The January Effect – What Is It?

As the end of 2013 approached you probably heard a lot of commentators talking about the “January Effect”.  No, this is not the feeling everyone in the Northeast has about relocating to somewhere warmer.  The “January Effect” is the market phenomenon that the stock market rallies in the month of January with a particular rise in small and mid-cap stocks.

There are several theories for the January Effect’s positive performance including:

– Investors selling losing positions in December to tax-loss harvest or offset taxable gains before year-end and then investing the excess cash in January.

– mutual fund managers becoming more conservative and taking less risk as the year ends, then becoming more aggressive in the new year.  In this case, small-cap stocks usually reap the benefits.

Research by notable professors Eugene Fama and Kenneth French shows the smallest 10 per cent of stocks averaged a 7.9% return in January from 1926 through 2011, versus an average of 0.9% in the other 11 months.  Large-cap stocks showed no such anomaly.

Of course, past performance does not guarantee future results and the historical trend has not been as pronounced in recent years.  Some additional reasons you would be ill-advised to put too much emphasis in the theory include fundamental economic and market conditions, tax harvesting occurring earlier in the year and increased transaction costs.

While the “January Effect” makes for interesting conversation and enjoyment at guessing what it actually means, the best investment strategy is based on your risk profile, time horizon and cash flow needs and not timing the market.

/0 Comments/by

Planning for the Unexpected

We have had the unfortunate honor of working with many widows – both young and old, breadwinners and stay-at-home mothers.  Whether there’s any warning or not, the death of a spouse is a tragic loss, but you can help your loved ones by making sure these basics are covered:

Life Insurance:  If others are financially dependent on you, life insurance (generally term insurance to cover an actual financial need of a specific duration) can replace your income and keep from adding financial hardship to emotional hardship.

Estate Planning Documents:

Will – Directs where you want your property to go, helps to preserve your family wealth, appoints a guardian for minor children if both parents die together

Medical Directive – expresses your wishes for medical treatment, extraordinary measures, and life-ending actions when you are unable to provide those directions

Power of attorney – names someone to manage your financial affairs when you cannot

Financial Directions:  These are incredibly important in easing the process of transferring assets to your survivors and bringing your financial matters to a close. We recommend a centralized location for keeping all your financial info, passwords, estate planning documents, and any other wishes.  Even with everything in place like this, the process can is overwhelming and lengthy, but your family will appreciate what you’ve done to lessen the burden.

This is the time of year that we most focus on family.  Taking the time to plan for the unexpected is a gift to our families that will last forever.

/0 Comments/by

One Month Left

Where did the year go?  Good thing there is one month left to take full advantage of all the tax deductions available for you.  One thing I’ve seen during the past two tax seasons  at Lighthouse Financial Advisors (LFA) is how clients benefit when everything they need for taxes is organized and complete before the year end, instead of waiting until April 15th of the following year.  This last month provides ample time to advantage of the following tax savings strategies:

  • Retirement Account Contributions:  If you haven’t maxed out for the year yet, try to increase the amount you contribute in the month of December.
  • Charitable Donations: What better time of the year to give?  If you haven’t opened a Fidelity Charitable Giving Account yet, reach out to any one of us at LFA for an easy to-do application.
  • Mortgage Interest Deduction: If you add up the amount you have paid in mortgage interest for the year, and combine it with the amount of your charitable donations, you may reach a number that exceeds the standard deduction, making it worthwhile to itemize.
  • Medical and Dental Expenses: They are often the largest expenses for retired people. Start getting all expenses organized.
  • Required Minimum Distributions (RMDs): Make sure you take your RMD before the year end.  Let your advisor know if you would like to take advantage of using your RMD to pay and offset the amount you owe in taxes.
  • HSA Contributions:  They are tax deductible; you can use your contributions to reduce your tax liability.

These are just a few of many ways to offset what you owe for taxes.  So reach out to any of us here at LFA to discuss what you can do to help lower your 2013 taxes!

T


/0 Comments/by

A Guide to Pass the Family Vacation Home to the Next Generation

Vacation homes by the beach, ski slopes or in the countryside are a great source of enjoyment and pride for a family. For most families, the intention is to pass ownership down to children and eventually grandchildren. However, there are numerous financial and emotional factors involved in transferring real estate to the next generation.

Tax strategy for transferring property is a tradeoff between income and estate taxes. If you do not have a taxable estate, then it makes sense to transfer property at death so your family members get a step-up in basis. If your family expects to pay estate taxes at your death, then there are a number of techniques designed to lower the tax bill.

For a refresher, under current Federal law estate tax law, each individual can pass $5.25M of property tax-free (there is no limitation if passing outright to a spouse), however, each State has its own limit of tax-free transfers (NJ’s is $675,000 and NY’s is $1M). A married couple can pass $10.5M of property estate tax free for Federal purposes.

The easiest and least expensive way to transfer a vacation home is through an outright gift during your life but this means giving up control of the property once the gift is made. This can be accomplished through a single gift of the fair market value of the home or giving away fractional shares of the house using the annual gift tax exclusion. The current annual gift tax exclusion is $14,000 per person. Thus, a couple with two adult children could transfer $56,000 of the home’s value in 2013.

Another common transfer option is using a qualified personal residence trust (QPRT). The QPRT has a set term of years (anywhere from 10-20 years) and ownership is transferred to a trust. For the length of the trust term, the original owner maintains the same level of use and is responsible for paying taxes and other expenses. Once the trust term expires, the beneficiaries assume ownership and are responsible for the taxes and other expenses.

An additional benefit/drawback for minimizing the grantor’s estate is they are required to pay fair market value for renting the property if they continue to live in or use the house regularly. A disadvantage of the QPRT is if the grantor dies during the trust term then the home reverts to his or her taxable estate.

Of course the most important factor in transferring a home is to make sure the next generation wants to keep the house, has the resources to maintain the property and the tools necessary make decisions together.

/0 Comments/by

Financial Health

The relationship between your financial health and physical health are interwoven and very similar.

With both, if you feel scarcity, the more time spent ruminating about it.  When your health fails, it can be all consuming.  Having trouble financially, the mental energy committed to it can be draining.

Choices you make today have a huge impact on your future self.  Did you push yourself physically to maintain a strong foundation? Did you save enough for your future self’s independence?

Chasing the fad of the day can spell disaster. Are you trying to get fit with a 2 week detox program only to find yourself right back where you left off? Are you seduced by the financial media into thinking there are shortcuts and can’t miss investments?

You may be able to splurge once in a while, but bad habits can be your downfall.

Life’s vices feel good in the moment but can be devastating for both your health and finances.  We usually know what we should do, but that doesn’t always make it so.  Of course we know a balanced diet and exercise with plenty of sleep is what we should do. Of course we know we should save for the future, insure against life’s perils, and take a long term view.

Working with a professional can greatly improve your long term results.  A trainer can keep you motivated, safe, and provide an expert plan to reach your goals.  A Financial Planner can keep you from making costly mistakes, provide discipline in trying times, and help you realize your dreams.

Many people can get by without either, but your chance and speed of success are usually much higher with than without. There is an expense to both, but both are investments in yourself.

As in financial and physical health, an ounce of prevention is worth a pound of cure. Have you had your check up?

/0 Comments/by

Keep It Simple

KISS (Keep it Simple Stupid), was the motto my high school basketball coach used to preach to us every practice.  Don’t try to force your passes; don’t do anything crazy when dribbling the ball; just stick to the basics and let the plays develop until you have the open shot.  Working at Lighthouse Financial Advisors and learning Robert’s views on the investment strategies for our clients, it is amazing to see a similar philosophy in place.  Our advisors do a great job of explaining to clients that it is not possible to “outsmart” the market.  Investors need to roll with the ups and downs, be patient and continue to keep their portfolios as diversified as possible.

The Investment Answer: Learn to Manage Your Money and protect Your Financial Future is a book I recently finished reading that does a phenomenal job of explaining how to simplify the investment decision for your clients in plain and simple English.  It is co-authored by Dan Goldie, an Investment Advisor who has been using Dimensional funds (also used by LFA) in his clients’ and Gordon Murray, who worked for Dimensional for many years himself.  They do a great job of cutting through all the financial mumbo-jumbo to explain the basics that we must know about investing in order to insure financial freedom.  If you are interested in obtaining a copy, please contact the LFA office.  We are confident that you will enjoy the book as well.

/0 Comments/by

Is it Time to Talk to Your Spouse/Adult Children about Your Finances? It May Save Them a Lot of Money and Stress.

Everyone has heard the stories of a famous person or family member that passed away without a will or without ever informing his spouse or adult children about his financial affairs.  Often, this places a huge financial and emotional burden on grieving loved ones and causes a lot of stress.  Whether it involves tracking down a complete list of all assets/life insurance owned or just maintaining the bills after a death, adult children and spouses have a much easier time when a road map is created and provided to them.

A role of a financial advisor is to persuade clients to have discussions with their spouse and adult children about their finances.  The biggest barrier advisors hear when discussing the topic is it will be a difficult discussion.  That is why we suggest four strategies to foster better communication:

1.      Use your advisor or another family member as a buffer to start and encourage conversation

2.      Let the client dictate the agenda of what is and is not discussed (estate plan, value of investments/assets, allocation of assets upon death, funeral arrangements/etc.)

3.      Start slowly – create a 1-page document listing all accounts with account numbers and passwords, important contacts, phone numbers and share with spouse/adult children

4.       Create a sense of urgency by using real life examples of clients and famous people that recently passed away.

Is it time for you to have this conversation?  Even if you think it will be too difficult, you should still discuss with an advisor and understand the ramifications if you do not.

For more information on this topic please read the NY Times article:   http://www.nytimes.com/2013/05/25/your-money/aging-parents-and-children-should-talk-about-finances.html?ref=your-money-email&nl=your-money&emc=edit_my_20130528&_r=3&

/0 Comments/by

DFA Continues Cutting Edge Academic Research

One of the main reasons we have chosen to utilize DFA (Dimensional Fund Advisors) as our primary investment/mutual fund strategy is their scientific approach based on ongoing academic research.  Below is an excerpt of their newest “dimension” of investing.  We look forward to discussing how this new layer of investment strategy works in our client portfolios.

Adapted From “Despite its Success, Firm is Tinkering with the Way it Builds Equity Portfolios” by Jason Kephart of Investment News, 8/7/13.

For the first time in more than 20 years, Dimensional Fund Advisors is changing the way it builds equity portfolios. Thanks to a breakthrough in asset-pricing research last year, DFA is adding a third layer of screening to its equity portfolios, which already tilt toward small and value stocks. The new layer, or dimension, focuses on a company’s persistence of profitability — basically a stock’s ability to earn a profit consistently.

The idea that a profitable company is going to perform better than a less profitable company over time isn’t a new idea. In fact, it is kind of common sense. The challenge for DFA, which bases all its investment methodologies on academic research, was finding a reliable way to use data to identify future profitability.

“New research has to be very robust, very reliable and have real information that’s not already captured in the other dimensions,” said Eduardo Repetto, Dimensional’s co-chief executive and chief investment officer. The breakthrough came late last year when DFA began looking at companies’ earnings-to-assets and earnings-to-book, rather than cash flow or earnings-to-price.

The company found that using a stock’s price doesn’t lead to any reliable data, because the price of a stock can be very volatile. Using a company’s assets or book value, by contrast, provides a more reliable look at how profitable a company is and how likely it is to continue to be profitable.

When DFA looked at the back-tested results of overweighting the most profitable companies in its portfolios, the results weren’t inconsequential, Mr. Repetto said. In fact, the power of the profitability dimension is about par with the premium seen over time by overweighting value. When the two are combined, it leads to even better results.

“When it’s combined with size, and in particular with value, you can really form portfolios that add value relative to not using that dimension,” Mr. Repetto said.

The new overlay already has been added to seven equity portfolios with about $2 billion in assets, or less than 1% of DFA’s approximately $240 billion in equity portfolios. The plan is to roll it out across the entire lineup by year’s end, Mr. Repetto said. “Right now, we’re working with clients so everyone understands what we’re doing,” he said. “We don’t want anyone to be surprised.”  “This is not magic; it’s based on our understanding of asset prices,” Mr. Repetto said.

“Whenever we can do something good for our clients, it’s in our best interest to do it,” he said.

/0 Comments/by

Charitable Contributions

We are more than halfway through the year but it’s not too late to start finding ways that can help lower your 2013 tax bill.  Donations to charity are a tax deductible expense.  These donations can reduce your taxable income and lower your tax bill, while helping others in the process.

Taxpayers are required to keep detailed records of their charitable contributions that must include the name of the charitable organization, the date of your contribution, and the amount of your contribution.  Nonprofit organizations often provide donors with a written letter acknowledging the gift or with a receipt for the donation. (Save these documents!)

We also encourage our clients to look into opening a Fidelity Charitable Gift Fund.  This is a a donor-advised fund program where donors who contribute to Fidelity Charitable, become eligible to take an immediate tax deduction.  They then are able to recommend grants to be distributed to qualified nonprofit organizations.  Their mission is to make charitable giving simple and effective.

To receive more information about the Fidelity Charitable Gift Fund please reach out to your team at Lighthouse Financial Advisors.

/0 Comments/by

Employer Term Life Insurance

Have you elected additional Life Insurance through your company’s employee benefits?  Many people sign up for coverage because it is easy to acquire since there is slim to no underwriting requirement and have relatively low premiums.  While young, this approach can work if you like the idea of extra insurance on the cheap.  However, at age 45 (if not sooner) the cost usually becomes more costly than private coverage and will increase at quinquennial ages (45, 50, 55 etc).  Employer coverage is also non-portable or expensive to do so.  It should not be counted towards your actual life insurance needs for these reasons.

If you have coverage through work, are near or over age 45 and have insurance needs for a certain time & amount, a term policy likely will save you premium dollars, have a locked in rate, and will not be affected by any employment changes.

Please contact us if this pertains to you and would like to research other options.

/0 Comments/by

Contact

Lighthouse Financial Advisors

3 Harding Rd Suite B
Red Bank, NJ 07701

P: 732.747.6697
F: 800.886.0302
info@lfadvisors.com

Contact Us

Disclosures

Client Relationship Summary – Form CRS
Firm Brochure – Form ADV 2A

Recent Posts

Your Estate Plan: A Living Part of Your Financial Picture

Why an IRS IP PIN is Important for Your Tax Security

Energy Credits – The Basics You Should Know

Maximizing Retirement Savings: Catch-Up Contribution Opportunities in 2025

Home
Founder’s Letter
Who We Are
How We Work
Get Started
Client Resources
Contact
Client Journeys

Copyright Lighthouse Financial Advisors, INC . Disclaimer . Privacy & Legal Information

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP(R),
Certified Financial Planner™ and CFP(R) in the U.S., which it awards to individuals who successfully complete initial and ongoing certification requirements

Website Design by TandarichGroup