The Most Wonderful Time of the Year

2013 has treated investors to a wonderful meal of huge equity returns, and there may still be a fine port waiting for us at the end. To steal from the Pola and Wyle song, we are entering what is typically the most wonderful time of the year (and right on cue, Bernanke Claus handed the market a dovish communique for the holidays). December is the second strongest month over the last 10 years and has a very clear pattern of strength during the last half of the month, as you can see from the chart to the right (from Jeff deGraaf, with RenMac).

Charitable giving

The Tax Benefits of Charitable Giving

As we come to the close of 2013, financial advisors focus our conversations with clients on assessing where they are and what there is to wrap up before year’s end. If we conclude that they’ll owe taxes, we look for ways to reduce what they’ll have to pay, which often leads to a discussion of the tax benefits of charitable giving. For example, if some of a person’s income is the result of required minimum distributions (RMDs) from an IRA because they are over 70 ½, we discuss donating some or all of the distribution (up to $100,000) directly to a charity before the end of the year. This is called a qualified charitable distribution; if they don’t need the income and hate taking the distribution, this can be a favorable strategy because it removes up to $100,000 of income from the tax return and helps a charity.

Are We Making Too Many Trades?

Actively managing a portfolio requires buying and selling securities with the goal of managing risk and outperforming passive benchmark portfolios. Clients are correct to question the number of trades that are being made in their portfolio in pursuit of this objective. After all, one trade can generate several trade acknowledgments from our custodians, and each trade acknowledgement shows the brokerage commission charged for each transaction. Clearly the cost of trading has a negative impact on total portfolio return. As we approach year-end and Pinnacle’s investment team continues to generate commissionable transactions in our managed accounts, it might be helpful to analyze the cost of brokerage commissions relative to our ability to implement our active management strategy.

The Good News and Bad News About Capital Losses

Discussing capital losses with clients isn’t usually much fun, because it involves the loss of money. The good news is that when we sell a position with a capital loss, it creates a taxable loss. And capital losses can be used to offset capital gains. If a taxpayer has taxable losses in excess of their capital gains, then they can deduct up to $3,000 of those capital losses against their ordinary income.

History Sides with Momentum at Year’s End

With less than two months to go in the year, the markets have returned a remarkable 23% on the S&P 500 index. Our portfolios are diversified, so we haven’t gained that much, but many policies are in double-digit territory (which represent significant gains in less than a year). With healthy returns already booked, one has to question whether investors will want to cash out and go the beach. I admit that a trip to the Bahamas sounds great right about now.

Media Gets it Wrong on Active Management… Again

In a recent “Your Money” column in the New York Times, John Wasik did a great job of delivering the status quo message about portfolio expenses. He reminds us that John C. Bogle, Founder of the Vanguard Group, and many others, have performed studies that demonstrated that active managers cannot beat a passive index because of the fees charged in actively managed funds. He reminds us that these consist not only of the well-known and often discussed fees in a fund’s expense ratio, but also include ‘hidden’ fees like the cost of managers who leave too much money in cash (which does not earn market returns), and fund transaction costs. The article goes on to mention a recent paper by William Sharpe, the Nobel Prize winner this year in Economics, who compared the expense ratio of Vanguard’s Total Stock Market Index Fund to a more expensive actively managed fund, and found that the costs of active management were $2,000 for a $10,000 investment over ten years.

The Shutdown is Over, So What Now?

With the end of the government shutdown and the lifting of the debt ceiling, it’s time to review how we’ve positioned Pinnacle’s portfolios. First, our stance has been that the political impasse was mostly noise — that’s why we didn’t pull volatility down over the past few weeks. Washington’s politicians waited until the last minute, hoping to force some policy concessions, but had to acknowledge the practical reality that making a deal was better than the alternative.

Five Myths About Financial Planning

When it comes to the subject of financial planning, people often have the wrong idea. Whether they confuse planners with accountants, or assume that the planning process is only helpful for those with a lot of money, the misunderstandings endure. Unfortunately, these misconceptions prevent those who would benefit from planning from ever considering the service.

In an effort to clear that up, here are five common mistakes people make about financial planning.