Financial Insights from Your Advisors at:
AJL Private Wealth Management
Fall 2010
IN THIS ISSUE:
Stocks Deserve a Second Look—Despite a
Rotten Decade
Beat the Clock: Five Money Moves to Make
Before Year-End
Where Can I Find Yield Today?
The Rich Life
Help, Get Me a Lawyer: Is it Time to Revisit Your
Estate Plan?
Borrowed Time: Why You May Want to Refinance
Stocks Deserve a Second Look—Despite
a Rotten Decade
They may be worth less. But perhaps we should like
them more.
AJL Private Wealth
Management
AT CITI PERSONAL WEALTH
MANAGEMENT
AJL Group provides investment
strategies to affluent clients. We utilize
a disciplined process, and our
investment capabilities are backed by
the extensive resources of Citi. The
cornerstone of our service
commitment is to offer our clients
distinctive, caring and personalized
attention, in addition to timely
communication and availability
Over the past decade, U.S. stocks have
shed roughly 20% of their value, as
measured by the Standard & Poor’s 500
index. That wretched performance, which
included two brutal bear markets, has
scared off many investors.
Yet stocks deserve a second look—for
these four reasons.
Over the past decade,
U.S. stocks have lost
roughly
20%
of their value.
1. The market’s past is not prologue. Just because stocks performed terribly
over the past 10 years doesn’t mean they’ll perform terribly over the next 10.
In fact, their lousy performance should arguably make us more enthusiastic,
because share prices are now lower relative to measures of value such as
dividends and corporate earnings.
For instance, at the March 2000 stock market peak, the S&P 500 stocks
were trading at 32 times the reported earnings for the prior year, according
to regularly updated data from the website of Standard & Poor’s, a unit of
McGraw-Hill. Recently, by contrast, the S&P 500 companies were trading at 17
times reported earnings.
2. Stocks may be risky, but so are bonds. After a decade of rough markets,
most investors are well aware of the stock market’s downside. But keep in
mind that bonds aren’t a sure thing, either. Since 1981, the yield on the 10-year
Treasury note has fallen from almost 16% to less than 3% today, according to
Federal Reserve data.
But what if that long decline in rates reverses course? If yields climb, bond
prices would fall—which means investors could face steep losses if they have to
sell before maturity.
3. When we purchase stocks, we become owners—and can potentially benefit
as the economy grows. By contrast, when we buy bonds or certificates of
INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED • NOT A BANK DEPOSIT •
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE • MAY LOSE VALUE
deposit, we’re lending money; all we can reasonably
expect to earn is the stated yield.
Over the past 50 years, the economy has expanded
at a 6.9% average annual clip. Corporate earnings,
in turn, rose by 6.5% a year, helping share prices to
a 6% average annual gain. On top of that, investors
collected dividends from many stocks. (The above
figures are based on data from www. bea. gov and
www. irrationalexuberance. com.)
There are, of course, no guarantees that we will
continue to see these sorts of returns. Still, by buying
stocks and becoming owners, our potential returns are
likely greater than those for lenders.
4. Then there’s always inflation. Bonds, CDs and
money market accounts can be useful buffers against
the stock market’s short-term volatility. But that’s
hardly the only danger we face. What about the threat
from inflation? What about the risk that we won’t
achieve our financial goals because our long-run
returns are too low?
Remember, to make real financial progress, we need to
earn a return that puts us ahead of inflation and taxes.
That’s tough to do with conservative investments. If we
buy a 3%-yielding bond and lose a third of our interest
to taxes, we are left with 2%. What if inflation runs at
2%? We’re merely breaking even.
The bottom line: If we want a portfolio that might
fend off the myriad risks we face, we will likely want
to own some bonds—but we probably also want to
hold some stock market investments.
Taking the Sting Out of Stock Market Investing
Stock market declines are almost always unnerving. But is
there any way to make them a little less frightening? Try
these strategies.
Mentally divide your money. Think of your portfolio in two
buckets, “growth money” and “safe money,” and adjust your
expectations accordingly. Your growth money, which includes
your stocks and riskier bonds, is there to provide upside
potential. You should expect the ride to be rougher—but you
hope the long-run returns will be rewarding.
Meanwhile, your safe money, such as your holdings of
certificates of deposit and money market accounts, should
offer downside protection. You don’t expect great returns,
but when your growth money is getting roughed up, you
might turn to this portion of your portfolio for solace.
Look at the big picture. There are also other places to find
comfort. Your total wealth might include your portfolio, any
pension you’re entitled to, the Social Security benefits you
hope to receive, your home and, maybe most important, your
human capital, which is your ability to pull in a paycheck.
When stocks plummet, it might feel like your financial
security is threatened. Yet, in reality, your stocks may be a
relatively small part of your overall wealth.
Turn pain into opportunity. If share prices plunge, your
investment portfolio may be worth less. But stocks could be
better value.
What to do? Focus less on your losses—and more on the
opportunity. Indeed, if you want to take advantage of market
declines, please call—and we can discuss setting up a regular
investment program and whether it might be appropriate to
invest more whenever shares have a particularly bad day.
Keep in mind, however, that this doesn’t guarantee you’ll
make money—and, in fact, you could suffer losses, especially
over the short term.
Where Can I Find Yield Today?
Investors have flocked to bonds in recent years. Could this financial love affair
end badly? For some perspective, we turned to Michael Brandes, Citi’s global
head of fixed-income strategy.
Q: Should we worry that interest rates will head
higher, driving down bond prices?
Michael Brandes: We have higher-than-desired
unemployment, a corporate sector that’s hoarding cash
and many governments around the world applying fiscal
constraint. All of these things suggest inflation will be
low, implying a period of low interest rates. In the U.S.,
we also have a central bank that is very determined that
rates stay low, thus encouraging hiring and spending.
Citi Personal Wealth Management
There’s a great deal of uncertainty—and that’s been
a good environment for bonds, since it’s boosted
safe-haven sentiment. Investors are more cautious
about where they put their money. Companies
and individuals are paying down debt rather than
spending, which is strengthening corporate balance
sheets and household finances. That means defaults
are less likely. Because companies aren’t hiring a
lot of people or buying a lot of new equipment, they
don’t need to issue a lot of new bonds to pay for their
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expansion plans, which also helps support bond prices.
And because overall economic demand is low, we have
slack in the economy, so there isn’t upward pressure
on consumer prices.
Q: What bond-market sectors do you find attractive?
MB: We like high-quality corporate bonds, high-yield
corporate bonds and emerging-market debt. We believe
those areas represent the best opportunity for total
return through a combination of interest payments and
rising bond prices.
When you look at areas like corporate bonds and
emerging-market debt, you’re looking at attractive
coupons. Meanwhile, economic growth will likely
muddle along at a relatively slow pace. In that
environment, we think the spreads between these
bonds and risk-free government bonds are wider than
economic conditions justify, so we could see some
price appreciation as spreads tighten. But the price
appreciation will be less pronounced than we’ve seen.
Q: Where should income investors look?
MB: Right now, the yield curve is pretty steep. If you
own bonds in the seven-to-12-year range, that’s where
you will get the most bang for your buck, whether
you’re looking at corporate or municipal debt. Even if
interest rates do rise, these bonds won’t be hit as hard
as those at the longer end of the yield curve.
Q: What about the risk of defaults in the municipalbond market?
MB: We will continue to see fiscal distress at the state
and especially the local level, so you may want to
review your portfolio with your Financial Advisor. Still, I
don’t think we’ll see widespread defaults.
Meanwhile, we don’t know whether we will get a
reprieve from higher tax rates. But whatever happens
in the near term, over time this isn’t an environment
where taxes are headed lower—which means
municipals will remain popular with bond buyers who
are looking to reduce their tax bill.
Help, Get Me a Lawyer: Is It Time to Revisit
Your Estate Plan?
Estate taxes are gone—but they shouldn’t be forgotten.
The 2001 tax law reduced federal estate taxes over
the years that followed so that, in 2010, there’s no
federal estate tax. Trouble is, the 2001 legislation
expires at the end of this year. That means estate
taxes will go back to their 2001 levels, with the estate
tax exemption set at $1 million—unless Congress does
something in the meantime.
Given the risk that the estate tax
exemption may be sharply lower,
you may want to start a regular
gifting program.
Given all the legislative uncertainty, this could be a
good time to revisit your estate plan. We can help
arrange a discussion with your attorney and with one
of Citi’s insurance specialists. For instance, given the
risk that the estate tax exemption may be sharply
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lower, you may want to start a regular gifting program,
assuming you can afford it.
In 2010, you can give $13,000 to another person
without worrying about the federal gift tax. That means
that, if you’re married and you have three children, you
and your spouse could potentially gift $78,000 this
year—and shrink your estate by that amount.
You might also consider purchasing additional life
insurance for estate tax purposes. A popular strategy:
arrange for insurance on your life to be owned by an
irrevocable life insurance trust. That way, the proceeds
could be exempt not only from income taxes, but from
estate taxes as well.
In addition, you could use various sophisticated estate
planning strategies, such as grantor-retained annuity
trusts, to take advantage of today’s low interest rates.
Those low rates are reflected in the AFR, or applicable
federal rate, which is published monthly by the IRS.
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Beat the Clock: Five Money Moves to Make Before Year-End
The year is winding down. But there’s still time to consider some smart year-end
money moves. Here are our top five.
Rebalance your portfolio. After the market turmoil
of recent years, your portfolio may be out of whack.
For example, to get back to a target mix of, say, 60%
stocks and 40% conservative investments, you may
need to add money to your stocks. One warning:
Rebalancing can mean selling investments with capital
gains, so it’s better done in a retirement account,
where selling won’t trigger a tax bill.
Take tax losses. Outside of a retirement account, you
may be able to cut your tax bill by offsetting any gains
with losses from other securities. Say you sold some
stocks at a profit earlier this year, possibly because you
were worried the federal capital gains rate will rise in
2011. Meanwhile, you also have positions that are worth
less than what you paid. If you want to reduce your tax
bill, you might consider selling some of those losing
securities to help offset your realized capital gains.
When harvesting tax losses, beware of the “wash sale”
rule, which says you can’t recognize a loss if you buy
the same or a substantially identical security within 30
days before or after the sale.
Boost your retirement savings. If you aren’t on track
to max out your contribution to a 401(k) or similar plan
for the year, consider increasing your contribution
from this year’s remaining paychecks. This has two
benefits: It puts more money aside for retirement, and
it will reduce your 2010 tax bill because contributions
The Rich Life
Think the wealthy are big spenders? Think again.
Many millionaires got that way, in part, by not
spending lavishly. Here’s what folks with $1 million
in investable assets do with their money.
Source: Stop Acting Rich…and Start Living Like a Millionaire
(John Wiley & Sons, 2009) by Thomas J. Stanley
Citi Personal Wealth Management
to traditional 401(k) plans aren’t counted in adjusted
gross income. Got even more money to save? Beat
the rush and fund your individual retirement account
now, rather than waiting until right before the April 15,
2011, tax-filing deadline. Your IRA contributions won’t
necessarily be tax-deductible, and you might want to
consult a tax advisor.
Do a Roth IRA conversion. Starting this year, there
are no income limitations on converting all or part
of a traditional IRA to a Roth. The upside: Unlike a
traditional IRA, withdrawals from a Roth can be made
tax-free after age 59½ . You’ll have to pay taxes on the
taxable amount you convert, however, so you probably
shouldn’t convert unless you have extra savings to
cover the tax bill. At Citi, we can run the numbers for
you and tell you whether a Roth conversion might
make sense.
Give back. Between the bear market and rising
unemployment, charities have taken it on the chin
over the past few years. You can lower your tax bill
by donating cash, as well as old clothes and furniture
(in good condition, please), to the charity of your
choice. Just be sure to get receipts to document
your generosity. One warning: If federal income tax
rates rise in 2011, the tax benefit from your charitable
contributions may be greater next year.
$13 Median price paid for a bottle of wine
$16 Median price paid for a man’s haircut
70% Never owned a boat
64% Never owned a second home
10.9% Toyota’s market share among cars recently
purchased by millionaires, making them the most
popular vehicle
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Borrowed Time: Why You May Want to Refinance
If it’s a smart move for America’s largest corporations, maybe it’s a smart move
for the rest of us.
As bond investors have discovered to their dismay,
it is hard to find decent yields in today’s market. But
what’s bad news for bond buyers is good news for
borrowers. In fact, in recent months, corporate America
has rushed to issue bonds, taking advantage of today’s
rock-bottom interest rates. Should ordinary Americans
be doing something similar? For many of us, our
biggest debt is our mortgage—and today’s low rates
may offer a great chance to refinance, especially if
your current mortgage rate is 6% or more.
If you have a 30-year loan and refinancing seems like a
smart move, consider whether you might take out a 15year loan instead, so you pay off your mortgage more
quickly. Indeed, plunking for another 30-year mortgage
may postpone the day when you’re mortgage-free, and
it could make refinancing look deceptively attractive.
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Refinancing your 30-year mortgage?
Consider the advantages of a
15-year term.
How so? Imagine you have had your current 30-year
mortgage for six years, so effectively you now have
a 24-year loan. If you refinance with another 30-year
mortgage, that will likely reduce your monthly nut
simply because you’re spreading the repayment of
your current loan balance over an extra six years. The
problem: It also means you are signing up for six more
years of mortgage payments.
page 5
AJL Private Wealth Management
Alex Marks
Jude Nwaiwu
Senior Vice President-Wealth Management
Financial Advisor
312-977-5163
Second Vice President-Wealth Management
Financial Advisor
773-881-6964
Citi Personal Wealth Management
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