Ken Himmler.com

Ever since the possibility of default on Greek sovereign debt has become headline news, a lot of people have found themselves wondering, "How is it possible for the financial problems of a country so small and so far away to create such turmoil in the world's markets?" What's happening in Europe is probably affecting your portfolio right now, regardless of the quality of your holdings or how well diversified you are.

Just what is all the shouting about? It's no secret that the so-called PIIGS nations (Portugal, Italy, Ireland, Greece, and Spain) are having difficulty coping with the debt that years of deficit spending have created. A robust global economy helped to mask the problem, but in recent years the burden of sovereign debt–bonds issued by sovereign governments–has become increasingly unsustainable. With debt at roughly 140% of its gross domestic product,* Greece is particularly troubled. Imposing austerity measures required by its European colleagues has added to the country's recessionary woes. That in turn has made it even more difficult to achieve mandated deficit reduction targets in order to qualify for additional installments of financial aid from the European Financial Stability Facility (EFSF) set up last year by 17 eurozone countries.

Bank exposure
One of the chief concerns about the possibility of default on sovereign debt has to do with the financial stability of banks that hold it. Some of the largest French banks have already suffered downgrades of their credit ratings because of their extensive holdings of debt from troubled European countries, particularly Greece. If a Greek default made banks reluctant to lend to one another, that could affect credit markets worldwide.

American banks hold very little Greek debt compared to European banks; however, they could face a different challenge. Understanding why requires some basic awareness of a type of derivative known as a credit default swap. Investors with large bond holdings from a particular borrower often try to protect themselves against the possibility that the borrower will default by buying a credit default swap on that debt as a type of insurance. The company that issues the credit default swap agrees to cover the bondholder's losses in case of default. The more risky the issuer–for example, Greece–the more likely bondholders are to try to protect themselves with swaps. However, in some cases, a company may have issued so many default swaps on a particular issuer that it could be overwhelmed by the claims resulting from the issuer's default.

Such derivatives can create a ripple effect in financial markets. If the company that issued the swaps can't make good on them, the institutions that relied on that protection also can find themselves in trouble, which multiplies the impact of a major default. U.S. financial institutions are major issuers of credit default swaps, and the potential impact of a Greek default on them is unclear. However, since the 2008 financial crisis, U.S. banks have been forced to hold greater capital reserves to deal with contingencies, and Treasury Secretary Timothy Geithner recently said that banks here have reduced their exposure to the debt of troubled countries.

Potential for tighter credit leading to recession
Lending worldwide hasn't fully recovered from the last financial crisis, and has helped keep global economic recovery sluggish. Fiscal austerity measures taken to try to reduce deficits have also taken their toll, hampering economic growth and making it even more difficult for countries such as Greece to balance their budgets. If banks' lending ability were impaired further by a financial crisis brought on by a default on sovereign debt, tighter credit could increase the odds of renewed recession. Also, Europe represents a major market for many American companies, and a recession there wouldn't help an already slowing global economy.

Greece could be the tip of the iceberg
Even though Greece is the immediate concern, larger economies in Europe actually could represent a bigger threat. Italy and Spain both face sovereign debt burdens and deficit problems. Italy's economy is more than five times that of Greece; Spain's is more than four times bigger.* If either country were to decide it needed to restructure its debts as Greece is attempting to do (which ratings agencies could see as a form of default), that would have a much bigger impact than Greece. If a Greek default would have a ripple effect, a default by either Spain or Italy could cause waves.

To compound the problem, as investors have become increasingly concerned about the possibility of debt contagion in Europe, borrowing costs for both Italy and Spain have risen. At recent auctions, nervous investors have been demanding higher interest rates to compensate them for the higher perceived risk of buying that sovereign debt. As any credit card holder knows, having to pay a higher interest rate makes paying off debt and balancing the budget more difficult. A Greek default could make investors even more nervous about buying other troubled countries' debt, and being frozen out of credit markets would likely aggravate fiscal problems abroad.

All politics is local
There have been signs in recent months that voters in stronger economies such as Germany are beginning to question why they should continue to support countries that have not been as disciplined about balancing their budgets. Also, investors worry that the financial support available from the EFSF may not be sufficient or available quickly enough to avert problems. Though there has been no shortage of suggestions for how to deal with the situation–issuance of euro bonds backed by all eurozone members, leveraging the EFSF's existing assets, greater fiscal integration among countries, Greece returning to its own currency–questions about the ability and willingness of other countries to support the eurozone's weaker members have caused investor anxiety worldwide.

Financial markets hate uncertainty, and the situation has contributed to the recent volatility across a variety of asset classes that don't usually move in tandem. However, Europe has the benefit of having watched the United States deal with its own difficulties during the 2008 crisis. Also, European leaders have generally reaffirmed their determination to defend the euro at all costs. Uncertainty about Europe could persist for months, but it's important to keep it in perspective. While you should monitor the situation, don't let every twist and turn derail a carefully construct
 

Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions before December 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you'll owe next April.

Look at the forest, not just the trees

The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well–for example, large-cap stocks–it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after Dec. 31 for tax reasons.    Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you're not meeting your financial targets, or more conservative if you're getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments do. Or you might look into an investment that you have avoided in the past because of its high valuation if it's now selling at a more attractive price. Diversification and asset allocation don't guarantee a profit or insure against a possible loss, of course, but they're worth reviewing at least once a year.  

Know when to hold 'em

When contemplating a change in your portfolio, don't forget to consider how long you've owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, that rate could be as high as 35%, not including state taxes. Long-term capital gains on the sale of assets held for more than a year are taxed at lower rates: 15% for most investors.  (Long-term gains on collectibles are slightly different; those are taxed at 28%.)

Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates if you have held the stock at least 61 days. (Those days must occur within the 121-day period that starts 60 days before the stock's ex-dividend date; preferred stock must be held for 91 days within a 181-day window.) The lower rate also depends on when and whether your shares were hedged or optioned during those 61 days. Check with your tax professional to make sure you don't inadvertently incur unnecessary taxes by selling or buying at the wrong time.

Make lemonade from lemons

Now is the time to consider the tax consequences of any capital gains or losses you've experienced this year. Though tax considerations shouldn't be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as "harvesting your losses."

Example: You sold stock in ABC company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.

Time any trades appropriately

If you're selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a "wash sale," and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.

If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you might think about. If you want to sell but don't want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You'd end up with the same position, but would have captured the tax loss.

If you're buying a mutual fund in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you'll owe taxes this year on that money, even if your own shares haven't appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Know where to hold 'em

Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it's generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments' typically lower returns. Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that distributions from a tax-deferred retirement plan don't qualify for the lower tax rate on capital gains and dividends.

Be selective about selling shares

If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold–for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares.

Example: You have invested periodically in a stock for five years, paying a different price each time. You now want to sell some shares. To minimize the capital gains tax you'll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price. 

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

When an individual starts down the path toward financial independence, it is understood that he or she will have to make adjustments along the way.  Even the most well thought out plan cannot take into account every unforeseen situation that can interfere with your future plans.  For this reason, it is extremely important to stay on top of your financial situation so that you can make the appropriate adjustments to your savings and investments as necessary.

There is no substitute for being well informed about the laws that govern things such as taxes, investments, or anything that could affect your personal financial status.  State and tax laws have a tendency to change seemingly overnight, and adjustments to your financial retirement plan may have to be made so that you continue to get the most out of your hard earned money.  Failure to stay on top of your financial situation in this way could even have some potentially dire legal consequences.  Always check with your retirement planner when you hear about new laws that could concern your savings and investments.

Besides legal changes, there are many other situations that you should stay well informed about.  New financial opportunities become available every day for those who are actively looking for them.  Whether it is a new investment opportunity or a special holiday savings account with a particularly high interest rate, adapting your plan as necessary can make you a lot more money in the long run. 

If you get in the habit of doing investment research, watching the economic forecasts, and playing an active role in the investment process, you will be better equipped to deal with life’s uncertainties.  All it takes is a little bit of time, effort, and energy and you will be well on your way to true financial independence.
 

When planning to make investments for your retirement, it is important to consider every option that you may have.  If you look close enough you may find a great retirement plan that has been hiding right below your nose.  These hidden gems often come in the form of a 401k retirement plans. 

401 retirement plans are special plans that are offered by a growing number of employers in the US.  They offer special benefits that most other retirement plans simply cannot match.  The first quality that makes a 401k plan special is the fact that they are a pre-tax plan.  This means that all of the money you invest into your 401k is not taxed until you withdraw it from your investment account.  This is a very convenient way to save money throughout the year by avoiding some potentially costly taxes.

Many employers that offer 401k retirement plans offer a variety of options that you can choose from.  These options often include investments in stocks, bonds, money markets, high interest savings accounts, and annuities.  The best 401k plans let you create for yourself a healthy investment portfolio that is perfect for you.  You should choose to invest your money in a plan that feels comfortable.

Another common bonus that many companies offer with their 401k retirement plans is company matching.  Company matching is when the company you work for matches a certain amount of money that you have placed in your 401k plan.  This could be a dollar for dollar match up to a certain amount or a guaranteed percentage of your invested money.  Either way, this is essentially free money for your future.

If you have not already, talk to your employer about the investment options that are available to you.  You could be sitting on your best investment option and not even know it.

Anyone making regular investments realizes that the fees involved in many investment opportunities can be pretty hefty when considering the high-risk nature of these investment options.  There are many investment firms that charge a large sum of money just to use their services.  While this may be worth it to some people who seek to gain a large amount of money in a short period of time there are some things to consider whenever you make any kind of investment.

The first investment strategy that you should always adhere to is investing within your means.  Most of us are not made of money, and when first starting out making investments are not able to dedicate a large portion of income towards retirement savings.  How foolish would it then be to waste so much of your hard earned money in the fees associated with investing it.  When you do not have the money to waste, it is best to choose low-cost options so that you can get the most out of your retirement investments.

The next investment strategy that we are going to examine compares high risk and low risk investments.  It is no secret that higher risk investments typically have a higher end payout when they are successfully executed.  While lower risk investments do not have this same potential for growth, they are much more secure.  Because the end payout is lower they typically also have a lower usage fee involved than do some of the higher risk investment options.  The key is always to let your money work for you, and if you do not have the money at first to risk on high-risk investment options, then do yourself a favor and focus on low risk options that do not have such a hefty fee associated with them.  It is your money, and there is nothing to say you cannot re-invest it in the future.

If there was a time-tested and proven path to wealth, it would without a doubt include saving, saving, and saving.  There is an illusion that affects even the best of us, and that allows many people to feel comfortable with procrastination.  The fact is, it is hard to accept the fact that we do not have an infinite amount of time.  So much of the time, people know that they need to save and make investments for retirement, but they follow the reasoning that they have so much time until retirement that they can always ‘do it later.’

Other reason that they will have plenty of time to save and make investments after their income increases to a more comfortable amount.  A lot of the time, this mindset makes it difficult to accept the fact that we all have enough to invest for a comfortable retirement in the future.  The problem is that most people run with the understanding that there is not enough in this world to go around and they need to take their share now.  When all is said, they would rather enjoy their money now instead of invest it and live comfortably in the future.

This hurdle is easy to overcome, however, when you create a budget and stick to it.  It may be overstated, but the fact is that whatever your situation is now is the time to be saving and making retirement investments.  While it may be difficult to see how you can fit it into a tight budget, there is a lot of wisdom that comes with paying yourself first.  Consider taking just ten-percent of whatever you earn in a week and placing it in a retirement savings account to start with.  Ten percent is not a lot, and most people can work with that kind of budget.  A little bit really does go a long way, and after a few short weeks you could be well on your way to a comfortable future retirement.
 

In the ancient past, people all over the world used to seek religious freedom from tyranny and oppression.  They employed numerous methods to attain their spiritual independence and achieve a state that we often call ‘Enlightenment.’  The situation is very much the same for investors today as they struggle to climb the investment ladder and attain their own financial independence. 

Investment strategies are a lot like the various religious paths of days gone by in that all of them are undoubtedly similar while employing different methods to achieve the desired effect.  Every investment strategy requires dedication and a degree of faith, which comes in the form of confidence in your own financial decisions.  Investors are like spiritual brothers and sisters who share advice with each other while walking parallel paths to the much-desired financial independence that everyone seeks.

While there is a degree of competition that exists on the stock market, investing for retirement is not a solitary path that you have to travel by yourself.  There are numerous opportunities that you can take to achieve your goal and have a comfortable retirement.  There are online internet communities that offer free investment advice, there are financial planners and financial advisors that can act as teachers and show you the way.  The investment journey of a lifetime begins with the first step, and the most important step is always the next.

As with any devotion, be it religious or secular, investing is a journey that is never truly over.  There is always a new plateau to reach.  One can never truly be at the top of the investment mountain.  There can be much satisfaction to be had when looking at all that you have accomplished and looking at what you can still accomplish in the future.  Your investment journey is never complete.