It Wasn’t As Bad As It Sounds. I have always enjoyed road trips, and Texas to Colorado to Arizona and back to Texas is one of my favorites. Trips like this give me time to think, listen to audio books, and enjoy some scenery that’s totally different from what I have every day in the piney woods of East Texas.
A Lot Of Risk In The Markets. On my trip, I usually stopped shortly before dark. This gave me an opportunity to catch up on my reading and study market trends. I am appalled at the way the markets keep increasing in the face of what I consider to be a very scary situation. Our government and the FED keep encouraging consumers to continue their borrow and spend habits in spite of the slow job market, expensive stock market, high mortgage delinquency rates, and artificially low interest rates. When we stop pouring borrowed money into the economy, the adjustment could be even more painful than it has been up until now.
The Bond Market Is A Dangerous Place. If you are tired of low interest income available on short-term instruments, a dangerous strategy would be to try to increase your return by extending your maturity. If (more like when) long-term rates increase, you will either have to sell long-term bonds at a loss or hold on at below market rates. Better to accept low yields and be ready to take advantage of the opportunity to get higher rates when the FED stops doing crazy things like buying mortgage backed securities. Although the municipal bond market offers higher after-tax yields to high bracket borrowers, this market offers more risk than reward. Not only do you still have the risk of increasing interest rates, but there may well be some credit risk as state and local governments find it increasingly difficult to meet their obligations in the face of decreased tax revenues.
Stocks Are Also Highly Valued. Although corporate earnings have been higher than expected, the shares of many companies have increased to unrealistic levels. The volatility index (VIX), commonly watched as a measure of fear in the marketplace, has fallen to below 18, the lowest level of the past 3 years. Contrast this with a level of almost 90 at the height of the recent scare. While this sounds good, it also points to the possibility of over-confidence among investors. I am still in the market but I am keeping higher levels of cash and writing options against my positions as a hedge. I still believe in dividends to provide an income stream in the event the underlying issues fall. The difference between the next anticipated correction and last is that I am being even more careful to evaluate the ability of the company to keep paying those dividends.
Beware The Tax Man. The government has spent poured trillions of dollars of borrowed money into the economy in an attempt to allow us to keep living beyond our means. Even the most aggressive borrowers among us are becoming worried that those who are funding our deficit will decide to stop. Since the consequences of this could be devastating, the federal deficit is becoming a more serious concern. Rather than decrease government spending, the pressure is being applied to the revenue side. The last tax cut was labeled a “tax cut for the rich” and there are a number of new rules and proposed new rules to gain new revenue from high income tax payers (although middle incomes won’t be exempt). I’ve never claimed to be a tax expert so the best thing that high income taxpayers can do is consult a CPA or Enrolled Agent to help lower the impact of tax increases. A few ideas are: 1. If you have your company stock in your IRA don’t neglect the opportunity to withdraw it and pay at capital gains rates instead of ordinary income. 2. If you have been delaying the sale of assets in which you have a gain, now might be a good time to sell since there will undoubtedly be higher rates in the future in addition to the new rules that will add a 3+% medicare tax to your gains. 3. Consider rolling your IRA’s into a Roth. This will allow you to leave these assets to your heirs tax free and eliminate the need to start withdrawal at 70.5. The feasibility of this approach is dependent on a number of factors so don’t forget to do your calculations first. 4. Accelerate deductions. President Obama wants to limit the value of your deductions to 28%. If you are going to be in the 36 or 39.6 bracket, the value of your deductions will be limited to a 28% rate.
It’s Nice To Be Home. I am enjoying being back at the lake, although I am spending a lot of time catching up on work. I anticipate being in Colorado more next year than last because of client needs. If you have a project that needs my attention, call Susan or send me an e-mail. I am considering a trip in mid April. Be sure to let me know if you want to schedule a meeting.
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