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The Wall Street Journal reports that efforts to pass an extension of the Bush-era tax cuts have failed in the Senate.

If these politicians are serious about getting rid of “tax uncertainty” and reducing tax liabilities on the vast majority of Americans, then they should be dealing with a relatively simple and uncontroversial thing – patching the AMT tax exemption. Otherwise, more than 21 million families will see their tax bills go up next year. But like the estate tax, these are for the most part great stealth taxes. No one has to go on the record about voting for higher taxes because it just will happen.

As a nation we cannot even afford to extend the Bush-era cuts temporarily much less permanently if we are serious about tackling the deficit. And the tax cuts are far from being stimulative in this economic environment.

More stimulative options would include payroll tax holidays and extensions to unemployment benefits.

Instead we will be left with the “tax uncertainty” of the AMT and the estate tax. And every other thing that is the serious province of government will be held hostage.

On second thought, there really is no tax uncertainty. The Congress has had nearly nine years to come up with solutions for the estate and Bush tax cuts. We know that the rates on both will be going up on January 1. And we know that AMT will, too.

So now that we have certainty, can we please move forward and do some other stuff that really needs doing?

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Black Friday is traditionally the day that can make or break a retailer’s bottom line.  But don’t let enthusiasm for the season, the sales or the advertising hype end up putting you into the Red.

Black Friday is here.  Even before you may have had a chance to digest your Thanksgiving feast or recover from a day of football, you may have already been lured into the local mall.  Maybe you were one of those early bird shoppers preparing for a marathon day of shopping at 1 AM.  (It’s not too late to consider these tips for the rest of your shopping season or to teach your kids).

I was not one of them.  I slept in and have probably missed a host of specials and discounts on every imaginable thing sold. While I don’t feel bad I know that I’ll probably be picking on the leftovers like a I will be with the Thanksgiving turkey in the refrigerator.

Although I’m not the best marathon shopper, I thought I’d share a few tips that may help you avoid turning this holiday’s shopping season into a budget-busting hole for your family budget that you’ll be paying for and digging out of long after that snazzy do-dad you bought for Uncle Charlie is lost or breaks.

Have a Budget

No one says that you have to go and take out a second mortgage on your home to buy gifts for the entire world (that’s even assuming that you can qualify for a Home Equity Loan or HELOC).

It’s probably reasonable to budget somewhere around 1% of your gross income for holiday purchases of gifts for others in your family and friend network. Unless you’re buying an engagement or anniversary ring for your significant other, there’s no need to bust the budget here – even then there are limits. (And you really should not be spending more on stuff than you’re putting away in your IRA or 401k).

Are you afraid you’ll be considered the cheap skate relative or office mate? Who cares?  Are those folks going to bail you out if you’re in financial trouble?  Do you really want to be one of the folks who’s still paying off the credit card charges you incurred for this holiday by the time you serve next year’s Thanksgiving turkey?  All of those great savings you got will simply be replaced by interest charges on the balance you carry.

Gifts are barely remembered while memories of sharing time with friends and family have more meaning to most folks.

Make a List and Check It Twice

Just like Old Saint Nick, you should prepare a shopping list. Have a written list of who’s going to be receiving gifts.  If you know them well, you can jot down a few ideas of types of gifts to try to find.  Before you even open up your web browser or step foot in the store, get this done.  Without a list you’re more likely to become an impulse buyer.

Have a Shopping Plan

Experienced shoppers know that it pays to have a plan of attack when those doors open.  You’ve been scouring the newspaper inserts (you do still get the newspaper, right?) and browsing the websites.  You’ve been in the stores before and know the floor layout.  You can bypass all the stuff you don’t need and just go straight to the department in the store where that perfect gift for Aunt Sally is.

Hey, store merchandisers know that you’re only human and easily distracted.  That’s why they’ll stack up stuff near cash registers.  That’s why grocery stores force you to walk through the entire store to get to the dairy case and that quick stop to pick up milk costs you $30 because you pick up a “few things.”

I prefer to use shopping sites that will find and compare items.  Whether you use Amazon.com or MySimon.com or a host of other shopping robots, you can narrow down the price range to expect to pay for an item.  And for the Smartphone set, “there’s an app for that.”  You can download an app that will allow you to scan a product’s UPC which can then pull up product information and comparative prices.

Consider Charity

You might want to give back instead of simply consume.  Sure, we need consumers to buy more stuff to get the economy moving again (we also need corporations to invest their $2 trillion in cash back into their businesses by buying equipment and hiring folks but that’s a different discussion).

But nothing says that you have to stimulate the economy single-handedly.

There are causes and people who need your help throughout the year and providing a donation in lieu of a gift made in China will help them, make you feel good, provide you with a tax deduction, and reduce our trade imbalance which will ultimately improve the strength of the US dollar.

Remember the Spirit of the Season

What do you really want your family to remember about the season?  What values do you want to pass down to your children or grandchildren?

Sure, it can be all about the ostentatious display of holiday lights and some of those displays are really nice and others are just way over the top.

Sure, it can be about buying the biggest, best new shiny thing.

I’m not trying to be Scrooge here. Far from it.  I believe that the holiday is about family and friends.  And more particularly, I think that playing Santa for young kids is magical – for you and them.

When I was growing up, my brother and I typically received one gift each from our parents, aunts, uncles and grandmother. And after we opened them up, our parents let us keep one toy out to play with while the others were put away so we didn’t end up overly distracted and bored with the toys all at once.

On the other hand, I remember going to a cousin’s house and they had TONS of packages under the tree.  Their parents would wrap all sorts of little stocking-stuffers – candy, marbles, even tooth paste and socks.  It was all about showing the quantity of gifts even if they were mundane, everyday sort of things.

I think that I enjoyed our holiday more and better because we weren’t focused on tearing off lots and lots of wrapping paper.

And I think that’s what I want my soon-to-be 15-month old son, Spencer, to take away as part of his understanding of the holiday and our new family’s traditions.

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After the Dow Industrials reached their peak on October 9, 2007, there was a long, painful decline to the trough reached on March 9, 2009.  During that time the DJIA lost 54% but was followed by a rally of 70%. Even with this spectacular run up through 2009, the index never reached it peak. While closer now after a good 2010 it, the peak is still a long climb up the mountain.  In fact, to break even from a 50+% loss requires a disproportionate increase (more than 100%) just to “get back to where you once belonged” as the classic rock song lyrics said.

Investors Win By Not Losing

As this roller coaster shows, its easier to keep what you have than try to rebuild it.  Unfortunately, after such volatility, investors tend to flee to places that are perceived to be safe.  For most that has created a flight to bonds. While investors think of risk as “loss of capital” the traditional views of risk continue to be turned on their head. Sure, you could stash your money away in a money market or under the mattress but what kind of return will that produce?  Will you have enough to eat more than dog food in retirement?

A recent documentary on the disaster at Pompeii and Herculaneum shows how many townspeople fled to the concrete tunnels near the wharves.  Considered a safe place, it ended up as a tomb to more than 300 skeletal remains. These hopeful survivors were trapped by the lava flows which sealed up the tunnels where they had fled.

In many ways, investors fleeing the danger of the markets by shifting to government bonds could be dooming themselves to a similar fate as the Pompeians.

The returns from “safe” Treasuries are pathetic.  Huge investor appetite has driven up to demand and helped lower the yields offered.  A backlash could hurt investors when interest rates rise as they inevitably have to.

If the goal is to preserve capital and avoid dangers, it shouldn’t matter to an investor what asset class is used.  (It’s Halloween.  Watch any scary movie and when the hapless victim is trapped he/she could care less whether the guy in the hockey mask is stopped by a dump truck or an arrow).

In much the same way, we should be looking at other ways to conserve capital.

Carrying Junk Around

Say “junk bonds” to someone and they may be thinking about Michael Milken in the 1980s or businesses on the brink of bankruptcy.  While these bonds are issued by companies with lower credit ratings, they offer a very good alternative to “safe” Government bonds. The point of diversification is to not put all your eggs in one basket.  Today most investors are torn between a savings account paying practically no interest or reaching for yield using alternatives.

The bond market prices the risks of bonds every day.  Currently, the bond market is pricing in a possibility of 6% default risk on junk bonds as a group.  That’s down from its historic number. Some individual bonds of companies may certainly be higher but as a group that’s not a bad number.  Some analysts at JP Morgan Chase have even estimated that the default risk for 2011 is as low as 1.4%.

Why so low? The projected default risk is low in part because companies are showing their highest level of profits in years.  They have shed workers, squeezed productivity gains from those remaining and taken over market share as weaker competitors have failed. The prospects for these companies look even better considering that as a recession ends company cash flows improve.  This means more cash available to service debt. And as these companies improve so too will their credit ratings leading to lower interest rates that they can get when they refinance their debts just like any homeowner would who has an improved credit score.

Avoiding the Danger of a Secular Bear

In a secular bear market, there are rally periods while the markets as a whole may languish or sometimes drop.  During the secular bear from 1/1/1965 to 12/31/1985, a Buy and Hold bond investor would have been whipsawed but ending up gaining about 1 basis point (or 0.01%)  per year for 20 years.  Not a lot of payback for the sometimes stomach-churning ride over that time.

A More Tactical Approach to Risk Management

Not all bonds are the same.  There are government bonds, municipal bonds, US investment grade corporate bonds, US hi-yield/junk bonds, convertible bonds, bonds from overseas and bonds from emerging markets.  Just like every homeowner applying for a mortgage is different and has to go through different underwriting,  the characteristics of all these bonds are different as well.

For instance, hi-yield bonds are more likely subject to credit risk.  Since the rates on these types of bonds are higher than that found on a Government bond or investment grade corporate bond, they are not so sensitive to changes in interest rates.  On the other hand, Government bonds are more sensitive to interest rate risk and the perceptions about expected inflation or the impact of monetary and fiscal policy on future interest rates.

Since these two bond categories are influenced by different factors, they tend to not be correlated meaning that they don’t move in lock-step: When one is zigging the other is probably zagging in the opposite direction.

A key way to reduce risk and potentially increase returns when dealing with bonds is to rotate among the different bond types.  Sometimes the market conditions favor one flavor of bonds over another.  At other times it’s better to reduce all bond types and shift to cash or money markets.

Simply buying and holding means that gains made in one period may be taken away by another. If you’re able to make gains and take them off the table from time to time, you’ll have less money at risk and greater opportunities at preserving capital for the long term.

In the chart below, you can see that buying each of these major bond indexes can produce widely different results.  For nearly the same risk level (as measured by the standard deviation), US High Yield long term bonds have a clearly higher overall return and higher return during periods of higher interest rates than the long-term US Treasury index.

Bottom Line

Investors seeking ways to add income to their portfolio and reduce risk of loss to their capital really need to consider alternatives to buying and holding.  Rotating among these different bond asset types may reduce the overall volatility to the portfolio and preserve capital for the long term.

If you don’t want to end up like the victims of Mount Vesuvius and be buried by a “safe” move, you should open your minds to understand all the risks and ways to manage them.

Figure 1 (Source: BTS Asset Management Presentation/Nataxis Global Assoc, 10/27/2010)

Bond Index Annualized ReturnNov 1992 – Aug 2009 Standard Deviation (measure of risk) Annual Return During Rising Rate Period
BarCap US High Yield Long 10.45% 10.94 6.75%
BarCap US Corp Baa Investment Grade 6.97% 6.31 1.75%
BarCap US Aggregate Bond 6.46% 3.82 1.31%
BarCap LT US Treasury 8.11% 9.28 -0.40%

Figure 2 (Source: BTS Asset Management Presentation, 10/27/2010)

Bond Sector Credit Risk Interest Rate Risk Currency Risk
US High Yield High Low None
International Developed Market Low Medium High
Long-term US Government None High None
Emerging Market High Low High
US Municipal Low High None
US Investment Grade Corporate Low High None

Figure 3 (Source: BTS Asset Management Presentation, 10/27/2010)

Loss Gain Needed to Get Back to Break Even


+ 18%


+ 25%

(30%) + 43%

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While a drip can be annoying while you’re trying to sleep, it is anything but that when it comes to investing. It may even be a sweet sound of money accumulating as you sleep.

DRP or DRIP are the acronyms for Dividend Reinvestment Plans.  Companies offer shareholders a way to reinvest in the company stock using a transfer agent and bypassing the services and cost of a stock broker.

If a company offers such a program, then any shareholder participate.  These programs are typically offered by larger companies that typically pay dividends.  A shareholder benefits from owning an equity investment from the possibility of capital appreciation (buying low and selling higher) and from cash flow distributed to stockholders in the form of dividends.

Companies offering such DRIPs will give a shareholder the option to receive their dividends in the form of cash or using the cash to buy more shares of the company stock.  This process may be familiar to mutual fund investors who choose to reinvest dividends distributed from the mutual fund company to buy more shares in the mutual fund.

In addition to buying company stock from the proceeds of dividends, some companies also offer optional cash purchases programs (OCP).  If you work for Raytheon, HP or GE, for instance, your employer provides a way for you to buy the company stock from amounts you may have deducted from your paycheck.

Participants in such plans in the US are listed as “registered” shareholders through a transfer agent. In the old says, this would have required a shareholder to hold onto the original stock certificates but now this is not necessary as the transfer agent keeps track of all shares in their “book entry” record keeping system.

By purchasing at least one share of a company’s stock, an investor becomes eligible to participate in these plans.

They are a cost-effective way to build a long-term position in a brand name company using “dollar-cost-averaging.”

These can be an ideal gift to young child or even to help supplement your retirement.

For instance, if you invest $50 per month from a child’s birth to their 18th birthday, you would have invested $10,830 and your investment could be worth nearly $30,459 assuming a 10% annual return (capital appreciation and dividends).

You can check out other resources at www.directinvesting.com or www.giftofstock.com.

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Do you have any idea of how much you need to save for the retirement lifestyle you envision? If not, you’re like the majority of Americans who have never done the math. According to the 2009 Retirement Confidence Survey conducted by the Employee Benefits Research Institute, only 44% of workers have tried to calculate how much money they will need for a comfortable retirement.

Nearly 47% of retirees left the workforce earlier than planned.

53% of American workers have saved less than $25,000 for retirement.

Whether you’re retiring today, a year from now or the idea of retirement is in the unimaginable distant future, getting a handle on what you need  ill help you prepare for the road ahead.

When workers have a better idea of what they may need they may respond by saving more.  In fact, investors with a financial plan typically have twice as much in savings and investments than investors without a written plan.

The first step is to get a handle on what your current cash flow position is now and what resources are available for saving for the retirement goal.

There is a standard rule-of-thumb that you need to plan for 70% of your preretirement income.  But an individual’s reality is more complex.

It really depends on your health, family history of longevity, desired lifestyle and debt situation at time of retirement.

One of the myths of retirement noted in the Road to Retirement workshop series presented by Quest is that your personal cost of living will drop and you’ll pay less in retirement.  Given the reality of blended families, marriage at a later age, housing costs and increasing healthcare costs in retirement, it may be better to plan for 80%, 90% or even 100% of pre-retirement income.

When thinking about a retirement income goal, don’t forget about the potentially ravishing effects of inflation.  A dollar now will not likely buy the same amount of goods and services that a dollar one, 10 or 30 years from now will.

So save early and often.  And don’t forget to include a good dose of equity – preferably dividend-paying type stocks to help counter the effects of inflation.

Now’s the time to start with a plan.  You can get your FREE Starter Roadmap here:  www.boulevardr.com/goals/SteveStanganelli.

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We live in a sea of credit, credit cards and debt in general. It’s the lifeblood of our economy and personal finances.

Now with recent legislative changes having taken effect in February, it’s time to reassess the credit cards we carry and make the most of them while avoiding any nasty bites from behind.

Cardholders have been receiving disclosures in tiny print from their credit card companies for a while now. But most of us ignore these densely worded forms. But there are hidden traps in them.

Sure, the card companies are not supposed to arbitrarily increase your interest rate on existing balances and it cannot apply payments to the lowest interest rate balances first.

On the other hand, the privilege of having a card will now likely cost more: the return of annual fees, inactivity fees and even fees if you use the card but not enough.

You could consider closing out the cards you don’t use. But remember that will likely have a negative impact on your personal credit score. One of the factors that a credit score is based on includes the longevity of an account and you could inadvertently be hurting your score by closing out an account that you don’t use. It may make sense to use the card for a few transactions to meet the minimum. But plan on paying these charges off in full each billing cycle.

If you do happen to carry a balance, then consider replacing your BIG BRAND card with one of the smaller competitors. These card issuers may offer better deals, lower rates and lower fees, too. Start with a credit union or smaller, local bank by logging onto FindACreditUnion.com.

To compare your existing cards and find other deals, you may also want to check out CardRatings.com or Savvy-Discounts.com.

Considering a balance transfer? Watch out. Big banks are moving to up the fee from the average of 3% of the balance to 5% and eliminating the dollar cap. Look for banks that will do such transfers and cap the total fee.

It’s your money and the one certain way to get ahead is to control the things that you can control. And by watching the details regarding your credit, you can control your costs. Put more into your pocket by reducing the bite from your plastic.

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A recent WSJ/Market Watch online article showed the recent results of a survey conducted by Lawyers.com.

To see the article, click here or paste this URL into your browser: http://www.lawyers.com/~/link.aspx?_id=FB4FE9A5-7469-46CC-B225-44B3BCB5A294&_z=z

The unfortunate reality is that humans are not by nature very good planners for the long term. Most tend to think that such things are good in general but too daunting to take care of given the demands of our over-crowded daily lives. And besides, nothing bad will ever happen to me, right?

It’s sad to say that more people spend more time planning a vacation than worrying about something as dry and abstract as “estate plan.”

The only time such an important topic can cut through the thought clutter is to make it real and tangible. That’s why there was a spike in calls to get life insurance after the Twin Towers fell. That’s why there was an uproar during the whole Terry Schiavo case and folks started calling lawyers to draft health care proxies.

The benefits need to be broken down so that folks can relate. For example: What would you do if your house burned down? People can relate to the pain of being without a home and the devastating impact if they had to shell out cold hard cash from their own pocket to rebuild. Or you can simply show pictures of Katrina victims.

The equivalent is needed for getting people to plan. And as professional planners it’s our job to keep people focused on getting these things done.

Regardless of the amount of your wealth, if you have someone or something you care about, you need to have a plan. Otherwise, the state will gladly impose it’s own plan on you.

So how do you feel about a foster parent for your kids or leaving your hard-earned savings to Uncle Sam?

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