Friday Financial Five – July 18th, 2014

Friday, July 18, 2014

Dan Forbes, GoLocalProv MINDSETTER™

 

ETFs and hedge funds approach new thresholds

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Certain types of investments continue to increase in holding values for different reasons. Exchange-traded funds (ETFs) continue red hot growth, with the latest numbers approaching $2 trillion. ETFs are by-and-large low cost and passive, presenting an alternative to some more expensive actively-managed mutual funds. On the other hand, hedge funds continue to gain in size and relevance despite a much heftier fee attached. Hedge fund holdings are approaching $3 trillion according to Reuters, with the majority of in-flows coming from institutional investors. The hope that these investments will preserve principal has outweighed the price tag and last 5 years of underperformance.

States with no income tax and population growth

Many industries are shifting to telecommuting, allowing employees to choose where they live and work remotely. While no individual factor usually determines where people choose to live, state income tax may play a larger role. There are currently seven states with no state individual income tax. They are Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska. Looking at the most recent growth rates by state from April of 2010 to July of 2013, all seven appear in the top eleven states ranked by percentage population growth. In a rising tax environment, expect that trend to continue.

Top 1 percent may actually be richer than reported

There’s more good news for the top 1 percent of U.S. households. According to a European Central Bank economist, Philip Vermeulen, they actually own a greater percentage of the country’s total wealth than is typically reported. The 2010 U.S. Survey of Consumer Finances estimated top earners have 34 percent of the nation’s wealth. Vermeulen’s estimate incorporates what he considers “missed data,” driving that number closer to 37 percent. The change is even greater for the European countries made part of the study.

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Trust as an IRA beneficiary

Another recent IRS ruling highlights issues that may arise when a trust is named as an IRA beneficiary. If family members start questioning provisions of the trust, this can lead to legal action. In the example presented by the recent IRS ruling, legal wrangling led a widow to miss the 60 day window for rolling the IRA assets into her own IRA. This meant the entire distribution was taxable and may have led to a penalty for excess contribution. Trusts can have a place as an IRA beneficiary, but must be done with forethought and consideration to avoid potential pitfalls.

The evolving NBA economy

The offseason in the National Basketball Association is always entertaining. The latest collective bargaining agreement intended to prevent top stars from colluding but seems to have had a side effect. The best players are no longer maximizing their value, while teams, having money to spend, are overpaying for lesser talents. Dwyane Wade opted out of a $40 million contract when his fair market value isn’t anywhere close to that. Dirk Nowitzki took a hometown discount and then his team signed an inferior player to a contract paying $5 million more per year. Should the NBA investigate the possibility of a “wink-wink” post-retirement office deal? Or should the players’ union get involved and try to prevent a player from opting out of a contract that conventional wisdom determines is a bad financial decision?

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

 

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