Corrections or additions?
These articles by Kathleen McGinn Spring were prepared for the
March 28, 2001 edition of U.S. 1 Newspaper. All rights reserved.
Stocks Are Still the Way to Build Wealth
The Federal Reserve has taken an ascending stock market,
built on a wonderfully sound U.S. economy, and plunged it into a
totally
unnecessary period of pain. This is the view of Ram Kolluri,
owner of Global Value, an Alexander Road-based financial consulting
firm.
“My goodness,” Kolluri says, “what we’re going through
now was inflicted by the Federal Reserve for no reason.” Alan
Greenspan, the Fed’s much-watched leader, was looking at Japan’s
model,
he conjectures. “Japan let a bubble build in all its assets —
stock, real estate. They paid $62 million for that Iris painting.
They paid $2 billion for Rockefeller Center.” When he raised
interest
rates last year, Greenspan believed the United States was building
a similar asset bubble. “He thought he was serving the long term
interests of the country by not letting it go on,” Kolluri says.
Kolluri says inflation was not a problem here. “The bond markets
have been saying for the last year `What inflation?’ The federal
government
is running huge surpluses. Now in the last two months the Federal
Reserve Board cut interest rates. Let someone explain to me what
changed
in six months in inflation. Nothing.”
Kolluri says the stock market, feeding on a strong economy and low
inflation, will rise again, probably in 12 to 18 months. But there
is another factor that is working to erode portfolio value. “There
has been more damage done to people’s finances,” he says, “by
AOL — or any other Internet service you want to name. People go
to their computers first thing in the morning. They check their
portfolios
before they look at the news. They follow their stocks minute by
minute,
move their 401(k)s from pillar to post. It’s sheer madness.”
Kolluri, whose company has $200 million under management, urges a
much more disciplined approach on his clients. He is a proponent of
long term investing, and is not ready to give up on the stock market
as the best way to build wealth.
When the market was “sky high,” Kolluri began looking for
larger offices for his company, which has grown from three employees
to nine during the current bull market. After looking for larger
offices
in Carnegie Center for over a year, he has moved Global Value from
1,750 square feet in 130 Carnegie Center to 6,000 square feet of new
construction at 821 Alexander Road.
The new offices are “just 700 feet from the train station,”
Kolluri says. This is a big plus because the company maintains a small
office in Manhattan. “I’ve been in five, six times in the last
two weeks,” he says. Besides a location that doesn’t require a
parking spot in the Princeton Junction lot, the new building offered
Global Value a chance to design its own space. The firm hired
Tarantino
Architect of Millstone to create its interior. The builder
incorporated
the design into the new building, which sits on the corner of Vaughn
Drive and Alexander Road.
Global Value is counting on growth, according to Kolluri, who says
he is just as glad the firm made the move during a slowdown. This
period will give his company time to gear up, he says. The new offices
were designed to hold 17 people, which would nearly double the firm’s
current personnel roster.
Kolluri, a native of Rajahmunbry, India, who studied business at Pace
University, started Global Value in 1982 after leaving Merrill Lynch.
He clearly recalls the panic that followed the 1987 market crash.
“I was on Nassau Street then,” he recalls. “People were
saying, `We’re living in a bubble! Oh my God, the Dow should never
have traded more than 1,000!’”
Fears were overblown then, and they are overblown now, he says. Some
of his clients are worried, and have been calling. But no one has
liquidated so far. Kolluri puts his clients on a course toward
financial
security using “building blocks,” and if they don’t hold,
he doesn’t think anything will. His recipe for wealth includes the
following:
Pay off all debts. Kolluri says his clients typicallypay off everything, including their mortgages. “If you minimizeshort term financial needs,” he says, “your portfolio canworker harder. It can work longer for a higher yield.” Nothingbeats stocks, he says, but they are not for any investor with a shorttime horizon. “If you have one day less than five years, do notbuy stocks.” Banishing the pressure of bills buys investorsliquidityand frees their dollars to be put to work for the long haul.Stash cash in a safe spot. Before investors put moneyinto the markets they should salt away the equivalent of two years’salary in CDs or money market funds, Kolluri says. No matter whatthe markets do, these cash equivalents will give investors flexibility— and a significant hedge against worry.Buy the S&P. With this cushion in place, Kolluri saysthe investor is ready to move into the markets. The best way to dothis, he says, is to invest in the S&P 500 through an index fund.”Buy all the companies,” he says.Move into blue chips. The next move is into a diversifiedportfolio of 25 to 35 blue chip stocks. “Stay with the bluechips,”Kolluri says. “They’ve been around for a long time for areason.”While he is opposed to chasing hot tips on technology stocks, Kollurisays “America’s future is technology,” and many blue chipsare technology stocks in disguise.”Wal-Mart is a technology company,” he says. “They’vewritten the book on logistics. It’s more a logistics company thanan old-line retailer. Wal-Mart could be selling cars, anything.”The same is true for many pharmaceutical giants, he says, which arereally “huge information technology companies on the frontierof research using computer simulations.”Consider bonds as a sleep aid. Bonds belong in theportfoliosof older investors, says Kolluri. They also can be part of aninvestmentstrategy for anyone who experiences motion sickness and sleeplessnessduring market swings like this one. The trade off, he says, is lowerreturn. The advice on who should buy bonds has been tempered to someextent by changing demographics. Where 50 was seen as old not toolong ago, Kolluri, who puts “old” at more like 75, sees peoplein their 50s as being middle aged. This being the case, a longerinvestmenttime frame, one with room to let stocks grow might cut the percentageof bonds held even by those in their 50s and 60s.While Kolluri is optimistic about both the U.S. economy andthe stock market, he urges investors to be patient. Recent interestrate cuts can work, but he says the economy is like a sick man justbeen given some much needed medicine. “Give the body sometime,”he says. “You can’t expect him to be up and jumping around.”Top Of PageTax Tips for Small BusinessesOn its website (www.njscpa.com) the New JerseySocietyof Certified Public Accountants offers help with a multitude of vexingtax questions that arise at this time of year. Among the group’s mosthelpful advice is that for small businesses grappling with thecomplexitiesof complying with tax laws while at the same time trying to takeadvantageof all the tax benefits of owning a business. Some of the issuesfacingentrepreneurs:Expenses of going into business The cost of investigatingthe potential for a new business and getting that business startedare capital expenses, which can be recovered by depreciation oramortization.Under tax law, you may elect to depreciate or amortize your start-upcosts over a period of 60 months or more if two conditions are met:(1) the costs are ones that would be deductible if they were paidor incurred to operate an existing business and, (2) the costs werepaid or incurred before you actually began business operations. Inthe event you decide not to go into business, any costs you paid toinvestigate the possibility of going into business are consideredpersonal costs and are not deductible. Costs you paid in your attemptto actually start or purchase a specific business can be claimed asa capital loss.Charitable contributions. Businesses may contribute cashor property to charities. Unincorporated business owners may makeand fully deduct cash gifts of up to 50 percent of adjusted grossincome and may contribute appreciated property of up to 30 percentof adjusted gross income. Unless your business is a C Corporation,you deduct charitable contributions made by the business on ScheduleA of your personal tax return. A corporation may deduct on itscorporatereturn charitable contributions that total not more than 10 percentof the corporation’s modified taxable income. A considerable taxadvantageexists for business owners who donate property that has appreciatedin value. In addition to a deduction for the full market value ofthe property, the donor avoids tax on the appreciation that has builtup.Tax credits. In addition to taking advantage of taxdeductions,you may be able to further trim your business’s tax bill by claimingbusiness tax credits for which your business is eligible. Tax creditsare generally more advantageous than tax deductions, because creditsare subtracted from your tax bill, while deductions are subtractedfor the income on which your tax bill is computed. Tax credits areavailable for certain taxes and investments, for hiring certaindisadvantagedworkers, and for actions that benefit the environment. The tax creditrules are complicated and typically require professional advice.Hiring your children. Assuming your children performactualservices and are paid according to the value of their work, thereare several benefits to employing your children in your business.First, the taxpayer receives a tax deduction for compensationexpenses.Second, if the business is a sole proprietorship, payments for theservices of your child under 18 are not subject to social securitytaxes. Third, the wages the child earns are not considered earnedincome and are not subject to kiddie tax rules.Casualty losses. Business owners who suffer damage orloss to business property as a result of a natural disaster areeligiblefor tax breaks to offset those losses. Special rules apply if thelosses occur in a location declared a federal disaster area. In suchcases, a business owner can treat the casualty loss as if it occurredin the year immediately preceding the tax year in which the disasteractually occurred. This action expedites the taxpayer’s refund.Medical Savings Accounts. Medical Savings Accounts (MSAs)are designed to work in conjunction with high-deductible healthinsuranceplans. They are available to self-employed individuals and ownersand employees of small businesses. MSAs are similar to IRAs in thesense that employers and employees can make tax free contributionsto the MSA. Instead of withdrawing the funds at retirement, thetaxpayerwithdraws the funds to pay for qualified medical expenses. Assetsnot spent on medical expenses accumulate from year to year and canremain invested on a tax deferred basis to fund future medicalexpensesor to supplement the taxpayer’s retirement savings.Obsolete inventory. Goods that can not be sold at normalselling prices or in the usual way because of changes of style ordamage may be valued for deduction purposes at bona fide sellingprices,less the direct costs of disposition. To realize expected losses,take steps to dispose of obsolete inventory.Retirement plan contributions. Retirement plans are oneof the most valuable tax breaks available to small business owners.As a business owner, you can personally deduct contributions to yourown qualified plan, and your company can deduct contributions madeon behalf of its employees. The government has a number of retirementplan alternatives in place for small business owners. SEPs, Keoghs,and SIMPLE plans all offer significant tax advantages. Depending onthe plan and your earnings, you may be able to shield as much as$30,000of your income.Home office deduction. The Taxpayer Relief Act of 1997redefined the term “principal place of business” to includea home office that is used by the taxpayer to conduct administrativeor management activities if there is no other fixed location wherethe business owner conducts such activities. In doing so, the actopened the home office deduction to those people who manage a businessfrom their home, but also provide a service and meet clients atanotherlocation. Under previous tax law, unless you met with clients,customers,or patients on a regular basis in your home office, you could notclaim the home office deduction. However, the crucial requirementthat your home office be used “regularly and extensively”for business remains in effect.Previous StoryCorrections or additions?This page is published by PrincetonInfo.com— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
