Expected Return: Avoid The Seduction of Big Numbers

When it comes to expected return, we love big numbers. We gravitate to it like paparazzi to a celebrity. We do it with performance and projections because it sells.

But there’s one tiny problem. Our expectations change with the market.

A while back I covered how asset allocation lowers volatility. In it, I showed how four different asset mixes performed against an all stock and an all bond portfolio. It looked like the graph below. It showed how volatility lowers as you decrease the amount of stocks in your portfolio. But did it?

Of course it did. It was a simple exercise to prove a point. But it also showed how much better an all stock portfolio performed over the same period. Continue Reading…

Tax Benefits of Qualified Dividends

Qualified DividendsDividends tend to get lumped as one single form of investment income. But the IRS doesn’t see it that way, dividing the tax on dividends into two types: ordinary and qualified dividends. This is good to know around tax time. But it’s just as important when choosing investments for a taxable account, since taxes are another cost that eat into your returns.

Ordinary Dividends

First, all dividends are considered ordinary dividends. The problem, of course, is how we loosely use the term dividends to describe any type of payout from stocks, mutual funds, savings accounts, or other investments. Sometimes that “dividend” is actually interest income or a capital gains distribution. Continue Reading…

Understanding The REIT Taxation Rules

REIT Tax RulesDividends are the big reason investors turn to real estate investment trusts or REITs. What many people don’t know is that those dividends are not taxed like normal dividend stocks. Thanks to an overly confusing tax code, owning REITs can get complicated. Understanding the REIT taxation rules could save you from a big charge when it’s time to file your taxes.

How Are REITs Taxed?

Real estate investment trusts were established to allow small investors access to large income producing real estate assets, much like how mutual funds provide access to stocks. In doing so, REITs were giving a special tax designation used to cut their corporate taxes.

In return for the corporate tax benefits, REITs must pay out 90% of their taxable income to shareholders in the form of dividends. While the REIT tax code simplifies things from a corporate perspective, this is where it gets confusing for shareholders. Continue Reading…

Market Corrections Are Hidden Opportunities

stock market correctionsThe headlines are full of market anomalies this time of year. In December it’s the Santa Claus Rally. January it’s the ever original January Effect. After this weekend you’ll see the Super Bowl Indicator. Then comes Sell in May. It’s a seasonal thing, offering a break from the back and forth between stock market corrections and bubble headlines we’ve seen more of these past five years.

As Goes January…

…So goes the year.

This is another anomaly. The theory goes that if the market is up in January, it’ll be higher at the end of the year. But a down January, could bring about a rough year. It makes for fun headlines, but I’m not making investment decisions based on who wins the Super Bowl or what happens in January. I’ll stick to valuation, thank you. Continue Reading…

How A Simple Allocation Reduces Portfolio Volatility

Simple Portfolio AllocationLast week I dug into alternatives to low volatility ETFs. In it, I hinted at a another, simpler way to reduce portfolio volatility. It starts with diversification. But it ends with the asset allocation you choose. In other words, you can build a simple portfolio of stock and bond funds that limit the impact of market volatility. In most cases simpler is better. That is the goal here, to show how the simplest allocation strategy can reduce volatility in your portfolio.

Market Volatility

To understand market volatility we need to understand what moves the markets: why stock prices move and the same for bond prices. Most of the causes can be reduced to rumors, news, political, economic, and disasters. Let’s not forget our own behavior plays a role too. Continue Reading…