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Friday Financial Five—August 17th, 2012

Friday, August 17, 2012


The gloves appear to be off when it comes to discussing the future of Medicare . . .

Defining the “fiscal cliff”

Not even the most daring cliff diver wants to stare down the “fiscal cliff”, a term you’ve probably heard over the last few weeks. It refers to a near certain recession we would be hurled into by a combination of tax increases and spending cuts set to take place at year’s end. The Congressional Budget Office estimates the combination would take $500 billion out of the economy. Tax brackets, capital gains, dividends, child tax credits, itemized deductions, and estate taxes are all subject to change if no agreement is reached.

Hedge funds vs. the 60/40 allocation

Over the last few years, pension shortfalls have been compounded by a shift in investments from the traditional 60/40 mix to the use of hedge funds. An interesting study came out of Bloomberg comparing the performance of Bloomberg’s hedge fund index to the performance of a balanced index comprised of 60 percent equities and 40 percent in bonds. The study found that the 60/40 mix beat the hedge fund mix over the past 5 years and in 6 of the last 7. It stands to reason that the fee charged by hedge fund managers, typically 2% of assets and 20% of profits, would significantly eat into returns.

More like Austria?

Listening to the debate over tax policy can make your head spin. It seems reasonable that most working and property owning people would like to keep their tax bill as low as possible, but there are serious deficits to consider. While the United States has one of the highest corporate tax rates in the world, the highest marginal income tax rate is 23rd in the world, according to KPMG. It’s interesting to note that some countries with the world’s highest income tax rates enjoy strong economies. Denmark currently enjoys low unemployment, low national debt, and small budget deficits. Austria, despite sizeable debt, has 4% unemployment and is often cited as one of the best places to live. On the other hand, you can look at other highly taxed countries such as Spain or Japan and find economies in shambles. All economies are different, and it’s important for our leaders to clearly define economic goals and then come to a compromise about how to get there. 

Investment Spotlight: Gold

Gold has been a great performer for the last 10 years, but getting in on the party now may be too late. Gold bulls suggest that the asset has even more room to run. You’ve probably even come across the multiple television and radio advertisements trying to sell it to you, but investors need to keep in mind the traditional reason for owning gold in the first place: safety. Gold is meant to hedge against inflation risk and preserve your capital. You might consider owning a small percentage in your portfolio as “insurance”, but in terms of a long term money-maker, it’s probably not a glittering idea.

Student loans are actually impacting retirees’ Social Security

Student loan debt is not just a hindrance on recent graduates starting their financial lives. According to Smartmoney, there is a growing trend among retirees defaulting on federal student loan payments. Consequently, the Social Security benefits of 115,000 recipients have been docked from January through August 6th of this year alone. In many cases, the retirees were simply trying to share education costs or co-sign on loans for children or grandchildren. If you’re retired and are tied to an educational loan, be sure you stay on top of the loan repayment. Getting involved means preparing for the worst case scenario where the student is unable to pay the loan back.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]


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