It's 2011—Do You Know Where Your Money Is?
As another year comes to a close, it’s time to review—and hopefully, rev up—our finances. Need advice? No worries: Just flip on the TV, turn on your car radio, go to CNNmoney.com or MSNmoney.com or just plain Money.com (you get the idea), ask your lawyer, banker or accountant . . . and you’ll be bombarded with pointers on managing your cash.
Of course, we know that the best financial advice is tailored to each individual’s circumstances, tolerance for risk and need for income. But we decided to conduct an unscientific poll of money experts statewide anyway, and came up with a handful of one-size-fits-all (well, sort of) tips for the coming year. Here they are, in no particular order:
Check your emotions at the door
“It’s very difficult to not be emotional about money,” says Ron Weiner, president of RDM Financial Group Inc. in Westport. “What happens, typically, is that human beings make bad decisions when they’re in an emotional state.” It’s not unusual to take things personally, especially during an economic downturn, says Weiner: “You may think you worked hard and you don’t deserve this.” It’s important to let go of any anger or frustration you’re feeling and think with your head, not your heart. “I talk to clients who say, ‘But my kids need my help,’ when they really should be asking whether it’s time to take care of the kids—or themselves,” he says. Develop a long-term financial plan—and stick with it, and manage money like it’s a business (which, of course, it is). Don’t get Weiner wrong; he isn’t suggesting you turn your back on family and friends in need, but do take a moment to reflect and ask yourself whether now is really the time to “pay for your daughter’s Manhattan apartment or send your grandkids to a private preschool for $35,000 a year.” Ron Weiner, RDM Financial Group Inc.,Westport, (203) 255-0222.
Pay your mortgage; protect your credit score . . .
Silly credit score jingles abound on TV, but there really is something to the buzz. While most people recognize the link between their scores and financial well-being, “few understand how important mortgage-payment history is to the calculation of your score,” says Katherine A. McCue, vice president of the McCue Mortgage Co. in New Britain. There are many companies that will run your numbers, but the most accurate barometer of your credit worthiness is your FICO (Fair Isaac Credit Organization) score, says McCue. FICO calculates your score based on money owed—and the type of credit debt you have (school loans or revolving credit cards, for example). “Because your mortgage is often the largest credit line you have, large debt and late payments will have a greater negative impact on your FICO score than a late payment on other bills such as car loans, credit cards or utilities,” she says. “If you are having trouble making your mortgage payments, start by contacting your lender and asking about your options. Many modification programs have changed recently to help more people, even those who are on time with their payments but may be at risk of being late,” says McCue. Some may even qualify for the Emergency Mortgage Assistance Program (EMAP) administered by the Connecticut Housing Finance Authority, which provides temporary assistance for eligible homeowners facing foreclosure because of financial hardship. To learn more, go to ownitkeepit.org, for information on budgeting, counseling and understanding your mortgage loan. Katherine A. McCue, McCue Mortgage Co., New Britain, (800) 382-0017.
. . . or refinance, if you can
Because interest rates are at historically low levels, this one really is a no-brainer. “Right now, long-term home mortgage rates are below 5 percent, and while the approval process is more arduous now than a few years ago, it is probably worth the trouble to refinance,” says John Vaccaro, CEO of Westport Resources Management in Westport. For starters, Vaccaro recommends switching any adjustable-rate mortgages to fixed-rate loans. “Do it now before rates go back up too much,” he says. “Should inflation reappear, your new smaller mortgage payments will feel even smaller as inflation shrinks the value of the dollar,” he adds. “For example, if your mortgage is $400,000 and you are able to refinance at 4.75 percent, your principal and interest payments will be about $25,000 a year. If inflation averages only 3 percent per year, in 10 years this will make your payments seem more like $18,500 a year.” A good deal. John Vaccaro, Westport Resources Management, Westport, (203) 226-0222.
Invest in emerging markets
We heard this one a lot, but in case you’re wondering, emerging markets are loosely defined as “developing countries with relatively low per capita incomes, often with above-average economic growth potential” (according to global investment firm TD Waterhouse). “These markets traditionally are rapidly growing, but lately have been volatile,” says John W. Rafal, president, Essex Financial Services Inc. in Essex. Still, many have been exhibiting much greater stability than in the past, so Rafal says his firm advises clients to “add a larger proportion of their assets to emerging-market funds.” Weiner of RDM Financial agrees. “It’s not that we don’t think the U.S. will become more financially stable, but [emerging markets] are growing at such a faster pace,” he says. “Countries like Brazil, Russia, India and China are likely to have growth rates in the 6 to 10 percent range, whereas the U.S. growth rate [is expected to] be no greater than 2 percent in coming years.” Weiner says another good investment option is companies that sell to, and derive a good deal of revenue from, emerging-market countries. John W. Rafal, Essex Financial Services Inc., Essex, (860) 767-4300.
Manage your smaller portfolio wisely
Few of us have buckets of money to invest. But no matter the size of your portfolio, “it’s a good idea to first balance income and growth,” according to Joseph Maxwell, senior vice president and chief investment officer for wealth management, People’s United Bank. “Next, determine your risk tolerance. You don’t want to get into an investment you’ll lose sleep over,” he says. “Lastly, consider your life stage and make appropriate investment decisions based on future plans.” In general, says Maxwell, the current interest-rate environment (rates are low and bond prices high) dictates that investors not be overly aggressive in bonds, but “concentrate assets in the equity area, which has better growth potential.” In addition, the economic stimulus package the Federal Reserve recently announced “bodes well for the equities markets,” he says. “Equity-income yields are now quite attractive when compared to those of bonds. In a normal environment, where we might recom-mend 60 percent in equities and 40 percent in bonds,” today, Maxwell says, “we would recommend 70 to 75 percent in equities and 25 percent in bonds.” Joseph G. Maxwell, People’s United Wealth Management & Trust, Bridgeport, (203) 338-2270.
Keep an eye on new tax laws
“The estate and income tax picture is changing dramatically,” says Vaccaro of Westport Resources. Because of federal, state and local budget gaps and the health-care entitlements voted in 2010, Vaccaro says some tax bills will be going up. “This is particularly true for those families earning more than $250,000 a year or with large estates.” This changing landscape is likely to impact everything from child-related tax laws (adoption, child investment income, earned income for additional child tax credits) and decreased estimated tax payments for some small businesses to earned-income credit changes—as well as health and medical-related tax laws. Vaccaro’s advice: See a certified financial adviser to determine just how you will be affected, and update your personal financial plan accordingly.
Convert to a Roth IRA
Remember, going into 2011, that “all individuals are able to convert existing IRAs (or workplace savings plans) to a Roth IRA,” according to Camille M. Gagliardi, senior financial adviser with Ameriprise Financial Services Inc. in West Hartford. The income limits that previously prevented individuals or couples with incomes of more than $100,000 from completing a conversion no longer exist. “There is now the potential for everyone to benefit from tax-free growth of earnings,” she says. What’s the appeal? “Perhaps the most attractive feature of a Roth IRA is that earnings grow on a tax-deferred basis and distributions are tax-free,” says Gagliardi. (Even better if you anticipate that your tax bracket will be higher than it is now by the time you begin withdrawing from your account.) Do keep in mind that taxes and penalties may apply if holding-period requirements are not met, she says. Also remember that conversion to a Roth IRA from your traditional IRA or other eligible retirement plan will be taxable, so check with a tax adviser to determine the actual liability that would apply to your conversion. Camille M. Gagliardi, Ameriprise Financial Services Inc., West Hartford, (860) 313-1313.
Invest in dividend-paying stocks
Let’s face it, there have been better times. For many investors, “it’s tough to find income,” according to Valerie Dugan, senior vice president for wealth management, Morgan Stanley Smith Barney LLC, in Hartford. “With interest rates at record lows, cash and money-market funds are earning next to nothing. Even the yield on 10-year Treasuries is hovering around 3 percent [at press time].” And yet, investors who are willing to take on a bit more risk may want to consider another option: dividend-paying stocks. “After the recent market slump, some beaten-down blue chips have dividends as high as 4.5 percent—and those payouts may soon increase,” says Dugan. “Amid the recession, companies hunkered down and squirreled away money. Now they’re sitting on record piles of cash. At the end of the second quarter, 2010, nonfinancial companies in the S&P 500 had a collective $842 billion on their balance sheets, according to Standard & Poor’s.” The (potentially) great news? “With corporate profits roaring back, CEOs may just be willing to loosen their purse strings—and give more money back to shareholders in the form of higher dividends,” she says. Valerie Dugan, Morgan Stanley Smith Barney LLC, Hartford, (860) 275-0779.
Consider MLP securities
It may be time to think outside the box, according to Vaccaro of Westport Resources. At present, returns on bonds, CDs and money- market accounts are very low (no more than 3 percent), so people who are trying to live on these investments may not be able to cover expenses. “As an alternative, you might consider an array of higher-yielding securities, such as publicly traded Master Limited Partnerships,” says Vaccaro. These are securities usually tied to the transportation of energy products (oil, natural gas, propane), with distribution rates over 5 percent. Furthermore, he says, “A high percentage of these cash distributions are typically tax-deferred until you sell the security.” Of course, though “returns have been predictable in the past, there is no guarantee for the future,” Vaccaro notes. “Also, since they trade on the stock exchanges, the prices do change.”
A final word to the wise
Because financial advice can affect the overall performance of an investment, best practices dictate that advisers who recommend specific investment types should also disclose that they are recommending them to other clients. Similarly, they should disclose whether any current clients hold positions in those investment types.