Layer Design

Timing the Financial Markets

There has been some misunderstanding in the financial community about the use of the word “time” or “timing” in discussing this subject. Obviously, the fund manager can control shifts between common stocks and cash or fixed-dollar assets in an effort to judge the timing of general market movements, and any measure of the fund manager’s skill should reflect his skill in making such judgements. The fund manager, however, does not control the time at which funds are received or at which they must be disbursed, and the measure should not reflect this timing.

There is an easy way to make the measurement of the rate of return insensitive to the timing of receipts and disbursals. In the BAI report, this measure has the possibly confusing name, “time-weighted rate of return.” Although the name may be confusing, the principle is not.

The time-weighted rate of return is logically equivalent to the rate of return on mutual fund shares which are bought and redeemed at net asset value per share. The investor who purchases shares in a mutual fund can measure the rate of return on his investment by knowing the price he paid, the value of payments received, and the price of the shares at the end of the period in question. He does not need to know the time or amount of new investments in the fund by other investors who bought shares or the time or amount of disbursals from the fund to shareowners who redeemed their shares. The individual investor’s rate of return is totally insensitive to those injections of capital into or withdrawals of capital from the fund.

It will not be surprising to any reader who has persisted to this point that the BAI report recommends that performance must take account not only of the rate of return on assets but also of the risk to which the investor has been subject.

It is undesirable or unwise for all investors to subject themselves to the same degree of risk, and therefore not all investors should expect the same rate of return. The elderly widow whose primary objective is the protection of her assets from loss cannot expect as high a return as the more venturesome young physician whose primary objective is to maximize the value of his holdings 25 years in the future. If one knew only the rates of return on the widow’s and the physician’s respective portfolios, one would not be in a position to judge the skill with which their investment advisers had done their work.

April 15th is not the greatest day for most people in the United States. Millions of people wait in long lines to mail forms that include checks they never wanted to write. One of the best ways to avoid the lines and the checks is to start thinking about next year’s taxes on (or even before) April 16th.

Keys to Lowering Tax Debt:

Waiting until the end of the year to begin thinking about taxes may mean you miss out on many of the tax deductions and credits that are available. It is important to make adjustments and changes in your daily routine that may offer you more tax relief in the year to come.

1. Review your current tax deductions and credits. Talk to your accountant or tax professional about any missed deductions (could you claim part of your home as an office, could you deduct your continuing education, or could you deduct the money that you are paying your kids).

Missed deductions and missed credits are some of the biggest reasons for higher tax debt.

2. Keep excellent records. The more information that your tax professional has to work with AND the better it is organized then the easier it will be to uncover more potential deductions and credits.

3. Review the tax code. Keep an eye on tax news (through the internet or other sources) to discover new deductions and credits as soon as they become available.

Lowering tax debt does not have to be difficult or painful. It is usually just a matter of knowing your potential deductions and credits and taking full advantage of them. The best way to get your tax debt down is to start thinking about your return the first day of the year. Waiting on this may end up costing you more than you can imagine.