Roth Idea

For those of you who are married, actively participating in a company sponsored retirement plan and making over $169,000 in adjusted gross income in 2008 ( $116,000 if you are a single filer), consider making non-deductible IRA contributions in 2008 and 2009. The goal would be to convert the balance to a Roth IRA in 2010. In 2010, the income limit for Roth conversions (currently $100,000 in adjusted gross income) goes away and you can pay the tax due on the conversion over two years. Given the expectation that marginal tax rates will be going up, it may be a way to give higher earners an opportunity to get some money into Roth accounts.

There are several other aspects to consider such as will the income limit really go away in 2010, how much you can set aside and where the dollars will come from to pay the tax due. So send us an email at planting@harvestfinancialpartners.com for more information and to discuss your specific situation.

Dividend Aristocrats

I was doing some research this morning and came across this chart on the Dividend Growth Investor website (http://www.dividendgrowthinvestor.com/). It shows the performance of the S&P 500 versus the S&P Dividend Aristocrats index. It also makes pretty clear why we like companies that pay dividends.

Dividend Aristocrats are companies which have paid and increased their dividends for the last 25 years. These are the types of companies that we look at when researching stock ideas. Some examples of Dividend Aristocrats are General Electric, Johnson & Johnson, Pfizer and Procter & Gamble.

This chart may not mean much today given the turbulent market environment, but it should help to provide some comfort that buying quality dividend paying companies is an attractive long term strategy.

Gift of Knowledge

I saw this story about mothers talking to daughters about financial matters on NBC News last night. The basic premise was that a subset of moms consider themselves the CFOs of their households and make it a point to discuss finances with their daughters. That is great, but the story does point out another very important reason why women in particular should be financially literate. You live longer than us men do and given that difference in life expectancy, as the piece says, 90% of women will be alone at some point in their lives. So by all means teach away about the timeless tenets of personal finance – how to make money, spend less than you make and put the difference someplace safe – but include sons too. It’s knowledge they won’t get at school so you are the only, or at least the best source. And it’s knowledge that will pay dividends over their lifetime. If you know it's important to discuss but don't know where to begin send Jim or I an email; we have some ideas about how to get the conversation started.

President-elect Obama

So we now have settled on who will be the next president. Congratulations Mr. Obama! He certainly will have a full plate when he assumes the presidency on January 20th.

But what does this mean for our clients. In two words, not much. Please don’t take this to imply that we are oblivious to the fact there will be changes under an Obama administration. Of course we know there will be winners and losers. What we do mean is that we will continue to search for high quality companies that pay a dividend and are inexpensively valued.

Some investors may respond to the election of Barack Obama and sell off certain stocks or sectors. We hope to take advantage of some of these overreactions and add new names to the portfolio. We believe the type of companies that we like and the managements we want to partner with can operate effectively in any political environment. We also are confident that strong balance sheets have no political allegiance. The new president and his policies may have some impact on how we value a company, but even that will be relatively minor.

Bottom line, the agenda of President Obama will be one of many factors that may have a modest influence on how we construct a portfolio, but it will not lead to a fundamental change in our approach.

Trick or Treat

Tonight is Halloween and kids will be out trick or treating. It is a fun time and it is great to see the many creative costumes that come to our door.

I remember when I was younger, how much I loved Halloween. As someone with a serious sweet tooth, this is my time of year. My favorite part after a long night of trick or treating was searching through my bag of candy for something special and unique amid all the M&Ms, Hershey or Snickers Bars. Back then, special was Dots or Bit of Honey or Sugar Babies.

October has certainly given us a whole lot of tricks. But today the market is a lot like Halloween and we are out trick or treating. But instead of Dots, we , we are looking to find a special stock or two for our portfolios. They are out there as the recent market decline has created lots of treats. We may have to go to a few more houses to find them, but we will find them! And when we do it will feel just as good as when we munched on our Halloween candy. The biggest difference between now and when I was younger is I don’t have to wear a costume and I am a lot more patient.

Happy Halloween!

The Three Most Important Things To Do Now

With apologies to the real estate industry, the three most important pieces of advice an investment advisor can give his or her clients right now are – rebalance, rebalance and rebalance. You and your advisor initially set an asset allocation – the percentage of your portfolio invested in stocks, bonds, cash, maybe real estate and commodities as well – for your investment portfolio. (If your investment advisor did not do this with you, make them your former investment advisor immediately.) The asset allocation was set based on your personal circumstances and risk tolerance. Even with Tuesday's monster rally, the stock market, as measured by the S&P 500, is down over 30% this year. So your portfolio is most likely out of balance. By rebalancing now, selling some bonds to buy stocks, you are increasing your odds of actually buying low and selling high. And the discomfort you feel in contemplating buying stocks right now shows why buying low and selling high is so difficult in practice while so obvious in theory. While past performance is no guarantee of future results, if you rebalance now, I think you will be very pleased you did in a year or two.

Earnings Season

Right now we are in the midst of earnings season and investors are reacting to news from individual companies, and in general it has not been good. This reflects the fact that we are in a very weak economic period. But it also reflects the lack of visibility by company managements and so they are keeping expectations low. I think it is the appropriate strategy. Expectations need to be lowered. It may make investors nervous, but eventually we will see positive surprises. That may not happen next quarter, but it could be sooner than most think. Recessions (and let us agree that we are in one now) tend to last on average 11 months, but stocks bottom about half way through and then begin to move up. We may not be in an “average” recession, but the point is stocks begin moving up before we see an improvement in GDP.

Of course, this morning all the talk was about how the overseas markets were down big and the futures in the US were at their limit lows. It looked like today could be really bad, and for awhile it was. But as the day progressed, investors began to buy. The market seemed to be acting more rationally. Still we ended up down over 300 points, but it appeared like it could have been much worse.

I am certain we are still seeing some panic selling. I also know that we are still feeling the effects of hedge funds liquidating their positions. This will all take some time to work through, but we will. And when it does, we will once again return our focus to company fundamentals. I said to many people during the tech bubble of the late 90s that valuation matters and it still does today. There are some incredibly cheap stocks available for purchase. Do your homework during earnings season and be prepared to buy.