Happy New Year 2010! The year of the Roth extravaganza!

by Evan on February 4, 2010

Happy New Year to all of my blog readers and clients!  2010 brings a new set of challenges, adventures, and fun to our lives.  It also means that the rules for opening a Roth IRA and converting to a Roth IRA have changed for the good.  No longer is there a restriction on being able to convert traditional IRAs or old 401k type accounts to a Roth.  Before 2010, one had to have a MAGI of under $100,000 to be able to convert accounts to a Roth IRA.   Now, anyone can convert a traditional IRA or 401k type account to a Roth IRA.  Of course, please consult a qualified tax specialist to make sure that you do this correctly, as there are tax consequences for the conversion.

Additionally, prior to 2010, taxpayers that made over a certain amount of money as defined at this link:


were not allowed to make any Roth IRA contributions, at all.  Now there is a work around!  Money can be contributed to a non-deductible IRA (meaning, an IRA that you prepay the tax on the contribution) and then converted to a Roth IRA with no tax consequence, no matter what the taxpayer’s income is!

Conclusion:  This is a great way for people to take advantage of a retirement account that does not have any future taxation, especially if you think the government will be raising tax rates, like I do.  In addition, for 2010 ONLY, a taxpayer can elect to pay taxes on the Roth IRA conversion in 2010 OR spread the taxes evenly over the 2011 and 2012 tax years.  I have posted a link in my links section on the left side of the resources page describing what I have just written in this blog.  Have a wonderful year!

ETFs vs Mutual Funds (Part 3 of 3)

by Evan on December 18, 2009

Let me start by saying that I apologize for not finishing this topic sooner. 

One of the other significant differences between ETFs and mutual funds is ease of access and transparency.  ETFs can be traded on any platform, meaning that no matter what broker or investment firm you use, you can purchase ETFs.  On the other hand, mutual funds can usually be purchased, at no cost, at the issuing mutual fund company’s brokerage unit or through select relationships with other brokers.  Thus, it is often not possible to transfer mutual funds from one broker to another, at least not without incurring an additional cost to do so. 

Transparency deals with the ease of  timing purchases and sales of ETFs vs mutual funds.  Mutual funds can only be purchased or sold once or twice per day, at pre-specified time intervals that the issuing company determines.   The investor has no control over the timing of the sales or purchases when dealing with mutual funds.  ETFs can be sold or bought during regular market hours, and in some cases, have a market even pre and post-market hours.  The ability to liquidate a holding is incredibly important, and thus, ETFs provide more transparency of understanding the purchase/sale process. 

As one can see, ETFs provide a lot that mutual funds do, but often without the additional lack of transparency, higher transaction costs, and still provide, for the most part, better tax efficiency.  The Ethical Advisor, LLC uses ETFs almost exclusively in non-retirement accounts to provide all of these benefits to the firm’s clients.

ETFs vs Mutual Funds (Part 2 of 3)

by Evan on November 14, 2009

Tax efficiency is a topic that a lot of individuals do not consider when making investment decisions.  In my opinion, this is a huge reason how qualified advisors can help clients.   The concept of tax efficiency is understanding how much taxes will be owed on a particular investment product, and then knowing what to do to minimize this tax.

Mutual funds and ETFs hold many securities and when the fund managers decide to sell the securities in the fund, the fund incurs taxable gains or losses.  These taxable gains or losses are passed along to the shareholders and the shareholders must pay the taxes based on their personal tax brackets.  Of course, if you hold a mutual fund or ETF in a tax deferred account or retirement account then these taxable gains or losses do not affect the client’s tax situation.

Traditional mutual funds are mostly actively managed funds (non-index based funds) and tend to have high turnover rates.  As turnover rates increase, so do the tax consequences of owning the fund.  The turnover rate also affects the cost of the fund, too, since the fund manager is buying or selling securities at a cost (commissions, spreads, and other fees).   Also, it is important to note that no matter if you have held the fund for 1 day or 10 years, if the fund issues a taxable distribution, each client is still responsible for the entire tax consequence!

ETFs are structured in such a way that large money managers are able to “swap” large numbers of shares, most of the time, and not incur a physical sale of the underlying  securities in the fund.   The understanding of this mechanism is beyond the scope of a simple blog, but you can find out more on how ETFs function in this way here:


Needless to say, this leads to lower turnover ratios, and thus lower taxable gains or losses to the holder of the ETF. 

However, do note that this works both ways.  When mutual funds have losses, you can utilize these losses to help offset some taxes.  ETFs will rarely issue a taxable loss, so after prolonged market down moves, some mutual funds may provide tax efficiency by issuing the client losses for usage.   Stay tuned next week for our conclusion to the ETF vs mutual fund blogging!

ETFs vs Mutual Funds (Part 1 of 3)

by Evan on November 6, 2009

Over the next several weeks, I will begin to explain the differences between exchange traded funds (ETFs) and mutual funds.  Today I want to focus on one of the major differences: cost or expense ratio (ER).  All mutual funds and ETFs charge a fee for a manager to over see the day to day operations of the fund.  These expenses typically include salary for the managers, sales/purchases of securities, marketing fees, sales loads/commissions paid to brokers, etc. 

A huge difference between ETFs and mutual funds is that there are no sales loads/commissions paid to brokers to distribute ETFs.  This fee is usually paid to a broker for selling a specific fund to a client.  In return the mutual fund company compensates the broker for the sale with a commission.  Another expense that mutual funds have that ETFs do not is called a 12-b1 fee, or a marketing fee.  This fee is charged to the client via a quarterly or yearly withdraw from the fund holdings.  While this fee is small, it still can add up with other expenses to create a large piece of the investment returns for the year.  Finally, some mutual funds charge a “short term trading fee”, which means that if you do not hold on to the fund for 90, 180, or even 365 days in some cases, the holder of the mutual fund is hit with a sales fee.  No ETFs charge this fee. 

In fact, the only fee that ETFs charge that mutual funds do not, most of the time, is a brokerage commission to buy or sell the ETF.  This fee is usually small ranging from free at some institutions to $20 at most discount brokerage companies.  So if you plan on buying small dollar amounts of funds over time, it might be beneficial to find a low-cost, no load (meaning no commission being paid to a broker), and purchase it regularly, but otherwise, ETFs trump mutual funds with their efficient fee structure.

Due to all of the fees listed above, ETFs, even when comparing similar mutual funds to a matching ETF have higher expenses most of the time, especially when in comparison to holding mutual funds over long term investment horizons (over several years).   Next week I will discuss the tax efficiency of ETFs vs. mutual funds.

Tax loss harvesting

by Evan on October 28, 2009

It is that time of the year again when I go over my client’s taxable portfolios and look for any opportunities to harvest tax losses or offset gains taken previously in the year with losses. The way this works is fairly straight forward. If you have a stock, mutual fund, or ETF that is below where you purchased it, and it is held in a taxable account (ie not a retirement account), you can sell the equity and take a loss. This loss can be offset against other gains that you have, or in the case that you have no other gains, you can use up to $3,000 worth of the losses directly against your taxable income. Furthermore, if you have more than $3,000 in losses that do not offset with gains, you can carry the losses forward to any future tax year. There is no limit on the number of years the losses can be carried forward to. However, understand that you must use the losses to offset capital gains in future years before you can apply the losses against your normal taxable income.

The best thing about harvesting losses is that you can buy the same security back 31 days later and start all over again. Or you can buy a similar security to the one you sold right away and take your losses while leaving your portfolio setup roughly the same way as before.

If you are interested in learning more about this process, please feel free to contact me.

Is Buy and Hold dead? Not according to me and not according to this article

by Evan on October 21, 2009

One of the questions I hear from my clients on a regular basis is: Is buying funds/ETFs/stocks/bonds and holding for the long-term dead? My answer is always a resounding ‘NO!’ Risk and reward has changed, but the premise of buying securities and holding them for long times has not. Financial planners need to re-evaluate asset allocations after the turmoil of the past year, however, there is no reason to try to time the markets, trade actively, concentrate positions, or advocate non-standard practices. The following article from Financial Planning magazine summarizes my beliefs very well:


Why taking the safe route does not work; DO NOT HOLD ALL BONDS OR CASH!

by Evan on October 12, 2009

While listening to the Rick Edelman show a week ago, I heard a great statistic that is very useful for everyone to understand. Here it is:

–Over the last 83 years since 1926, there have been 880 rolling 10 year periods.

A.) Bonds have only beat stocks 17% of those 880 periods.

B.) That means 83% of the time stocks have outperformed bonds!

With interest rates at all time lows, it is especially important not to chase bonds, as a majority of your investment holdings, because as interest rates go up, which is going to happen over time, bond prices must go down. Thus, right now is completely the wrong time to shift to a more conservative portfolio full of bonds because bond prices will be decreasing and bonds statistically do not beat stocks over 4 out of 5 10 year time periods!

The conclusion to draw from this set of statistics is to always be diverse with your investments. It is important to hold both bonds and stocks, but remember that due to inflation and current interest rate risk, bonds on their own, do not make sense.

Market Tendencies

by Evan on October 6, 2009

While I do not advocate short term trading or timing of the market for profit, there is some merit to understanding the stock market’s ups and downs. There have, historically, been times of the year that behave more rationally than others. The point of this discussion is to allow for individuals who are rebalancing, dollar-cost-averaging, or buying into a large long term position, the ability to understand patterns.

January – March The first quarter of the year. This is usually a good time for equities and companies are looking to make sure their balance sheets are boosted for 1st quarter earnings. A good majority of stock market gains are made in this quarter and the 4th quarter.

April – May Transition period. Flip a coin and hope for the best! The old adage of “sell in May and stay away” means that it used to be common practice for traders to liquidate positions going into May for the summer months.

June – September The “summer doldrums”. Most purchases and sales during this time are related to specific events and economic news. The markets tend to be choppy, low volume, and have very little direction. Nothing changes until after the summer season is over and institutions begin to start purchasing/selling securities again.

October – December Where much of the action takes place! Most of the large movements up or down in the markets occur during this time and during the first few months of the 1st quarter. October tends to be a large sell-off month if the market is going to correct for a large upswing earlier in the year. November and December tend to be much more to the upside due to the “Santa Claus” rally. People act more positively around the holidays and it ends up showing up in the stock market, too.

Market timing is a zero sum game for long term investors, but knowing when to act prudently through out the year gives each and every investor more power to understanding the markets.

Bogleheads 8 was a blast!

by Evan on October 4, 2009

To all of my fellow Bogleheads out there that I met, last week was a blast! Special thanks to Rick Ferri for his kind words of encouragement and continuing service to the community. Here is to hoping that we all meet up again in Philly next year to spend time with our mentor Jack in his home town. Stay safe and see you all soon!

The most informative 529 plan site online – savingforcollege.com

by Evan on September 28, 2009

I have posted a link on my resources page for the most informative website that I am familiar with regarding college savings plans, or 529 plans. Savingforcollege.com allows users to compare state college 529 savings plans side by side and through a comprehensive 5 cap rating system.

Depending on an individual’s need, there are several state 529 plans that are worth looking at here in Texas. Since our state does not have an income tax, you can feel free to choose the best plan from any state offered on the website. There is no tax benefit for Texas residents to use the Texas 529 plan. Some of the plans that I have used under different circumstances are the Nevada Vanguard 529 Savings Plan, the Ohio CollegeAdvantage 529 Savings Plan, the Utah Educational Savings Plan Trust, and the Virginia Education Savings Trust (VEST). Each one uses primarily Vanguard funds, which allows for the owner to minimize costs and obtain broadly diversified index funds. Make sure to check into the costs associated with maintaining the 529 plan along with the actual investment costs. For instance, the Utah plan charges a fee each year to maintain the account, while the Ohio plan does not. However, be sure to select the most appropriate investment vehicle, also. I have chosen the Utah plan over other plans in the past for larger accounts because of the flexibility of investments and the overall expense ratios of the underlying funds being lower.

Be sure to check out all of this by linking to www.savingforcollege.com and then click on 5 Cap Ratings. As always, feel free to contact me for additional help!

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