Chasing performance, tax law changes for 2011, all about exchange traded funds (ETFs) and choosing a financial advisor in Wesban's May newsletter.

1. Wesletter
May 2011 No. 1 Investment and Planning Insights from Wesban
Chasing Performance
Investors often endure poor timing and planning as
many chase past performance. They buy into funds that
are performing well and initiate a selling spree following
a decline. This becomes evident when evaluating a
fund’s total return compared with the investor return.
Overall, the investor return translates to the average
investor’s experience as measured by the timing
decisions of all investors in the fund.
The image illustrates the investor return relative to the
total return for a given fund. Over the short term, both
the total and investor returns were positive, with the
investor return ending slightly lower. Over a 10-year
period, however, total return greatly exceeded investor
return. Investors who attempted to time the market ran
the risk of missing periods of exceptional returns.
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2. Investment and Planning Insights from Wesban May 2011 2
Tax Law Changes for 2011
with this) and watching out for private-activity
municipal bond funds, which aren't taxable under
the conventional tax system but are for the
purposes of AMT.
A good mantra, for investing and for the rest of
your life, is “Focus on what you can control.”
Dividend Tax: Through 2012, the tax on qualified
While most people are inclined to put taxes into
dividends remains at zero for taxpayers in the 10%
the "out of my control" bucket, that doesn't have
and 15% tax brackets, and is 15% for all other
to be the case. Where taxes are concerned, it is
taxpayers.
always a good idea to consult with a tax
professional. This article is intended only as a
Long-Term Capital Gains Tax: Through 2012,
starting point to help you become informed about
taxpayers in the 10% and 15% brackets will not
tax-law changes; it does not constitute tax advice.
owe capital gains tax on the sale of assets they've
Some of these changes have an impact only on
owned for more than one year. Long-term capital
those in very high tax brackets, while others affect
gains tax rates remain at 15% for all other
individuals of all income levels.
taxpayers. Short-term capital gains are taxed as
ordinary income.
Social Security Payroll Tax Holiday: Social
Security payroll taxes have dropped from 6.2% to
Estate Tax: Although the federal estate tax was
4.2% for 2011, giving an effective boost in pay to
set to jump to 55% for estates of more than $1
all workers. (As in the past, you won't pay Social
million in 2011, last-minute Congressional
Security tax on any earnings over a certain level--
maneuvering resulted in a much less onerous rate
currently $106,800.) This provision is designed to
for people who die with a lot of assets. The top
get people out there spending, but a better idea,
estate tax rate is 35% for 2011 and 2012, and it
assuming you can afford it, is to divert that money
only affects those who have amassed estates of
to another retirement fund: your own. Increase
more than $5 million. Those who inherit assets
your 401(k) plan contribution as close as you can
will also once again receive a step-up in the cost
to the annual limit; in 2011, that limit remains
basis of those assets, meaning that the inherited
$16,500 for those under 50 and $22,000 to those
assets are valued at their fair market value as of the
over 50. And if you're already funding your
decedent's death.
401(k), 403(b), or 457 plan to the max—or if you
would rather save outside the confines of your
company plan—you can direct that money to an Given the more generous estate-tax limits, you
IRA instead. IRA contribution limits are also may be assuming that a visit to your estate-
unchanged from 2010: $5,000 for individuals planning attorney isn't necessary, but even if you
under 50 and $6,000 for those over 50. don't anticipate that you will ever amass $5
million in assets, there's more to creating an estate
plan than sidestepping taxes. A properly crafted
Alternative Minimum Tax: Toward the end of
estate plan will detail how you would like your
2010, Congress put in place a so-called patch to
assets distributed after you are gone. Gift Tax:
keep a new group of taxpayers from having to pay
The annual gift-tax exclusion stays the same as it
the alternative minimum tax, a parallel tax system
was in 2010: $13,000. That means you can gift
that disallows many of the credits and deductions
$13,000 apiece to an unlimited number of people
that taxpayers are entitled to under the
this year without having to worry about a gift tax
conventional tax system. That's good news, but if
or even fill out the gift-tax paperwork.
you've fallen into the AMT zone in the past, the
latest patch isn't likely to keep you out of it.
However, by taking steps to control your AMT-
subject income and managing your deductions,
you may be able to reduce your AMT tax hit.
Some key strategies that you can employ include
carefully managing the exercise of stock options
(a well-versed tax advisor should be able to help

3. Investment and Planning Insights from Wesban May 2011 3
Three Reasons to Consider Exchange-
many can be used effectively if approached with
discipline and a long-term view. It can take time
Traded Funds
for some undervalued corners to produce, so
impatient investors need not apply.
There is one terrible reason to invest in ETFs:
Despite all the buzz surrounding exchange-traded
fads. Many investors think of them as vehicles for
funds (ETFs) these days, many investors are
making a quick buck on a hot corner of the
confused about how best to use them. ETFs are
market. However, by the time one catches your
versatile investment vehicles that can be
eye, it's about to cool down. Unfortunately, ETF
effectively incorporated into a portfolio. They are
providers have a bad record of launching new
essentially index funds that invest in a
ETFs in faddish pockets of the market, which
representative sample of securities in the index
tends to encourage an investor’s worst instincts.
they seek to imitate. Unlike mutual funds,
So watch for fads, and before investing in an ETF
however, ETFs are traded on an exchange, just
in this area (or any ETF, really) speak with your
like stocks. As of November 2010, Morningstar
financial advisor.
estimates there are approximately 1,099 ETFs in
the United States, with a total of about $942
billion in assets. Keep in mind that diversification does not
eliminate the risk of experiencing investment
losses. Investors should read the prospectus and
There are at least three good reasons for investing
carefully consider a fund’s investment objectives,
in an exchange-traded fund: lump sums, tax
risks, fees, and expenses before investing. It is
efficiency and undervalued corners of the market.
important to note that ETFs are not immune
from capital gains distributions; ETFs may make
Lump sums: If you have a lump sum you are capital gains distributions if changes in the
looking to invest, consider an ETF. Why? Well, underlying index occur. International investments
you pay a brokerage commission each time you involve special risks such as fluctuations in
buy and sell an ETF, so commissions can add up currency, foreign taxation, economic and political
very quickly with every trade. You can bypass risks, and differences in accounting and financial
these costs with a lump-sum investment. (If you standards. Keep in mind that concentrated
plan to make periodic investments over time, your investments are narrowly focused investments
overall costs will be lower if you go with a no-load that typically exhibit higher volatility than the
mutual fund.) market in general. These investments will
fluctuate with current market conditions and may
Tax efficiency: Equity ETFs are among the most be worth more or less than the original cost upon
tax-efficient vehicles around. The way they’re liquidation.
structured, ETFs rarely make taxable capital gains
distributions, those payments to shareholders of
security-sale profits. So you'll typically owe taxes
only on any capital gains you incur when you sell
the ETF. Investors can easily build a low-
maintenance, tax-efficient, broadly diversified
portfolio with only three ETFs. There are a
number of ETFs that offer domestic-equity
exposure and others that cater to those looking to
take their investment overseas. There are also
many fixed-income ETFs to consider.
Undervalued corners of the market: In addition to
these ETFs, there are others that track practically
every market segment there is. While some of the
narrowly focused ETFs are better than others,

4. Investment and Planning Insights from Wesban May 2011 4
How to Choose a Financial Advisor
Securities and Exchange Commission—ask to see
it. It will show the planner’s professional history
and any legal problems their practice has had.
Choosing a financial advisor is a process that must Once you ensure an advisor's legitimacy, you can
be conducted with the utmost care and only after start the interviewing process. The National
meticulous planning. After all, this will be the Association of Personal Financial Advisors' Web
person managing your life’s savings, your site has an excellent questionnaire called “The
retirement portfolio, or your children’s college Comprehensive Financial Advisor Diagnostic”
money. While referrals from trusted friends or that you can use to interview potential planners.
loved ones are usually one of the safest ways to find Ask about track record, past performance and
a good advisor, that path might not be available to experience, fees, and commissions.
everyone. Those looking for a financial advisor
might want to follow the steps below. Also, ask the financial professional what type of
clients he or she sees most often to determine if the
First of all, beware of investment gurus who other clients' financial situations are similar to
promise that by using their “secret method” you yours. You can ask to speak with some of these
will be able to beat the market by some ludicrous clients as well—are they satisfied with the way the
amount. If it sounds too good to be true, it probably advisor handles their finances? Your financial
is. Look for reliable credentials, such as the advisor will have to be someone you can trust and
Certified Financial Planner (CFP), Chartered whose skills are a good fit for your financial needs.
Financial Analyst (CFA), or Chartered Financial
Consultant (ChFC) designations. These
certifications require passing a series of exams and
a certain number of years of experience in the
financial field. A Registered Investment Advisor
(RIA) must file Form ADV with their state or the
©2011 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or
the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the
content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar"
and the Morningstar logo are registered trademarks of Morningstar, Inc.
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