Making Cents

February 2010 Monthly Economic Update

Fri, 12 Mar 2010 10:30:00 -0600

Monthly Economic Update for February, 2010

The month in brief. We saw a very pleasant 180º from January. New M&A action, nice corporate profits and the possibility of a rescue for Greece helped the market. By the end of February, 457 companies in the S&P 500 had issued 4Q earnings reports, with earnings per share about 154% above a year ago.(source) The S&P 500 had its best February since 1998, rising to 1,104.49.(source)

Domestic economic health. Consumer spending increased, even though consumer confidence didn’t. Personal spending advanced by 0.5% in February, and the Commerce Department also noted a 0.7% gain in inflation-adjusted purchases of durable goods and a dip in the personal savings rate to October 2008 levels. It suggested consumers were shopping enthusiastically.(source) Yet consumer confidence indices went south: the Reuters/University of Michigan index went from 74.4 to 73.6 and the Conference Board barometer went from 46.0 from 55.9.(source)

How about the manufacturing and service sectors? The February data showed more growth. ISM’s manufacturing index came in at 56.5, and its service sector index read 53.0 (up from 50.5 in January.)(source)(source)

As for consumer and producer prices, something really notable happened: core CPI fell by 0.1% in January. It was the first monthly decline since 1982. Overall CPI rose 0.2% for January. PPI rose 1.4% in January, 0.3% factoring out food and energy costs.(source)

In Washington, it appeared to be reconciliation or nothing when it came to health care reform. (Since 1980, reconciliation has been used 22 times in Congress and succeeded 19 times, one of those results being the Bush administration tax cuts.)(source) Sen. Harry Reid (D-NV) introduced a jobs bill that would exempt employers from payroll taxes on new hires for the rest of 2010. Its fate was uncertain in the House.(source)

Global economic health. Would the Eurozone ride to the rescue of Greece? At the close of the month, it formally asked Greece for a plan to control its debt. Meanwhile, some economists speculated that the nation would be bailed out by some kind of unprecedented EU action. The respected Markit Economics PMI survey showed manufacturing increasing in Europe at the fastest rate in over two years; Eurozone joblessness also ticked down 0.1% to 9.9% in February.(source)

Japan’s jobless rate was 4.9% in February, down from 5.1% a month earlier. Its GDP, which had been flat in 3Q 2009, came in at +1.1% for 4Q 2009. New data showed that China’s economy grew by 8.7% in 2009. Impressive? Certainly. Yet look at Taiwan: we learned last month that its economy was growing at an annualized rate of 18.0% during 4Q 2009.(source)(source)(source)

World financial markets. It was truly a mixed bag last month – some indices had great gains, others big losses. Some gains in the Asia-Pacific region: Shanghai Composite, +2.10%; Hang Seng, +2.42%; Australia All Ordinaries, +1.18%; Sensex, +0.44%. Losses in that region: South Korea’s Kospi, -0.49%; Nikkei 225, -0.71%. In Europe, the FTSE 100 gained 3.20% while the DAX and CAC 40 respectively declined -0.18% and -0.82%. Russia’s always volatile RTSI was -4.51%. The best-performing and worst-performing indices of the month were the benchmark indices of Mexico (+4.09%) and Turkey (-9.05%). The MSCI Emerging Markets Index declined by 0.27% in February, while the MSCI World Index gained 1.77%.(source)(source)

Commodities markets. The broad commodities market staged a rebound last month – and the dollar kept strengthening. The U.S. Dollar Index gained another 1.12% in February to go +3.20% on the year. On the NYMEX, the big mover was oil, which had its finest month since May 2009, advancing 9.29%to erase some severe January losses. Other fuels did well last month: RBOB gasoline futures gained 8.64% and diesel fuel gained 8.00%.(source)

In metals, copper shot up another 7.58%. Other metals logged nice gains in February: gold rose 3.31%, silver 1.91%, platinum 2.25% and palladium 5.11%.(source)

It was winter, and when it came to crops, there was volatility. Pork bellies performed better than any other notable commodity in February, posting a 12.02% gain. Other commodities had banner months: soybean oil, +9.82%; wheat, +9.55%; copper, +7.58%. Sugar futures cratered, dropping 21.07% on the month. Orange juice was +5.51% last month and +11.27% through the first sixth of 2010.(source)

Housing & interest rates. Snow or no snow, the January numbers weren’t pretty. Existing home sales fell 7.2% from the previous month – on the bright side, they were 11.5% above January 2009 figures.(source) New home sales dropped 11.2% to a record low adjusted annualized sales rate of 309,000 units – and that was a 6.9% descent from year-ago levels.(source)

We all knew mortgage rates would rise; it was just a question of when. Last month turned out to be “when”. By the end of February, rates on 30-year FRMs averaged 5.05%. As for averages on other kinds of mortgages, the percentages were as follows: 15-year FRMs were averaging 4.40%, rates on 5-year hybrid ARMs were averaging 4.16% and rates on 1-year ARMs averaged 4.15%.(source)

Oh yes, Fannie Mae asked for $15.3 billion more from the Treasury to keep its net worth in the plus column. It also announced plans to buy up as many as 200,000 delinquent home loans out of mortgage-backed security trusts in March.(source)(source)

Major indexes. Stocks made up a lot of ground last month. It was not only the S&P 500’s best February in 12 years, but also the NASDAQ’s best February since 2000. At the end of February, the real yield on the 10-year TIPS was at 1.48% - right where it was at the end of 2009.(source)(source)

%Change	02-2010	YTD 2010
Dow Jones	+2.56%	-0.99%
NASDAQ	+4.23%	-1.36%
S&P 500	+2.85%	-0.95%
10Yr TIPS Real Yield	+13.85%	0.00%

(Source: CNBC.com, ustreas.gov, 2/26/10)(source)(source)

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

March outlook. We had some really nice signals at the start of the month – consumer spending increasing by the biggest monthly amount since mid-2008, a mid-50s ISM manufacturing index reading, and some strong M&A activity, all welcome after some very poor numbers concerning housing and consumer confidence in preceding days. The market ultimately decided to pay attention to mergers and earnings in February and take some of its collective mind off economic challenges. Will that trend continue this month? The markets have weathered the sovereign debt crisis nicely, and seem resilient enough to handle all but the biggest geopolitical shocks. Worth noting: at the start of March, the Dow, NASDAQ and S&P 500 had each crested their 50-day moving averages.(source)

Please feel free to forward this article to family, friends or colleagues.
If you would like us to add them to our list, please reply with their address
and we will contact them and ask for their permission to be added.

New Careers After Age 50

Thu, 11 Mar 2010 11:00:00 -0600

New Careers After Age 50

Where The Jobs Are, How to Spruce Up Your Skills and Ready Your Finances for the Change

During the recent recession, many have found themselves back in the job market after age 50 due to layoffs or changing demands at their employers. Yet as life expectancies lengthen, a late career change isn’t always a negative. It may be a welcome chance to renew, re-educate and restart a full life.

It’s possible that in the future, an over-50 career change might become a common event, maybe even a desired event in our society – which means it’s definitely worth planning for.

A visit to a fiduciary fee-only financial planner might be a good first step in planning a move to a second career or dealing with a sudden change in your career prospects. You need to plan for any possible change in income up or down in any opportunity you entertain. You’ll also need to plan how you’ll afford any training you’ll need – college or otherwise – in making that successful transition. To make an over-50 career transition successful, it’s all about preparation. So here are some ideas:

Start with research: One of the best-detailed, up-to-the-minute career resources for the types of jobs that exist in this country and their salary and hiring forecasts is the U.S. Bureau of Labor Statistics’ Occupational Outlook Handbook. This extensive online resource not only lists major career groups, but the leading occupations in it. If you haven’t been in the job market for awhile, this kind of research is a good way to reset your knowledge of your industry and whether its hiring prospects are bright. This database also lays out the need for the necessary training required to reach certain salary and career levels.

Check industries that are friendly to older workers: Healthcare and education are just two industries that are more welcoming to older workers. U.S. News & World Report has come up with its own list of popular over-50 occupations, and it’s a good starting point for people looking for flexible scheduling and other workers their age in the field.

Network: Face-to-face contact with people in your target fields is important. If you can, check out events at professional organizations in that field or attend casual networking functions to learn more. Being someone over 50, you can get an idea of whether there’s true age diversity in a field and how all those groups work together – or if you’re simply the oldest person in the room. Obviously if you feel welcome, networking will give you a better idea of which companies with someone with your maturity and experience might fit in. Consider adding your profile/resume to Linkedin.

Emphasize your up-to-date experience and training, not your birthday: Career experts suggest that older workers should lead with work experience and skills and leave off all but the most essential timeframe information. You’re not there to lie about your work experience, but the reason young workers are so valuable is that they’ve gotten the most recent training and they are generally less costly to employ. That’s why older workers should lead with every strength that makes them attractive to employers and should de-emphasize descriptors that broadcast age.

Make your perspective an asset: If you are already familiar with the industry you’re targeting, you can use your extensive work experience to position yourself as a problem solver. If you know what a company really needs in your chosen job, say so in the cover letter and be clear in stating why you’d be a great solution.

Consider timing issues at your current employer: If you are up for a salary review soon, it might make sense to have a better idea of what you’re worth in the marketplace. Also, as the end of the year is coming, you might want to use up any money in your flexible benefits accounts for medical appointments, glasses or dental work before you leave.

Don’t be shy about approaching managers who aren’t hiring – publicly: The best jobs aren’t always advertised. Instead of limiting your options to companies with posted openings, send letters of introduction to managers at firms where you’d really like to work. And again, make your perspective an asset – if you can see what a great role for you would be in their organization, tell them about it. The worst thing they could do is not respond. The best might be an interview that puts you on their radar screen.

Get in shape: It’s not just a matter of looks. Healthy employees cost less. It makes sense to lose weight if you need to and upgrade hair and wardrobe not to look like a twenty-something, but to fit in comfortably at the organization where you want to work.

Decide what you’ll be doing with your 401(k) and other retirement funds: You may not want to make any moves for awhile, but it’s good to talk with a fiduciary fee-only CFP® professional about whether you’ll be moving that money to private accounts. Also, make sure you know when you can enroll in the company 401(k) and other retirement offerings at your new employer.

Secure your health insurance: You might wait a few months to a year for new health coverage to kick in at a new job. You might need to buy private insurance until then or go onto a spouse’s health plan in the meantime.

Please feel free to forward this article to family, friends or colleagues.
If you would like us to add them to our list, please reply with their address
and we will contact them and ask for their permission to be added.

When Doing Your Own Taxes Makes Sense

Tue, 09 Mar 2010 11:00:00 -0600

When Doing Your Own Taxes Makes Sense

And When It Doesn’t

Tax deadline is April 15, so if you haven’t begun gathering your annual tax records it’s time to do so. Every year, however, people’s lives change – they buy and sell houses and move, they take new jobs, have kids, buy and sell stock. Those and dozens more reasons might give you cause to hire a tax preparer.

It’s worth going over the primary reasons why some people should get help with their taxes and others can continue going it alone.

Should you do it by yourself? If you meet the following circumstances, you can probably do your taxes by yourself:

• You work for only one employer who gives you a W-2 tax form each year.

• You rent your residence and don’t own a home or vacation property.

• You don’t have kids or other dependents.

• You don’t have any complex investments such as a partnership, a trust or extensive stock holdings.

• You really like numbers, are willing to investigate annual changes to the tax code and double-check your work.

• You’re comfortable doing computations by calculator or by hand, or by using tax software on your computer or online.

For do-it-yourselfers with computers, the Internal Revenue Service’s Free File program is aimed at some 95 million taxpayers with an Adjusted Gross Income (AGI) of $57,000 or less in 2009 to prepare and e-file their federal tax returns for free. E-file, the IRS’s online tax filing service, is available to both tax professionals and individuals with compatible home computer tax software. You can learn more about the e-File program here.

Should you seek help? It generally makes more sense to get help with your taxes if:

• You’re buying or selling property.

• You own a business or rental property.

• You get regular income from a trust or partnership.

• You trade investments frequently or have a complex portfolio.

• You’ve undergone a major financial impact during the previous tax year, such as a divorce, death of a spouse, an inheritance or a move of more than 50 miles for a new job.

• You are supporting a child between the ages of 19 and 24 who is a full-time college student.

• You don’t have time to do it yourself.

• You are subject to the Alternate Minimum Tax (AMT).

• Your income has increased by a considerable amount from the previous year.

You’re still legally responsible for your return even though you have professional help, so it’s important to choose a qualified professional to help you. The IRS gives the following suggestions for finding a qualified preparer:

1. Ask how they charge: Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.

2. Don’t believe promises: If a preparer guarantees results or bases fees on a percentage of the amount of the refund, be suspicious. Tax preparers aren’t allowed to charge a contingent fee (percentage of your refund) for preparing an original tax return.

3. Ask what preparers will need: Reputable preparers will expect you to provide receipts and other paperwork if they need it to justify the return they’re preparing for you. You need to keep scrupulous records.

4. Make sure you know exactly who’s preparing your return: It’s OK if your preparer has onsite staff assistance in preparation of your return, but the person you hire needs to be the person who reviews your return and signs off on it.

5. Investigate your preparer’s record: Check with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents.

6. Check your preparer’s credentials: Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.

7. Stay aware of tax scams: Newspaper business sections and news programs focus on abusive tax shelters and scams. So does www.IRS.gov. If you have a preparer encouraging you to get involved in tax avoidance strategies that are overly complex, check them out before you agree to jump in.

How Fast the Markets Recover

Fri, 05 Mar 2010 11:30:00 -0600

HOW FAST THE MARKETS RECOVER

A look at how the markets have rebounded through the years.

The stock market is amazingly resilient. You might be surprised at how fast the stock market can change … for the better. Let’s look at how the market has recovered remarkably – and quickly – from some notable downturns.

2008-2009. The collapse of the subprime mortgage markets triggered a recession and made 2008 the poorest year for stocks since 1931. The Dow Jones Industrial Average fell 10% in June 2008 and fell 10% again in October 2008, losing 19.12% for the year. On March 9, 2009, the major U.S. indices closed at 12-year lows with the S&P 500 at 676.53.(source)(source)(source)

Then the market took off. Investors who swore off stocks in early 2009 lost out on one of the great rallies. From the March 9 lows to the end of 2009, the S&P 500 soared 64.83% while the NASDAQ gained 78.87% and the Dow gained 59.28%.(source)

2001-2002. After the four-day closure of the stock market following 9/11, the Dow fell 685 points to 8,920 on September 17. It kept falling, losing 14.26% in a week to close at 8,235 on September 21. But what happened next? A huge gain. The Dow closed 2001 at 10,021 – a 21% rebound in less than three months.(source)

There were more challenges ahead. On October 9, 2002, the Dow had fallen to 7,286. But on Halloween, the Dow sat at 8,397 – a 10.6% gain in 22 days.(source)

As for the people who panicked and bailed out of the stock market, they ended up kicking themselves: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.(source)

1987. October 19 was Black Monday: in a contagion of selling exacerbated by unchecked computer technology, the Dow lost 22.6% in one day, falling to 1,738, a 508-point loss.(source) (That would be akin to a 2,400-point one-day drop today.) The S&P 500 lost 20.4%.8 By comparison, the initial “Black Monday”, the stock market crash of 1929, represented a 12.8% market loss.(source)

Then the recovery kicked in. During the next two trading days, the Dow gained nearly 300 points – and it closed 1987 at 1,939, gaining back all of the loss and ending up 2% for the year.(source) By January 1990, the DJIA was at 2,800.(source)

If you were fortunate enough to invest $1,000 in the S&P 500 index at the close of Black Monday and reinvested your dividends, you would have wound up with about $10,800 20 years later.(source) If you had invested in the Dow stocks a week before Black Monday, you would have lost 30% on your investment in the crash … but if you held on, your investment would have gained 462% over the next 20 years.(source)

1974. With investors fretting over rising inflation and the energy crisis, the Dow loses 30% of its value during the first three quarters of the year. Suddenly, the Dow gains 16% in October.(source) In early December 1974, the Dow is at 577; in July 1976, it hits 1,011.(source)

So while the Dow, S&P and NASDAQ have been through some rough periods (and even a poor decade), the important thing is how they have climbed historically.

On August 12, 1982, the Dow was at 777. On January 14, 2000, it was at 11,722.98. That’s a 1,500% gain in 17½ years.(source) This is why people stay in the market through the downturns. This is what the market is capable of achieving. There are periodic descents, but history is definitely on an investor’s side.

Breaking the Surface

Wed, 03 Mar 2010 12:30:00 -0600

BREAKING THE SURFACE

Four tips for recovering from unemployment.

Any period of unemployment is fraught with stress – both personal and financial. While landing that formerly-elusive new job can be a relief, it is only the first step on the road to recovery from unemployment. This transition time is akin to breaking the surface after being underwater for several minutes. It’s a relief to be breathing again and feel the sun on your face, but it’s no time to relax. You must start swimming right away to get back to a healthy financial shore.

Here are four steps you can take to help make sure your recent unemployment doesn’t cast a long shadow across your future financial health.

Continue to live lean. More likely than not, you weren’t buying $4 coffees while unemployed. Five star restaurants were out too. Hamburger may have replaced steak. You may want to continue to follow that pattern. We tend to grow into our incomes, our budgets bloating along with our salaries. Fighting that urge will help with the rest of the steps to unemployment recovery.

Protect yourself ASAP. The longer your unemployment lasts the more important basic survival becomes. Someone who is unemployed may let life insurance, disability insurance or health insurance policies lapse as they try to keep current on the mortgage, pay utilities and put groceries in the pantry. Sometime during the first few days of your employment you should enroll in whatever benefits you need your company offers. If the new firm does not offer the coverage you need, make an appointment with an insurance professional and use part of your first paycheck to protect you and your family. Remember, the income from your new job won’t benefit anyone if a catastrophic illness, disability or death suddenly takes it away.

Develop a plan to pay down your debts. When you have a job, debts are a nuisance. When you don’t have a job, they may become a threat to your future financial well-being. While it’s normal to hope you never have to go through unemployment again, you must start preparing for the possibility.

If you are behind on your mortgage, call your lender to let them know of your new job and to work with them on a plan to catch up on your payments. If they are unwilling to work with you, consider using a Federal resource such as those offered by the U.S. Housing and Urban Development Administration.

While there are fewer similar programs for car loans, calling your lender and trying to develop a plan for a loan you’re behind on should be your first step.

All too often during unemployment, credit cards may be used to get by when cash is low. While your interest rates may have been low when you initially signed up for the card, new legislation has caused a spike in credit card rates.(source) Rates of 20% - 30% are not uncommon as banks react to new rules. Paying down these balances should also be a primary goal.

Remember to start paying yourself. Whether you call it a rainy day fund, a nest egg or emergency cash, slowly, paycheck by paycheck, begin paying yourself a fraction of your salary. Some experts will argue a family should keep six months to one year’s worth of expenses in the bank for unexpected events such as a blown car engine, the roof caving in, or another round of unemployment.(source) For many families, that may feel like an insurmountable sum. But as the old joke goes “How do you eat an elephant?” The answer: “One bite at a time”. Paying yourself has to be done paycheck-to-paycheck, little by little.

A Medigap Update

Mon, 01 Mar 2010 12:30:00 -0600

A MEDIGAP UPDATE

New changes are taking effect. New policies may have lower premiums.

Lower premiums ahead? Back in 2005, Congress voted to make major changes to Medigap plans effective June 1, 2010. While these changes are a bother, they could indirectly result in reduced premiums for these policies.

As the “modernized” Medigap plans sold after June 1 will have some differences from previous plans, insurers will be allowed to reset rates. Competition may drive premiums lower.

Please note: we’re talking about new Medigap policies that will be sold after June 1. If you already have a Medigap policy or buy one before June 1, these new changes won’t affect your plan, and you don’t need to replace your existing plan unless you feel the need.

Just to clarify things further, Medigap plans are Medicare supplement plans, not Medicare Advantage plans.

The changes in brief. In June, three Medigap plans are going away, another is being modified, and two new plans are being introduced. Also, a new benefit will be included in all plans.

•    Plan E, Plan H, Plan I and Plan J will no longer be sold beginning June 1. (If you have one of these plans, you can continue to renew it as long as you keep paying premiums.)(source)

•    Two new lower-cost options will be available: Plan M and Plan N. Both come with some unique cost-sharing.

o    Plan M looks like Plan D with a couple of alterations. It covers just 50% of Medicare’s Part A deductible; 100% of Part B co-insurance is covered, plus skilled nursing facility care and emergency care in foreign countries.(source)

o    Plan N also resembles Plan D, but there are differences. Plan N will pay the full Part A deductible, but it asks you for co-payments of up to $20 for each covered healthcare provider office visit (including specialists) and up to $50 for each covered emergency room visit (you don’t pay that $50 if you end up being admitted to a hospital).(source)

•    Plans D and G will not come with preventative care and at-home recovery benefits after June 1, 2010. After June 1, Plan G coverage of Part B excess charges will be raised from 80% to 100%.(source)

•    A hospice care benefit will be added to basic benefits of Plans A-G.(source)

How easy would it be to switch to a lower-premium plan? If you’re going to celebrate your 65th birthday in the next few months, you can enroll in a Medicare supplement plan now and switch to a lower-premium plan in June, as you’ll be in the six-month open enrollment period. If you are older than 65, of course, you’ll have to go through underwriting to switch to a lower-premium plan – but if you’re healthy, making the switch to a cheaper plan may not be difficult at all.

Could you save on prescription drugs as well? If you find yourself hard-pressed to pay for prescription drugs, see if you qualify for Medicare’s new Extra Help program, which is worth an average of about $3,900 a year to Medicare recipients.(source)

As of January 1, 2010, Medicare no longer counts money contributed by others to pay your household expenses as income. It also no longer counts your life insurance policy as an income resource. This means that more people can qualify for prescription drug savings.

Basically, a married couple living together qualifies for Extra Help if it has less than $25,010 in resources (savings and investments) and less than $21,855 in annual income. For individuals, the limits are $12,510 in resources and $16,245 in annual income. However, you still may qualify even if you have earnings from work.(source)

Downsizing Isn't All About Stuff

Mon, 22 Feb 2010 12:00:00 -0600

Downsizing Isn’t All About Stuff:

It Can Be a Smart Financial Move, Too

As people move into their 50s and 60s, priorities change. The hours spent on home improvements and the sheer time necessary to maintain a full-sized home seem to be a little more of a burden. As kids move on, there’s all that unneeded space.

Men and women tend to turn on the gas in the last 15-20 years of their working lives to make sure their retirement savings will be adequate to their needs. That’s why the idea of downsizing is a good one to start early. It’s also a good time for a financial check-up as well.

A fiduciary fee-only CERTIFIED FINANCIAL PLANNER™ professional may not be able to help you sort out what dishes and furniture to sell or give away, but he or she would make a good first stop in developing a complete downsizing strategy involving assets, investments, career and overall financial lifestyle planning. With life expectancies lengthening, many people 50-55 years of age could conceivably be at only the midpoint of their lives.

What is the chief advantage to downsizing? Handled correctly, it can save a lot of money. Selling a larger home – possibly one that still has a mortgage – in favor of a smaller house or condo that’s completely paid off can save potentially tens of thousands of dollars in interest payments over time while still building equity. The earlier the process starts, the better.

Here’s a checklist of considerations in downsizing your life:

Get advice first: As mentioned, downsizing should be a holistic process, a chance for a check-up of your overall finances while identifying things, expenses and habits in your life that you can jettison. A fiduciary fee-only CFP® can give you a push by asking important questions that will get you to a better place financially. It’s helpful to set up a plan to extinguish debt in all of its forms and move on to a check-up of savings, investments and estate matters.

Downsize potential health issues: No matter what the final effect of health reform on pocketbook issues, your out-of-pocket and premium-based health costs over time will be cheaper if you take steps to better maintain your health. Make weight and other personal health maintenance issues a new priority as you move into your pre-retirement years.

Plan for a retire-career: You might be working for a company or organization with a mandatory retirement age or you have a year in mind when it might finally be time to pack up and go. And there’s nothing wrong with a retirement devoted to travel and leisure activities. But if you think you won’t be able to afford to quit working completely or if doing nothing will eventually drive you nuts, consider getting some career counseling, personality testing and do some research now that will help you train for a new full- or part-time career for after you retire from your present job.

Start thinking about real estate and new places to live: Today’s retirees don’t necessarily have to move to predictable retirement destinations. Telecommuting allows many people to continue working lives and education from anywhere. For many people, the magic combination might involve cheaper real estate, desired weather and activities, travel options and access to good doctors and quality health care facilities. Decide what kind of home you could see yourself living comfortably in at age 70 or 80. This combination of factors might happen in a surprisingly large number of places based on individual preference. To get you thinking and hone your expectations, start with resources like U.S. News & World Report’s online “Best Places to Retire” selection tools.

Talk to your family: It’s really important to discuss not only your expectations for later in life with your family members, but it’s important to get their feedback on what they consider good ideas for you. There may come a day when you need to rely on others for help, and it would be a good idea to identify how realistic that is. Also, if you’re talking about downsizing certain assets or property that might have been in your family a long time, it’s important to discuss that with others who might be affected by that decision.

Start weeding: Physical downsizing isn’t something that’s done in a month. Give yourself a year to go through each room in your home and prioritize what you’re really going to need if you move to a smaller place. Make a list of what you hope to give to friends and family members and what you’ll donate or trash. Time will give you more opportunities to put good, usable items in the hands of people who could really use them. Develop a recordkeeping system that fits you so you won’t forget any decisions you’ve made along the way. Also, you might want to set up a separate area for family photos and other keepsakes that have high emotional value and set up a hopefully egalitarian system for who will get what either when you move or when you die.

Don’t start upsizing later: When you do move, chances are you will need to invest in some new household items or possibly furniture to match new surroundings. Try to avoid going overboard with this – that’s why thoughtful downsizing should prevent a lot of spending for stuff you’ve already chucked. Oh, and make a permanent life decision if possible not to start re-using credit cards or mortgage debt if you can possibly avoid it in your later years.

Don't Miss the Match!

Fri, 19 Feb 2010 12:00:00 -0600

Don't Miss the Match!

Are you taking full advantage of your company’s 401(k)?

The 401(k) plan is one of the most widely-utilized wealth creation tools offered Americans. These retirement savings plans have several advantages, including dollar cost averaging, tax savings and tax deferral. However, one of the most powerful advantages is the company match. If your company offers a match, are you making the most of it?

Not taking advantage of the company match is like passing up “free money”. Most rational people don’t walk past a $5 bill on the ground without picking it up, but that’s what people do every day when they don’t contribute enough to their 401(k) to get the full company match. A full one-third of employees don’t take advantage of this feature, and it may make their retirement less comfortable.(source)

In a typical plan an employer will match 50% of an employee’s contributions - up to 6% of their salary.(source) Let’s say an employee with that type of plan decides he can’t afford to contribute 6%, but instead chooses to put away 2% of his salary into his 401(k) account. If he’s earning $75,000 a year, his account balance (assuming no growth) will be $2,250 by year’s end. That’s $1,500 of his own money as well as $750 of his employer’s money. If the same person had contributed 6% he would end the year with $6,750 - including $4,500 of his contributions and $2,250 of his employer’s.

By investing just $3,000 more dollars each year ($4,500-$1,500), the employee can make an immediate $1,500 ($2,250-$750). It’s hard to make that type of return in any other environment.

This isn’t a 401(k) plan’s only benefit. The higher account balances from making the most of a company match is magnified further by three other advantages of a 401(k) plan.

Regular investments into your 401(k) may help to reduce risk. Putting a pre-determined amount of money into an investment at regular intervals – as with your 401(k) - is called dollar cost averaging. This is believed, by many experts, to aid in reducing the overall risk of investing by helping an investor avoid buying at market highs. A dollar cost averaging program allows investors to buy more shares when market prices dip. This lowers the average cost of each share purchased. If the share prices go up, the lower cost provides greater return.(source)

Investing in your 401(k) plan is an immediate tax savings. The reason? Every dollar put into the plan avoids being taxed as income.

For example, let’s assume you decide to put $100 per paycheck into your 401(k) plan and you pay 25% of your income in taxes. On payday, $100 will go into your 401(k) plan. However, if you decided against investing in your 401(k), then you’ll only get an additional $75 in your paycheck after taxes. That additional $25 is, essentially, a reward from the IRS for saving for retirement.(source)

Finally, contributing to your 401(k) allows those investments to growth tax-deferred. With most investments, you’ll pay tax on any interest, dividends, capital gains, or proceeds from selling an investment each year. A 401(k) is a shelter from those taxes. As long as you keep the funds in your 401(k), your dollars can grow without having to give a share to the IRS. Over time, this can be a tremendous benefit.

For example, a $10,000 account balance in a traditional investment for 30 years, with a tax rate of 30%, would only grow to $27,970. If those same dollars grew at 6% in a 401(k), they could grow to $33,043 over 25 years. That’s an additional $5,073 to enjoy during retirement.

Maximizing the company match with the inherent tax benefits of a 401(k) can go a long way toward helping achieve the goal of so many Americans … a comfortable retirement.

The Potential of the BRIC Nations

Wed, 17 Feb 2010 16:30:00 -0600

THE POTENTIAL OF THE BRIC NATIONS

Why emerging market equities have the world’s attention.

Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.(source)(source)

Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.

Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.(source)

Look at the last decade. The Dow and the S&P 500 underperformed in the 2000s compared to previous decades. How did benchmark indices in the BRIC nations do?

Are you sitting down? Brazil’s Bovespa gained 301% across the 2000s. India’s stock market gained 249%. China’s Shanghai Composite was the laggard, only rising 72% over that stretch. Russia’s RTSI gained 863% in the past decade.(source)

BRIC, or BRIMCK? Some economists would modify BRIC to BRIMCK, arguing that Mexico and South Korea belong in this collective powerhouse. The key market indices in Mexico and South Korea respectively advanced 44.87% and 49.65% last year.(source)

The opportunity of a lifetime? Wall Street bulls see wisdom in giving more and more weight to the BRICs in portfolios. They draw a line between the impressive, sustained growth of these nations to higher returns and rising demand for capital. They look at these nations and see a rapidly growing middle class and upper middle class and a corresponding rise in spending … translating to a momentous opportunity for global companies who leap into the right place at the right time … translating to great corporate profits down the line.

Of course, this vision assumes that the BRIC nations will a) keep economic policies in place that drive growth, b) avoid political and social upheaval, and c) escape the worst of global economic crises.

A new alliance? A decade ago, “BRIC” was simply Wall Street slang – a term coined by Goldman Sachs economist Jim O’Neill. Today, the BRIC nations appear to be heading toward some form of coalition. In recognition of their power, BRIC leaders have scheduled annual economic summits – the first one was in Russia in 2009, the 2010 summit is in Brazil. The presidents and prime ministers of these countries entered into dialogue to determine how their economies can work together and maintain their fantastic growth.

In sum, the BRIC nations are responsible for about 15% of global GDP, and about 40% of the gold and hard currency reserves on earth are in their possession.(source)

Does the BRIC demand your attention? Some fiduciary fee-only financial advisors believe any well-diversified portfolio should have exposure to emerging markets. The future growth is simply too spectacular to ignore. Others counter with the argument that past performance is no guarantee of future results, and cite the remarkable volatility that can affect the stock markets of these nations. If you are interested in learning more, have a chat with the fiduciary fee-only financial advisor you know and trust.

How Your Personality Affects Your Financial Decision-Making

Fri, 12 Feb 2010 12:30:00 -0600

How Your Personality Affects Your Financial Decision-Making

All investors are not created equal. That’s why many fiduciary fee-only CFP® start their initial client meetings with a discussion of money attitudes, goals and risk tolerance – the driver at the root of all investment decisions. Some financial planners do this by general conversation, others by detailed surveys they ask their clients to fill out.

The survey route can be a more valuable tool because it forces clients to face their money issues, perhaps for the first time. Despite the difficulty in facing up to such key issues, individuals get a better idea of where their money strengths and weaknesses really lie. Often, the real difficulties lie in how money is spent.

The real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, your money viewpoints and current methods of handling it will inform every decision you make about it in the future.

The most important thing a questionnaire can reveal is your true money priorities and behaviors. Trained financial advisers, such as CERTIFIED FINANCIAL PLANNER™ professionals – use both conversation and surveys to reach some firm answers that might surprise you.

Are there particular money types? In reality, you’ll find quite a number of surveys out there that define money types in particular ways, but you’ll find personalities that are common on the scale from conservative to liberal. Deborah L. Price, a Financial Planning Association member and founder and CEO of the Money Coaching Institute, offers these scenarios in an article titled, “What’s Your Money Personality?”:

The Innocent: Price notes that innocents often live in denial, are easily overwhelmed by financial information and rely heavily on the advice and opinions of others. They tend to be the most trusting because they generally don’t see people or situations clearly – which leaves them open to bad decisions at best and fraud at worst.

The Victim: She notes that victims are people who tend to live in the past and blame their woes on outside factors and situations they claim they can’t control. These people may have been abused, betrayed, or have suffered some great financial loss, but they generally see life as a self-fulfilling prophecy that they can’t change.

The Warrior: Generally seen as a successful person in the business and financial worlds, they will listen to advisors, but they make their own decisions. They tend to be great caretakers.

The Martyr: These people generally put other people before their own financial health. They use their money to rescue others based on their high expectations for themselves and the people they’re rescuing, but these decisions may be costly in the long run.

The Fool: The Fool, explains Price, is a combination of the Innocent and the Warrior because they have no clue about what they’re doing but they’ll act fearlessly. They are financially adventurous and they act on impulse.

The Creator/Artist: These people often have a love/hate relationship with money. They’re constantly struggling to make their finances work, but they often feel that caring about money means something bad.

The Tyrant: Price reports that this type hoards money and uses it to manipulate others. They may have everything they need, but they’re never comfortable with their lives because they fear losing control.

The Magician: Price defines the The Magician as the ideal money type. They’re aware of their circumstances and responsibilities and can see situations very clearly.

A fiduciary fee-only CFP® tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:

1.    How would you describe your financial status right now?

2.    What’s important about money to you?

3.    What’s your family history with money?

4.    What do you do with your money?

5.    If money wasn’t an issue, what would you do with your life?

6.    Has the way you’ve made your money – through work, marriage or inheritance – affected the way you think about it in a particular way?

7.    How much debt do you have and how do you feel about it?

8.    Are you more concerned about maintaining the value of your initial investment or making a profit from it?

9.    Are you willing to give up that stability for the chance at long-term growth?

10.    What are you most likely to enjoy spending money on?

11.    How would you feel if the value of your investment dropped for several months?

12.    How would you feel if the value of your investment dropped for several years?

13.    If you had to list three things you really wanted to do with your money, what would they be?

14. What does retirement mean to you? Does it mean quitting work entirely and doing whatever you want to do or working in a new career full- or part-time?

15. Do you want kids? Do you understand the financial commitment?

16. If you have kids, do you expect them to pay their own way through college or will you pay for all or part of it? What kind of shape are you in to afford their college education?

17. How’s your health and your health insurance coverage?

18. What kind of physical and financial shape are your parents in?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation might affect your investment decisions. A fiduciary fee-only CFP® will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you!

Are you Prepared for the Nine Minute Phone Call?

Wed, 10 Feb 2010 12:30:00 -0600

Caregiving 101:

Helping Older Relatives Articulate Their Long-Term Care Wishes

In the coming months, preparation has begun for a presentation to my NAPFA colleagues at our May national convention in Chicago. It is an indeed an honor to be asked. My topic is “Real Life Experiences with Long Term Care and Medicaid". Both clients and colleagues have witnessed the past eight years as Deb and I continue to be caregivers for our collective parents. As the outline for the continuing education course is in preparation stage, we both feel sharing critical beginning steps is very important. Sooner than we ever expect or plan for, we are placed in the caregiver role.

Think about it, you have nine-months to prepare for a new child to be born. With elder care, you may get nine minutes. Our life was forever changed during one phone call when “Granny” broke her hip. She was the primary caregiver to her husband, thus, we were thrust into a dual caregiver role immediately after the nine minute call. How can you be prepared for those nine minutes?

In the best of all situations, helping an older relative or a parent plan for long-term care and various other end-of-life issues happens when they’re healthy and various options can be considered with adequate time to do so. Unfortunately, events can sometimes intervene and make an elder’s need for assistance an emergency.

This is why it’s so important for adult children and younger relatives to gather the courage and preparation to begin a series of important conversations when elders are healthy. Once stricken, older relatives may be unable to understand questions or express their wishes in proper detail. If there is no plan, family members grasp at responsibilities – or shirk them – perhaps without a clear understanding of the older relative would actually want.

These talks need to go far beyond money. There should be discussions about independence and basic preferences for the way individuals want to live and die. Demographers believe with the rising number of single Americans – those divorced or never married – these conversations will become increasingly complicated as they fall to nieces and nephews, younger friends or designated representatives.

How to avoid a worst-case scenario? Start the conversation NOW, Don’t postpone. Here are some ideas:

Start with the most important priorities: Maybe the first conversation isn’t about where to find the will or health care power of attorney, though you’ll eventually have to get to that. Maybe this conversation is about you noticing a parent or loved one is moving slower, is more forgetful, is clearly looking like their health has taken a turn for the worse – and maybe that’s why you want to know where the will is. Even so, jumping into money issues first is usually a mistake. Deal with immediate health and lifestyle issues first.

Prepare your questions in advance: When a parent or relative is unconscious or unresponsive, the designated relative is immediately thrust to the drivers’ seat. That’s why it’s critical to make a list of questions for the elderly relative to answer in detail while they have the capacity to address them. The basics: Where important papers are, how household expenses are paid, who doctors and specialists are, what medicines are being taken and whether there’s a will, an advanced directive and a funeral plan (and money or insurance proceeds to pay for it). There may be dozens more questions beyond these based on your family’s personal circumstances. But in creating this list, which can be very revealing, ask yourself: “What do I need to know if my family member suddenly becomes sick or dies?”

Get proper documents executed. During your search, if the proper documents are not found, make an appointment today! Have an elder care attorney prepare: Will, Directive to Physicians, Durable Power of Attorney for Health Care, and a General Durable Power of Attorney documents. You will need all of these the minute you get the nine-minute call.

Turn the conversation to affording long-term care: One of the greatest continuing fallacies about long-term care is that Medicare pays for it – it pays for a significant amount of medical care associated with it, but not for the actual cost of home-based or skilled nursing home-based care. In 2009, private room nursing home care averaged more than $70,000 a year. Long-term care insurance is something that should be purchased in one’s 50s for the best chance of affordability, but the conversation needs to be a mixture of preferences and finances. If an elder cannot afford top-quality care, families need to plan alternatives, especially if it means pitching in.

Be patient: In some families, having a successful financial discussion means several attempts and expect frustration. Don’t become angry if this happens. Just keep starting the conversation until it begins to take shape and moves forward. It might make sense to say something like, “You’ve always been so independent, Mom. I just want you to give us the right instructions so we do exactly what you want.”

Offer to get some qualified advice: If you don’t fully understand your relative’s financial affairs, it might make sense for you both to talk to an elder care attorney, their CPA, or fee-only fiduciary CFP®. A qualified advisor can help you straighten out whatever confusion exists and can help you put specific legal documents in place and establish ways to pay medical and household bills if they’re unable to do so. If you can, involve your elder in this conversation – an impartial and trusted third party can sometimes move things along. Above all, an elder should have a current will and health power of attorney documents in place – either making or reviewing those documents can be a good starting point for making sure other necessary plans are in place.

Plan a caregiving strategy together: You should discuss the relative’s preferences and trigger points for various stages of health care. An individual always wants to stay in his or her home, but you should have an honest discussion about how much you can do at home as a caregiver and whether various services (home health aide, geriatric care manager, assisted living) should be introduced at various stages. Talking through what a parent will be able to live with at various health stages, and putting that information in writing, will save plenty of doubt and bitterness later. Learn more by reviewing these websites: www.caregiver.org or the www.thefamilycaregiver.org. A geriatric care manager can help you determine what is best for your family; visit www.caremanager.org to find one in your area. To locate specific services in your community, including free or low-cost assistance, contact your local Area Agency on Aging (www.n4a.org).

Discuss what should happen with the home: If an elderly relative becomes sick and irreversibly incapacitated, the equity in his or her home may come under consideration as a resource to pay uncovered medical or household maintenance. Since the home is both a major asset and an emotional focal point, it’s best to get good advice and spell out specifically what the elderly relative wants done with his property and under what conditions.

Make sure everyone knows the plan: Once you settle on a strategy, make sure all family and friends understand the plan and their assignments, based on the individual strengths and comfort level.

Ask for Help. One of the biggest mistakes you can make is trying to go it alone. Many caregivers take on more than they can handle. The stress can put your own health at risk. Reach out to family and friends, senior centers and local services that offer help.

These articles on Interactive Capital Management’s website offer additional knowledge of this critical issue:

“A Primer on Medicare and Medigap Coverage” Money Cents Newsletter 10-19-2009

“Are Your Prepared to Pay for Long Term Care” Money Cents Blog Post 11-13-2009

“Social Security: Late Retirement Boosts Benefits” Money Cents Newsletter 06-2009

“Retiring Early? Don’t Forget About Health Insurance” Money Cents Newsletter 07-2009

It's Not too Late to Get 2010 Off to a Great Financial Start

Mon, 08 Feb 2010 12:30:00 -0600

Get 2010 Off to a Great Financial Start

It's not to late to get 2010 off to a great start. Plenty of people make resolutions to lose weight, get a new job or make other things happen in their personal life, but relatively few make solid resolutions about money. Make 2010 the year you’ll live a better life financially. Here are a few resolutions to think about:

Write down the things you really want in life: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do. Make a list today of your 2010 financial goals and objectives.

Evaluate your risk tolerance: One of the most beneficial things fiduciary fee-only financial planner can do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the recent recession and market turbulence, many individuals would benefit from an analysis of how much risk they want (or need) to take based on what they want to achieve with their money.

Track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order whether you do it on paper or on your computer. Mint.com or QuickenOnline.com are free online programs that help you do this. Try this handy cash flow statement as a first step as well. Go through your checking and credit cards for the past six months to determine where you spent your money.

Get tax and planning advice toward retirement, other goals: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CFP® professional to discuss your whole financial picture.

Cut your debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. And if you can pay extra toward mortgage, auto, student or other borrowings, do so.

Start saving -- or save more: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum amount in your retirement plans and savings.

Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. Keep in mind that bettering yourself is always a good investment.

Redefine the way you shop: If you’re an impulse shopper, break the habit in 2010. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.

Change the way you commute: If driving is the single best option to getting to work or other destinations, it’s tough to make that switch. But if you have the option to leave the car in the garage at least one day a week and walk, bike, carpool or take public transportation instead, try it. You’ll save money on gas, maintenance, insurance and parking costs, you’ll benefit the environment and in the case of walking or biking, the exercise may do you good.

Cut unnecessary expenses: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.

IRA Contribution Deadline

Fri, 05 Feb 2010 12:30:00 -0600

IRA Contribution Deadline

Don’t miss the IRA contribution deadline! Make sure you make your 2009 IRA contribution before April 15, 2010! Fully funding your IRA for 2009 (and 2010) could mean a tremendous boost toward saving for retirement.

If you’ve been contributing $50 or $100 to an IRA each month, there’s room to contribute a lot more. Putting $600 or $1,200 in your IRA annually is nice, but you can direct up to $5,000 into your IRA for tax year 2009 (and up to $6,000 if you turned 50 in 2009).

This $5,000 (or $6,000) IRA contribution limit can fund a traditional IRA, a Roth IRA or be split between the two. The maximum contribution may be reduced if your modified adjusted gross income, or MAGI, is really high.(source)

As for your 2010 IRA contribution … you have until April 15, 2011 to make it, but you can also make it this year and cross it off your to-do list. There’s really no point in waiting until April 2011 to make that 2010 contribution – if you wait that long, you’ll potentially lose 15 months of interest and compounding.

Don’t delay – e-mail me today so I can help you fully fund your IRA. You may call me at 713-521-9525, or e-mail me at curtis@icmcfinancialadvisors.com. I look forward to speaking with you.

Please feel free to forward this article to family, friends or colleagues.
If you would like us to add them to our list, please reply with their address

and we will contact them and ask for their permission to be added.

January 2010 Monthly Economic Update

Tue, 02 Feb 2010 12:30:00 -0600

January 2010 Monthly Economic Update

The month in brief. Wall Street had an eye on Washington for much of last month. Anticipation of earnings season gave way to concern over what might happen if proposed limits on bank risk went into effect, and what might happen if federal tax credits in the housing market went away. Stock and commodities markets fared poorly as some economic data led traders, economists and investors to wonder how much of the recession recovery was attributable to government measures. Still, consumer confidence was on the rise and the economy was clearly on the mend.

Domestic economic health. Some very good news arrived in January: according to the Commerce Department, the preliminary 4Q GDP reading was +5.7%, the best quarter in six years and 1.0% higher than the expectations of analysts. Consumer spending represented 2.0% of the gain. Additionally, the Conference Board’s survey of consumer confidence hit a two-year high last month.(source) The University of Michigan consumer sentiment poll rose by 1.6 points to 74.4.(source) The latest consumer spending data showed a 0.2% gain for December. January also brought the best news on factory output in five years – the Institute for Supply Management’s manufacturing index read 58.4 for the month.(source)

Other news items bothered the Street. In late January, President Obama rolled out a proposal he referred to as “the Volcker rule”. Developed with input from former Federal Reserve chairman Paul Volcker and former SEC chair William Donaldson, the rule would prohibit banks and bank holding firms from getting involved in hedge funds or conducting proprietary trading operations.(source) Intended as a corrective to the behavior of the 2000s, the proposed limits on bank size and bank risk sent stocks skidding, as investors saw reduced potential for bank profits. Tightening in China, debt problems in Greece and a downgrade of the U.K.’s banking system didn’t help the mood.

In terms of rates we all watch, things stayed pretty much the same: the benchmark interest rate remained between 0-0.25% after the latest Federal Open Market Committee meeting, and the Senate reconfirmed Ben Bernanke as Fed chair. We learned that the jobless rate stayed flat in December at 10.0%.(source) The inflation rate (CPI) had inched north 0.1% for December, up 2.7% over the last 12 months with core CPI rising 1.8% in that stretch.(source)

A previously obscure Massachusetts state senator became a person of influence on Capitol Hill. The unexpected election of Sen. Scott Brown (R-MA) effectively derailed passage of the Obama administration’s seemingly assured healthcare reforms. White House press secretary Robert Gibbs claimed that the health care reform bill was still “inside the five-yard line.” There were signals that health insurance reform might be the new tack.(source) This was great news during January!

Global economic health. Concerned about an overheated economy, China told its commercial banks to boost capital ratios; that led to the worst market day in Asia since early November, and it was the first in a series of cautions from the government.(source) China’s GDP was +10.7% in 4Q 2009 with December showing amazing annualized gains in industrial output (+18.5%) and retail sales (+17.5%).(source) The Bank of Japan forecast moderate improvement for that nation’s economy; Japan’s jobless rate fell to 5.1% in December, and its vehicle sales went north in January for the sixth consecutive month.(source)

In Europe, the government of Greece wrestled with a $75 billion budget deficit. Standard and Poor’s took the United Kingdom’s banking system off of its global list of “most stable and low-risk” banking systems.(source) Yet Eurozone consumer confidence increased for the tenth consecutive month in January, even as the latest figures showed unemployment had reached 10.0% for November.(source)(source)

World financial markets. Indices in a few of the BRIC nations posted gains last month. Venezuela’s Caracas General pulled off a 7.7% increase, and Russia’s RTSI rose 3.3%; the Jakarta Composite in Indonesia gained 3.0%. (The world’s best performing index was the CASE 30 in Egypt, which rose 7.8% last month.) Most world indices took monthly losses, as follows: Hang Seng, -8.0%; Shanghai Composite, -8.8%; Sensex, -6.3%; All Ordinaries, -5.9%; Nikkei 225, -3.3%; STOXX 600, -2.4%; DAX, -5.9%; CAC 40, -5.0%; FTSE 100, -4.1%. The MSCI World Index fell 3.67% in local currency terms; the MSCI Emerging Markets index lost 4.47% in January.(source)(source)(source)

Commodities markets. Most commodities struggled on the NYMEX last month. Three posted January gains of 5% or better: coal, +8.31%; sugar, +9.80%; orange juice, +5.46%. Platinum prices went up 3.15% and palladium prices gained 0.93%. Gold lost 1.20%, silver 3.89% and copper 8.79%. Gold ended the month at $1,083.00 per ounce. Crude oil, which finished January at $72.89 per barrel, lost 8.15% for the month. Crops were hit hardest, with soybeans down 12.83%, wheat down 12.47%, corn down 13.99% and oats down 17.69%. The U.S. Dollar Index gained 2.07% last month.(source)

Housing & interest rates. What would happen with the housing market without federal subsidies in place? The latest new and existing home sales figures made analysts wonder. Purchases of existing homes fell by 16.7% while new home purchases dipped 7.6%; both figures reflected the assumption that government tax credits were expiring.(source) Construction spending slipped 1.2% in December.(source) On the bright side, National Association of Realtors tallies put existing home sales for 2009 approximately 5% above levels of 2008.(source)

What about mortgage rates? Did 30-year FRMs manage to average under 5% for another month? The answer is yes. On January 28, Freddie Mac tracked average interest rates on 30-year FRMs at 4.98%. Rates on 15-year FRMs were averaging 4.39%, rates on 5-year hybrid ARMs were averaging 4.25% and rates on 1-year ARMs averaged 4.29%.(source)

Major indexes. January brought some chills to Wall Street, with the proposed “Volcker rule” and concerns about financial pressures in China, England and Greece affecting the three marquee indices.

% Change	1-Month	YTD 2009
Dow Jones	-3.46%	+18.82%
NASDAQ	-5.37%	+43.89%
S&P 500	-3.70%	+23.45%
10Yr TIPS Real Yield	-12.16%	-30.84%

(Source: CNBC.com, ustreas.gov, 1/29/09)(source)(source)

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

February outlook. The Dow opened February with strong gains, as it did in January – it seemed those who had sold stocks toward the end of the month wanted to buy back in. Some feel a correction is coming after the fantastic gains of 2009; in late January, the S&P 500 broke it 80-day moving average for the first time since March.(source) Bulls feel January represented a short-term blip on the radar screen in response to the headlines of the moment, and that investors will proceed cautiously but with confidence.

The Decade in Review

Thu, 28 Jan 2010 12:30:00 -0600

THE DECADE IN REVIEW

A look at stocks, commodities and memories (good and bad).

A turbulent ten years. The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify.

Stocks. Was it really a “lost decade”? It depends on how you were invested. Yes, the Dow ended the 1990s at 11,497.12 and ended the 2000s at 10,428.05, amounting to a 9.30% slip. The S&P 500 lost 24.10% in the same interval. If you had invested a lump sum into an index fund tracking the S&P 500 on December 31, 1999 and left those assets untouched for ten years, you would have ended up with a sizable loss.(source)(source)

Well, that sounds dismal - but how many of us actually invest this way? Very few of us make one lump sum investment and just watch it for ten years. Thanks to diversification, rebalancing and constant inflows of new money, quite a few investors were able to grow their assets and/or outperform the S&P 500 in the past decade.

The fact is, five sectors of the S&P 500 gained 10% or more across the 2000s – health care (+10.85%), utilities (+10.92%), materials (+24.91%), consumer staples (+31.84%) and energy (+102.12%).(source)

Few articles about the “lost decade” mention this notable factoid: the Russell 2000 advanced 23.90% during the 2000s.(source) Mutual funds that focused on buying undervalued small-company stocks gained an average of 8.3% annually in the 2000s.(source)

Outside America, developing stock markets shattered all expectations while the developed markets mirrored American performance. Look at the decade-long gains in key indices in some of the BRIC nations, as measured by CNBC.com: China, +72%; India, +249%; Brazil, +301%; Russia, +863%. Compare those gains with the benchmark indices in Japan (-44%), France (-34%), Great Britain (-22%) and Germany (-14%) in the past decade.(source) Emerging market mutual funds gained an average of 9.3% per year in the last ten years.(source)

Commodities. It was a decade of amazing gains in the broad commodities market. From the end of 1999 to the end of 2009, gold advanced 278.52%. How about silver and copper? Silver gained 208.91% and king copper rose 287.78%. Crude oil rose 210.00% during the 2000s.(source)

How great a decade was it for the commodities sector? Only one notable commodity posted a ten-year loss from 12/31/1999 to 12/31/2009. That was palladium, which retreated 8.98%. On the other hand, we know that 16 commodities gained 100% or more across the decade.(source)

The two biggest gainers during the 2000s were a pair of crops: sugar (+340.36%) and cocoa (+293.31%).(source)

Highs and lows. We are 10 years past the bursting of the tech bubble – March 10 will mark the 10th anniversary of the NASDAQ’s all-time high of 5,132.50.5 And of course, a decade-defining geopolitical event rocked the markets 18 months later.

General Motors and Chrysler filed for bankruptcy protection in 2009; at the start of the decade, so did Enron - the company that Fortune Magazine ranked as “most innovative” each year from 1995-2000.(source) In 2008, Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch, and Washington Mutual either folded, mutated, or were bought up while AIG, Freddie Mac and Fannie Mae were bailed out.

The Dow hit a new high of 11,723 in January 2000, a post-9/11 closing low of 7,286 in October 2002, and then ended 2003 at 10,453 (as the DJIA gained 25.32% that year while the dollar lost 14.67%). The Dow hit new peaks of 11,727 on October 3, 2006 and 14,164 on October 9, 2007. A close of 11,215 on July 2, 2008 officially marked the start of a bear market.(source)

From March 9, 2009 closing lows to the end of the year, the Dow shot up 59.28% and the S&P 500 advanced 64.83%.(source) This led to some to entertain tantalizing thoughts about the birth of a new bull market. Or it is simply a cyclical bull in a secular bear? The jury is still out, as the saying goes; we can hope for the best.

What did we learn? The 2000s taught us lessons about irrational exuberance (companies that had never made a dime were probably not worth billions) and lessons about the value of diversifying your portfolio. We also learned lessons in perseverance – those who stayed invested have seen their portfolios make a strong recovery.

The 2000s put investors through some seemingly unimaginable financial headlines. It was a rare decade, an aberrant one in stock market history – for example, the Dow hadn’t had a negative decade since the 1930s, and it had advanced 228.25% over the 1980s and 317.59% for the 1990s.(source) Will we see it make a double- or triple-digit advance in the next ten years? We don’t know. Past performance is no indicator of future success. Yet the awesome potential of the stock market should not be dismissed – and with economies healing the world over, it is clearly time to look forward and stay invested.

Managing Inflation Risk

Fri, 22 Jan 2010 12:30:00 -0600

Managing Inflation Risk

As the capital markets have improved, more investors have shifted their concern from weathering the financial crisis to anticipating the inflationary effects of rising federal spending and debt. Many people are asking how they can prepare for potentially higher inflation. This blog post explores two basic ways to address inflation uncertainty and highlights asset groups that may prove useful.

As you consider strategies, remember the difference between expected and unexpected inflation. Asset prices already reflect the market’s expectations about future inflation, given all available information. Inflation may turn out to be worse than expected, and this risk of unexpected inflation is what some investors may want to manage.

Hedging vs. Total Return Strategies

Investors can prepare for unexpected inflation by following one of two basic strategies—hedging the immediate effects of inflation or earning a total return outpacing inflation over time.

Hedging involves choosing assets whose value tends to rise with inflation. Although holding these assets may reduce the total return of a portfolio, the positive correlation with inflation can help an investor keep up with rising consumer prices, at least over the short term. (Correlation refers to the co-movement of asset returns. When two assets are positively correlated, their returns tend to move together; when negatively correlated, their returns are dissimilar.)

Candidates for hedging include retirees, fixed income investors, and others who would experience a diminished living standard during an inflationary period. These investors are willing to forfeit long-term growth potential for more immediate inflation protection.

In a total return strategy, an investor attempts to outpace inflation by holding assets that are expected to earn higher real (inflation-adjusted) returns. This investor is willing to give up short-term inflation protection for an opportunity to grow real wealth. Younger investors are typically well suited for this strategy because they have many years until retirement and expect their earnings to advance faster than the inflation rate. As they save and invest for the future, they can accept more risk through greater exposure to higher-return assets, such as stocks.

To insulate a portfolio from unexpected inflation risk, both strategies may employ some combination of stocks, short-term fixed income, and Treasury Inflation-Protected Securities (TIPS). Let’s consider each of these:

Stocks

Equity securities have provided a positive inflation-adjusted return over the long term. From 1926 through 2008, the total US stock market, as measured by the CRSP 1-10 Index, outpaced inflation by an average of 6.16% per year. (see end notes) To achieve this higher expected real return in stocks, however, an investor had to accept more risk, as measured by greater volatility in returns, and endure periods when stocks did not outpace inflation. As a result, stocks may be less effective for hedging short-term inflation and more suitable for investors who want to beat long-term inflation by earning a higher total return.

Some investors assume that high inflation leads to lower stock market performance, while low inflation fuels higher stock returns. In reality, inflation is just one of many factors driving stock performance. US market history since 1926 shows that nominal annual stock returns are unrelated to inflation.

Fixed Income (Bonds)

Higher inflation can hurt bondholders in two ways—through falling bond market values triggered by rising interest rates, and through erosion in the real value of interest payments and principal at maturity. This inflation exposure tends to impact the prices of long-term bonds more than those of short-term bonds, and investors can mitigate the effects of rising interest rates by holding shorter-term instruments.

Many types of investors may benefit from holding short-term bonds. When interest rates are climbing, a portfolio with shorter-term maturities enables an investor to more frequently roll over principal at a higher interest rate. This can help inflation-sensitive investors keep up with short-term inflation and enable total return investors to reduce portfolio volatility, which can lead to higher compounded returns and growth of real wealth.

Treasury Inflation-Protected Securities (TIPS)

Issued by the US government, TIPS are fixed income securities whose principal is adjusted to reflect changes in the Consumer Price Index (CPI). When the CPI rises, the principal increases, which results in higher interest payments. At maturity, an investor receives the greater of the inflation-adjusted or original principal. The inflation provision enables TIPS to preserve real purchasing power and hedge against unexpected inflation.

TIPS are generally a good short-term inflation hedge since principal is adjusted for changes in the CPI. They are also a good portfolio diversifier for some long-term investors due to their negative correlation with equities and relatively low correlation with most types of fixed income assets. TIPS were introduced in 1997, so these correlations are based on a relatively short sample period.

However, keep in mind TIPS prices have also have been affected by changes in real interest rates, so TIPS may not track inflation one-to-one in the short term or over longer periods of time. In fact, TIPS can lose market value if real interest rates increase.

Commodities

Commodity futures, as well as gold and oil, are perceived as effective inflation hedges because their returns are positively correlated with inflation. But commodities are more volatile than stocks, and their returns do not always rise with inflation because of this significant volatility. So adding these assets to a portfolio may increase real return volatility, which could offset the benefits of hedging.

Investors should also consider the economic argument against holding commodities. Unlike stocks, commodity futures do not generate earnings or create business value. They are essentially a speculative bet in which there is a winner and loser at the end of each trade. Moreover, a broad-based stock portfolio already has significant commodity exposure through ownership of companies involved in energy, mining, agriculture, natural resources, and refined products.

Summary

While the media have featured divergent opinions and theories about the effects of recent government actions on inflation, no one really knows how consumer prices will respond to the complex forces at work in the economy and markets. Investors should carefully review their financial circumstances and investment goals before making changes to their portfolio.

As you assess your exposure to a high-inflation scenario and form a strategy that reflects your financial goals and risk tolerance, consider that:

•    Expected inflation is built into asset prices. In our view, markets efficiently integrate all known information into prices. Thus, current prices already reflect expectations of future inflation. Only unexpected news will affect the inflation outlook.

•    Hedging unexpected inflation has a cost. Investments traditionally regarded as effective short-term inflation hedges have lower historical returns than stocks—and some have much higher volatility.

•    Volatility matters. Evaluating assets solely on their ability to track inflation disregards the effect of volatility on returns and risk. Some assets that are positively correlated with inflation have large return variances, and adding these to a stock and bond portfolio may increase overall volatility.

Even with the prospect for higher inflation, investors who take a total return approach may be better served than those who choose assets based on correlation with the CPI. By choosing assets with higher expected long-term returns and maintaining broad diversification, investors can seek to grow real wealth and preserve the purchasing power of their dollars.

Complimentary related commentary include this Money Cents Newsletter article:

Managing Asset Allocation in Your Investment Portfolio

Endnotes
Real return calculation: (1+CRSP 1-10 Index return)/(1 + US CPI)-1. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca stock exchanges. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

Disclosures
Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics.

Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes.

CRSP is a non-profit center that also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26,500 stocks, both active and inactive. OTC bulletin board stocks are not included.

The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money.

Diversification neither assures a profit nor guarantees against loss in a declining market.

2009: The Financial Year in Review

Wed, 13 Jan 2010 12:30:00 -0600

2009: The Financial Year in Review

“Many an optimist has become rich by buying out a pessimist.”

Robert Allen

The year in brief. The market improved; the economy improved. The doomsayers with visions of “Dow 4,000” were disproven. The Great Recession in all probability ended. Unemployment reached and remains at 10%, and major automakers went bankrupt, reorganized and shed brands. Stocks went on a nine-month rally of historical proportions. Major healthcare reform made its way through Congress. It was a hard year for Main Street but a gratifying year for Wall Street.

Domestic economic health. In 3Q 2009, the U.S. economy grew again, telegraphing an end to a recession that likely lasted about 18 months. U.S. GDP had come in at a pitiful -5.8% and -6.4% for 4Q 2008 and 1Q 2009, then improved to -0.7% and +2.2% in subsequent quarters.(source) How much of the improvement can you credit to the government stimulus? Good question. The Federal Reserve kept interest rates at record lows, and the Obama administration put forth the "Cash for Clunkers" program and first-time buyer credits to encourage auto sales and home sales.

Businesses and consumers endured through a rough first half into a better second half. Most notably, 2009 saw Chrysler and General Motors entering and emerging from bankruptcy, with Chrysler eventually partnering with Fiat. Saturn, Pontiac, Saab and Hummer all flirted with or faced extinction. The closely watched and highly respected Institute for Supply Management manufacturing index went from a downright scary 35.6 in January to 55.9 in December. It went over 50 in August (meaning growth) and has stayed above 50 since.(source) As for the even more closely watched ISM service sector index, it went from 42.9 to 50.1 over the course of 2009, with the highest reading of the year being 50.9 in September.(source)

While we don’t yet have data for December, we do know that the Consumer Price Index increased 1.8% from November 2008 to November 2009, the first year-over-year gain since February. Energy prices rose 7.4% in that stretch, with all items less food and energy rising 1.7%. In November 2009, personal incomes had advanced for five straight months and consumer spending had increased four of the past five months; while personal spending was up 1.5% from a year before, it still was 0.8% below December 2007 levels (when the recession began).(source)(source)

Somber nightly news anchors regularly presented us with bleak updates on unemployment and foreclosures. No doubt about it, the numbers were troubling. The jobless rate was 7.2% in December 2008, and 10.0% 11 months later. RealtyTrac said U.S. foreclosure filings reached a record high in 3Q 2009, 23% above levels of a year before.(source) Foreclosures did fall for the fourth consecutive month in November, but many analysts wondered if this was temporary and simply a byproduct of the Obama administration’s mortgage relief plan.(source)

Still, as the calendar pages turned there was the sense that things were getting better – and they certainly were on Wall Street.

Major indexes. On March 9, the S&P 500 and Dow fell to 12-year lows, and the NASDAQ hit a 6-year low. There was nowhere to go but up. From those troughs to the end of the year, the Dow rose 59.28%, the S&P 500 64.83% and the NASDAQ 78.87%. The turnaround was truly epic.

% Change	2009	2008
Dow Jones	+18.82%	-33.84%
NASDAQ	+43.89%	-40.54%
S&P 500	+23.45%	-38.49%

Source: CNBC.com, 12/31/09(source)(source)

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

"Long range goals keep you from being frustrated by short-term failures"

James Cash Penney

Global economic health. In its April forecast, the International Monetary Fund estimated a 1.3% contraction in the world economy in 2009 – which would mark the first such instance since the end of World War II. It also predicted a -2.8% contraction for America’s economy in 2009 and 0% growth for the U.S. in 2010.(source) But things improved slightly. By October, the IMF had U.S. GDP at -2.7% for 2009 and +1.5% for 2010. It estimated world GDP at -1.1% for 2009 and +3.1% for this year, led by roughly 5% growth across emerging economies.(source) In July, the World Bank forecast global GDP at +1.2% for 2009, 2.0% for 2010 and 3.2% for 2011, with growth in developing nations rising to 4.4% for 2010 and 5.7% for 2011.

World financial markets. If 2008 was a year of extreme losses, 2009 saw extreme recoveries. The indices appreciating hte most (no surprises here) were in emerging markets. At the top, the always entertaining RTSI in Russia: +128.62 for 2009. Brazil’s Bovespa had the second-best year among notable indices: +82.66%. The Asia-Pacific region saw amazing gains all around: the Australian All Ordinaries, +33.43% for the year; India’s Sensex, +81.03%; the Shanghai Composite, +79.98%; the Hang Seng in Hong Kong, +52.02%; South Korea’s KOSPI, +49.65%. Even the Nikkei 225 rose 19.04%. The major European indices posted nice gains: the German DAX climbed 23.85%, the French CAC 40 advanced 22.32% and England’s FTSE 100 rose 22.07%.(source)

Commodities markets. With a weak dollar for most of the year, it was a tremendous year for hard assets. Copper was king: it had the finest year of all widely traded commodities, gaining +137.34%. Palladium had a great year too, advancing 116.67%. Big 2009 gains also came for gold (+23.96%), silver (+49.14%) and platinum (+56.24%).(source)

Metals weren’t the only commodities to post such astonishing gains. Take sugar: it rose 128.20% last year. Orange juice futures went up 90.06%. Those two were the all-stars in agricultural commodities. Turning to energy, crude oil certainly recovered from its 2008 swoon, rising 77.94% for 2009. Gasoline futures gained 93.27%. Diesel and heating oil respectively rose 49.16% and 46.92%.(source)

A few commodities actually lost ground across 2009. Natural gas took a beating for most of the year, and finished -0.89% YTD after a strong 4Q gain. Coal and wheat futures suffered the biggest losses: -24.36% for coal, -11.34% for wheat on the year.(source)

The weak dollar gained a bit of strength at year’s end. The U.S. Dollar Index rose 4.10% in December. For the year, it finished -4.13%.(source)

Housing & interest rates. Did the market hit bottom? Were we seeing a real rebound, or just a short-term wave of activity spurred by federal housing credits? Whatever the case, 2009 did see some improvement in home sales, though certainly not to pre-recession levels. On December 23, the U.S. Census Bureau report showed November new home purchases down 9.0% from a year prior, but the inventory of new homes for sale had dropped from 11.4 months to 7.9 months over that period. New home sales were quite volatile month-to-month last year, in a range between +8% and -12%.(source) As for residential resales, the credits did inspire waves of purchases – for example, first-time buyers accounted for 51% of November’s existing home sales.(source) However, the latest National Association of Realtors data we have showed existing home sale prices down 7.1% from October 2008 to October 2009, and the Case-Shiller index was down 7.3% over the same stretch. Yet pending home sales – even with an alarming November drop – were still 15.5% above year-ago levels in November 2009.(source)

Tracking Freddie Mac’s Weekly Primary Mortgage Market Survey, we really don’t see much year-over-year change in conventional 30-year mortgage rates, but we certainly do in other types of home loans. Rates on 30-year FRMs averaged 4.71% in the December 3 survey, but the national averages for these loans were 5.10% on 12/31/08 and 5.14% on 12/31/09. (Will they remain that low by the end of 2010? Almost no one thinks so.) The survey calculated average interest rates on 15-year FRMs at 4.83% at the end of 2008, and 4.54% at the end of 2009. Across the same time frame, averages on 5-year ARMs went from 5.57% to 4.44%, and averages on 1-year ARMs went from 4.85% to 4.33%.(source)(source)

2010 outlook. New year, new decade … should we be bracing ourselves for a pullback, or savoring a new bull run? It depends on whether you see the glass as half-full or half-empty. Yes, minimal interest rates and a big infusion of federal money have spurred an economic comeback – but so have other factors. The manufacturing and service sectors have been growing. Job losses have slowed. Consumer spending consistently increased in the second half of 2009. The U.S. trade deficit for the year totaled $304 billion in October, compared to $610.8 billion of deficit from January-October 2008.(source)

These and other 2009 phenomena seemed to point to a better year ahead. But there will be major tests for the economy. What will happen in the second half of the year, after the impact of the federal stimulus package presumably starts to fade? What happens when the Fed raises rates and concludes its purchases of mortgage-linked securities? (For the record, more than 80% of economists polled in a fresh Blue Chip survey think the Fed will raise the key interest rate sometime between September and November.)(source) Many economists think we are in a U-shaped recovery which may take a few years to fully unfold.

The mood on Wall Street has certainly turned more optimistic. Obviously, the market can’t stay as vigorous as it has been for the last nine months; bearish analysts see a mid-year correction and minor 2010 gains for stocks in the wake of altered Fed policy, while bulls see the market breaking any potential midfield tackle. If we are in a new bull market, the year may be very satisfying: Standard & Poor’s respected chief investment strategist Sam Stovall noted to USA Today that since 1949, stocks have never fallen in year two of a bull market, with the average annual gain for year two being about 15%.(source) Wall Street and Main Street are certainly ready for a return to some normalcy after the volatility of 2008-2009; here’s hoping 2010 will offer us some relative calm and sustained confidence.

Please feel free to forward this article to family, friends, or colleagues.

If you would like us to add them to the list, please reply to this e-mail with their e-mail address

and we will contact them and ask for their permission to be added.

Why Choose A Credit Union?

Fri, 08 Jan 2010 12:30:00 -0600

WHY CHOOSE A CREDIT UNION?

What do they have going for them that banks don’t?

Why do people choose a credit union over a bank? It isn’t just a matter of one’s profession or union encouraging the choice – though that certainly plays a role. People like credit unions for other compelling reasons.

A fundamental (and philosophical) difference. Credit unions are not-for-profit organizations owned by their members; retail and business banks are for-profit private enterprises. A bank seeks to maximize earnings as it serves its customers. The more income it can derive from you, the better for its future. Banks have to answer to shareholders. Credit unions must ultimately answer to members.

Credit unions commonly use profits to fund reserves. Excess earnings may be indirectly returned to members – they can translate into reduced loan rates, higher interest rates on savings accounts (which are called share accounts), and lower fees. Some CUs have even sent members bonus checks.

A chance to potentially save money over time. Money which banks might charge you, that is. Checking accounts are free at most credit unions. In most cases, a checking account at a CU requires no minimum balance, and there are no per-check fees or overdraft fees. Historically, most credit unions haven’t returned cancelled checks to their members – mostly because of the expense. However, many CUs provide them at request.

What about ATMs? Well, there are more than you might think. Many credit unions belong to the CO-OP Network, a credit-union only ATM network with more than 28,000 ATMs in America. Credit Union 24, a member-owned, full-service ATM cooperative, helps CUs offer their members more than 100,000 ATMs and more than 50,000 surcharge-free ATMs.(source)(source)

If you need to get a loan to buy a car or some other major item, the person on the other side of the desk may quickly ask you if you belong to a credit union. There’s a reason for that: loan rates at CUs are often better than those at banks.

Are your assets federally insured at a credit union? Yes, in almost all cases. Just as almost all banks are FDIC-insured, about 98% of credit unions are federally insured through the National Credit Union Share Insurance Fund, administered by the National Credit Union Administration (NCUA). No member of a federally insured credit union has lost a cent of their insured credit union savings in the NCUA’s history. (source)

A share account at a federally insured credit union is insured up to $250,000 through the end of 2013 as a result of the Emergency Economic Stabilization Act of 2008, the same level of insurance that the FDIC affords bank accounts.(source)

Credit unions may not be as numerous as banks, but these are some of the reasons why their members prefer them. If you have eligibility to join a credit union, it is worth seeing what that credit union can do for you and comparing the potential long-term savings of a credit union relationship against a bank relationship.

Positive Financial New Year's Resolutions

Thu, 07 Jan 2010 12:30:00 -0600

POSITIVE FINANCIAL NEW YEAR’S RESOLUTIONS

Things you might want to consider doing in 2010.

Okay. It’s that time of year - the time for New Year’s resolutions. They can include financial resolutions. Here are some possibilities for 2010.

Control non-mortgage debt. Experian says the average American carries about $17,000 in debt unrelated to home loans. Too much of this is simply credit card debt. So how about paying down, paying off and maybe getting rid of some cards?(source) How much financial ground can you lose to plastic? Well, if you have a credit card with a $17,000 balance and 10% APR and you pay $200 monthly on it, it will take you 12 years to pay it off.(source)

You may have so-called “good debts” as a consequence of your business or your professional career. Yet ultimately, debt is debt. You can certainly plan to build wealth and control debt at the same time, and why not plan to do both?

Play catch-up if you’re older than 50. All of us over 50 have the chance to make a catch-up contribution to our IRAs and 401(k)s. If you have a 401(k), you can defer up to $22,000 of your 2010 salary into it if you’re over 50 (an extra $5,500 above the usual limit). You also have the chance to contribute an extra $1,000 to your IRA (or among multiple IRAs if you have more than one). And if you’ve got an IRA, there’s no point in waiting until April 15, 2011 to make your 2010 contribution – if you wait that long, you’ll potentially lose 15 months of interest.(source)

Look into the possibility of a Roth IRA conversion. 2010 presents investors with a prime opportunity to convert traditional IRAs into Roths. The IRS has removed the income limitations on Roth conversions this year, and it will let you spread the taxes due on a 2010 Roth conversion across 2011 and 2012. However, you should definitely talk to a fiduciary fee-only financial planner or tax professional before you make this move. Review this newsletter post on our website for additonal information. As income tax rates could be raised for 2011 or 2012, you may want to take the tax hit on a Roth conversion in 2010 instead.(source)

Keep important documents where you can access them. Tax returns, wills, trust documents, deeds, insurance policies – you don’t want to have to hunt for this stuff, and neither should your heirs in a crisis. You may not want to keep these documents out in the open, but you should know where they are. Resolve to put them all together in a central place in 2010. Another option: you may want to store copies online. Some financial advisors offer their clients firewall-protected, password-only “web vaults” for this purpose, so you can take a look at these items away from home if needed.

Understand how your portfolio assets are allocated. A new FINRA survey finds that 79% of Americans regularly contribute to retirement savings plans. That’s the good news. The bad news? About a fifth of those people had no idea how those assets were invested.(source) Review this article on the firm's website about allocated 401k assets.

When stocks do well, it is easy to become less vigilant about your investments. It is also easy for your portfolio to get out of whack and become overweighted in this or that asset class. So the first part of 2010 is a very good time to check in with your fiduciary fee-only financial planner. After all the volatility in the market the last couple of years, it is prudent to review your investments and see if your portfolio needs rebalancing to bring it back in line with your risk tolerance and investment horizon.

More people abide by financial resolutions than you might think. In late 2009, Fidelity surveyed a group of about 1,000 Americans and found that 60% of them had kept financial resolutions they made at the start of the year.(source) So it can be done. Resolve to change your financial habits for the better – and follow through on it.

Fourth Quarter 2009 Economic Update

Wed, 06 Jan 2010 12:30:00 -0600

Quarterly Economic & Investment Update Fourth Quarter 2009

The quarter in brief. The rally continued, the economy showed definite signs of improvement, and the biggest health care reform in decades inched toward reality. Stocks upwardly appreciated, with the S&P 500 rising 5.49% for the quarter.(source) Commodities experienced even higher gains. A wave of buyers rushing to take advantage of federal credits helped the real estate market. World economies were growing healthier.

Domestic economic health. Let’s look back at some key economic indicators during the quarter. Consumer spending, for one. Personal spending rose 0.6% in October and 0.5% in November; personal incomes rose 0.3% for October and 0.4% for November.(source) The jobless rate climbed to 10.2% for October, then declined to 10.0% with only 11,000 jobs lost in November, the tiniest payroll decline since the start of the recession.(source) Remember, the consumer is 70% of the economy, and it will be interesting to see if there really was a Christmas spending spree this year. This is doubtful, as consumers remain nervous about government spending and taxation legislation Congress may soon enact.

The key U.S. manufacturing index (the ISM) went 55.7, 53.6 and 55.9 across October, November and December – victories three, four and five, if you will, in a five-month winning streak.(source) Its sibling, the ISM service sector index, went from 50.6 in October to 48.7 for November (the new orders gauge came in at 55.6 and 55.1 those successive months).(source) Durable goods orders rebounded from a 0.6% decline in October to a 0.2% gain the ensuing month.(source)

The Consumer Price Index rose 0.3% in October and advanced 0.4% for November. For November, there was actually a year-over-year rise in CPI (+1.8%). PPI rose shockingly in November (+1.8%) after a 0.3% gain the previous month; the shock was mostly due to a 6.9% month-over-month jump in the price of energy goods.

The Federal Reserve kept interest rates at record lows while dropping occasional hints that rates might necessarily rise in coming quarters. After much contention, the House and Senate passed differing versions of health care reform legislation, with the bills yet to be reconciled as 2009 drew to a close.

Major indexes. The fourth quarter of 2009 was not as amazing for the market as the preceding quarter, but we’ll take it just the same. The fourth quarter brought a big descent in the CBOE VIX (the “fear index” fell 14.92%). With a strong concluding quarter, the Dow gained 59.28% from the March 9 close to the end of the year. The S&P 500 and NASDAQ respectively gained 64.83% and 78.87% in the same time frame.(source) Does it feel like a great year? These returns are amazing considering the collective mood of the country currently.

%Change	4QTR2009	3QTR2009	YTD 2009
Dow Jones	+7.37%	+14.98%	+18.82%
NASDAQ	+6.91%	+15.66%	+43.89%
S&P 500	+5.49%	+14.98%	+23.45%
10 YR TIPS	-5.13%	-12.36%	-30.84%

(Source: CNBC.com, ustreas.gov, 12/31/09)(source)(source)(source)

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

Global economic health. The data suggests a global recovery is in full swing, with Asia’s economies leading the way. By December, manufacturing indices in China, South Korea, India and Taiwan all showed growth (though Australia’s actually showed contraction).(source) The PMIs in Europe followed suit. The Eurozone PMI was 51.2 in November and 51.6 in December. PMIs in Germany, Italy, England and France were all above 50 for December, with France’s index the highest at 54.7. At the quarter’s end, manufacturing in the U.K. was growing at the fastest rate in two years.(source)

The IMF and the OECD respectively predict 3.1% and 3.4% growth for the global economy in 2010, with the bulk of emerging and developing economies heating up to 5% growth or better. In this quarter, we learned that China’s economy grew 9.0% in 3Q 2009 as India’s economy grew 7.9%.(source)

World financial markets. Investors cheered worldwide as stock indices made further impressive gains. Would you have guessed the Nikkei 225 would have climbed 4.08% in the fourth quarter? It did, and that index climbed 19.04% in 2009 – its first positive year since 2006. Hong Kong’s Hang Seng gained 4.38% in 4Q 2009, and the Shanghai Composite advanced 17.91%. The U.K. FTSE 100 rose 5.43%.(source) The MSCI World Index rose 4.11% in the quarter. The MSCI Emerging Markets Index rose 6.88%.(source)

Commodities markets. The hottest commodity of this quarter was orange juice: prices rose 41.04% in three months. Palladium prices rose 36.65%. Corn prices were up 20.49%. Many other commodities gained between 10-20% last quarter: sugar (+11.73%), copper (+18.71%), platinum (+13.54%), crude oil (+12.39%), heating oil (+17.97%), oats (+18.88%), natural gas (+15.10%), milk (+19.08%), wheat (+18.36%), gasoline (+15.15%) and diesel fuel (+13.63%). In fact, only two widely traded commodities went negative during the fourth quarter: coal (-4.64%) and cattle (-0.39%). Gold? Silver? Well, gold was +8.61% for the quarter and silver was +1.12%. Gold finished the quarter at $1096.20 per ounce. The U.S. Dollar Index gained 1.70% last quarter.(source)

Housing & interest rates. New home sales were down 11.3% for November after rising (a greatly revised) 1.8% for October; the numbers are up and down because first-time buyers thought federal housing credits geared to help them would expire this fall. Existing home sales rose (a revised) 9.9% for October and 7.4% for November.(source)(source) Pending home sales, which had risen for nine straight months, raised eyebrows by slipping 16.0% in December.(source) Housing starts reversed, diving 10.1% for October but rising 8.9% a month later.(source)

Mortgage rates of 30-year FRMs touched record lows but eventually climbed above 5% again. From the last 3Q Freddie Mac survey to the last 4Q Freddie Mac survey, the average interest rate on a 30-year FRM went from 5.04% to 5.14%. Across the quarter, averages on 15-year FRMs inched north from 4.46% to 4.54%. However, averages on 5-year ARMs moved south from 4.51% to 4.44%, and rates on 1-year ARMs went from 4.52% on September 24 to 4.33% on December 31.(source)

1st quarter outlook. For the first time in a long time, good news is nice to hear. Many analysts thinkwe are just two or three quarters into a U-shaped recovery that will play itself out across the next few years. Of course, there are concerns to watch: how the Fed and the Obama administration choose to wind down the stimulus effort, when and how the Fed finally makes a move with interest rates, and the indicators in the housing market. But barring a major geopolitical or economic event, much of the optimism (and federal support for the economy) will likely be sustained through the coming quarter and perhaps the next two. The Great Recession is slowly becoming a memory, and a classic “January effect” may kick off further upward movement on the major stock indexes.

Making Cents

February 2010 Monthly Economic Update

Monthly Economic Update for February, 2010

Please feel free to forward this article to family, friends or colleagues.If you would like us to add them to our list, please reply with their addressand we will contact them and ask for their permission to be added.

New Careers After Age 50

New Careers After Age 50

Where The Jobs Are, How to Spruce Up Your Skills and Ready Your Finances for the Change

When Doing Your Own Taxes Makes Sense

When Doing Your Own Taxes Makes Sense

And When It Doesn’t

How Fast the Markets Recover

HOW FAST THE MARKETS RECOVER

A look at how the markets have rebounded through the years.

Breaking the Surface

BREAKING THE SURFACE

Four tips for recovering from unemployment.

A Medigap Update

A MEDIGAP UPDATE

New changes are taking effect. New policies may have lower premiums.

Downsizing Isn't All About Stuff

Downsizing Isn’t All About Stuff:

It Can Be a Smart Financial Move, Too

Don't Miss the Match!

Don't Miss the Match!

Are you taking full advantage of your company’s 401(k)?

The Potential of the BRIC Nations

THE POTENTIAL OF THE BRIC NATIONS

Why emerging market equities have the world’s attention.

How Your Personality Affects Your Financial Decision-Making

Are you Prepared for the Nine Minute Phone Call?

Caregiving 101:

It's Not too Late to Get 2010 Off to a Great Financial Start

Get 2010 Off to a Great Financial Start

IRA Contribution Deadline

IRA Contribution Deadline

January 2010 Monthly Economic Update

January 2010 Monthly Economic Update

The Decade in Review

THE DECADE IN REVIEW

A look at stocks, commodities and memories (good and bad).

Managing Inflation Risk

Managing Inflation Risk

2009: The Financial Year in Review

2009: The Financial Year in Review

“Many an optimist has become rich by buying out a pessimist.”

Robert Allen

"Long range goals keep you from being frustrated by short-term failures"

James Cash Penney

Why Choose A Credit Union?

WHY CHOOSE A CREDIT UNION?

What do they have going for them that banks don’t?

Positive Financial New Year's Resolutions

POSITIVE FINANCIAL NEW YEAR’S RESOLUTIONS

Things you might want to consider doing in 2010.

Fourth Quarter 2009 Economic Update

Quarterly Economic & Investment Update Fourth Quarter 2009

Please feel free to forward this article to family, friends or colleagues.
If you would like us to add them to our list, please reply with their address
and we will contact them and ask for their permission to be added.