Going Green

Going Green

Everyone is feeling the pinch at the pump. And just about everywhere else it seems. No matter where you look: the grocery store, utility bills or airline tickets; prices are going up. We all hope these increases are just a temporary road bump, on the financial landscape, but unfortunately, I believe we'll be experiencing the effects of the energy crisis for years to come.

With all the talk about going green, for the environment, it's time for investors to go green, with their portfolio. And I don't mean investing only in earth-friendly, companies (though you certainly can.) What I mean is positioning your portfolio so that you add enough green, to your bottom line to allow you to weather the effects of inflation and without lowering your standard of living.

First, let's take a closer look at the current energy crisis. To make a long story short, the problem is based mainly on supply and demand. As the standard of living has been rising around the globe, and particularly in large Asian nations such as China and India, the demand for oil has exploded. And this trend will only continue.

While demand has risen, supply has not. Non-OPEC countries are actually seeing supply decrease, while our domestic exploration has been hindered by environmental concerns. So while China can drill off the coast of Cuba, we aren't tapping new oil off our own coast or in ANWAR. While it is true our known reserves would not solve the current crisis, they would certainly lessen our energy dependence and help keep prices in check.

There are only three ways to solve a supply and demand issue: reduce demand, increase supply, or do both. On the demand side, there is no way we can simply conserve, our way out of this mess. Any oil we conserve in our nation will be more than offset by rising demand globally. That's not to say that hybrids, carpooling and alternative energy sources are bad ideas, just that they aren't enough.

Take wind farms for instance. They work great, as long as the wind is blowing. But the power grid must have a constant flow of energy into it. And because wind energy flow isn't constant, traditional power plants have to be constructed to cover the energy needs when the wind farm isn't generating power.

On the demand side, we need to open up more drilling and exploration. Environmentalists will resist this move, but the fact remains that currently there is no viable substitute for oil. The world will continue to depend on oil to survive for years to come, even with all the research going on in alternative fuels. We can't go back to horse and buggy days while waiting on a miracle solution.

Ethanol, bio diesel and other sources won't make the problem go away, either. And they each have their own issues to contend with. Take ethanol for example. Increased production has caused corn prices to rise, affecting food costs across the board, not to mention the energy it takes to produce it.

To combat the energy crisis, we will need to pursue all means available to both reduce demand and increase supply. This will be a herculean task to accomplish, but a lesson from history can give us hope. My youngest daughter and I have been watching a new television series on the early days of the space program that put man on the moon. Our country had the will, determination and desire to accomplish the impossible. And we did it. It took the hard work, ingenuity and creativity of a multitude of motivated people. It also took a large investment of time and money to bring about. But in the end, a giant leap for mankind touched not only America, but the entire world.

And we can do it again. As prices continue to rise at the pump, I am optimistic that we as a nation will gain the political grit to do what it takes to attack this issue head on. We still have some of the brightest minds on the planet, and if we could put a man on the moon, surely we can find a way to solve the energy crisis.

Next week, we'll look at how you can add some green, to your bottom line and avoid turning the energy crisis into a financial one.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. For more information go to www.guardingyourwealth.com.

Death and Taxes

The old saying is that there are only two certainties in life, death and taxes. Now that we know who the two nominees are for this year's presidential election, it's time to take a look at what might happen regarding taxes and how we should adjust our portfolios.

The bottom line is that regardless of who wins the White House, our taxes are going to go up. That is going to impact the money that we have to spend at the shopping center. The result is that we may see U.S. economic growth continue to lag.

Let's look at the candidate's position on capital gains, income, payroll, and estate taxes. This information is derived from analysis of comments made by the candidates themselves and from interviews with campaign advisors.

The issue that has the greatest potential of affecting those who are retired or near retirement is capital gains. We know that President Bush reduced the dividend and capital gains tax rates to a maximum of 15% and that those cuts are set to expire in 2010. That means that unless new legislation is drafted extending them (or making them permanent) that capital gains tax rates will go up.

Senator McCain has stated that he wants to make the current capital gains rate permanent. Senator Obama favors increasing the capital gains rate to 20-25%. Many retirees rely on dividends and capital gains to supplement their Social Security, so increasing the capital gains tax rate will directly affect them. Also, increasing the capital gains tax rate on dividends may negatively affect the share prices of stocks in general.

Regarding estate taxes; currently there is an exemption of $2 million dollars per person with a top estate tax rate of 45%. The personal exemption is set to rise to $3.5 million in 2009. In 2010, there isn't any estate tax, but then in 2011 the personal exemption goes back to $1 million dollars. It's amazing what they can come up with in Washington!

Senator McCain proposes an exemption on estates less than $10 million with the highest tax rate on estates larger than that being 15%. Senator Obama proposes exempting estates less than $10.5 million, but has a sliding tax rate that tops out at 45%.

On the positive side, the expiration of the existing estate tax rates has made long-term estate planning very difficult. Getting a new plan in place will allow that planning to be done much easier.

Positions on income taxes differ between candidates as well. Senator McCain wants to maintain the current maximum of 35% and Senator Obama may potentially move the maximum rate from 35% to 52%. I haven't been able to find out each candidate's position on the Alternative Minimum Tax (AMT). The AMT, which isn't indexed to inflation, is resulting in many middle-income Americans paying a much higher tax rate, so whether or not this is changed is just as important as what the maximum tax rate will be.

Lastly, Senator Obama advocates removing the OEcap, on earnings subject to FICA (Social Security) tax. Self-employed individuals currently pay a 12.4% FICA tax on their wages. Employees of companies pay half that while the employer pays the other half. Currently, FICA tax is only paid on wages up to $102,000. Senator Obama has stated that he wants to remove the cap for those earning $200,000 or more per year. I don't know Senator McCain's position on payroll taxes.

Keep in mind that small business owners have their profits taxed as wages, so that is really a tax on small business. Remember also, that employment growth the past several years hasn't come from major corporations but small businesses. So this additional tax has the potential to affect employment.

Should democrats control the Congress, the chances of the current tax rates becoming permanent are low. If Senator Obama wins the election, the likelihood of passing higher taxes is high. All indications are that the democrats will control Congress.

From an investment standpoint, I am concerned about the impact higher taxes will have on our economy. Moreover, higher taxes won't be used to pay down our nation's debt but to fund additional programs. The effect of taxes, inflation, and the decline of the Dollar causes me to favor foreign investments. As always, selection and proper management is tantamount.

Reader Questions Advisor Recommendation

I recently received a question from a reader in Florida who is taking an early retirement. Like many investors, he was confused after meeting with a couple advisors. My advice to him might save you from making a wrong decision, too.

"Phil" (not his real name), has the option of taking either a lump sum payment or a monthly pension from his employer. He goes on to detail his financial situation: 401k, money market accounts, house paid for, no debt, low monthly expenses. Phil has lived beneath his means, saved his money and achieved financial freedom.

Phil writes: "I met informally with 2 CFP's. They are working with people at [my company]...but they seem to only push annuities. After reading your articles on annuities I am cautious...I have always been conservative with my finances, but I realize that to retire at 55 I might have to expose myself to the equity markets. I would like to talk with an advisor who will show me multiple options and talk straight, with no fluff."

Here's a shortened version of my actual response:

"You are in one of the most important times of your life, and are facing what may be your biggest financial decision. Whatever you do, be careful.

It looks like one of your initial questions is whether you should take a lump sum. Generally speaking, I feel that people should take the lump sum because it gives them greater control, flexibility and access. It also becomes an asset that can increase in value and be passed on at death to your heirs.

There is risk in doing so, though. Many retirees have been duped by advisors into investments that weren't in their best interest and ended up losing large portions of it as a result. You have to be willing to invest some time and energy finding the advisor that is right for you. Even then, you will want to keep track of what is going on at least on a monthly/quarterly basis, so you can alert the advisor if you become concerned.

There are several things to keep in mind regarding choosing an advisor.

First, you aren't going to know if the advisor (or investments) you've chosen is the right one for you until probably 6-12 months down the road. Commission-based salespeople with their packaged products needlessly force you to make a 7-10 year time commitment. That's why it is VITAL that you not be in a situation where it will cost you thousands and thousands of dollars to make a change.

On the other hand, fee-based advisors like me only get paid for the time you use our services. There's no commission, no time commitment and no automatic surrender penalty. This gives you significant control and flexibility. You remain the boss. If I don't keep you satisfied then I'm not going to keep you as a client.

Second, beware of the advisor that promotes buy and hold. They're the ones that tell you to "just hang in there" while they watch your account drop in value--and do nothing. The diversification I use combined with the technological safeguards I've created result in my clients being comfortable going for the growth because they know I'll take action should things not go as expected.

Third, don't feel pressured by anybody to make a decision. There's no investment so great that you need to rush into it. You can take your time to find someone you feel comfortable with. Talk to their references (existing clients). Even then, only start with a portion of your nest egg and let the advisor prove him/herself."

As with Phil, you too need to beware of financial salespeople pushing pre-packaged solutions. If it's designed for the masses it's not designed for you. Don't give in to sales pressure. Take your time--this may be the biggest financial decision of your life. A wrong move is costly.

Just because someone has the right initials behind his or her name doesn't mean they will act in your best interest. Most won't. Be very skeptical. Do some independent research.

It didn't cost Phil a penny to get my opinion. It won't cost you anything either. If an investment is being recommended that you aren't sure about, I'll be happy to provide a second expert's opinion. Go to www.guardingyourwealth.com and click on Ask Jeff.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.