Benefit from The Financial Meltdown Now!

Most people and small business owners have incurred investment losses for 2009. Some alot more than anticpated! You may want to look at taking advantage of tax losses now instead on waiting until the end of the year. Your advisor should be bringing this up to you. You also should look at rebalancing. If you have had large losses in one sector and have not rebalanced your portfolio and if that big losing sector recovers you may not have enough in that sector to take full advantage of the rebound. This lack of rebalancing can really cost you.

I have included a column I wrote last year on harvesting tax losses. Do this now and reap some benefits from such a tough year.

Column for Small Business Review Dec 2007 - apply these principles now

Balancing your portfolio and taking advantage of tax-reduction strategies can pay off.
While 2008 is just around the corner you still have time to look for tax-saving opportunities before year-end. Today, let’s look at tax loss harvesting from the taxable portion of your investment portfolio.

Have you analyzed your portfolio to get a view of your 2007 gains and losses? This is an important task that you should pencil in on your annual financial to-do list every December. If you have gains for the year in your investment portfolio, you should seriously consider the tactic of “tax loss harvesting.”

Tax loss harvesting is simply selling assets that have fallen below their purchase price before year-end to offset your annual capital gains, thereby reducing the amount of taxes you will have to pay.

This investment strategy is often overlooked, but can prove quite beneficial. In fact, a Fidelity Institute study found that 67 percent of households do not take full advantage of their unrealized losses. Of the 252,000 taxable accounts held by the surveyed households, the Institute found that about 26 percent of them had sufficient losses to take full advantage of the $3,000 maximum allowable deduction.

Wash Away Your Underperformance BluesThis year may look particularly inviting to take advantage of losses in your taxable investment portfolio. The stock market has given investors a bumpy ride in the second half of this year. The subprime mortgage mess in the credit markets is a key culprit causing the increased price volatility in the stock and bond markets. The subprime situation has cost some big banks and brokerage firms billions in losses this year. As of this writing, the CEOs of two of the biggest of these firms have lost their jobs; and these businesses will likely be writing off quite a few billion in losses for 2007.

While a typical individual investor is unlikely to have a high level of exposure in his portfolio to companies holding billions in questionable subprime debt, his or her investment portfolio is still likely impacted. Marketplace nervousness about the credit markets crunch has dragged down the stock prices of numerous companies, many of which have nothing to do with making or holding subprime loans. You may be directly holding many such stocks in your portfolio.
Can you turn this situation to your advantage? Yes. As most CPAs know there is a rule called the “wash sale.” This rule prohibits an investor from claiming a capital loss for tax purposes if the investment in which the loss originated is repurchased within 30 days.

If you now sell a position to create the tax loss, you are precluded from buying it back for 31 days. As an unintended result you may miss out on appreciation if part of the market in which your portfolio was allocated happened to swing up during that period.

There is a strategy to overcome this obstacle: Buy a stock that is similar (just make sure it isn't too analogous per IRS regulations). Say you sold your Merck stock at a loss. If you wanted to maintain a pharmaceuticals allocation you could buy Pfizer. Or, you could buy the Pharmaceutical HOLDR (PPH), which is an exchange-traded fund that tracks the shares of 21 of the world’s largest drugmakers. What would work best for you? Your investment advisor can help by revisiting your intended portfolio allocations and weightings, and evaluating which substitute investment vehicle makes the most sense for your portfolio goals.

One pitfall to look out for is in the area of mutual funds when you are doing tax harvesting. Mutual funds frequently make year-end capital gains distributions that can wreak havoc on your strategy. For example, if you're planning to sell a mutual fund with gains to use up some of your loss carryforwards, do it before the fund makes it’s the year-end distributions that are required by law. That lets you control your gains and losses. While it may be too late for you to take advantage of this tactic this year, make yourself a financial to-do note for next October to reexamine your mutual fund holdings in your taxable portfolio and look for this type of opportunity.

Think carefully before you purchase a mutual fund at this time of year, too. Wait until after its year-end distribution. Otherwise, you’ll get caught having to pay taxes on gains that only the fund’s older shareholders realized.

Planning for a Healthy Investment YearTake some time before year-end to see if your portfolio allocation is properly positioned or to rebalance it if you have not done so within the last year.
Be smart and reduce your taxes—and at the same time balance your portfolio. These issues are complex so please find an excellent investment advisors and CPA to help guide you through these

Taking Control of Your Financial Future

Like you, I’m a small business owner. As president at my financial planning and investment advisory firm I’m the co-equity owner of this small business. Small business owners also comprise a good part of our business, so over the years I’ve seen many of the financial management challenges you face both in running your business and with your own personal finances and wealth building.

I’m going to be sharing with you a variety of tips and strategies that may help make your business more profitable and enable you to build your personal wealth more quickly. I’m no expert in your specific industry, so my business-related counsel will have nothing to do with what you do. Instead, I’ll be addressing how you make financial management-related decisions for your business.

Financial management: your second full-time job

One of the reasons you decided to start or buy a business was to have greater control over your own destiny. You wanted to be in a position where the decisions you make about running and growing your business have a direct impact on the lifestyle you create for yourself and your loved ones.

As you have undoubtedly learned, being a small business owner isn’t easy. Most of us start out with great expertise in our professions or industries; we soon learn that we also need to become experts at managing a business’s finances. Without this added skill, your business will never generate maximum returns, and your personal wealth will be limited as a result.

When you started your own business you probably drafted a business plan that stated what you would be selling, who you would be selling to and how you planned to attract and serve customers. Most likely, your plan also included a review of your start-up expenses and estimated operating costs for the first year or so. Having a feasible business plan gives the new small business owner — especially one who has never been in business before — credibility in the eyes of banks, vendors and customers.

But, when you drew up your business plan, were you also writing down how your business would help you achieve your personal financial goals? Did you establish some guidelines as to how you would manage your business’s cash flow? For that matter, did you take the time and effort to determine just how much money you actually need to accumulate in order to achieve your personal wealth goals? If you answered no to these questions, you are not alone. All too many small business owners launch their businesses without paying attention to these important issues, which impact their future financial well-being.

It is not too late to take charge of your financial destiny — both through the financial management of your business and of your personal wealth building. For this, you first need to draw up a personal financial plan. Next, create or refine your business plan so that it incorporates its own financial plan regarding the financial management of the business.
The first questions you’ll need to answer are: How much wealth do I need to accumulate for my personal financial goals? How much profit does my business need to generate in order for me to create the cash flow that I need to achieve my goals in a specific time period? What financial management actions can I take, at this stage in the life of my business, to hold on to more of the cash coming in and to minimize my operational expenses?

A financial planner who is also a CPA should be well equipped to help you run the numbers and establish the financial plans you need for yourself and your business. Think of it this way: The financial success of your business and your own personal financial success are as closely linked as two people bound together in a three-legged race. Unless you draw up and implement two financial plans — one for your personal finances and the other for your business —you may have trouble crossing the finish line, let alone winning the race.

Article written for SmallBusinessReview Sept. 2006