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Archive for July, 2011

If you have two years before your student enters college …

 Test Prep

Every tenth of a point added to a student’s GPA may save thousands of dollars in loans that won’t have to be paid back later because colleges will give preferential aid to good students.  So now’s the time to consider test prep courses for the SAT.

 

Business Interest

Financial aid is based on the parents’ tax return from the base year (the year before the student enters college).

So any strategies (including tax strategies) that can lower the reported family income may help improve odds for financial aid. If you have any interest in running a business on the side or working as an independent contractor (i.e. real estate agent or MLM distributor, for example), now  would be the time to start.  That’s because most businesses will show losses during the first couple (or more) years which can help lower the Adjusted Gross Income and improve odds for financial aid.

 

Real Estate Strategies

Use home equity if you have any.  The possible “triple play advantage” for this option is clear:  1.) in most cases there is a tax deduction for the interest, 2.) you temporarily reduce the equity in your property and lower your asset value which lowers your potential family contribution and 3.) as a secured loan, the interest rate is low compared to other options.

Another late-stage planning technique is to use the proceeds to buy an immediate annuity.  This can shelter the capital and the payout can be used toward the mortgage payment. For details on this strategy, call for a College Cash Flow Planner Model.

 

FOR MORE PERSONAL TIPS, CALL STEVE @ 978-388-0020 or 617-398-7494

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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Bonds are not the stodgy, boring things that most investors think of even though there’s no army of talking heads on financial news shows talking about them.

They are a huge market (about double the value of stocks as noted in my last post). They are an essential part of our economy.  Most companies cannot function without easy access to credit.  In fact, the shock and uncertainty that followed the collapse of some of the largest banks pretty much brought the economy to a standstill and contributed mightily to the Great Recession.

But that doesn’t mean that there isn’t money to be made in this asset class. Savvy investors of all stripes need to consider the value of bonds in a well-diversified portfolio.  And how you build that portfolio will help lower risks and costs and ultimately mean more money in an investor’s personal bottom line.

Whether someone is retired or not, bonds can provide income and potential capital appreciation (and depreciation if not hedged properly).

Bonds are a key part of an income-producing strategy (dividend-paying stocks are another asset class useful for this as well).

What is a Bond Ladder?

Essentially, a bond ladder describes a strategy to manage fixed-income investments by staggering the maturity dates of the various investments.

Some may be familiar with CD ladders: You select a series of bank certificates of deposit and stagger their maturity dates so that every six months, for example, a CD matures and you can reinvest the proceeds.

The advantage of this is that in a rising interest rate environment the investor is not locked out  of getting a higher rate on new money.

As with any fixed income investment, the disadvantage is that in a falling rate environment money that matures gets reinvested at a lower rate.

To minimize this impact professionals focus on the concept of “duration” which is a measure of how sensitive a bond (or any fixed income investment) is to changes in interest rates:  The lower the duration, the less sensitive and vice versa.

Mutual funds may publish an implied “duration” measure but it is not accurate because the fund, unlike the bonds themselves, is perpetual.

So to minimize risk to a fixed income portfolio, an investor (with the help of a competent financial professional) can create a custom portfolio.  And unlike a passive index fund, this custom portfolio can be built using bank CDs of staggering maturities for the near-term money coupled with a variety of bonds (corporate, US Government and municipal issues) with their own staggered maturity dates.

To mitigate the risks posed by higher interest rates caused by inflation or other political influences, the mix can also include “floating rate” bank notes. These are essentially bank loans to companies that adjust. Think of them like adjustable rate mortgages but to fund company operations  instead of real estate.

To add diversification to the mix, one can add closed-end funds that can be bought at a discount. These funds are professionally managed and offer an opportunity for price appreciation but at an expense ratio that is typically far lower than a conventional open-ended bond mutual fund.

By combining these elements, an investor may be able to lower the overall risk from interest rate movements, from default risk of individual components and from the impact of a “run on the bank” when others are selling (NAV risk).

And the overall cost of putting this together is cheaper than many mutual funds.  The cost to buy or trade an individual bond is typically included in the yield offered without any additional charge.  CDs do not have any added cost.  And for US Treasurys there may be a nominal fee (less than $3 per bond or example).

A knowledgeable financial professional can have access to hundreds of bond brokers.  By being independent and not beholden to any one broker’s inventory, an adviser can access offerings from multiple sources, find the best price and terms and lower an investor’s costs.

Depending on the total assets in the bond portfolio, the cost for professional management to monitor and make changes can typically run between 0.4% and 0.7% of the portfolio which is well under the cost of many mutual fund options.

For help putting your personal portfolio together, call Steve Stanganelli at Clear View at 978-388-0020 or 617-398-7494.

 

 

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Investors are always looking for the next big thing. By the amount of time and energy devoted to talking heads divining tea leaves and spouting stock tips on news programs, cable TV and the internet, you would think that the only market that counts is the US stock market.

In fact, the global bond market actually dwarfs the stock market by a factor of two to one. According to the December 2010 Asset Allocation Advisor, the amount of outstanding debt in the world tops $91 Trillion compared to the $52 Trillion market value of all stock markets around the globe. Of this all US stocks are valued at only $17 Trillion.

There is a mistaken belief among investors that bonds are only for “conservative” investors or those who are retired. Stocks are exciting.  Bonds are boring.  If we have learned anything from the financial collapse triggered by mortgage bonds in 2008, bonds are anything but boring.  The important lesson is knowing that bonds are not to be ignored and can play an important role in a diversified portfolio when done right.

What’s an investor to do?  Build a better mousetrap.

Most investors, if they have any bond exposure at all, will buy them through a mutual fund.  While mutual funds offer instant diversification and professional portfolio management, there are limitations.  In no particular order, these are: costs, inability to control for taxes, lack of customization and what is known as “NAV” risk.

For actively managed bond mutual funds, the average operating costs (or expense ratio) can exceed 1% per year.  For index or passive bond mutual funds, the costs can be less (sometimes as low as 0.2% per year) but you will only have access to a statistical sampling of bonds.  With either option you lack the ability to customize the holdings to match your specific needs for generating income or control the timing of sales which may be important from a tax perspective.

Another problem, NAV risk, is little understood by consumers.  Mutual funds are priced daily.  A value is determined for each of the mutual fund’s investments (closing price times number of shares or units owned).  And this total is divided among the total number of mutual fund units outstanding.  This Net Asset Value is the number you see in the charts and tables on line or in the newspaper.

With a mutual fund there is a constant flow of money coming in to buy more units or flowing out to cover redemptions made by other investors.  Sometimes there is a mismatch between these flows.  If there is a “run on the bank” and lots of redemptions occur, the mutual fund may be forced to sell holdings at “fire sale” prices intended for long-term investment to raise cash to meet the demands caused by redemptions.  For those investors who hold on, they can be punished in the near-term by seeing the NAV fall and dragging down the value of their holding. That’s the NAV risk.

In the next part of this blog, I’ll talk about the ways to help reduce the impact and costs of these problems by building your own portfolio of bonds.

For additional information or help with investing, call Clear View Wealth Advisors at 978-388-0020 or 617-398-7494.

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