Marcel Dupré and Wealth Planners - Investment Advice

The Sky is Falling

Negative advertising works.  Just ask any political consultant.  Consistency is also key.  So, if you put the two together and find a consistently negative message, you may find lots of interest.  How many times have you heard doomsday scenarios from people in the media recently?  I routinely get an email forwarded from a client that says the sky is falling in the money world and occasionally the writer is correct.  But, the majority of the time he is wrong.

These days I hear the following from clients or others that are worried:

1. our government leadership is creating a huge deficit which will translate into another enormous plunge in the stock markets (the rungs on the ladder of logic vary based on the messenger);
2. the dollar will continue to fall in value and gold is a wonderful investment.  I heard it on TV;
3. local businesses have been closing and people have been laid off so the stock market will crash;
4. the market will crash again soon because “__________” (fill in the blank, I’ve heard it all).

It is understandable that people are afraid of the unknown and there are many possible terrible scenarios, but what happens when you miss the good times that the negativity professors never mention?  If you decided to listen and put all your money on the sidelines from the beginning of March through yesterday, you would have missed a pretty large run-up (see a sample Wealth Planners’ aggressive account and disclosures below).  No one knows the future but if you can absorb both the negative and positive talk without reacting in extremes, you will probably be better off in the long run and have a less stressful life.  We will continue in our quest to find value and good people and to not overreact to negative or positive global news that may or may not affect the stock or bond markets.

DISCLOSURE:

Notes:
This data is furnished to you for informational purposes only. Although it is derived from information which we believe to be accurate we cannot guarantee its accuracy. Individual investor's results will vary. Past performance does not guarantee future results. Performance is depicted on a time-weighted average for the entire period and is net of our fees.  Dividends are not guaranteed and will fluctuate. The inception date indicates the date of account or household initiation in the Portfolio Performance system. This date may not match the date the account was opened. Annualized refers to the annualized return from the inception date of the account, or the selected beginning date when using the date-to-date functionality.

Definitions:

Time-Weighted Return - The geometric (compounded) return measured on the basis of periodic market valuations of assets. An alternative to the dollar-weighted return measure, it abstracts from cash flows; however, in principle it requires valuations to be made on the occasion of each cash flow. Approximations to this measure can be obtained by prorating cash flows to successive valuation points or by computing internal rates of return between valuation points. If there are no interim cash flows, the time-weighted return, compounded annually determines the entire value of an investment. See also Dollar-Weighted Return. The portfolios on this report are being compared to secondary benchmarks for informational purposes only.  These benchmarks may require adjustment to correlate with the assets held in the portfolio.

Lehman Aggregate Bond Composite Index - This index is a measure of the investment grade, fixed-rate, taxable bond market of roughly 6,000 SEC-registered securities with intermediate maturities averaging approximately 10 years. The index includes bonds from the Treasury, Government-Related, Corporate, MBS, ABS, and CMBS sectors.

S&P 500 Index - This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. This index does not include the effects of reinvested dividends.

Active vs Passive - An Old Debate Continues

Morningstar, the creator of the star system and style boxes for mutual funds, is once again beating the indexing drum.

If you haven't been keeping up with this old debate, it's pretty simple. There are those that believe that since only 37% of "active" money managers (fund managers that buy/sell/hold investments for a reason) beat an index (which Morningstar deems to be an appropriate measuring stick) for the past 3 years, then we should all just be lazy and go with a blindly chosen basket of investments, an index.

To me it sounds something like, since only 40% of recreational fishermen caught fresh delicious fish over the last few days, no one should try to go fishing for fresh fish any longer and we should all just buy frozen tilapia. As an "active" manager of managers, we have been picking stock and bond funds for years with very nice results even after our fees are taken into consideration. The same goes for many other firms. I simply do not buy the theory that since a majority fail, then everyone should accept mediocrity and abandon ship.

There must be lots of people at Morningstar in marketing that feel the same way as I do. If everyone should just be indexing, why pay for Morningstar's research and who cares what a fund's star rating is?   I've heard from indexers all the smack about Warren Buffet and other gurus who advocate indexing. Why would they endorse such a method when most of them (such as Buffet) are "active" investors themselves? It's because they don't think the general public is savvy enough to pick their own funds (and keep up with them) or that the average Joe or Jane will be ripped off by a broker or insurance sales person who doesn't know much more than what he or she was taught by the industry (spread money in Morningstar style boxes and hope for the best) yet charges lots of money in the form of commissions of other fees.

If you apply common sense to what you know from the financial media, keep up with the fund managers that you use, ignore the emotional inclinations to buy or sell on fear or greed, and make sure you are keenly aware of costs, you can be successful as an "active" manager of managers. If you are too busy to do the research and maintain your portfolio(s), indexing is a low-cost alternative which will give you mediocre results over time which is perfectly acceptable to many. After all, if you buy an index, you'll never do better but you'll never do worse either.

Saving More and Spending Less

With the holiday season quickly approaching many shoppers will soon be excitedly running up credit card debt or spending most of what they earn on gifts and other things. Spending money can give a euphoric feeling that releases happy juice in your mind. The problem is the hangover from the spending sprees will come in the form of a less than spectacular retirement or in the worst case scenario, personal bankruptcy if proper controls are not put into place.

If you are spending lots of money on your spouse, kids, grandkids, siblings, or friends you may not necessarily helping them if they have a pretty good life already. A friend of mine recently told me that she discovered how it is good to want. Her children had been finding everything they asked for under the Christmas tree for years and she realized that she was teaching the wrong lesson. She feels as though she has been throwing their motivation under the bus. Sure, some may be motivated to do great things in spite of having everything they want, but why take away the desire to earn money through some creative endeavor?

Before you start spending money this holiday season think about the following:

• Have you maxed out your retirement plan at work? (this number should be a minimum of either $11,500 or 10-20% of your income a year on your part depending on the plan)
• Do you have 3-6 months of expenses set aside in a savings account, money market or CD?

If you haven't taken care of the above maybe you should consider reducing your monthly expenses. Life is not about collecting material items or a big house. Financial security for you and your family will be much more rewarding than "things". Think about the following to help you save more:

• move into a smaller place with a lower rent or mortgage payment
• sell your car and buy one with the proceeds to eliminate car notes or consider public transportation
• shop insurance rates for homeowners, auto, life, health, etc.
• look into public schools for your children, you may be pleasantly surprised
• prepare more meals at home

I truly wish for a very happy holiday season for you and yours and hope you will have a fantastic retirement someday too.

Invitation – Doing Business with Brazil

This morning at my Rotary meeting  Sunrise Rotary Club of Baton Rouge Facebook  we heard from Ye-Sho Chen PhD on doing business with China as an entrepreneur. 

If you want Dr. Chen’s PowerPoint with examples of success stories of US/China relationships just email me and I’ll send it to you.  Dr. Chen also mentioned the “Doing Business with Brazil” talk by Brazilian Associate Professor Edgard Cornachione from the University of Sau Paulo.  Dr. Cornachione will be speaking on this topic at LSU’s campus on Monday, October 26, 2009.

As our world continues to shrink, I believe it is important to look beyond our borders for business relationships and investment opportunities and hopefully help your fellow man in the process.  I hope to see you at the meeting.

New information:

New call in or webcast instructions for "Doing Business with Brazil"
Audio only: Land line option
Dial In: 1-888-560-3504
Participant Code: 499765# Video and Audio: Live video stream http://bus.lsu.edu/videos/windowsmedia.asp

Convert or Not, that is the question for 2010

You will soon be bombarded with the name “Roth” in the media because of some changes coming next year.  Beginning in 2010, two important changes are scheduled to take effect for converting to a Roth. 

1. the income limit requirement ($100,000 or less of income) for Roth IRA conversions will no longer be in effect.  However, income limits for Roth IRA contributions will remain in effect. 
2. conversions to a Roth IRA that occur in 2010 will allow the you to spread the taxable income from the conversion ratably over a two-year period in tax years 2011 and 2012.

The decision to convert your IRA or employer plan is not an easy one. Here are some factors to consider that can help you determine whether you would be a good candidate.

Conversion to a Roth IRA may be appropriate if:

• You have enough money outside of your IRA or employer plan to pay the taxes – example: if you convert $200,000 IRA to an Roth and you are in the 25% income tax bracket, you will owe $50,000 in taxes on the conversion.
• For 2009 - Your modified adjusted gross income is $100,000 or less.
• You expect to be in the same or higher tax bracket when you retire (I predict we will all be in a higher tax bracket over the next decade or two).
• You have at least 10 years before you need the spend the assets.
• You wish to eliminate having to take Required Minimum Distributions from these funds during your lifetime.

Conversion to a Roth is NOT appropriate if:

• You will need to tap your retirement account to pay the taxes on a conversion.
• For 2009 - Your income is more than $100,000.
• You expect to be in a lower tax bracket when you retire.
• You will be spending the money sooner than 10 years from now.

I hope this helps.  If you want to call to go over this, please call me directly at 225-214-4421 or my cell phone at 225-802-2920.

Retirement Savings – Time To Punt Or Go For It?

This is a chart of one of our Taxable Moderately Aggressive Portfolios (approximately 80% stock funds and 20% bond funds) showing it’s back above 0% growth for the time period noted (see disclosures below) 

 

This is a chart of one of our Moderate Portfolios (approximately 60% stock and 40% bonds) showing it was back above 0% growth much quicker than our more aggressive portfolio above (see disclosures below) 

Today we are sitting at a year to date high for stocks. Before the carnage of last fall began, many who were retired or close to retirement and were using their investments to fund their lifestyle had a rude awakening.

As you can see from the charts above, the stock market (S&P 500) crushed the dreams of many who had invested most or all of their retirement in equities, but since then, it has showed a little life.  So if you are nearing retirement and you’ve done a good job of saving, or you’re already retired and need to protect what you have, it is probably a good time to punt and play more defense.  You can be more defensive by selling some of your equity investments (stocks, stock funds, real estate, commodities, etc.).  The second part of your defensive strategy could be to use the proceeds of the equity sales to buy more short term bond funds and/or inflation protected bond funds.  If you are 10 years or less away from spending the money in your retirement accounts, or you are currently spending the money in your retirement accounts, then the only reasons for you to have more than 60% of your money in “equity” type of investments are:

1. You have plenty of savings and don’t depend on this money to fund your lifestyle;
2. You want your heirs to have more money 20 years or more from now.

On the other hand, if you have been ultra conservative and own nothing but CD’s (I’m NOT referring to the offshore junk like Stanford was peddling) or you have Mason jars of cash buried in the back yard, this may be a good time to build a little equity position and inflation protected bond position.  You’re not doing yourself or your family a favor by burying your head in the sand and ignoring the financial markets.  Short term treasuries, CD’s, and cash will probably be some of the worst performing assets over the next 5 years if we have any hint of inflation.  This means that when you do pull money out of your super safe spot, you won’t have as much buying power as you did when you put in there.

Of course our Moderately Conservative, Conservative, and Risk Adverse portfolios, which have much less in stocks, have fared better than the portfolios shown above over the same brief time periods, but I don’t think that will be the case over the next 20 years.  You can see our graphs which are updated quarterly at http://www.professionalinvesting.com/portfolio.html.

No one knows what our future holds, except maybe the palm reader down the road, so make some plans based on where you are mentally for both best case and worst case scenarios and build that into your financial decisions.  A moderately conservative portfolio of 40% equity and 60% bond portfolio at or nearing retirement age doesn’t say you are schizophrenic, it just says you have a high water mark and a low water mark that are acceptable for you.

DISCLOSURE:

Notes:
This data is furnished to you for informational purposes only. Although it is derived from information which we believe to be accurate we cannot guarantee its accuracy. Individual investor's results will vary. Past performance does not guarantee future results. Performance is depicted on a time-weighted average for the entire period and is net of our fees.  Dividends are not guaranteed and will fluctuate. The inception date indicates the date of account or household initiation in the Portfolio Performance system. This date may not match the date the account was opened. Annualized refers to the annualized return from the inception date of the account, or the selected beginning date when using the date-to-date functionality.

Definitions:

Time-Weighted Return - The geometric (compounded) return measured on the basis of periodic market valuations of assets. An alternative to the dollar-weighted return measure, it abstracts from cash flows; however, in principle it requires valuations to be made on the occasion of each cash flow. Approximations to this measure can be obtained by prorating cash flows to successive valuation points or by computing internal rates of return between valuation points. If there are no interim cash flows, the time-weighted return, compounded annually determines the entire value of an investment. See also Dollar-Weighted Return. The portfolios on this report are being compared to secondary benchmarks for informational purposes only.  These benchmarks may require adjustment to correlate with the assets held in the portfolio.

Lehman Aggregate Bond Composite Index - This index is a measure of the investment grade, fixed-rate, taxable bond market of roughly 6,000 SEC-registered securities with intermediate maturities averaging approximately 10 years. The index includes bonds from the Treasury, Government-Related, Corporate, MBS, ABS, and CMBS sectors.

S&P 500 Index - This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. This index does not include the effects of reinvested dividends.

Portfolios Changing Next Week!

It may be a bit presumptuous for me to predict the death of the global recession, but my magic 8 ball says it will end in the U.S. in the 3rd quarter and many international economies are in better shape than ours.  Of course, this summer’s economic data could also be the catalyst for us to re-test the lows in the stock markets.  Only one thing is certain, interest rates will eventually go up.

Stock represents an equity position in a publicly traded company and our portfolios use funds that invest in stock to provide growth.  Since stock prices overseas still appear to be significantly cheaper, we are adding even more exposure to the world outside of the U.S.   There will be approximately 50% of all stock fund holdings in international stocks after we make changes.  There will also be a significant increase in small and midsize company stock fund holdings because the odds are that coming out of the recession (yes, recessions always end), smaller companies will do well.  Many of the former large company stocks are now small or midsize companies that are more fairly valued.

With regard to bonds (bonds represent a debt owed by governments, corporations, etc. and have been generally safer than stocks), we are taking sanctuary mainly in inflation protected bonds.  The way inflation protected bonds work is that as the consumer price index (CPI) goes up, the value of the bonds goes up.  We are adding more to the funds that invest in these securities to portfolios and are investing more in funds that have bonds that on average are maturing soon.  As interest rates go up, existing bonds generally go down in value because the interest rate they pay is less than newer bonds being issued.

Here are some “new” funds we are adding to portfolios:

Retail Accounts under $50,000:

Nuveen Tradewinds Global All-Cap NWGAX

Retail Non-Taxable Accounts over $50,000:

Templeton Emerging Markets Small Cap TEMMX

Eaton Vance Atlanta Capital SMID EAASX

Royce Intl Small Cap RYGSX

Retail Taxable Accounts over $50,000:

Royce International Small Cap RYGSX

Eaton Vance Tax-Mgd Mid-Cap Core EXMCX

Templeton Emerging Markets Small Cap TEMMX

401(K) Plans:

Vanguard Selected Value

Vanguard Emerging Markets ETF

No-Load Annuities:

Vanguard-Short-Term Investment Grade

TIAA CREF Accounts– no new funds for portfolios

Investment Ideas in Anticipation of Inflation and Economic Growth

We’ve given you some ideas of what you can do from a practical standpoint while markets are down in another post http://professionalinvesting.typepad.com/no_load_investment_manage/2008/10/taking-advantage-of-down-markets.html, but I wanted to share a few other thoughts with you.

In order to limit the possibility of a depression, our government has stepped into the mud with both feet (fiscal and monetary stimulus) to pull us out of the water.  This is a historical move and one that will more than likely lead to inflation.  Inflation can severely erode the “safe” portion of your portfolio.  The value of your bond holdings goes down in general when rates go up.  This is because demand for bonds that pay a fixed rate set before rates went up sell for a discount to make up for the “bad” coupon rate.  Because of this potential inflation bomb, we are increasing the percentage we hold in inflation protected bond funds in all portfolios that hold bonds.  Some of the bond funds we are using for this purpose include Franklin Real Return (without the load), Vanguard Inflation Protected Securities Fund, and TIAA CREF Inflation Linked Bond Fund.  Another unique fund that helps serve this purpose for “taxable” accounts is the JPMorgan Tax Aware Real Return Fund (without the load).  This fund doesn’t buy direct interests in Treasury Inflation Protected Securities (“TIPS”) but instead buys municipal bonds that pay interest free of federal income taxes and other instruments that add value when the Consumer Price Index increases.

Also, if you have any debt that doesn’t have a fixed rate and period you should probably try to consolidate into a loan(s) with a fixed rate or just pay it off as quickly as you can.  If buying a home is on your radar, now is probably the time.  When prices are lower AND rates are ridiculously low, buyers can get ice cream with their cake.  The average mortgage rate for the last 30 years has been over 9%.  In 1981 mortgage rates were over 16%.  If we get into an inflationary period again, many homes will be out of reach even if the price is low because buyers won’t be able to afford to pay the note.

Another idea to use at this time is to increase the percentage you hold in small company stocks.  We are adding more to small company stocks in all portfolios to try and take advantage of potential upswing that can happen in the early stages of a stock market rally.  For a number of reasons I won’t bore you with, smaller companies have had an upper hand versus bigger companies coming out of recessions.  Of course we are not putting all of the stock portion of our client portfolios into smaller company stocks, but we are looking at putting up to 50% of the stock portion there depending upon the aggressiveness of the account.  There are a number of great managers for small company stock funds that you use and I would be happy to share a few names with you if you like.  We tend to prefer “value” managers.

Emerging markets are beginning to look attractive but we are still on the sidelines waiting to see when it appears to be safer to jump into the waters.

I am not offering you specific investment advice in this column.  I am merely providing a sounding board.  We make no predictions on the stock markets but instead try to make predictions on the economy and work from the top-down.  Wealth Planners is not responsible for losses with regard to your investments.  Unless you have a signed contract with us and we manage your account, we do not offer specific investment advice for you.  Any references to mutual funds or investments in this column should be a starting point for you in investigating whether or not they are suitable for you and your situation.

Saving for Retirement in 2009 - Use the ROTH !

If you are trying to take advantage of the down markets and you want to put away some money for your future, check out the Roth accounts.  A Roth account can come in different forms as a Roth IRA, a Roth 401(k), and a Roth 403(b).  Using a Roth is a no-brainer if you think tax rates will be higher in the future and your income will be the same or more later because in general, if you wait until retirement to take money out of a Roth, you won’t owe any taxes on your withdrawals.

Roth IRA – 2009 contribution limits are $5,000 for those under 50 and $6,000 for those over 50.  If you’re single and make over $95,000 or married and make over $150,000 combined, then the Roth IRA is probably not for you.

Many higher compensated people believe that they cannot make contributions to a Roth because they make too much money.  This is not the case!  With the Roth 401(k) and Roth 403(b) there are no income limits.

Roth 401(k) – In 2009 you can contribute up to $16,500 in a Roth 401(k) account plus an additional $5,500 if you are over 50.  Check with your employer about adding the Roth feature to your retirement plan at work if you don’t have this option.  I just changed my 401(k) contributions to 100% Roth because I already have substantially more saved in pre-tax accounts such as regular IRA and 401(k) and I think tax rates will be higher by the time I retire.  When the Roth feature first became available, we began working with our retirement plan clients to add this feature to their plan because it is such a great way to diversify the tax treatment of your dollars for retirement.  If you don’t have it, get it!

Roth 403(b) – The Roth 403(b) contribution limits are the same as 401(k) for 2009.  You may have a 403(b) account at your work if your employer is a non-profit or you have a government job.   You may have never been told that the Roth feature is an option but don’t overlook this valuable resource.

Why Roth? - You probably have some retirement savings already in a traditional pre-tax retirement account such as IRA, 401(k), 403(b), 457, etc.  One of the main benefits to pre-tax accounts is that you usually don’t pay income taxes on your wages that are contributed to the account in the year you make them.  The problem comes later when you retire.  These pre-tax accounts are a time bomb with regard to taxes at retirement because every dollar you pull out will be taxed at your ordinary income tax rate.

Roth contributions are “after-tax” meaning you don’t get the benefit of reducing our taxable wages when contributing to a Roth account.  But, when you retire at 60 or later, and take money out of the Roth type of account, you generally won’t owe any taxes on the money you take out.

If you retired at 60 and income tax rates are relatively high, wouldn’t you want a choice of where to withdraw money?  If you have a Roth account you can choose to take tax free withdrawals from this account until tax rates go down.  in other words, Roth accounts give you breathing room if the politicians go crazy with taxes.  They are also better for estate planning purposes in general and with avoiding excise taxes for not taking enough money.  I believe tax rates will be substantially higher when I retire, plus I like the feeling of having plenty of options of where to pull money at retirement so I am a big fan of the Roth.

Our Financial House Needs an Update

The financial house we built post World War II was pretty solid. It had a gold standard foundation with FDIC storm shutters. The plumbing and electrical by the Federal Reserve and Treasury Department seemed adequate. Much of the house plans were drawn using a simple tax code, the Securities Acts of 33, 34, and 40, and Glass Steagall. This house was funded by American ingenuity and hard work but the mortgage seemed pretty steep back then because our national debt was rather large due to the war. The kitchen was fairly basic but we managed to feed the GDP enough to pay down the debt substantially and continue down the path of prosperity.

Over the years there have been many rooms added and the original house plans have been modified substantially. The original gold standard foundation was pretty solid but it handcuffed growth of the home and limited the amount of tools the Federal Reserve could keep in the shop. The new foundation was costly to put in but it helped spur growth in the economy overall.

Some additions to the home were needed and some were not. What started out as a small room for taxes has turned into a collection of rooms and closets that are inefficient, poorly built and structurally unsound. It is only a matter of time before this wing of the home will come crashing down due to shoddy workmanship and the inability to adapt. Unfortunately, this wing of the house generates most of the cash needed to pay the mortgage.  Instead of a working office, it is the playroom for politicians. The entire wing needs to be torn down and rebuilt using a simple tax structure such as 0% corporate tax and a national sales tax. A fresh coat of paint won’t help the situation.

The Social Security and Medicare rooms started out small but have grown to the point where they will be an added strain on the mortgage due to cost overruns. The occupants of our home will soon be on average, much older and needing more care plus health care costs continue to skyrocket. Our tax “playroom” isn’t conducive to generating money so it won’t be adequate to foot the bill. Hopefully we can avoid defaulting on our mortgage but this will be one of the next crisis situations we will need to address soon.

There are cracks the walls of the kitchen and laundry room (banking and securities) and our government is working on foundation repairs to make these rooms solid once again. The building inspectors (banking and securities regulators) did a poor job of reviewing the additions to these areas and both criminal and inept contractors took advantage of us when building these additions. The weight of their colossal greed caused the foundation to crack. Credit doors are still stuck and the quick fix cable-lock system isn’t working yet. Hopefully we will find some decent structural engineers to solve the issues soon so that the occupants of these rooms can begin their work of helping spur growth of new and existing businesses which will lead to jobs, tax revenue, GDP growth, and future wealth.

The real estate room occupants expanded a bit too quickly for the size of the room because our banking and securities kitchen kept feeding them junk food such as complicated derivatives and zero down loans. The occupants need to lose weight and be put on a more healthy balanced diet of traditional mortgage backed securities and loans that actually underwritten using “old school” analysis.

Our home used to be fairly isolated but our neighborhood had grown and now every country is on the same street. When our home becomes worth less, the entire neighborhood suffers. We definitely have the nicest home on the street as far as property values but we need to do lots of remodeling and maintenance to preserve our position and help out our friendly neighbors.

Worrying about the future of our home doesn’t help so try to get involved where you can make a difference. When voting, put tax reform at the top of your list of priorities. A simple but fair taxation system is the key to getting our financial house in order. If someone running for office is too afraid to vote for something such as the proposals at www.fairtax.orgthen DO NOT vote for them.

If you’ve lost your job but you have creative talents, use this opportunity to start a new business or a new career. If you’re retired and your investment balances are no longer sufficiently generating income to fund your monthly expenses, try to find some sort of work you can do or start a new enterprise. The world has abundant needs for new products and services and we Americans have found ways to satisfy these quite well in the past. Don’t wait for your government to provide a solution because they can only try to help get our house in order. Opportunity is knocking!