““How much of a stomach have you got for riding this out?’’ is his big question–one we should all ask ourselves as we move into the closing days of a happy, scary year for investors. Because when every theory gets rewritten in the space of a Hang Seng hang-up, it’s not the latest tip that will pull you through, it’s guts.
It’s the guts to make a plan and stick with it. This year you’ll need a plan that allows for stock-market shenanigans and tax and workplace shifts. Here’s what you have to handle before you get too busy cooking turkeys, taking airplanes and drinking eggnog to give a hang about the Hang.
Economic Outlook: Moderately Sunny and Mild. If consensus scares you, then you might find the 1998 outlook terrifying. Virtually every economist is spinning a view of the U.S. economy like this one from David Wyss, economist at Standard & Poor’s DRI: moderation in all things. He sees very low inflation that will continue to decline through the middle of next year, slowing economic growth, a continuing fall in interest rates and stock-market returns in the 8% to 10% range. Meaning what? As long as you don’t expect to double your money every three years like you just did, you’ll do OK in stock and bond markets. If the consensus is right. If all those economists turn out to be wrong, it will be because that low 4.7% unemployment rate finally translates into some interest-rate-pushing inflation or because Asian contagion spreads beyond export-driven Western states all the way to Wall Street.
On the Street: Rebalancers Rule. Here’s where you’ll need those guts. The tough are shopping right now for Asian bargains so that their portfolios will stay balanced in fixed percentages of stocks and bonds, small companies and large U.S. firms and foreign concerns. Their theory–that over the long term this broad diversification will protect you and reward you–still holds, despite the Halloween blowout that demonstrated what Forbes calls the CNN effect: when everyone is watching a crisis unfold on TV, all markets might tank at the same time.
Over the long term, it still makes sense to rebalance. Left unadjusted, a portfolio invested 20 years ago in 60% stocks, 30% bonds and 10% cash would have become 84% stocks, 13% bonds and 3% cash, reports Morningstar, the Chicago research firm. If you rebuild your international holdings, you’ll be buying more of the recovery than the drop, says McLean, Va., money manager Greg Sullivan. It’s a good time to be contrarian: Sell some winners and pick up some cheap losers so you’re back in balance. Don’t overlook small-company stocks. With less dependence on foreign currencies and trade, and lower prices relative to their earnings growth, they’re the place to be in 1998, says S&P’s Arnie Kaufman.
But be careful when you make your trades. Most mutual funds will be posting their annual capital gains over the next six weeks. If you buy in just before they do, you can end up having to report a huge on-paper taxable gain even though you really got there too late for the profits.
If you’re trading individual securities, expect the changing capital-gains tax structure to complicate an already complex buying and selling season. Last year’s tax law created nine different possible tax treatments for stock and bond profits (chart). If you want to offset those profits with losses, you need to know the rules. Every loss first offsets a gain from its own box and then starts offsetting long-term gains taxed at 20%. A short- or midterm loss that could be taken against a similar 28% gain might be partially wasted if you don’t have any of those gains and use it instead to offset a long-term gain.
Bonds Look Bright. A healthy, slowing economy is a bond buyer’s dream. ““It’s a script written in Hollywood,’’ says Northstar fund manager Ryan Johanson, who’s snapping up Treasuries he sees gaining from a nervous world’s flight to quality, as well as high-income (junk) bonds that usually get a bigger boost when rates fall.
You may even get a buying opportunity around the bend. If Asian investors need to bring their cash home and pull some of their record-breaking billions out of the U.S. Treasury markets, that might cause prices to fall a bit. That will be the time to make sure you’re not scrimping on the bond portions of your portfolio.
At the Office: Modest Raises, With Strings. With inflation low, the average 4% raise employers say they’re ready to start doling out might go farther than it has in recent years. But don’t expect all the cash up front. Companies are increasingly offering ““at risk’’ pay, including profit-sharing plans and individual goal-pegged rewards, says Pam Hastie, a benefits expert with Buck Consultants in Chicago. The best way to prosper in an environment like that is to negotiate specific performance goals now for next year. If you meet them, you get more. How hard is that?
After you leave that fall performance review, remember these year-end money savers: find out how much you have left in your health-care spending account and use it before you lose it, even if you just buy a spare pair of prescription sunglasses.
Look into pay-your-own-way long-term care plans being offered this year. For the first time ever, they are tax-deductible.
And up the ante in your 401(k) plan. After holding in place for two years, the maximum contribution rises to $10,000 in 1998. It’s still the best deal round, so make sure you’re putting away as much as possible.
Those Year-End Tax Moves: Bracing for New Deals. For some well-salaried folk, the old take-deductions-now, push-income-till-later approach to the end of the year may not work this year. If you expect your 1998 adjusted gross income to teeter on the edge of $100,000, you may want to shift income into 1997 to stay under that limit next year. That will preserve your ability to take advantage of 1998’s one-time tax break for people who want to roll existing IRAs into new, improved Roth IRAs, which offer tax-free buildup.
Income ceilings will also limit a whole grab bag of gifts that become effective in 1998, including education credits and deductions, deductible IRAs and more. Check out the rules for your favorite break before this year ends so you’ll know whether you want to accelerate income for a change.
Others will want to stick with the usual year-end tax-minimizing strategies. Anyone eligible for a full deductible IRA (and in 1997, that includes nonworking spouses for the first time) should stash the $2,000 maximum. Even if you qualify only for a nondeductible IRA, you might want to establish one of those at year-end so you can roll it over to a Roth next year.
Maximize your deductions by not leaving anything on the table, reminds Huntington, N.Y., CPA Ed Slott, who calls unclaimed medical deductions one of the IRS’s biggest profit centers. Though you can deduct only medical expenses that exceed 7.5% of your income, you may get there if you remember to include health insurance, Medicare and long-term-care premiums, transportation costs, disability-related home improvements, expenses you pay for your parents (in some circumstances) and–if you’re self-employed–the 60% of your health-insurance premiums that aren’t deductible on the front of your form. Add it all up and if you’re over that 7.5% floor, consider tacking on some health-care expenses now that you might have been putting off until next year.
Like a checkup for those butterflies in your stomach.
This year there are nine different ways to calculate capital gains. If you are trying to time a loss to offset a gain, make sure your losses and gains match up. A guide to the rates:
How long did you hold on to your investment? UNDER 12 TO 18 MOS. 12 MOS 18 MOS. OR MORE When did you sell? BEFORE Short-term gain, taxed 28% 28% MAY 7, 1997 as regular income MAY 7, 1997- Short-term gain, taxed 20% 20% JULY 28, 1997 as regular income AFTER Short-term gain, taxed 28% 20% JULY 28, 1997 as regular income
