The Financial Advisor
A Quarterly Publication Of FMA Advisory, Inc.
FMA Advisory, Inc. is committed to our clients’ needs, striving to keep them informed about conditions in the marketplace that impact their investment strategies. As a part of that commitment, we publish a quarterly newsletter, featuring articles on the latest marketplace investment strategies, market trends and conditions, and some of our insights into the opportunities that exist. We invite you to peruse the most recent edition of our newsletter below.
Current Issue - First Quarter 2012
Fourth Quarter Recap
Following a broadly difficult third quarter in equity markets, fourth quarter market performance improved, bringing domestic markets near breakeven levels for the year. In the U.S., concerns about a double dip recession abated, as economic indicators have shown signs of modest growth. Signs of this growth include strengthened manufacturing activity, continued improvement in retail sales figures and gradual improvement in the employment picture. Initial unemployment claims have fallen, staying below 400,000, and job growth has shown recent improvement. Challenges remain domestically as the excess supply in the housing market dampens this important component of the U.S. economy.
International markets also experienced an improvement in fourth quarter results, but gains were muted by the level of uncertainty with respect to the resolution of the European situation. Additionally, although it receives much less press, there is concern in the market surrounding China’s ability to manage slower growth.
Global equity markets closed the year mixed. The S&P 500 index was flat for the year (up 2.11% with dividends). During the fourth quarter the S&P 500 added 11.15%. Although the index was flat overall, sectors showed a wide variance, with utilities doing best (up 14.83%), and financials and materials lagging (down 18.41% and 11.64% respectively). The Dow Jones Industrial (DJIA) Average ended the year up 5.53%, its third consecutive positive year. The DJIA was up 11.95% during the fourth quarter. The NASDQ was down 0.83% for the year following an 8.21% increase during the fourth quarter. International markets were the worst performing asset class during 2011. Measured by the MSCI EAFE index of developed international markets, performance for the year was negative 11.60% following a 3.41% gain in the fourth quarter. With equity returns improving, the Barclays U.S. Aggregate Bond Index lagged during the fourth quarter, returning 1.12%. On the year, bonds were the best performing asset class, up 7.86%.
First Quarter Forecast
After a year of tremendous swings in markets around the globe, it is likely that 2012 will hold more of the same. Investors are looking for a greater level of certainty. Greater certainty hinges on Europe’s sovereign debt crisis and the United States’ economic growth outlook. We are optimistic that the level of certainty will improve over the coming year; as Europe moves forward with a plan to address its debt crisis, and here in the U.S. we will have an election that is likely to clarify expectations with respect to future policy measures emanating from Washington.
The Importance Of An Annual Portfolio Review
Whether you are a just a beginner or an experienced investor, one of the keys to successful investing is an annual portfolio review. Reviewing your portfolio on a regular basis serves several purposes, but is especially important during times of market volatility.
There are a few important things to consider
when reviewing your portfolio:
Have you had significant life changes?
Marriage, divorce, birth and death are the four major life events that can impact investing plans. An annual review will allow you to make sure that your plan reflects your current family status and financial situation. A review will also help take care of minor modifications such as changing beneficiaries.
Has your tax bracket changed?
Boost your after-tax returns by employing tax-efficient strategies that can help reduce your tax liability. You may be able to take advantage of some of these strategies, including contributing to more tax-advantaged investments (401(k) plans or deferred annuities), tax-exempt bonds or tax-managed mutual funds. It may also be important to consider the impact of changes in the federal estate tax law, which took effect January 1, 2011. The federal estate tax applicable exclusion increased to $5 million per person and includes a portability provision.
Have your investment goals changed?
Your investments should reflect your priorities, whether planning for a new home or impending college tuition. An annual review will help you adjust your investments according to changes in your goals and ensure that you are on track.
What is the current market condition?
This is also a good time to look at specific investments. From mutual funds to individual stocks and bonds, evaluate if they continue to have a role in your portfolio based on the past year’s performance and any changes in your objectives.
Does your plan reflect your current financial situation?
Your strategies must reflect your priorities, and since your lifestyle and financial needs change, so should your investment strategies. Does your portfolio now need to generate income? Most investors establish plans to generate income that is sufficient to cover essential expenses, but many factors can change the expenses you have, including marital status and health concerns. Any new or unexpected expenses should be assessed during the annual review.
Likewise, your portfolio income may need to be adjusted. More aggressive strategies that were appropriate earlier in your career may not be appropriate as you near retirement. An annual review can point out how to structure your portfolio to provide the income level you need and identify shortfalls that need to be adjusted.
A portfolio that is regularly reviewed and adjusted to meet your changing life and needs will be more effective in providing the results you and your family need as life progresses. Let the professional advisors at FMA work with you to conduct an annual review of your assets and adjust your holdings accordingly to maximize the effectiveness of your portfolio.
What You Need to Know About
the New Cost Basis Reporting
As part of the Emergency Economic Stabilization Act of 2008, the federal government put new tax reporting requirements into place to make sure that investors accurately report gains and losses on securities when they file their taxes. The changes are ultimately expected to simplify tax preparation for investors, but as the legislation rolls out in phases between 2011 and 2013, investors will need to pay special attention to ensure that the information being reported is correct.
The new legislation requires brokerage firms and mutual funds companies to report the cost basis and gross proceeds of holdings to the investment owner AND the IRS on Form 1099-B. The reporting must include any investment classified as covered securities and identify whether the holding period for the security was short-term or long-term in nature. The 3-year roll out of covered securities is as follows:
• Stock in a corporation purchased on or after January 1, 2011.
• Registered investment companies, including open-end mutual funds and stocks acquired in dividend reinvestment plans purchased on or after January 1, 2012.
• Additional types of securities, as determined by the Treasury Department, purchased on or after January 1, 2013.
Uncovered or non-covered securities are those acquired prior to the effective dates. Taxpayers will remain responsible for reporting cost basis for all uncovered and covered securities on their tax returns.
In most cases, any investment purchased on your behalf by FMA Advisory, will already have the cost basis established. When selling any holdings, FMA follows the industry standard for cost basis called FIFO, or First In First Out. You may elect to utilize other cost basis methods (LIFO, average cost, etc.). Please notify your FMA advisor at the time of the transaction if you want to utilize something other than FIFO.
If any of your investments were transferred into your FMA account and you do not have a cost-basis, you will need to determine the cost basis of any sold security in order to accurately file your taxes. There are steps you can take to help determine the cost basis including: reviewing your original statements or confirmations from the purchasing broker; research historical prices for the purchase date or contact the broker who transferred your securities to FMA.
The IRS may allow the use of an estimate, such as the average for the day purchased or approximate time frame of the purchase. The IRS may require you to report zero if you can't prove the cost basis, so whenever using an estimate, you should consult with an FMA advisor to ensure accuracy.
The professionals at FMA can help you thoroughly understand these new reporting procedures to ensure that your tax obligations are being met. As always, we will work closely with your accountant to provide any information they need. We encourage you to contact our office with any questions you may have on these important changes in IRS reporting.