Put these five investing strategies to work within the first few weeks of the New Year for a payoff that will keep on giving for months and years to come…
Investing Strategy #1 – Write Yourself an Instant Tax Rebate
Taxes are almost certainly going up at the end of 2010, and may do so sooner if (as seems increasingly possible) some kind of health care “reform” package clears Congress. Start pushing back with investments that give you an instant tax write-off.
If you’re covered by an employer’s 401(k) plan at work, I encourage you to sign up for the biggest contribution you can afford. Don’t believe for a moment the defeatist propaganda in Time magazine (and elsewhere) that says 401(k)s have somehow “failed.” Investors who continue to plow cash into their retirement accounts through the stock market’s ups and downs will come out far ahead of those who count on the government to care for them in old age. In 2010, you can deduct up to $16,500 in 401(k) contributions, plus another $5,500 if you’re over 50 years of age.
Self-employed people can pour in even more. An SEP-IRA, for instance, lets you contribute (and deduct) up to $49,000 a year, with minimal paperwork requirements. For a taxpayer in the top bracket, that’s an instant tax rebate of $17,150 from Uncle Sam. Virtually all discount brokers and mutual fund families offer SEPs.
Investing Strategy #2 – Get Rid of Mutual Fund Deadwood
I continue to be shocked and dismayed by comments from mutual fund managers who seem to have learned nothing from the debacle of 2008. If your manager hasn’t made any explicit changes to deal with today’s accident-prone economic and financial world (or worse, denies that changes are necessary), it’s time for you to make a change.
Specifically, these seven mutual funds continue to pursue strategies uncomfortably similar to those that brought shareholders so much grief in 2008. Sell these mutual funds now:
- AIM Constellation
- Ariel Fund
- Fidelity Growth & Income
- Legg Mason Value Trust
- John Hancock Classic Value
- Selected American Shares
- Weitz Value
Replace these over-the-hill funds with FMI Large Cap (FMIHX, 800/811-5311), a value fund that emphasizes quality and recognizes that the U.S. government’s imprudent fiscal policies will have consequences.
FMIHX lost far less than the market indexes in 2008 and tacked on a respectable 20.9% during the first 11 months of 2009. Minimum to open an account: $1,000. No sales charge or redemption fee; available without commission through leading discount brokers.
Investing Strategy #3 – Buy Newly Issued Bonds
It can make lots of sense to buy individual bonds rather than bond funds. You control your maturities and the quality of the bonds you purchase. However, it’s also expensive — if you trade bonds frequently before maturity. Typically, brokers mark up the wholesale price of a corporate or municipal bond by 1%-3% before selling it to you. The reverse (markdown) applies when you go to sell.
You can avoid this pesky expense, at least on the buy side, if you stick with newly issued bonds. Issuers other than the U.S. Treasury normally pay the selling syndicate a fee for distributing the bonds to the retail public. Thus, you can generally buy new issues at face value (100 cents on the dollar), without any added commission or markup.
Investing Strategy #4 – Beat Inflation With Distressed Real Estate
With single-family homes and commercial properties down as much 50% from their peaks in some areas, bargain hunters are finding some irresistible deals. A story in The Wall Street Journal told of an investor who bought a custom home in Phoenix at a foreclosure auction for $486,300 — about $800,000 less than the mortgage alone. A week later, he agreed to sell the house for $690,000, a cool 42% profit.
If you’re a hands-on type of investor, you should look into the bargains available through foreclosures, repossessions, bankruptcies and IRS seizures. Never done it before? Get some low-cost guidance from veteran property investor Jack Reed, author of Distressed Real Estate Times. I’ve followed Jack’s career for the past 25 years, and I like his no-nonsense approach.
For the armchair investors among us, a number of “opportunity funds” are forming to exploit the downturn in real estate prices. Most are private offerings, open to well-heeled folks only. Minimums are typically $50,000 and up. Check with Bob Condon at Foundation Investment Group in Berkeley, Calif. (800/899-8779) for a current list.
Investing Strategy #5 – Recycle Capital for Faster Growth
When markets are strong, people hesitate to take profits on their successful investments — after all, who wants to pay taxes? This reluctance to book profits leads investors to hang on too long to assets that have exhausted their upside potential. Then the market plunges again, and you kick yourself for not harvesting your gains when you could have easily done so.
With the stock market indexes now far above their March 2009 lows, many individual issues — and indeed, whole industry groups — are approaching what may prove to be their ceiling prices for the next six months at least, and perhaps for the next several years. Now is the time to recycle your capital into new investments that will reward you with faster appreciation, more dividend income or both.
In December, I pointed out that a number of electric utility stocks have shot up lately, diminishing their potential return in 2010. In particular, I recommended selling Consolidated Edison (ED) and Great Plains Energy (GXP). I also advised selling Colgate-Palmolive (CL) and Merck (MRK), two blue chip industrials that have surged from their 52-week lows.
Recycle the proceeds from these sales into the stocks set to make a comeback in 2010. The market indexes may remain trapped in a broad trading range for some years, so it’s important to recognize limits. Sell into rallies, buy into pullbacks. That’s how you’ll keep your money growing at an attractive pace while “buy and hold forever” investors settle for midsingle-digit returns — or worse — over the long run.