investing

Investment Risk FAQs

Scarsdale CPA Paul Herman has all the answers to your personal finance questions! The following are frequently asked questions our Westchester CPA firm regularly receives regarding risks involved with investing.
 What should I take into account when I start investing?

  • Risk vs. Return
  • Asset Allocation
  • Diversifying
  • Monitoring Progress
► Risk vs. Return

The first step in the investment process is to figure out what sort of Return on Investment (ROI) that you are seeking.

► Asset Allocation

Asset Allocation is the selection of assets from across the asset classes.

► Diversification

Diversification is similar to asset allocation, but within the asset class.

► Monitoring Progress

You can start by examining your trading records and ensuring that all of the trades went through at the prices that you instructed.

Keep tabs on how your assets are performing.

Investment Risk FAQs from Scarsdale Accountant

Get to know the risks involved with building your nest egg.

If they seem to be underperforming, you may want to change your investments to some that may be more lucrative. You may want to also check to make sure that the investments that you own are in line with your current investment strategy. Your strategy may change over time. Be sure to compare your investments to your current situation.

▼ What risks will I be exposing myself to by investing?

There are definite risks to investing, but educating yourself can drastically limit your exposure to these risks.

  • When the rate of return is great, the risk usually is as well. Depending on the situation, you may put yourself at risk to lose all of your initial investment.
  • There is a great difference in the liquidity of assets. Some can be sold in moments, and some may take quite a bit of time – take this into consideration when buying. Some may also have penalties for selling early or maturation dates.
  • Investing in a company with little or no history is much riskier than those with a proven track record.
  • The previous performance of a stock doesn’t necessarily mean that the stock will follow that pattern.
  • Pay attention to news that pertains to the companies that you hold, information that is released about the companies in the news can seriously affect the values of the investments you hold.
▼ How can I avoid taking unnecessary risks?

  • Always trade through your brokerage firm.
  • Never make purchases from phone solicitations offering the next hot stock.
  • Never send personal checks to a sales rep, always to the company.
  • Always receive your monthly statements to double check that everything is correct and that there are no irregular charges.
  • If any sales representatives attempt anything that seems out of place, contact the branch manager of the company.

Scarsdale accountant Paul Herman is here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Rye Brook NY, Armonk NY, Tarrytown NY, Purchase NY, Stamford CT and beyond.

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Taxes 101: FAQs

Scarsdale CPA Paul Herman has all the answers to your personal finance questions! Tax FAQs from Scarsdale accountantThe following are the most common FAQs our Westchester CPA firm receives on a regular basis regarding taxes. 
▼ Being self employed, what sort of deductions can I take?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

▼ If I have a large capital gain this year, what can I do?

If you have a large capital gain this year from an investment, it may be advisable to hold onto the investment until next year to put the gain into next year’s taxes. You may also want to sell off any investments that you have that are losing value at the moment to claim your losses.

▼ What investments can I make to help defer taxes?

The interest gained from state and local bonds is usually exempt from federal income taxes. These investments generally pay back at a lower interest rate than commercial bonds of similar quality.

Since Treasury Bonds are similarly exempt from state and local income tax, they can be a particularly good investment for those who are in high tax brackets and live in high-income-tax states.

▼ What retirement plans are available to aid in the deferral of taxes?

You have the ability to invest some of the money that you would have paid in taxes to add to your retirement fund. Many employers will offer the opportunity to defer a portion of your earnings and contribute them directly to your retirement account. Some of them may even match a portion of your savings. If this is the case, it is always advisable to save at least the amount that your employer will match. This will give you an automatic 100% gain on your money.

If you are self-employed, look into getting a Keogh, SIMPLE or a SEP IRA.

▼ What other ways can I defer this year’s income?

If you own your business you may want to postpone sending certain invoices to ensure that you will receive payment in the following tax year. This can help greatly if some of this income would push you into a higher tax bracket. You may want to accelerate paying for expenses to cover your taxes in the current year.

Scarsdale CPA Paul Herman is here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Katonah NY, Mamaroneck NY, Rye NY, Scarsdale NY, Tarrytown NY, White Plains NY, Bedford NY and beyond.

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Bonds FAQ

▼ What is a Bond?

A bond is simply a certificate which the borrower promises to repay within a certain time period. Bonds FAQ for retirement from Scarsdale accountantFor the privilege of using the money, the government entity, municipality or company will agree to pay a certain amount of interest per year, usually an exact percentage of the amount loaned.

Bondholders do not own any part of the companies they lend to – they do not receive the benefits of dividends or the privilege to vote on company matters as stockholders would, and the success of the investment isn’t related to that company’s record in the market either. A bondholder is entitled to receive the amount that was agreed upon, as well as the principal of the bond.

Corporate bonds are generally issued in the denominations of $1000. This price is referred to as the face value of the bond – this is the amount that is agreed to be paid by the company at the time that it matures. Bond prices can differ from their face values, because the prices of the bonds are correlated to the current market rates. When these rates change, the value of the bond will as well. If one were to sell the bond before the time that it matures, the bond may be worth less than was initially paid. A callable bond is one that the issuer may choose to buy back at full face value before the maturity date.

There are three major features of bonds:

  • Issuing Organization
  • Maturity
  • Quality

Short Term Bonds mature in two years or less and long term bonds mature in ten or more. Intermediate is between two and ten years.

▼ What is Bond Quality?

Bond quality is the rating of the creditworthiness of an issuing organization. There are organizations that specialize in judging bond quality. The higher the rating, the lower the risk of the investment. The rating system uses letters A through D. The only bond considered to be risk free is the U.S. Treasury Bond.

▼ How Does the Bond Rating System Work?

Highest Quality Moody’s Standard & Poor’s
High Quality Aaa AAA
Good Quality Aa AA
Medium Quality Baa BBB
Speculative Elements Ba BB
Speculative B B
More Speculative Caa CCC
Highly Speculative Ca CC
In Default - D
Not Rated N N

▼ How do Interest Rates Affect Bond Prices?

Generally bond prices and interest rates have an inverse relationship – as interest rates drop, bond prices rise and vice versa.

▼ How does Maturity Affect Bond Prices?

Bond prices are heavily influenced by maturity – the longer the maturity, the greater the change in price for a change in interest rates. If interest rates rise, it would make a larger difference in the 20 year bond, as opposed to a 10 year bond. Because of this, bond fund managers will attempt to change the fund’s average maturity to anticipate changes in interest rates.

▼ What is a Bond Call Provision?

A “call” is when the issuer of the bonds has an opportunity to redeem the bonds after a certain specified amount of time has passed. This doesn’t guarantee a continuation of a high yield after the call date – it limits the appreciation of the bonds, and it makes the investment more risky. These call provisions can be complex, so it is best for investors that don’t have strong knowledge to avoid bonds with a call feature.

▼ Should I Buy Bond Funds Directly or go Through a Mutual Fund?

A bond mutual fund has within it multiple bonds, and for that reason it is impossible to lock in the payment rate or the principal, which you would be able to do if you were directly buying a fund.

A bond mutual fund is an investment company which manages a portfolio of individual bonds. The investors buy ownership in the company, and each share represents ownership in all of the company’s holdings. Managers will use these investments to buy and sell bonds that align with the objective of the fund.

Because a bond fund manager has more resources to deal with, they can invest in a vast array of bonds – many more than could any individual investor. There are also certain investments that cost tens of thousands of dollars a share – a bond fund costs far less.

Liquidity plays a major role in bond buying. If you purchase a bond individually and wish to sell it, you must find a buyer for your bond, but if you are invested in a bond fund, that fund has to buy your shares back at any time you wish.

▼ What are the Different Issuing Organizations?

  • Municipal bonds are offered by local governments, states and cities. The interest of these bonds is not subject to federal income tax, and if the bondholder lives in the jurisdiction of the governing authority, the interest is exempt from state and local tax. Because of all of these tax advantages, the interest rates paid on these bonds is usually lower than others.
  • Like municipal bonds, the U.S. government also issues these securities. Since they are issued by the U.S. Government, they are considered to have the best safety of all bonds.
  • Treasury bills can be bought through a broker or directly from the Federal Reserve.

Scarsdale tax preparers at Herman & Company CPA’s are here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Scarsdale NY, Mount Kisco NY, North Salem NY, South Salem NY, Rye NY, Larchmont NY and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.