Six must-know investment terms

Industry specific jargon can be intimidating. Fortunately, you can leave most of it to the experts. The six terms listed below are the exceptions – understanding them is crucial to your long term investment success.

Fiduciary. Someone who is legally obligated to put your interests ahead of theirs. In the investment world, Registered Investment Advisors (RIAs) have a Fiduciary responsibility. Stockbrokers do not. The difference is dramatic. Do yourself a favor and make sure you work with someone who is legally obligated to put your interests first so that you can prosper.

Market index. Indices are measuring sticks for different sections of the market. A good example is the S&P 500, which represents the 500 largest companies in the United States. Understanding the indices allows you to track your relative performance. To do so, it’s important to understand which indices are fair representations of your portfolio. Using the S&P as a barometer against a portfolio of international stocks, for instance, does not make sense. In this case, using the EAFE Index (Europe, Asia and Far East) would be suitable.

Personal risk tolerance. In its simplest sense, how much of your portfolio should be allocated to stocks and how much to bonds? The answer depends upon your unique set of goals and circumstances. Remember – it is a personal risk tolerance. Speak with a Certified Financial Planner™ to guide you to an answer.

Stock risk. Ever heard the saying “don’t put all your eggs in one basket?” While some companies may seem like a sure thing, remember this – the S&P 500 of 1960 looked much different than the S&P 500 of today. Times change, companies grow and others fail to meet changing demands of the world. Eastman Kodak and Enron come to mind. Successful investors use diversification to increase their long-term risk adjusted return.

Loaded mutual funds. A front-end load is recognized when you purchase a mutual fund. A back-end load is recognized when you sell one. Choose their no-load counterpart. You will save the fee and the performance is more often than not just as good. After all, a no-load fund has a head start in the amount of the load, which can be upwards of 4% in some instances.

Pundit. Someone who prognosticates, in this case, about the financial markets. Their pedigree may be impressive and their intellect alluring, but do not follow their advice. No doubt they made a few good calls in their day. Chances are they made more bad ones. Your best bet is to develop a long-term strategy with your financial advisor that you can stick to. One that is tailored to your specific needs and goals.

A stellar 2012 for DFA

The article “All in the Family” by Barron’s ranks mutual fund families across several asset classes and time periods. A stellar 2012 for the DFA Value Portfolio helped it earn first place for the US equity fund category. Its three year performance was also very respectable. DFA took 16th place overall for 2012 and 33rd for five-year performance. This article substantiates our use of DFA in client portfolios. The funds served clients well in the short term, but more importantly for the long term. Investing is, after all, a marathon, not a sprint.

5 ways to simplify your finances

For many Merriman clients, getting investments right is only part of achieving their financial goals. I am often asked what else people can do to help improve their financial outlook, and I always answer that being financially disciplined is just as important as investing wisely.

Here are five things I think everyone should do to simplify their financial situation and become more disciplined with their finances:

  1. Consolidate your accounts. If you have an inactive 401(k) with an old employer, transfer it into an IRA. Often, 401(k)s have limited investment options, and you can take advantage of diversification and management benefits by moving your old 401(k) into an IRA account held elsewhere.  Likewise, if you have several IRAs in your name, consider consolidating them into one. There is no real benefit to maintaining multiple accounts, and it can be a headache to manage them all.
  2. Get a handle on what you are spending. There are dozens of apps and websites that can simplify the process of tracking expenses. Mint.com is a great example – it is free and anyone can use it. If you own an Apple device, go the App Store and search for “budget.” Find the app with the highest ratings and download it. Knowing how much money you spend and what you are spending it on is important, both before and after retirement.  You cannot, for instance, know how much you are going to need in retirement unless you know how much you typically spend.
  3. Put your savings on auto-pilot. If your employer matches contributions to your 401(k), you should contribute at least enough to max out that matching and take advantage of that “free money.” If you can afford more, all the better. Don’t forget that saving is not limited to company-sponsored retirement accounts. Saving toward your emergency fund in a bank account or your child’s education in a 529 college savings plan is just as important.  As with your 401(k), you can set these types of accounts up for automatic contributions. Ideally, you would work with a Certified Financial Planner™ to figure out the exact percentage you need to contribute based upon your specific set of circumstances.
  4. Limit the number of credit cards you own.  The more cards you own, the more complicated it becomes to manage them. If you have several cards with outstanding balances, consider transferring balances to consolidate your credit card debt at a lower interest rate and save yourself a substantial amount in interest payments.
  5. Use an auto-pay service to manage and pay your bills. I have a Schwab checking account that allows me to pay thousands of vendors directly from my account. It also alerts me when I have a bill due. If you do not bank with Schwab, don’t worry – most banks now offer a similar service. Ask your local branch for help in getting this set up.

Some of these steps may sound daunting, but are actually quite easy to complete. I know you’ll be glad you did it. Ultimately, these steps will allow you more time to focus on the things that matter most to you.

Tax provisions in the American Taxpayer Relief Act

The American Taxpayer Relief Act, passed by Congress on January 1, 2013, contains many far-reaching tax provisions. In addition to extending many tax items that had expired or were due to expire, the act also made permanent many provisions of previous tax acts. The tax features of this act are too numerous to list here, but the most comprehensive description of these changes I have found is this Journal of Accountancy article.

I highly recommend you read this article or consult a qualified tax professional to assess the impact of this act on your personal situation.

2013 retirement contribution limits

As we near the end of 2012, it’s time to start thinking about your finances for 2013. While some year-end planning might still be needed, it’s not too early to start thinking about next year. Many employers will start having their open enrollment periods over the next few weeks, and this is a great time to review your retirement plan contributions.

The new 2013 retirement contribution limits are as follows:

  • The elective deferral contribution limit for 401(k), 403(b) and most 457 plans increased to $17,500 from $17,000 in 2012.
  • The catch-up contribution limit for employees aged 50 and older into those same plans remains unchanged at $5,500 for 2013.
  • The maximum total contributions into a defined contribution plan rise to $51,000 for 2013 compared to $50,000 for 2012. For those aged 50 and older, the limit is $56,500.
  • If you participate in a Simple IRA plan, the salary reduction contribution limit increases to $12,000 in 2013, up from $11,500 in 2012. The catch-up contribution remains at $2,500.
  • The limit for IRA and Roth contributions increased to $5,500 from $5,000 in 2012. The catch-up contribution remains at $1,000 for 2013.
  • For traditional IRAs, there are a few different scenarios where different income limitations apply. These income limits increased from years prior and need to be looked at in more detail for each specific situation.
  • For Roth IRAs, the AGI phase out range is $178k-$188k for married couples filing jointly. For single and heads of households, the phase-out range is $112,000-$127,000.

If you’d like to learn more, you can read the IRS press release here.

Hedging higher tax rates with Roth conversions

Please Note: With the passage of the Tax Cuts and Jobs Act of 2017, beginning in 2018 a recharacterization of a Roth conversion is no longer allowed. You may still recharacterize any Roth conversions done in 2017, but this will no longer be allowed for Roth conversions done in 2018 or beyond.


With the Bush-era tax cuts set to expire at the end of 2012, many investors are seeking ways to hedge against a potential increase in tax rates for 2013 and beyond. One option that should not be overlooked is the use of Roth conversions.

A Roth conversion allows you to pay tax on the converted IRA assets now, with those assets then growing tax-free for the rest of your life. It is generally preferable to defer taxes for as long as possible, but in a situation where tax rates may increase in the future, it may be worth locking in the taxes at today’s rates. For example, the top tax rate in 2012 is 35%; In 2013, the top tax rate may be as high as 43.4% (39.6% top marginal rate plus the 3.8% “Medicare surtax”). If tax rates don’t increase, you can always undo the conversion by recharacterizing the Roth back to a traditional IRA. As long as a recharacterization is done by the extended due date of the tax return (October 15th), you’ll just be back to where you started.

It is also important to recognize that a Roth conversion may bump you up into a higher tax bracket in the year of the conversion, depending on the amount converted. In that case, you should consider a partial conversion, where you only convert enough to stay within your current tax bracket. This is where the assistance of a tax professional can be invaluable.

Everyone’s situation is different, and whether a Roth conversion makes sense for you will depend on your particular circumstances and desires. Your financial advisor and CPA can help you weigh the costs and benefits of such a strategy to determine if it is right for you.