Nathan Bacal Financial

Stocks are a great way to make money since they reflect real growth on top of appreciating to cover the costs of inflation. However, they can also be expensive compared to other investments due to capital gains taxes, and investors are therefore always looking for ways to reduce their taxes on stocks. There are two main ways for saving taxes when investing in stocks, being individual retirement accounts and capital loss tax deductions.

Invest in an Individual Retirement Account

There are plenty of tax advantages to be had by investing in stocks within an individual retirement account, depending on the kind you get. Some will allow you to only pay taxes on the income you deposit and make anything you withdraw including profits tax-free, while other allow you to defer current taxes and only pay taxes when you withdraw.

There are limits to how much you can invest per annum in these accounts which are indexed to your annual taxable income, and you should ensure that you take full advantage of these accounts by putting as much as you can in before putting anything in a non-registered account.

Use Your Capital Losses

Many people don’t realize that just like a capital gain is taxed, capital losses can be used to reduce taxes. If you made a lot of money by selling a profitable stock this year but also have a major loss of value in another stock, you should sell the other stock if it has no hope for improving in the future as it will improve your tax payout by allowing you to use it as a deduction on the capital gains section of your tax form. For example, if you made $20,000 selling one stock, but lost $22,000 by selling another, you will have a net tax loss of $2,000 and won’t pay capital gains taxes.

This is not to say you should sell every stock that’s currently at a loss in order to avoid paying taxes on your successful payouts. Value invested stocks often fluctuate over time, so it makes little sense to sell them in the short term for a tax benefit when it means you ultimately lose money. However, if you invested in Pump-and-Dump Incorporated and it is obvious that you have no hope of ever seeing your money again, selling the stock can be useful.

Keep in mind that there are some limitations on using capital losses. If you sell a stock at a loss and repurchase it within a certain timeframe, it will not be counted as a loss until you resell the repurchased stock. So, don’t sell stock just before the tax year ends and repurchase it right after and think that you can avoid taxes this way, as you’ll only be taking a loss for no reason and paying extra commissions on your trade with no tax benefits whatsoever.

Planning for retirement starts when you’re young. At least that’s how it’s supposed to work. Every investment you make, throughout your lifetime, should be part of a long-range plan to make sure that your retirement years are happy, stress-free ones.

The theory goes like this: When you’re young, you invest in riskier vehicles. As you age, you slowly begin moving your investment dollars from high-risk, high-reward investments to steady, surer ones. These latter investments won’t have the big rewards, but they won’t have the big risks, either. It’s a way to protect your money as retirement draws near.

People, though, tend to make two common mistakes when investing: First, they start saving for their retirement years too late. This limits the amount of money they can earn. Secondly, they get too comfortable with one investment strategy and never take the time to diversify their dollars.

This last problem is a serious one. It can lead to your money shrinking instead of growing. No investor should ever grow complacent. There’s always room to explore and diversify.

Financial experts always recommend that individuals diversify their investment dollars. This means that you should sink your dollars into a wide range of investment vehicles. Try the stock market. Consider an annuity. Look at mutual funds, certificates of deposits, bonds and other investment options. It’s when you place too many dollars into one particular investment vehicle that you increase the risk of watching your investments lose value.

After all, say the stock market takes a sudden nosedive. If you have most of your investments tied into it, your savings will take a nosedive, too. However, if you have your investment dollars tied into not only stocks, but other investment vehicles, too, your wealth won’t take nearly as serious a hit.

Meet with your financial advisor to discuss the diversity of your investment portfolio. Your advisor might be able to recommend some new homes for your investment dollars.

It’s never easy to plan for your financial security in your retirement years. Most of us can’t even fathom the day when we no longer report to work on a daily basis. But that day is actually closer than you think. By investing in a diverse array of financial tools, you can help ensure that your retirement years are happy ones. No one, after all, wants to spend these years worrying about paying the bills.

You don’t have to search too hard on the Internet to find some financial expert with something negative to say about annuities, both standard ones and variable annuities. These products are not sound investments, they’ll say. They don’t provide the amount of returns that investors can get by sinking their dollars into other savings and investment vehicles. So should you run out and buy annuities for your portfolio?

In short, the financial press rarely has a positive thing to say about the potential of annuities.

Why is this? What, exactly, is it about these financial products that experts view as so objectionable?

A recent column by financial guru Terry Savage on MSN Money sums it up well: She says that investors should consider annuities, but only as a last resort. That’s not exactly high praise. Why should these products be considered as a last-ditch investment opportunity? According to Savage it’s largely because annuities sometimes come with sizable fees. She refers to it as financing the retirement of an insurance salesperson.

There is certainly truth in this. Consumers do have to do their homework before signing up with any annuity. Some companies and salespeople do charge outrageous fees. That’s why it’s so important for investors to get in writing exactly how much they’ll be paying for their variable or tax-deferred annuity.

Of course, you could say the same about most any investment vehicle. Consumers must always do their research, whether they’re considering investing in the stock market, buying real estate or choosing a new mutual fund. Consumers need to know exactly what it is in which they are investing.

But, and this is important, an annuity with reasonable fees can be an important part of anyone’s investment portfolio. That’s because annuities provide investors with a check every single month. That is guaranteed money. It’s also a safety net. We all know that the current economy is a terrible one. People are losing their jobs. They’re watching as the values of their homes are plummeting. Many folks have used up their savings. They are struggling.

Annuities provide a hedge against future uncertainty. You can always count on those guaranteed checks. It’s a way to feel some security in a financial world that’s anything but secure.

So, yes, the financial press is unnecessarily harsh on annuities. These are investment vehicles that certainly have a place in today’s economic world. Don’t let your opinion of them be unnecessarily soured because of the financial analysts. Meet with your own financial planner. Study your own financial situation. And ask the right questions.

You just might discover that an annuity makes financial sense.

What are large cap and small cap mutual funds?

Stocks are usually grouped into categories based on the size of the company that you are investing in, namely big or small. The terminology “size” in this instance refers to the value of the company on the stock market. This is basically calculated by multiplying the company’s number of outstanding shares by the current purchase price of those shares. This is normally referred to as “market capitalization” or the “cap” size.

Typically, the larger companies are less risky to invest in whereas the smaller ones involve considerably more investment risks. However, the smaller firms usually provide you with a greater growth potential. The best recommendation is to diversify your portfolio in order to balance it out and minimize the investment risk factor. It is best to employ a combination of large, mid-sized, and small cap mutual funds.

Large-cap funds

The standard norm for large capitalization funds is that they are invested in companies that have a market value of $8 billion or greater. Large-cap funds are considerably less volatile than small-cap funds invested in smaller companies. Additonally, you should always anticipate smaller returns on your investments when you purchase small-cap funds. Despite the market tanking in late 2008, large-cap funds still outperformed all the other mutual funds out there. Although this is not always a hard and fast rule, most investors prefer large-cap funds to be the core of their investment portfolios.

Small-cap funds

Small-cap funds usually focus on investing in those smaller companies that have a market value of $1 billion or less. It is the level of investment aggressiveness displayed by the fund’s manager which determines the volatility of a small-cap fund. Most of the time, the more aggressive small-cap mutual fund managers will purchase funds of both hot-growth and technology companies.

Higher risks are taken by the aggressive fund managers because they anticipate higher rewards as a result of that increased risk factor. Conversely, those fund managers that are more conservative in their investment strategies will look for specific companies that the stock market has recently beaten down in value.

Despite the fact that hot growth funds are considerably riskier than value funds, the latter is just as subject to market volatility as the former is. Additionally, and due to this volatility factor, most small-cap funds insist that you hold onto them for the long-term in order to offset the potential for short-term losses. While large-cap funds have taken center stage in the investment theater due to market volatility, small-cap funds have become unstable.

Despite all of the above, you should by no means abandon the idea of investing in either large-cap or small-cap mutual funds in order to diversify your investment portfolio. History always repeats itself, and if that holds true, then small-cap mutual funds will once again be viewed in a favorable light because the stock market has always settled down after encountering an unstable period.

We’ve all had it drummed in our heads by now: Investing in the stock market is high-risk, high-reward. As you get closer to retirement age, it’s time to take your money out of the market and into safer vehicles.

This all makes sense. But, is the stock market really that risky of an investment?

Yes, the market crashed during the Great Recession. But today it’s back on the upswing. In early April, the Dow Jones Industrial Average rose past 11,000 for the first time in a year. In other words, stocks have made it through the Great Recession and are in recovery mode.

If you invested in the stock market right before the Great Recession, then, you’re likely seeing your investments start to rise again. If you were patient, and if you didn’t sell your shares when times were bad, you should be in line again to make a nice profit.

Consider another popular investment: residential real estate. Financial analysts have long called this a safe investment. That’s because historically, home values in the United States have risen. But look at what happened during the recession. Home values plummeted, even in some of the strongest residential real estate markets in the country.

Housing experts, though, say that real estate investors should not panic. They just have to be patient. If investors hold onto their real estate for five years, seven years or more, they should see their investment pay off. When they sell, they should make a solid profit.

This isn’t much different, then, than what investors should do when putting their money into the stock market. Patience, again, is the key. Investors who hold out the slumps can usually find a time to sell in which they’ll make a solid profit from the investments in the stock market.

Doesn’t this, then, make investing in the stock market a relatively safe investment? Yes, it does require some financial savvy. You have to make sure that you sell at the right times. But if you have enough time before retirement, and if you’re willing to hold onto your shares through the inevitable down times in the market, you should be able to realize a solid profit by investing in stocks.

Talk with your financial advisor when you’re considering investing in the stock market. One worth the fee you’re paying will guide you to stocks with which you’ll be most comfortable. Don’t consider the stock market to necessarily be a risky investment.

Certificates of deposits are the ultimate in safe investments. Or are they? Yes, they do provide a guaranteed rate of return. But what if the money you invested in a CD was instead placed in an investment vehicle that had a far higher rate of return? Doesn’t the money you didn’t make because you had your dollars in a low-returning CD count as risk?

That’s the debate that centers around CDs. Many more conservative investors like these vehicles because they know that they will see their money grow, guaranteed. But others point to the relatively low interest rates that they pay and say that CDs are little better than investing money in a bank savings account.

CDs are uncomplicated. They have a definite term – often two years or five years. And they pay interest. How much interest varies, but Bankrate.com, a leading financial Web site, said that as of mid-April that the average five-year CD was paying interest of 2.85 percent. The average one-year CD was paying interest of 1.35 percent.

These rates vary according to market conditions, but they generally stay in that range. As you can see, these aren’t exactly stellar rates of return. Investors who put their dollars in CDs, then, will see their money grow. They just won’t see it grow by much.

If these same investors put their money in mutual funds, they have the opportunity to see their dollars increase at a significantly higher rate. Of course, they also face the risk that their investment will lose money. No mutual fund, no matter how well it’s performed in the past, is guaranteed to increase in value. Remember, history is not a reliable indicator of future performance.

The key, then, is for investors to determine how much risk they are comfortable with. If you’re young, and your retirement years are far in the future, you should invest more of your dollars in higher-risk, higher-reward investment vehicles, places like the stock market. As you move closer to retirement, it’s time to switch some of your money into safer ventures such as bonds. And as you get even closer to retirement, you might consider taking out a variable or fixed annuity. You might consider, too, putting some of your money into a CD.

CDs, like all investment types, have their pros and cons. There is no one investment vehicle out there that is perfect for every situation. CDs, then, have their place. It’s just up to investors to determine how much of their money they want to tie up in CDs and for how long.