Midyear Investment Strategies


In 2005, about 15% of people making between $75,000 and $100,000 could end up owing AMT. While it hurts, the AMT allows any tax you owe this year to be used as a tax credit the following year.

You’re more likely to run up against the dreaded tax if you’re like Warren Steele, 42, a retired senior vice president of marketing with AFLAC who receives stock options and claims multiple deductions. To lessen his tax bite, Steele and his wife, Lorie, who live in Columbus, Georgia, defer some deductions and exercise stock options every other year. This forces Steele to pay the AMT every two years. The stock options are a main source of his income.

Another way to reduce taxes is to do some tax-loss selling to offset any potential capital gains. Generally, this is a year-end strategy. But you can employ it now and continue investing in the stocks or bonds you like.

For example, if you own Cisco stock, which is down 11% so far this year, and you sell it to buy shares of Juniper Networks, which is down 17%, you’d wind up with similar computer networking stocks, but you’d also have some losses to offset your tax picture for next year. By law, after accounting for any stock market gains, you can reduce your income by up to $3,000 a year.

"If you trim a little off winners at the end of year, the losses you took midyear give you more flexibility," says Sue Stevens, director of financial planning with Morningstar Inc.

REVISE YOUR ASSET ALLOCATION
Ibbotson Associates, a Chicago-based data provider, suggests that asset allocation is more important than individual stock selection in determining your long-term investment success. Stocks are more volatile than bonds, so the more time you have until retirement, the higher amount of stocks you should have in your portfolio. If you’re in your 20s and 30s, your goal should be to save as much money as possible and make it grow.

Consider Turner and Rice. The Maryland couple recently loaded up on stock funds because they believe they have time to ride out any volatility in order to get a greater payoff. For almost 80 years, stocks have beaten bonds by an average of five percentage points a year after inflation.

If you are in your late 40s and 50s, keeping the money you’ve accumulated is more important. That’s when bonds take on a bigger role. One rule of thumb to determine your bond allocation is to match it to your age. In other words, a 40-year-old should have an asset allocation of 60% in stocks and 40% in bonds. Each year, the stock portion should fall and your bonds should increase. A more aggressive formula to determine your stock allocation is to calculate: 110 minus your age multiplied by 1.25. With this approach, a 40-year-old should have a whopping 87.5% in stocks and just 12.5% in bonds. Even people in retirement


×