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8A STRICTLY BUSINESS/ The Charlotte Post May 16, 1996 401(K) investing: Positive asset allocation CHARLES ROSS Your Personal\ Finance Successful investment pros are the people you should imitate when figuring out how to manage your 401(K). And the pros agree: ninety percent of successful invest ing has to do with asset allo cation. Asset allocation refers to the way you divide your money among the invest ment options in your 40 IK, like stocks or bonds. A mcyor research study found that investment mix accounted for over 90 percent of the vari ation in total return among the investors surveyed. Most surprising was what didn't seem to make much dif ference. When the investors bought or sold, and whether they chose stocks or bonds that did better or worse than the pack, had little impact on the overall success of their portfolios. Allocation above selection If you had bought Intel stock in the spring of 1994, (Intel is a computer chip maker), you'd have more than doubled your money by the end of 1995. So how could picking a big win ner like that not be more important than asset alloca tion? Simple. Research shows that it is more important that you know to invest in stock in general over investing in any one particular stock. But you can't always make those brilliant calls in advance. In the long nm, even the pros generally earn a little less for their shareholders than the market's overall per formance. So, unless your money manager is psychic, use asset allocation to strengthen your portfolio. The key is to divide your money between stock fimds and bond funds in the right balance for your financial needs and goals and your own investment per sonality. Take your own measure When you're deciding on asset allocation for your 401K, the very first person you need to consult is you. Only you can assess how much risk you can tolerate, how soon you might need the money, and how like ly it is that something could unexpectedly put a snag in your financial plans. The longer you plan to keep your money in the 401K plan, the more of it you can afford to put at risk in stock funds. But if an emergency should rise it could mean having to with draw money at the bottom of a sour market. So look at your overall financial situation. Is your job secure? Do you have other emergency resources? Is your retirement more than a decade away? If you answer no to any of these questions. Should you rent your vacation home? If you're thinking about renting out your vacation home, don't forget to check in with Uncle Sam. The North Carolina Association of CPAs points out that the tax rules governing vacation home rentals are complex, particularly if you're planning to mix personal use with rental use. While the lure of rental property tax deductions may be enticing, before signing any rental agreements, take the time to understand fully the tax rami fications and the impact they will have on your personal use. Here are some important questions CPAs recommend you address: • Do you want the freedom to use your home whenever you want? If you want to use your vaca tion home whenever you please, you'll have a tough time getting the tax benefits of a rental property. Those benefits vary significantly, depending on the number of days the home is rented and the extent of personal use. Keep in mind that personal use includes a stay by a family member unless he or she uses the unit as his or her main home and pays the fair mar ket rental price. When your vacation home is used primarily for personal use by you and your family, your tax write-offs are limited to your mortgage interest and property taxes, just as they are with your primary resi dence. The trade-off is that you get to use your vacation home with no strings attached. • Do you want to rent your house out only on a limited basis? Tax law does provide you with a means to earn some tax-free income on a vacation home deemed to be a personal residence. If you rent out the house for less than 15 days a year, then you do not have to pay taxes on the rental income. What's more, allow able deductions, such as mort gage interest and real estate taxes, may still be taken. This unique exemption provides a valuable loophole for those with vacation homes near annual events where rents soar for short periods. In fact, when the Olympics come to Atlanta this summer, thou sands of individuals with vacation homes (and primary residences) in Georgia are expected to take advantage of this opportunity to earn tax- free rental income. • Are you willing to limit your use of the home? You'll reap the greatest tax advantage if you don't make personal use of your vacation home for more than 14 days a year, or more than 10 percent of the number of days the home is rented, whichever is greater. As such, you may deduct expenses for repair and maintenance, utilities, insurance coverage and clean ing services. You also may claim depreci ation on, and thereby deduct a portion of, the home's cost each year. Keep in mind, how ever, that even if you use the home for one day, you must allocate your expenses between personal-use and rental days, and calculate your deduction accordingly. Regardless of how many days you use your home, mortgage interest (on primary and sec ondary residences) and prop erty taxes remain fully deductible under the current tax law. Keep in mind that the more frequently you use your vacation home, the fewer the tax benefits. If your personal use of the property exceeds the above limit, the rules on deducting expenses are more restrictive. Your rental expenses also must be deducted in a certain order: first, mortgage interest and real estate taxes allow able to the rental period; sec ond, operating expenses like repairs, maintenance and util ities; and, finally, deprecia tion. But keep in mind that you cannot use your vacation home to produce a tax loss to shelter income such as com pensation, interest or divi dends. However, any excess losses may be carried forward to future years. However, there is one exception by which, if your rental deductions pro duce a tax loss, you may be entitled to write off up to $25,000 of those losses against your salary and other income. To qualify, you need to meet three requirements: 1) you must limit your personal use to 14 days a year or less; 2) you must actively manage the property; and 3) your adjusted gross income (AGI) must be below $100,000. (The $25,000 amount is phased out as your AGI increases from $100,000 to $150,000.) • Do you need rental income? Realistically assess your financial situation to deter mine the extent to which you can afford the expenses of maintaining your vacation home. If you anticipate incur ring substantial maintenance expenses, such as repairing faulty or old wiring, you may want to rent your house out as much as possible to qualify for the biggest tax benefits. Money Management is a weekly column on personal finance prepared and distrib uted by the North Carolina Group charges ‘Net scams children THE ASSOCIATED PRESS WASHINGTON - A private group wants the government to investigate a Milwaukee company's Internet web site it says lures children to adver tisements and marketing sur veys, by posing as educational. The Federal Trade Commission said Monday it would look into the Center for Media Education's complaint against the KidsCom web site, operated by SpectraCom Inc. of Milwaukee. SpectraCom officials insist their web site does not exploit children. The company does, at one spot on the site, occasionally gather information from chil dren about their likes and dis likes, using “standard mar keting techniques” that site developer Jorian Clarke com pared to asking people ques tions in shopping malls. The information, without the children's names, is passed on to the company that paid for the survey, Clarke said. The area on the site that asks these questions is optional, and includes a line encourag ing children to get parents' permission, she said. Most of the site is education al or games, Clarke asserted. But the media education center believes the site “was set up by a marketing firm with the sole purpose of moni toring children's on-line behavior, collecting personal data and aggressively promot ing products,” said president Kathryn Montgomery. The media watchdog group last month released a report alleging that several firms, including SpectraCom, have designed web sites - places on the Internet where companies or individuals can be reached - “to capture the loyalty and spending power” of children. The FTC does not regulate ads for children over the Internet. But its jurisdiction over deceptive market prac tices does extend to the com puter network. The agency plans a conference next month on the issue of privacy in cyberspace, with one day devoted to children's issues. On SpectraCom’s web site, children also are asked to fill out questionnaires that include favorite T'V show, commercials, musical groups and interests. They are offered points for their responses that can be used to “buy” items including video games and cookies. The company says it asks those questions to match chil dren worldwide with electron ic pen pals. And those ques tions are in a separate area from the occasional marketing surveys it also conducts, Clarke said. She said the site is meant to be entertaining and educa tional and that developers try hard to get parents involved, she said. The media center, a nonprof it organization, received most financing for its web-site pro ject from the Carnegie Corporation in New York. Association of Certified Public Accountants. Question Complaint Compliment Call us at ®I)E CJjarlotte ^0£!t 376-0496 and let us know what’s on your mind then take less risk in your 401K. Diversification The first law of investing says that reward is commen surate with risk. If this were always true, then making the most with your 40 IK money would be simple. Just go with high-risk stock funds. But there are two good reasons not to allocate all your money to the most aggressive stock funds in your plan. One rea son is if you can't tolerate that level of risk. The other is the loophole: it's something called the diversification effect. It says that you can get nearly as strong a return with far less risk by spreading your money around among the investment options in your plan. Often, gains in one fund offset losses in another, pro ducing a better trade-off between risk and reward than putting all your money in any one fund alone. Your money and moxie Your goal in deciding on asset allocation for your 40 IK is to arrive at a mix that gives you the highest return with out exceeding your tolerance for risk. Constructing a portfolio is not simply a matter of study ing numbers and making a choice, even though the num bers are a good starting point. Your financial advisor can cal culate the expected returns and risk levels on different portfolios to find the one whose numbers promise the best match for your financial goals and your risk tolerance. But remember that these pro jections are educated guesses based on past performance and can give you only a gener al idea of what to expect. You must be the judge of how your 401K options fit your plans and needs. Charles Ross is host of the syndicated radio program, 'Your Personal Finance," and author of Your Common Sense Guide to Personal Financial Planning. hentagG fiousG SPECIALIZING IN UNIQUE GIFTS, ART, BOOKS AND HOME ACCESSORIES WITH AN ETHNIC FLAIR ALL GOD'S CHILDREN® Patti 1996 Special Event Figurine We are excited to introduce a precious new Special Event Figurine named “Patti.” Sculpted by Miss Martha, this exclusive figurine will only be available at 1996 collector events. SPECIAL EVENT MAY 18th 1996 Refreshments served 10:00 -12:00 • Door Prizes Kings Court At 901 South Kings Drive • Charlotte • 344-9695 (By The Melting Pot & Mama Ricotta's Restaurants) NEW 1996 Hours Mon. - Sat. 10-6 K Call one of our professional representatives to help market your business, profession or event in the publi cation that produces results and keeps you in touch. > StrictlyBusiness, Designed to Profile Minorities in Business and Minorities Successful Within Majority Corporations. Healthy Body/Healthy Mind, Designed to Keep You Abreast of Current Health Issues, Concerns and Preventions. • The Post, Designed and Dedicated to the concerns of the Black Community. FRAN FARRER Advertising & Marketing Director & General Sales Call: (704) 376-0496 or Fax: (704) 342-2160 JERI Assistant Sales Manager & Automotive Specialist CARLOS StrictlyBusiness Specialist & Rock Hill Account Executive PAT Healthy Body/Healthy Mind Specialist BOB General Manager & Account Executive Prime Spots Still Available hi the BLACK GUIDE CALL TODAY!! 376-0496 Account Executive Salisbury, NC
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May 16, 1996, edition 1
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