Category Archives: Investments

Vacation Homes, Timeshares

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  1. Personal-residence rules: Properties rented 14 days/year or less;
  2. Personal-residence rules: Properties rented > 14 days/year and is less than personal use days.  Personal use days = max(less than 14 days, 10% of the rental days)
  3. Rental property rules: Properties rented > 14 days/year and is greater/equal to than personal use days.  Personal use days = max(less than 14 days, 10% of the rental days)

Examples:
a. Rent for 210 days and vacation for 22 days, then you’re under the personal-residence rules.  (rental, 210days x 10% < vacation, 22 days)

b. Rent for 210 days and vacation for 21 days, then you’re under the rental property rules. (rental, 210days x 10% >= vacation, 21 days)

Timeshares

  • If you use your timeshare yourself and not rent it out, then deduct your share of the mortgage interest (as interest on a second home) and the property taxes on Form 1040, Schedule A.
  • If you rent out the unit a portion of the time, the correct tax approach is to allocate expenses based upon personal and rental use by all owners. If these figures are difficult to obtain then use your best guess as to a reasonable allocation, e.g. 50%, and follow the personal residence rules. This approach will permit you to deduct the personal portion of the mortgage interest (as interest on a second home) and the property taxes on Form 1040, Schedule A.

Different Tax Treatment of Economically Equivalent Portfolios

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On December 2, 2011, The Joint Committee on Taxation released a report on income tax treatment for different financial instruments and products.

Thomas Barthold, chief of staff of the joint committee testified “While the underlying economics of two different financial situations may be identical, the tax treatment under the present law may not be equal”.

Mr. Barthold gave the example of two portfolios. Portfolio A holds $100 worth of stock and sells a call option on the stock with a strike price of $112 with a settlement date of two years. The premium is use to buy a put option on the stock with a $112 strike price and a two-year settlement date. The series of transactions results in a $12 profit characterized as a long-term capital gain and taxed at a maximum rate of 15%.

Portfolio B invests $100 in a zero-coupon bond paying 6% interest a year. Imputed interest income of $12 is taxed at ordinary rate up to 35%.

This concept is presented in the example below:

Wells REIT II declined 25%

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[November 10, 2011] Federal regulators have been concerned with nontraded real estate investment trust (REITs).  What appears to the norm for non-traded REITS, the giant Wells REIT II has declined 25%.

Wells REIT II closed their window to new investments on 6/30/2010, bringing in $5.9 billion. The portfolio invested in 93 office buildings in 24 states, Washington, D.C., and Russia, covering more than 23 million square feet. In about a year, share value declined from $10 per share to an estimated value of $7.47 per share for a decline of 25% in value. Following are figures that we have compiled from 3rd party sources:

On 6/29/2011 the fund declared 2nd Quarter 2011 distribution of $0.125 per share or 5% per year.

In September, 2011, the Financial Industry Regulatory Association (FINRA) issued an investor alert cautioning investors on the dangers of non-traded REITs, including liquidity risks, valuation methods, and excessive fees.

FinancialEdge.net encourage investors to do due diligence prior to investing in non-traded REITs. Please contact us at paulsid@financialedge.net should you wish to discuss potential investment opportunities.

more:

http://www.wellsreitii.com

Indexing for Superior Performance

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Passive Investments Can Provide You With Superior Performance

“When you’re underperforming the index, you go home at night and cry in your beer,” he said, adding: “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.” Bill Gross, Pimco.

In a May 2011 study, New York-based Greenwich Associates (a) found that 50% of asset-management firms interviewed and 33% of institutional funds interviewed indicated they expect to increase their allocations to ETFs by 2013.

Just why are asset-management firms and institutional funds employing ETFs?  The reasons include:

  • Use ETFs as part of their regular rebalancing procedures;
  • Employ ETFs for more strategic purposes, such as hedging;
  • Use ETFs as a liquidity sleeve in their portfolios; and
  • Save in fees.

If the smart money is using ETFs shouldn’t you?

Yes.  I think that you should definely use ETFs.  The reasons are many:

    • Many of us work full time and we don’t have time to research individual stocks.
    • Few professionals are able to beat the market indexes over multiple market cycles.
    • Fees for ETFs are significantly lower than actively managed stock funds.
    • Investment in certain ETF (e.g. SPY) exposose the investors to market risk with minimal stock risk.
    • Easier to achieve diversification, an important rule to investing.  Index-based funds tend to have many more individual securities in the fund.
    • Easier to protect our equity investments by use of puts or selling limited holdings.
    • Provides liquidity.
    • Are more tax-efficient that active funds due to their lower turnover ratios.
TakeawaysInvestments in ETFs can provide you with superior investment results.

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(a) http://www.greenwich.com/WMA/in_the_news/news_details/1,1637,1958,00.html?vgnvisitor=eKibl6WLopw=

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Should You Create Your Own Fixed Income Annuities?

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“The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.” — j.p. morgan

Today fewer employers are offering defined benefit plans to their employees.  As an alternative retirees are purchasing annuities that would provide them with a steady stream of income into their retirement years.  Insurance companies have responded to the retiree’s needs with various annuity products.  In recent years annuities continue to grow in popularity.  According to LIMRA, the Windsor, CT-based financial services research firm, the sale of all annuity products reached $122.4 billion for the six months through 6/30/2011, an increase of 13% (a).

What are types of annuity?

Annuities can be segregated into variable annuities and fixed annuities.  With fixed annuities the investors are offered a lower return as the insurance companies assume the investment risk.  With variable annuities the investors assume the risk an can invest in a variety of investments with the expectation of achieving superior returns.

Fixed annuities provide guaranteed regular payments to the policyholder over the term of the contract.  These contracts can either start immediately or deferred to a future date.  Retirees are using annuity payouts to supplement Social Security and cover basic expenses.

Advantages and disadvantages?

With a deferred annuity the investor lose control of his assets once he hands over the money to the insurance company.  Should the investor change his mind there could be substantial surrender charges.

With an immediate annuity the investor give up control of his money.  Most immediate annuity provide the investor with income for life.  Once the investor dies, nothing is left to the heirs.

There are immediate annuities that can provide income to heirs.  Such policies are more expensive resulting in a smaller income to the investor during his lifetime.

Create your own Fixed Annuities.

To save on high commission fees, you can create your own fixed annuities.

In the charts below are example computations using an initial investment of $100,000.  I used the 10 year Treasurys for investment in the fixed income portion.  This instrument currently pays an annual yield of 2.5% (b).  I use the SPY ETF to mimic investment in the S&P 500.

In exhibit A, I allocated $79,250 to 10 year Treasurys with the balance going to the SPY ETF.  Should the market declines 13% per year (twice the gain of 6.7%), the investor have protected his initial investment after 5 years.  Should the market stay flat the investor’s $100k investment grows by 10.4% to $110,414.  Should the market increase by 6.7% per year (c) the investor’s $100k investment grows by 18.4% to $118,361.  In the three scenarios, the Treasurys provide a guaranteed return.  And you, the investor, maintains the assets, not the insurance company,

In exhibit B, I show a 100% allocation to 10 year Treasurys.  If the investor can achieve a rate of 2.63% for the 20 year investment period, he should be able to withdrawal $6,414 per year over twenty years.

Should you buy a fixed income annuity or should you create your own fixed annuity?  Call us at 415.967.EDGE or e-mail us at paulsid@financialedge.net today and let us crunch out the answer for you.

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References:
(a) http://www.financial-planning.com/news/variable-annuity-sales-surge-second-quarter-2674713-1.html?portal=annuities&id=2674713&sponsor_info=1238
(b) http://www.bankrate.com/rates/interest-rates/10-year-treasury-bill.aspx
(c) http://seekingalpha.com/article/270171-jeremy-siegel-finds-stocks-currently-fair-to-undervalued-is-he-right

Alternative Investments Used By Advisers (Investment News Survey)

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In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.       — Warren Buffett

Related Article(s):

Forbes: Indexed Annuities: Protection Racket

Florida’s State Board of Administration Found That It’s Tough to Beat an Index Fund

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According to the St. Petersburg Times, The State of Florida pension fund is under fire by the St. Petersburg Times. According to the article and public documents, the fund is invested about 50 percent in passive index strategies and 50 percent in active strategies including hedge funds, venture capital, real estate and special investments.

The passive index portion has done fine.  Because of poor performance and high fees the active strategies did not perform as well.

The State of Florida pension fund gained 22% for the year ending June 30, 2011.  A simple Core-4 portfolio of Vanguard index funds with the same stock/bond allocations performed 25% during the same period.

read more: http://www.tampabay.com/news/politics/article1183442.ece

8/8/11.  Bank of America (BAC) is down 17% today to $6.80.  Morgan Stanley (MS) plunged 14%, to 17.12.  S&P’s 8/5/11 downgrade on the U.S. sovereign credit rating could have a “material adverse” impact on financial markets.  OfficeMax (OMX) plunged 22%, to 5.43.

8/3/11.  Shares of Dendreon fell 62% to $13.66 in after-hours trading Wednesday on the Nasdaq Stock.  wsj.com”>more

8/1/11.  Skilled Healthcare Group Inc (SKH). had plunged 43% in today’s trading to $5.06 as nursing-home companies generally declined.

Passive Investments, Mutual Funds, and Individual Stocks

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“It’s tough to make predictions especially about the future.” — Yogi Berra

Passive Investments in an index ETFs such as SPY can provide the investor with superior performance.

Below is a chart comparing the SPY to the Magellan fund and four stocks of major U.S. companies – - Citicorp, Cisco, Hewlett-Packard and Microsoft for the 1, 2, 3, 4, 5, and 10 year periods through June 30, 2011.  Note that the fund and the stocks had underperformed the indexes for all periods with the exception of Hewlett-Packard for the 5 and 10 year periods and Microsoft for the 4 and 5 year periods.

The Magellan fund was chose because of their strong performance under Peter Lynch.

The performance were computing from the adjusted ending values obtained from finance.yahoo.com without dividends.

Passive Investing FinancialEdge.net

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Take-Away
* Investments in ETFs can provide you with superior investment results.

Rate of Inflation. Historical Rates of Return.

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The historical rate of inflation is 3%.
source: A bond bubble? Don’t buy low yields, but don’t sell everything

Expected rate of return.  The annual rate of return for your IRA. This calculator assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the type of investments you select. For example, from December 1999 to December 2009, the average annual compounded rate of return for the S&P 500 was -0.6%, including reinvestment of dividends. From January 1970 to December 2009, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.1% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.