Investment

Comments on the Boston Business Journal's piece "Boston's Economic Forecast: Trouble on the Horizon"

It is easy to forget that newspapers and television live on sensationalism. 

The more sensational the headline, the more newspapers will sell.  Boston Business Journal recently released an article entitled, "Boston's Economic Forecast: Trouble on the Horizon." If their headline was instead, “Ignore the pundits, things are basically OK," they’d probably sell fewer newspapers. 

Our advice when there is “Trouble on the Horizon,” from an investment point of view, is to ignore the headline and look into the premise behind it.  Often, ignoring the hype is the right long term investment decision.

We agree with the sentiment quoted, “A recent report … rated the chances of a 2016 U.S. recession as “reasonably low,” though … economic data pointed to “a somewhat fragile future” for the national economy, as suggested by the weak fourth-quarter GDP”.  There is a possibility of recession (there is always the possibility of recession) but the probability is reasonably low.

As far as Greater Boston, the major industries of education and healthcare are largely impervious to economic downturn.  Financial services, real estate, bio-tech and venture capital may be subject to recessionary pressures, but high talent human capital can often offset cyclical economic forces.  In the longer term, Greater Boston’s attractions as a world class city with world class facilities, universities and hospitals point to further population growth and increased tourism.  As Boston goes, so goes Massachusetts, so we think the Massachusetts economy will continue to grow slowly over time.

With regard to equity markets, past experience helps us to frame our understanding of the future.  For example, the average market correction since December 1949 is -14% with the average correction lasting 120 days.  The average gain following a market correction is 47% (median gain is 32%) lasting an average of 495 days. From peak (July 20, 2015) to trough (February 10, 2016), the S&P 500 was off -12.1% on a total return basis. Since February 10, the S&P 500 has returned + 9.5% through last Friday.  Year to date, the S&P 500 is off -0.5%. (See chart below)

The year began poorly with market fears related to the continued drop in oil prices, slowing growth in China and the strong dollar.  This created uncertainty in the short term which fed negative investor sentiment and poor equity market returns.  We expect continued uncertainty related to the US election, emerging market currencies, the direction of oil and the dollar and liquidity concerns in low-grade segments of the bond market.  However, a good earnings season, lower PE valuation ratios and the long term positive impact of low oil prices may offset these fears in 2016, leading to low single digit equity returns in 2016, albeit with a lot of volatility and uncertainty.

There is uncertainty as to the direction of overseas economies and markets.  When oil prices plunged below $30 to the lowest level in twelve years in February, fears of contagion spread into the energy, materials and financial sectors.  Global deflationary fears are a concern to central bankers with negative interest rates in Japan, Denmark, Switzerland and Sweden.  In the US, the fear is the opposite, that the Fed will raise rates over the next two years.  This divergence in foreign monetary policy from US policy is causing disruption in currency markets.  Add geo-political uncertainty and we get a flight from investment risk.

The major drivers of equity returns are the state of the economy, the actions of the central banks, company fundamentals and valuations.  The US economy is still growing in the low 2%s annually, despite a slowdown in the fourth quarter.  Ex-US central bank actions remain accommodative, which are net positive for stock appreciation and global liquidity. Earnings weakened in the fourth quarter, particularly in the energy sector but most analysts still believe that earnings growth will be forthcoming and thus far in the quarter, company earnings have been at or above estimates.  This leaves us with valuation, or investor sentiment.  At year end, forward PE was at 16.1 times earnings versus the 20-year average of 17.2 times earnings.  Valuations are not stretched at this juncture, but on the other hand, equity risk seems to be increasing which might justify a lower PE. 

While we are not certain of the current direction of markets, we do have confidence that well-diversified portfolios should give us opportunity for gain while limiting exposure to losses.  There is a chance that the market forces evident in January and early February will return and continue a long stretch of negative returns, beginning last August, such as we saw from 2001 to 2003.  Today, the market forces are more positive and being driven by earnings, improved investor sentiment and higher oil process.  Our most likely scenario is that the US equity market recovers to low single digit returns by year end.

- Matthew V. Pierce, Chief Investment Strategist

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest.

What you Need to Know about the Net Investment Income Tax

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If your income hits a certain level, you may face an additional wrinkle in calculating your taxes: The Net Investment Income Tax.

The Net Investment Income Tax (also referred to as the unearned income Medicare contribution tax) is a 3.8% Medicare tax applied to some or all of your net investment income if your modified adjusted gross income (MAGI) exceeds certain thresholds. The tax is in addition to any other income tax applicable to such income.

Note: If the net investment income tax applies, your long-term capital gains and qualified dividends may be subject to a combined federal tax rate of as much as 23.8% (the top long-term capital gains tax rate of 20% + 3.8%). Your other taxable investment income may be subject to a combined federal tax rate of as much as 43.4% (the top regular income tax rate of 39.6% + 3.8%). Your investment income may also be subject to state income tax. In general, the net investment income tax applies to U.S. individual taxpayers (similar rules apply to certain domestic trusts and estates).

Calculation of Net Investment Income Tax

The net investment income tax is equal to 3.8% of the lesser of (a) your net investment income or (b) the excess of your MAGI over:

• $200,000 if your filing status is single or head of household

• $250,000 if your filing status is married filing jointly or qualifying widow(er) with dependent child

• $125,000 if your filing status is married filing separately

For purposes of the net investment income tax, MAGI is generally equal to your adjusted gross income (AGI). However, if you are a U.S. citizen or resident living abroad, you must include in MAGI the foreign earned income that is generally excludable from gross income for federal income tax purposes.

Example: You and your spouse file a joint tax return. Assume your net investment income is $50,000 and your MAGI is $270,000. The amount of your net investment income subject to this tax is equal to the lesser of (a) $50,000 or (b) the excess of $270,000 over $250,000, or $20,000. Your net investment income tax is equal to $20,000 x 3.8%, or $760.

Net Investment Income

Net investment income includes gross income from:

• Interest, dividends, nonqualified annuities, royalties, and rents that are not derived from the ordinary course of a trade or business, and

• Net gain from the disposition of property not used in a trade or business

Gross income and net gain (or loss) from a trade or business may be included in net investment income if the trade or business is (a) a passive activity or (b) engaged in trading financial instruments or commodities.

Note: In general, a passive activity is a trade or business in which you do not materially participate. Rental activities are treated as passive activities regardless of whether you materially participate, but there are certain exceptions.

Net investment income is reduced by any income tax deductions allocable to these items of gross income and net gain that are included in net investment income. Examples of deductible items that may be allocated to net investment income include investment interest expense; state, local, and foreign income tax; and miscellaneous investment expenses. Deductions may be subject to limitations.

Note: Generally, an interest in a partnership or S corporation is not property held for use in a trade or business, and gain or loss from the sale of a partnership interest or S corporation stock is included in net investment income. Net investment income does not include income excluded from gross income for income tax purposes. It also does not include items of gross income and net gain specifically excluded from net investment income. Examples of excluded items include:

• Wages

• Unemployment compensation

• Alimony

• Social Security benefits

• Tax-exempt interest income

• Income from certain qualified retirement plan and IRA distributions

• Self-employment income

• Gain that is not taxable on sale of a principal residence

Note: Even though certain items such as wages and income from certain qualified retirement plan and IRA distributions may not be included in net investment income, they may be included in MAGI, which (as discussed above) is a factor in determining the amount of net investment income that is subject to the net investment income tax.

Planning for the net investment income tax

For a particular taxable year, the net investment income tax applies only if your MAGI exceeds the appropriate threshold based on your tax filing status. Also, the net investment income tax applies to the lesser of (a) your net investment income or (b) the excess of your MAGI over the appropriate threshold. So you may be able to reduce exposure to the net investment income tax by controlling the timing of items of income or deduction that enter into the calculation of net investment income or MAGI.

For example, you might consider increasing your net investment income in a year in which your MAGI does not exceed the threshold. Conversely, you might consider decreasing your net investment income in a year in which your MAGI exceeds the threshold.

In general, you may be able to increase net investment income in a particular year by pushing income into that year and deductions into another year. Conversely, you may be able to decrease net investment income in a particular year by pushing deductions into that year and income into another year. You will need to consider how increasing or decreasing net investment income affects MAGI.

Example: Tom, a single taxpayer, is considering selling some stock, either at the end of Year 1 or at the beginning of Year 2, with the effect of increasing his net investment income by $10,000 for one of those years. To keep things simple, assume that an increase in net investment income would result in a dollar-for-dollar increase in MAGI. Before taking into consideration the proposed sale of stock, Tom expects to have $190,000 of MAGI in Year 1 and $200,000 of MAGI in Year 2. If Tom sells the stock in Year 1, he would not be subject to the net investment income tax because his MAGI of $200,000 ($190,000 + $10,000) would not exceed the $200,000 threshold for single taxpayers. If Tom sells the stock in Year 2, he would be subject to the net investment income tax because his MAGI of $210,000 ($200,000 + $10,000) would exceed the $200,000 threshold and he would have $10,000 of net investment income.

Note: Ordinary income and long-term capital gains tax rates are generally much higher than the 3.8% Medicare tax rate applicable to net investment income. Planning for the net investment income tax should not be done without considering its effect on the regular income tax.

Note: There is no standard deduction for purposes of determining your net investment income. Itemized deductions are not available for purposes of reducing net investment income unless you itemize deductions for purposes of regular income tax. However, neither standard or itemized deductions reduce MAGI.

Recordkeeping

Net investment income tax is reported on IRS Form 8960. If you owe net investment income tax, you must attach Form 8960 to your tax return. For purposes of the net investment income tax, certain items of investment income or investment expense receive different tax treatment than for the regular income tax. You will need to keep records for the items included on Form 8960. Generally, you need to keep records for the life of the investment to show how you calculated basis. You also need to know what you did in prior years if the investment was part of a carryback or carryforward.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2015-2016 Advisor Websites.

11 Things to Consider when Deciding Between Investing and Paying Off Your Mortgage

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Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list.

But competing with the desire to own your home free and clear is your need to invest for retirement, your child's college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the Opportunity Cost

Deciding between prepaying your mortgage and investing your extra cash isn't easy, because each option has advantages and disadvantages. But you can start by weighing what you'll gain financially by choosing one option against what you'll give up. In economic terms, this is known as evaluating the opportunity cost.

Here's an example. Let's assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you're paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you'll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so--the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you're paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you've calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you'll receive is directly related to the investments you choose. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other Points to Consider

While evaluating the opportunity cost is important, you'll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.

1. What's your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.

2. Does your mortgage have a prepayment penalty? Most mortgages don't, but check before making extra payments.

3. How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there's less value in putting more money toward your mortgage.

4. Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.

5. Do you have an emergency account to cover unexpected expenses? It doesn't make sense to make extra mortgage payments now if you'll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change--if you lose your job or suffer a disability, for example--you may have more trouble borrowing against your home equity.

6. How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.

7. Are you saddled with high balances on credit cards or personal loans? If so, it's often better to pay off those debts first. The interest rate on consumer debt isn't tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you're likely to receive on your investments.

8. Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you've gained at least 20% equity in your home may make sense.

9. How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you're likely to be paying more in interest).

10. Have you saved enough for retirement? If you haven't, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.

11. How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The Middle Ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there's no reason you can't do both. It's as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2015-2016 Advisor Websites.

Designing a Benefit Package for Your Small Business

If you're a small business owner, you face many challenges in growing your company. One of them is recruiting and retaining the best talent for your needs.

When your primary goals are managing costs and increasing revenue, how do you sufficiently entice new recruits and reward current staff members for continually putting their best efforts forward? One way is ensuring that you provide a competitive, cost-effective benefit package comprised of both traditional and not-so-traditional benefits.

Traditional Benefits

In order to remain competitive, nearly all employers should offer some form of health insurance and retirement savings plan. Yet according to the U.S. Department of Labor, only 58% of small employers (those with fewer than 100 employees) offer health coverage and just 52% offer a retirement plan. (Source: National Compensation Survey, March 2015)

Health Insurance

Small businesses can typically choose among traditional plans or managed care/health maintenance organizations (HMOs). Traditional plans are typically more expensive but tend to provide more access to providers. HMOs generally carry lower costs but have fewer options for care providers. Some small employers opt for a high-deductible health plan (HDHP) along with a health savings account (HSA). In an HDHP, employees carry a higher burden for up-front costs, but the HSA allows them to set aside money on a tax-advantaged basis to help defray these costs. Note that a provision in 2010's Affordable Care Act requires employers with 50 or more full-time employees (as defined by the Act) to offer adequate health insurance that's affordable or face a possible penalty. "Adequate" means that the company's share of total plan costs must equal at least 60%. Coverage is "affordable" if an employee's share of the premium is less than 9.66% of his/her household income. (Originally delayed for employers with between 50 and 99 employees, the provision takes full effect for this employer group in 2016.) Employers with fewer than 25 full-time employees may also be eligible for a credit to help them pay for health insurance; certain conditions apply.

Retirement plans

In today's economic and political environment, most adults view retirement planning as a high financial priority. That's why it's important to include a retirement savings option in your benefit package. There are several options available to small employers, including traditional 401(k) plans, SIMPLE savings plans, and SEP-IRAs. A financial professional can help you choose the plan that's right for your company's needs.

Other options

Other traditional benefits include the following group insurance policies:

• Life insurance: These policies generally provide employees' survivors a death benefit in a set amount or an amount based on salary (e.g., two times salary).

• Disability insurance: These plans provide employees with an income stream should they become disabled. Benefit amounts are typically a percentage of salary.

• Vision and dental coverage: These plans tend to be highly valued by employees, as the costs associated with dental and vision treatments, which are generally not covered by health insurance, can be quite high.

Not-so-traditional perks

In addition to traditional benefits, there are several not-so-traditional perks you can offer to help set your organization apart in the competition for talent.

Wellness programs

Some employers offer workplace-based wellness programs. Incentive-based wellness programs help improve overall employee engagement and encourage individuals to take responsibility for their own well-being. According to the Kaiser Family Foundation, 49% of small employers offer a wellness program. Of those employers, 15% provide a financial incentive to participate. Examples include a lower insurance premium or deductible, a larger contribution to a tax-advantaged savings account, a gift card, cash, or merchandise. (Source: Kaiser Family Foundation/Health Research & Education Trust 2015 Employer Benefit Survey )

Flexible work arrangements

In today's hectic world, time is nearly as valuable as money. A company that values the work-life balance of its employees is nearly as highly valued as one that offers the best insurance or retirement plan. For this reason, one of the most popular and appreciated employee benefits available today is a flexible work environment. Once the hallmark of only small and "hip" technology companies, flexible work arrangements are growing in popularity. In fact, flexible scheduling is now offered by many larger, more established organizations as well. Some examples of flexible work programs include:

• Flex schedules: work hours that are outside the norm, such as 7:00 a.m. to 4:00 p.m. instead of 8:00 a.m. to 5:00 p.m.

• Condensed work weeks: for example, working four 10-hour days instead of five 8-hour days

• Telecommuting: working from home or another remote location

• Job-sharing: allowing two or more employees to "share" the same job, essentially doing the work of one full-time employee (e.g., Jan works Monday through Wednesday noon, while Sam works Wednesday afternoon through Friday)

• Part-time or a combination: allowing employees to cut back to part-time during certain life stages, or use a combination of strategies to meet their needs

Allowing your employees to tailor their work schedules based on their individual needs demonstrates a great deal of respect and can generate an enormous amount of loyalty in return. Even if your business requires employees to be on-site during standard operating hours (such as a retail establishment), having a process in place that supports occasional paid time off to attend to outside obligations can have tremendously positive effects. These obligations might include doctors' appointments, family commitments, and even unexpected emergencies, such as a sick relative. In some cases, these benefits have no costs associated with them, while in others, the costs may be minimal (e.g., the price of a smartphone or laptop to help employees remain productive while on the go).

Social activities

Sponsoring periodic activities can help workers relax and get to know one another. Such events don't need to take much time out of the day, but can do wonders for building morale. Bring in lunch or schedule an office team trivia competition or group outing. If you work in a particular industry in which colleagues share a common passion, consider organizing events around that interest. For example, a sporting goods retailer could close up early on a slow-business afternoon and go for a hike or bike ride.

Concierge services, discounts

You may also be able to negotiate with other local companies for employee discounts and services. Laundry service, dry cleaning pickup/drop-off, and meal providers that can deliver hot, family-sized, take-home dinners may help employees save both time and worry--and stay focused on the job.

Financial planning/education

For many people, money worries can be distracting and time consuming. Consider inviting a local financial professional into your office to provide counseling sessions for your employees. While you don't necessarily have to pay for any services provided, simply offering the opportunity to get such help during work hours will be appreciated by your workforce.

Involve your employees

The best benefits are those that meet the needs of your employees. Before making any assumptions, solicit ideas from your employees and then conduct a survey to see what benefits they value the most. Consider putting together teams of associates to help with the idea generation and execution. By involving your employees in the decisions that matter most to them, you demonstrate that you value their time, efforts, opinions, and hard work.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2015-2016 Advisor Websites.