Timing may be right to re-examine your portfolio


With all of the negative sentiment surrounding the financial markets, is it appropriate to simply avoid them until things improve?

Key Points

Q With all of the negative sentiment surrounding the financial markets, is it appropriate to simply avoid them until things improve?

As an alternative to being swayed by various financial journalists and the "experts" who make market predictions, use this unique period of time to re-determine your own course of action based on your specific goals and objectives. Once this is accomplished, you will be in a better state of mind to determine what changes, if any, need to be made within your portfolio. To help with this, it's important to understand what the latest downturn means to the basic investment asset classes such as stocks and bonds.

When earnings growth is scarce, investors tend to prefer the investment characteristics of higher-quality stocks and are more willing to pay a premium for them. A company's fundamentals, including past and projected earnings growth, management track record, product strength, and current valuations, are some of the factors to consider when evaluating a stock's quality. Because of last year's sell-off, on an absolute basis, equity valuations have become relatively more attractive, although there is always potential additional downside risk.

Historically, when the markets are weak, certain sectors tend to decline less than the overall market. Commonly known as defensive sectors, this area includes health care and consumer staples. From a global standpoint, since the U.S. was among the first to enter into a recession, it may also be the first to emerge from it. For investors interested in emerging market stocks, the emerging market's performance is typically dependent on global growth and a recovery in commodity prices.

This is also a time to revisit your investment strategy as it relates to fixed-income investments such as bonds. Whether your goals involve reducing tax liabilities or adding diversification to your portfolio, bonds can offer a number of potential benefits. From an income tax standpoint, tax rates on capital gains, dividends, and income likely will be rising over the next few years. This potentially makes certain bonds, which are free from federal income taxation, more appealing to those in higher tax brackets.

From an asset allocation standpoint, the volatile markets have caused many portfolios to be out of balance. Maintaining an investment strategy with a risk level appropriate to your needs and comfort level has never been more important. Determining how and when to rebalance your portfolio can be a difficult task, especially if you have more than one investment account, as most physicians do.

Take the time to review your overall investment portfolio to ensure that your targeted allocation strategy is still appropriate and that your risk exposure is not at an uncomfortable level. The time you spend on this, either on your own or with the assistance of your financial adviser, will be well worth the effort.

Q I've heard that the Alternative Minimum Tax exemption amount does not increase with inflation. Is that correct?

A The Alternative Minimum Tax (AMT) is designed to ensure that individuals who have high incomes and significant income tax deductions or credits pay a minimum amount of tax. The tax law provides each taxpayer an AMT exemption, which phases out at higher income levels. Unfortunately, the exemption amounts are not tied to inflation.

As a result, many middle-income taxpayers find themselves being hit with the AMT. Over the past decade, Congress has passed temporary increases in AMT exemptions to reduce the number of middle-income taxpayers who have to pay AMT. The latest increase, which raised the exemption amount up to $69,950 for joint filers, expired at the end of 2008.

For tax year 2009, the exemptions were to decrease to the exemption amounts in place before the temporary increases were implemented, which would have lowered the exemption amount to $45,000. The American Recovery and Reinvestment Tax Act of 2009 extends the higher AMT exemption amounts to taxable years starting in 2009 to $70,950. In addition, taxpayers may use various non-refundable tax credits to offset regular tax and AMT.

Ronald J. Paprocki, JD, CFP, CHBCJoel M. Blau, CFP, (top) is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or blau@mediqus.com
or paprocki@mediqus.com

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