Where are Registered Retirement Income Funds used?

These tax-deferred retirement plans exist under Canadian tax law. The Registered Retirement Income Fund and Registered Retirement Savings Plan are both registered with the Canada Revenue Agency.

What is the difference between having money in an RRIF as compared to an RRSP?

Although both plans will allow the contributed funds to continue to grow in a tax-deferred state, there are differences between the two plans. Registered Retirement Savings Plans are designed to be used while the person is still working. These plans account for allowing ongoing contributions to be made throughout a person’s work career. RRSPs are designed to accumulate the funds, but not to distribute them. The Registered Retirement Income Fund is designed to be used after the person retires. Once the money from the RRSP is moved to the RRIF, contributions can no longer be made to the plan. RRIFs are designed for the distribution of funds, not the accumulation of new contributions.

How are Registered Retirement Income Funds used?

By the time a person reaches 71 years of age, they are required to make arrangements to start using RRSP funds as retirement income. An RRIF is a popular choice for this purpose, although the person could also use a life annuity purchased from a financial institution instead. There is a minimum RRIF withdrawal each year, which is calculated using the person’s age and the total amount in the plan on January 1 of each year. While this withdrawal is taxable under Canadian law, it is also eligible for a tax credit up to a certain amount. When a person is considered to be low income after retirement, it is likely that they will end up not paying taxes on their RRIF withdrawals, because this income is taxed in the same way a person’s regular income would be.

What are some of the features of an Independent 401(k) plan?

While some of the features of an independent 401(k) plan are similar to standard 401(k) plans, they also have similarities to an SEP IRA or a Keogh plan. If the person contributing to the plan is over the age of 50, they are permitted to make catch-up contributions, just as is the case with a standard 401(k) plan. These plans can be useful for allowing a sole proprietor to save money in taxes, since the contributions they make to the plan as the employer for the company are also tax deductible. Over time, this can save a sole proprietorship a good deal of money.

What are the advantages of an independent 401(k) plan?

When compared to a SEP IRA or a Keogh plan, the independent 401(k) plan has a number of advantages. Under certain circumstances, it is permissible to take out a tax-free loan against an independent 401(k) plan. They are also simpler and less expensive for the sole proprietor to set up and maintain. These plans also provide the sole proprietor with the option of rolling the funds over into most other kinds of retirement plans if desired. Also, just as is the case with a standard 401(k) plan, pre-tax money is used to pay into the plan.

Are there any disadvantages to an Independent 401(k) plan?

There are also a few disadvantages to contributing to an independent 401(k) plan, as compared to other kinds of retirement plans. The most obvious limitation is the fact that these plans are designed strictly for a sole proprietor and their spouse or a close family member. If any employees are hired, then they are no longer eligible to participate in an independent 401(k) plan. If a person owning a sole proprietorship has any plans to hire employees, an independent 401(k) plan would not be the best plan. These plans are also relatively new, which means there may still be fewer investment options from which to choose.

Where are Registered Retirement Savings Plans used?

These tax-deferred retirement plans exist under Canadian tax law. The Registered Retirement Savings Plan and Registered Retirement Income Fund are both registered with the Canada Revenue Agency.

What is the difference between having money in an RRSP as compared to an RRIF?

The Registered Retirement Savings Plan is designed to be used during a person’s work career for the purpose of accumulating funds for retirement. Ongoing contributions can be made to these accounts, but these plans are not designed to make distributions or withdrawals. Therefore, when a person reaches retirement age, they are required to transfer the funds from their RRSP into another kind of account that will allow them to use the funds as retirement income. The money in the RRSP can then be transferred to an RRIF so that the person can receive a constant source of retirement income. However, once the funds are placed in the RRIF, the person can no longer contribute additional money to the account. Basically, the two plans differ in that the RRSP is designed to accumulate the funds to save for retirement, while the RRIF is designed to distribute the funds as income after retirement.

Are there different types of Registered Retirement Savings Plans?

There are a number of different Registered Retirement Savings Plans available, which are designed to meet different needs. These include individual RRSP accounts, which are held by a single individual. There are also spousal RRSP accounts which allow a high income earner to contribute to an RRSP in their spouse’s name. There are also group RRSP accounts, which employers can use to allow employees to make regular contributions to their retirement savings.

What are the advantages of extended IRA plans?

These plans can be quite useful as an estate and tax planning tool, as it can be used to continue the accumulation of tax-deferred plan earnings for a longer period of time. If you are the original owner of the IRA, you will begin taking at least the minimum distribution of funds from the plan starting at age 70-1/2. The first generation beneficiary will then need to take at least the minimum distributions from the plan based on life expectancy figures. These accounts are commonly used by one spouse to leave their IRA plan to the surviving spouse. Then, the surviving spouse is able to leave the remaining amount in the IRA to younger beneficiaries, such as children or grandchildren. This can be especially useful when the spouse doesn’t need to use all of the funds, but there are younger beneficiaries who could benefit more. The money in these plans can continue to grow in a tax-deferred state for a longer period of time, which can extend the financial benefits of the IRA. These plans also offer a great deal of flexibility, since the beneficiary can distribute only the minimum amount, or even more if necessary, up to and including the entire amount of the IRA.

What should I consider before opening an extended IRA plan?

When considering an extended IRA plan, it is important to research the plan to make sure it provides all the required features. If you want to allow the IRA to be passed to multiple beneficiaries, it is important to make sure that the plan provides the option for the first generation beneficiary to pass the plan on to a designated beneficiary. Not all plans provide for this option. If this option is not available, the beneficiary would be required to transfer the IRA to another account where such designations are allowed. Consulting with a financial adviser is usually recommended for those who are considering an extended IRA plan.

Is a spousal IRA plan a special type of IRA plan?

In actuality, a spousal IRA is not a separate or special kind of IRA plan. Spousal IRAs are just regular IRA plans that are set up by the working spouse to help the non-working spouse save for retirement. These plans simply take advantage of IRA rules that allow this sort of savings arrangement to take place. In the case of an IRA set up by an employed person, there are contribution restrictions that state you can’t contribute more to the plan than the rules for qualifying income dictate. But, for a person that don’t work that files jointly with a spouse that does work, the non-working spouse doesn’t have to have a qualifying income of their own. This means that for spouses who file a joint tax return, a person who has little or even no income can make scheduled contributions to an IRA plan. In this case, any qualifying income that the non-working spouse has will be added to their spouse’s qualifying income. Then, the amount of the working spouse’s contributions to his or her IRA plans will be subtracted. In most cases, this means that if one spouse works and one doesn’t, as long as the working spouse makes at least double the contribution limit for the IRA plan, then both spouses are allowed to contribute to their IRA plans at the maximum level. Of course, all other requirements and restrictions that govern contributions to IRA plans must still be followed.

How would a spousal IRA be different from a joint IRA

There is no such thing as a joint IRA. IRAs are by their very nature “individual” retirement accounts, and as such they cannot be shared by more than one person. When one spouse sets up an IRA for their non-working spouse, essentially the spouse’s IRA is set up and behaves exactly as it would if they did work and had set it up on their own. The source of the money that is put into the spouse’s IRA plan isn’t really important. It could be contributed by the working spouse, or it could be some money that the non-working spouse had on their own, or it could even be money that was given as a gift. The only thing that a spousal IRA really means is that one spouse relies on another spouse’s qualifying income in order to be able to make contributions to an IRA.

Are there any special requirements?

Overall, the requirements for a spousal IRA are the same as for setting up any other IRA. However, the non-working spouse must be married to the working spouse at the end of the tax year, and a joint federal income tax return must be filed. The working spouse must have taxable compensation for the tax year, and this compensation must exceed any income that the non-working spouse does have.

Are there different kinds of top hat programs and how are they beneficial?

Basically there are two kinds of top hat plans. Nonqualified Deferred Compensation Plans (NQDC) operate in fashion that is similar to a standard 401(k) plan. However, these plans generally allow highly compensated individuals to defer an unlimited amount of their income into these plans. There are also Supplemental Executive Retirement Plans (SERP). These plans are set up by the employer and are completely funded by the company, without the use of the employee’s own money. SERPs are usually set up according to a defined benefit that was offered to the individual. Overall, these plans provide key executives and other highly compensated employees with preferential treatment. Companies may also match a higher amount when these employees contribute to their own NQDC plan, or the vesting period might also be shortened or completely eliminated.

How are Top Hat plans funded and regulated?

Funding for a company’s top hat plans is handled completely differently than how other standard plans are dealt with. These plans are unfunded liabilities, so in reality, the company’s shareholders are paying for these plans. Most companies consider these plans to be just an expected expense for their business. Accounting rules often allow companies to bundle the expenses for these plans in with the expenses for other plans, so shareholders might not even know how much money is actually being spent on these plans. There might not be a requirement for these plans to conform to government regulations, as least not to the same extent as other kinds of plans. If a company does not properly document their top hat programs, they could incur fines, penalties and other costs. However, it’s not always clear what regulations they are required to adhere to.

What are some of the features of a defined-contribution plan?

Defined-contribution plans have become increasingly popular for a number of reasons. They are much easier and less expensive for companies to administer, and reduce much of the financial risk and uncertainty for employers. Employees usually also have the advantage of having some control in how the money in the defined-contribution plan is invested. Fixed contributions to the plan are made by the employer as well as the employee, and the funds are then invested in various ways to grow the money in the plan. Of course, there is also a chance that money may also be lost on the investments. More and more companies are decommissioning their defined-benefit plans in favor of offering defined-contribution plans. Examples of defined-contribution plans include the popular 401(k) plan, the 403(b) plan, and the 457 plan.

What are the advantages of a defined-contribution plan?

Many employees like the higher level of control that a defined-contribution plan provides. It is possible to choose from a variety of stocks, bonds, mutual funds and other kinds of investment options. These plans also provide employees with the opportunity to contribute larger amounts to their plan, as long as it is within the allowable range. These plans do not depend as much on the employee’s years of service, and instead can be heavily influenced by the performance of the plan’s assets. These plans are also much more portable if an employee changes jobs than a defined-benefit plan.

Are there any disadvantages to a defined-contribution plan?

Because there is no guarantee of regular payments for life after retirement, employees who do not save enough in their defined-contribution plan or who do not invest it wisely run the risk of running out of funds. Although some people do purchase annuities with their retirement savings, they are not required to do so, so there is always a risk of outliving your savings. These plans also require the employee to assume the risk for the performance of the investments that are utilized in the plan, since they have some choice in the matter. Although this level of control is often viewed as a good thing by those who are investment savvy, it can cause problems for those who are not sure concerning the best way to manage the funds in their account. Overall, defined-contribution plans are riskier for employees, especially if they do not save enough or if they are not sure how to manage and make the most of their funds before or after retirement.

What are some of the features of a DB(k) plan?

This retirement plan option, which is employer sponsored, is designed only for companies that have between two and five hundred employees. These plans are simple for employees to participate in and easy for companies to maintain. A DB(k) plan combines the best features of a 401(k) plan with a small income stream, which is guaranteed. Although these plans are essentially equivalent to two different kinds of retirement plans, they are conveniently combined into one, making it much easier for companies to administer. There is much less paperwork involved for a company to administer one single DB(k) plan as compared to a 401(k) plan plus a pension plan. The DB(k) plan is a relative newcomer to the retirement plan arena, with Congress authorizing it during the 2006 Pension Protection Act. The overall intention of this plan was to compensate for a perceived flaw in the existing pension and retirement fund systems, which is the possibility that a person may run completely out of money after retirement when their 401(k) funds are depleted.

Are there any specific advantages to a DB(k) plan?

These plans can provide a good alternative to plans which are designed for only voluntary employee contributions. Especially in the current economic climate, with the stock market in fluctuation, the DB(k) plan can provide an extra measure of security. Instead of simply receiving a lump sum of money at retirement, as is the case with a 401(k) plan, a DB(k) plan will also provide a small ongoing pension amount. The amount of pension provided is far less than traditional pension plans provided in the past, but it can still help to protect people who may run out of money after their lump sum of retirement funds are depleted.

What are some of the features of a DB(k) plan?

There are a number of requirements that must be satisfied in order for a company to set up a DB(k) plan for its employees. In addition to satisfying the required number of employees, these plans must also provide an automatic enrollment option for the contribution portion of the plan. There are also requirements for how the defined benefits portion of the plan is to be administered, based on a percentage of years of service calculated along with the average final rate of pay. After the designated years of service, employees become fully vested in the plan. By implementing a DB(k) plan, employers can help boost the retirement savings for their employees, while providing cost-savings benefits for the company itself.

What are the different types of corporate pension plans?

Although the details of these plans vary, there are two basic kinds of corporate pension plans. Some of these plans are defined benefit, while others are defined contribution plans. In the case of a defined benefit plan, the retirement benefits that an employee qualifies for is calculated according to a specific formula. This formula is determined by a number of factors, both on the side of the employee as well as the employer. On the employee’s side, the formula takes into consideration the length of the person’s employment, as well as their salary history. On the employer’s side, the contributions are determined by the company’s ability to have the money needed in order to properly fund the pension plan. In the case of a defined contribution plan, there isn’t a guarantee on the amount of money that will be available at the time of retirement. This is because the plan payout for defined contribution plans is completely dependent upon the success of the investment plan itself, so varying results can be expected and should be planned for. Defined contribution plans are becoming much more common among corporations, because defined benefit plans can often put a financial strain on a corporation. Instead of guaranteeing a certain level of funds to provide for the former employee’s financial requirements for the rest of their life, as would be the case with a defined benefit plan, a defined contribution plan will simply provide whatever amount is in the plan at the point of retirement. This can be a much more manageable situation for the employer as compared to the relative unknown total payout for a defined benefit plan.

Can corporate pension plans be underfunded?

In recent years, a bad economy and problems in the stock market have caused underfunding situations in some company pension plans. Especially if companies were depending on high returns for their plan’s investments instead of making direct contributions to the plans, shortfalls may have occurred. In order to fix the problem of underfunding, companies are required to make significant contributions to their pension plans. The company’s goal, of course, is to have their corporate pension plan fully funded.

Conduit IRA plans are sometimes referred to as a Rollover IRA. These plans are designed to temporarily house fund distributions from other qualified retirement plans. They can be used as a temporary solution when a person leaves a company as a means of storing the money accumulated in that company’s retirement plan. The money is never intended to stay permanently in a Conduit IRA plan, and there are certain limits on how long money can stay in this kind of plan. They are generally only used until the individual can make a more permanent arrangement for their retirement funds.

How can a Conduit IRA plan be utilized?

When a person has paid into a company’s retirement plan, the expectation is that the employee will remain in the plan until the funds are dispersed at retirement age. Of course, many times an employee will leave a company due to a job change or other circumstances before they actually reach retirement age. In these situations, the person might not be able to participate in the new employer’s retirement plan until after a designated period time has passed, as there are often probationary periods in place before benefits are provided. During this time, the money that was in the previous employer’s retirement plan has to be rolled over into another qualifying plan. If the money is simply withdrawn from the previous plan, taxes would need to be paid. A Conduit IRA plan can help fill the gap between the time when the employee leaves their previous employer and when they can place the funds in the new employer’s plan. Once the money can be transferred to another qualifying plan, the Conduit IRA simply ceases to exist. Using one of these plans essentially allows a person to temporary “park” their funds between jobs, without having to pay taxes. When used properly under circumstances that allow the use of a Conduit IRA, they can be a good solution which will allow an individual to retain the tax exempt status of their retirement plan funds. There isn’t a limit on the contributions that can be transferred into a Conduit IRA plan, but the funds must be kept separate from any other money or contributions.

Does a Conduit IRA plan have any limitations?

A Conduit IRA plan cannot be used in every circumstance, because not all retirement plans accept them. There are retirement plans that do not allow the transfer of funds into a Conduit IRA. There are also employer retirement plans that do not allow money to be transferred into their plan directly from a Conduit IRA. Therefore, one should investigate these plans before using them to make sure they will operate as desired. It is also extremely important to keep the money placed in a Conduit IRA separate from any other funds. If you make any contributions to the Conduit IRA in excess of the amount of money rolled over into it from the previous plan, the money will not be tax deferred. This could make the balance taxable, and could limit your ability to roll the funds over into another qualifying plan when the time comes.

A 457 plan is a deferred and non-qualified compensation plan. These plans are established by state and local governments, tax-exempt local governments, and employers who are tax-exempt. Employees who are eligible can make contributions to these plans, which are tax-deferred, so that all contributions will not be taxed until the assets are distributed at retirement.

What are the basic features of a 457 plan?

Although a 457 plan is often considered to be similar to a 401(k) plan in many aspects, it differs in the fact that employer-matched contributions are not made. These plans are also not considered to be qualified retirement plans by the IRS. Qualified employees participating in these plans can contribute a portion of their annual income to these plans, up to a defined annual limit. The money contributed to a 457 plan will not be taxed until it is withdrawn at retirement age. Distribution of the money contributed to these plans can also be taken in certain emergency situations, or when a person changes jobs. At the point of distribution, regular income taxes must be paid, and the money cannot then be transferred into an IRA or other plan. Distributions can be taken in annual installments, as a lump sum, or in the form of an annuity.

Who can participate in a 457 plan?

These plans are designed for state and local government agencies that are exempt from paying federal income taxes. They are also used by other non-church related organizations, as long as they are exempt from federal income taxes. These can include charitable organizations and foundations, educational organizations, labor unions and trade associations, and hospitals. There are two different types of 457 plans, one designed for government agencies and one designed for organizations that are non-government, but which are still tax-exempt.

What is a 457(b) plan?

When these plans are designed for non-government organizations, they are established under Section 457(b). These non-government plans are limited to employees within the organization who are highly compensated, which usually means only the officers or directors or the organization. Because these plans are usually reserved only for the executives or others who are highly compensated, they are sometimes termed as a “top hat” plan. These plans can be useful to defer federal and state income tax payments during the person’s peak years of financial earning, so that the taxes can then be paid at a point in the person’s life where their earnings are much lower. As compared to a 457 plan designed for government employees, these non-government plans are more restrictive. Money that is deferred into a 457(b) plan can be rolled over into another non-government 457 plan, but not into another kind of retirement plan.

What is a 457(f) plans?

457(f) plans are designed so that employers who are tax-exempt can offer additional retirement benefits to employees who are highly compensated. Employees can contribute to these plans on a tax-deferred basis, which can save them a substantial amount of money. However, this money is only paid to the employee when they retire. The money remains the property of the company, which essentially creates a tax shelter for the employee. However, if the employee leaves the company before retirement, they forfeit the money. 457(f) plans are often referred to as “golden handcuff” plans for this reason.

The 412(i) plan is designed to be used for small United States business owners. These plans often suit the needs of those who might have problems saving for retirement while also focusing on building and investing in their company. These plans can provide the largest possible tax deduction, and are funded by an insurance company. All the money that is contributed to the plan by the owner immediately becomes available to the company as a tax deduction, which can offer significant financial benefits. The retirement benefits provided are fully guaranteed. However, there are large premiums to be paid yearly, so the 412(i) plan is best suited to small business owners who are already profitable and established.

What are the features of a 412(i) Plan?

These plans are completely funded with group or individual life insurance, or with annuity contracts. A participant entering into one of these plans will make payments on an ongoing basis, which extend only as far as the stated retirement date. An insurance company is required to guarantee these contracts.

What are the advantages of a 412(i) Plan?

These plans can be quite attractive for business owners who are over the age of forty who do not have many employees, or for those owners who have young employees, since their contributions would be lower. In these cases, the significant tax deductions offered by a 412(i) plan can be quite beneficial. The contributions typically allowed under these plans are much higher than would be possible utilizing a typical defined benefit plan. This makes it possible to make very high annual deductions for employees in some situations. These plans can allow business owners to move even hundreds of thousands of dollars out of their business into the plan, providing financial protection for these assets. They are also very secure, due to the fact that they offer such a high level of asset protection against the business’ creditors or the plan participants. This feature alone can make these plans very desirable for small businesses, as long as they are able to pay the large annual premiums. These plans are also impossible to overfund or underfund, because of how the contributions are based. 412(i) plans can be funded annually, without the required quarterly contributions of a traditionally defined benefit plan.

Are there any disadvantages to a 412(i) Plan?

As a general rule, a 412(i) works best if the business owner has only a few employees. It also works best if these employees are younger than the owner, and if the owner is within 10 years of their planned retirement date. These plans are not a good option if making policy loans is important, since taking out a loan against the funds would make the plan invalid. A 412(i) plan also does not offer the option of flexible investments, since these plans are completely funded by annuity and insurance contracts. Although some insurance agents may urge business owners who have a 412(i) plan to invest primarily in a life insurance policy, it is usually better for the owner’s retirement plan overall if approximately 50% is invested in annuities, as this makes for a more conservative plan. In recent years, guidance for these plans has been issued by both the IRS and the U.S. Treasury, to help avoid any abuses of these plans.

There are numerous financial planning tools to choose from, but not all plans are able to be offered by every employer. There are restrictions and limits which must be followed, including the number of employees a company has. While many companies offer 401(k) plans for their employees, these are not always feasible for smaller companies. In these cases, there are other similar plans that can be offered, such as the 408(k) plan.

What are the basic features of a 408(k) plan?

A 408(k) is a plan that allows employees of smaller companies and those who are self-employed to save money for retirement. Although many people think the 408(k) term is the actual name of a plan, it is really a term that describes an Internal Revenue Code. This code defines and details the Simplified Employee Pension account, which is commonly referred to as an SEP account. These plans allow individuals to contribute to a retirement plan account using their pre-tax dollars. The use of pre-tax instead of after-tax dollars can effectively reduce an employee’s income for the year, which can result in significant tax savings for the individual. The employee and the employer can both contribute to this account, although the account itself is in the employee’s name. Although these plans have many features that are similar to a 401(k) plan and they are used for similar reasons, the 408(k) is actually a simpler plan. There are annual contribution limits for a 408(k) plan. However, the employee does not have to pay any taxes on the monetary contributions that the employer contributes to the account. All money that is contributed to a 408(k) account is tax deferred, which means that no taxes are paid until the money is withdrawn when the employee reaches retirement age. Any money which is contributed to one of these accounts is not considered as income, until the time of retirement. Although the employer maintains the 408(k) plan, the employee is actually considered to be the owner of the account.

What are the restrictions of a 408(k) plan?

Although the 408(k) plan is similar in many respects to the 401(k) plan, there are limits to when a company is able to offer the 408(k). Basically, this plan is limited to companies who have fewer than 25 employees. The 408(k) plan is also a retirement plan option which is available to individuals who are self-employed. 408(k) plans are controlled by the corresponding section of the Internal Revenue Code, which details the actual requirements and restrictions of these plans. Money cannot be taken from a 408(k) plan prior to retirement or before the person reaches the age of 59-1/2. When the employee reaches this age, the money in the plan is then considered to be regular income, and is therefore taxed at the person’s current taxable level. If necessary, the employee can take out loans on their 408(k) plan and then repay the amount. However, if the money is simply withdrawn and not taken out as a loan, a 10% penalty will be assessed, along with any taxes that would be due on the total amount that is withdrawn.

A testamentary trust is one of the most common varieties of trusts. These trusts are activated by a person’s will at the time of their death. Testamentary trusts are commonly used to provide benefits for a minor child or disabled child even if they are older, in the case of the death of both parents. Testamentary trusts can also be set up under certain circumstances for one’s spouse as a way of providing benefits to them.

What are some things to think about when considering a testamentary trust?

The need for a trustee to administer the trust is one important factor to consider. Administering a trust can be a time-consuming task, and some people are not up to the task of doing it. It is common to appoint a trustee as part of a person’s will. However, if that person is not able to perform the tasks of being the trustee, the court may appoint one. To avoid potential problems and inconveniences for beneficiaries, one should discuss the matter of becoming a trustee with friends and relatives in advance, choosing the one who is best suited for the job. It’s also important to understand that the person specified as the beneficiary for the trust will not receive full disbursement of the funds. Instead, the money will be handled and distributed by the trustee. While this can be a good way of insuring the funds are handled in a responsible manner, which is especially necessary in the case of a minor or disabled child, it also means that somebody else will have control of how the funds are used and dispersed. Although the trustee’s control will be overseen by the probate court, a lot of the monetary control and discretion will be in the hands of the trustee. Therefore, it is extremely important to choose a trustee who will handle the funds in a way that is in the best interests of the beneficiary. Plus, although a person can utilize their will as a means of specifying how the trust is to be handled, there is not really a requirement that the trustee follow these wishes.

How does a testamentary trust compare with a revocable living trust?

Because a testamentary trust could be in place for a lengthy period of time, there can sometimes be extensive legal fees involved. This is because the trustee will be required to go to probate court to have the trust regularly reviewed. A revocable living trust is often a more economical choice that can accomplish some of the same end results. When using a revocable living trust, the grantor will transfer their assets to the trust and name themselves as the trustee. Upon the person’s death, the trustee responsibilities will transfer to another person, providing them with control of the trust. However, in the case of parents who may be leaving a large sum of money or life insurance benefits to a child, a testamentary trust can offer more control and guidance as to how this money should be spent.

A term certain annuity is an insurance product which is designed to provide a person with predetermined payments over a designated period of time. Term certain annuities can be purchased gradually over many years, with the person making regular payments towards the total purchase amount. However, these are often purchased at the time of a person’s retirement, using one lump sum of retirement funds. The main thing to keep in mind when purchasing a term certain annuity is that they are designed for a specific timeframe. Once the overall term has expired, there can be no further payments made.

What are some things to think about when considering a term certain annuity?

The overall term length of the annuity is one of the most important things to consider. Because annuities are designed for a particular timeframe, it is possible to outlive your annuity. If the annuity is your only planned resource in regards to your retirement, you might find yourself without any further means of support if the term of the annuity expires. Because of this, a term certain annuity can be a great enhancement to an overall retirement plan, but it should never be the entire financial plan. It can be helpful to seek out the advice of a good financial planner if you are contemplating the purchase of a term certain annuity.

What are the advantages of a term certain annuity?

Term certain annuities are a good choice if somebody is looking to help stabilize other forms of investment income after retirement. They are also a good choice for those who may not have been fully employed earlier in life, and as such, may not have a 401(k) plan or other retirement option. One of the advantages of an annuity is that there is a guaranteed fixed rate of return, which can help take some of the guesswork out of retirement. With careful planning, a term certain annuity can provide a dependable source of income that is not affected by fluctuating interest rates or the stock market, which can provide a lot of peace of mind. They are also much less expensive than a life annuity, since there aren’t any insurance components involved.

What are the disadvantages of a term certain annuity?

One of the primary concerns with a term certain annuity is the chance that it may run out of funds while the person is still alive. If a person is counting heavily on the regular payments provided by the annuity as their income after retirement, they could run into problems if they live longer than they expect. Although one of the advantages of an annuity is the fixed rate of return, this can also be a disadvantage under certain circumstances. In many cases, other types of investments can offer a better return. The annuity will continue to provide payments up to a specified date, regardless of the circumstances that occur during this time period. If the person dies before that date, the remainder of the annuity’s value is kept by the insurance company. These annuities do not take beneficiaries into account, and there are no insurance components to the plan. If a person’s health begins to falter and their medical bills increase, the payments will not increase in a corresponding fashion. For those who are looking for the assurance of insurance benefits, or for those who wish to provide their beneficiaries with the remainder of the annuity’s value, a life annuity could be a better choice.

Teacher retirement systems are offered by individual states, for the purpose of offering pension and retirement benefits to teachers and other qualifying education system employees. These systems can vary widely from state to state in the way they are funded and how the contributions are made. There are also differences in how the percentage of the teacher’s final salary is calculated according to the plan and how a teacher qualifies for the pension. There are also differences in the portability of the pension benefits.

What are some things to consider when evaluating a teacher retirement system?

Because of how widely these programs can vary from state to state, it is often difficult to make generalities about any given plan. In some cases, the retirement plan is offered in addition to other social security benefits. However, this is not the case in all states. Especially in some states, there have also been concerns about these accounts being under-funded. In some cases, states have had to make large additional contributions to these retirement systems just to make them actuarially sound. It’s also important to understand how the actual retirement benefit is calculated. In some states, the final salary percentage that is offered to those who retire can be much higher or lower than the national average. States also vary in regards to the number of years a teacher needs before they can retire.

What is offered as part of the Teacher Retirement System?

Again, this can vary widely from state to state. The individual teacher retirement systems that are set up by each state are primarily designed to help arrange for an education system employee’s retirement. There are variations in these systems, with some states offering more benefits than others. Other services commonly provided by a teacher retirement system include death and disability benefits.

How do I participate in the Teacher Retirement System?

The employment requirements that qualify an employee to participate in the teacher retirement system vary from state to state. In most cases, an employee is required to be a permanent full-time teacher or a board of education employee. In some cases, employees of the state itself are also eligible, as are employees of charter schools who are participating in the state’s retirement system. Enrollment in the system is usually automatic when a teacher is hired. A set percentage of the employee’s salary will then be automatically deducted and deposited in the retirement system. State contributions are based on calculations made on an actuary basis. The combination of employee and state contributions, combined with investment earnings, make up the total of the eventual retirement benefits.

What are the requirements in regards to becoming vested in the system or being eligible for retirement?

There is a time requirement for membership service before an employee is considered fully vested. There are generally differences in how employee and employer contributions are handled in regards to withdrawals or rollovers. There are also specific requirement as to age and years of service when qualifying for retirement benefits. Because these requirements vary from state to state, it is important to fully understand them when participating in any teacher retirement system, especially as one begins to approach retirement age.

A tax-sheltered annuity is an account where you can deposit some of your pre-tax dollars for the purpose of long-term savings. The money deposited in the annuity is not taxed when the money is deposited, but is instead taxed when the money is withdrawn. A tax-sheltered annuity can be a great addition to a person’s overall retirement plan, but should not be the only type of plan used to prepare for retirement.

What are the advantages of a tax-sheltered annuity?

Tax savings is one of the primary advantages of a tax-deferred savings plan. In most cases, a person’s tax rate is higher during the time that they are working, as compared to what it will be when they retire. By putting the money into the account during their “high tax bracket” years, a person can save a significant amount of money. Plus, since you are using pre-tax dollars, the amount deposited in the account can be greater, which means your money will grow faster.

Do I have to meet certain requirements to participate in a tax-sheltered annuity?

Not everyone will be eligible to participate in a tax-sheltered annuity. There are IRS rules that govern the participation in one of these plans. IRS code 403(b) determines what kind of employees can participate. Tax-sheltered annuity options are available for those who are employed by tax-exempt charitable organizations, public schools, Indian tribal government employees, or self-employed ministers. There are also other investments or annuities that are sometimes referred to as being “tax-sheltered,” but true tax-sheltered annuities are governed by IRS code 403(b).

Are there limits to the amount of money I can deposit in a tax-sheltered annuity?

There are maximum annual limits placed on tax-sheltered annuities, just as there are with other retirement financial savings plans. If you contribute more than the allowable amount, you will be taxed on the overage in accordance with your current tax bracket. In some cases, employers will match annuity contributions. There may also be a “catch-up” clause that will allow you to contribute more money based on certain circumstances.

When can I withdraw my money from a tax-deferred savings plan?

Tax-deferred savings plans are designed to be comparable to how one uses a 401(k). Money placed in these accounts is intended to be used for retirement purposes. However, one difference that exists is that if there were employer contributions made to the account, these amounts could be withdrawn without penalty if it was then invested in an annuity. This is because these matching contributions were made by a non-profit organization, which is not subject to tax liability. However, withdrawing your own contributed funds would be subject to the usual penalties if withdrawn prematurely.

How does a 403(b) compare to a 401(k) plan?

In most ways, a 403(b) and a 401(k) are extremely similar. Both are designed as a way for employers to help their employees manage their retirement funds. In both cases, employees deposit pre-tax dollars into these accounts. In many cases, organizations that offer 403(b) plans will match employee contributions up to a certain amount. The primary difference between the two is that 403(b) plans are offered by non-profit organizations, and 401(k) plans are offered by for-profit companies. The money deposited in a 403(b) tax-sheltered annuity will be invested in mutual funds, money markets, or other investments, just as is the case with a 401(k). The administration costs for a 403(b) plan are very low, and as a result, in most cases employers offering these plans will allow your account to stay in place, even if you leave the organization. However, it is important to insure that the investment options offered by the plan match your own objectives in regards to investing. A financial planner can help you make this determination.

A tax-deferred savings plan is usually an account that is associated with a person’s retirement savings, such as a 401(k) plan or an IRA. Tax deferred plans are also available for other purposes, including education savings plans. These plans work by deferring any taxable income accumulated in the account until a particular date or until the money is withdrawn, depending on the details of the account.

What are the advantages of a tax-deferred savings plan?

The most obvious advantage of these plans is the ability to save money without the need to pay current income taxes. This can be extremely helpful when trying to grow a retirement fund. The money deposited in these accounts, as well as any interest accumulated, is not taxable unless the amount deposited is in excess of what the law allows. In many cases, a person’s tax rate will be lower upon retirement than it is while they are working. By utilizing a tax-deferred savings plan, a person can avoid paying the higher tax rate while they accumulate retirement funds. The fact that taxes are not deducted up front also means that there will be more money in the account in the beginning, which can increase the amount of interest accumulated over time. There may be other advantages to tax-deferred plans as well, depending on the type of plan utilized. For example, in the case of a 401(k) plan, most employers have a system where contributions to the plan can be automatically made from a person’s paycheck. This can provide an easy method to add money to a tax-deferred plan over the course of a person’s career.

Do I have to meet certain requirements to participate in a tax-deferred savings plan?

Participation requirements will vary depending on the type of plan chosen. For example, in the case of a 401(k) plan set up through an employer, there might be requirements in regards to how long a person has been with the company, or whether they are a full-time employee. There can also be restrictions on how much money can be deposited into these accounts on a tax-deferred basis.

How will money be deposited into my tax-deferred savings plan?

If you are participating in a tax-deferred plan through your employer, such as is the case with a 401(k) plan, then it will generally be set up for deposits to be made directly from your paycheck. In these cases, money may also be deposited by your employer, often matching your contributions up to a certain amount. If you have set up your own IRA plan, you will be responsible for depositing money into the account.

When can I withdraw my money from a tax-deferred savings plan?

This depends on the type of tax-deferred savings plan chosen. In the case of a 401(k) or IRA account, the money should be withdrawn after reaching the age of 59 1/2 in order to prevent the 10% penalty that will result from an early distribution. If you are contributing to a 529 plan, this money should be withdrawn only to pay for qualifying educational expenses. Of course, it is always possible to withdraw your money from a tax-deferred plan early if you absolutely need to, but doing so is not financially advantageous.

What is an early distribution?

The term “early distribution” means taking your money out of one of these accounts before the designated time. Taking an early distribution will require the taxes to be paid on the money withdrawn, plus there will be a 10% penalty.

Are there any circumstances when I can withdraw my tax-deferred savings plan money early without paying penalties?

There are some circumstances that allow money to be withdrawn from a tax-deferred plan before the designated time without the need to pay fees. Although you will still be required to pay the taxes on the amount withdrawn, you can avoid the extra 10% early withdrawal fee as long as the proper criteria is met. These circumstances include a first-time home purchase, qualified education expenses, unreimbursed medical expenses, and under certain disability situations. However, it is very important to understand these criteria completely before attempting to withdraw money early to avoid potential problems.

A thrift savings plan, commonly referred to as a “TSP,” is a retirement plan that was created as a result of the Federal Employees Retirement System Act of 1986. This plan was designed to provide for the retirement needs of those who worked for the federal civil service. The thrift savings plan was designed to provide these federal employees with the same kind of retirement savings plan that private sector employees have as a result of a 401(k) plan. Contributing to the thrift savings plan is accomplished in a similar fashion as with other retirement planning accounts, with a set amount being automatically deducted from the employee’s paycheck while they are employed. There are a variety of funds within the thrift savings plan that a person can choose from when planning their retirement investments.

What are some of the benefits provided by a Thrift Savings Plan?

The financial advantages provided by a thrift savings plan are similar to those provided to private sector employees through a 401(k) plan. Pre-tax funds are used to make deposits to the plan, which can save a lot of money over the course of the plan. Because a person’s income and tax bracket are generally higher during the time they are employed, it can be quite beneficial to have taxes deferred on a savings plan until the point of retirement. Using pre-tax dollars also insures that more money will be available to be contributed to the plan, which will help a person’s savings grow faster. Just as is the case with a 401(k) plan, there are often matching contributions made by the agency that the person works for, in addition to the opportunity for the employee to make catch-up contributions. If a person has a pre-existing 401(k) plan or personal IRA, they will be able to move these funds into a thrift savings plan at the point when they become an employee of the federal civil service.

How does one become eligible for participation in the thrift savings plan?

To participate in a thrift savings plan, one must be a federal civilian employee or a member of the uniformed services. There are special requirements for those in the uniformed services if they wish to receive matching contributions. If a person agrees to serve for at least six years in active duty, and meets the other requirements in regards to type of service, then matching contributions will be made during that six year period, up to a certain amount. For civilian federal employees, agency or employer contributions will be made for those who are considered to be Federal Employee Retirement System employees. The amount of these contributions will be based on the amount the employee is contributing to the plan. Employees who are part of the Civil Service Retirement System can also contribute to the thrift savings plan, but they will not be able to receive matching employer contributions.

What are some of the other details concerning the thrift savings plan?

Just as is the case with other retirement plans such as a 401(k), there are some restrictions involved. There are limits on what the employee or employer can contribute each year. There are also vesting requirements in terms of years of service to be eligible to keep the employer contributions for some federal employees. It is possible to roll over other retirement plans into the thrift savings plan upon employment by the federal government. One can also choose from a variety of investment options using the funds in the savings plan.

Greece, which is an ocean away and no stranger to tragedy, (think Aeschylus, Sophocles, and Euripides), nearly imploded last week on fears that its government was bankrupt. With huge budget deficits and no credible way to pay them, Greece saw its short-term government bond yields soar past 20%, according to Barron’s. By contrast, the comparable bond in the U.S. yielded about 1% last week, according to the Treasury Department. As a euro country, Greece has limited tools to deal with the crisis on its own (e.g., it cannot devalue its currency or adjust its interest rates) so it has to rely on the kindness of neighbors to bail it out. This past weekend, the European Union and the International Monetary Fund announced that they will support Greece with a $146 billion multi-year aid package, according to Bloomberg. Now comes the hard part for Greece–implementing the austerity measures that accompany the bailout.

The concern that this debt problem could spread and undermine the euro countries helped undercut many world stock markets last week.

Closer to home, the uncapped oil leak in the Gulf of Mexico has states bordering the Gulf bracing for an environmental and economic disaster. The Gulf is a major oil-producing region and this spill could deter new drilling, a thought which helped send oil prices up more than 1% last week. Unfortunately, fishermen, the tourism industry, and the environment itself all stand to lose, too, as the spill worsens.

While the twin tragedies captured many of the headlines last week, much of the economic news was bullish. For example, first quarter gross domestic product grew at a respectable 3.2 percent annual rate, household spending increased at the fastest rate in three years, and The Institute for Supply Management-Chicago Inc. said its business barometer rose to 63.8 in April, the highest level in five years, according to Barron’s. On top of that, The Economist magazine said, “global output is now back to where it was before the downturn…(and) there is growing optimism that the recovery is becoming self-sustaining.”

Although the twin tragedies are still developing, recent solid economic news has helped limit their financial market impact.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

“EVEN AFTER THE BIGGEST RALLY SINCE THE 1930s, U.S. stocks remain the cheapest in two decades as the economy improves,” according to an April 26 Bloomberg story. How can that be? Well, digging into the numbers a bit, it appears the statement comes with some qualifiers. First, the “cheapness” is based on the price to earnings ratio (P/E) using forecasted earnings estimates. By that measure, the S&P 500 is trading at 14.1 times forecasted earnings. As you know, forecasts may or may not come true so, if earnings actually fall short of the projection, then today’s P/E will be higher in retrospect.

Second, while the Bloomberg headline said stocks were the cheapest since 1990 based on analyst estimates, the article qualified that and said, “except for the months after Lehman Brothers Holdings Inc. collapsed.” So, yes, stocks may be cheap now, but they have been cheaper in the recent past.

But wait, in the same article, Bloomberg points to another market valuation measure that says the market is significantly overvalued. Using the 10-year average corporate earnings model popularized by Yale economist Robert J. Shiller, the P/E on the S&P 500 is currently about 22, which is well above the historical average of 16.

Bulls will point to the P/E using forecasted earnings estimates and say stocks are cheap. Bears will point to the Shiller calculation and say stocks are dear. Regardless of which view is ultimately correct, we stay focused on helping you reach your goals and your objectives for the future.

Weekly Focus – A Riddle

Two fathers and two sons went fishing one day. They were there the whole day and only caught three fish. One father said, that is enough for all of us, we will have one each.

How can this be possible?

(See below for the answer and send us an e-mail to let us know if you got it right. Good luck!)

Value vs. Growth Investing

Here are the numbers (4/30/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Struggling States Are ‘A Drag on the Economy’

Tough decisions must be made.

The Pew Center recently reported that 10 states – Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island, and Wisconsin – are barreling toward economic disaster. Double-digit budget gaps, rising unemployment, and high foreclosure rates are just some of the reasons.

People who are re-entering the workforce are taking an average 40% pay cut from their previous jobs, estimates Kenneth Couch, an economics professor at the University of Connecticut, based on the experiences of Connecticut residents during the 2001 recession and on other studies during the 1981 recession^[1].  In the past, Couch said it has taken six years before people were earning an average of 80% of their old paycheck with younger workers creeping closer to their old wages more quickly than older workers.

Foreclosure starts, as reported by the Mortgage Bankers Association and other data from the Center for Responsible Lending, indicate that foreclosures in most states will more than triple during the next four years, reaching a total of 8.1 million foreclosures.

Throughout the country, states filled 30-40% of their budget gaps for the current fiscal year with federal stimulus money.  They were allotted about $250 billion of the $787 billion stimulus package, most of which will be distributed by the end of next year.  Without more federal help, state budget cuts will shave nearly a percentage point off the nation’s gross domestic product growth. The cuts also will eliminate roughly 900,000 jobs in fiscal 2011, according to The Liberal Center on Budget and Policy Priorities.

“The problems are evident from coast to coast,” said Mark Zandi, chief economist for Moody’s Economy.com.  “Without more help to state and local governments, the resulting budget cuts will become a very significant drag on the economy.”

So, how can the country dig out of this hole? Ideally, the best way is to grow out of it. Strong economic growth may help individual states and the country as a whole stop the red ink. Of course, the government is aware of this and they’re trying to do what they can. Unfortunately, the government’s hand is somewhat limited because of budget concerns.

Ultimately, there are no simple solutions to our economic malaise. It may take time and even more pain before we get back on sound financial footing.

Answer to the Riddle:  There was the father, his son, and his son’s son. This equals two fathers and two sons. (Source: Riddles.com)

A volcano in southern Iceland erupted last week and sent a massive ash plume across Europe, which caused the cancellation of tens of thousands of flights over a several day period and created unexpected hardship for millions of travelers, according to CNN. This floating ash plume is costing the airline industry at least $200 million a day, according to the International Air Transport Association.

So, what’s the connection between the Goldman Sachs fraud case and the Icelandic ash plume? Nothing! Yet, in the world of investing, seemingly random and unpredictable events like these can materially affect financial markets and specific stocks.

The fact that random and unpredictable events can trigger financial disturbances is one reason why it is important to keep an eye on capital preservation and not just focus on capital appreciation.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

WHICH IS MORE IMPORTANT–making sure you participate in the market’s 10-best performing days or avoiding the market’s 10-worst performing days over any given period? Based on the 81 years between January 3, 1928 and March 31, 2009, here are some numbers to help us answer this question, according to data from Invesco Aim:

• The 10-best performing days in the S&P 500 index yielded a daily average return of 11.7%. The 10-worst performing days yielded a daily average return of -10.8%.
• If you missed the 10-best performing days, $1 would have grown to just $14.99.
• If you missed the 10-worst performing days, $1 would have multiplied to $143.47.
• If you missed the 10-best and the 10-worst days, $1 would have grown to $47.59.
• On a buy and hold basis, one dollar invested at the beginning of this 81-year period would have grown to $45.18 by March 31, 2009.
• All 10 of the worst performing days occurred during bear markets as did seven of the 10 best-performing days.

Here are a few thoughts on interpreting this data:

• First, missing the 10-best performing days reduced your growth over the entire 81-year period by about two-thirds compared to staying fully invested during that period. This makes a case for staying fully invested so you don’t miss these big up days.

• Second, missing the 10-worst performing days more than tripled your results compared to staying fully invested. This suggests that historically, if you had magical powers to foresee the future and were out of the market on the 10-worst performing days, your return would have more than tripled the return of the fully invested buy-and-hold strategy. This makes a case for market timing.

• Third, missing both the 10-best and 10-worst days in the market had very little impact on your results compared to just staying fully invested during the entire period. Score another one for buy-and-hold.

But, let’s be realistic. The above numbers are based on historical data, you cannot invest directly in an index, and few people have an 81-year investment horizon. And, by the way, nobody we know has the ability to perfectly time the market and pinpoint the 10-best and 10-worst performing days before they happen.

This data helps support two of our beliefs. First, the historical data shows the importance of risk management relative to return maximization. Second, we design your investment plan to meet your financial goals, not simply to capture or avoid the best and worst days in the market. Ultimately, it’s your number that we are trying to achieve.

Weekly Focus – Think About It

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

–Warren Buffett

Value vs. Growth Investing

Here are the numbers (4/16/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Caring For Your Aging Parents (Part 3)

Financial and tax considerations for you

Caring for your aging parents is not only an emotional burden for you but may be a financial one as well, depending upon how well off your parents are and how much caring for them costs. Because many adults today are becoming first-time parents in their thirties, and others are remarrying and rearing second families, increasing numbers of adults are finding themselves in the “sandwich generation.” They face having to pay expenses of growing children (including college expenses), plan for their own retirement, and support their aging parents financially. Thus, it’s important to plan not only your parents finances, but your own as well.

Financial planning for your parents

Making sure that your parents won’t outlive their money is a critical step in ensuring that your own finances will remain sound. In particular, you’ll need to make sure that your parent is receiving all the benefits to which he or she is entitled and that his or her money is invested wisely. You’ll also need to create a financial profile for your parents, a statement that includes income, expenses, and net worth.  If, after considering your parent’s financial condition, it’s clear that they won’t have enough resources to pay for their own care, you’ll need to find ways to supplement their income. You may need to look at Supplemental Security Income (SSI), for instance, or ask other relatives for help. You’ll also have to determine how much financial support you can give your parents (see below).

Financial planning for you

Besides caring for your parents, you have a lot of other financial obligations. Before you can determine the best way to help your parents financially, you’ll have to look at your own financial picture. Not only will you need to consider your current expenses, but you’ll have to look down the road a few years, considering how much you’ll need to save for your own retirement and, perhaps, for your child’s education.

TIP: Due to the complexities inherent in providing adequately for several generations in the same family, consider seeking the advice of a financial professional.

Tax benefits for children supporting aging parents

Federal income tax law provides several tax benefits to you if you are supporting your parents financially. If you have a dependent care account at work, you can put pretax dollars into the account that you can use to pay for some costs associated with caring for your dependent parents. You may be able to claim an exemption for your parents as dependents, and you may be entitled to claim a dependent care credit. In addition, you may be able to file your taxes as head of household and deduct medical expenses you paid for your parents. For more information consult your tax advisor.

Questions & Answers

If you are financially supporting your parent, is he or she entitled to receive Social Security benefits based on your earnings?

If you are providing at least one-half of your parent’s support at the time of your death, and he or she is age 62 or over and is not entitled to a retirement benefit that is equal to or larger than the amount he or she would receive based on your earnings record, then he or she may be entitled to receive a parent’s Social Security benefit equal to 82.5 percent of your primary insurance amount (PIA).

Who could set up a SARSEP?

A state or local government, or one of their agencies, with fewer than 25 eligible participants, was able to set up a SARSEP plan.

Are SARSEPs still in existence?

Yes, if the SARSEP was established before 1997 and meets the three criteria each year to continue the SARSEP, then SARSEPs can still exist even though no new SARSEPs can be established.

How is a SARSEP maintained?

A SARSEP must meet the following requirements each year:

1.  25 or fewer employees were eligible to participate in the SARSEP in the previous year;

2.  50% or more of the eligible employees choose to make salary reduction contributions this year; and

3.  The elective deferrals of highly compensated employees meet the SARSEP deferral percentage limitation.

How much money may an employee defer under a SARSEP?

An employee may make an elective deferral up to the lesser of the following amounts:

1.  25% of compensation, or

2.  $16,500 for 2010.

The $16,500 limit applies to the total elective deferrals an employee makes for the year to the SARSEP and any 401(k) plan or 403(b) tax-sheltered annuity plan.

May an employer contribute to the SARSEP for its employees?

Yes, the employer may make non-elective contributions, but the contributions are subject to an annual addition limit.

What is the annual addition limit?

The annual addition limit is the lesser of:

1. 100% of the employee’s compensation (limited to $245,000 2010)
2. $49,000 for 2010.

Are employer matching contributions possible with a SARSEP?

No, matching contributions are not allowed with a SARSEP.

When can you withdraw money from a SARSEP?

Money contributed through a SARSEP is deposited in a SEP-IRA.  You can withdraw your money at any time. However, there are two rules to consider when withdrawing money from a SARSEP.

If you withdraw any money from your SARSEP within two years of the date you first made a contribution to your SARSEP, you will owe a 25% tax on the amount withdrawn.  For example, if Joe began participating in his company’s SARSEP plan on January 1, 2010, he will owe the 25% tax on any withdrawals made before January 1, 2012.

The second rule to consider is if you withdraw money before reaching age 59 ½, you will be subject to a 10% tax penalty on the money withdrawn. For example, if Joe withdraws $500 from your SARSEP when you are age 45, you will generally have to pay $50 to Uncle Sam as a tax penalty. You may not owe the 10% penalty if you qualify under the early distribution rules.
What are the early distribution rules?

An early distribution is any money you withdraw from your Traditional IRA before reaching age 59 ½. When you reach age 59 ½, withdrawals are automatically tax-free. Early distributions are subject to a 10% tax penalty, but if you withdraw money for any of the following situations, you will NOT owe the 10% tax:

1. You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
2. The distributions are not more than the cost of your medical insurance.
3. You are disabled.
4. You are the beneficiary of a deceased IRA owner.
5. You are receiving distributions in the form of an annuity.
6. The distributions are not more than your qualified higher education expenses.
7. You use the distributions to buy, build, or rebuild a first home.
8. The distribution is due to an IRS levy of the qualified plan.
9. The distribution is a qualified reservist distribution.

References

Internal Revenue Service Publication 560, Retirement Plans for Small Businesses (SEP, SIMPLE, and Qualified Plans), http://www.irs.gov/pub/irs-pdf/p560.pdf

Retirement Plan FAQs Regarding SARSEPs

http://www.irs.gov/retirement/article/0,,id=112859,00.html

The main difference between then and now is the economy–it was bad then and getting worse, now, it is still weak but clearly improving.

On the improvement side, Thomson Reuters says analysts are looking for a 37% rise in first-quarter 2010 corporate earnings. Retailers reported a whopping 9.1% jump in March same-store sales, according to Barron’s. On top of that, “The service sector is growing at the fastest pace since May 2006, and manufacturing the most since 2004. Employers are hiring again, and sales of existing homes rose 8.2% in February,” according to Barron’s. Stats like that are keeping investors interested in owning stocks even at ever-increasing prices.

Of course, the problems of the Great Recession are still here such as high unemployment, unsustainable budget deficits, tight credit, and weak housing. However, there is a potential solution to working our way out of this hole. The Economist magazine calls it a “re-balancing” of the world economy. Put succinctly, the magazine said, “If Americans save more and spend less while other big countries do the opposite, the world economy will prosper.” In effect, the U.S. will need to export more to other countries who gobble up our goods and services. A weaker dollar could speed up this re-balancing; and, word that China might let its currency appreciate against the dollar in the near future supports this re-balancing theory, according to MarketWatch.

The effectiveness of this re-balancing could determine whether the next 1,000-point move in the Dow Jones Industrial Average is up to 12,000 or down to 10,000.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

U.S. COMPANIES ARE SITTING ON A RECORD PILE OF CASH and that could buoy stock prices as companies use their cash to repurchase stock, according to Bloomberg. At the end of 2009, S&P 500 companies were sitting on a record $831 billion in cash, according to Standard and Poor’s. This cash hoard grew as companies spent only 28% of their operating profits on stock buybacks in 2009, according to Standard and Poor’s as reported by Bloomberg. Further, Bloomberg said, “The last time the ratio dropped to that level, the S&P 500 subsequently climbed for four years.”

Prominent money manager and Forbes columnist Ken Fisher said in a Bloomberg television interview in early April, “There’s cash sitting there, waiting to come in later, which will then later help buoy both businesses and stocks. This bull market will carry on for several years.” Yes, it is getting easier to find reasons for the stock market’s year-long rise. But, just like in the late 1990s, a good fundamental story can get taken to an extreme and end in major disappointment.

One of the hallmarks of great investors is their ability to manage their enthusiasm. Rather than succumbing to euphoria, they try to maintain perspective. They aim to balance the positive with the potential negatives and not get carried away with an untamed crowd.

With the S&P 500 still down more than 20% from its all-time high and trading volume relatively low, we are likely not in danger (yet) of a new wave of market hysteria. However, we are always mindful of what could go wrong and, if this market keeps rising, so will our concern about the danger of getting caught in an “untamed crowd.”

Weekly Focus – Think About It

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

– George Soros

Value vs. Growth Investing

Here are the numbers (4/9/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Caring For Your Aging Parents (Part 2)

What kind of advice will you need?

Housing and health care advice

If your parents are like many older individuals, where they live will depend upon how healthy they are. As your parents grow older, their health may deteriorate so much that they can no longer live on their own. At this point, you may need to find them in-home health care or health care within a retirement community or nursing home. On the other hand, you may want them to move in with you.  In addition, you will need information on managing the cost of health care, long-term care insurance, major medical insurance, Medicare, and Medicaid.

Contact:

National Association for Home Care

Visiting Nurse Associations of America

Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration)

American Association of Homes and Services for the Aging

American Association of Retired Persons (AARP)

Health Insurance Association of America

Financial advice

If your parents need help managing their finances, you may need to contact professionals whose advice both you and your parents can trust, including one or more of the following individuals or organizations.

Contact:

Your financial planner

Your banker

Your investment counselor

Your tax attorney

The Social Security Administration

Legal advice

Legal advisors can help you plan for your parents’ incapacity (including preparing documents such as power of attorneys, medical directives, and living wills), contact nursing home ombudsmen, set up and monitor guardianship, prepare wills, give tax advice, and provide bill payment and representative payee assistance. Many states provide funds for the delivery of free legal services to the elderly and many attorneys specialize in elder law, so finding legal advice shouldn’t be difficult.

Contact:

Your attorney

National Association of State Units on Aging

American Bar Commission on the Legal Problems of the Elderly

Legal Counsel for the Elderly

What kinds of support and community services will you need?

Caring for your aging parents will be easier if you know what kinds of support and community services are available and where to locate them. The following is a list of the kinds of support and community services you can find locally and nationally, along with specific suggestions of who to contact for information. For other useful information and a more comprehensive list of organizations you can contact for help.

Adult day care

If you need to work or run errands and you can’t leave your parents alone, consider using adult day care. These programs are located in hospitals, churches, temples, nursing homes, or community centers. Many are private nonprofit organizations. Adult day care can be expensive but is sometimes subsidized by the government, and fees may be based on a sliding scale. In addition, Medicare, Medicaid, long-term care insurance, or your health insurance may pay part of the cost.

Contact:

Your local senior center or community center

National Institute on Adult Day Care

The Alzheimer’s Association

Caregiver support groups (self-help)

Many self-help groups are available to provide information and emotional support on broad topics (such as aging) or specific topics (such as heart disease). You may find these support groups helpful if you know little about caring for your aging parents. Such groups might also provide an opportunity to help others by sharing your experiences.

Contact:

The Alzheimer’s Association

Children of Aging Parents

National Self-Help Clearinghouse

Caregiver training/health education

You may feel better about taking care of your parents if you are armed with knowledge. You may want to complete first-aid courses or take classes in gerontology.

Contact:

Your local college or university

Your local hospital

The American Red Cross

Geriatric assessment

If you are uncertain of your parent’s mental or physical capabilities, ask his or her doctor to recommend somewhere you can take your parent to undergo an assessment. These assessments can be done at hospitals or clinics. Your parent will be evaluated to determine his or her capabilities. The evaluation determines whether the individual can take care of himself or herself on a day-to-day basis, including such things as bathing, dressing, eating, using the telephone, doing housework, and managing money. Based on this evaluation, you and your parent will receive advice regarding care options.

Contact:

Your doctor

Your lawyer

The National Association of Professional Geriatric Care Managers

Aging Network Services

Respite care

When you are caring for your aging parents, you may feel guilty or even resentful because you don’t have limitless energy. Taking care of your parents is hard work, however, and everyone needs a break once in a while. If you are caring for your aging parents, look into respite care. Medicaid may pay for some respite-care services.

Contact:

Your doctor

Your local hospital

The Alzheimer’s Association

National Association for Home Care

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

STOCK MARKET RALLY CONTINUED

The stock market followed 2009′s powerful rally with a strong performance in the first quarter. The S&P 500 rose 4.9%, excluding dividends, which was its best first-quarter percentage gain since the heady days of 1998, according to MarketWatch. Strong corporate earnings, solid corporate balance sheets, and upbeat manufacturing data helped support the stock market’s bullish results, according to The Wall Street Journal.

It wasn’t a straight line up, though. Between late January and early February, the Dow Jones Industrial Average dropped more than 7% as news of credit tightening in China, sovereign debt woes in Greece, and debates in Washington on healthcare and bank reform helped scare investors, according to The Wall Street Journal. The scare was brief as investors quickly “bought the dip” and sent the averages higher by the end of the quarter.

INTEREST RATES WERE STABLE

The yield on the 10-year Treasury was essentially unchanged during the quarter as investors continued to snap up all the debt the government offered, according to The Wall Street Journal. Demand for corporate and high-yield bonds was robust which helped keep those rates at relatively low levels.

Some investors are concerned that our large budget deficits may result in a glut of bonds, which could cause interest rates to rise substantially. That could put the brakes on an economic recovery, but this worry has not come to fruition–yet.

THE DOLLAR ROSE AGAINST THE EURO

The big story in foreign currencies during the first quarter was the strength of the dollar against the euro. According to The Wall Street Journal, the dollar rose 6% against the euro as debt concerns in Greece, Portugal, and Spain weighed on the common currency. Investors are also evaluating the relative strength of the U.S. economy versus the euro countries and it appears that a consensus is building that our country may grow faster. If that occurs, it may mean interest rates could rise sooner in the U.S., which would also help support a strengthening dollar.

DOUBLE DIP RECESSION LOOKING LESS LIKELY

Recent economic indicators suggest the economy is healing from the severe recession of 2008-2009. For example, the Commerce Department said consumer spending rose in February for the fifth consecutive month. Consumer spending makes up about 70% of gross domestic product, according to Morningstar, so a rise in this number bodes well for the economy. The manufacturing sector is looking robust, too, as the ISM manufacturing diffusion index rose to 59.6% in March, which was its highest level since July 2004, according to MarketWatch. Readings over 50% indicate that more firms said business was improving than said it was worsening. It was also the eighth straight monthly increase.

Just after the quarter ended, the Labor Department released the March payroll report and it showed a gain of 162,000 payroll jobs. It was the third gain in the past five months and the largest increase since March 2007. This report, coupled with other economic data, prompted Robert Hall, the head of the National Bureau of Economic Research’s Business Cycle Dating Committee, to say that it is “pretty clear” that the deepest recession since the 1930s is over, according to a Bloomberg report. Hall’s organization is the “official” source on declaring the beginning and ending of recessions. Jeffrey Frankel, another member of the business cycle dating committee, said, “The most likely date for the recession’s end would be midyear of 2009,” according to the same Bloomberg report.

This mid-2009 date would seem to confirm the validity of the stock market rally that we’ve experienced over the past year. The market started rising in March 2009–not too far ahead of the time that Frankel suggested the recession ended.

SUMMARY

The stock market performed well in the first quarter as earnings growth continued to shine and the economy continued to mend. Longer-term issues such as large government deficits, housing weakness, and the withdrawal of stimulus money hang over the markets like a black cloud, but so far, these concerns have not deterred investors.

Weekly Focus – Think About It

“Economic progress, in capitalist society, means turmoil.”

– Joseph A. Schumpeter

Value vs. Growth Investing

Here are the numbers (4/1/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Caring For Your Aging Parents (Part 1)

What is it?

Caring for your aging parents is something you hope you can handle when the time comes, but something you probably hope you never have to do. Caring for your aging parents means helping them plan for the future, and this can be overwhelming, both physically and emotionally. When the time comes for you to take care of your parents, you may be certain of only two things: Your parents need you, and you need help.
Start planning
Talk to your parents about the future

Start caring for your aging parents by talking with them about their needs and wishes if they are able. In some cases, however, they may not be willing to talk to you about their future, either because they are afraid to face it or because they resent your interference. If this is the case, you may need to do as much planning as you can without them, or, if their safety or health is in danger, step in as caregiver anyway.
Prepare a personal data record

The first step you should take is to ask your parents to help you prepare a personal data record (if they are unable to help you, you’ll have to search for the information yourself). A personal data record is a document that lists information that you might need in case your parents become incapacitated or die. Information that should be included is financial information, legal information, medical information, insurance information, and information regarding professional advisors and the location of important records.

Example(s): When Marcia and her mother prepared a personal data record, Marcia realized that her mother did not have a durable power of attorney or health care proxy in case she became incapacitated and could not make decisions about her medical care. The next day, Marcia made an appointment with her mother’s lawyer to discuss this issue.
Get advice

You can’t know everything, and you probably don’t have enough time to learn everything you need to know to care for your parents. That’s why you should seek advice from professionals. Some advice will be free, and some you will have to pay for. If you live far from your parents or are too overwhelmed to handle all your parents’ affairs, you can hire a geriatric care manager who will evaluate your parents’ situation, suggest options, and coordinate professionals who can help. In addition, talk to your employer. Some employers have set up employee assistance programs that offer advice and assistance to people who are dealing with personal challenges, including caring for aging parents.
Get support

Don’t try to care for your parents alone. Many local and national caregiver support groups and community services are available to help you cope with caring for your aging parents. If you don’t know where to start finding help, call the Eldercare Locator, an information and referral service sponsored by the federal government that can direct you to resources available nationally or in your area. Call the Eldercare Locator at (800) 677-1116.

The stock market seems to be climbing the proverbial “wall of worry.”

Despite potential road hazards such as sovereign debt issues, rising interest rates, a weak job market, and a stalled housing recovery, investors bid up stock prices last week to an 18-month high, according to MarketWatch. Of course, these things could eventually affect stock prices, but, for now, stocks are riding the momentum of improving earnings and some underlying stability in the economy.

Lack of job growth has been a major problem for our economy the past couple years, but that could change this week. On April 2, the government will release the March employment report and, according to CNBC, economists expect it to show a rise of about 200,000 non-farm jobs. That would be a small down payment on the 8.4 million jobs lost since December 2007, according to Bloomberg. The fact that the S&P 500 has risen for four consecutive weeks may suggest that the market has been anticipating a good report. Ironically, on the day the employment report is released, the U.S. stock market will be closed for the Good Friday holiday, so we won’t know the market’s reaction until the following Monday.

Fear of a double-dip recession seems to be fading, too. In its final revision, the Commerce Department said fourth quarter 2009 GDP increased at a 5.6% annualized rate, which is the fastest rate in six years. For 2010, economists surveyed by MarketWatch expect GDP to expand at a non-recessionary 3% rate. On a regional note, the Great Lakes commercial shipping season has started early partly due to increased demand for iron ore and coal. “Things are moving quicker, sooner than a year ago. And it seems like more ships are involved,” said Eric Reinelt, Port of Milwaukee executive director as quoted in the March 28 edition of the Milwaukee Journal Sentinel.

So, despite the worries, there is some good economic news supporting stock prices.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

THE DAY OF RECKONING due to our country’s ballooning deficits may be getting closer. Back in 2008, the Congressional Budget Office (CBO), projected the U.S. would run a budget surplus of $247 billion for the years 2009 through 2018. Now, just two years later, CNBC and the CBO have crunched the numbers again and project that we will incur a $7.4 trillion deficit during that 10-year period, according to a March 26 CNBC article.

How could the situation deteriorate so much in just two years?

The CBO said 57% of the projected deficit increase was due to lower government revenues–much of which is due to the decline in our economy and projected sluggish economic growth. The other 43% included expenses such as, “the stimulus bill, a change in accounting for the war, extended unemployment benefits, and additional interest on debt.”

At the end of 2009, the U.S. national debt stood at $12.3 trillion, according to the Treasury Department. Tack on the projected deficit over the next 10 years and we could be close to $20 trillion in the hole 10 years hence.

Like chocolate chip cookie dough, a spoonful of annual deficit and national debt is fine, but gorging our country on borrowed money may eventually cause significant problems. Too much government debt could lead to rising interest rates and slower economic growth, according to Fortune Magazine. In a worst-case scenario, it could lead to economic collapse.

We have several options to solve the budding debt problem before it gets completely out of hand. First, we could grow our way out of it. This is the preferred method and the least painful. Second, we could raise taxes. Third, we could cut government spending. Most likely, we’ll see a combination of the three.

Given the magnitude of our swelling deficits, we will likely have pain in our future. Whether that pain happens in our generation, our children’s, or our grandchildren’s, remains to be seen.

Weekly Focus – Think About It

“The way to wealth depends on just two words, industry and frugality.”

–Benjamin Franklin

Value vs. Growth Investing

Here are the numbers (3/26/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

***For the remainder of tax season we will prepare current tax returns (Federal & State) for the immediate family (serviceperson & spouse, etc) of any serviceman or woman currently serving in a war zone living in PA, NJ or Delaware.***

Office Notes

The Pros and Cons of Alternative Investments

If you start to really look at all of your investing options and you start collecting advice, it would not be long before you ran into an investment professional who touts the benefits of a “public, all-cash, non-traded REIT. “ Your first response might be, “What’s the ticker symbol?”

Since they have no ticker symbols, your next conversation would probably consist of a description of what an “alternative” investment is and how, although there is a share price, it can’t be found on an exchange. Then, if market fluctuations make you queasier with age, this investment may start sounding pretty good the more you look into it because it’s a competitive investment that takes some of your money off of the daily pricing roller coaster. You may find that it’s an alternative worth exploring, although there are, of course, pros and cons.

What Alternative Investments Are

Investments that are considered “alternative” are investments other than the traditional stocks, bonds, mutual funds, and annuities offered by stock brokerage and insurance companies. They allow for a more direct way of investing in an entity in that you buy your shares, or units, from the company itself, not over an exchange like the New York Stock Exchange or the NASDAQ. They are usually long-term investments by nature with very limited liquidity.

One of the most common assets classes for alternative investments is real estate. Real estate investment trusts provide the opportunity to invest into a wide variety of different classes and types of real estate including, but not limited to, office, retail, industrial, houses, apartments, self- storage, timberland, healthcare, and government tenant buildings. In addition, there are varying degrees of risk which usually can be measured by the level of leverage the program uses. For example, a program that buys buildings using all cash has no mortgage default risk, so interest rate risk and property value fluctuations are less of a concern. There is no mortgage to default, whereas a speculative program that uses a high level of leverage and is probably aiming for spectacular returns, is much more likely to default if there is, say, a commercial credit freeze such as we are experiencing right now. Low debt is also usually associated with competitive monthly or quarterly distribution payments with limited appreciation potential. High debt is also usually associated with little or no periodic distributions, but high appreciation potential.

Those are the extremes. There are many levels of risk in between and it takes some effort to gauge the level of risk you are taking. What is somewhat helpful is that the alternative investment industry is using some general terms when titling their programs that loosely describe the level of risk for the program. “Core” means no leverage. “Core Plus” means some leverage, with probably an overall loan-to-value ratio of 25% to 50%. “Value Added” or “Growth and Income” means moderate leverage, with probably an overall loan-to-value of 40% to 60%. ”Opportunity” means they are probably on the high side with 55% to 75% overall loan-to-value.

In general, REITs usually have a Share Repurchase Program which typically states that they will buy back your shares at a reasonable discount to the purchase price in the first two or three years, and then at either 100% or the appraised REIT value thereafter. However, they are limited to redeeming 5% of the REIT per year and can stop redemptions at any time if it’s in the best interest of other shareholders. A “public” REIT is also one of the easiest alternative investments for which to qualify. You will typically need to have either a net worth of $250,000, or a net worth of $70,000 combined with an income of $70,000. It differs, though, REIT by REIT, and state by state.

Investing in real estate entails certain risks, including, but not limited to, changes in the economy, supply and demand, laws, tenant turnover, and interest rates. Some real estate investments offer limited liquidity options. There is no assurance that the investment objectives of any program will be met. REITs are not right for all investors. Be sure to consult your advisor regarding your specific situation.

For more information regarding risks, fees and expense, you can obtain a copy of a prospectus relating to the offering  from your financial professional. Read it carefully before investing.”

To sum it up, alternative investments can be useful in several ways. They can diversify your overall portfolio, provide some tax advantages, and provide strong cash flow and/or appreciation. On the minus side, your liquidity is very limited until the program goes full cycle and returns your principal along with whatever gain or loss it generated. As with all investments, the return of your principal is not guaranteed.

One could spend pages and pages debating this legislation. Democrat and Republican lawmakers were bitterly split on it. Monday’s lead editorials from the New York Times and the Wall Street Journal do a nice job of highlighting the polar opposite views held by Democrats and Republicans, respectively. As investors, our opinion about this bill is not all that relevant. Our job is to assess the impact of this bill on the investment landscape in general and on our companies in particular. It is too early to put hard and fast numbers into our earnings models. There are many details left to be worked out and many of these taxes don’t begin to take effect until 2013 or 2014. However, the following is our initial take on this situation:

The health care legislation does not appear all that onerous for the health care companies that we own. The removal of the public option from an earlier version of the bill was a big positive for most of these companies. The passage of the bill, even though it increases taxes on many healthcare companies, removes the uncertainty that has been acting as an overhang for the sector over the past year. Here are some thoughts on the specific sectors that we currently care about in our client portfolios (please note the disclaimer at the bottom regarding any company-specific comments):

Medical Device Companies

In 2013, the Medical Device companies are expected to begin paying a 2.3% excise tax on medical devices sold in the U.S. This provision is expected to raise $20 billion over the 10 years covered by the bill. The initial estimate for this tax was $40 billion over 10 years and it would have started in 2010. Medtronic, Stryker, and Johnson & Johnson will likely be impacted by this tax. Our initial assessment is that this tax will be manageable for all three of these companies. Let’s take Medtronic as an example. Please keep in mind that these estimates are very rough in nature given the number of moving parts! Medtronic will have about $16.5 billion in sales in fiscal 2010. U.S. sales are about 60% of the total sales number, or ~$10 billion. If we tax the U.S. sales at 2.3%, this would equate to a total annual tax of $230 million. This tax is expected to be deductible which means that the approximate hit to company profits would be $172 million. Though $172 million is not a small number, it represents only about 4.5% of expected fiscal 2010 profits. Medtronic has stated that it will lay off employees and take other measures to partially offset this tax if it is ultimately enacted in 2013. Also, Medtronic would likely benefit from the 32 million newly insured Americans.

Drug Makers

The pharmaceutical companies are expected to pay $27 billion in annual fees over the next 10 years. The total amount committed by the pharmaceutical industry, in the form of industry surcharges and lower prices from government programs, could go as high as $85 billion over the next 10 years. This sounds like a big number and frankly, it is a big number. However, global spending on prescription drugs topped $643 billion in 2006, with nearly half of this number coming from spending in the U.S. Pharmaceutical companies have suffered from slower revenue growth in recent years due to significant patent expirations but remain extremely profitable. Most importantly, the drug companies stand to benefit significantly from the wave of newly insured Americans over the next 10 years. Drug companies got involved with this legislation from the very beginning in an effort to head off deeper regulation that could have come in the form of price controls. As an aside, we are looking closely at some of the global pharmaceutical companies as potential additions to our client portfolios.

Hospital, HMOs, Biotechs, PBMs, Etc.

We don’t currently own hospital companies or HMOs. Hospital companies have committed to $155 billion over 10 years. HMOs will face harsher regulation but should benefit from the new customers and the lack of a public option, which could have ultimately driven them out of business completely. Biotech companies (we own Celgene, Gilead, and Genzyme) shouldn’t be impacted too much by this legislation. PBMs, such as CVS, shouldn’t be impacted too significantly either. Life Science Tool companies, such as Waters Corporation, should not be directly affected. Patterson Companies, which is a primarily a dental distribution company, should not be significantly impacted.

Pricing Pressure?

All of these observations are very preliminary in nature. Though the healthcare companies generally, in our view, could have done a lot worse than the current legislation, pricing pressure is almost certainly coming through the entire healthcare chain. In order for the healthcare legislation to not add to the budget deficit over the 10 year period, the legislation calls for significant cuts in the growth of Medicare spending. These cuts are not particularly well-defined at this point and Congress doesn’t have a great history of following through on proposed cuts that are politically unpopular. Still, the U.S. is currently spending about 16% of its GDP on healthcare. This number is much larger than the amount spent by other developed nations. If something can’t keep going up forever, it won’t keep going up forever. In other words, health care costs will eventually get curbed, one way or another. The mechanism and the timing are not clear but as investors, we believe that we need to assume that pricing pressure is coming for most of the companies that we own. We take this into consideration when we are looking at each company’s long-term growth rate.

We Remain Overweight Healthcare

We like our current overweight position in healthcare. Our healthcare companies currently trade at 15.8x 2010 estimated earnings per share, representing only a slight premium to the S&P500. These companies have great balance sheets, generate high returns on capital, have solid organic growth prospects, and are less cyclical than the average company in the S&P500. Earnings for the S&P500 FELL 29% from 2007 to 2009. Earnings for our portfolio of healthcare companies, excluding the biotech companies which grew significantly faster, GREW 16% on average over this two year period. Long-term growth rates should remain above average due to an aging U.S. population. Clarity on the healthcare legislation should remove an overhang and help valuations as investors begin to appreciate that these companies should continue to grow faster, and in a more stable fashion, than the overall market over the coming years.

Let’s start with a brief analogy. Imagine you’re an investor with a million dollars to invest in bank CDs. However, the rules of the game state that only $100,000 may be invested in any one institution. Pretty easy decision, right? You would invest $100,000 in each of the ten highest-paying banks because the FDIC currently insures bank deposits up to $250,000. But now imagine that the rules of the game change such that there is no FDIC insurance. That would be a more challenging exercise to say the least. Instead of relying solely on the FDIC insurance to make investment decisions, the investor would have to perform credit analysis on each individual bank to ensure she will receive her money back (with interest). This would probably lead to a situation where smaller, less well-known banks would have to pay higher interest rates than their larger brethren in order to attract CD accounts. This situation would likely exist, despite the fact that many of the smaller banks might be less risky than some of the larger banks, because investors would rather blindly put money with institutions that they know than to do their own credit analysis.

Something similar to this now exists in the municipal bond market. Municipal bonds, issued by state and local governments, pay tax-free interest with many carrying insurance that guarantees timely payment of interest and principal. This insurance is issued by one of several major bond insurance companies, such as MBIA or Ambac. Most of these insurance companies were rated AAA but, due to the mortgage meltdown and shoddy underwriting, they have either been severely downgraded or eliminated from the market. As a result, municipal bonds that were initially sold with AAA rated insurance but no underlying rating (issuers would have to pay the rating service for an underlying rating in addition to the premium payment for the insurance guarantee) now trade in the marketplace with only a downgraded insurance rating or no rating at all. These bonds offer conservative investors an attractive yield because most muni bond investors refuse to take the time to do their own credit analysis on an individual issue. This dislocation in the municipal bond market has created an opportunity.

At Farr, Miller & Washington, we believe that carefully selected bonds of this type have excellent risk/return characteristics for investors looking for tax free income and a stable return on investment. For example, FMW recently purchased for clients a municipal bond issued by the American Red Cross. The organization issued taxable bonds in June 2007 with AAA rated Ambac insurance, but it did not apply for an underlying rating. FMW bought these eight-year bonds with a coupon rate of 5.56% at discount to par, an attractive yield premium over US Government and investment grade corporate offerings. Our internal credit analysis estimates that The Red Cross would garner an investment grade rating if it did decide to pay one of the rating agencies for a rating.

In the tax exempt arena FMW has been able to find attractive issues yielding 4% to 5% and in some cases even higher, and all federally tax free. That equates to a taxable equivalent yield of 6.15% to 7.7% for investors in the highest federal tax bracket. As an example, we recently purchased a medium-term, tax-free municipal bond issued by a southern state that was financing local infrastructure projects. The bond is backed by a pool of loans to local borrowers, with the added security of an appropriation from the state if any of the local borrowers were to default on payments. This bond was originally insured and rated AAA. Now that the insurance rating is essentially meaningless, the bond trades as a non-rated bond yielding over 5%.

These types of opportunities don’t come along all that often. Most of our client bond portfolios will continue to be dominated by AAA and AA General Obligation or essential service Revenue bonds. However, we believe that these opportunities are welcome additions to a conservative bond portfolio from both a yield and a diversification standpoint, without compromising the overall safety of the portfolio.

A SIMPLE IRA is an employer-sponsored retirement plan.  It stands for “Savings Incentive Match Plan for Employees”.

Who can set up a SIMPLE IRA work?

A company with fewer than 100 employees, and with no other retirement plan, can set up a SIMPLE IRA plan.  It requires very little paperwork and has low administrative costs.

Who can participate in a SIMPLE IRA?

Any employee of a company that has a SIMPLE IRA plan may participate if he has at least $5000 in compensation for the year.  However, employees whose benefits are provided in accordance with a collective bargaining agreement and nonresident alien employees who received all foreign currency compensation from the employer cannot participate in a SIMPLE IRA plan.

How does a SIMPLE IRA work?

There are two methods for making SIMPLE IRA contributions.  The first and most common is the employer matching method.

With the employer matching method, employees decide what percentage of their paycheck will be deposited in their SIMPLE IRA each pay period.  Then, the company matches all or part of the employee’s contribution.  The money is automatically deducted from the employee’s check and deposited for him in his SIMPLE IRA.  For example, Joe works for Acme Company.  If Joe makes $500 a week and contributes 3% , or $15, to his SIMPLE IRA, Acme also deposits an additional $15 into Joe’s SIMPLE IRA.

The second employer contribution method is available with SIMPLE IRA’s.  Employers can choose to make non-elective contributions instead of matching contributions to employees’ SIMPLE IRA’s.  Non-elective contributions must be 2% of an employee’s gross compensation, up to $245,000.  This 2% must be paid by the employer whether the employee makes his own contributions or not.

What are the advantages of participating in a SIMPLE IRA?

Since employers match contributions, participating in a SIMPLE IRA increases the amount of money an employee makes.  The contributions are also pre-tax, which means that the employee will not have to pay federal income tax on the money he and his employer contribute.  To continue our previous example, if Joe contributes $15 a week and his company matches it by also contributing an additional $15 a week to his SIMPLE IRA, Joe will have a total of $1560 in his SIMPLE IRA at the end of the year.  He will not owe any federal income tax on that $1560.

Making contributions to a SIMPLE IRA is also very easy since the company withholds the money from each paycheck and deposits it for the employee in his SIMPLE IRA.

Are there limits to how much you can contribute to a SIMPLE IRA?

However, if you are age 50 or over at at the end of the calendar year, you can make “catch-up” contributions.  The limit for catch-up contributions are $2,500, so if Joe turns 50 on April 15, 2010, he can contribute up to $14,000.

When can you withdraw money from a SIMPLE IRA?

You can withdraw your money at any time. However, there are two rules to consider when withdrawing money from a SIMPLE IRA.

If you withdraw any money from your SIMPLE IRA within two years of the date you first made a contribution to your SIMPLE IRA, you will owe a 25% tax on the amount withdrawn.  For example, if Joe began participating in his company’s SIMPLE IRA plan on January 1, 2010, he will owe the 25% tax on any withdrawals made before January 1, 2012.

The second rule to consider is if you withdraw money before reaching age 59 ½, you will be subject to a 10% tax penalty on the money withdrawn. For example, if Joe withdraws $500 from your SIMPLE IRA when you are age 45, you will generally have to pay $50 to Uncle Sam as a tax penalty. You may not owe the 10% penalty if you qualify under the early distribution rules.

What are the early distribution rules?

An early distribution is any money you withdraw from your Traditional IRA before reaching age 59 ½. When you reach age 59 ½, withdrawals are automatically tax-free. Early distributions are subject to a 10% tax penalty, but if you withdraw money for any of the following situations, you will NOT owe the 10% tax:

1. You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
2. The distributions are not more than the cost of your medical insurance.
3. You are disabled.
4. You are the beneficiary of a deceased IRA owner.
5. You are receiving distributions in the form of an annuity.
6. The distributions are not more than your qualified higher education expenses.
7. You use the distributions to buy, build, or rebuild a first home.
8. The distribution is due to an IRS levy of the qualified plan.
9. The distribution is a qualified reservist distribution.

What happens to your SIMPLE IRA if you stop working for the company?

You are fully vested in your SIMPLE IRA, including both employer and employee contributions.  The money contributed is still yours.  You still own your SIMPLE IRA completely independently of your company.

References

Internal Revenue Service Publication 560, Retirement Plans for Small Businesses (SEP, SIMPLE, and Qualified Plans), http://www.irs.gov/pub/irs-pdf/p560.pdf

The implication from Senator Johanns’ comments is obvious: the Japanese have stricter safety standards for their own consumer market than for their export markets. While Johanns has a point, it is also clear that both the beef and auto disputes were safety issues, and not trade issues. Toyota should undoubtedly be subject to the scrutiny of regulatory bodies such as the National Highway Traffic Safety Administration (NHTSA) so that all measures are taken to ensure the safety of their vehicles. In this respect, Toyota should be treated no differently from any other automaker, domestic or foreign, operating in the US market. And if it is found that Toyota had knowingly sold vehicles with faulty accelerators into the US market, heads will obviously roll in the form of lawsuits, fines, and the potential criminal prosecution of management. However, the issues at Toyota are by no means the result of any failed trade policies in the US or Japan.

In the late 1970′s it was learned that Ford continued to produce and sell the Pinto model despite clear “smoking gun” evidence that the vehicle was not safe (ie, had a propensity to explode upon collision). Amazingly by today’s standards, Ford was acquitted of criminal wrongdoing even as the company revealed its cost/benefit analysis showing that it was less costly to pay jury awards to the families of crash victims than it was to make the vehicles safe. However, the damage to Ford’s reputation was immense. The company remained in the penalty box for many, many years for its ethical breach. Customers shunned Ford products, and financial results and shareholders suffered mightily.

Yesterday, Toyota announced that US sales of its vehicles fell for the second straight month due to the safety problems. February sales of Toyota vehicles fell 8.7% compared to February, 2009. By contrast, industry wide US auto sales were up 13% in February. Ford sales were up 43%, General Motors was up 12%, Nissan was up 29%, Honda was up 13%, and Hyundai was up 11%. Year-over-year sales gains at Ford, GM and Chrysler “gave US-based automakers a combined 46.6% market share, more than the 44.8% for Asian competitors, according to Autodata Corp.” (from the Wall Street Journal) Toyota’s US market share fell to 12.8% in February from 15.9% a year ago.

Yesterday’s sales data reveal the free market at work. While Toyota’s dramatic market share gains over the past many years were based on a reputation for quality, reliability, and safety, yesterday’s data reveal the loss of some of that brand equity. Perhaps the company started to cut corners in its quest for ever-higher market share. In any case, consumers are speaking with their wallets, which is the way it should be. Trade restrictions will only invite retaliatory action, but Toyota will pay for its sins regardless.

Stocks rose for the second consecutive week and have now recouped about two-thirds of the 9% drop that occurred between January 19 and February 8. Jitters about sovereign debt problems in Europe, central governments “taking away the punch bowl” of easy money, and a surprise rise in the discount rate last week have started to give way to the good news that corporate earnings are still moving up smartly, the manufacturing sector is on the rise, and inflation is subdued, according to Bloomberg.

Interestingly, whether you are bullish or bearish, there is still plenty of data to support either view. However, some of this data is contradictory which makes discerning solid trends a little more difficult. For example, the value of the U.S. dollar rose more than 8% against a basket of six currencies between late November 2009 and February 19, according to www.stockcharts.com. Yet, as the dollar is rising, our government is running trillion dollar deficits and the Federal Reserve continues to proclaim that it will keep interest rates low for an extended period of time–both of which would seem to be bad news for the value of the dollar.

Also, core consumer prices declined in January for the first time since 1982, suggesting inflation is well under control. Despite low inflation, gold closed last week over $1,100 an ounce, which is not far from its all-time record high, according to Barron’s and CNBC. Low inflation would seem to be bearish for gold prices, but, so far, gold has ignored our relatively stable prices.

This “new normal” of contradictory relationships makes navigating the financial markets a bit trickier than usual, but we are working hard to meet the challenge for you.

THE RICH ARE GETTING RICHER and the IRS just released some data that drives home that point. Below are some eye-popping tidbits on the top 400 individual tax returns based on largest Adjusted Gross Income, according to the IRS.

In 1992, the person ranked 400th on the list had an Adjusted Gross Income of $24.4 million. In 2007, that number rose to $138.8 million.

In 1992, the average Adjusted Gross Income for the 400 people on the list was $46.8 million. In 2007, the average rose to $344.8 million.

In 1992, the top 400 paid 1.0% of the country’s total income taxes. In 2007, they paid 2.1% of the total.

In 1992, the average tax rate for the top 400 was 26.4%. In 2007, the average tax rate was 16.6%.

During the 16 years between 1992 and 2007, a select group of 3,472 different people made the top 400 list at least once. And, out of those 3,472 people, 72% appeared on the list only once. At the other end, 7 extremely wealthy people made the top 400 list every one of those 16 years!

Do you have any guess as to who those 7 people are that made the top 400 list every year between 1992 and 2007? Inquiring minds want to know, but the IRS is not divulging the names.

Weekly Focus – Think About It

“A man is rich in proportion to the number of things which he can afford to let alone.”

–Henry David Thoreau

A 2002 study by Meir Statman and Kenneth Fisher found that, “Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.” That seems a little counterintuitive because you would expect apprehensive consumers to be in no mood to buy financial securities and push their prices higher. On the contrary, though, the authors said, “When people lose confidence as consumers, they should regain it as investors.”

So, how does this make sense?

Not surprisingly, declining financial markets tend to drag down consumer confidence. However, at some point, financial markets typically revert to the mean and start heading up again. Often, financial markets start heading up before consumer confidence does. This suggests that consumer sentiment is a contrarian indicator, according to Mark Hulbert at MarketWatch.

Does this mean you should base your entire investment strategy on the level of the consumer sentiment index? No. Sentiment is just one of many indicators that may play a role in the complex interplay of factors that affect asset prices. Oh, and just for the record, the U.S. stock market did rise last week so the consumer sentiment “contrarian” indicator did work–at least for one week!

THE DRUG OF EASY MONEY will eventually be withdrawn from the worldwide economy since governments cannot indefinitely spend (or create) money that they don’t have. The question of when and how that happens is looming large over the financial markets. Just in the U.S. alone, we invested (spent?) trillions of dollars propping up the economy, according to CNN, and so far, it has helped avert a potentially even larger disaster. Unfortunately, it may have just delayed the next day of reckoning.

So, how do you withdraw the drug of easy money from an economy without tipping it back into a recession? Very carefully! The Economist has identified three key components to address in order to pull off an effective exit strategy.

First, you have to get the timing right. If you pull the stimulus too soon, you might end up with a relapse into recession. If you let the stimulus slosh through the economy too long, it could break the budget, lead to unacceptable inflation, or cause new bubbles to form.

Second, you have to get the tactics right. The two main tactics include cutting the government budget and raising interest rates. However, if you cut the budget too much, you run the risk of–you guessed it–another recession. Ditto for raising interest rates too soon.

Third, you have to get the technique right. The U.S., in particular, was zealous in creating newfangled funding mechanisms, bailout programs, backstop guarantees, and lending facilities to stop the market meltdown in 2008-09. How we unwind these programs may have a big impact on the economy so we have to get this right, too.

Ultimately, there are no easy answers to these three components, yet they are vitally important to our economic future. And, the best way to monitor how effective the government is in answering these components is to follow the reaction in the financial markets. Of course, we do that on your behalf so you can spend your time in areas that are most important to you.

Weekly Focus – Think About It

“Nobody can go back and start a new beginning, but anyone can start today and make a new ending.”
–Maria Robinson

In short, an investment advisor has a fiduciary obligation to act in the best interest of its clients. Investment advisors are required to register either with the Securities and Exchange Commission (SEC) or the states in which they operate in and are regulated under the Investment Advisors Act of 1940. According to Rule 206 of the Investment Advisors Act of 1940, investment advisors are considered fiduciaries, and as such, owe their clients a higher fiduciary duty. What this means in layman’s terms is that advisors must operate in a way that avoids conflicts of interest, puts their clients’ interests ahead of their own and make a full disclosure of their fees.

On the other hand, brokers (which are registered representatives of a brokerage firm (or in industry lingo a “broker-dealer”)) are salespeople whose primary responsibility is to help clients buy and sell securities for their accounts. While there is nothing wrong with this, investors should be made fully aware that broker-dealers are subject to the Securities Exchange Act of 1934, a different regulatory rule than for investment advisors. As such, their principal obligation is to make suitable recommendations (emphasis ours) to their clients and as such, do not necessarily owe their clients a fiduciary duty.

I decided to write this piece because the differences between an investment advisor and a broker-dealer have become quite blurred over the years. Many broker dealers market themselves as offering financial advisor or investment consultant services. I think it is quite critical for the general investing public to know these differences. Many investors may have a false sense of security that their “advisor” may be continually managing and acting in the best interest of their clients, when in reality this may not be the case. In addition, be aware that just because your broker may be recommending a suitable security for you, their primary goal may not be to act in your best interest, but rather to generate a commission for their employer’s brokerage arm.

Moreover, a portfolio that fared relatively well during the downturn (ie, declined less than the overall market) may not have fared as well for the rally. In fact, a defensive portfolio would be expected to produce results inferior to the overall market in strong years such as 2009. Conversely, an aggressive portfolio would be expected to suffer much more than the overall market in declining markets while rebounding more quickly than the overall market as the markets rebound.

Choose your ride. My 17 year-old son and I test drove a Ferrari recently. He is sort of a car nut. We were never considering actually purchasing the car, but we thought it would be cool to take a spin. When we saw a 2006 for sale by a local dealer, we headed right over. It was awesome; we felt like James Bond. It was low-slung, sexy, raw power. We found a straight, quiet road and prayed for no cops. Robert and I concluded that we would likely kill ourselves in that car. We would die happy but die nonetheless.

Investing for me is about the same as NOT choosing a Ferrari. Larger, safer, and more comfortable characterize my automotive and investment choices. Ferrari drivers and derivative traders are not wrong; their lifestyle is just not for me. My great friend P.J. O’Rourke would rightly point out that I’m sounding old, but he drives a 1987 Suburban and has limited room to comment. (P.J.’s latest book, Driving Like Crazy is tearfully funny, especially if you like cars.)

The choice of your investment ride will have pros and cons which will change as market conditions change. I’ve never been a wild risk-taker, and I’m becoming even less risk-tolerant as the years pass. The portfolio for me tends to keep up during strong markets and perform very well (on a relative basis) during weaker markets. Investors often forget the performance trade-offs they’ve made when conditions are dry and sunny and it would be fun to put the top down. After all, piles of snow and ice seem very distant when balmy breezes blow. However, it should be recognized that keeping up in strong markets and declining less in weak markets is a very effective way to achieve positive long-term performance in your portfolio. This is the Farr, Miller & Washington approach.

Stocks Still Make Sense. I may advocate caution, but I hardly long for a return of the horse and buggy. It was John Maynard Keynes who said, “In the long run, we’re all dead.” While the context for this statement was something altogether unrelated to investing, I think we can apply his sentiments here. The fact is that many of us don’t have the luxury to wait decades to achieve our investment ambitions. Stocks, simply put, are a necessary investment component for many of us to meet our retirement, philanthropic or inheritance goals. A well-structured bond portfolio, which provides income and capital preservation, can provide a great anchor for many portfolios. However, as we look out over the next decade, stocks appear likely to outperform bonds following a decade in which the opposite occurred. Moreover, bonds with longer maturities can be volatile and, adjusting for inflation and taxes, bonds have provided meager historical returns. These returns are likely to be even more meager as we begin the decade at near-record low interest rates. Yes, again, I know that bonds were great over the past ten years, but that was an exception not the rule. Investors are always well-advised to expect the historical norm and not the exception.

Some allocation to stocks makes sense for most people. Long-term historical returns for stocks well exceed similar returns for bonds. People seeking a higher rate of growth in order to meet long-term goals can ill afford the pony-cart pace no matter how safe it feels. A sufficient time horizon argues for stocks too. A longer time horizon allows a greater chance for long-term trends to emerge. Baby Boomers suffered significant wealth erosion. Retirement dates have been postponed, and investment plans have been revised. The larger historical returns from stocks will be necessary for many Boomers to achieve their retirement objectives.

Investment Advice

It’s easy to feel doubtful, insecure, and even scared when you hear that something that you own is lagging or that something you don’t own is rocketing. The resulting fear can easily lead to mistakes. Here’s the advice: have a plan that has a logical and reasonable chance of achieving your investment goals. Commit to your plan and ignore the noise. The only important investment goals and achievements are your own no matter what anybody on TV says.

We’ve been through an amazingly difficult recession and stock market cycle. While the downturn may not be over, you are armed with a lot of new experience to bring to your own investment planning. I recommend a review of your goals and of your risk tolerance. As years pass, investment horizons shorten. Money that is needed sooner should be safer. If you barely survived this recent March 2009 bottom, now is the time to adjust your plan and become more defensive. I’m not advocating a rush to bonds. In fact, bonds seem expensive to me. If you need help modifying your plan, call an investment professional and ask for some help. Ferraris are cool, but there are darn good reasons why retirees don’t usually drive them.

Most people are pointing to the sovereign debt “crisis” in Europe as the primary factor for the recent sell-off. While the main focus has been on Greece, there are several other European countries running huge deficits that may pose a problem in the near term. These so-called PIGS (Portugal, Ireland, Greece, and Spain) have seen their borrowing costs rise as investors have become more nervous about their ability to fund their deficits. While it appears the EU and other institutions may be rallying in support of Greece for now, this issue will likely affect the markets for a while. Incidentally, we would note that the US deficits as a percentage of GDP are trending dangerously high as well, and they are expected to remain so for the next couple of years (see last week’s market commentary). In the best case scenario, we are going to needavery painful round of belt-tightening across the globe in order to shore up confidence in these debt markets.

Recent housing data suggest that the stabilization in the housing market has been highly dependent on tax credits, which are expected to expire at the end of April. Most notably, existing home sales fell sharply in December after buyers rushed to close purchases before the initial deadline for tax credits. As we look out over the next few months, the tax credits may actually be discontinued at the same time that the Fed is scheduled to discontinue its purchases of mortgage-backed securities. We believe these events could lead to significantly higher mortgage rates and reduced demand for housing. Therefore, we believe investors are beginning to more fully appreciate the possibility of further home price declines ahead.

The release of the Obama budget for 2011, covered in last week’s market commentary, instilled fear in many market participants. Large budget deficits for several years into the future have many people thinking that higher taxes will be in the offing. The uncertainty surrounding future tax rates leads to increased reticence among companies to invest in projects and hire new employees. It also makes consumers less willing to spend as they continue to work toward repairing their balance sheets after the loss of $11 trillion in wealth.

Although the unemployment rate fell to 9.7% in December, the payroll and weekly jobless claims continue to suggest that employers are not adding workers at anywhere near the pace required to meaningfully improve the employment picture. Last week’s jobless claims rose significantly and this week we remain firmly above 400,000. The notion of a jobless recovery is becoming more widely accepted, which will likely mean more government spending to stimulate job growth in the future. More importantly, however, consumers are less likely to spend if they either have no job or are concerned about losing their job.

Yesterday, Fed Chairman Bernanke released the transcript of his testimony intended for the House Financial Services Committee (postponed due to the weather). In this testimony, Bernanke said the Fed would likely soon raise the discount rate, which is the rate that banks pay the Fed for short-term loans. This first baby step toward tightening, combined with the fact that there was a dissenting vote among the FRB with regard to the recent statement about the duration of low interest rates, has investors believing we are incrementally closer to a tightening in policy. Rising interest rates are generally not good for stocks.

Investors remain nervous about the impact of new bank regulation. In fact, Obama’s speech about the need to limit the size of banks and reign in proprietary trading was the impetus for this sell-off. The future regulatory landscape remains highly uncertain. Bank business models could potentially look very different in the wake of all the new regulations. In response, banks are stockpiling capital, tightening lending standards and accumulating large amounts of deposits. These actions act as a deterrent to economic recovery.

While probably the least significant factor, healthcare uncertainty remains. To the extent that companies do not know what their future costs will be (healthcare AND taxes), they remain reluctant to bring on new employees. For now, it seems that the most onerous components of a tax care bill may be avoided. However, until there is complete clarity with regard to this issue employers will feel pressure to delay hiring decisions.

We hope it is clear that the investors have many risks to consider going forward. Recall that stocks began rising before there weren’t many (if any) signs of economic recovery. This is because the market acts as a discounting mechanism. Investors anticipated the stabilization in the economy and corporate earnings before they actually occurred. Now, investors may be looking out to what the economy looks like in the absence of a tremendous amount of government support. In any case, the 70%+ move in the major market indices (from trough in March, 2009, to peak in January, 2010) did not reflect much appreciation for the aforementioned risks. We believe these risks argue for high-quality, defensive, and reasonably-priced stocks.

Volatility in the financial markets has risen noticeably in the past few weeks as investors remain on edge about a multitude of issues.

A mixed employment report for January, continued budget deficit issues in Portugal, Italy, Ireland, Greece and Spain, monetary tightening in China, and a growing sense that the worldwide economy might be running on government stimulus fumes instead of stable gas all contributed to worldwide jitters, according to the Associated Press. In the U.S., the S&P 500 index dropped for the fourth week in a row and it is now down 7.3% from its January 15 recovery high, according to data from Yahoo! Finance. Foreign stocks, commodities, and gold are also down for the year as shown in the chart below.

The increase in investor anxiety helped send the value of the U.S. dollar up, up, and away. Last week, the dollar reached an eight-month high against the euro and a seven-month high against a trade-weighted basked of six major currencies, according to MarketWatch. The good news about a stronger dollar is that it suggests investors still have faith in the U.S. as a “safe haven” in times of uncertainty.

The global economy is still recovering from the Great Recession and the path to future prosperity will likely be bumpy. With proper seat belts, though, we will do our best to make the trip as smooth as possible.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

CORPORATE AMERICA IS MAKING AN EARNINGS RECOVERY, but the revenue recovery is slow to develop. For 2009, The Wall Street Journal projects that the S&P 500 companies will show a sales drop of $1.1 trillion, or 13% from the prior year. In the fourth quarter of 2009, revenue is expected to total just over $2 trillion, which would be the same number as the first quarter of 2006. In other words, this Great Recession has set corporate America’s revenue back nearly four years.

Interestingly, while revenue is back down to levels from nearly four years ago, total U.S. employment in January 2010 was back down to where it was in April 2000 – that’s nearly a 10-year setback in employment – according to data from the Department of Labor. This indicates that on a comparative basis, corporations have cut employment more dramatically than the decline in revenue. With employment levels back to where they were in early 2000, you can see why corporations are showing solid earnings growth (up 47% so far in Q4 2009 from the year earlier quarter excluding financial companies, according to The Wall Street Journal) even though revenue growth is weak (projected to rise just 0.9% in Q4 2009 from the year earlier quarter, according to The Wall Street Journal). Corporate America is showing profit gains partly due to the leverage from keeping employment costs low.

The good news is that Corporate America cannot keep employee headcount low indefinitely if revenue starts to rise significantly. Eventually, companies have to hire to support revenue expansion. When this new revenue expansion/hiring cycle starts is anybody’s guess. But, when it does, that could be a positive sign for the financial markets.

Weekly Focus – Think About It

“Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time.”

– David Dreman

Value vs. Growth Investing

Here are the numbers (2/5/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes

Current State of Estate Planning

As you may have heard, the federal estate tax rules changed radically in 2010 and could change radically again in 2011 unless Congress passes new legislation. This letter is intended to advise you of what has happened and encourage you to reevaluate your estate plan as soon as possible.

2001 Tax Act. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates.  EGTRRA provisions included:

• In 2009, the estate and GST exemptions increased to $3.5 million per decedent, with a flat 45% estate and GST tax rate on any excess. The gift tax exemption was $1.0 million, with tax rates from 41% to 45%.
• In 2010, the federal estate and GST taxes were repealed for one year. The gift tax $1.0 million exemption remained, with a lower flat tax rate of 35%. Thus, you had to die or pay gift tax to get the benefit of the change. The step up in basis rules (which gave a “fresh-start” fair market basis for most assets of a decedent) was replaced with an adjusted carry-over basis.  These new basis rules permit a step up in basis of up to $1.3 million, plus an additional $3.0 million for certain spousal transfers at death.
• On January 1, 2011, EGTRRA was automatically repealed, resulting in an odd situation: A $3.5 million estate and GST exemption and flat 45% tax rate in 2009, no estate and GST tax in 2010, and a $1.0 million estate exemption and tax rate up to 60% in 2011.

What Happened in 2009? Estate planning practitioners universally expected Congress to carry the 2009 estate tax rules across 2010 (both Representative Rangel as Chair of the House Ways and Means and Senator Baucus as Chair of the Senate Finance Committee said it would happen earlier last fall). However, unexpectedly in December the House failed to act on a one year extension and instead sent the Senate a bill to make the 2009 rules permanent. Because the Senate was focused on health care and there was broad disagreement in the Senate on what to do with estate taxes, Congress enacted no changes to the EGTRRA’s 2010 rules. Thus, effective as of January 1, 2010, there is no federal estate or GST tax.

Planning in Chaos. Congress’s failure to adopt estate tax legislation in 2009 and the possibility that changes will not be adopted during 2010, radically change the estate planning considerations of many clients. For example, Congress has indicated that in 2010 about 6,000 decedents will benefit from the elimination of estate taxes, but over 70,000 heirs will pay higher income taxes because of the change in the income tax basis rules for assets received from decedents.

2010 Changes. The U.S. has an unpredictable planning environment in which any number of radically different changes may occur in 2010:

• Congress may do nothing in 2010, in which case there is an adjusted carryover basis, and no federal estate or generation skipping tax for people who die in 2010. While you probably will not die in 2010, you still need to consider planning for that possibility, because not planning for these changes, if death occurs, can be disastrous. For example:

o       Formula clauses (e.g. terms that allocated your estate exemption to a “by-pass trust”) in your planning documents could inadvertently disinherit some heirs and/or your surviving spouse and/or create conflicts among family members on how your documents should be properly interpreted.

o       Conflicts could arise among your heirs and fiduciaries on asset basis issues.

o       Inadvertent generation skipping taxes could be incurred after 2010.

o       Passing assets directly to your surviving spouse may result in higher estate taxes after 2010.

o       Inadvertent state taxes could be incurred from out of date terms in your documents.

• Congress may adopt legislation to carry the 2009 rules over 2010, retroactive to January 1, 2010. There is broad disagreement on whether a retroactive tax bill is constitutional. If a retroactive law it adopted, it will be challenged as unconstitutional and it could take years for the Supreme Court to rule on the issue. Until such a ruling, uncertainty will prevail. Those dying after the enactment should not have that uncertainty. In any event, your estate plan should contemplate dying both before or after a potential retroactive enactment, which may or may not be constitutional.
• If Congress acts in 2010 to address the estate tax issues, it could:

o       Adopt permanent estate tax exemption, beginning in 2010 or 2011. If so, most commentators anticipate estate tax exemptions to fall between $2-5.0 million and tax rates 35% to 45%.

o       Adopt a temporary higher estate exemption.

o       Adopt rules to limit or eliminate valuation discounts.

2011 Changes. Unless Congress enacts new legislation in 2010, then on January 1, 2011, a number of automatic changes occur to the federal tax code, including:

• The estate tax exemption drops to $1.0 million per decedent.
• The estate tax rate increases (e.g., 55% above $3.0 million and 60% above $10 million).
• States which remain “coupled” to the federal estate tax will have their state death taxes restored. Thus, if you own property in one of these coupled states, you could have new exposure to a state estate tax.
• The fair market value step up in basis returns for assets passing from a decedent.
• The top income tax rates go up by at least 4.6%, capital gain tax rates go up by up to 5% and dividend tax rates go up by up to 24.6%.

Higher Taxes. No matter what happens to the estate tax, substantial tax increases are looming. A $12 trillion deficit is projected for the next decade. The Congressional Budget Office indicates that the social security trust fund will pay out more then it receives starting in 2011 or 2012. Taxes will have to increase across a broad range of Americans. Both the Washington Post and the New York Times have stated that the President will have to abandon his pledge to only increase taxes on taxpayers earning over $250,000. Given slow economic recovery and the fact that we are in a mid-term election year, the federal government will probably not increase taxes until sometime in 2011. While substantial tax increases are likely, we just don’t know any details.

ROTH IRAs. In 2010, taxpayers can convert traditional IRAs to ROTH IRAs and can pay the income taxes due on such conversion in 2010 or equally in 2011 and 2012. There are significant benefits and traps for the unwary in making these decisions.

Effectively, unless Congress adopts new legislation, in 2010 the estate tax rules rotate 180 degrees from where they were in 2009, and then rotate 180 degrees again in 2011 – only the estate tax and income tax rules could be even worse than what we had in 2009. Uncertainty makes it difficult to plan, but waiting to see what happens next is not a good idea. The earlier you can implement flexible tax and estate planning to respond to these changes the better.

Perhaps the most striking aspect of the administration’s outlook is the sheer magnitude of government debt we are expected to accumulate over the next 10 years.  But first, let’s take a look at where we stand now.  At the end of the 2009 fiscal year, gross government debt outstanding was $11.9 trillion, with $7.5 trillion of that debt held by the public.  The difference between these two figures ($4.3 trillion) represents debt that has been issued by the government to other government agencies, such as the Social Security trust.  Effectively, this is money that the government has borrowed from itself (in an effort to lessen its dependence on the public markets and keep borrowing costs down), and it will have to be paid back if we are to fulfill the obligations of our entitlement programs.  In any case, gross government debt and debt held by the public were 83% and 53%, respectively, of GDP at the end of the fiscal year.  For some perspective, debt held by the public had averaged under 36% of GDP over the prior 40 years.

Now let’s fast forward to the year 2020.  Based on the administration’s budget figures, federal government debt held by the public is projected to increase to over 77% of GDP by the year 2020.  If we include the debt issued by the government to other government agencies, the ratio is projected to increase to 107% of GDP by 2020.  If these figures are right, the government will need to borrow a net additional $11 trillion from the public over the next 10 years in order to fund the deficits.  Interest on the debt alone will balloon to $840 billion in 2020 (from $187 billion in 2009) and will represent 15% of total government spending (up from 5% in 2009).

We would note that these figures include some pretty optimistic assumptions, without which the budgetary figures would look even worse.  First, the administration is projecting that GDP will grow at a real average rate (adjusted for inflation) of 3.8% over the next five years.  Most economists will tell you that this assumption is aggressive in light of the continuing headwinds in the economy.  The consumer must save more for retirement given huge losses of wealth and massive amounts of debt, unemployment is expected to remain high, the housing market remains a mess, and banks are not lending freely.  A lower GDP assumption would mean lower tax revenues, potentially more stimulus outlays, higher budget deficits and more debt than already projected.

Secondly, the government is assuming that the yield on the 10-year Treasury note will not exceed 5.3% over the next 10 years.  We would find this assumption especially aggressive given the administration’s forecast for strong GDP growth over the next several years.  Moreover, the need to raise an additional $11 trillion to fund deficits over the next 10 years will certainly lead to higher borrowing costs.  In fact, some central banks (read: China) have already expressed concern over the sheer magnitude of new debt issuance.  Others are demanding more issuance of TIPs (Treasury Inflation-Protected Securities) so they can protect against a surge of inflation brought on by massive injections of monetary stimulus.  Simply put, these prospective buyers will want to be compensated as the risk of owning increasing amounts of US government debt continues to rise.

Third, the government is not including as debt the over $5 trillion in mortgages either owned or guaranteed by Freddie Mac and Fannie Mae, the two companies that were effectively nationalized during the throes of the financial crisis.  The scale and scope of government support for these entities would argue that the government should consolidate their assets and liabilities – something the administration would like to avoid for obvious reasons.  But the reality is that the federal government is on the hook for a massive amount of mortgages.  These mortgages are going bad at a record pace, and the government may wind up owning a lot of residential real estate when it’s all said and done.

The figures in President’s budget are alarming.  America is skating on thin ice.  Creditor nations understand that we must spend money now to revive our economy, and there are few safer alternatives to the US dollar and US government’s securities.  However, there is a tipping point somewhere out in the future.  Nobody knows where this tipping point is, but it is safe to say that we are getting close.  The days of avoiding difficult decisions out of political expediency may be drawing to a close as the public begins to more fully appreciate our predicament.

We continue to recommend sticking with the high-quality, defensive and reasonably-priced stocks that have lagged the overall market during the 60%+ surge since March.  In general (and in contrast to both the consumer and the federal government), corporate balance sheets are in good shape following a difficult period of lay-offs and restructuring.  This is especially true of the large-cap multinationals that we favor for our client portfolios.  Moreover, valuations and growth expectations remain reasonable for these defensive investments.

The Commerce Department said the economy grew in the fourth quarter at its fastest pace in more than six years;

The Institute for Supply Management-Chicago said its index of Midwest business activity rose more than expected in January;

Consumer sentiment in January as measured by The Reuters/University of Michigan Surveys of Consumers hit its highest level in two years; and

Of the 220 companies in the S&P 500 index that have reported fourth quarter earnings, 78% of them exceeded analysts’ expectations, according to Thomson Reuters. In a typical quarter, only 61% of companies beat Wall Street targets.

Sounds pretty good, doesn’t it? So, how does the stock market respond? It goes down.

Once you delve into it a little further, this “good news for the economy is bad news for the stock market” may not be as illogical as it seems. Do you remember how bad things were back in early March 2009? Just as the economy seemed on the brink of destruction, the stock market turned around and started soaring. Back then, investors detected the early signs of a turnaround in the economy. They were proven right as evidenced by last quarter’s GDP growth and the positive fourth quarter earnings that are now coming out.

Effectively, the stock market anticipated the recent positive news and that is partly why the market rallied so much in 2009. Now, it appears that much of this good news is already “priced” into the market. So, rather than propelling the market higher, the good news is causing some investors to take profits while waiting for the next catalyst.

Whether this recent downturn is just a bump along the bull market path or the beginning of a new leg down is unknown. Either way, we continue to monitor the situation on your behalf.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

WHAT DO A MICROSCOPE AND A TELESCOPE have in common as it relates to investing? Both of them represent ways to look at the markets that may help us be better investors.

Structurally, we like to view the markets through a microscopic and a telescopic lens. Through reports like the one you are reading now, we keep tabs on what is happening at a microscopic level. We know that what happens in the short-term at the granular level could be early warning signs of longer-term changes. These microscopic changes could include things such as: changes in market internals and technical analysis, insider buying or selling, unexpected changes in economic numbers, and sentiment changes.

Our telescopic lens captures the big picture view of trends and opportunities that unfold over longer periods. These take longer to come to fruition, but usually end up generating the greatest rewards. Telescopic changes could include things such as: regulatory changes, technological changes, monetary and fiscal policy changes, and demographic changes.

Utilizing a microscopic and telescopic point of view helps us pay attention to the short-term so we don’t get blindsided, while allowing us to scan the horizon for bigger trends that may ultimately have the largest positive impact on your portfolio. You could also call it being “bifocal.”

Weekly Focus – Think About It

“It is impossible to produce a superior performance unless you do something different from the majority.”

John Templeton

Value vs. Growth Investing

Here are the numbers (1/29/10)

Source Morningstar.com

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

It’s Good Advice to Create an Annual Review Checklist

The beginning of the year is a great time to think about what you want to accomplish and to set specific goals. A good way to start is to create your own annual review checklist.

Things change … interest rates, tax laws and your personal situation. Many events may require you to revise your financial and estate plans, including:

• Marriage, divorce, separation or serious consideration of one of those options by a family member
• Expected or actual birth of a child or grandchild, adoption or addition of a stepchild
• Health changes that affect your or your spouse’s planning, lifestyle or attitudes
• Desire to add or delete specific bequests
• Decision to make gifts of property or cash to your children/grandchildren, or to make a charitable gift that will provide income for life
• Significant changes in your asset values
• Acquisition or disposal of real estate (or serious consideration)
• A received or imminent inheritance
• A change (or consideration of a change) in life insurance beneficiaries
• Reconsideration of designated guardian(s) or successor guardian(s)
• Wish to name a specific person as advisor to your executor and/or trustees
• Relocation due to a job transfer, retirement or personal reason
• Significant changes in your spending patterns
• Changes in retirement planning
• Purchase of a retirement home, vacation home or time-share unit
• Significant realized or unrealized capital gains or losses from last year
• Casualty insurance review
• Changes in your savings plan contributions

Plan for the unexpected.  Along with your estate plan and testamentary arrangements, consider writing down your objectives, ideas and wishes in a letter to your family that will guide them in handling estate and investment matters, and in making other important decisions, in your absence.

Consider including a note of caution not to consider your thoughts rigid or binding, but to temper them by careful consideration of facts and circumstances existing when a decision must be made. Things change, and we can’t foresee every eventuality.

Here are other things you may want to include in your letter:

• Arrangements for funeral, last rights and burial
• Provisions relating to medical and nursing home car
• Wishes regarding life support systems and organ donation
• Advice on whom to seek out for medical, legal and financial counsel
• Investment philosophy
• Important goals for the family
• Special information or other comments for a spouse
• Locations of original legal documents (power of attorney, will, etc.)

Your letter should be signed and dated, and may be sealed. The envelope should be marked “To be opened in the event of my serious illness, incapacitation, or death.”

It is important to address these and related issues now. Set goals and determine a time frame for accomplishing them.  Remember the adage that if you fail to plan, you can plan to fail.

On the consumer side, most banks reported an improvement in credit card metrics and a decline in early-stage delinquencies across a number of consumer loan categories. At the same time, the data suggested that problem loans in the residential real estate category are growing at a slower pace than they had in previous quarters. Why is this important? It is important because a decline in the rate of increase in problem assets is a precondition to an eventual decrease in problem assets. Moreover, historical data suggest that bank stocks perform very well once the rate of increase in problem assets starts to decline. Essentially, investors are anticipating the return of normalized levels of credit losses well in advance of the actual improvement. They do this because as loss rates decline, banks are able to drop their large vault of accumulated loss reserves to the bottom line. Therefore, earnings growth can be very strong and bank stocks can do very well during this stage in the credit cycle. However, we would stress that it remains highly unclear as to whether or not we are indeed nearing peak loss rates for the cycle.

On the commercial side, credit metrics continue to come in much better than many had feared. The warnings that commercial real estate would be the “next shoe to drop” have thus far been largely unfounded. While losses and problem assets continue to grow, the rate of growth in problem assets declined signficantly in the fourth quarter and the situation is nowhere near the fiasco that many had predicted (at least not yet). Furthermore, management commentary regarding the sale of some problem assests suggest that the secondary market for problem loans is open for business again. This is also a positive.

As we continue to work through the cycle, one thing that is unambiguous is that bank balance sheets have improved dramatically over the past several quarters due to large capital raises and huge additions to loan loss reserves. Moreover, many of the banks have already repaid TARP and the resulting dilution is well known. The balance sheet strengthening is important because it offers protection in the event that losses come in much higher than the consensus expects. However, it is also important because if loss rates are indeed beginning to peak, there is a huge amount of reserves that can be dropped to the bottom line, resulting in outsized growth in book value. Under this scenario, bank stocks would likely perform very well.

So why aren’t we banging the table on bank stocks? We continue to believe that the apparent stabilization in credit quality may be a head fake. We continue to believe that a second leg down in housing may be in the offing based on the removal of key stimulus initiatives. Recent home sales data suggest that the $8,000 tax credits played a huge role in stimulating demand for housing at the lower end of the spectrum. At the same time, the Fed has kept mortgage rates artificially low by purchasing enormous quantities of mortgage-backed securities. Third, as much as 95% of new mortgage loans are now guaranteed by the government through Fannie Mae, Freddie Mac or low-down-payment FHA loans. What will happen when the government removes this support? The private banking sector is clearly not fighting over new mortgage loans, and housing demand will clearly subside when tax credits expire and mortgage rates rise by 50 or 100 basis points (or more). Lower demand for housing and reduced access to credit will mean further home price declines, more foreclosures, and another round of write-downs at the banks.

On the commercial side, we believe the reason for the better-than-expected credit performance within commercial real estate is that bank regulators have provided the banks with flexibility to work with borrowers such that losses will be spread out over a much longer period of time (years instead of quarters). So rather than allocating more capital and reserving for losses on underwater, restructured CRE loans, banks can now modify terms without having to take such measures. This Japanese-style flexibility essentially amounts to kicking the can down the road as these losses will have to be recognized sooner or later. The problem will grow with time.

The bottom line is that we remain cautious on banks as a group. Bank earnings are highly levered to the health of the economy, and we do not think there is much to sustain the pace of recent economic growth once the government steps out of the way. Having said that, we at Farr, Miller & Washington are long-term investors. We buy great companies for reasonable prices with the idea that they will be able to outperform the market over an economic cycle (3-5 years). Therefore, the recent sell-off in bank stocks due to the regulatory uncertainty may in fact provide us with an opportunity to add to our positions in two banks we believe are well positioned to withstand the storms we see on the horizon. However, we will remain underweight in financials until we see more definitive signs of an end to this miserable credit cycle. Finally, we would note that the BKX bank index (an index of 24 large bank stocks) has been flat since August while the overall market has trended higher.

Our outlook for 2010 is modestly positive.  We would be delighted with 10% returns.  The main question for 2010 and perhaps 2011 is the questionable sustainability of the current rebounds both for stock prices and economic data.  Stunning amounts of government money averted disaster in the financial system and have served to stem mounting losses in jobs, housing, and credit.  The economic contraction has been artificially forestalled and somewhat reinflated.  Will the latest government hot air be replaced by the warm trade winds of real economic growth or will the contraction resume as accomodations are removed?   Everyone has an opinion, but NO ONE KNOWS.

Our 2010 list, therfore is defensive and has exposure to international and emerging markets.  Most names have lagged during the market rebound, and all have excellent balance sheets.  Few of our names are “well-loved” by the Street.  Long time reader will note that this year’s list does not include a financial stock and that we have added an energy company.
PepsiCo (PEP – $60.52)
PepsiCo is a leading global snack and beverage company operating in four major business segments: Frito-Lay North America, PepsiCo Beverages North America, Quaker Foods, and PepsiCo International.  The company manufactures, markets and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.  The company has leading market share in many of its product categories, and its presence in all major emerging economies positions the company for continued growth well into the future.  While the stock has appreciated over 38% since the market lows in March, it now trades at a discount to the market at 14.5x the consensus estimate for 2010.  Historically, PEP has traded at an average of over 20x EPS and a considerable premium (25+%) to the market.  Combining the attractive valuation with a rock-solid balance sheet and a 3% dividend yield, we find uncommon value in shares at these levels.  Furthermore, the stock’s defensive characteristics should be highly valued in this uncertain economic environment.
CVS Caremark Corp. (CVS – $32.07)
Shares of CVS sold off sharply following the company’s most recent conference call, on which management lowered financial guidance for the company’s Pharmacy Benefits Manager (PBM) segment.  The problem at the PBM stems from the fact that management deviated too far from its core offerings as a PBM and spent too much time trying to sell new services, such as the ability to fill 90-day scripts at either retail or via mail order.  This issue is confined to the PBM segment, as the fundamentals at the core retail business have been quite good in recent quarters.  Having said that, management has acted swiftly to address the PBM problems, most recently by hiring a new president of PBM operations.  Our analysis suggests that even if the original rationale for combining a PBM with a drug retailer is completely disproved, the company still trades at a very attractive multiple of 12x our conservative estimate for 2010.  This valuation is even more appealing if we value the company on a sum-of-the-parts basis.  If we assume a market multiple of 15x on our estimate for core retail EPS of $1.78 in 2010, we would effectively be getting the PBM for an about 6x our 2010 EPS estimate for that segment – well below the multiples commanded by similar PBM’s.

Wal Mart (WMT – $53.43)
After holding up much better than the market on the way down, Wal Mart did not participate in a signficant way during this year’s massive rally off the March lows. However, we believe the company is ideally positioned for a protracted period of increased consumer frugality, higher consumer savings rates, and relatively stable energy prices. Recent data confirm this assertion as Wal-Mart’s domestic stores consistently posted superior same-store sales results throughout the recession. The largely positive sales results, which stood in stark contrast to other retailers which had been posting sizable sales declines, were the result of a “trade-down” effect to more affordable substitutes, Wal-Mart’s high percentage of staples offerings, and sharp declines in gasoline prices during the worst of the economic crisis. Going forward, the stock offers attractive value at just 13.5x the consensus estimate for 2010, which is a meaningful discount to the overall market at 15.0x. The combination of attractive valuation, reasonable growth prospects, relative earnings stability, and balance sheet strength position WMT for out-performance in a volatile economic environment.

United Technologies (UTX – $69.33)
Shares of United Technologies have rallied over 85% from the March low, but are still trading at a reasonable market multiple of 15x the consensus estimate for 2010.  While we still have lingering concerns about the company’s exposure to commercial aerospace, and US housing and commercial construction, we also believe the company’s outstanding track record is likely to continue over the longer term given its strong global presense, particulary within emerging economies.  The company recently provided guidance for EPS growth guidance of 7-13% in 2010 based largely on significant restructuring initiatives taken throughout the downturn.  These proactive initiatives reflect management’s prowess in navigating difficult environments and ultimately coming out stronger as conditions improve.  The company also consistently generates free cash flow in excess of net earnings, enjoys significant revenue contribution from more recurring and stable aftermarket business, and sports a dividend yield of 2.2%.   Reflecting our belief that investors will increasingly ascribe more value to quality blue chip names with strong management, we find solid value in shares of UTX at today’s level.
Dell (DELL – $14.24)

Dell’s business model, once envied by every other IT hardware manufacturer, has come under enormous pressure in recent years.  Demand has shifted dramatically away from corporate buyers willing to buy Dell computers in bulk over the Internet to finicky consumer buyers more inclined to purchase a computer from a physical retail location.  Dell has done a terrible job of reacting to this trend and financial results have suffered as a result.  So why do we like Dell at current levels?  The answer is simple.  We believe that the market is giving Dell virtually no credit for growing its business over the next 5 to 10 years.  DELL currently trades at 11x 2010E EPS, or 9x 2010E EPS excluding the cash on the company’s balance sheet.  This valuation tells us that the market is discounting some growth in 2010 and then virtually no growth into perpetuity.  This assessment by the market appears far too conservative to us.  There are numerous ways to reach a forecast of 10%+ growth for DELL over the long-run, including: 1) an improving global economy, 2) a shift in industry demand from the consumer to the enterprise, 3) an enterprise IT upgrade cycle, and 4) continued cost-cutting which would boost Dell’s currently depressed margins.  As such, we find the current risk/reward proposition appealing for long-term investors.

Nokia (NOK – $12.70)
Nokia is the world’s largest producer of cell phones (37% global market share).  The stock has been weak of late due to the tough global economic environment and because the company has lost several points of market share in recent quarters.  We believe that this recent weakness represents an attractive investment opportunity for long-term investors.  Nokia currently trades at 12x 2010E EPS and offers investors a 4.0% dividend.  2010E earnings, though higher than 2009 earnings, are still expected to be roughly half of what Nokia managed to earn in 2008.  The market appears to be assigning almost no chance that Nokia stabilizes its market share and improves its margins from the currently depressed levels.  We’ve watched Nokia stumble and then regain its footing multiple times over the past 10 years.  Meanwhile, we take comfort in the company’s solid balance sheet, great cash flow, solid returns on capital, top 5 global brand recognition, huge global scale advantage, and excellent presence in the emerging markets.  As such, we find the current risk/reward proposition attractive for long-term investors.

Exxon Mobil (XOM – $68.36)
Exxon Mobil outperformed the market during the decline, but has failed to participate in the rally off the March lows as investors have jettisoned this name for lower quality and higher beta energy companies.  Since March 9th, ExxonMobil is up just 7% versus a 48% rise for the energy sector and 64% for the S&P 500.  Investors remain concerned about the company’s sheer size, which naturally inhibits its ability to grow both reserves and production.  On the other hand, ExxonMobil is the industry’s most efficient operator and remains well positioned to out perform many of its energy peers over a full-market cycle since its vast resources allow it to acquire and develop oil and gas reserves in times of weakness.  Its recent acquisition of XTO Energy may not pay immediate dividends, but it has the potential to help the company grow production and become the global leader at developing unconventional natural gas reserves.  The stock trades at just 11.7 times the 2010 consensus estimates, has the best balance sheet in the industry, and is trading at 3.3x book (low end of the historical 2.8x – 4.2x range).  Given the attractive valuation and other investment attributes, we find the current risk/reward proposition attractive for long-term investors.

Medtronic (MDT – $44.10)
The company is a leader in a diverse group of high growth industry segments, including cardiac rhythm management, vascular, cardiac surgery, spinal, gastrointestinal, urology, diabetes, neurological, and ear, nose and throat.  Foreign sales currently account for nearly 40% of total company sales.  Medtronic’s end markets should continue to grow significantly faster and in a more stable manner than the overall U.S. economy due to attractive demographic trends. Specifically, we believe that MDT has a reasonable chance of increasing EPS at a low- to mid-teens annualized pace over the next five years.  Recent stabilization in the company’s core ICD markets, numerous new product offerings in 2010, and the longer-term benefits from Medtronic’s recent acquisitions in certain high-growth medical technology markets, give us confidence that the company is turning a corner.  Health care legislation should provide the company with new customers, although the proposed tax on the medical device industry is an offset.  We find the shares, valued at roughly 13x 2010E EPS, attractive for long-term investors.

Patterson Companies (PDCO – $27.85)
Patterson operates three business units: Dental Supply (70% of sales), Veterinary Supply (18% of sales), and Rehabilitative Supply (12% of sales).  Patterson and Henry Schein continue to enjoy significant scale benefits vs. smaller competitors in the Dental business.  U.S. demographics remain favorable for solid long-term dental industry growth.  The Vet and Rehab businesses were created through bolt-on acquisitions.  These industries share many characteristics with the Dental business (e.g. solid long-term secular growth trends, not particularly economically sensitive, etc.) but differ from the Dental business in that these markets remain extremely fragmented.  Consolidation opportunities in these fragmented areas should allow Patterson to boost its growth rate significantly over time.  PDCO currently trades at roughly a market multiple (~15x) on 2010E EPS.  We believe that PDCO offers long-term investors a unique combination of downside protection (earnings didn’t actually fall during this economic downturn) and high-quality, above-average long-term growth at a reasonable valuation.

Johnson & Johnson (JNJ – $64.65)
We believe that Johnson & Johnson is an excellent choice for uncertain economic times.  Johnson & Johnson is one of the world’s largest and most diversified healthcare companies. The company sells Pharmaceuticals, Medical Devices & Diagnostics, and Consumer products. Johnson & Johnson sports a AAA balance sheet, generates huge free cash flow, and has churned out 12%+ annualized earnings per share growth over the past 10 years.  The S&P 500 has rallied over 60% since the March 2009 low.  Many high quality, low beta stocks have under performed over this period as investors have flocked to severely depressed, lower quality stocks.  As a result, it is our view that many high quality companies are now trading at very reasonable valuations in relationship to both the overall market and their lower quality peers.  Johnson & Johnson is a perfect example of this trend.  JNJ is up 36% off of its March 2009 low and currently trades at 13x 2010E EPS with a 3.0% dividend yield.  Improved certainty on the healthcare legislation front should calm investor fears for the entire healthcare sector.  We continue to like JNJ for long-term investors.

* The securities identified and described do not represent all of the securities purchased, sold, or recommended for client accounts.  The viewer should not assume that an investment in the securities identified was or will be profitable.

The S&P 500 index rose every day last week and finished with a 2.7% gain. This gain came despite a disappointing jobs report, which showed another 85,000 jobs were lost in December. A survey from MarketWatch expected a gain of 15,000 jobs. On the bright side, temporary-help jobs rose by 46,500. This is often a precursor to growth in full-time jobs.

The Holiday shopping season turned out a little better than expected as some store retail sales in December rose 2.8% compared with a year ago, according to the ICSC sales index. Paradoxically, consumer debt fell by a record $17.5 billion in November and continued a streak of monthly declines that now stretches 10 months. Maybe consumers were paying cash for all their holiday goodies?

This week ushers in a new earnings season and experts project a whopper. Corporate profits are expected to rise 184% in the fourth quarter of 2009 compared to the year-earlier period, according to Thomson Reuters. Of course, numbers can be misleading as the year-ago period included massive write-offs by major banks. By comparison, these banks should show healthy profits in the quarter that just ended as they are enjoying a wide spread between their cost of money and the rate at which they can invest it. If you remove the financial stocks, profits are expected to rise a more benign 8%.

As with every new year, there will be challenges and opportunities. Through diligence and discernment, we will try to minimize the impact of the challenges and maximize the gain from the opportunities.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

DO THE WILD SWINGS WE’VE SEEN IN THE MARKETS over the past couple years defy explanation? How is it that the S&P 500 index can drop 56% between October 9, 2007 and March 9, 2009 and then turn on a dime and rise 69% over the next 10 months, according to data from Yahoo! Finance? How can a company like Bank of America decline 94% and then rise 380% – all in less than the 30 months ending December 31, 2009? Or, how about Alcoa dropping 87% then more than tripling during the same period as Bank of America, according to The Wall Street Journal?
 
Aren’t the markets supposed to be “efficient” and “rational?”
 
These massive swings seem to happen with frightening frequency and investors who are unprepared for them will likely pay a heavy price. Benjamin Graham, arguably the “father” of security analysis and author of a classic book by the same name, said the price of a stock reflects two components. The first component, investment value, represents the discounted cash flow of all the company’s present and expected future earnings. The second component, speculative value, is driven by sentiment and emotions such as fear and greed.
 
It is not much of a stretch to suggest that an oscillation between investment value and speculative value may help explain the head-spinning volatility of the past few years. In other words, as markets rise or fall rapidly in short periods, speculative value may take prominence. Conversely, when markets are stable or moderately trending, investment value may take the lead.
 
Keeping this idea of investment value versus speculative value in mind can help us do a better job of maintaining a disciplined perspective on market volatility. It can help us better understand and potentially profit from the market’s periodic “inefficiency” and “irrationality.”
 
Weekly Focus – Think About It
 
“The individual investor should act consistently as an investor and not as a speculator.”
–Benjamin Graham
 
Office Notes

The Perfect Retirement Storm

When 401(k) plans were officially sanctioned by Congress in 1982[1], the S&P 500 index had been struggling to gain traction for more than a decade.[2] Back then, few could have imagined one of the longest bull markets in U.S. history was about to begin![3] By the time the new millennium arrived on January 1, 2000, the S&P 500 had generated an average annual total return during the ‘80s and ‘90s of more than 17.5%,[4] according to Vanguard!  

But, the seeds of potential disaster were being sown for some soon-to-be retirees in the early 2000s as they began to implement the “lessons” they’d learned over the previous two decades. Here are three of the soon-to-be-doomed lessons:

·    Stocks may go down temporarily, but they’ll soon go back up. For plan participants who’d been watching their account balances balloon over the years it was normal to believe that owning stocks wasn’t as potentially risky as they’d been told. And the last five years of the 1990s “proved” this to be “true” as the S&P 500 total return averaged over 20% per year from 1995-1999,[5] according to data from Yahoo! Finance. Many media pundits were proclaiming a “New Era” of ongoing investment gains had arrived as our global economy was linked via the internet, forever canceling normal business cycles.

·    Use “conservative” withdrawal rates from your 401(k) – like 10% per year. When it came time to retire and begin taking income from their retirement accounts, some retirees logically assumed they could easily withdraw 10% per year without eating into their principal. After all, stocks had been doing much better than that for many years. But, a hypothetical retiree with $500,000 in the S&P 500 who began withdrawing 10% annually in 2000 would have no money left by 2007, according to Thomson/Reuters Investment Analysis.

·    Leave your money in your 401(k) when you retire because it’s “free.” Some retirees believed they would be better served by leaving their funds in their 401(k) when they began taking withdrawals because there were no or low fees. But, that’s not necessarily the case according to the Department of Labor (DOL). A DOL study found that the fees charged for 401(k) plans varied widely, and were often difficult for consumers to understand.[6] And, in some cases, it may cost no more to engage a professional investment consultant with access to literally thousands of investment choices.

As the decade of the 2000s winds down, another historic investment milestone appears to be in reach – that of the worst decade for stocks in the history of the market. It may eclipse the disaster of the 1930s during the Great Depression, which saw the S&P 500 produce an average annual total return of 0.0%, according to Vanguard.

Unfortunately, for many retired 401(k) participants who bought into the “lessons” learned during the heady days of the ‘80s and ‘90s, time is not on their side. The funds they have lost over the past decade can’t be easily replaced. And some may have lost everything they had spent a lifetime accumulating for their “golden years.”  Of course, hiring a professional financial advisor doesn’t guarantee retirement success. But, it usually provides access to many more choices and opportunities for retirees to possibly reach the goals for which they’ve worked so hard.

Properly structuring your beneficiary designation could potentially extend the income tax deferral on your IRA assets for decades after your death. And even though your beneficiaries must take the annual required minimum distributions (RMDs) after your death, the balance of the assets in your IRA can continue to accumulate tax deferred. 

You may be wondering how this all works.  In order to get the most “stretch” out of your IRA, neither you, your spouse or your children would withdraw more than the RMD amount, which is determined by life expectancy. If each generation withdraws only the RMD amount, the assets can continue to experience potential growth and tax deferral. 
With a traditional IRA, keep in mind that taxes are owed on withdrawals and, of course, withdrawing assets limits the potential for growth and tax deferral benefits. With a Roth IRA, however, the tax-free growth feature as well as the absence of minimum distribution requirements during your lifetime can potentially increase the amount you pass on to your heirs after your death.

Let’s take a look at an example.  Say a husband names his wife as the primary beneficiary for his $1 million IRA.  Upon the husband’s death, the wife rolls the IRA assets into her own IRA and names her three children as beneficiaries.  When she passes away, the $1 million in assets are divided three-ways and the children set up separate IRA beneficiary accounts to receive payments based on their life expectancy.

Let’s say the oldest child is 50 years old, the second is 45 years old and the youngest is 40. Assuming an eight percent growth rate in the accounts and that only RMD withdrawals are made at the end of each year, the oldest child would end up with nearly $1.8 million in total distributions from the IRA, the middle child with $2.3 million and the youngest child with around $3 million for a total of more than $7 million distributed over the lifetimes of the three children.

As you can see, by stretching out the husband’s IRA and taking advantage of the continued tax deferral and compounding benefits, the IRA’s assets can potentially go from $1 million to more than $7 million after his death.

Keep in mind this example is for illustrative purposes only and does not reflect the performance of any specific investment.  Investments held in an IRA will fluctuate such that an investor’s shares when redeemed may be worth less or more than the original value.

Be aware — a stretch-out IRA is most beneficial if you have sufficient retirement income and don’t need more than the IRA’s annual minimum required distributions once you turn 70 1/2. If you plan on stretching out your IRA assets to benefit your children or grandchildren, you should know that, depending on the size of your estate, taxes may play a large role so carefully consider the impact of stretching-out the IRA. When planning your estate, be sure to work with your financial, legal and tax advisors. Each can play a role in understanding your objectives and structuring your estate to help you meet your goals.

Dividend paying stocks or ETF’s.  Not all stocks are created alike and investors often overlook this strategy of generating income.  Investing in a diversified group of stocks that pay dividends may be a good strategy for those looking for potential price appreciation and income stream.  You will be able to use the dividend payments as income or reinvest them into your portfolio as you see fit.  With this strategy, it is important to evaluate the companies you may be investing in before making your selection and verify that the fundamentals are strong and that they are likely to continue paying dividends to investors. 

Mutual funds.  Another strategy for generating income while maintaining proper portfolio diversification is mutual funds.  You may be able to take systematic withdrawals from your mutual funds.  These can serve as an “income stream”, while enabling you to enjoy the benefits of diversification. While mutual funds are a popular investment for many different types of portfolios, you may not have thought of them as a potential income source.     
Laddered bonds.  Staggering bonds with different interest payment and maturity dates has been popular for many income investors.  By laddering the interest payment dates, you’ll be receiving the interest income throughout the year at different times instead of all at once.  And by staggering the maturity dates, the bonds will mature at continue the laddering process if desired. 

Variable Annuities.  A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. Variable annuities let you invest in the stock market through mutual fund-like accounts. When you are ready to take income from your annuity you can convert to a lifetime income stream.  The major drawback with the older annuities is that you lose control over those assets once you convert and in most cases the payments stop upon your death.

There is a new breed of Variable Annuities that can provide income for life and there are two popular kinds of guaranteed payouts. With guaranteed minimum withdrawal benefits, you can take out up to a certain amount every year — 5% or 6% of your initial investment had been typical — no matter how your investments perform or how long you live. Some annuities let you boost the annual guaranteed withdrawal amount if your account value increases.  If there is money left in the annuity you can pass it on to your heirs.

The other variation, a guaranteed minimum income benefit, also allows you to withdraw up to a certain amount each year (again, 5% to 6% had been typical). Plus, you always have the right to convert to a lifetime income stream based on the original investment amount, even if the balance in the account falls below that level. Although you give up control of your money, you may be able to increase your annual withdrawals to 8% or more. The older you are when you annuitize, the higher your payouts.

Fixed annuities. In simple terms, an annuity is an agreement between you and an insurance company.  With a fixed annuity, your assets earn a fixed interest rate and can accumulate tax-deferred.  Also, the issuing insurance company guarantees* the interest and your principal against loss so you won’t be as affected by market fluctuations. Fixed annuities also allow you to exchange the money you accumulate in the contract for a fixed income stream for a specified time or as long as you live.

Life insurance.  Purchasing a life insurance policy has many benefits including an income tax free payment to your beneficiaries upon your death.  In addition, many life insurance contracts offer cash value buildup.  This cash value accumulates tax-deferred.  Contract owners seeking income can access the cash value, in many cases, without taxation.

Keep in mind, not all of the above strategies are appropriate for every investor so it is vital that you work closely with your financial consultant in order to develop the best plan for your financial situation.  Be aware that the value of some investments will fluctuate and may be worth more or less than the original investment when redeemed.  Also, as your situation changes or new developments occur, you’ll want to revisit your portfolio to ensure the changes are reflected in your allocation of investments.

I’m of the camp that stocks will have at least an average year.  And what I mean by average is 7-10%, simply because I believe money will start to flow out of bonds and have to go somewhere.  The logical place would be equities.  Bond investors are in a quandary with rates as low as they are.  Clearly bond prices will be vulnerable when we see the momentum of interest rates start to increase higher.

I’m advising my clients to stay with relatively short to intermediate term bonds, say 5-8 years.  These will not be as volatile as the longer term issues.  What’s more, I like bond funds as opposed to individual bonds.  Bond funds will be able to go “out with the old and in with the new” easier than an individual.  Of course, one of the top bond funds is the Pimco Total Return.  This is an investment grade corporate bond fund that has done extremely well in any interest rate environment.

I added a few new stocks to the list.  Please adhere to all stop levels

Defining The Roth IRA
Simply stated, the Roth IRA is an IRA that individuals make contributions to on an after tax basis (contributions to a traditional IRA may be made with pre-tax money). When qualified withdrawals are taken1, they are totally free from federal income tax (state income tax treatment may vary depending upon your state of residence).

Benefits of a Roth IRA
There are three.

1.) Passing income tax-free money to an heir. The estate planning benefits begin with the Roth IRA’s ability to pass money to a beneficiary income tax-free on qualified distributions at your death, provided the Roth IRA satisfies a five-year holding period.

2.) The Roth IRA avoids forced depletion at old age. Due to minimum distribution requirements (forced distributions at age 70 ½), many traditional IRAs may be substantially depleted if their owners live into their late 80s or beyond. Since a Roth IRA faces no such requirements, it can continue to benefit from tax deferral each year with no requirement to take distributions.

3.) Contributions may continue through any age. Provided eligibility requirements are met and that you have compensation (as defined by the Internal Revenue Code).

With the Roth IRA, you may have the opportunity to save more money for your heirs than with a traditional IRA, especially if you live a long time. Do remember that IRA money, including money in a Roth IRA, passed to heirs will be included in your gross estate for federal estate tax purposes.

Meet with your tax advisor and financial professional to discuss your personal situation and how a Roth IRA strategy may help you to meet your goals.

1Tax-Free Roth IRA withdrawals of earnings permitted five years after first contribution creating account. Once the five year requirement is met, distributions will be free from federal income taxes if taken: (1) after age 59 1/2; (2) on account of disability or death; or (3) to pay up to $10,000 of the expenses of purchasing a first home. Withdrawals of earnings made earlier than five years after the first account contribution creating the account for purposes not aforementioned, will be subject to a 10% IRS penalty and taxed at ordinary income tax rates.

Yes, with the Cash Balance Plan.  The CBP is a hybrid of a traditional defined benefit plan and a 401(k) plan.  This combination is often a good fit for professional service organizations, such as doctors groups,  law firms, consultants and high net worth business owners of closely held companies which have demonstrated a consistent profit pattern and will continue to do so for several more years.  The Cash Balance Plan offers an enhanced retirement vehicle which allows for accelerated retirement savings, while taking advantage of potentially tremendous tax benefits.  Depending on the situation as much as $200,000 per individual.

An increasing number of highly compensated individuals are finding that contributions made to their 401(k) and profit sharing accounts have reached the maximum allowable amounts. However, now those highly compensated individuals can increase their contributions through the increasingly popular Cash Balance Plan. The main  retirement plan in the United States, 401(k) plans allow participants to contribute up to $21,500 for 2009, depending on the participant’s age. A profit-sharing plan allows employers to contribute another $30,500 on behalf of the participant.  However, once the annual maximum contribution has been reached ($54,500 for those 50 years of age and over or $49,000 for those under 50 years of age), then no further contributions can be made for that participant on a pre-tax basis.  On the other hand, a Cash Balance Plan contribution can be as much as $200,000 per year, which varies by age. For individuals making in excess of $250,000 per year and who have a need for additional tax deductions, a Cash Balance Plan might provides a welcome respite from the low retirement plan contribution levels available through a 401(k) profit sharing plan.

The cash balance plan also has the benefits of creditor-proof asset protection and Benefit protection provided by the Pension Benefit Guaranty Corporation (PBGC).

The plan comes with some hurdles but could be well worth investigating.

If you have assembled a “hodgepodge” portfolio, you may not know the extent to which your investments are (or are not) consistent with your objectives. How do you go about setting up a framework which tailors your investments to your particular circumstances?

A sound portfolio management strategy begins with asset allocation – that is, dividing your investments among the major asset categories of equities, bonds and cash. Since each type of investment category has unique characteristics, they rarely rise or fall at the same time. Then, you can make finer distinctions within each asset category (i.e., diversification). Combining different asset classes could help reduce risk, although it doesn’t eliminate market risk altogether. Still two nagging questions remain: What factors guide the asset allocation process? How much of a portfolio should go into each category.

To answer the first question, the main objective of asset allocation is to match the investment characteristics of the various investment categories to the most important aspects of your personal investment profile – that is, your tolerance for risk, your return and liquidity needs, and your time horizon.

Investing according to your risk tolerance will help keep you from abandoning your investment program during times of market turbulence. One way to measure your risk comfort zone is to ask yourself how much of a loss in a one-year period you could withstand and still stay the course.

Finding an appropriate match for you means balancing your tolerance for risk against the different volatility levels of various asset classes. For example, if you have a low tolerance for risk, that fact may dictate a portfolio that emphasizes conservative investments while sacrificing the potentially higher returns that usually involve a greater degree of risk.

Return need refers to the income and/or growth you expect a portfolio to generate in order to meet your objectives. For example, retirees may prefer a portfolio that emphasizes current income, while younger investors may wish to concentrate on potential growth.

Your personal time horizon extends from when you implement an investment strategy until you need to begin withdrawing money from a portfolio. For example, a very short time horizon (less than 5 years) is probably best served by a conservative portfolio emphasizing safety of principal. On the other hand, the more time you have to invest, the greater risk you may be able to withstand because you have time to recover from market downturns.

The short answer to how much of a portfolio should go into each category is that asset allocation is more a personal process than a strategy based on a set formula. There are guidelines to help establish the general framework of a well-diversified portfolio. For example, you may decide on the need for growth in order to offset the erosion of purchasing power caused by inflation.

However, building an investment portfolio that is right for you involves matching the risk-return tradeoffs of various asset classes to your unique investment profile. One final point that is worthy of emphasis – when you put together your own asset allocation strategy, you should combine all your assets (i.e., your investments and retirement savings). That way you can ensure that all your assets are working together to help meet your goals and objectives. Keep in mind, investment return and principal value will fluctuate with changes in market conditions so that shares may be more or less than original cost. Diversification cannot eliminate the risk of investment losses.

The price of the shiny yellow metal keeps on rising despite little sign of rampant inflation or extraordinary fear in the markets. Prices jumped last week on news that India purchased 200 metric tons of gold from the International Monetary Fund as a way to diversify its foreign-exchange reserves. Gold bulls took that as a cue to get on the gold bandwagon.

The jobless rate and the economy seem to be living in alternate universes. The economy grew 3.2% in the third quarter, yet the jobless rate continued to spike, hitting a rate not seen since the early 1980s. Yes, they say employment is a lagging indicator, but, at some point, we have to start seeing a net increase in jobs or else we risk a double-dip recession.

Warren Buffett made perhaps the last major purchase of his lifetime by agreeing to acquire the remaining shares of Burlington Northern Santa Fe Corporation that he did not already own in a $44 billion deal. Surprisingly, for a debt-adverse investor, he will borrow roughly $8 billion to complete the deal. (BNI close 11/6/09 $97.23)

And the stock market? No matter the news, it seems to take it all in stride as the Dow Jones Industrial Average closed above the 10,000 mark. The bulls are making it difficult for the bears to find an opening.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

THERE IS A FINE LINE between having the conviction to stick to an investment position that is temporarily going against you versus being flexible enough to change your mind as the situation changes. Knowing how to discern that line is an important part of successful investing.

Before you make an investment, here are three things you should know:

1. The rationale or thesis behind your investment.
2. The level at which your investment would become “fully valued.”
3. What would have to happen for you to realize that your rationale or thesis was no longer valid.

Having clarity on those three items makes it easier for you to know where that line between conviction and flexibility lies.

The British economist John Maynard Keynes famously said, “When the facts change, I change my mind. What do you do, sir?” Since nobody knows for certain what the future holds, we have to review the data as it arrives. If that data is materially different from our original thesis and the market is responding to it, then that will likely cause us to change our mind. This concept of conviction versus flexibility is something we are conscious of and we use it to help us be better – and more flexible – investment managers.

The dollar’s recent move up has taken its toll on commodity prices, especially gold.  The precious metal is down over $120 and ounce over the past few weeks.  I think there is some upside at current levels.

Good earnings news will help stocks today, as Nike, Oracle, Research in Motion and Palm all reported after the close yesterday.  These companies had very strong performance in their most recent quarter.  In fact, Oracle said the recovery is in place.

With today being a quadruple witching Friday, I look for the volume to be huge.  I’m not sure if a rally will have legs next week, when the volume dries up to nothing, but today should be a fun one.

I have an announcement to make to you, my subscribers.  I’ve decided to no longer charge for my service.  This is a business decision, as I feel that if I give more people access to my commentary, it would help the other aspects of my business.  That said, I have made the adjustments and as of today there will not be any more charges on your credit cards.  I will continue to give you my comments on the markets and stocks 2-3 times a week.

If you have assembled a “hodgepodge” portfolio, you may not know the extent to which your investments are (or are not) consistent with your objectives. How do yougo about setting up a framework which tailors your investments to your particular circumstances?

A sound portfolio management strategy begins with asset allocation – that is, dividing your investments among the major asset categories of equities, bonds and cash. Since each type of investment category has unique characteristics, they rarely rise or fall at the same time. Then, you can make finer distinctions within each asset category (i.e., diversification). Combining different asset classes could help reduce risk, although it doesn’t eliminate market risk altogether. Still two nagging questions remain: What factors guide the asset allocation process? How much of a portfolio should go into each category.

To answer the first question, the main objective of asset allocation is to match the investment characteristics of the various investment categories to the most important aspects of your personal investment profile – that is, your tolerance for risk, your return and liquidity needs, and your time horizon.

Investing according to your risk tolerance will help keep you from abandoning your investment program during times of market turbulence. One way to measure your risk comfort zone is to ask yourself how much of a loss in a one-year period you could withstand and still stay the course.

Finding an appropriate match for you means balancing your tolerance for risk against the different volatility levels of various asset classes. For example, if you have a low tolerance for risk, that fact may dictate a portfolio that emphasizes conservative investments while sacrificing the potentially higher returns that usually involve a greater degree of risk.

Return need refers to the income and/or growth you expect a portfolio to generate in order to meet your objectives. For example, retirees may prefer a portfolio that emphasizes current income, while younger investors may wish to concentrate on potential growth.

Your personal time horizon extends from when you implement an investment strategy until you need to begin withdrawing money from a portfolio. For example, a very short time horizon (less than 5 years) is probably best served by a conservative portfolio emphasizing safety of principal. On the other hand, the more time you have to invest, the greater risk you may be able to withstand because you have time to recover from market downturns.

The short answer to how much of a portfolio should go into each category is that asset allocation is more a personal process than a strategy based on a set formula. There are guidelines to help establish the general framework of a well-diversified portfolio. For example, you may decide on the need for growth in order to offset the erosion of purchasing power caused by inflation.

However, building an investment portfolio that is right for you involve matching the risk-return tradeoffs of various asset classes to your unique investment profile. One final point that is worthy of emphasis – when you put together your own asset allocation strategy, you should combine all your assets (i.e., your investments and retirement savings). That way you can ensure that all your assets are working together to help meet your goals and objectives. Keep in mind, investment return and principal value will fluctuate with changes in market conditions so that shares may be more or less than original cost. Diversification cannot eliminate the risk of investment losses.