High Performing ETFs

Exchange traded funds (ETFs) have been in existence since the early 80s, but in the past 10 years they have become increasingly popular amongst investors. ETFs are funds that track indexes such as the S&P 500, Dow Jones Industrials, etc. When you buy shares of an Exchange Traded Fund, you are buying shares of a portfolio which tracks the yield/return of its respective index. The main difference between an ETF and other mutual funds is that ETFs don’t try to outperform their index, they just replicate its performance. ETFs are not attempting to beat the market. Lets take a look at other differences.


ETFs vs Mutual Funds
Both ETFs and mutual funds are inexpensive ways to own the market. There are some major differences however

– FEES: ETFs are typically less expensive when compared to the expense ratio of the average index mutual fund.

– COMMISSIONS:ETFs are typically less expensive in terms of commissions too. They can be anywhere from commission-free to $7-$10 per trade. Mutual funds on the other hand can be expensive to trade (upwards of $40), especially if your brokerage doesn’t also own/manage the particular fund.

– LIQUIDITY: Buying or selling an index fund means you’ll get end of day pricing. ETFs trade like stocks

Buy Real Estate with an IRA / 401k

When it comes to retirement accounts, most people invest in the standard menu of mutual funds and stocks. However with recent volatility and uncertainty in the markets, some bold investors are now looking at alternative options to get ahead.

It’s called a self-directed IRA. While most custodians are banks and broker-dealers that limit your holdings to “firm-approved” stocks, bonds, mutual funds, and CDs — Custodians of self-directed IRAs allow you to invest your retirement assets in other areas: real estate, businesses, private placements, foreign currency, and more.

An attractive element of a self-directed plan is that it allows you to create wealth by investing in areas where you might already have interest, knowledge, or even expertise. Some feel more comfortable having this discretion and control. While still a small fraction, self-directed IRAs may be a growing trend for investors. Of the roughly $4.7 trillion U.S. investors held in IRAs last year, an estimated 2 percent – or $94 billion were in self-directed accounts according to the Investment Company Institue.

Rules and Risks

While the flexibility can be attractive, there are substantial taxes and penalties if you don’t follow IRS guidelines properly. For example, in real estate transactions there are specific rules against self-dealing or renting property to your spouse or child. Make sure you understand all the rules before setting up a self-directed IRA.

Custodial firms that specialize in setting up self-directed accounts, such as Equity Trust, provide some guidelines. While they do not advise on legitimacy or suitability of a specific investment, their administrative guides may be helpful. As always, be sure to consult with an attorney or financial professional before making investment decisions.
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  • Understand IRA rules and regulations
  • Earn tax-free profits on real estate deals
  • Invest in real estate while reducing your tax burden[/checklist]

Equity Trust is the nation’s leading custodian of self-directed IRAs and 401ks – with over 38 years of experience, 130,000 clients, and $12 billion of retirement plan assets under administration. Equity Trust , a regulated financial institution, is made up of a staff of experienced professionals. As a passive custodian, Equity Trust does not offer investments or investment advice.



3 New Threats Facing Unsuspecting Investors

The North American Securities Administrators Association (NASAA) released its most recent list of top financial products and practices that aim to exploit laws and take advantage of unsuspecting investors.  The full list contains ten threats and was compiled by the securities regulators in NASAA’s Enforcement Section and it includes both new and long-standing threats.  Below we highlight three of the newest threats from the list.  For the full list, please visit the NASAA website.

Three New Threats

  1. Crowdfunding over the Internet– the 2012 Jobs act signed this year into law helps ease some of the burdens that small business face when raising capital.  Croudfunding, made popular by non-profits during recent disaster relief efforts, is one of the most publicized new ways of raising funds even though provisions related to crowdfunding are not yet available and will not be until sometime in 2013.  Investors should look at these new investment markets carefully before committing their funds.
  2. Using Self-Directed IRAs to Conceal Fraud – State securities regulators have investigated numerous cases where a self-directed IRA was used in an attempt to lend credibility to a bogus venture like a Ponzi scheme. Scam artists are using self-directed IRAs because of their implicit safety and tax-reducing characteristics.  But beware, investments help in IRA’s have the same inherent risks as any other investment.  Just because it is in an IRA doesn’t make it safe or real for that matter.
  3. The Immigrant Investor Program – this is a program linked to job-creation investments from foreign investors that is becoming quite popular because it can grant a U.S. visa to foreign nationals who invest a minimum of $500,000 into a new commercial enterprise.  This program is particularly alluring because its connection to the federal government might make it appear safer and because domestic investors may be intrigued by the prospect of big funding from investors in China or other foreign countries with traditional or growing economic power.
photo credit: David Shankbone

Ready to Buy that Annuity? Not so fast.

Annuities have become a popular investment tool in a retiree’s arsenal. Annuities have great appeal for the investor looking to mitigate the risk of losing a large portion of their principal when they need it most. But many people considering annuities don’t fully understand how they work.  An annuity is a contract between you and an insurance company, designed to meet retirement and other long-range goals. You make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Below are some important considerations that should be noted before purchasing an annuity contract:

1. Early Withdrawal Penalties
If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

2. Type of Annuity
There are generally three types of annuities — fixed, indexed, and variable. Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC.

3. Death And Taxes
Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates.

Remember, if you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties. Annuities aren’t suitable for everyone. As always, be sure to consult with an attorney or financial advisor before making investment decisions.

photo credit: Steve Snodgrass

Understanding Variable Annuities

A variable annuity is a contract between you and an insurance company. The insurer agrees to make periodic payments to you, beginning either immediately or at a future date. You purchase a variable annuity contract by making either a single purchase payment or a series of payments.

The underlying investment options for a variable annuity are typically mutual funds which invest in stocks, bonds, money market instruments, or some combination of the three. The value of your investment will vary depending on the performance of the investment options you choose.

Variable Annuities have a few defining characteristics that make them different from other investment vehicles.

1. You receive periodic payments, in most cases, for the rest of your life.

2. They have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount.

3. They are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. When you take your money out of a variable annuity you will be taxed on the earnings at ordinary income tax rates.

Generally speaking, variable annuities are designed to be long-term investments, to meet retirement and other long-range goals. They are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. Variable annuities also involve investment risks, just like mutual funds and other investments do.

Before buying any variable annuity, always request the prospectus from the insurance company or your financial advisor. Read the prospectus carefully – it contains important information about the contract, fees and charges, investment options, death benefits, and payout options. You should compare the benefits and costs to other variable annuities and to other types of investments.

source: U.S. Securities and Exchange Commission (www.sec.gov) photo credit: Iman Mosaad

59% of Retirees Make this Mistake

The Society of Actuaries found that roughly 59% of Americans surveyed underestimate their life expectancy after retirement. As a retiree or an individual approaching retirement, this miscalculation could put your future quality of life at risk when you need it most.

The report begins by explaining a trend that many know but fail to fully understand. Americans are living longer. In the past 50 years we have seen the life expectancy of men increase from 66.6 years in 1960 to 75.7 years in 2010. For women, life expectancy is also up from 73.1 years in 1960 to 80.8 in 2010.

It is important to understand that these are averages and that the people that die decades before their retirement actually bring these averages down. This means that the older you are, the higher the probability of you having a higher than average life expectancy. As the report notes, “By age 65, U.S. males in average health have a 40 percent chance of living to age 85 and females more than a 50 percent chance. The survivor of a 65-year-old couple is more than 70 percent likely to reach 85”.

The results from the Society of Actuaries survey shine a light on a number of issues that should raise concerns about the risks in a financial retirement plan. The main concern is the short planning horizon of many of the survey respondents. This is a very serious issue, especially for people that fail to recognize how just a couple of unplanned years at the end of our lives can put tremendous stress on our financial security and that of our loved ones.

In many cases, working with a financial advisor that understands the risks associated with outliving your money can help mitigate some of the concerns raised by the survey results.

You should consult with a financial advisor if you have any questions or concerns about your life expectancy assumptions and/or retirement strategy.

For a copy of the report, please visit the Society of Actuaries website www.SOA.org.

source: Society of Actuaries (www.soa.org) photo credit: Guerrilla Futures | Jason Tester

Are You an Emotional Investor?

Do emotions impact your investment decisions? If so, it could be costing you a lot of money.

Every year, Dalbar, a financial services market research firm, releases a study that compares the performance of the S&P 500 (stock index) and the Barclays Agg (bond index) with the performance of the average investor’s portfolio for each category over different periods of time. It has long been said that this comparison highlights the difference in the investment approaches between the average investors and institutions like insurance companies, mutual funds, and investment banks.

Most financial experts believe that institutions are not as susceptible to the emotional ups and downs of the markets as individuals are. When the market is swinging violently, institutional investors are more likely to stay put while the average investor will try to protect their investments by moving in and out of the market. Average investors in such cases are believed to be investing reactively in accordance with their emotions.

Historically speaking, those moves have proven costly to the average investor.

So, how much does moving in and out of the market cost the average investor? According to Dalbar, the average investor stock portfolio underperformed the S&P 500 index by about 4.3% per year over the last 20 years ending 2011. For bonds, the difference is larger with the average investor bond portfolio underperforming the Barclays Agg index by about 5.6% per year over the same 20 years.

As always, utilizing the expertise of an experienced and objective financial advisor can provide much needed guidance and oversight toward avoiding the common pitfalls of the average investor.

For a copy of the full report, visit www.Dalbar.com.

photo credit: jurvetson

Doctors Make These 4 Financial Mistakes

Doctors are amongst the highest earning professionals in the U.S. but when it comes to personal financial management, many are ill prepared and unnecessarily sacrifice portions of their wealth .

Here are four areas you may want to consider taking a closer look at if you are a physician.

1. Mismanaging Debt:
Medical school loans, mortgages, auto loans, and credit cards eat away at your wealth by taking away from your savings. Having a simple budget could help you set your living expenses and spending habits to a level that will help you avoid using credit, reduce your debt and will help you accumulate more wealth early on.

2. Misaligning Investments and Goals 
From purchasing a second home to buying mutual funds or stock in Apple – it’s very important to understand both the risks underlying each investment as well as the expenses associated with each. Many physicians are unaware of how exactly the professionals involved in guiding their investment decisions and transactions get compensated for their recommendations.  Start with your specific goals and their respective time horizons then research or work with an independent, objective financial advisor to find the best way to meet them.

3. Tax Management:
Maximizing your retirement plan contribution amount is likely the first and easiest action you can take toward minimizing your tax liability. With the help of a professional, you’ll also realize opportunities for tax-loss-harvesting, the use of charitable contributions, and other tax deductions. Many physicians earn high wages and pay more than they may need to in taxes.

4. Insurance:
Most doctors are painfully aware of the costs associated with liability and malpractice insurance, however many lack adequate coverage in other areas. Term-life insurance and disability insurance for instance can be very important.

Regardless of your profession, we all have different investment objectives, debt, time horizons, and risk tolerance levels. It is best to always consult with an experienced financial advisor, attorney or CPA for professional help in making decisions that are most suitable for you.

photo credit: Alex E. Proimos

Changing Jobs? Don’t Make this 401(k) Mistake

The average US employee switches jobs 11 times before retiring. That means you could potentially participate in 11 different 401(k)s or other retirement savings plans during the course of your career.

If you’re starting a new job or looking to change careers, you’ll have to make a decision about your 401(k). The good news is – 401(k) plans are portable.  You could  consider moving it to your new employer’s plan if the plan accepts transfers. You could move your assets to an individual retirement account (IRA) or withdraw the money as a lump sum. Or you may be able to leave the account where it is. Before making a decision, know that each option has its own unique benefits, risks and penalties.

If you leave the money where it is or roll it over into a new plan or IRA – you won’t lose the contributions you’ve made, your employer’s made (if you’re vested) or earnings you’ve accumulated in the old 401(k). Your money will maintain its tax-deferred status until you withdraw it.

If you do instead decide to withdraw the money – beware of the penalties.

Believe it or not, many people make the mistake of asking their employer or plan administrator to cut them a check after they leave their job, without considering all the consequences. Doing so can be extremely costly.

First, your employer will withhold 20 percent of your account balance before cutting you a check, just to prepay the tax you’ll owe. Also, the IRS may consider your payout an early distribution meaning you could owe a 10 percent penalty for early withdrawal in addition to paying federal, state and local taxes. After all is said and done, you could lose more than 50 percent of your account value this way.

Lets also not forget the the opportunity cost involved. If you took $10,000 out of your 401(k) instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.

If you can, keep your money in a 401k or IRA somewhere. It will allow it to compound tax deferred.

Regardless of which route you choose, always remember to evaluate your new plan closely before deciding to move your assets over. Make sure the new plan has plenty of investment choices, includes all the options you prefer, and that the fees aren’t too high. If you’re unhappy with the options provided by your new employer’s 401(k), consider a rollover into an IRA. If you’re unsure, talk to a trusted professional that is licensed to offer suitable advice on such matters.

By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs, so you have time to consider all your options before making a move.


Sources: US Securities and Exchange Commission. Financial Industry Regulatory Authority, Inc.  Photo credit: Dave Dugdale