Orange County Register March 13, 2001

Taking stock in a downturn
Stay calm, learn to adapt and don't do anything drastic, local investing experts say.

March 13, 2001

The Orange County Register

What do I do now?

That's what some individual investors might be asking today after Monday's dramatic sell-off on Wall Street, which left the Dow off 4.1 percent and the Nasdaq down 6.3 percent.

Local financial experts are quick to say "don't panic,'' which is probably easier said than done. So here are their answers to some questions jittery consumers might have about their investments.

Q: Monday's market drops really make me nervous. What's one thing I can do now to settle my nerves?

A: For starters, make sure you have a contingency plan in place, says Don Wilkinson of United Planners' Financial Services of America in Newport Beach. For example, right now a conservative investor might want to increase his or her cash position.

"When the market drops 5 percent to 10 percent, increase your cash position by 5 percent to 10 percent,'' Wilkinson says.

And if you're losing sleep at night, it might be time to look at how much you've got hanging out there in stocks and in what sectors, experts say.

If you're properly diversified - and that doesn't mean merely owning 20 different Nasdaq stocks - you shouldn't be worrying.

Q: What about my 401-k?

A: What about it? "I really wouldn't base a decision on just Monday,'' says Sandra C. Field, a certified financial planner at Asset Planning Inc. in Los Alamitos.

Since we really don't know where the bottom of the market is, consumers who are thinking about changing the mix of their assets should be making small adjustments, she says. Also, check the holdings in your retirement funds now. You might be surprised to learn you don't have as much exposure to some declining sectors as you thought. "Many managers have sold off technology and are moving into defensive positions such as health care and utilities,'' she says.

But the big point? Continue to make your contributions, Wilkinson says. "The stock market is on sale.''

Q: Why do I have to do anything at all?

A: You might not have any adjustments to make, but you need to check your attitude and expectations.

"People have to be willing to adapt,'' says Ryan Kelly, chief executive of Spectrum Asset Management in Newport Beach.

Investors used to be able to simply buy an index fund or stock and it would usually go up, in what Kelly calls an investing market. "Now, we're in a trading market and the rules have changed,'' he says.

Investors might have bought a stock at $18, but instead of holding it and hoping it hits $50, they might have to let go at $30, Kelly explains. He encourages investors to use "stop loss'' orders, which tell brokers when to sell a slumping stock.

Q: I've saved money for a down payment on a house. I hope to buy in less than two years, but I'm worried about putting my money into the stock market.

A: You're right to be worried. "You have no business risking that money in the market right now,'' Field says. She suggests tucking away the savings in a Roth IRA, where you should choose some stable investments, such as bonds or cash (CDs or a money-market fund) or perhaps value stocks. You'll also be able to take out your contribution for your first home and not worry about taxes or early-withdrawal penalties.

Q: Is there a way to take advantage of the Nasdaq's slide?

A: Aside from looking at the slide as a buying opportunity, you could look at mutual funds that "short'' the Nasdaq, Wilkinson says. This strategy is for the aggressive investor, he points out, but the idea is simple. You invest in a fund that gains when the Nasdaq loses. He recommends Rydex Dynamic Venture 100. When the Nasdaq drops 5 percent, this fund goes up twice the loss, or 10 percent. Of course, if Nasdaq goes up 5 percent, the fund drops 10 percent. But for aggressive investors looking to recoup some losses, shorting the Nasdaq is working right now, he says.

Q: I'm retired and know I need to be in the market, but I'm afraid now.

A: If you're newly retired, you're right that you can't afford not to be invested. "A lot of people in their 60s think they just need to move all of their retirement money to bonds,'' Field says. "But they might live another 40 years. If you think you'll stay in bonds, your money is not going to last 40 years,'' she says. She suggests keeping two years' worth of cash in short-term corporate bonds, money-market accounts or certificates of deposit. The rest goes into the market but in a mix that the investor is comfortable with, she says.

Q: OK, so if I get out of tech stocks, what sectors should I be looking at?

A: Kelly and others like energy. "It's been on a nice run for the past 12 months,'' he says. He also suggests health care -- and keeping a portion in cash.

A good bond is also something to consider. For example, a California municipal bond with a AAA or AA credit rating might yield around 5 percent now. But if the economy continues to slow, its total return might rise to 8 percent to 10 percent, Kelly says.

Q: How long is this turmoil going to last?

A: Well, that's the big question. The interest-rate cuts of the past few months won't really have any impact on the economy for several more months. Wilkinson thinks the ride on Nasdaq will be bumpy all the way through June.

"There are no clear directions and that's what's confusing.''

But the Dow has basically been flat, so don't expect any major drops there, Wilkinson says.

"Overall, people are concerned with weak earnings and there's just this kind of fear that spilled over.''

New Capital Gain Rates Effective 2001

There are new capital gains rates available for assets held for more than five years. The rules are different depending on what tax bracket the taxpayer is in.

For those in the 15% tax bracket, the long term capital gain rate is 8% on assets held more than five years and sold after December 31,2000. The 8% rate applies regardless of when the five-year holding period began and it applies to the extent that the taxpayer is in the 15% bracket.

For those in the 28% tax bracket or higher, the long term capital gains rate drops to 18 % for assets purchased after December 31,2000 if the asset is held for more than five years. Capital gains of assets held 1 to 4 years or purchased before January 1,2001 will still be taxed at 20%.

Note: Because the asset must be held five years and must be acquired after December 31, 2000, the 18% tax rate will not apply before 2006.

In determining if the holding period begins after December 31,2000 for this special 18% rate, taxpayers must include the option holding period. So if an employer grants an employee incentive stock option in the year 2000, stock acquired by exercising the option will not be eligible for the 18% rate, even if the stock is acquired in 2001.

Special Election to use the 18% Rate instead of the 20% Rate

Taxpayers other than corporations can elect to treat capital assets, business assets, and stock held on January 1, 2001, as if they are sold for their fair market value in order to reset the acquisition date so the future appreciation can qualify for the 18% rate. The gain from the deemed sale is taxable, however any loss resulting from this election is not allowed. This election is irrevocable.

Note : This election can not be used on a personal residence.

When to use this election: A taxpayer should use this election when a stock has a small gain and the taxpayer expects appreciation in the future and he plans on holding the stock for more than five years after January 1,2001.

Carol J. Patrick, CPA

December 2000 Tax Planning

To reduce the amount of tax you owe when you file your 2000 return next year, you may have some tax decisions to make between now and December 31.

The secret to successful year-end tax planning is to consider your tax situation two years at a time. The idea is to reduce the tax you will pay over both years (’00 & ’01), not just one. You need to look at the income and deductions which apply to ’00, which fall into ’01 and which are available in either year.

It is usually better to defer income and accelerate deductions. This way you will delay, for the longest period of time, the tax you pay. This will be especially true if there is an across the board tax decrease in ’01. (Possible, but don’t hold your breath!). If you expect to be in a higher tax bracket in ’01 the opposite strategy, delaying deductions and accelerating income, would probably be more beneficial.

Your investments offer a way to shift income at year-end. You can decide when to take the gain or loss, this year or next. You shouldn’t let taxes be the sole driving reason for making changes in your investments. Whatever decisions you make should make overall economic sense.

Retirees can juggle payouts from IRAs for the best tax result.

Tax planning using deductions may be the most successful. Three types of itemized deductions are easiest to shift:

Charitable Contributions – Deducted in the year your check is mailed. Also consider donating appreciated securities. You get to deduct the full value of the asset (if held for more than one year) and avoid paying income tax on the appreciation.

State and local taxes - This works especially well with estimated state income taxes. You can pay the estimate that is due in January ’01 in whichever year it produces the best result. The second half of property taxes due in April can also be considered for prepayment in December if needed. Care should be taken to make sue that the alternative minimum tax does not come into play.

Interest Expense – You may consider paying the January mortgage payment in December. It is important to make sure the Mortgage Company receives the payment before the end of the year. This way it will be reflected on Form 1098 that shows the interest paid by you for the year.

Other itemized deductions can also reduce you income tax bill:

Medical – The deduction is limited to 7-½% of AGI. Shifting payments from one year into the next may allow you to exceed this limitation and get a deduction in at least one of the years.

Miscellaneous – The deduction is limited to 2% of AGI. This deduction includes investment and tax advice, job-hunting expenses, unreimbursed employee business expenses, IRA fees and safety deposit box charges. Shifting these expenses into one year or the other may enable you to exceed the limits.

Some individuals, by careful planning, are able to itemized in one year and use the standard deduction in the second year.

The alternative minimum tax should always be carefully considered. If it applies to your tax situation many of these strategies will just not work!

Careful tax planning can make a difference in your income tax liabilities. Please contact your tax advisor for more specific tax saving ideas that may be used in your specific tax situation.

Diane K. Burch, CPA

API 4th Quarter Update 2007

 December 2007, 4th Quarter

It wouldn’t be January without a comment about my Trojan football team!
The Trojans (10-2, 7-2 Pac-10) won their final four regular-season games to earn an unprecedented sixth consecutive conference championship. It also gives them a record 32nd appearance in the Rose Bowl as well as a sixth straight BCS bowl berth. They easily won the Rose Bowl 49 to 17 over Illinois. Go Trojans!!

Money Magazine Makeover
I again had the pleasure of doing a money makeover for Money Magazine. The story is about a young school psychologist, Patty, who like so many others bought real estate at the peak of the market and will face mortgage resets in the near future. You can read the entire enclosed article to find out how Patty can bring herself out of her current bind without ‘mortgaging her future’.

Junk Mail and Going Green
Did you know that you can stop 90% of all bulk and junk mail from being delivered to you? Join for a $20 fee and they will stop your junk mail and plant 10 trees. I am doing what I can to become more “green” and help preserve the environment. I take my cloth bags to the grocery store, I recycle plastic, glass, cans and paper and dispose of paints, pesticides, florescent bulbs and batteries on a monthly basis at a designated drop off site. I got an artificial Christmas tree this year- also to stop my puppy from chewing a real one. If you want to cut paper use by Asset Planning, we can email your quarterly statements to you. Both TD Ameritrade and Schwab have electronic confirmation and monthly statements available.

2007: The year in review
What a crazy year this has been. The market has been more volatile this year with the subprime mortgage mess and the talk of recession in 2008. The S&P gained only 3.5% for 2007, the Dow gained 6.4% for the year. Large, mid and small cap value stocks were negative for the year and growth showed positive returns. This is the first year growth style equities had returns higher than value style during the past five years. Oil began the year at $51.57 and crossed $100.00 a barrel last week. Gold began the year at $650 per ounce and recently traded at $863, driven by the dollar’s steep decline against the euro. The euro finished at $1.4773 versus the dollar.
Will 2008 be a recession year? I believe the answer depends on how much lower home prices will fall and if the trouble with lenders persist. At the national level, a recession is commonly defined as two or more consecutive quarterly declines in real GDP. I think the GDP will grow by 1.5% in 2008, barely avoiding recession. I also think the Fed will cut rates again, but that will not help the homeowners that need to refinance their adjustable mortgages. Why? With home prices falling, most of the troubled homeowners cannot obtain an appraisal that will match or exceed their current mortgage. Also, lending standards have tightened and now require proof of income to obtain new mortgages. Foreclosures will increase, and market prices will fall further. The job losses in retail, mortgage and construction have impacted Orange County more than LA County. One positive is that 2008 is an election year and that usually bodes well for the market. Economists at Morgan Stanley and Merrill Lynch commented today that the U.S. Economy was transitioning into a recession at the end of 2007, based on the jobless rate of 5% in December.

Credit report
It is time to review your credit report for possible fraud and see who is accessing your credit information. You should review all your credit card accounts you have open and close those you do not use any longer. Having too much credit available will decrease your overall credit score. Go to and get your free report. You can also request the report by phone from any of the three credit reporting agencies and they will mail the report to you.

You may regret many things in life but you will never regret being too kind or too fair. -Brian Tracy

Election Jitters

WASHINGTON (CBS.MW) - Bush and Gore campaign officials continued to clash over Florida election results Friday, while uncertainty over the outcome of the presidential race weighed on Wall Street. Texas Gov. George W. Bush told reporters he was preparing for the transition to the White House, but noted that "there are still votes to be counted" in Florida. Bush said "each candidate and each team have to do what they think is in the best interest of the country. It's in the best interest of the country to plan (for transition) in a responsible way."

Could anyone have predicted this sort of an outcome from our recent election? It almost seems like a fiction novel. My only hope is that the outcome is decided quickly and the country and the financial markets are able to move forward.

If you missed the recent Los Angeles Times Money makeover, here is a link to the article. It is on an early retirement couple.

While the markets are in limbo, this is a good time to take care of other financial business. Have you reviewed your will recently? Have your beneficiaries changed names or addresses? Have you changed your wishes? Have you reviewed the title on all of your assets to be included in your living trust? Have all of your assets transferred correctly?
Are you going to make a charitable donation this year? Have you thought of donating stock in place of a cash contribution? This is a good time to do these year end chores.

Have a wonderful Thanksgiving!

Sandra C. Field,CSA,MBA,CFP

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