Capital Gains and the Fiscal Cliff: Take Profits Now or Later?

Capital Gains“What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound.”

Warren Buffett

Without legislative action in the waning days of 2012, next year’s maximum long-term capital gains tax rate will rise from 15% to 20%.  This means, for example, selling an investment with accumulated long-term capital gains of $100,000 will generate taxes of $15,000 in 2012. Beginning January 1, the same sale will cost $20,000 in taxes. Happy New Year.

International Stock Allocation: 0%, 20%, 50%, or None of the Above?

International Stock

In my last blog posting, “Is it Safe?” I provided a solid rationale for diversifying overseas, despite current headlines. Still, an ongoing stream of uncertainty might have you thinking that it’s time to forget about a significant allocation to foreign stocks and funds. Fearful investors tend to flee to more familiar home turf, but I would propose the best defense to global volatility remains a prudent – and yes, still relatively significant – allocation to foreign holdings that reflects your personal risk tolerance.

Diversifying internationally: “Is it safe?”

Turmoil and uncertainty in international stock markets, particularly in the Eurozone, may have you feeling as exasperated and perplexed as Dustin Hoffman in the 1976 classic movie “Marathon Man.” 

International DiversificationSzell (Laurence Olivier): Is it safe?

Babe (Dustin Hoffman): I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.

Szell: Is it safe?

Babe: Tell me what the “it” refers to.

Szell: Is it safe?

Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.

Szell: Is it safe?

Difference Between Stocks and Bonds

Right now it’s hard to find an investment that makes money.  Safe bonds earn paltry interest and banks pay next to nothing on deposits.  Stocks, while risky, at least pay dividends. You may be wondering whether it is time to boost your allocation to stocks.  The answer is a resounding “maybe.” Before leaping, here are a few things to consider.

Stocks are more volatile than bonds:

No surprise here.  The best and worst 12-month periods across three decades are illustrated by the gray bars below.  (We’ll get to what those orange dots mean in just a second.)

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