Brinton Eaton, a New Jersey-based wealth advisory firm, has some suggestions for investors for the coming year, starting with “keeping the faith” in equities and keeping a tight rein on emotions. While neither one may be easy in a market gyrating worse than a slowing-down top, a third hint may be easier to swallow: watch for opportunities to plan against changes in tax legislation for 2013.
“Our resounding message is to invest for the long term,” says CEO Robert J. DiQuollo. “It’s a troubling time in terms of geopolitics and global economic change, but be strong in your investment convictions.”
Jerry A. Miccolis, CIO, adds: “Don’t let your emotions dictate your investing behavior. History has shown that investors who shift their investment strategy based on market behavior do significantly worse than those who make a choice—whatever it is—and stick with it.”
Here are Brinton Eaton’s eight suggestions you might want to share with your clients for 2012.
8) Proactively Prepare for the Possible Change in Estate Tax in 2013.
In 2013, unless Congress intervenes, estate tax law will revert back to a $1 million exemption and a 55% tax rate. Thus 2012 presents a valuable opportunity to structure your estate plans accordingly. Consider leveraging historically low interest rates to provide low-interest loans to adult children, as well as funding grantor retained annuity trusts (GRATs). “Individuals who fail to plan in advance may wind up giving more money to the IRS than they have to, rather than to their loved ones or favorite charity. This should be a component of anyone’s financial plan,” says DiQuollo.
7) Take Advantage of Roth IRA Recharacterization Rules.
If you converted your IRA to a Roth IRA during 2011, you may want to consider a “recharacterization.” One of the main reasons people recharacterize is a market decline. Let’s say you converted your IRA to a Roth IRA and at the time, the IRA was worth $50,000. If you decided to pay all the tax up front, you paid tax on $50,000. If the account is now worth $40,000, due to a drop in the stock market, it may make sense to recharacterize to a traditional IRA and get back the tax you paid on the conversion. You can always reconvert back to a Roth at a later date and pay tax on the lesser amount.
6) Read the Fine Print Before Purchasing an Annuity.
Although fixed annuities promise a steady income stream for life, you are paying a hefty cost for the privilege. By locking up a sizable sum of your money until the day you die, you are restricting your ability to use those funds to participate in any future equities rally or other attractive investment. And a fixed annuity won’t serve you well in the face of inflation. Variable annuities, which are marketed as investment vehicles, are rarely a good alternative to investing the money in other, lower-cost vehicles.
5) Consider Investments That Incorporate Portfolio Protection and Exploit Volatility.
Volatility is omnipresent in today’s market. One way to combat this is by investing in volatility itself. The trick is to invest in volatility in such a way that the investment does not lose its appreciation when markets and volatility return to normal. Other proactive risk management strategies include momentum-based sector rotation. Any risk management product should work in concert with, not in place of, any carefully designed asset allocation.