Global Investing

It's A Big World

The world can be a scary place and for most Americans, there's no place like home. But for investors, not only is the world a place for adventure, it may also be the source for higher growth and returns. Since World War II, the U.S has dominated the world capital markets. With five percent of the world's people, the U.S. produces 25 percent of global economic output and, until recently, accounted for 50 percent of world stock market value. With growth abroad eclipsing that in the U.S., in the last seven years, the U.S. share of world stock market value has dropped to 42 percent, according to Dimensional Fund Advisors. Emerging market share has climbed to 14 percent from a low of 4 percent in 2003 as commodity prices soared. With disasters in Japan looming large and revolutions spreading, it's tempting to stay at home. Mark Twain dismissed U.S. travelers as innocents abroad. But over the last thirty years, investment returns have been higher abroad. Over the last 10 years, U.S. market returns were often negative while international stocks returned 7 percent a year and the MSCI Emerging Index was up 10 percent. There's no place like home but it could pay to shop the world.

Social Security Earnings

Never Too Old

 

Many people continue to work and get paid past their normal retirement age. No matter how young or old people are, Social Security adds those earnings to their lifetime earnings record. In turn, this 35-year earnings record is used in determining their retirement benefits. If one has worked for less than 35 years, zeros are added into the formula for years not worked. If one has worked more than 35 years, the lower earning years (adjusted for inflation) are dropped from the formula. A surprisingly large number of people are affected by this and should review their benefits. We know of child singers and teenage actors who have substantial earnings. We also have met many people in their 70s or 80s who continue to work and are well paid. Some women initially retired with a spousal benefit but continued to work. At some point, the woman’s own benefit could eclipse the spousal benefit, which is at most half as large as the primary wage earners’. In the case of a divorcee, it may be a little difficult to check, but it may be worth doing. With the help of the Social Security administration, a review of your benefits is always available.

Tax Planning

More Than An Afterthought

In the last minute rush to finish their taxes, many people throw in an IRA contribution without much thought. Tax planning in general and IRAs in particular deserve more care and attention. In growing our assets and preparing for retirement, we have four major levers: increasing income, spending less, improving investment results and minimizing taxes. IRAs can be useful in two of those four categories. Since the huge bear market, it is generally advisable for most people nearing retirement age to try to increase their savings. Correctly using the best retirement vehicles is one of the easiest steps to do this. Choosing which types of accounts to use is important and varies with each person’s needs. For starters, using a Traditional IRA provides a front end tax deduction for those eligible. Establishing a Roth IRA doesn’t provide the initial deduction, but in most circumstances earnings from the Roth come out tax free.  Traditional IRA distributions are taxed at the ordinary income tax rate.  Further, Roths don’t have a required minimum distribution after age 70 ½ as do Traditional IRAs. Getting these choices right and not running afoul of the complex rules can make a huge difference in how much money you accumulate.

Gift Taxes

 A Congress Bearing Unusual Gifts

For those inclined to be generous, Congress made it a lot easier last year. As part of the tax cut extension, Congress increased the estate tax exemption as well as increasing the gift tax exclusion. It is now possible for an individual to give $5 million without a gift tax. Each spouse could separately gift $5 million or for a couple, acting together, $10 million. The individual annual gift limit remains at $13,000. The extension is good for two years. No one knows what will happen afterwards. The $5 million figure could stay, it could revert to the previous $1 million or it could be any other number. Although anyone who watches Congress closely soon learns that it is difficult to predict Congressional actions, most observers believe that Congress won’t make retroactive changes to the tax law during this two year period. For wealthy individuals who are in a position to take advantage of the higher gift tax exclusion, the next two years may prove to be a uniquely favorable period.  Many possibilities have been opened up by these tax law changes and the window of opportunity could shut as quickly as it opened.

Rule Change

 No More Social Security "Do Over' Rule

The Social Security Administration has ended the “do-over” provision. 

The rule enabled people whose circumstances had changed -- they found a new job or inherited money -- to stop receiving their Social Security retirement benefits.  In return, they would receive higher monthly checks when they did retire.

The do-over required repaying benefits in a lump sum with no penalty or interest. In extreme cases, delaying benefits from the early retirement age of 62 to 70, the retiree’s monthly check would be twice as large counting inflation adjustments. Over a lifetime the difference could total hundreds of thousands of dollars if the retiree and spouse live into their 80s.

Only a tiny fraction of the 50 million Social Security recipients used the do-over clause. But there were   rising concerns of potential abuse of the rule. The financial press had emphasized the possibility of an “interest-free loan.” 

The rule change highlights the importance of carefully analyzing Social Security options before signing up for benefits. For nearly two-thirds of Americans, Social Security is their largest or second largest asset in retirement. Getting it right can make the difference in the financial security they enjoy in retirement.

An Investing Bargain

Try the Free Lunch 

The best bargain in investing is diversification: its free.

Most people nod agreeably when they hear that but then do the opposite. They can't resist buying a 'hot' initial public offering of a promising company that could lead to riches. Or they look up which mutual fund manager has a hot hand and climb aboard.

Unfortunately most IPOs or other well considered stocks may not tum out as well as we hope. Managers with the hot hand often find that it cools off occasionally with dreadful results.

Three years ago many experts considered AIG among the safest insurance companies in the world. In September. 2008. stockholders found out otherwise.

Meanwhile. investors who placed their faith in widely diversified mutual funds fared much better. While diversified investors got hurt in the crisis. their funds probably recovered. Those who relied on a handful of stocks were at much greater risk of never recovering. 

It comes down to the old story of the tortoise and the hare. While the hare might shoot ahead during the race. the tortoise is a much more reliable finisher. And if you want to take good care of your money. isn't that your aim?

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