Growing Your Wealth

As economic uncertainty increases so does the volatility of the financial markets. The storm clouds over Europe during 2011 demonstrated the truth of that observation. Each bit of news over resolving the sovereign debt crisis seemed to inspire a strong market response.

With the fragile economy, this might seem like an unlikely time to explore the issues that attend "sudden wealth." But even in difficult economic times, people can come into money suddenly. The most routine sources of sudden wealth are inheritances and lump sum distributions from employer retirement plans.

IRS issued a report in May on the top 400 taxpayers by adjusted gross income (AGI) each year for the years 1992-2008. This exclusive club has a lot of turnover. The report demonstrates that top incomes are derived from investments, not wages or salaries.

The IRS is cracking down on people who have undisclosed income from hidden offshore accounts. It's a big job. To get a jump on it, in 2009 the Service offered reduced penalties for anyone who came forward to disclose voluntarily such accounts and bring those assets into the U.S. tax system. About 15,000 taxpayers came forward during the program, and another 3,000 have made voluntary disclosures since the program closed. Perhaps because of this success, a new voluntary disclosure program has been announced for 2011.

What duty does an investment advisor or stock broker owe his or her clients? The flip answer might be, to paraphrase Will Rogers: "Only recommend stocks that will go up in value. If they go down, don't recommend them." But that's not the real world of investing. Nearly all investments may go down in value in some circumstances. Currently, there are two legal standards, one for brokers and another for investment advisors. Brokers must take steps to be confident that an investment is suitable for each client.

Officially, the current economic recovery has been under way since June 2009, when the economy as a whole began growing again. Unofficially, many Americans have remained skeptical of such pronouncements, given the persistence of high unemployment. But the skepticism seemed to give way in the 2010 Christmas shopping season, when consumers opened their wallets a bit wider than expected. Early projections tracked a 5.5% increase in retail spending in the 50 days before Christmas, compared to the year earlier.

Investors with a sense of the history of the financial markets have high hopes for 2011. That's because since the 1930s the stock market has generally done best in the third year of a President's term. MarketWatch's Mark Hulbert, looking at the Dow Jones Industrial Average since 1896, has found that the average Dow return in the third year was 15.5%. In contrast, the first year of a President's term averaged 8.8%, the second 0.4% and the fourth 4.1%.

Within days after the law reforming the financial industry was signed by the President, the Securities and Exchange Commission asked for public comments about possibly changing the standard of care associated with the delivery of investment advice. The new law requires the SEC to study the matter, and having studied it, the SEC is empowered to change those standards. The goal is to enhance investor protections and investor confidence.

What's up with inflation? I see gas prices are going up, yet there's no increase in Social Security payments? Should I be worried? -LIVING ON A FIXED INCOME. Remember the $4 per gallon gas prices of 2008? Those were factored into the CPI that year, and the 2009 Social Security payments got a boost that, in hindsight, may have been higher than necessary.

The recession is over. In fact, according to the National Bureau of Economic Research, the economic trough was reached in June 2009, so the recession has been over for 16 months. This was the longest downturn since the Great Depression, lasting 18 months. The previous post-World War II recordholders were in 1973-75 and 1981-82, both lasting 16 months.

Are Treasury bonds my safest choice in today's market? Your question has oversimplified the problem. Bonds are subject to default risk-the possibility that the issuer will fail to meet interest or principal payment obligations. On this measure, yes, Treasury bonds are your safest choice.

The price/earnings ratio (P/E ratio, for short) is the comparison of a firm's current stock price to its earnings, either reported earnings or projected earnings. As such, it tells us if investors are willing to pay a high price or a low price for a stock. Careful consideration of the P/E ratio was advocated by value-investing theorists Benjamin Graham and David Dodd in the 1930s.

Mutual funds have been permitted to charge shareholders 12b-1 fees to cover the costs of marketing and advertising the fund. Such fees, which are distinct from the fees charged for managing fund investments, may be as high as 1.00% of the fund's value.

Perhaps the most important economic story of 2010's second quarter concerned the Euro and what steps should be taken to restore the standing of Greece in the financial markets. Because other members of the Eurozone are on similarly shaky ground, the ending of this story remains unwritten.

Given the wrenching losses in global equity markets of the last few years, a flight by investors to the lower volatility and higher predictability of bonds is to be expected. Perhaps "stampede" would be a better description than "flight." According to Morningstar Advisor, open-ended bond funds in the U.S. took in $357 billion in 2009, more than all other asset classes combined and more than the previous five years combined.

In an experiment summarized by Gary Belsky and Thomas Gilovich in Why Smart People Make Big Money Mistakes (Simon and Shuster, 1999), shoppers in a grocery store were offered free samples of fancy jellies and a $1.00 coupon good for buying the jar of their choice. During some hours the samplers had six kinds of jelly from which to choose, and at other times they were offered 24 different varieties. The coupons were bar coded to enable tabulation of the buying response of the two groups. The results were somewhat surprising.

During a severe economic downturn, one expects companies to cut their dividends to preserve cash. That flexibility is an essential element of corporate fiscal management. Sure enough, during 2009 the companies in the S

To stimulate more private sector job growth, Congress has enacted the Hiring Incentives to Restore Employment Act. The new law offers employers two distinct tax breaks for hiring "qualified" employees in 2010.

Over the years, employers have taken many steps to improve 401(k) plans, to make them more attractive to participants and to encourage higher participation rates. One of those steps was to increase the number of investment choices available, so that each participant would be more likely to find an investment alternative exactly to his or her taste.

Some stocks pay dividends, and some don't. Which ones an investor chooses is, in part, a matter of risk tolerance. In general, larger and, some might say, stodgier firms are more likely to pay a dividend, while younger, smaller, growth-oriented stocks don't. The company that does not pay dividends plows that money instead back into the firm, which, theoretically, is supposed to make the stock price appreciate more quickly. At one time there was a strong tax incentive to take this approach, as dividends were taxed much more severely than long-term capital gains. At the moment this tax disparity is gone, but it is scheduled to return after 2010.

The U.S. Commerce Department reported on October 30 that the U.S. economy contracted at an annualized rate of 0.3% in the third quarter-the largest drop since the end of 2001 - as consumer spending declined at the fastest rate in 28 years. Most observers concede that a recession is under way.

Historically, municipal bonds have been the Mr. Rogers of investment options: a gentle, risk-free, tax-exempt way to protect wealth. Then came the fourth quarter of 2008, with its stock market crash and Round One of federal government bailouts. Distressed institutional investors pulled out of the muni market, making the problem worse.

Speaking on the anniversary of the collapse of Lehman Brothers, Fed Chairman Ben Bernanke said that from a technical perspective, "The recession is very likely over at this point." He cautioned, however, that the economy may remain weak. In its final meeting of the quarter, the Fed seemed to confirm that view, suggesting that economic activity had "picked up."

There were some hopeful signs during the second quarter, but the recession remains far from over. On the plus side, major stock indexes were briefly in the black for the year, overcoming the steep first-quarter losses. The economy did not contract quite so quickly in the first quarter as initially thought, as the Commerce Department revised the Gross Domestic Product loss to 5.5% from the earlier 5.7% projection. GDP fell 6.3% during the final quarter of 2008, so that is seen by some as the low point of the recession.

There are new players on the municipal bond stage, Build America Bonds (BABs). The new instruments, introduced by the American Recovery and Reinvestment Act (also known as the "stimulus bill"), are a new type of taxable municipal bond.

When the financial markets are in turmoil, a reshaping of the financial and investment advisory industry isn't far behind. Some banks, brokers or advisory firms may go out of business; bankers, brokers or advisors may decide to change employers; or unhappy clients simply may conclude that it's time for a change. There's no hard data on how much "money is in motion" as a consequence of the current economic downturn, but, speaking anecdotally, it seems significant.

As bad as the stock market's performance was during President Bush's final quarter in office, it was worse still as President Obama took the reins. The Dow Jones Industrial Average fell to 6,469.95 in March, and the S&P 500-stock index slipped to 666.79, levels last seen in the last century, when Alan Greenspan famously warned of "irrational exuberance." That's a 54% drop from the high set in October 2007; the only worse period for the stock market in modern history was the 89% drop in the Dow from 1929 to 1932.

Last year was a tumultuous one for municipal bonds. Muni prices tumbled on average 4% in 2008. The Wall Street Journal cited a Morningstar finding that ten muni bond funds fell by at least 15% last year. That's happened only four times in the last 25 years.

Many investors have long relied upon dividend-paying stocks. Retirees felt secure that they had a dependable source of regular income. Conservative investors found them a safe way, relatively speaking, to generate growth by reinvesting their dividends.

The economic news throughout the final quarter of 2008 was unremittingly bleak. The National Bureau of Economic Research declared in December that not only was a recession under way, it had begun in December 2007, a year earlier.

The U.S. Commerce Department reported on October 30 that the U.S. economy contracted at an annualized rate of 0.3% in the third quarter - the largest drop since the end of 2001 - as consumer spending declined at the fastest rate in 28 years. Most observers concede that a recession is under way. The report came just when the Federal Reserve lowered the federal funds rate by one-half of a percentage point-down to 1% - in its attempts to boost economic growth and increase the availability of credit. That's the lowest rate since the 12-month period between June 2003 and June 2004. Before that the rate had not been that low in 45 years, back when Dwight Eisenhower was in the White House.

In September, Hurricane Ike sped toward an historic rendezvous with the Texas coast. Early estimates put the property damage at $16 billion, dwarfing the state-led insurance pool developed to offer hurricane insurance. More than 3 million homes and businesses in Ike's path lost power.

Retirees seeking a reliable source of income at an acceptable level of risk often will boost the bond portion of their portfolios.

Perhaps one of the most common of stereotypes is that women tend to leave family finances to men, while they manage the serious tasks of raising children and keeping the household functioning.

The record price of oil was topic number one through much of the second quarter of the year. Gasoline at $4 per gallon and more hit American automakers hard, as sales of SUVs plummeted. The crucial questions: How long until higher energy prices ripple through the rest of the economy, and how big will the impact be?

Consistent with the practice in other states, Kentucky exempts from state income tax the interest earned on bonds issued by Kentucky or its political subdivisions, but it taxes in full the interest income from out-of-state bonds. In April 2003 Mr. and Mrs. Davis challenged the constitutionality of that tax treatment, pointing to the Commerce Clause of the U.S. Constitution and the Equal Protection Clause of the Fourteenth Amendment. They persuaded the highest state court in Kentucky that they were correct.

Many investors control their tax exposure by adding tax-exempt municipal bonds to the fixed-income portion of their portfolios-especially investors in the highest tax brackets. Is it an option that you should consider today?

We don't know for certain, as of this writing, whether a recession is under way. Certainty comes with hindsight, which is what makes policymaking so difficult. A recession conventionally is defined as two consecutive quarters of negative growth. Although growth has slowed sharply, the U.S. economy hasn't gone negative for even one quarter-the 0.6% growth reported by the Commerce Department for the fourth quarter of 2007, though anemic, was positive. However, there has been enough worrisome economic news-notably in housing and employment statistics-that policymakers already have implemented a range of pro-growth initiatives.

During 2008, 2009 and 2010, there will be an opportunity for certain qualified taxpayers to sell appreciated assets without paying any capital gains tax. This rare zero percent tax bracket for capital gains will last only during the current three-year window of opportunity, and many people have some basic questions about how best to take advantage of this new tax break.

When an investor purchases stock, he or she stands to gain in two ways. First, the investor may sells the shares after they have appreciated in value. Second, earnings may be distributed to shareowners in the form of dividends.

The third quarter of 2007 was an excellent one for the U.S. economy. The Commerce Department reported gross domestic product (GDP) annualized growth at 4.9%, the best quarter since the sizzling 7.5% in 2003's third quarter. Year-to-year quarterly corporate profits rose a respectable 2.7%, to $1.153 trillion. Unemployment continued at the historically low rate of 4.7% into December. Christmas season sales were up 3.6% according to MasterCard Advisors, with a 22.4% spurt for online spending.

The third quarter of 2007 began on an upbeat note, as the Dow Jones Industrial Average and S&P 500-stock index marked new highs in early July. By late July the Commerce Department reported that gross domestic product rose at a buoyant 3.4% annual rate in the April-June quarter. Continued strong employment numbers seemed to be powering an economy-wide surge.

What leads investors to act as they do? Although we would like to believe that all of our decisions are based upon sound judgment, it's easy enough to conclude that emotions may play a role in the decision-making process. In fact, an entire academic field, behavioral finance, has emerged in recent years in an attempt to explain how emotions and cognitive errors influence investors and the decisions that they make.

The big question on many investors' minds is whether the Federal Reserve Board has achieved a "soft landing," a slowing of the economy short of a recession that nevertheless lays the foundation for future growth. The evidence is mixed.

The 27th of February was a difficult, down day on Wall Street. A record 4.31 billion changed hands on the New York Stock Exchange, and the Nasdaq set a record billion shares. Each component of the Dow Jones Industrial Average (DJIA) was at 3:19 PM the losers outnumbered the gainers by 50 to 1. The 416-point drop seventh worst in history for the DJIA, bringing the index back to 2006 levels. In terms, however, the 3.29% loss can't compare to the historic 22.61% crash of 1987. Still, it was the worst one-day percentage drop since March 24, 2003.

Mention the word "risk" in the context of a discussion about investing and what springs to most people's minds? A huge loss when the stock market takes a dive? Or when the price of bonds tumbles? Most likely. Such possibilities lead some people to cling to the "safety" of cash equivalents that bring no risk to their principal. These investors fail to recognize that risks are inherent in this kind of savings, too.

The transition to new leadership at the Federal Reserve Board, in the person of Fed Chairman Ben Bernanke, appears successful. The Fed extended the pause in its series of interest rate upticks by holding rates steady in December. Although the statement accompanying the decision indicated lingering concern over inflation, the drop in oil and gasoline prices in the autumn helped keep overall price indices in check.

How well are your investments living up to your expectations? Are your expectations reasonable? One of the best ways to answer those questions is to compare the performance of your investments to a benchmark, or index.

Investing is serious business, requiring time and study, patience and vigilance. That’s why we offer investment management services to our clients. These services are especially valuable for many people, including those who: recently have sold businesses or properties; work in demanding careers and have little time to follow investment markets and trends; have retired or are about to retire; find themselves with large sums to invest from legal settlements, inheritances or insurance payouts.

Suppose that you buy a newly issued, ten-year, 5% bond for $1,000. You know that you will receive a $25 interest payment every six months for nine-and-a-half years and a final payment of $1,025 at the end of ten years when the bond matures. In all, you receive 20 interest payments totaling $500.

Almost everyone believes that he or she needs life insurance to provide cash for his or her family, business partners and charitable endeavors that he or she values. But what people don't always consider is the utility of life insurance as an investment vehicle during one's lifetime.

Inflation-indexed Treasury securities (commonly referred to as TIPS) first were introduced in 1997. They were created to protect the purchasing power of “savers” and bond investors, while earning a guaranteed rate of return on their principal.

Investing in stocks can be exciting, with the possibility of big rewards (as well as the accompanying risks). Bonds generally appeal to those who are less adventurous. But, John Finneran, CFA, in a June 20 article (

Despite the proven risk-reducing benefits of diversification, many portfolios are underdiversified. A concentrated stock position is natural for the founder of a company, or for executives who are expected to own stock to keep their interests aligned with shareholders'. Inheritance and exercise of stock options also can lead to concentration in too few stocks.

People who are averse to risk often consider cash investments such as money market funds and CDs to be worry free,

Your asset allocation decision establishes the percentages of your portfolio dedicated to various asset classes-stocks, bonds, cash and, perhaps, other less traditional investment vehicles. That decision establishes the risk/reward benchmark for your portfolio.

Individual securities or mutual funds? This question confronts people from the moment that they become investors. Will a portfolio of stocks and bonds or a few well-chosen mutual funds better serve your purposes, means and temperament? The answer, as so often in life: It depends.

You wouldn't start a long road trip without a map or consulting a Web site such as mapquest.com. The same holds true as you develop a strategy for managing your investments. This particular map is the strategy that will allow you to reach the financial destinations that you have chosen.

In August 2005 the U.S. Treasury Department announced that it is reviving the 30-year Treasury bond. The bond, discontinued in 2001, will be auctioned in the first quarter of 2006 and carry a maturity date of February 15, 2036.

As an investor, you're likely to have learned any number of valuable lessons over the years. Some came from observation, some from experience. Why not share some of your life lessons with your children, helping them become knowledgeable investors at an early age?

Market observers long have detected that investment decisions have an emotional component. Behavioral finance scholars have produced a series of studies that point out mistakes that investors tend to make in managing their portfolios. Because it is basic human psychology that is behind their actions, even experienced investors are likely to make these mistakes.

Successful investing does not begin with the question: "Where should I invest my money today?" An orderly, almost scientific, approach is necessary for successful management of your investment assets. We approach investing as a multistep process. Here we focus on the first step: assessing your financial needs and goals, tolerance for risk, investment time horizon and other constraints that you may have.

Whether expected or not, an inheritance, divorce settlement, severance package or pension payout, proceeds from the sale of a business, life insurance, legal judgments, or even lottery winnings-all can put in your hands the equivalent of several years of earnings. Now you're at a crossroads-suddenly called upon to switch from wealth-building mode to wealth management. You will, of course, face circumstances special to your situation. Yet, there are some general guidelines that apply to almost all such transitions.

With the fragile economy, this might seem like an unlikely time to explore the issues that attend "sudden wealth." But even in difficult economic times, people can come into money suddenly. The most routine sources of sudden wealth are inheritances and lump sum distributions from employer retirement plans.