Financial

By Abraham Dugal

When you embark on a professionally managed financial strategy, you might wonder when your money is really going to kick into high gear and start paying off for you. Well, the rule of 72 can help you figure it out.
The rule gives you a rough approximation of how long it will take an investment that earns compound interest—whether it’s a simple savings account or a complex investment portfolio—to double.
Simply divide 72 by the annual percentage of interest you expect to earn on the investment. The result is the number of years it will take to double your money.
Let’s say we have a hypothetical investment that currently returns 6.50 percent annual compound interest:

72 divided by 6.50 = just over 11 years to double

And we have a second hypothetical investment that returns 7 percent annual compound interest:

72 divided by 7 = about 10 years and three months to double

You can see how the slightest difference in interest rates can have a pronounced effect on how quickly your money might grow. Of course, interest rates can and do fluctuate, and taxes can take a chunk, too—so that’s why it’s important to stress this is only a rough approximation. Also, note that the hypothetical illustrations are not predictions of investment performance; investment principal and interest are not guaranteed and are subject to market fluctuation.
But the larger point to make is that the sooner you start an investing strategy, the sooner you can put your money to work for you.
Abraham Dugal is a registered financial advisor with Allen Insurance and Financial, 31 Chestnut St., Camden, Maine, 04843. 207-236-8376. Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser.

Buying a home is one of the most stressful experiences and biggest financial commitments of many people’s lives. But inheriting a home from a parent or relative can be equally stressful and complex in ways you may not anticipate. As you cope with a loved one’s death and all the emotions it stirs up, you’ll need to decide whether you should sell the home, live in it, or rent it out.
Unfortunately, inheriting a house isn’t always a financial gain. The good news is that you can avoid many potential pitfalls by asking the right questions. Here are some key factors to consider before you make any decisions about the house you’ve inherited.
Is there a mortgage on the property?
If so, will the estate assets be used to cover it? If there aren’t enough assets to pay off the mortgage, or if the other heirs don’t agree to do so, you can take on the deceased’s mortgage in order to keep the house—as long as you have the means and desire to assume the debt. In this case, you’ll want to consider refinancing to see if you can get a better rate or lower monthly payment.
If the house is “underwater” (i.e., the home’s current value is less than what is owed on the mortgage), you may decide to walk away from the property and let it go into foreclosure. Of course, before making any decision, you should seek the guidance of an estate attorney.
Would it make sense to keep the home?
Although selling a family home can be a painful process, it’s important not to let nostalgia jeopardize your financial well-being. Even if you’re able to manage the mortgage, does the home have any other value to you? Ask yourself these questions:

• Is it a property you’re going to use, either for vacations or to live in yourself?
• Do you have the time and money to handle the maintenance and upkeep the house will require?
• If you plan to use it for rental income, would renovations be needed? Would you be willing to hire a property manager (if you can’t manage the rental yourself)?

What does the local real estate market look like?
If you’re thinking of selling or renting the home, do your due diligence on the local market. A knowledgeable real estate agent can advise you about the options in your area, discuss comparable properties and what they’ve sold or rented for, and help you determine if any renovations would be worth the time and money. (Real estate laws differ from state to state, so it’s important to work with a professional licensed in the state where the property is located.)
If you plan to sell, keep in mind that high-end finishes and other upgrades won’t necessarily get you your money back if the neighborhood isn’t made up of similarly designed homes. Rather than investing in renovations, listing the house “as is” for a lower price may result in a quicker sale.
What are the potential implications for your taxes?
Upon inheriting the house, you will receive a stepped-up cost basis: the property’s fair market value at the date of the former owner’s death.

• If you decide to sell, this means that, even if the home has appreciated significantly since your loved one purchased it, you’ll only pay long-term capital gains on the sale price over that stepped-up basis.
• If you decide to live in the house, you may face higher property taxes due to the step-up in cost basis. On the other hand, if you eventually sell, you can avoid capital gains if you reside there for at least two of the past five years.
• If you decide to rent out the house, you can deduct certain improvements and the depreciation of the house itself against your taxable rental income. Just keep in mind that you’ll have to reimburse the IRS for that depreciation if you eventually sell.

What do your professional advisors say?
Working with professionals who have experience navigating these situations is key to a successful outcome. In addition to your financial advisor, you may benefit from enlisting the services of qualified estate and tax attorneys, as well as a real estate agent. Although dealing with inherited real estate is seldom simple, having an experienced team on your side will help smooth the process, no matter what you decide to do with the property.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
© 2016 Commonwealth Financial Network^®

One bad day doesn’t make a bear market. Two bad days, however, and the prospect of more to come, may well signal one.
Bear market is a scary term, and the past several days have certainly given investors cause for concern. Rather than spend time worrying, though, let’s try to understand what has happened and what it means for our long-term financial goals.

Markets decline worldwide, but U.S. fundamentals remain strong

At times like this, it’s worth reviewing where stock prices come from. The two components are earnings (how much companies are making per share) and valuations (how much investors are willing to pay for those earnings). Earnings evolve with the economy as a whole, whereas valuations are much more variable.
Asian markets, particularly China’s, are suffering from a double hit. Earnings growth has slowed substantially for many companies, making them worth less even if valuations remain constant. Valuations, however, have been dropping sharply as investors lose confidence in the economy and in future growth. This double whammy has slammed markets in China and around the world, and it may well continue.
In Europe, the turbulence in China has sapped confidence, but the damage has been mitigated by relatively strong fundamental economic and corporate performance. This shows that investors are still making rational distinctions between markets—a positive sign—and also allows for confidence to recover as fundamentals continue to improve.
Right now, with the exception of energy, the U.S. economy continues to grow at a reasonably healthy rate—better than European economies. Corporate earnings, which are based on the economy as a whole, are relatively strong outside of the energy sector. Even there, lackluster earnings are due to low oil prices, which actually help the rest of the economy. In any event, earnings are expected to increase over the next year.
Just as in Europe, any declines in U.S. markets will be based on what investors are willing to pay for a given stream of earnings, and valuations may well recover as confidence improves again.

A closer look at U.S. market valuations

The following chart from Yardeni Research shows how U.S. stocks have been valued with respect to expected earnings over the next 12 months, from before the financial crisis to now.

We can see that stocks were priced at around 15x earnings before the financial crisis, dropped to about 10x at the bottom of the crisis, subsequently recovered to around 12x–14x, and then moved to a higher range, over 14x, in 2014.
With forward earnings now at $127.72, the close on Friday, August 21, left us at a valuation of 15.4x earnings, in line with where stocks were in 2007, suggesting the market may have further to go on the downside. In the short term, this is upsetting, but we need to remember that, while valuations cycle between good and bad, earnings continue to grow. Note that valuations have cycled between 10x and almost 18x, and that they have recovered from extremely low levels.

Putting it all in perspective

When we consider where we are now, compared with where we have been, it’s important to make the following distinctions:

• In the financial crisis, the banking system was in jeopardy. Now it is far more solid, with much higher levels of capital and much lower exposure to risky areas.
• In the financial crisis, U.S. consumers and businesses had large stocks of debt and the housing sector was collapsing. Now, the housing market has normalized and household debt has come down substantially to a healthy level.
• Supportive economic factors are in place—namely, Federal Reserve policy and low oil prices, both of which continue to stimulate the economy.
• Combined, these facts suggest we’re unlikely to see the low market valuations that we saw in the financial crisis of 2008. Although we may experience further declines, they will be constrained by the much healthier economic and financial position the U.S. now finds itself in.A better comparison is probably to the Asian financial crisis. As that situation deepened in 1998, U.S. markets dropped substantially, only to recover shortly thereafter. The damage was real but short lived, as strong U.S. economic fundamentals supported markets and investors from other parts of the world moved capital into what they perceived as a safe haven.Given that the problem here in the U.S. is largely related to confidence, it’s logical to think that the market will recover as fundamentals continue to improve. We’ve gone several years without a significant decline, and the first was bound to be unsettling. In reality, though, the market’s foundations remain solid.
  

  Taking the long-range view

  Over the longer term, this type of adjustment is normal and healthy. Periodic downturns clear out market excesses and set the stage for further advances. To put the recent decline in context, the market is still up substantially over the past five years. And, although down over the past 12 months, it remains above the levels of October 2014, when it dropped and then fairly quickly recovered.
  As always, the key is to remain focused on your long-term objectives rather than short-term fluctuations. As unsettling as recent market movements have been, the real economy continues to improve. That, not short-term price fluctuations, is what will determine the ultimate success of your investment process.
  Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged, and investors cannot invest directly in an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is no guarantee of future results.
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  Authored by Brad McMillan, CFA®, CAIA, MAI, chief investment officer at Commonwealth Financial Network.
  © 2015 Commonwealth Financial Network®

The new year is when many of us make resolutions to improve our finances and financial planning habits. Instead of telling you what you should do, we’re offering some advice on how you should do it: Make S.M.A.R.T. goals.
SMART goals help clarify expectations and improve chances of success.
Specific: Pick a specific area for improvement and enlist people to do the work. Is this you alone or are family members involved?
Measurable:  List indicators for success. How is success measured?  Do you need a spreadsheet or other tool?
Attainable: Set goals that are realistic and reasonable and can be achieved in a specific amount of time.
Relevant: Be realistic when setting goals. Choose goals that will make a difference for you.
Time-framed:  Set deadlines and keep to them.

Are you taking full advantage of your retirement account? The end of the year is a good time to reevaluate your contributions based on what your employer is willing to match. Check the 2014 retirement plan limits below to ensure that you’re making the most of your contributions.