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 - Second Quarter 2013
First Quarter Recap
Equity markets had a strong performance through the first quarter of 2013. During the first three months of the year equity markets across a broad base have moved sharply higher; with the S&P 500 up 10.58% year-to-date. So, let’s give these significant first quarter numbers some perspective. If the S&P 500 continued to increase at this pace all year long, the index would climb close to 50% over the year. Certainly no one actually expects that kind of performance for stocks this year, but it does highlight just how sharply markets have increased so far in 2013.
The other side of this story is fixed income markets. After an extraordinary period of very low interest rates, a minor shift higher in interest rates has more than offset meager yields. The total return on bonds has been pushed to just below zero so far this year. Of course, the ongoing activity of the Federal Reserve significantly impacts the reality in fixed income markets and the Fed is clearly committed to keeping the monetary stimulus for an extended period.
Following a mixed fourth quarter, equity returns were broadly higher during the first quarter of 2013. Including dividends, the S&P 500 Index increased 10.58% year-to-date. At the close of the first quarter, all market sectors posted an increase. Industries that saw gains ranged from healthcare stocks, which had gains of 15.46%, to telecommunication stocks, which lagged with gains of less than 1%. During the quarter, the Dow Jones Industrial Average (DJIA) increased 11.90% and the NASDQ grew by 8.50%.
After leading equity returns in 2012, international markets experienced smaller gains during the quarter. The MSCI EAFE Index of developed international markets increased 5.29% during the first quarter. Picking up where they left off in 2012, bonds have performed poorly so far this year. The Barclays U.S. Aggregate Bond Index fell -0.12% year-to-date.
Markets have remained resilient through the end of the fourth quarter and into the first quarter of this year. They have been able to shrug off developments in Washington, which in the past might have derailed positive momentum. Economic indicators for the U.S. continue to point to slow, but steady economic growth. From a valuation perspective, equity markets continue to trade at reasonable levels.
Taxes and investing go hand in hand. It is literally impossible to invest money without considering the tax consequences. Managing potential tax implications related to individual portfolio investments is necessary to maximize the reward from the risk incurred, but taxes should not be the final arbiter. Investors should never allow taxes to rule how or when to buy, or how and when to sell.
That being said, we certainly don’t advocate anyone over paying on their taxes.
It’s key that your investment advisor work in concert with your tax professional to provide comprehensive investment advice. Working together, they can help to maximize after tax returns.
Managing long and short term capital gains
Long term capital gains are net gains realized from the sale of securities held for more than one year. You can offset long term capital gains with capital losses, if your gains exceed your losses. When filing taxes, you can deduct up to $3,000 in losses from your ordinary income. Remember that excess losses can be carried forward to future years.
Short term capital gains result when securities, which were held for less than a year, are sold. Actual tax rates varying, depending on your situation, but normally the rate for short term gains is higher than long term gains. If possible, avoid short term capital gains, which are taxed as ordinary income.
Include reinvested dividends in cost basis
There are new tax reporting requirements in place to make sure that investors accurately report gains and losses on securities. The legislation requires brokerage firms and mutual funds to report the cost basis and gross proceeds of holdings to the investment owner and the IRS on Form 1099-B.
When making cost basis calculations, be sure to include reinvested dividends in your cost basis. When you reinvest dividends it increases the cost basis since the tax has been paid on the dividends that were reinvested.
Take advantage of available tax shelters
Using tax shelters that are readily available, like 401k plans, IRA accounts and Roth IRAs are good ways to shelter your investments from taxes. Participation in these accounts allows your money to grow on a tax deferred basis. IRA’s and 401K plans will help maximize long term return.
Other tax considerations
• Efficient investing over time will enhance returns. Investing in Municipal bonds, when your tax bracket justifies the spread between taxable and tax free bond yields, will help maximize after tax returns.
• Avoid costly tax shelters, like over-priced annuities. They provide tax deferral, but their excessive expenses and high commissions often erode the overall benefits.
• Be mindful of the mutual funds you buy. Mutual funds with high turnover can cause tax problems at year end.
• Investing in dividend producing assets can still be effective, even with the recent dividend tax rate increase from 15 to 20%.
• Consider appreciated asset gifting to charitable organizations. These contributions avoid capital gains tax and allow for a deduction of the full value of the gift.
These are some strategies that can help minimize taxes related to investments. Be sure to consult with your tax advisor to verify these are right for your situation.
This article first appeared in the Patriot News. For more information on cost basis reporting visit the Articles of Interest section.
Mega mergers and acquisitions (M&A) of U.S. companies have been making headlines recently. Warren Buffet’s Berkshire Hathaway and Brazilian investors plunked down $23 billion for H.J. Heinz. Prior to that Michael Dell, founder of Dell Computers offered $24 billion to take the company he founded private. So where is all this money coming from and why are so many deals being done now?
A number of factors have come into play related to the upswing in mergers and acquisitions. One of the biggest reasons is that many corporations are sitting on a mountain of cash. Uncertainty associated with the slow economic recovery and potential changes related to healthcare and tax policy has caused many companies to slow capital spending and they have seen their cash balance grow as a result of the savings. Normally, companies would have spent this cash to expand or reduced debt, but near zero interest rates have them searching for other ways to realize a return on their cash.
In addition to the growing cash hoard, a general improvement in the economy and rising stock prices, have made CEOs more confident and willing to delve into riskier moves. The final piece is that credit markets, which finance many of the acquisitions, are recovering from the toxic mortgage debacle.
Companies that are in the same industries which are seeing increased M&A activity can benefit from the valuation appreciation resulting from deals. So, if during an acquisition XYZ Company is valued at two times book value, then perhaps it’s competitor ABC, Inc.’s value will rise to a similar level. Private investors holding stock in ABC, Inc. will then see an increase.
There is usually some level of M&A activity across all industries, but the ones that are most likely to see an increase include healthcare, IT and media content companies. Healthcare reform will undoubtedly be a driven for medical service providers and allied industries. Sustained growth and consumer’s insatiable demand for the next, best will keep IT industries on the radar.
Before getting caught up the merger mania, investors should heed to the lessons of the dot-com bubble of 1999 and the buyout bonanza witnessed in 2007. It’s important to remember that the excesses developed from the momentum of the market don’t always end well. Fueled by a rush to join in the action, investors in the past have overpaid for companies or took on debt loads that were too large to sustain.