Best wishes for 2012. It is good to have 2011 behind us with the year’s excessive daily volatility, which was 117% higher than the 50 year historical daily volatility average.
How the Markets Performed in 2011
Last year was a mixed bag for the markets as can be seen from the table below:
With a well diversified portfolio, most individuals will have realized a slightly positive return for the year. Nothing to write home about, but better than a negative return, and these meager returns show how important it is to keep fund costs low, so you keep what little return the market delivered. Remember, it is very important to rebalance your portfolio to get it back in line with your target allocations. Let me know if you need any help with this very important process.
Cost Basis Changes Coming for Mutual Funds
Last quarter I touched on the cost basis reporting changes, but did not give you any recommendations on which option to elect. This section will try to demystify the rule changes for you. Remember, this information is only relevant to taxable (or non-retirement)accounts.
First of all, what is Cost Basis? It is the amount you paid for your shares, including commissions and transaction fees. Add to this amount dividends and capital gains that have been reinvested. So if you bought $10,000 of a fund many years ago and reinvested all dividends and capital gains, your cost basis could be $10,000 + $2,111 for a new cost basis of $12,111.
The specifics of the new rules are very confusing for the average individual, not to mention financial planners. Morningstar has an excellent article on the subject.4 The main types of cost basis options that are available are explained below, with notes on each:
Average Cost
This is the cost basis reporting method that most custodians have been using for the last few years. Basically the total cost of your shares is divided by number of shares to give average cost basis. This is the simplest option to elect, but the downside is that when you sell a fund you will not be able to exercise as much control over your tax situation as the other methods offer.
Specific Share Identification
This method lets you select which lot(s) of shares to sell, thus enabling you to have more control over the capital gains or losses that will be realized by the sale. The down side is that this method is more complex than the average cost method, but could save you on taxes owed.
Other Methods
These include First In First Out (FIFO), Last In Last Out(LIFO), Highest In First Out (HIFO) and Lowest In First Out (LIFO). In general I would not advise you to opt for any of these options,as investment and tax circumstances invariably change, and you could get stuck with the wrong election.
In summary, it is recommended that if you want to have a tight control on your investment tax situation, elect the Specific Share Identification Method. If simplicity is your goal, then opt for the Average Cost Method. Remember, you can always change your election, but you cannot reverse your choice after a specific trade has been executed. Please do not hesitate to give me a call to discuss your situation and which election would be the best one for you to choose.
Personal Notes
In December, I taught another 10 week financial literacy class for individuals through the PB&J Services. A great group of individuals who are committed to turning around their financial lives. In October, Roberta and I entered the Halloween themed Day of the Tread 54 mile bike ride. Weather was great, and the Madeyski Bumble Bees enjoyed the ride with many other riders dressed as bees! Just before the coldest day of the season, I officially joined the ranks of triathletes by completing the Nutcracker Triathlon in Rio Rancho. Despite the snow flurries and the fact that it did not get above freezing during the event,we survived it. I even came 2nd in my age group (never mind that there were only 2 in the category!).
Please contact me for a review meeting if needed. As I continue to welcome new clients,please feel free to pass this newsletter on as seems appropriate. My website at http://madeyskifp.com has information for those interested in my financial planning services.