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River Hill Magazine: Does Your Portfolio Look Like a Shoebox? Part II: Getting Organized

Investment Portfolio Shoebox

Click Shoebox image to access Part I

The first article in this series (February, 2015) defined the concept of a shoebox portfolio, identified the various effortless ways that a shoebox portfolio can be cultivated, and pointed out the pitfalls and consequences of neglecting a thorough portfolio review on a periodic basis.

This article focuses on how to address the problems of a shoebox portfolio by undertaking a comprehensive portfolio review and taking action to streamline the shoebox.

Step 1: The first step in this review process is to organize the items in your shoebox by making a list of every distinct financial account that is owned by the members of your household.  A simple table can be created listing the name of the account holder, the type of account, the brokerage company that serves as custodian for the account, and the current value of the account.  It is best to use the same reporting date for all accounts such as the end of a month, quarter, or year.

Account types refer to all of the various account forms mentioned in last month’s article – individual, joint, IRA, Roth IRA, 401(k), Pension, Tax-Deferred Annuities, custodial accounts for minors, etc.  A spreadsheet program such as Microsoft Excel is ideal for this exercise because it can eventually be useful when calculating totals, percentages, and “slicing and dicing” the various components and groupings of the portfolio.

Step 2: Once the list of accounts has been compiled, the next step is to designate these various accounts by the account owner.

Step 3: The third step is to separate this list of accounts by owner into the two major categories of tax-deferred accounts and taxable accounts.  This step will become important later as specific investment decisions are reviewed or made to optimize the total household portfolio for tax-efficiency.

Step 4: Now it is time to add the itemized list of the specific investments currently held in each account to your spreadsheet.  The sum of the individual investments in each account should provide a total that agrees or reconciles with the total value of the account.  It should be noted that some investments are treated more favorably than others by the tax code and may be able to be strategically re-positioned by account type to optimize tax-efficiency.

Step 5: Subtotal the value of all taxable accounts in a given household portfolio, and then subtotal the value of the tax-deferred accounts.  The sum of the taxable account subtotal and the tax-deferred account subtotal should equate to the grand total value of the portfolio at the household level.  To cross-check, add up the total account value of each individual account from your account statements. This amount should reconcile to the grand total of your portfolio.

Thus far, all we have done is build an organized, reconciled current snapshot of the shoebox portfolio.  Step 6: Review the spreadsheet focusing at the account level to determine if there are opportunities to streamline and simplify your financial situation by consolidating similar account types.  For example, multiple, dormant (no new deposits being made), company retirement plans from old employers may be able to be rolled into a single self-directed IRA account to minimize annual fees, improve investment choices, and simplify record keeping.

With the number of the accounts in the portfolio streamlined, and sorted by taxable and tax-deferred status by account holder, it is finally time to analyze the portfolio and develop an effective investment strategy.  This will be the topic for a future article.

Christopher P. Parr, CFP®, is a River Hill resident and president of Parr Financial Solutions, Inc., a Columbia-based, independent, fee-only, wealth management firm.  He can be reached at 410-740-9011 or online: www.ParrFinancialSolutions.com.

This article was written for the April 2015 issue of River Hill Magazine.

 

BBC: “Planning Ahead for Adoption”

Christopher P. Parr comments on adoption planning for the BBC.   On the amount of money adoption with take: “To be safe, add 20% to what you are being told the adoption will cost,”  said Parr.  To read the full article — “Planning Ahead for Adoption: Keep Costs, Time in Check” by Kate Ashford — Click Here

 

 

 

 

 

 

 

 

The Business Monthly: Gifting Appreciated Securities – A Win-Win Deal

Charitable contributions are an important part of many household budgets. It is quite common for families who budget carefully to base annual contributions to charities on a targeted percentage of gross household income. Charitable donations generally range between 1% to 10%. A typical percentage is perhaps 3%.

Most donees, however, overlook a gifting strategy that can provide significant economic as well as other benefits. This relatively simple strategy involves gifting appreciated shares of stock or mutual funds to your favorite charity in-lieu-of cash.

The most important economic benefit of gifting appreciated securities is that the donor reaps immediate tax savings. Assume a donor originally purchased 100 shares of stock at $10.00 per share net cost (including transaction charges) for a total cost basis of $1,000. With the help of the recent extended bull market, the market value of those shares could have easily doubled over the past 3-5 years to $20.00 per share or $2,000. By donating these shares, your favorite charity will receive the average market value of the shares on the date of receipt. The donor will get credit for the same $2,000 donation on Schedule A, although the original out-of-pocket cost was $1,000. By gifting the shares, the donor avoids having to pay tax on the $1,000 capital appreciation ($2,000 market value of gift less $1,000 original cost). In this example, the donor avoided the 20% long-term capital gains tax ($200) as well as brokerage transaction costs that would have been incurred to eventually liquidate those shares.

A second advantage of gifting appreciated securities is that this technique can be used to periodically rebalance your portfolio. If you are fortunate to own shares of a high-flying stock and are concerned about a potential “crash”, gifting appreciated shares in a timely manner can alleviate this problem. There is no extra cash outlay on your part since you planned to donate the same dollar amount to charity anyway.

Another reason to rebalance your portfolio could be that a particular stock prudently represented 2-3% of your portfolio at the time of original purchase, but has swelled to10% of your total nest egg by outperforming the rest of your portfolio handily during the past few years. Your portfolio risk has increased significantly. Perhaps you have too many eggs in one basket. This is a nice problem to have, but rebalancing may be prudent strategy to reduce risk.

A third example of gifting appreciated shares as part of a portfolio rebalancing strategy is to reduce the exposure of an income generating asset in a taxable portfolio in favor of a more tax-efficient holding.

A final advantage of gifting appreciated securities applies to those who contribute weekly/frequently. Religious organizations are the example that quickly comes to mind. Since gifting securities are drawn from investments instead of income, monthly cash flow can be improved. This technique is particularly beneficial for those who are self-employed and have irregular income streams. It can also benefit those who for whatever reason, fall behind in their annual pledges, or happen to “come-up-short” between pay periods. Since securities contributions are made in one lump sum, eliminating the need to tediously write that weekly check also saves time. Some organizations offer “the convenience” of automated payroll deductions for contributions. Gifting appreciated securities is a superior strategy since it involves pre-tax (capital gains) funds rather than after-tax cash.

When considering gifting securities, here are a four potential pitfalls:
1. Do not donate securities that have depreciated (suffered a loss in value). It makes more sense to gift cash instead.
2. To achieve maximum tax advantages, do not gift securities that are held in tax-deferred retirement accounts.
3. Consider gifting appreciated securities for donations of at least $500. This arbitrary requirement is due to the time and paperwork required to process, and potential benefit.
4. Be sure to identify specifically in a letter to the brokerage custodian which shares of a particular holding that you intend to gift. This is particularly important for mutual fund accounts that have reinvested dividends. Gift the shares with the lowest tax-basis.

In conclusion, by gifting appreciated securities in-lieu-of cash, your favorite charity still wins as you intended, but the donor also wins at the expense of Uncle Sam. To initiate a gift of appreciated securities, contact your favorite charitable organization, your brokerage firm, or your financial adviser for assistance.

This is an updated post of an article that originally appeared in the May 1999 issue of The Business Monthly.

Copyright © by PARR Financial Solutions, 2011

Please feel free to contact us if you have any questions or comments.

The Baltimore Sun: Debt-Ceiling Debate

Debt-ceiling debate, market downslide test investors’ appetite for risk

For risk-averse, it’s a good time review your portfolio.

Christopher Parr is quoted in this article, which discusses how to manage risk in your portfolio.

“If it is for short-term purposes — within the next year or up to five years — that money shouldn’t bounce around a whole lot,” says Christopher P. Parr, a Columbia financial planner. “You need to have it protected.”

Instead of the stock market, money to be used within five years should be in a savings account, money market fund, certificate of deposit or, if you have a few years to invest, a short-term bond fund. Sure, you won’t be happy with the piddling earnings, but that’s not the point.

“It’s not about making money,” Parr says. “It’s making sure it’s there to meet goals.”

Read the full article here.

Parr Provides Insight to Students at U of MD Business School Event

COLLEGE PARK, MD — Christopher P. Parr, president of Columbia-based Parr Financial Solutions, Inc., was invited by the Alpha Kappa Psi, Omega Theta chapter (University of Maryland College Park) to participate in a two-part “Getting Ahead” career event along with six other well-established, highly successful professionals and executives representing a variety of fields.

The first part of the event was a “professional circuit.” Each professional conducted a series of rapid student interviews in a two-minute, quick-thinking exercise. In the second part of the event, Parr and the other professionals served on a panel responding to a series of questions from the students offering insight, understanding, and identifying ways to differentiate themselves.

“I look forward to having opportunities to mentor and work with students, and did not hesitate when invited to participate,” said Parr. “The Alpha Kappa Psi event provided a chance to make a difference, share my experiences, and meet other Mid-Atlantic business professionals.

Alpha Kappa Psi is the oldest and largest professional business fraternity in the country, starting at New York University in 1905. The Omega Theta chapter (University of Maryland, College Park) is a new chapter, created in 2007. Since its creation, it has been highly successful, winning “Chapter of the Year” in 2009, the only chapter to win the award within five years of creation, and has gained the privilege of being in direct affiliation with the Robert H. Smith School of Business.

Parr Financial Solutions, Inc, provides fee-only financial planning and independent wealth management services to clients locally as well as throughout the U.S. Services cover the spectrum of personal financial planning issues including retirement planning, estate planning, and professional portfolio management. The firm specializes in helping clients transition smoothly into retirement.

For more information, visit www.ParrFinancialSolutions.com

The Business Monthly: The Mortgage Debt Time-Bomb

As we approach the end of the third quarter of 2002, short-term interest rates set by Federal Reserve Policy are at 40-year lows of 1.75%, and could be headed even lower to stimulate a sagging economy that is potentially on the verge of entering a double-dip recession.  Mortgage rates are also at extremely attractive levels. Fixed mortgage interest rates are driven by the yield on 10-year Treasury bonds currently around 4.08% – the lowest level since 1963!

It is an excellent time to take advantage of low mortgage rates and consider refinancing.  It is possible to obtain a 5.50% fixed rate mortgage with zero points, or perhaps a fixed 30-year mortgage rate with a rate around 6.125% with zero points.  When considering refinancing, keep in mind that even with zero points, there will be closing costs to pay.  Closing costs include appraisal fees, processing costs, and title exam, title insurance, and recording fees.

Until recently, continued robust consumer spending helped to keep the economy out of a serious recession.  To a great extent, consumer spending has been fueled by lower monthly mortgage payments.  Many consumers have also taken advantage of these low rates to get “cash out” of existing mortgages by refinancing and incurring even more debt that in turn has been used to propel spending and consumption.

Many consumers are reaching a point of inflection, however, where they are now tapped out with high debt levels.  Consumer spending is starting to weaken and impact the economy.  The unemployment rate is steadily increasing as companies are increasingly cutting back the work force to deal with declining profits.

There is an emerging trouble spot for many families that has, up to this point, gone relatively unnoticed.  Historically, a prudent mortgage credit policy was to borrow just enough so that an ideal comfortable monthly mortgage payment (principal & interest) was 25% or less of gross monthly income.  Refer to the exhibit “Prudent Credit Management Guidelines”.  Recently, however, aggressive mortgage lenders are approving mortgage payments over 50% of gross monthly income!

Lets look at the consequences from a feasibility perspective by making a few generic assumptions for discussion purposes.  If gross monthly income represents 100% of available funds, 35% of income typically can be expected to be eaten-up by payroll taxes, deductions, and withholding.  In this generic example, net income or disposable income would be 65% of gross income.  Actual individual case-by-case figures, of course, can be higher or lower.

If 50% of monthly income is being used to service mortgage debt, then only 15% of income is available to cover all other monthly lifestyle expenses.  Lifestyle expenses include essential spending items like food, clothing, utilities, property taxes, insurance, and transportation.  There are also discretionary expenses to be covered such as recreation, entertainment, travel, etc.

As you can see, we have not even considered saving for intermediate needs like auto replacement, home maintenance or saving for longer-term goals such as retirement, or perhaps education for children.  Retirement savings alone should be at least 10% of gross income, and perhaps much more for many families who started late, or suffered serious stock market declines over the past two years.  The bottom line is that such a high level of mortgage debt is clearly not feasible for many families.  Many consumers are compensating for the shortfall by taking on increasing levels of consumer debt (credit cards, home equity loans, and personal loans.

A healthier financial model is to start with gross income at 100% and deduct perhaps 35% (or your specific percentage) for payroll taxes and deductions. Next, deduct an appropriate percentage for long-term and intermediate term savings goals.  This follows the rule of “pay yourself first”.  Then structure your ideal mortgage payment to provide a comfortable monthly payment while still having room for adequate lifestyle expenses.  This ultimately will point you toward a policy of living comfortably below your means and while building your nest egg toward the long-term goal of financial independence.

There are a few exceptions that should be considered.  If household income can be expected to grow at a steady pace, higher levels of debt can be manageable and you can “grow into” a comfortable mortgage payment.  Another exception might be if both spouses have stable jobs and can independently support the family on a single income.

These comments are designed to be a wake-up call for many families.  They will also make you think twice about common rules of thumb like these:

–       Borrow as much as you can and invest the difference.

–       Buy as much house as you can afford so that you can have the largest income tax deduction for mortgage interest expense.  (You still are much better off in the long run not paying the interest to begin with!)

–       Consider the lower interest rates available on adjustable mortgages (ARM’s).  While certainly attractive today, your payments will increase when the economy eventually begins to recover and interest rates start to increase.  An adjustable mortgage may be the best option, however, if you plan to stay in your home for a relatively short period of time.

On a final note, no one knows when the housing market bubble could burst.  If you borrowed the maximum, and this situation occurs, you could find your house “underwater” where you owe more than the value of your home.  This in fact happened in the rust belt, in Texas, and in California in the past 20 years as the local economies fell upon hard times and the real estate market collapsed.  Many people defaulted on their loans, lost their homes, and were forced to simply walk away.

This article originally appeared in a 2002 issue of The Business Monthly.

Copyright © by PARR Financial Solutions, Inc. 2002