Monday, June 3, 2013

6 ETF Investing Tips for Beginners / Tax Efficient Investing

John Nyaradi for Sector Selector writes: Various academic studies have indicated that asset allocation is more important than security selection, especially in times of greater volatility in the markets. However, according to Roger Ibbotson, writing about the importance of asset allocation in the March/April 2010 publication of the Financial Analyst Journal, about three-quarters of market gains or losses come from general (broad) market moves, rather than asset allocation or security selection. As a consequence, individual investors are turning more and more to index-based and/or sector-specific exchange traded funds (ETFs), rather than managed mutual funds or individual securities.
According to ETF Database, there are currently more than 1,400 exchange traded funds available, ranging from broad general market funds to highly specialized funds representing a single industry, country, commodity, or investment goal. You can pick ETFs which seek high dividends and/or interest payments, those focused solely on share appreciation, or those which seek both objectives. ETFs are available for bonds, commodities, real estate, or currencies. They are structured to move in concert with the index they track, exceed the index’s moves, or move in the opposite direction. The industry follows the advice popularized in the movie Field of Dreams: “If you build it, they will come.”  And they have – to the tune of more than one million shares per day on average.
What Is an Exchange Traded Fund?
Simply put, an ETF is an exchange-traded mutual fund. Rather than buying or selling a mutual fund through its sponsor/manager once per day at the close of business, ETF shares are bought and sold just like shares of stocks – at anytime during the trading day. You can also use the same trading strategies you would use with a share of stock, such as selling short, using stop-loss orders, and buying on margin.
ETFs are passively managed funds, meaning their portfolios reflect the price movements of a weighted average of a group of selected commodities, stocks, or bonds. Samples of various indexes include the S&P 500 (stocks of the largest companies on the NYSE), the Wilshire 5000 (virtually all publicly traded companies in the U.S.), or a specialty index such as the Morgan Stanley Biotech Index which consists of the top 36 American companies engaged in biotechnology. Index funds are managed or “weighted” to reflect the changing price relationships of the underlying stocks in the index, not to pick winners and losers among individual companies. As a consequence, management fees for the typical ETF are considerably less than the fees paid for a typical mutual fund (0.53% versus 1.42%).
Investing Tips
When investing in ETFs, it’s essential to research the market and ask yourself several strategic questions.
1. Determine Your Risk Tolerance
The most critical element in successful investing is knowing your risk tolerance. All people want maximum gains, but few have the stomach to accept the possible losses that accompany a swing-for-the-fences philosophy. Similarly, most people’s tolerance is directly proportional to the amount of funds they have at risk. A younger person, for example, just starting to build an asset base may seek high-reward, high-risk investments; a 60 year-old is more likely to want to preserve his or her hard-earned capital and seek a moderate, though surer return. You need to ask yourself, “Can I live with a 10% drop in the value of my portfolio? a 20% drop? 50%?” Your answers can help you identify the investments that best fit your psyche.
2. Develop an Investment Philosophy
Your investment philosophy should match your risk tolerance as well as your investment horizon. The safest way to become wealthy boils down to three rules:
  • Let the Magic of Compounding Work For You. Invest $5,000 today at 5% and it’s going to grow to almost $17,000 in 25 years. Investing should not be a once in a lifetime event, but a habit developed slowly over time.
  • Protect Your Assets. Suppose your investment drops 50% in the first year, then gains 80% over the next two years. Unfortunately, your portfolio is still going to be underwater with a 10% loss over the three years. Successful stock investors let their profits run and cut their losses short. Sell assets only when they fail to meet your earnings expectations; the market price fails to respond to increased earnings; or the price of the asset declines a pre-determined amount from the purchase price. Good-to-cancel stop-loss orders at pre-determined levels below the purchase price are an effective way to implement this strategy.
  • Maximize Investment Returns Within Your Risk Tolerance. While it is impossible to accurately project the future (contrary to what some stock market gurus tell you), you can reduce your investment risk by understanding key performance measures regarding volatility and correlation of specific ETFs, such as beta and R-squared values.
3. Develop an ETF Investment Strategy
Investors in ETFs employ a variety of different strategies to achieve their investment goals. While no strategy is exclusive or permanently appropriate, determine which program best fits your needs today and put it in practice until experience indicates a change is needed. The five most popular strategies are as follows:
  • Buy and Hold. Used most often by those investors with limited time or inclination to study their investments, this strategy is regularly buying a general market ETF indexed to a broad market index such as the S&P 500 or the Wilshire 5000.
  • Portfolio Completion. The objective of this strategy is to ensure broad market diversification across sectors, asset classes, or foreign markets.
  • Core/Satellite. This strategy consists of a core holding of a broad-based index complemented with actively managed smaller assets (individual stocks or sector ETFs). The core holding minimizes the risk of lagging the market, while the satellite holdings provide upside potential.
  • Fixed Income. This strategy maximizes your investment in fixed income vehicles for higher income, diversification, and low cost.
  • Sector Rotation. “It’s not a stock market, but a market of stocks.” At one time, this old adage may have been true. After all, buying the stock market as a whole was extremely difficult, if not impossible, before the appearance of ETFs. But today you can buy the stock market or a single sector of securities which has enabled the sector rotation strategy. At any given point, some individual stocks and industries are popular and their stocks rise just as others go out of favor and their values drop. Employing this strategy requires active oversight of your portfolio and the economy in general as you rotate from one sector to the next, ideally catching each as it comes into favor and selling when it becomes unpopular.
4. Don’t Invest in Leveraged ETFs
Leverage – using other people’s money – is often very attractive, doubling, even tripling the gains of an investment when it works for you. Unfortunately, the same upside potential also exists on the downside, generating the possibility of catastrophic losses. Leveraged ETFs use debt and complicated financial derivatives to achieve a leveraged daily return. As a consequence, leveraged ETFs are exposed to a constant leverage trap so that when the market moves down, the ETF is forced to sell shares and reduce its debt level in order to make the targeted leverage return. This locks in losses and reduces the ETF’s asset base, making it harder to recover gains in the next market upturn.
Investment professionals generally agree that, while leveraged ETFs can be useful in certain situations, they are intended to be held for less than a day and should be limited to large institutional investors. The long-term investor has no need to be in these products at all.
5. Understand the Weighting Mechanics of ETF Construction
While ETFs are investments intended to track a particular index, the percentage of each stock within the portfolio varies according to the weighting method elected by the creator of the ETF. Examples of weighting methodologies include the following:
  • Market Capitalization. Stocks are proportioned in the portfolio based upon their total market value (all of the outstanding stock of a company times its share price). As a consequence, companies deemed most valued by the stock market represent a greater proportion of the fund than companies less valued. ETFs weighted by market capitalization tend to have less trading and consequently are considered tax-efficient. They generally have lower expenses as well. One criticism of a market cap strategy is that selection potentially favors past performance rather than future potential.
  • Equal. The simplest strategy is that every stock position percentage-wise is equal. If you have 100 stocks, each occupies 1% of the portfolio. ETFs using these schemes have more trading, requiring frequent re-balancing and tax consequences as well as higher expenses. Smaller companies represent a greater percentage of total assets than in most other weighting schemes.
  • Fundamental. ETFs using fundamental weighting rely upon factors such as net profits, sales, book values, dividends, or other tangible measures to determine the proper proportion of the stocks in the ETF, premising that such factors better represent the economic value of the company. The underlying investment assumption is that all companies ultimately reflect their real economic value in the long-term; if the assumption is correct, the ETF reaps benefits as the stocks change to reflect that value. This weighting shares similar disadvantages of the equal weighting scheme – low tax efficiency and high operating costs relative to a market cap-weighted index.
  • Other Schemes. The proportion of the individual securities in an ETF can be based upon share price, dividends, market factors such as momentum or volatility, or other special strategies to make them unique or serve a particular investment objective. It is always important to read the description of the ETF to see how the portfolio is built.
6. Keep Studying
Your investment returns from within your comfortable risk zone are directly proportional to the effort you expend learning about ETFs, the stock market, and the economy in general. The environment is constantly evolving, creating new opportunities and causing once-safe investments to fail. There is a vast amount of information on the Internet about investing and investment vehicles that can be easily accessed for no cost. Read the business section of your local newspaper regularly, subscribe to national periodicals such as The Wall Street Journal, and visit websites like Morningstar and Zacks. The more you know, the faster your portfolio can grow.
Final Word
ETFs offer investors one of the most efficient, cost-effective, and convenient ways to participate in the growth of businesses in the U.S. and around the world. In fact, evidence indicates that the majority of returns in any given investment portfolio results more from long-term asset allocation than trying to pick and time the purchase of individual securities. ETFs are the perfect investment vehicle for a first-time or beginning investor – transparent and low-cost, with broad diversification and excellent liquidity – and should be a part of every investor’s portfolio.
Posted on 5:08 AM | Categories:

Xero Review – Intuitive Accounting Software

Business2Community writes: Simple accounting errors can be costly to a small business owner, with late penalties and overdraft fees eating away at a company’s bottom line. Xero is an online accounting platform that aims to help businesses reduce those types of critical mistakes, making it easier for merchants to keep their financial houses in order.

In this Xero review, I will take a close look at the cloud-based service and test many of the platform’s most popular features. I will see how easy the system is to deploy, and compare the benefits of a web-based platform to those of a traditional desktop system. Based on my personal experience using Xero, I will offer my opinion as to whether this is an accounting system that small businesses should use.

About Xero

Entrepreneurs can’t make sound business decisions without reviewing accurate financial data, which is where Xero comes into play. The online accounting platform frees its users from the confines of traditional desktop-based systems, and gives businesses all the tools they need to stay up-to-date on all their latest transactions. Xero connects to a user’s banks, credit cards, and PayPal accounts. It automates as much of the accounting process as possible by importing credit card statements, reconciling bank transactions, sending invoices, and making scheduled payments on a company’s behalf.

Xero integrates with many of the apps that businesses already use, importing and exporting data from CRM, inventory management, and invoicing applications like Vend, PayPal, HighriseSalesforce, and Capsule CRM. Even private accountants and bookkeepers can take advantage of Xero, collaborating with clients in an online setting while still keeping security and compliance requirements in mind.

Main Functionality of Xero

Xero is a soup to nuts accounting system that allows teams of individuals to work together to manage business finances. By connecting their bank accounts to Xero, businesses can automatically import statements and categorize individual purchases. Meanwhile, cash coding allows users to seamlessly reconcile cash transactions with multiple tax rates.
Financial information from multiple institutions and business applications is combined on the Xero dashboard page, where users can find an overview of bank balances, invoices, bills, and expenses. Zooming in allows users to monitor specific accounts in real-time, and curated graphs show all the money coming in and going out of a business over the course of a day, a month, or even a year.

The deeper a business gets inside of Xero, the more useful the platform’s financial reporting tools become. Inventory management features can be used to import and export price lists, track sales, and expedite the invoicing process. Basic payroll needs — like printing payslips, making bulk payments, and creating detailed wage expense reports — can be met using Xero’s built-in system. Users with more advanced payroll needs can integrate Xero into top payroll systems like ADP and Monchilla.

Benefits of Using Xero

Business owners should be able to focus on growing their companies without worrying about basic accounting and payroll issues. Xero makes that possible, encouraging entrepreneurs to handle their own business finances without worrying about their accounting system. The web-application handles all of the most common financial issues that businesses face — including budgets, payroll, expense claims, and financial reporting — and integrates seamlessly with many business apps. This integration allows for the automatic importing and exporting of financial data on a business owner’s behalf.

Xero also offers a number of collaboration features that business owners can use to share the workload with their partners and employees. By relying on a cloud-based system, rather than a desktop software suite, users can log-in to their accounting system from anywhere — Xero works on Mac, Windows, iPhone, and Android devices — at any time, day or night.
When they use Xero, small business owners get all the financial reporting features that their larger competitors enjoy, with none of the headache or financial burden that comes with employing an in-house accountant or bookkeeper.

The Basics: What Does the Interface Look Like?

Follow the directions in Xero’s step-by-step setup guide to get started using the platform. Input basic information like your organization name, contact details, social media links, and financial details like your tax basis and ID number.
Xero Review – Intuitive Accounting Software image Xero11

To begin reconciling your bank account information, you’ll need to start by connecting your account to the Xero system. Type in the name of your bank, the account name, account number, currency, and choose a unique code/number for the account.


Xero Review – Intuitive Accounting Software image Xero2


Create a sales invoice from scratch by entering the necessary information. To streamline the process, you can set up your invoices to auto-populate with information as you type. For example, type in “Acm” and Xero will auto-populate the remainder of the line as “Acme Plumbing” if that’s a vendor you’ve worked with in the past.


Xero Review – Intuitive Accounting Software image Xero3

Review your overall financial picture by clicking on the “Budget Manager” tab. You’ll find a month-by-month report showing income (interest, revenue, and sales), costs of goods sold, and gross profits, among other figures.



Xero Review – Intuitive Accounting Software image Xero4

Support Information

Inside Xero’s Help Center, users can get detailed answers to hundreds of frequently asked queries. Support articles can be browsed by topic (like banking, sales tax, or expense claims), or searched by keyword. Xero also provides a number of tutorials and informational videos that guide new users through the process of getting their accounts set up and linked to outside apps and banking institutions. To get immediate answers to questions not found in Xero’s Help Center, visit the platform’s Business Community. Users in the Business Community are encouraged to ask questions and learn from the experiences of their peers.

Pricing Information

Xero offers three pricing plans for businesses, ranging from $19 per month to $39 per month. All plans come with a free trial, and require no setup fees, upgrade fees, or contracts. Businesses that use Xero can add an unlimited number of users to their accounts. Xero runs automatic backups for accounts at every pricing level.

The Bottom Line

If independent contractors and small business owners want to compete with larger businesses, they need the right tools. Xero’s design may look simple and sleek, but the system’s tools are hearty and robust. The system offers dozens of vertical small business solutions thanks to its integration with more than 200 popular apps. Businesses that use Xero can feel confident that their financial information is secure, and that important data sets are being backed up regularly in the cloud.

Ratings: ease of use 5/5, features 5/5, value 5/5 and ease of deployment 4/5

Posted on 5:07 AM | Categories:

June A Busy Month At IRS For Taxpayers and Tax Pros

Kelly Phillips Erb for Forbes writes:  We tend to think of summer as a slow time when it comes to taxes but it’s hardly a vacation for taxpayers and tax professionals. This summer, in particular, the Internal Revenue Service has a full calendar and June is no exception. Here are some notable dates to keep in mind:
  • June 3. The IRS has announced tax relief for victims of the tornadoes in Moore, Oklahoma, and surrounding areas. Those businesses affected by the May 21 storms have until June 3 to make federal payroll and excise tax deposits normally due on or after May 18 and before June 3.
  • June 14. The second planned closure for IRS due to furloughs will happen on June 14. All IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed on this day. No employees will report to work (they are furloughed without pay) so that means no answers to your phone calls or correspondences. No tax returns will be processed and no electronically filed returns will be accepted or acknowledged. No refund checks will be issued. You will also not be able to access the “Where’s My Refund?” tool and the Online Payment Agreement system. The furlough does not extend any due dates: tax-filing and tax payment deadlines will remain in place.
  • June 17. Taxpayers who were out of the country on April 15 and therefore entitled to an automatic two month extension must file their federal income tax return by June 17. You qualify if, on April 15, you lived outside the United States and Puerto Rico and your main place of business or post of duty was outside the United States and Puerto Rico; or if you were in military or naval service on duty outside the United States and Puerto Rico. This extension gives you an extra 2 months to file and pay the tax, but interest will be charged from the original due date of the return on any unpaid tax. Remember that the extension is automatic (you didn’t have to file a form 4868 to claim it) but you must include a statement showing that you meet the requirements. If you need more time, you must file the federal form 4868.
  • June 17. Estimated payments are due for most individuals and corporations.Taxpayers impacted by the Oklahoma storms who would have been subject to the June 17 deadline have until September 30, 2013, to file these returns and pay any taxes due.
  • June 30. If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS. FBAR returns are due on June 30 of the year following the applicable calendar year and there are no extensions.
Normal deposit and reporting requirements still apply throughout the month. Enjoy your summer!
Posted on 5:07 AM | Categories:

Is there a tuition reimbursement program that I can offer as an employee benefit that also offers my business a tax advantage?

Barry S. Kleiman for NorthJersey.com writes: There is a tuition reimbursement, or educational assistance, program that can help enhance a company's business and offset the financial burden of education for employees. While most are commonly associated with a graduate education, the program can apply to any form of instruction or training and can even apply to courses that are not necessarily part of a degree program.

One of the most important and generous benefits a company can offer its employees is tuition reimbursement. It is a contractual arrangement between employer and employee that outlines specific terms under which the employer may pay for the employee's education. The company can tailor the criteria of the program as it sees fit. For instance, the company may require that the employee repay the company upon resignation or termination within a certain time period after completion of the courses. The company also may stipulate approval of the specific courses to be reimbursed and require the employee to maintain a certain grade-point average to qualify for reimbursement.

Providing a reimbursement program benefits the company by increasing employees' skills and value and improving their ability to contribute to the growth of the company. It also serves as an incentive for hiring and retaining employees. There also is a tax benefit, in that employers can deduct the tuition reimbursement as a business expense.

Employees not only receive an economic benefit in the form of a tuition break — the reimbursement is not taxable as long as the employer establishes a qualified Educational Assistance Program (EAP). To qualify, the EAP must be a separate, written plan for the benefit of employees (spouses or dependents do not qualify). Notice of the availability and terms of the program must be provided to eligible employees and the plan cannot discriminate in favor of owners or highly compensated employees. The non-taxable portion of tuition reimbursement is limited to $5,250 per employee per year and can be used only toward tuition, fees and similar expenses, books, supplies and equipment. It cannot be used to pay for food, lodging, transportation or other items.

If more than $5,250 of educational assistance is provided to an employee, the excess is generally considered a fringe benefit that is taxable to the employee. However, if the tuition reimbursement can be treated as a working condition fringe benefit, the cost of educational assistance in excess of the $5,250 income exclusion cap may qualify for tax-free treatment. A working condition fringe benefit is assistance that an employer gives to employees expressly for the purpose of making them better able to do their jobs. In other words, a working condition fringe benefit is a benefit that, had the employees paid for it themselves, could be deducted as an employee business expense.

To learn more about the tax benefits of an Educational Assistance Program and how to implement one at your company, consult your tax adviser.
Posted on 5:07 AM | Categories: