending. Cutbacks begin to ripple through the economy.

Deflation typically affects not only prices but wages; scarce jobs can lead to pay cuts even for those who stay employed. And lower incomes can start a new round of cost-cutting by both consumers and business. If this process sounds familiar, it’s because for much of 2009, the U.S. experienced negative annual inflation rates for the first time since 1955.

Though consumers have loosened their purse strings in recent months, deflationistas argue that if another financial crisis were to reduce credit availability, or if high ongoing unemployment once again begins to weigh on consumers’ willingness and ability to spend, the threat of deflation could return. Those concerned about the possibility of a new round of deflation at some point keep an eye on consumer spending, the state of the credit and housing markets, and the stability of banks and other financial institutions.

Seeing shades of gray

Inflation and deflation aren’t necessarily an either-or proposition. It’s possible to have inflation in some areas and deflation in others; anyone who has watched food prices or health-care costs increase while their paycheck stayed the same and the value of their house declined can vouch for that.

From an investing standpoint, inflation isn’t black-and-white, either. Some industries and asset classes benefit from inflationary forces, while companies that are highly dependent on both commodity prices and cheap labor can be more challenged by rising prices

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 of successful portfolio management.  Being realistic about the level of risk your portfolio involves and how much time you have to come back from potential downturns may help you increase both your emotional and financial resilience.

We are seeing signs that interest rates could be moving up in the near future.  Rising interest rates are not a good thing for bond investors as bonds generally lose value when rates rise.  For example, if you own a bond that matures in 10 years, or own a bond fund with an average maturity of ten years, a 1% rise in interest rates could cause your bond investment to decrease in value by as much as 10%.

There are ways to protect, or at least mitigate potential loss in this type of a scenario.  Give us a call if you’d like to discuss this in more detail.

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).

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.

Who is eligible: Businesses with less than 100 employees, tax-exempt organizations, and government entities.

Who must be covered:  Any employee earning $5,000 during any two preceding years.

Required Employer Contribution: Dollar-for-dollar match up to 3% of pay OR 2% of gross pay up to $245,000 for all eligible participants who earn at least $5,000.

Maximum Contribution:  $28,000 ($11,500 deferral plus $11,500 maximum match; $2,500 catch-up contribution and $2,500 matching contribution, if over age 50.)

Advantages:

     - Minimal paperwork and expense

     - Minimal tax filing

     - Participant deferral of current income taxes

Note: When participants take before-tax contributions out of their retirement plans, that money is subject to ordinary income tax and, if withdrawn before age 59 ½ , may be subject to an additional 10% federal tax penalty (25% penalty if withdrawn from a SIMPLE IRA within the first two years).

Those are the basics, but please give us a call if a SIMPLE plan seems appropriate for your business.