Fundmastery Blog

Kurt Brouwer October 25th, 2007

As we reported previously in $16.4 Trillion in Retirement Assets, Americans have amassed substantial savings in retirement plans, IRAs and other tax-deferred retirement accounts. This accumulation of wealth for workers has been one of the largely untold stories of the past 30 years.

I am happy to say that Congress and President Bush have crafted a new law that should accelerate the process of accumulating assets for retirement. And, it was specifically designed to help those who need help the most. The Pension Protection Act was signed into law last year and it should accelerate the accumulation of retirement assets, with a particular emphasis on those workers who have not yet enrolled in a 401(k) plan or those who are enrolled, but have not figured out how to invest the assets in their account. This new law also has implications outside the world of retirement plans because it should result in significant new assets being invested in our financial markets, particularly in stocks and bonds.

Now, the Department of Labor has released new regulations for 401(k) plans to help companies better understand how to comply with the requirements of last year’s law. Not only will the guidelines help employers, but they should also benefit employees, particularly those who are not already enrolled in their company’s plan and also it should benefit those who have not made any investment elections or have just chosen the money market fund option. Here are some excerpts from the DOL’s factsheet on these new regulations [emphasis added]:

‘…Approximately one-third of eligible workers do not participate in their employers’ 401(k)-type plans. Studies suggest that automatic enrollment plans (in which workers “opt-out” of plan participation rather than “opt-in”) could reduce this rate to less than 10%, significantly increasing retirement savings.

The Pension Protection Act (PPA) President Bush signed into law last year removed impediments to employers adopting automatic enrollment, including employer fears about legal liability for market fluctuations and the applicability of state wage withholding laws.

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• Business , Investing , Mutual Funds , Personal Finance , Retirement
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Kurt Brouwer October 23rd, 2007

A great deal of Wall Street’s brainpower is devoted to gaining an edge in short-term trading. If you read brokerage house research reports, they are frequently focused on what stocks are picking up momentum and thus should be good buys — over the short-term. On the other hand, there are those investors who buy and hold for the long haul.

In this post from his blog, Kudlow’s Money Politic$, Larry Kudlow talks about traders versus investors.

‘…Last night I asked Jeremy Siegel, Wharton Finance professor and author of “Stocks for the Long Run,” the following question: Who does better, long-term investors or traders? That’s really the key question. Siegel said it’s a no-brainer—definitely long term investors. He conceded that there’s a very tiny few who can buck the trend and succeed in the short term game. But on the whole, it’s no contest, you want to be a long-term investor.

I posed the same question to Trend Macro CIO Don Luskin. Here’s what he had to say: “There’s no question about it. The great myth of trading is that it’s the very, very few survivors in the trading game who show their face to the public, who come on CNBC. What you don’t see…are [the] 10,000 who are driving cabs and flipping burgers somewhere.”…’

Don Luskin kind of mangled his comment, but his point is a good one. When we hear about someone who was successful in short-term trading what we do not hear about are the thousands of traders who lost money using similar strategies. One analogy to consider has to do with coin tosses. If one million people paired up and tossed a quarter, then half would call it correctly and half would fail. If we repeated that process, after 20 tosses, we would have one winner who had called the toss correctly 20 times. No doubt this hero would get rich off promoting his or her ’system’ for calling tosses correctly with advertising that might go like this, “I made a fortune with my patented wrist flip and you can too!”

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Tags: Investing, Kudlow, Luskin, market timing, trading

• Investing , Mutual Funds , Personal Finance
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Kurt Brouwer October 22nd, 2007

We have discussed the shrinking budget deficit before (see below) and, at one point, I had high hopes that the budget would be balanced by mid-year 2008. Unfortunately, tax revenue growth is slowing down (mainly on the corporate side) and so the date for a balanced budget has been pushed back.

This is still good news because it was only a few years ago that we had huge and growing deficits. The sad news is that many people have not even heard that the budget was quite close to being balanced. I’m not sure why this has not been a media topic, but it should be. One of my favorite bloggers, Steve Conover, has covered this issue frequently and he posted this update on the state of the deficit as of September 2007 [emphasis added]:

‘…Unfortunately, the trends are pointing towards a May 2009 balanced budget. The reason that’s unfortunate is because May 2009 is seven months too late to keep the politicians on both sides from demagoguing “the deficit” during the presidential campaign…

…Anyway, here’s the latest balanced-budget-trend chart;…’

Source: Skeptical Optimist

As you can see from Steve Conover’s chart, tax revenues are growing at 6.7%, which is faster than spending growth of 2.8%. As long as this trend continues, the deficit will fall and eventually will move into balance. The obvious question is what happens if tax revenues stop growing as fast as they are growing or if spending grows faster? Those questions, of course, are primarily political questions rather than economic ones because Congress has in its power that ability to cut spending in order to balance the budget. And there are many things Congress could do to spur economic growth. Conover continues:

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Tags: balance, budget, debt, deficit, government, politics

• Business , Economy , Geopolitics , Money
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Kurt Brouwer October 22nd, 2007

Whether we are talking about stocks, real estate or a business, one of the enduring themes of long-term investing is to defer taxes as long as possible. Two related factors are causing investors to rethink this tried and true strategy. First, capital gains tax rates are at a historically low point. Second, tax rates may be going up in the next few years. As this article points out, investors are starting to change their behavior [emphasis added]:

Looming Tax-Rate Change Spurs Sales (The Wall Street Journal, October 18, 2007, Arden Dale)

‘Investors may be starting to sell stock at today’s low capital-gains tax rate because they expect it to rise in a year or two.

The standard top tax rate on long-term gains is 15%, but it’s set to rise to 20% in 2011. Many financial advisers believe a Democratic administration in 2009 may raise it even higher — and sooner — and some are urging clients to consider selling off big stock positions now to capture the current rate. Long-term gains are those on investments held for more than a year.

“You should never let the tax tail wag the dog,” says Edmund T. Hyland, global investment specialist at JPMorgan Private Bank, a unit of J.P. Morgan Chase & Co. “But we think there is a window of opportunity with the rate at 15% to maybe be quicker to diversify than you might otherwise have been. We’re encouraging clients who have concentrated positions of low-basis stock to think about this.”…’

This article focuses on sales of stock, but the same issue applies to any appreciated asset such as real estate. Many investors seeking to defer taxes on real estate do a 1031 Exchange which allows them to exchange one property for another without realizing a gain. However, those considering such a move may want to rethink it because higher capital gains tax rates in the future could reduce or even eliminate the benefit of tax deferral. The article continues:

‘…Many tax experts are laying odds that a new administration will move quickly to raise the top rate even higher than 20%, according to David Shechtman, chair of the tax section at Drinker Biddle & Reath LLP in Philadelphia.

The idea of Congress cutting rates seems far-fetched. “Never say never, but it’s hard to imagine that the standard cap-gains rate is ever going to go below 15%,” says JPMorgan’s Mr. Hyland…

‘...Prior tax increases have led to a surge in capital gains being realized ahead of time. After Congress passed the Tax Reform Act of 1986 and the top rate on gains rose to 28%, there was a “surge of recognition of capital gains” in the last months of the year, says Len Burman, director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. “People sold a lot of assets to avoid the increase.”…’

At this point, there is no certainty that tax rates are going up, but I think it is reasonable to conclude that tax rates are not likely to go lower. While I see no reason to sell an asset just to take advantage of low tax rates, I also think delaying a sale just to defer gains is less attractive now because of possibility that capital gains rate will climb in the next few years.

Tags: Business, capital gains, income taxes, Investing, taxes

• Investing , Personal Finance
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Kurt Brouwer October 19th, 2007

It has been 20 years since that memorable day when the Dow Jones Industrial Average fell over 22%. The fact that the drop was only 508 points should put things in perspective for us in the sense that a comparable drop would have to be over 3,000 points.

1987 was also a memorable year for our firm because we opened our doors in August, 1987. At that point, we did not have many clients, our track record was nonexistent and few people could spell or pronounce our firm’s name correctly, so we figured we had an opportunity to do something new and different. Our firm, Brouwer & Janachowski Incorporated, pioneered what was then a new type of investment or financial advice. We developed portfolios of no-load mutual funds for our clients instead of the more traditional portfolio of stocks and bonds. We still invest this way today — 20 years later.

That year I was in the middle of writing our first investment book, Mutual Funds: How to Invest With the Pros (Wiley). Since 1987, many things have changed, but our beliefs and values as financial advisers have remained remarkably constant. Here’s what I wrote about investing way back then:

‘…Planning your next investment move these days can be like driving in the fog. Even if you manage to get home, your nerves are shot. Was it worth the aggravation? Or you may feel you’ve been left behind-stuck in the slow lane as a red Ferrari screams by at 80. The stock market has taken off, but your stocks haven’t. Or you hear about takeovers and leveraged buyouts where savvy investors made a killing-but when you finally act, it’s on a stale ‘hot’ tip and your fingers get singed.

Before you spend time learning how to invest, first decide if you should be investing at all. Before you put money in mutual funds or other investments, think hard about your finances. Do you have good health and life insurance? Have you salted away several months’ living expenses in a money market fund or a bank account? Have you contributed to your individual retirement plan (IRA) or your company’s retirement plan? Make sure you have taken care of these personal investments before you look further.

BROUWER’S BASICS FOR BULLETPROOF INVESTING

Pros invest using simple, common-sense rules. They’re human, too, so they need a disciplined work and decision-making environment. Sounds complicated, right? Don’t believe it. Just follow these four steps

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Tags: 1987, 508 points, Crash, doom, Investing

• Business , Investing , Mutual Funds , Personal Finance
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