A Critical Distinction
in Estate Planning
Stay Vigilant Against
Investor's Best Friend
Sizing Up Stocks
Selecting the right mix of stock investments—and understanding the role these investments
play in your portfolio—is the key to pursuing your long-term financial objectives.1 But to do
that successfully, you need to appreciate the relationship between company size, or market
capitalization, and performance potential.
What Is Market Cap?
Market capitalization, or "market cap," refers
to a publicly traded company's current value
on the open market. Capitalization is
determined by multiplying a stock's current
share price by the total number of existing
shares. For example, if a company issues
10 million shares of stock, which trade for
$50 each, its market capitalization would
be $500 million. Most companies are
defined as small-cap, midcap or large-cap.
Although definitions of these categories
can overlap and/or change as the overall
market loses or gains value, Standard &
Poor's currently uses the following ranges:
Large-cap company — market value of
$4.6 billion or greater
Midcap company — market value between
$1.2 billion and $5.1 billion
Small-cap company — market value of
$1.6 billion or less
Not coincidentally, a company's market
capitalization typically corresponds to
where the company is in its growth cycle:
Small-cap companies may be newer
companies in the stage of accelerating
growth; midcaps might be experiencing
(or expect to experience) rapid growth;
and large caps may be in the midst of
Who Will Lead the Pack Next?
Historically, stocks of small-cap, midcap and large-cap companies
have taken turns leading the market. This chart ranks them in order
of performance from first place to third.
Source: ChartSource®, Wealth Management Systems Inc.
Based on calendar-year returns for the 10 years ended
December 31, 2013. Large-cap stocks are represented by
the S&P 500 index. Midcap stocks are represented
by the S&P Midcap 400 index. Small-cap stocks are
represented by the S&P SmallCap 600 index. Securities
of smaller companies may be more volatile than those
of larger companies. The illiquidity of the small-cap
market may adversely affect the value of these investments.
Unmanaged indices do not take into account the fees
and expenses associated with investing. It is not possible
to invest directly in an index. Past performance is not a
guarantee of future results.
Small-cap companies may offer significant growth potential, but they are more prone to volatile stock price swings than larger companies and involve increased investment risk. In addition, they may be susceptible to intense competition within rapidly changing industries. Two examples of small-cap companies are bed and bedding manufacturer Select Comfort and online family history resource Ancestry.com.2
Midcap companies are often found in maturing industries or markets. They may be in the process of increasing their market share and improving their overall competitiveness. This stage of growth is critical and is likely to determine whether the company eventually lives up to its full potential. Midcap stocks may have growth potential similar to that of small-cap stocks,
but with somewhat less risk. JetBlue Airways
and restaurant chain The Cheesecake Factory
are considered midcap companies.
Large-cap stocks have usually experienced their most dramatic growth and often have done so
en route to becoming dominant players in
their respective industries or markets. Investors
expect large-cap stocks to produce strong,
stable returns with much less risk than smaller, less-established companies. IBM, Coco-Cola, Microsoft and General Electric are all examples
of large-cap companies.
What It Means for Your Portfolio
Why should you care about a company's market capitalization? Because the unique risk-and-reward qualities of different investments can have a direct influence on the growth of your portfolio over time. As the table above illustrates, small-, mid- and large-cap stocks have performed differently at various times in recent years. Therefore, diversifying throughout the market-cap spectrum may help reduce risk in your portfolio and assist you in achieving your long-term financial goals.
1Investing in stocks involves risks, including loss of principal.
2Securities of smaller companies may be more volatile than those of larger companies. The illiquidity of the small-cap market may adversely affect the value of these investments.
Bequeath or Beneficiary?
A Critical Distinction
in Estate Planning
It is a common oversight in the estate planning process—and one that can lead to a host of unintended consequences. When individuals prepare wills, the goal is typically to ensure that their assets pass to beneficiaries as they intend while also maximizing estate tax planning opportunities. But often families realize too late that a parent's or other loved one's wishes cannot be fulfilled because their wills have not taken into account the named beneficiaries of assets that pass outside of a will.
Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies and individual stocks and bonds.
The upside of these arrangements is that when the account holder dies, the monies go directly to the beneficiary named
on the account, bypassing the sometimes lengthy and costly probate process. The downside of beneficiary-designated
assets is that current tax law states that the will does not control these non-probate assets.
What is the potential fallout from this situation? Some individuals who you no longer wish to inherit your property may do so, some individuals may receive more than you intended, some may receive less, and ultimately, there may
not be enough money available to fund the bequests you
laid out in your will.
Keep Beneficiaries Current
Not naming beneficiaries or failing to update forms if a beneficiary dies can have its own unintended repercussions, which can be particularly damaging in the case of retirement accounts. For instance, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiaries are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred, thus preventing the children from stretching IRA distributions out over their lifetime.1
Planning Is Crucial
Given these very real consequences, it is important to
work with your financial advisor and/or estate planning professional to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.
You should also review your beneficiary designations on
a regular basis—at least every few years—and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.
Finally be sure to keep thorough records and inform
the person named as executor of your estate as to their whereabouts. This will help to eliminate any confusion
over which of your assets will be distributed via beneficiary designation and which will pass, or be bequeathed, exclusively by the terms laid out in your will.
1Distributions will be subject to taxation at then-current rates. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Stay Vigilant Against
Conducting financial transactions online can help streamline your business processes, but it can also give cybercriminals a gateway to your assets. Recent research sponsored by the Association of Financial Professionals found that fully half of smaller businesses were affected by attempted or actual online fraud in 2013.1
The study urged small businesses to remain vigilant as cybercriminals
continue to adapt ever-more sophisticated techniques to obstruct protections that have been put in place by banks and
other financial institutions.
The Current Threat Landscape
In another, more wide-sweeping report
on the risks and security measures required to uphold online account security, the Federal Financial Institutions Examination Council (FFIEC) outlined some current threats that businesses and financial institutions alike should be aware of
and guard against. These include:
Keyloggers. A type of surveillance software program that records the keystrokes entered on the PC on which it is installed and transmits a record of those keystrokes to the person controlling the program
over the Internet. Keyloggers often go undetected by antivirus programs and
can be installed on a PC simply by visiting an infected website or by clicking on an infected website banner advertisement
or email attachment. Keylogger files are used to steal logon credentials and other account-related information.2
Man in the Middle (MIM) or Man in the Browser (MIB) attacks. A cyber-attack in which the criminal essentially hijacks an online session between
the customer and the financial institution. For instance, the criminal may be able to intercept the logon credentials
submitted by the customer, modify the transaction content or add unauthorized transactions (e.g., fund transfers). Criminals may conceal their actions
by directing the customer to a fake website that looks identical to the financial institution's website or by sending a message claiming that the institution's website is unavailable and to try again later.2
While financial institutions are working diligently to detect and prevent the types of attacks described above, there are a number of simple security measures that businesses can take to protect their assets.
Communicate with your bank and other financial institutions. Understand their security procedures and make use of all services that are available to you.
Educate your staff. Establish and periodically review company security guidelines for conducting online transactions, including:
- Protecting credentials used to access your online banking systems or other financial accounts.
- Reporting suspicious emails, phone
calls or text messages from a party claiming to be from your financial institution and asking for account verification credentials.
- Having a formal, written mobile device usage policy and reviewing it regularly with employees.
Maintain a PC dedicated exclusively
to financial transactions. This should greatly reduce the chance that you will pick up a virus that will infect your online financial activities.
Keep a clean house. Keep all computer and mobile devices protected with up-to-date antivirus and malware protection.
- Encrypt sensitive data.
- Ensure your technology staff is up-to-date with the latest security technologies and software releases.
1Source: Association of Financial Professionals,
2013 AFP Payments Fraud and Control Survey, March 2013.
2Source: Federal Financial Institutions Examination Council (FFIEC), "Supplement to Authentication in an Internet Banking Environment," June 28, 2011.
Time and Compounding
Investor's Best Friend
Investing is a lifelong process. And a key part of a successful lifelong investment strategy is consistency. Over time, regular contributions to an investment account can have a big impact on your financial outlook—and go far toward helping you realize your long-term financial goals.
As the chart below illustrates, time and compounding can be a powerful
duo for disciplined investors. In this hypothetical example, an investor put away $150 a month in a tax-deferred IRA account that earned an 8% annual rate of return. After 20 years, the investor had contributed $36,000 to the account—but the effects of tax-deferred compounding added more than $50,000, for a total of nearly $89,000.
Source: Wealth Management Systems Inc. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
By committing to a regular investment plan, you are giving your money a chance to grow to its full potential over time, regardless of how individual investment classes may perform in the short-term. And finally, but equally important, by investing through a tax-deferred vehicle such as an IRA you
are allowing your investment to potentially grow faster than it would in a comparable taxable account.1 So by embracing the formula of time, compounding and tax-deferral, your investment plan has the potential
to exceed your expectations.
1Withdrawals will be taxed at then-current rates. Withdrawals prior to age 59½ may be subject to an early withdrawal penalty. This strategy requires a continuous investment in securities regardless of economic conditions. Such a plan does not assure a profit and does not protect against loss in declining markets.
The opinions voiced in this newsletter are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.