Thursday, December 30, 2010

Happy New Year!

Dear Valued Clients and Readers,

Our office will be closing early this afternoon and will be closed all day tomorrow in observance of the New Year's holiday.  Our normal office hours will resume on Monday, January 3rd.

If you have a matter that requires immediate attention, please contact Joe Rollins at or 404.372.2861.

Cheers to 2010 being a great investment year and to a prosperous 2011!


Joe Rollins, Robby Schultz and Eddie Wilcox

Thursday, December 23, 2010

Happy Holidays!

Dear Readers,

In celebration of the Christmas holiday, our office will be closed on Friday, December 24th and Monday, December 27th. Our regular office hours will resume on Tuesday, December 28th.

If you have a matter that requires immediate attention over the weekend, please contact Joe Rollins at or 404.372.2861.

We wish you and your families a holiday weekend filled with peace, joy and laughter!  Here's a clip from "Elf" -- a great new Christmas classic -- to get you in the holiday spirit:

Warm Regards,
Joe Rollins, Robby Schultz and Eddie Wilcox

Tuesday, December 14, 2010

Q&A Series – Timing IRA Contributions

This week’s question comes from John, a client who is wondering when is the best time to contribute to his IRA – at the beginning of the year or at the end?

Q: When is the best time of year to make an IRA contribution?

The clear answer is “the sooner the better.” Many of you have received a note or an email in the past from Joe suggesting to make an IRA contribution early in the year. Undoubtedly, many wonder "what’s the rush?" You actually have until the tax filing deadline of the following year to actually make an IRA contribution, but it’s our position that it’s always in your best financial interest to make the contribution on January 1st or the first business day of each year (the first business day of 2011 is January 3rd).

Making the following assumption, here’s why contributing to your IRA on the first business day of the year is best:

  • Our expected return is 8% annually (keep in mind that some years will be better while others will not be as good, but we’ll expect this average over the next 35 years).
  • Each participant makes an annual lump sum contribution of $5,000 to his or her respective IRA.
  • Each participant will retire at 65.
  • We’ll assume this is the participants' only savings and not consider prior or additional investments.
If we make the assumptions noted above, you can see the results in the following table:

Age Year End Value (8% return - end of year contribution) Year End Value (8% return - beginning of year contribution) Difference
30 $940,506.84 $1,010,352.68 $69,845.84
40 $399,772.08 $431,753.84 $31,981.77
50 $151,621.42 $163,751.13 $12,129.71

Clearly, the savers who chose to invest their IRA contributions at the beginning of the year have come out much better. The 30-year old who contributes and invests for 35 years comes out nearly $70,000 ahead by making his or her contributions to gain the full benefit of each year’s returns. The 40-year old is better off by nearly $32,000, and finally, the 50-year old who has only invested for 15 years has over $12,000 more than if he or she had contributed at the end of the year instead.

What’s the moral of the story here? Be proactive; don’t procrastinate in making your annual IRA contributions if you can. There are very real and negative consequences to delaying your IRA contributions until the end of the year or waiting until the filing deadline in April.

John, I hope my answers above have given you a better understanding of our thoughts about when to contribute to your IRA each year.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Eddie Wilcox

P.S. Some of you are probably good candidates to convert your regular IRAs into Roth IRAs before the end of the year, although we are almost out of time. If you’ve got severely diminished income in 2010 compared to future and past years, you’re probably a good candidate. Conversely, if you’re in the top bracket now and think you’ll be in the top bracket throughout retirement, you’re probably also a good candidate. Call us ASAP to discuss the details if you think your situation might apply.

Tuesday, December 7, 2010

Q&A Series - What the Tentative Tax Deal Means for Investors

This week's question comes from Jim, an investor and reader who is wondering about the tentative deal to extend the Bush-era tax cuts.

Q: I saw on this morning’s news that there’s a deal on the table to extend the Bush-era tax cuts. How might this impact stock market investing?

Great question, Jim. First, and as you noted, this is not a done deal. Right now, there’s a potential tax cut extension deal in the works that would extend the Bush-era tax cuts for two years at all income levels. Also included in that package is a 13-month extension of unemployment benefits for the long-term unemployed and a 2% decrease in payroll taxes for all workers for one year.

I feel relatively certain that the extension will be enacted pretty much as it is currently written with some minor changes, and the basics of this deal are extraordinarily positive for stock market investing. The Bush-era tax incentives offer a 15% maximum tax rate for dividends and capital gains, and extending these incentives could not be any more bullish for the stock market. With this tax cut extension and with interest rates as low as they are right now, anyone who keeps money in a taxable money market account or CD instead of investing in the stock market is making an ill-advised choice.

For example, if an investor purchases a common stock today with a 5% dividend, even the after-tax (federal and state) return on that investment is 4%. Rarely in the history of investing have investors been able to earn 4% after taxes on any type of investment. Investors who invest in taxable money market accounts and in commercial bank CDs pay a maximum federal and state tax rate of approximately 40%. Therefore, for the pleasure of getting virtually no return on an inferior investment, the investor is punished by a much higher tax rate.

The basic intention of the tax cut extension is to drive money out of money market accounts and CDs and into stock market investing. This will fund economic growth and create stability in corporate America. Furthermore, over the last two weeks, there has been a lot of positive conversation about deficit reduction. The bipartisan deficit-reduction panel made what I consider to be fairly radical proposals to reduce the federal deficit over the next decade.

At the end of the day, the National Commission on Fiscal Responsibility and Reform did not receive the super majority of the committee voting on the proposals, but they did receive a simple majority. Some of the participants in this committee have already finished their political careers and made hard recommendations that would be very useful for the U.S. government to adopt. However, as is true to form at the federal level, the proposed tax deal announced last night by President Obama adds approximately $900 billion to the federal deficit over the next two years.

Nearly half of the money from this compromise package will be to finance social programs that will put money into the economy and hopefully help employment. One of the programs is the one-year 2% reduction in payroll taxes for all workers. Even though the employer will not be involved, this 2% will be immediately felt by all who are employed. As pointed out by the New York Times, a family earning $50,000 per year would receive a savings of approximately $1,000 while those who pay the maximum tax on income of $106,800 or more in 2011 would receive a savings of $2,136. This type of proposal has been recommended for years, but hopefully now be adopted. It will affect all working Americans and immediately put money into the economy.

As noted above, the package would include an additional 13-months of unemployment benefits for the long-term unemployed. Even though numerous studies indicate that long-term unemployment benefits probably does more harm than good for the economy, it is a humanitarian gesture. Studies indicate that when unemployment extends beyond a normal and reasonable time period, the unemployed tend to not take jobs that are available. Even though unemployment benefits are minimal, they tend to provide enough money where someone would not take a job they feel is inferior. With this extension, up to three years of unemployment benefits are paid in the United States. Unquestionably, unemployment benefits paid to those who are out of work are a necessary humanitarian effort and these benefits are quickly spent in the economy, creating additional stimulus.

The 2% decrease in payroll taxes along and the extension of unemployment benefits are very expensive programs, but they will hopefully add additional stimulus to the sluggish U.S. economy.

The most controversial provision announced by President Obama last night was the reintroduction of the estate tax in 2011. This will affect estates in excess of $5 million with an incremental rate of 35%. This is one provision that I anticipate will change before the deal is agreed upon, and everything I have read indicates that the preferred level will be $3.5 million at a 45% rate. The important point is that in 2010, there was no estate tax, but in 2011, there clearly will be.

Included in the bill are many other extensions of tax provisions that are related to businesses. However, the bill does fix the alternative minimum tax for 2011 so that the vast majority of Americans will not be impacted by this brutal add-on tax. There are many provisions under the proposed bill that would increase depreciation and extend additional pro-business and pro-investment credits.

Even though none of us want for this package to add to the federal deficit, none of us should be disappointed to see the lower tax rates extended for two more years. My post from last week indicated that we are now in the best investing environment in a decade. With the extension of the 15% capital gains and dividends tax rates for two more years, my theory raised in that post may be truer than ever.

Jim, I hope my explanation above has given you some insight as to how this tentative tax deal might affect the stock market and provide information on some of the other elements of the package on the table.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joseph R. Rollins

Friday, December 3, 2010

Best Investing Environment in a Decade?

From the Desk of Joe Rollins

In Wednesday's edition of the Wall Street Journal, it was reported that if you met the minimum for a 6-month "jumbo" CD investment, you could profit handsomely at the rate of 0.32%. I found this to be both amusing and confusing. Folks, this is 0.32% return, not 32%. This means that if you had a $100,000 CD on a 6-month term, then you would earn $160 at the end of the CD term. This percentage further supports my theory that we are now enjoying what is perhaps the most favorable investment environment in over a decade.

I have often written that stock values are affected by interest rates and earnings. During the 3rd quarter of 2010, American corporations enjoyed the highest profits ever recorded in the history of U.S. finance, as reported by the New York Times on November 23, 2010 in the article, Corporate Profits were Highest on Record Last Quarter. Those high corporate profits coupled with the lowest rates ever in the U.S. could not provide a better recipe for high earnings and low interest rates.

I can’t imagine why any investor would consciously roll over a CD earning a miniscule interest rate of less than one-half of 1% annualized, especially when so many stocks can be purchased with dividends yielding well in excess of 5%. I suspect that many investors will come to this realization as their CDs begin rolling over in the next few months.

The recent stock market run has been somewhat remarkable: At the end of trading yesterday, the S&P was up 11.62% for 2010, and the average of all of Rollins Financial’s accounts under management are up 12.34%. It has been an extraordinary year, so I am completely baffled as to why the financial press seems intent on focusing on the negative news.

On March 9, 2009, the value of the S&P 500 was at 681. As of Thursday, December 2, 2010, that same index is at 1,219, which represents a total gain of 80% in the last 19 months. This is an extraordinary percentage by any definition. However, many financial analysts who have been out of the market this entire time are still expressing caution regarding the U.S. economy.

Have you noticed that there has been no talk of a double-dip recession lately? In fact, the economy has now stabilized and is actually starting to grow again. While unemployment is still high and will decrease gradually, the hard evidence indicates that the U.S. economy is picking up. Manufacturing, exports and retail sales have been gaining traction recently – all signs of an improving economy.

It is now estimated that the U.S. GDP for 2011 will be approximately 3%. If you reflect on this percentage, you will see that it is more than incredible. During 2010, we enjoyed the highest corporate profits ever in the history of the United States during an economic environment of high unemployment and subdued 2% GDP growth. Can you imagine how high corporate profits will be when employment and GDP improve as they surely will in a year or two?

Even though the U.S. economy is described as sluggish and slow-growing, it is still recording record profits. Given that scenario, the potential growth that is available to us through investing in China with its 9+% GDP growth, India with its 8+% GDP growth, and the rest of the emerging markets that are growing at a rate that – in most cases – is twice the anemic growth in the U.S. In short, corporate profits – which eventually impact stock prices – are exploding around the world.

There is hardly a day that goes by that I am not asked by investors about investing in gold. It’s hard to evaluate gold since it has virtually no investment quality. The things that we worry about with stocks are hard to analyze when it comes to gold. Gold pays no dividends, it is not scarce by any stretch of the imagination, and demand is not particularly robust. At one time, gold was considered the investment to protect against inflation (but there is no inflation – why else would we have QE2?), and during times of world strife. Neither of those factors seems to be present at the current time.

I am also asked whether one should invest in gold or the numerous gold coins that are continuously advertised on the financial press. If you really want to test the investment quality of gold coins, call the many companies that advertise on TV and ask them if you buy $1,000 worth of their coins today, what they would be willing to pay you to buy them back tomorrow. I’m sure you will discover that it’s a much better deal selling gold coins than purchasing them.

Even though I cannot evaluate gold from an investment standpoint, there is no question it has gone up throughout the year. However, in the words of George Soros, gold is now “the ultimate bubble.” So if you invest in gold, you do so at your own peril. Truly, the more important question to ask yourself is why would you buy gold at an all-time high when stocks are so cheap?

It’s interesting that almost everything around us is going up in price. Even though the Fed continues to express concern regarding deflation, all around us we are seeing inflation. From the date that the Fed announced that QE2 would be expanded by a total of $600 billion, everything has gone up appreciably. Even though the goal of QE2 was to reduce interest rates, the 10-year Treasury has gone from 2.57% on the date of the announcement (November 3, 2010) to 2.95% today. (See my QE2 post by clicking here) You could say that the 15% higher interest rate we have today was not the positive move that the Fed wanted when they announced QE2.

I talk to investors every day about the misconceived and misplaced perception that the markets have been bad this year. The facts completely belie those investors’ assessments. What baffles me even more is that so many investors are sitting around with money in money market accounts earning zero and are not overcoming their fear of investing in these great markets.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins