The Magi’s Gift in 2008

Posted on December 18th, 2008 in Investments, Newsletter Articles by wayne

In the story of the birth of Christ, the Magi gave Jesus gold, frankincense and myrrh. As many of us celebrate the Christmas season, perhaps we should consider giving ourselves one of these gifts, the gift of gold.

I have never been a gold enthusiast. However, gold can be both a hedge against inflation as well as a “safe haven,” when the investment markets are in turmoil. Even with declining inflation during the later part of 2008, November CPI was still up 1% over November of 2007. In the short term we could see deflation. However, with historically low Fed rates and a trillion dollar “stimulus package” on the horizon, long term inflation is a very real potential. In the 1970’s, gold was an excellent investment during that period of extended “stagflation.”

If the markets continue in turmoil, gold may also be a good investment, serving as a “safe haven” investment while other financial markets recede. In 2008, with the S&P 500 down 37%, the bond market down over 20% and most other commodities down, gold is virtually the same price as it was on January 2, 2008.

Since the beginning of 2005, the price of gold has doubled and is now at approximately $850/ ounce. Until 2008, the all time high for gold was reached in 1980 with a price of 850/oz. Based on this, it might appear that there is very little upside in a gold investment. However, in inflation adjusted dollars, the $850/oz in 1980 is almost $2200/oz. in 2008 dollars. Thus, on an inflation adjusted basis, gold is now trading approximately $300/oz. in 1980 dollars.

While gold should never represent a large portion of an investors portfolio, when we are considering a prudent asset allocation, we must consider the current financial turmoil. If inflation does increase as the economy recovers or if the economy deteriorates even more than is expected, the price of gold could increase. Thus, all of my clients have approximately 5% of their liquid assets in gold, which will remain in their portfolio until economic conditions change.

If you decide to add gold to your portfolio, one of the easiest ways of owning gold is through an Exchange Traded Fund (ETF). The most popular gold ETF is the streetTRACKS Gold Shares ETF, with the call symbol GLD. ETFs are traded like stocks and are easy and inexpensive to buy and sell through a discount brokerage house.

While a gold investment is not for everyone, adding the “Magi’s Gift” to your portfolio may increase your future portfolio returns.

Give Yourself a $1000 Christmas Present

Posted on December 18th, 2008 in Newsletter Articles, Taxes by wayne

In early December, I made sure that all of my asset management clients received a Christmas present. However, they will not be able to open it until April 15. In this article, I will show you how to give yourself the same present, which could be worth $1,000 or more.

I am not aware of any investor who has not suffered substantial losses in 2008. The one bright side of investing losses, is that up to $3000 in net capital losses can be deducted from your 2008 taxes. If you are in the 28% federal tax bracket and the 5% state bracket, your total tax savings would be approximately $1,000. The savings is even more if you are in a higher tax bracket.

Many investors are buy and hold investors. While this investing approach defers capital gains taxes when markets are up, strict adherence to such an approach could cost you tax dollars in 2008. Here is a simple way give yourself a 2008 tax reduction.

For each of your taxable brokerage accounts, go on-line or call your broker to determine what your realized capital gains/losses are for 2008. If your realized capital losses, in all of your taxable accounts, is greater than $3,000, no further action is required. However, if you have realized capital gains in these accounts, you must take some action.

Review your taxable portfolio to determine which stocks or mutual funds are are most concerning. Pick one or more of these assets and determine its unrealized capital loss. If this loss is at least $3,000 more than your current realized gains, sell it by December 31 to claim your $3,000 tax loss. If your loss is still not at least $3,000, pick your next least favorite stock or mutual fund, until you have at least a $3,000 net loss.

If you own mutual funds, immediately call each fund company to determine if they will be making a capital gain distribution in 2008. Even though virtually all mutual funds are down in 2008, some will be adding insult to injury with the requirement that they pay out all capital gains by the end of the year. If your fund will pay out capital gains, either sell it or be sure to include the capital gains amounts in the above calculations.

If you want to maintain your current asset allocation after you sell a stock or mutual fund, look for a similar type of stock or fund with better financial prospects in 2009 and beyond. While I never recommend that investors make investment decisions strictly on the basis of tax savings, now is the time to take a close look at your investment portfolio. You will be a fairly unique investor if none of your stocks or mutual funds are of concern in 2009 and beyond.

If this strategy makes sense to you, I hope that you enjoy this Christmas present, even if you have to wait until April to open it.