Celebrating That Special Day Takes Financial Smarts


Special To The Dispatch
OCEAN CITY — Weddings can be wonderful, emotional, memorable events — and they’re even more so when the apple of your eye is making the vows. On such momentous occasions, you simply want your child to be happy and to support him or her in every way possible — including financially.

But as we all know, nuptials aren’t exactly inexpensive — the average cost of a wedding today is in the neighborhood of $24,000. And with traditional ideas about weddings going out the window, it can be hard to get your bearings and to figure out the best way to contribute.

A good first step, as you figure out how to afford an upcoming wedding, is to determine the extent of your financial responsibility. Don’t assume that the traditional funding model — parents of the bride paying for the wedding, while parents of the groom pay for the rehearsal dinner and honeymoon — still applies.

In a growing number of cases, the couple and both sets of parents split the tab, thereby decreasing the burden on any one party. "There is less concern now about etiquette and protocol when it comes to who pays for what," says Scott Cooper, Managing Director of Merrill Lynch’s Wealth Structuring Group. "It’s more about who can afford what."

Splitting the bill may appear to be a blessing, but "it can also be like Congress deliberating on the national budget," says Cooper, noting that each person with a financial stake may feel entitled to control the details. Therefore, you should communicate early and often with your son or daughter.

In what may be a boon to your assets, simpler, scaled-down weddings have come into vogue as a result of the recession. Deborah Moody, director of the Association of Certified Professional Wedding Consultants, says brides are more practical and less elaborate with spending decisions for dresses, flower arrangements and meals. "Five years ago you might have invited 300 guests, but today couples are inviting people who are most important to them," says Moody.

"Even some very wealthy clients are planning simple weddings to lessen the impact on the environment," says Stacy Allred, Managing Director of Merrill Lynch’s Wealth Structuring Group. For example, fewer weddings are releasing butterflies or doves. Some are skipping the paper invitations and e-mailing or calling guests.

In the end, a proper plan and clear communication can make all the difference.

"Today’s wedding is all about deciding on the most important elements that will define that special day," says Moody. "Once you recognize what memories will stay with you, you can spend accordingly."

And, most important, you can help your children start their new lives with joy.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Tech Companies Rebounding


OCEAN CITY — It should come as little surprise that earnings reports from major technology companies have been driving the strong market news of late. Investing in today’s tech sector is considerably different from the dot-com bubble (and bust) that eliminated $5 trillion in shareholder value back in the early 2000s. Currently, many major tech companies boast solid balance sheets, strong business fundamentals and attractive valuations.

Larger, slower-growing technology firms are especially appealing, says David Bianco, head of U.S. Equity Strategy at BofA Merrill Lynch Global Research. "Many of these companies are being priced as if they’re likely to gradually go out of business, and that’s preposterous," he says. "In fact, these are great businesses, in my opinion — their earnings have only gotten stronger over the past few years, and I believe many of them are poised to capitalize on expanding demand from emerging markets and a global recovery in business spending."

True, no sector is without risk. Case in point: Semiconductor shares tumbled in mid-March, in response to the closure of Japanese chip makers following the catastrophic earthquake and tsunami. However, from a market point of view, this may prove to be a temporary obstacle: Many factories have already restarted production and shipping, and Japanese companies seem committed to maintaining the international competitiveness of their electronic component industry. In the meantime, a number of catalysts should drive strong results for technology companies in the year ahead.

Perhaps the most important factor to consider when assessing the outlook for the tech sector is growth outside the United States, largely in emerging economies, particularly China. Bianco notes that while S&P 500 companies have been generating about 40% of their profits outside the U.S., he expects that figure to climb to 50% in just five years. Technology companies as a group have significant exposure to foreign markets, and in particular to the emerging markets expected to provide the lion’s share of the world’s economic expansion.

Meanwhile, consumers worldwide are demanding access to broadband and mobile Internet. "They want the ability to access information no matter where they are," says Tal Liani, a research analyst at BofA Merrill Lynch Global Research. "That boosts demand for new devices, bandwidth, software and other technology products."

Consumer demand is only part of the story, one that is dwarfed by the expected rise in business capital spending. During the economic downturn, companies invested in technology only to the extent that they had to. But today corporations are entering the recovery with historically large cash stakes and little debt; as concerns of a double-dip recession wane, corporate decision makers are likely to begin spending in earnest.

At the same time, corporations are moving rapidly to take advantage of the efficiencies of cloud computing — the ability to cut costs and optimize network capacity by using servers deployed in different locations, rather than adding capacity in any single one. That requires major investments in networks, software, storage and other components — creating demand for companies that build the cloud’s infrastructure.

What’s more, many companies increasingly prefer to do business with one tech provider worldwide — and the sector’s largest companies are positioned to benefit from that trend. "As a result, large-cap tech companies may try to crowd out small local players," says Bianco, "and acquire them at reasonable terms."

Despite the sector’s current strong fundamentals, tech has been neglected by many conservative investors who eschewed any asset considered risky.

"The only people who put money into tech in the past few years tended to be dedicated tech investors," Bianco says. "And even they often put all their firepower into the growth stars. We like those stocks too, but we think companies offering steadier if less spectacular growth have been neglected. We believe the best opportunities are on the value side of large-cap tech."

Bianco points out that in February 2011, shares of the Tech Titans were sporting an average price-to-earnings ratio of just 13 — the lowest since 1995 — despite a benign interest-rate environment, very strong balance sheets (the companies have cash equal to 15% of their market capitalizations) and the firms’ dominance of a fast-growing global market.

"These companies are the technology sector," notes Bianco, who points out that these corporations combined account for about 85% of the sector’s profits. "Their profit-to-earnings ratios shouldn’t be 13 or 14. We think they should be more like 15 or 16, and that valuations should expand from there."

With that in mind, Bianco recently increased his recommended tech allocation to 22% — three percentage points higher than the sector’s weighting in the S&P 500. As he puts it: "I believe these are some of the best-positioned firms in the global marketplace."

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Investing In What You Love


OCEAN CITY — "I buy because I love the work."

That’s what one legendary financier and patron of the arts told Bloomberg News in 2003. Through his money management firm he had amassed not only a fortune but also a stunning collection of modern American art, fueled purely by the desire to support living artists and to share their work with the public.

Ardent collectors of all stripes understand that kind of passion, even if they’re not buying million-dollar paintings: Whether pursuing a bottle of Château Lafite Rothschild, a signed first edition by F. Scott Fitzgerald or antique Shaker furniture, many have experienced the thrill of the hunt and the rush of ownership that, frankly, shares of a mutual fund just can’t provide.

Yet a fresh focus on the financial dimension has crept into discussions of such "passion investments" over the past two years. Many owners of objets d’art have increasingly become "investor-collectors," strategically seeking items that may provide long-term returns along with short-term pleasure, according to the 2010 Capgemini and Merrill Lynch World Wealth Report. With the right approach and the help of your Financial Advisor, you can both find the liquidity to fund aesthetic interests and take into account the inherent risk of holding them as bona fide investments.

The first thing to acknowledge is that the markets for artwork, rare wine, vintage automobiles and other collectibles are inconsistent and often illiquid. In many cases, future value depends on fashion and taste rather than cash flow and profits, so you won’t necessarily be able to sell the asset when you want to, or even know how much it might currently be worth.

"Passion investments get priced for their market value only if you are out there actively selling," says Ashok Rajan, Merrill Lynch GWM Investment Management & Guidance. "You won’t get a daily quote letting you know how your Picasso is doing." Of course, there are ways to make real assets more liquid, but relying on these types of investments as sources of cash could prove problematic, especially given the inconsistent and unpredictable nature of their markets.

While their markets may be unpredictable, real assets like collectibles should be included in personal net-worth calculations, especially if they make up a large chunk of your overall portfolio. Rajan points out that they carry a unique risk and potential return profile, which you need to account for as you build a more accurate financial strategy. "You need to harmonize them with the rest of your investments," he says. For example, if you find you have considerable wealth tied up in artwork — and even "blue chip" paintings can take time to sell at auction — you may want to balance that with greater liquidity elsewhere in your portfolio.

One way to do that, says Rajan, is to look at all of your assets and liabilities to make sure you’re not overweight in "aspirational risk.” You should make sure most of your assets can help you maintain your basic standard of living and your lifestyle.

If your portfolio is too heavily invested in aspirational risk, you may want to adjust your strategy for your next big purchase of contemporary fine art. For example, you may decide to boost your cash or other liquid assets so you’re not overexposed to riskier assets or investments that can’t be unlocked when you need ready cash. "The worst thing that can happen is to have to sell assets at a loss just to get some liquidity," says Rajan.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Funding Your Next Step Involves Lots Of Options


OCEAN CITY — The current economy has created double challenges for many midcareer professionals: Not only are they saving for their children’s college education or helping their children to repay their college loans, they may also be reinventing themselves to improve their employment prospects.

While an advanced degree can offer abundant rewards, including intellectual satisfaction and entrée into a new, potentially higher-paying field, it can also mean a temporary drop in income and a big jump in expenses — with profound financial implications that can ripple out all the way to retirement.

If you’re thinking of going back to school, you can pursue your dreams without putting your kids’ future at risk or sacrificing your own retirement. The key: make the most of the assets you already have and rework your long-range plans.

Additionally, leave the 401(k) alone. Tuition and fees at private universities that offer master’s programs average $23,700 annually, according to the College Board. Many schools and degree programs can run considerably higher.

To cover these tuition costs, first off "you want to stay away from raiding a 401(k) and IRA because that money compounds tax-free and you’ll likely incur steep early-withdrawal penalties," says Chuck Toth, Director of Retirement Product Management for Merrill Lynch. Although your employer may allow loans from a 401(k) without penalty, if you lose your job or leave it — to go back to school, for example — you must repay the entire amount immediately.

So with retirement accounts off the table, what sources of funding do make sense? Toth encourages clients to approach the process entrepreneurially.

"Think of yourself as a business investing in R&D," he says. "You want to decide which option gives you the easiest access to capital with the lowest financing and opportunity costs and the least disruption to cash flow."

Tapping savings, for example, might be a good short-term solution, but not if that would mean greater difficulty in meeting ongoing household expenses. Similarly, you might want to think carefully before liquidating stocks, bonds or other investments. Doing so in a less-than-strategic way can end up triggering capital gains taxes or may mean walking away from considerable upside potential.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Tax Relief Act Questions


OCEAN CITY – Today, part two of last week’s discussion on how the new

the $858 billion tax law enacted in December – formally known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act") will impact you.

Does the new law affect my municipal bond holdings? Probably only in the short-term, says Christopher J. Wolfe, chief investment officer for the Private Banking and Investment Group at Merrill Lynch Wealth.

Municipal bond prices, which had been surging in anticipation of higher demand for sources of tax-free income, have retreated since the Act’s passage. It doesn’t help that Congress also chose not to renew the taxable Build America Bond program. With Build America Bonds no longer an option for raising revenue, more jurisdictions are likely to be crowding back into the tax-exempt bond market even as concerns continue to mount about municipal credit risk. All the same, Wolfe believes worries of muni defaults should be monitored closely.

"We expect the vast majority of municipal bonds to fare well over the next few years," he says. "However, there are growing concerns around municipal budgets and pensions which may cause some issuers to reschedule or reorganize their bond payments."

Are there any particular provisions retirees should know about? As a bonus to those who are at least 70 ½, the Act keeps in place a provision allowing them to give up to $100,000 directly from their IRAs to charity without incurring any income tax. Although you can’t claim a deduction for the contribution, it can help satisfy your required minimum distribution for the year, thereby reducing your income tax liability.

What else can I consider to take advantage of the lower tax rates now?

If you haven’t already converted traditional IRA assets to a Roth, you now have two more years to act and pay tax at low rates on the conversion

Could this legislation help to lift the stock market? That’s impossible to forecast, but Wolfe notes that reducing uncertainty around tax policy and lowering market volatility could steady price-to-earnings multiples or even give them a boost in 2011. More importantly, he suggests that the actual passage of the Act itself sends a positive message about cooperation in government.

"Agreements are being forged in a very partisan Congress, and that is good for investors, chiefly because it shows that Washington isn’t entirely broken," he said.

Additionally, this is a good time for investors to take a step back and carefully assess the tax and fiscal environment going forward.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Taking A Step Back From Risk


OCEAN CITY – While the wounds from the deep recession of 2008 aren’t quite so raw today, there is evidence of their having a strong long-term impact on how Americans think about their finances.

When Sallie Krawcheck, president of Global Wealth & Investment Management, Bank of America, recently traveled around the country to talk with clients about their greatest concerns and goals, a majority of those she spoke with said they’d become more focused in their investing style.

A range of financial responsibilities, from maintaining their standard of living and saving and investing for retirement to rebuilding finances to prerecession levels, have the potential to "keep them up at night," according to the families surveyed. Of particular concern are retirement and the rising cost of health care. More than two-thirds say they don’t think their retirement plans are sound enough to withstand an unexpected family event, and nearly as many say that health care costs are their No. 1 financial concern overall. Affording children’s college expenses is a big worry, cited by 41% of families.

As a consequence of financial stresses like these, families are spending — and saving — in a way that’s markedly different from what they did before the recession, according to a recent survey by PricewaterhouseCoopers.

Nearly two-thirds of households have cut down on their discretionary spending during the past year in order to bolster their savings, with 36% of respondents setting an aggressive goal of saving 7% or more of their disposable income during the next five to 10 years. The increased discipline comes amid increasing worries that pension plans may default on obligations and that a financially strapped Social Security program may have to reduce benefits to future retirees — possibilities that could mean that retirement income is insufficient to support many people’s lifestyle goals.

As households prepare to ride out America’s fragile economic recovery, their practical concerns frequently turn on one idea: liquidity, the access to the cash they need to meet their ongoing expenses. The credit that many counted on in the recent past to bridge gaps in income or to finance large purchases will likely remain tight for several more years. Meanwhile, portfolios that are still recovering from recent losses are better left untouched as sources of liquid funds.

According to Krawcheck, the great majority of people she has met in her recent travels are voicing a pressing need for a stable cash flow. In this environment, timely, dependable and efficient ways to turn savings into income are critical.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Sorting Out Future Business Tax Changes

OCEAN CITY – A few weeks back, we looked at some questions regarding tax changes enacted in recent years that take effect in 2011. Here are some more commonly heard questions about the new changes and how they may affect you and your business.

(BOLD QUESTION)What about the small-business tax incentives enacted over the past couple of years? Are there any worth taking advantage of?

Absolutely. The most significant are the ones governing the depreciation of certain types of property. For the past three years, you’ve generally been able to deduct up to 100% of equipment purchases (up to a total of $250,000) and claim the deductions in the current tax year rather than having to depreciate the asset over time, and in 2009 a so-called "bonus depreciation" rule permitted the deduction of up to 50% of the cost of the purchases of qualified equipment with no limits on the current-year tax savings.

One proposal approved by the House would extend the bonus depreciation through 2010. Another, more ambitious proposal by the Obama Administration would allow business owners to deduct and claim up to 100% with no limits on any qualified equipment expenditures made between Sept. 8, 2010, and Dec. 31, 2011. Yet there’s also a possibility that all of these provisions could go away. "Probably the best approach you can take is to tentatively plan on acquiring fixed assets and putting them into service by the end of the year," says Vinay Navani, a tax advisor with Wilkin & Guttenplan, a New Jersey accounting firm.

That way if the more ambitious proposal passes by year-end, you can always postpone the purchase to 2011 if that works better in your budget, but if Congress balks and does nothing, at least you’ll be in position to take advantage of the $250,000 deduction before it sunsets at the end of the calendar year.

(BOLD QUESTION)And what about hiring incentives?

The Hiring Incentives to Restore Employment (HIRE) Act, signed by President Obama in March, offers two tax credits to businesses that hire unemployed workers before Jan. 1, 2011.

First, you generally get a payroll tax exemption on your share of the Social Security taxes on wages paid to those workers from March 19 through Dec. 31, 2010. Second, if the employees are retained for at least a year, you receive a tax credit of as much as $1,000 per worker. In order for employees to qualify, they must have been unemployed or worked fewer than 40 hours during the 60 days prior to their start date and begun work for you after Feb. 3, 2010.

"Since this year is almost over, you’ll increasingly get less bang for your buck on the payroll deduction, and the credit is only $1,000," says Navani. "Still, for businesses with a lot of employees, it’s at least something."

(BOLD QUESTION)If I’m planning to sell my business next year, how will the rising taxes affect any profit from the sale?

The proceeds from the profitable sale of closely held businesses are usually taxed at capital gains rates, which are set to rise to 20% from 15%. If you already have a deal on the table, it might be worth giving the buyer a discount to move up the date. If your agreement includes installment payments, you can generally elect to pay all the taxes upfront in 2010 at the lower rate even though you’ll be receiving the checks over successive years. The key is sitting down with a trusted tax advisor to run the calculations and structure the payments ahead of time. "But, again, ultimately you’re looking to maximize the cash that goes in the seller’s pocket, and that’s driven by a lot of things — taxes being just one of them," says Navani.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

Identifying Best-Of-Breed Investments


OCEAN CITY – In the 1990s, when Michael Hartnett, Co-Head of International Investment Strategy at Banc of America Securities–Merrill Lynch Research, used the phrase “best of breed,” he was referring to Japanese companies that escaped the decade-long bear market in the world’s second-largest economy.

“Japan was facing something similar to what is going on in the U.S. today — a credit-fed boom followed by a deflationary bust,” says Hartnett.

Yet, in sharp contrast to the plight of most Japanese stocks, a basket of 15 top-performing Japanese blue chips rose 330% during that decade, versus a 40% decline for the broader market.

Today “best of breed” applies to the kinds of companies that tend to weather downturns and are more likely to provide long-term opportunity for investors. Such companies have healthy balance sheets, strong management, consistent earnings histories and forecasts with bright future prospects, plenty of cash as a percentage of overall assets, and clear growth strategies.

Now, as investors look for signs of recovery in the global economy and markets, searching for companies with these best-of-breed attributes could help identify stocks that have the potential to rise even if market benchmarks don’t. Although markets may remain volatile, investing in well-positioned companies can potentially enable you to achieve better-than-market results over the long term, according to Hartnett.

Where should an investor look for such companies? One fruitful area might be markets that are primed to outperform. Hartnett is especially optimistic about the prospects for some emerging markets in Asia and Latin America. What makes certain countries in these regions attractive is that they have current account surpluses, they have stronger domestic demand prospects in 2009 and beyond, and their banking sectors are relatively healthy. China currently matches those criteria, so it shouldn’t be surprising that some large-cap Chinese stocks fit the best-of-breed definition, says Hartnett.

Emerging-market banks that avoided the subprime mortgage lending that crippled many U.S. financial institutions could be particularly appealing. “Three years ago, not one of the top 20 banks in the world, ranked by market capitalization, was Chinese,” Hartnett says. “Now the top three are Chinese.”

As far as U.S. investments are concerned, investors may consider globally oriented brand-name companies that export to high-growth countries such as India and Brazil, which have burgeoning consumer markets. “When you wake up one day in the emerging world and recognize you’ve made it to the middle class, you want a Big Mac, a Coca-Cola and a pair of Nike sneakers,” observes Robert Doll, Vice Chairman and Global Chief Investment Officer of Equities at the BlackRock investment firm.

While it makes sense to invest in sectors poised for growth, even hard-hit industries such as U.S. banking and real estate may offer best-of-breed candidates.

“The commercial real estate sector is one of the main beneficiaries of U.S. government intervention, so there are opportunities to invest in REITs [real estate investment trusts], not only on the equity side but also in fixed income,” says Doll

While no investment strategy can guarantee success, screening for best-of-breed stocks offers important historic lessons for choosing equities suited to today’s global downturn, says Hartnett.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

Improving Your Portfolio Quality


OCEAN CITY – Recession, war, and corporate accounting problems are weighing on stocks and generating concerns about retirement security. Your retirement security depends not only on your pension or 401(k) plan, but also on your IRAs, deferred compensation, stock options, taxable investment accounts, annuities, insurance, and more. All assets must work together if you hope to achieve your long-term goals.

There is renewed interest in investment fundamentals – the approaches to wealth creation and preservation that have proved successful over the long term. The most time-tested of these approaches are proper asset allocation and the selection of quality investments.

Though it is tempting to sit on the sidelines during times of uncertainty, now is a particularly good time to take a fresh look at your portfolio, to make sure you hold a variety of quality investments, and to be positioned for future opportunities. When conducting your review, it is crucial to include all of your assets in the mix.

We have entered a very different environment than the one that prevailed during the late 1990s’ bull market and the economic slowdown of the past two years. At Merrill Lynch, we believe the economy is showing early signs of recovery, pointing to a fairly quick end to the recession (in fact, it may already be over) and better-than-expected economic growth by the second half of the year.

But we do not foresee a return to the 20 percent annual stock-market gains of recent memory. In fact, we’re probably at the beginning of a period of sub-average returns. Why? The expected recovery appears to be already built into stock prices, which are at historic highs in relation to earnings.

The prospect of moderate returns is no reason to become passive about investing. Neither should you be "frozen" by the accounting irregularities that recently have cast a pall over the market. The questionable practices that have been uncovered are likely to give rise to reforms that will bring more transparent balance sheets and stricter financial reporting.

With gains harder to come by, it will be important to be even more focused and ready to take advantage of opportunities as they arise. Speculative issues should be replaced with high-quality stocks and bonds of companies that have solid balance sheets, strong cash flows, and attractive business models.

But it is important to remember that investing is not only about wealth creation. It’s also about wealth preservation. And prospects for modest gains in the short term are certainly better than the negative returns of the past two years.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)