VOL. 127 | NO. 247 | Wednesday, December 19, 2012
The Worldly Investor
Cash In on Cashing Out
By David Waddell
While we may not know the details of next year’s tax increases, we do know that taxes will increase. This has created a rush of year-end tax planning to sell assets, issue dividends and claw compensation forward. In fact, hundreds of public companies have announced special dividends to pad investor’s pockets before year-end.
However, returning excess liquidity to investors before year-end only benefits those investors who reinvest effectively. For example, if you have a company that has increased in value at an 8 percent annual rate and sell today to take advantage of the 15 percent capital gains rate, you must reinvest the proceeds and receive a comparable rate of return to lock in the tax advantage. If you sell an investment that is performing and then fail to reinvest effectively, you would have been better off continuing to defer the tax … even at the higher rate.
So, if you have liquidity created by tax planning entering year-end, you have successfully cashed out. However, to fully cash in on the decision, you need to reinvest the proceeds at an equal or higher rate of return. While most may realize that selling before year end to avoid taxes makes sense, few seem to realize the necessity of successful reinvestment to complete the exercise. For those of you with newfound liquidity and re-investment risk, the sooner you reinvest the better. If you are unsure of how to do it … call Waddell & Associates!
Now Print This
The Federal Reserve has committed to print $85 billion a month indefinitely to support the economy. They will also leave short-term interest rates at zero until the U.S. unemployment rate falls below 6.5 percent. This stimulus commitment actually accelerates the printing pace. Between 2008 and 2012, the Fed bought securities with printed money at a pace of $500 billion annually.
At $85 billion a month, the Fed will purchase securities at double that rate and based on their own projections, the US unemployment rate will not dip below 6.5 percent until 2015. For the inflationistas, this looks like heavy fuel for the hyperinflation hyperventilation. Yet, gold prices haven’t budged since mid-2011. Why? Remember that inflation consists of not only the supply of money, but also the speed at which it circulates. Currently, the velocity of money stands at historic lows. The reason there is no inflation is because although the Fed has pumped enormous liquidity into the system, the funds sit idle.
Conversely, beneficial price inflation is occurring in housing and equity markets. In fact, U.S. household balance sheets, benefiting from less debt and higher asset prices, stand today less than 4 percent below their 2007 highs. While the Fed’s printing might be controversial, and may lead to runaway inflation someday, so far they have instigated a near recovery in household net worth without sparking general price inflation.
This story continues to be written, the ending remains a mystery, but for the moment the consequences of Fed printing reads like a love story.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.