Damien Couture

Is a Roth conversion right for you?

February 1, 2010 by Damien Couture

As you may have heard, there has been quite a bit of hoopla surrounding the change in the Roth IRA conversion rules for 2010. Could it be right for you? Let’s examine the basics and then discuss when it might be appropriate. Starting this year and for all subsequent tax years all taxpayers, regardless of income, will be permitted to convert their retirement assets to a Roth IRA. Prior to this year, conversion was limited to those taxpayers with an adjusted gross income of less than $100,000. The amount converted will be included as ordinary income for the year in which the account was converted. However, for 2010 only, taxpayers can elect to defer half the tax liability to 2011 and half to 2012. Partial conversions are allowed so you can dial in how much you want to convert in any one year.

Whether a Roth conversion makes since will depend on a number of factors including; your investment timeline (the younger you are the better), your current income tax bracket, and your anticipated income tax bracket in retirement. Also key, do you have assets outside the converted account to pay the resulting tax? If not, conversion is probably not a good idea. Of course, each individual’s specific financial goals and estate planning objectives will also factor in. Having looked at conversion possibilities for a number of clients, I believe that it is well worth the time to explore conversion. There are many potential benefits to converting:

The current market may still provide a low-cost conversion opportunity – Despite the recent market rally, most investors’ account values are still below the peak of a couple years ago.
Hedge against increasing tax rates – many believe tax rates are going up in the years to come, a Roth removes the uncertainty of what future tax rates might be like.
No required minimum distributions (RMDs) – Roth IRAs are not subject to RMDs that begin at age 70 ½ for traditional IRAs.
Estate planning benefits – beneficiaries can stretch tax free distributions over their lifetimes.
Free “do over” – Roth conversions can be undone with no tax consequences. Re-characterization back to a traditional IRA can be done up to your tax filing deadline plus extensions.
Tax loss harvesting – Taxpayers with Net Operating Loss carry-forwards, business and other ordinary losses, charitable contributions carry-forwards, deductions and exemptions in excess of income and nonrefundable tax credits may be able to convert and pay little or no income taxes on the conversion.

Of course there are many situations where conversion may not be a good idea. A conversion may put you in a higher tax bracket, negating potential benefits. If you expect to be in a lower tax bracket in the future then conversion probably does not make sense. Distributions are tax exempt as long as you have waited five years and are at least 59 ½ so you must be able to wait that long. The decision to convert to a Roth IRA can be very complex and should not be taken lightly. After all, we are talking about pre-paying your tax to Uncle Sam. Please call or email me if you would like to talk about the specifics of your situation.

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and an Investment Adviser Representative of, and offers securities and investment advisory services through, Financial Network Investment Corporation, Member SIPC 1850 Mt. Diablo Blvd., Suite 170 Walnut Creek, CA 94596. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or dcouture@jbcfg.com.

Back to Basics in 2010

January 8, 2010 by Damien Couture

Happy New Year everybody! At the beginning of a new year it is always very tempting to offer up some forecasts of what to expect in the economy and investments during the coming year. I am sure you will see many commentaries out there that will attempt to do this. One thing that always makes me laugh is when I hear people say that we live in “uncertain times” or that the “market doesn’t like uncertainty.” What a joke. Since when has there ever been a time when the future was certain? As investors, uncertainty is all we have and all we ever are going to get. As Yogi Berra taught us; “It’s tough to make predictions, especially about the future.”

Of course, I certainly have some opinions as to what the outlook might be and it is very important to understand how major long-term trends will affect the economy and the markets. However, for today I thought it would be a good idea to go back to basics and talk about some fundamental guidelines for investing that I believe can guide you through any type of market. Regardless of an investor’s stage in life, the information age we live in has made investing more complicated and confusing than ever. Individual investors are bombarded with an information overload on a daily basis. My advice is to turn down this “white noise” by doing the following:

Know and keep your objectives in place, only altering them when circumstances force a change. Consider adhering to my Five Tenants for Investing:

Invest with a plan. Sounds basic enough but have a specific plan and time frame for your money.
Diversify. Invest globally and maintain exposure to a variety of asset classes.
Invest with a professional. Get some help. A professional can help you put a plan together to reach your goals and manage risk. More importantly, a professional cam help take the emotion out of investing by injecting some rational thinking and perspective. This is crucial during downturns.
Invest continually. Up or down markets, keep reinvesting and adding to those accounts.
Have patience. Probably the most important tenant of all. The biggest pitfall I see for investors of all ages is not sticking to their plan. Too often, investors change the direction of long-term plans by making short-term decisions based on emotion. Decide if you are an “investor” or a “trader.” Investing should only be undertaken with a long-term time horizon.

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and an Investment Adviser Representative of, and offers securities through, Financial Network Investment Corporation, Member SIPC 1850 Mt. Diablo Blvd., Suite 170 Walnut Creek, CA 94596. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or dcouture@jbcfg.com.

Emerging Markets the Key to a Global Recovery?

December 10, 2009 by Damien Couture

You do not have to look too hard to find evidence that the U.S. economy is still in sorry shape. Unemployment just went over 10%, there are “for lease” signs everywhere you look, consumer sentiment indicators remain low and the housing market is still trying to find a bottom. I expect consumer spending here in the U.S. to be depressed for a long time. Despite the economic situation domestically, I still believe there will be good investment opportunities over the next several years for those who maintain a global perspective. The growth of the emerging market economies and specifically the growth of emerging world consumers may well play a pivotal role in keeping the global economy humming along.

The excessive spending by U.S. consumers the last ten years or so has left U.S. households under saved and over indebted. At the same time, however, our spending binge has helped create tremendous economic growth, job growth and income growth in the emerging markets. These newfound emerging world consumers may help pick up the slack going forward as U.S. consumers curtail their spending and repair their balance sheets by paying off debt and saving more.

The growth in the spending power of emerging world consumers has been quite dramatic over the last ten years. Ten years ago, the total value of emerging world consumption was about 50% of the total value of U.S. consumer spending. Today, the spending of emerging world consumers is equal to 91.7% of the spending by U.S. households.* Essentially, the world has almost reproduced or cloned the U.S. consumer.

Going forward, this new class of consumers will be a force. On average, these emerging market consumers are much younger, have low debt and high savings. They desire all the nice things we have (and take for granted I might add) and are willing to spend to get them. Cleary the U.S. consumer may not be up to the task of leading global growth, but all is not lost. We are no longer the sole engine pulling the global economic train. Emerging market consumers should be able to fill or at least reduce the gap created by our subpar spending and consumption. Invest globally with this in mind and rewards should
follow over time.

* Wells Capital Management, Economic and Market Perspectives, September 2009
Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and an Investment Adviser Representative of, and offers securities through, Financial Network Investment Corporation, Member SIPC.

These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability and differences in accounting standards. Not all recommendations are suitable for investors. Each investor must consider their own goals, time horizon and risk tolerance.

Your comments are welcome. Damien can be reached at 925-280-1800 x101 or dcouture@jbcfg.com.

MARKET WATCH
DAMIEN COUTURE

What Tiger Woods Can Teach You About Investing

November 7, 2009 by Damien Couture

Tiger Woods recently became the first professional athlete to eclipse the billion dollar mark in career earnings and endorsements. Now, I have no idea what he does with all his money, but an interesting study of professional golfers shows that Tiger, along with the other Tour players, show a tendency to be risk averse when they putt. Behavioral finance research has shown that individuals are hard-wired to avoid certain risks at crucial times. This risk intolerance is evident even though, in so doing, people impose costly economic penalties on themselves.

Perhaps this study can tell us a little more about why, at key moments, people refuse to take chances that will make them money. The golf research was done by two professors from the University of Pennsylvania. They studied putts attempted by 200 professional golfers between 2004 and 2008, 1.6 million putts in all.* Their research showed that professional golfers make par putts more frequently than they do birdie putts. They estimated that his can cost a top-20 golfer about $1.2 million in prize money per year. The study measured the length of each putt using laser technology and showed that birdie putts were made 3% less frequently than par putts of the same length. They ruled out other factors; player ability, ball position on the green, learning from other players’ putts, and the players’ standing in the tournament. After adjusting for those possibilities and others, they concluded that golfers exhibit a measurable and costly bias known as loss aversion. And yes, even Tiger Woods, widely regarded as the greatest player of all time and arguably the best putter of all time, was just as guilty of loss aversion as his competition.

Stated another way, golfers’ fear of making a bogey carried more weight than the potential benefit of making a birdie. This bias affects how professional golfers play. Many professional golfers admit as much. Justin Leonard, a very successful Tour pro had this to say, “When putting for birdie, you realize that, most of the time, it’s acceptable to make par. When you’re putting for par, there’s probably a greater sense of urgency, so therefore you’re willing to be more aggressive in order not to drop a shot. It makes sense.”

When it comes to investing, I am all for risk management. However, successful investing combines balancing risk and reward. Think about how the aversion to loss may have affected your investment decision making during this past year. Reducing risk has been in vogue since the financial crisis began, sometimes, however, the problem is not too much risk, but too little.

* Advisor Perspectives, Investing Lessons from Golf and Blackjack Players, 9-15-2009

Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and an Investment Adviser Representative of, and offers securities and investment advisory services through, Financial Network Investment Corporation, Member SIPC. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources, however we make no representation as to it’s completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or dcouture@jbcfg.com.

MARKET WATCH
DAMIEN COUTURE, CFP