Dow Drops 2700 Points

• It's a headline that every stock market investor fears will happen. The markets crash and their hard-earned nest egg evaporates. They’re forced to go back to work and must resort to eating beans and rice. Is that fear justified? No.

Stock markets around the world dropped on Tuesday. The news media echoed that it was the biggest one-day drop since September 11^th, 2001. The Chinese stock market dropped almost 10%. Here in the U.S., the major indexes were down over 3%. At one point the Dow Jones Industrial Average dropped over 150 points in one minute!

Should investors panic? No. The world is not coming to an end. The world’s economies continue to be strong and are growing. Interest rates are still low compared to historical standards. And yesterday’s decline follows 7 months where the markets recorded increases of 15%, 25%, 40%, and even 77%.

First, let’s put yesterday’s drop in proper perspective. I remember watching the ticker back in 1987 when the stock market tumbled. It’s something that I will never forget and is one of the reasons I have developed the systems and strategies I use to manage my client’s money today.

On Tuesday the Dow Jones Industrial Average dropped a little over 400 points. To equal the market drop in 1987, Tuesday’s total decline would need to be 2700 points. Tuesday, the Dow dropped 3%. In 1987 it dropped around 20%!

Second, there are going to be times when the markets make rapid adjustments. This applies not just to the stock markets, but to bond and real-estate markets as well. The introduction of electronic trading and the proliferation of hedge funds only add to volatility.

That may have been what occurred yesterday. Hedge funds can be leveraged as much as 30:1. That means if they have one dollar, they borrow thirty dollars more and invest it all. If the markets go up, a hedge fund can make enormous returns. If the markets drop too much then they get a ‘margin call’. That’s when those that lent the money decide they want it back—right away.

When someone trading on margin receives a margin call, typically they have to sell investments to generate the cash needed to cover the call. When you’re leveraged 30:1, it means you have to sell a lot of investments. Hundreds of millions of dollars can be sold in a matter of minutes with the use of electronic trading. That selling causes the market to go down, which causes others to receive margin calls. So they then have to sell.

Many of today’s mutual fund managers haven’t experienced a decline like 1987 or 2001. Initially, they hang in there. But as the markets drop further they succumb to the fear and decide to start dumping investments. In my opinion, that’s why the sell off picked up speed Tuesday afternoon.

That brings me to my second point. Who’s watching your money? When things go bad they can go bad in a hurry. That’s why it is so important that you know there is someone who is closely monitoring your money and will take action if necessary to protect it.

Unlike most managers, I employ multiple strategies in each account. Some are short-term, some medium term and others long-term. Days like yesterday illustrate the benefits of this multi-strategy approach. The money in short-term strategies was quickly moved to cash. Some sales actually took place the day before the big drop. Others occurred shortly after trading started. If 25% of an account is quickly moved to cash in such instances, that reduces the overall risk to the portfolio substantially.

Third, it’s important that you be selective in what you sell. Liquidating short-term positions allows me to hold on to high-dividend paying stocks and other investments that should comfortably weather the storm. Even if the market languishes, I hold strategies that pay dividends of 6-9%.

Lastly, after the market closed yesterday I saw a picture of a U.S. soldier carrying an Iraqi child needlessly killed. I talked with a client who was undergoing additional testing to see if she has cancer.

While it’s my job to monitor and manage my client’s money and your job to safeguard your nest egg, it’s important to remember in the end, there are things in life that are much more important than money.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

“The Investment from Hell”

If you were nearing the edge of the cliff and didn’t know it, would you want someone to warn you before it was too late? Of course you would. That’s been the guiding principle of this column, to inform everyday investors of the pitfalls that could cause them and their nest egg irreparable harm. I’ve been hearing from many of these investors lately. Some of them got the message before they stepped off the cliff. For others, the warning came too late.

Over the past several years I’ve been sounding the alarm bell due to the inherent dangers found in equity indexed annuities (EIAs). And the message is being heard. I’ve recently issued detailed reports on EIAs in general and one specifically on the most popular EIA on the market, the Allianz MasterDex 10. In these free reports, I explain the risks and pitfalls to you that the person selling them doesn’t.

http://www.guardingyourwealth.net/SpecialReports/GeneralEIA.ht

http://www.guardingyourwealth.com/SpecialReports/Allianz.htm

Too bad that Greg’s grandpa didn’t know the truth. Greg explains: “Back in 2000, my Grandpa was talked into buying one of these by an agent. He was planning on just withdrawing the interest each year to live on. Well, for the first 6 years, they distributed 10% of his initial investment. Recently, he has come down with terminal cancer, and wanted to get out.

“He asked for a full withdrawal, knowing that he’d have to pay the 4% (surrender) penalty. Well, his total withdrawals over the seven years came out to less than 90% of his initial investment! Reading through the contract, it looks like he wasn’t supposed to start receiving distributions until 2015, when he would 98 years old! Does this sound right to you?”

No, Greg, it doesn’t sound right to me. But unfortunately, that’s how some of these EIAs work. The truth is written in the fine print of the contract, which most people fail to read, much less understand.

Fortunately, Jim read his contract, and just in time. Jim said, “I meet with an advisor. He recommended the Allianz MasterDex 10, since at the time they were offering a 12% bonus up front. After he went through his talk it sounded good so I rolled my IRA over into it. That was the first time I saw the booklet, when he laid it out for me to sign, and I did. Upon getting home, I read it and saw I had messed up, thank goodness for the ‘three day cooling off period.’

“I called him back and stopped the deal. I get cold chills when I think how close I come to really messing up. I thought he was on my side and was trying to help me out, when all he was trying to do was help himself to my money. I’m glad I got on the internet and found you. You answered even more questions.”

Not all agents are unscrupulous. As Mark found out, some of them are just as ignorant to the truth as most investors are. After reading my free report, Mark forwarded it to his advisor. The advisor replied, “I printed the report, talked to the Allianz representative and hit him with each point. I can’t believe that they could have BSed me so well. This is a lousy product. You shouldn’t buy it and I don’t plan on EVER showing it to anyone else again.”

I’m glad Mark has an advisor that doesn’t put the profit motive above doing what is right for his clients. That wasn’t the case for Phil and Donna. Here’s their story, in their own words: “We were stupid enough to be swayed into turning my husband’s entire 401k into an EIA. Obviously, if we would have understood what we were getting into, we would have run, not walked, away from this! This is really the Investment from Hell!

“We would like to find out if there is anyway out of this mess, without losing almost 25% [in surrender penalties]. This policy made 0% the first year.” Even though the market went up almost 15% in 2006, Phil only made 1.5% that year!

Don’t repeat their mistake. Go to my website and check out my free report for yourself. I promise you’ll find it very revealing, and you’ll never look at an EIA the same way again.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

The ‘Corrected 1099’ Nightmare

There’s nothing more frustrating than receiving a corrected 1099 a few weeks after you’ve filed your tax return. Must you amend your return? Read on to find out. The number of corrected 1099s issued has increased dramatically the last few years and it looks like that trend will continue. The increase is due to 2 major changes in the tax law and the information banks, brokers and mutual funds must report.

The first change occurred in 2003. That’s when the tax rate on dividends and capital gains was separated from the tax rate on your other income. Previously, you paid the same amount of taxes regardless of whether the income came from a Certificate of Deposit, a preferred stock or capital gains on a mutual fund.

The good news is that most of you are paying less in tax as a result of this change. The bad news is that banks, brokers and mutual funds companies have to report interest income on one form (1099-INT) and your dividends on another (1099-DIV). Surely that shouldn’t be that difficult for those big computers they all use!

Well, nothing is ever simple with the IRS. Congress decided that only certain dividends qualify for the lower tax rate. So banks, brokers and mutual funds must wait to hear from the underlying company whether a dividend is qualified or not. If you own a preferred stock in a utility company, the utility company will have its lawyers make the determination. Then that is communicated to the banks, brokers and mutual funds.

So a mutual fund must wait for the utility to inform them if the dividend is qualified. Then the mutual fund company has to compile all that information so it can accurately report to the brokers who then must compile it and report it to you. Multiply that by tens of thousands of companies and you can see why it’s a nightmare.

The second change occurred last year. Now, a 1099-INT must include tax-free interest and the amount of that interest that is subject to the Alternative Minimum Tax (AMT). If a mutual fund holds hundreds of tax-free municipal bonds, it has to determine whether each one is subject to AMT.

Over the last few years, 1099s have been sent out by the January 31st deadline only to be followed by corrected 1099s soon after. It isn’t uncommon for someone who files a tax return in early February to get a corrected 1099 a few weeks later. They then dutifully go back to their accountant and pay a couple hundred bucks to have an amended return filed.

It doesn’t have to be that way. There are steps that you can take that will minimize the pain and suffering caused by corrected 1099s.

First, just because you receive a corrected 1099 doesn’t mean that you need to file an amended return. Most corrections are very small. The amount of taxes you owe is based on tax rate tables. Tax rate tables move in increments of $50.

If the difference between the original amounts you reported and the corrected amounts aren’t going to change your bracket, then there’s no need to file an amended return. If the corrections result in you getting an additional refund, and that refund is minimal, there’s no need to file the amended return.

Second, you can delay filing your initial return until early April. The deadline for filing a return is April 15th. There’s no rush to file it before then. You can have your return filled out and ready to go, but hold on to it until early April. If you get a corrected 1099, it’s much easier to make the change on your initial return than it is to file an amended one.

Third, unless your taxes are very complicated (and most retiree’s aren’t), you might consider doing your own taxes using popular tax software you find at most office supply stores. The software isn’t very expensive and completes your return based on your answers to some straight-forward questions. When you get a corrected 1099, you can easily go in and make the change yourself.

The chances are high that you will receive a corrected 1099 this year. Take steps now, before your file your return, and you can alleviate much of the frustration they normally cause.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.