fed policy, inflation, and interest rate risk
TRANSCRIPT
March 2014 Vol. No. 1 Investment Updates
Advisor Corner
Please enjoy our Marchnewsletter. We invite yourfeedback. Let us know whattopics you would like to readabout.
Fed Policy, Inflation, and Interest-Rate Risk
With interest rates still relatively low, the questiontoday is by how much they are likely to rise.Historically, the 10-year Treasury bond has yielded,on average, about 2.5% over the inflation rate. Withinflation at 1.5%, the 10-year Treasury bond typicallywould yield about 4.0%. In an attempt to supporteconomic and job growth, the Federal Reserve hasbeen purchasing long-term Treasury and mortgage-backed bonds to artificially keep interest rates low. Aslong as the Fed kept this asset purchase program up,10-year Treasury yields remained relatively low.However, the Fed has begun tapering, and interestrates are likely to rise significantly in the near future.Both investors and advisors should be aware of theimplications of rising interest rates.
Dieter Drews, J.D.Founder/CEO
Prism Capital Management, LLC Investment Updates March 2014 2
Five Estate-Planning Tasks That YouShouldn't Put Off
Keeping tabs on the estate-planning rules during thepast few years has been a little like watching Olympic-level table tennis: The action moves quickly, and it'sdifficult to keep up. However, no matter how laws andrules change, there are a few basic tasks that areactually pretty evergreen and that everyone shouldexecute. Five such estate-planning to-dos are outlinedbelow.
1) Update Beneficiary Designations. Even people whohave never set foot in an attorney's office may havelaid the groundwork for an estate plan if they filled outbeneficiary designation forms for their financialaccounts. Those designations, in fact, trump otherestate-planning documents when it comes todistributing assets, so it's worthwhile to periodicallyreview them to make sure they're up-to-date with yourcurrent situation—if you’ve gotten married ordivorced, for example. (How would your spouse feel ifyou inadvertently left your 401(k) account to yourbrother?) People who have drafted estate-planningdocuments such as wills should ask their attorneys tohelp them review beneficiary designations to ensurethat they sync up with other estate-planningdocuments.
2) Designate Legal Guardians. Parents of youngchildren should designate legal guardians who willlook after their children if the parents should die orotherwise be unable to care for their minor children. Itis important to focus the discussion on actual child-rearing abilities and willingness to do the job. What isnot helpful is to get hung up on hurting anyone'sfeelings or bypassing friends or family members whomight expect to be guardians but aren't the bestchoice. Most importantly, a guardian should be willingand able (emotionally and financially) to take care ofyour children if the need arises, so an essential step isto discuss the responsibilities with the potentialguardian beforehand.
3) Create a Living Will and Last Will and Testament.A living will tells your health-care providers and yourloved ones how you would like to be cared for if youshould become terminally ill and unable to expressyour wishes yourself. It is called a "medical directive"in some states. This document details your views
toward life-support equipment. Not to be confusedwith a living will, a last will and testament details howyou'd like your assets and possessions distributed afteryour death.
4) Draft Powers of Attorney. A basic estate planshould also address what would happen to your affairsif you are still living but incapacitated. A power ofattorney is a document that specifies who will handleyour affairs if you are unable to do so. You'll need todraft two separate documents: one that names yourpower of attorney for health-care decisions andanother for financial matters (often called a durablepower of attorney). The person you entrust with yourpower of attorney for health care will, ideally, live inclose geographic proximity to you. The person youname on your durable power of attorney form shouldbe detail-oriented and comfortable with financialmatters.
5) Name an Executor. Your executor will gather all ofyour assets after you're gone and make sure they aredistributed in accordance with your will. Ideally, yourexecutor will be someone who's comfortable withnumbers and good with details, and will also be able tofind the time to work on your estate. It's common toname family members as executors, but in morecomplicated situations it might be preferable to use aprofessional, such as a bank trust officer, to serve asyour executor. It's a good idea to tell your executorthat you've named him or her, and also provide detailson how to obtain access to important documents, suchas your will and a master directory detailing all of youraccounts.
This information is for informational purposes onlyand should not be considered as legal or financialplanning advice. Please consult a legal and/orfinancial professional for advice specific to yourindividual circumstances.
Prism Capital Management, LLC Investment Updates March 2014 3
Tips for Preparing Your Taxes
It's that time of year again. While many people cannotsay they enjoy preparing their income-tax returns,you'll like it even less if you make mistakes and paymore tax, penalties, and interest than you need to.Here are some things to watch out for as you preparethis year's return or ready your tax documents for youraccountant.
Qualified Dividends versus Nonqualified Dividends:Nothing can be more frustrating than receiving acorrected 1099 from your brokerage company. The1099 is used to report various types of income otherthan wages, salaries, and tips. If you receive one afteryou had already filed your taxes, you might have toamend your return.
The problem is that mutual fund companies arerequired to submit tax information by the end ofJanuary, and in some cases they might not have thecorrect breakdown of qualified and nonqualifieddividends by then. Because the tax treatment ofqualified dividends might result in you paying lessincome tax, a revised 1099 might be to your advantage(although in many cases, only by a small amount). Soit might pay to wait a bit before filing your tax returnif you expect to receive a 1099.
Capital Gains and Losses: When you sell aninvestment for less than you paid for it, you realize acapital loss. The bright side is that capital losses canhelp you save on taxes. You can use capital losses tooffset capital gains in your portfolio. You'll need toknow if your gains and losses are short term or longterm. If you held an investment a year or less, it will bea short-term gain or loss. If you held an investmentlonger than a year, it will be a long-term gain or loss.
In 2014, short-term capital gains are taxed at ordinaryincome-tax rates from 10% to 39.6%. Long-termcapital gains, meanwhile, are taxed at lower,preferential tax rates from 0% to 20%.
Municipal Bond Income: If you own municipal bonds,interest income you receive is exempt from federalincome tax. That income may or may not be exemptfrom state income tax. If the bonds are issued in yourstate of residence, you usually won't have to pay state
and local taxes on the interest. You can find out forsure by contacting your state or the brokeragecompany at which you hold your securities.
Does that mean all money you receive from municipalbonds isn't subject to taxes? Not necessarily. If youown a municipal-bond fund that paid out capitalgains, that money is taxable on your federal and moststate returns. In addition, if you own municipals thatare classified as "private-activity" bonds, you may besubject to the Alternative Minimum Tax. You maywant to consult an accountant about this type of bond.To see if you have both interest income as well ascapital gains distributions, check the 1099 forms youreceived.
Exclude Interest from U.S. Government Securities:Don't forget to exclude the interest from governmentsecurities on your state income tax return. You canexclude all income from "direct" government securities(for example, Treasuries). Some states also allow youto exclude income from "indirect" securities (forexample, agency bonds like GNMA and FNMAsecurities). To know for sure, contact your state or thebrokerage firm at which you hold your bonds.
Some mutual fund companies can be very good aboutsending information on the percentage of your fundsthat are invested in government securities. But therehave also been situations where the fund company willonly provide this information if you ask.
If you didn't obtain this type of breakdown when youreceived your 1099 statements, visit your fundcompany's website to find the information, or call thefund's customer-service line.
Prism Capital Management, LLC Investment Updates March 2014 4
Simple Steps for Late Savers
The sooner you start putting aside money forretirement, the more you might have once that highlyanticipated day arrives. Saving for college tuition,purchasing a new home, unforeseen medical expenses,or life’s other necessities, surprises, or even enjoymentscan cause investors to postpone saving. Starting theretirement planning process late in one’s life can bedaunting, but it is by no means impossible.
Crunch the Numbers: The first step to getting back ontrack is to put together a budget—this will force you tofocus on your financial situation and can serve as aroad map to success. Once you have outlined all ofyour expenses, simply subtract the total from your netincome. The result will give you a clear indication ofhow much you can potentially save, and also help youidentify areas in which you may be spending toomuch.
Cut Any Unnecessary Expenses: There are essentialexpenses that cannot be eliminated: food, electricity,etc. However, most people can identify some areas,like entertainment, that are not vital to one’s existenceand can be cut back on. The more areas that you cantrim will lead to more money that can be earmarkedfor retirement.
Take Advantage of Catch-up Contributions: Catch-up contribution limits allow investors age 50 andabove to increase their contribution. For example, theycan make an extra contribution of $5,500 to their401(k) in 2014, equating to a maximum contributionof $23,000. IRA catch-ups are $1,000 in 2014, leadingto a maximum contribution of $6,500.
©2013 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is notwarranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arisingfrom any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar MarketCommentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder.
Dieter Drews, J.D.Founder/CEO
Prism Capital Management, LLC601 Union StreetSuite 4200Seattle, Washington 98101
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