June 2000

Hot tech funds were battered once again in the second quarter, but still managed to squeeze out a positive return. Mid-cap and Small-Cap growth funds are close to double digits for the year whereas Large-cap funds are barely at a positive. The Dow Jones Internet Composite Index was down 28.28% at June 30^th from the end of 1999 much worse than the NASDAQ Composite .54%.

Word is out that the venture capital funding is drying up and many IPOS (Initial Public offerings) are being delayed or suspended.

The shake out is about to begin. Buy more, hold, sell? Many mutual fund companies experience steep redemptions as a result of sub par investment returns, so traders yank money in and out of funds at record levels, which play havoc with performance figures. Stay put.

Investors associated top performance in 1999 with some fund firms that fared poorly in terms of overall investment returns, according to Financial Research Corp. of Boston. Analyst Chris Brown writes, "large fund firms, many of which advertise heavily were perceived to have very strong short and long term performance whether or not the firm actually did." This survey helps explain why mutual fund companies can survive during difficult performance years.

Bond funds have had massive withdrawals due to fears about inflation and more interest rate increases. I keep my eyes open for taxable muni bonds as a replacement for intermediate and long-term bonds. These bonds are issued by municipalities, and pay as high as 7% or more depending on the maturity date.

Large pension funds in Europe are being privatized. An amount estimated to be in excess of $10 trillion will go into the European securities markets over the next decade or so.

Thumbs up for Intel Corp for launching a community-outreach program designed to help schoolteachers afford housing in the Bay Area. Eligible teachers will receive $500 a month for mortgage payments for up to five years. For all you struggling to find your own home, check out www.domania.com, which will help you find the answer to the eternal question "How much is it worth?" Thumbs down to any realtor that says you must submit an offer over the asking price in order to buy a home.

The Senior Citizens Freedom to Work Act will repeal a law that reduced Social Security payments by $1 for every $3 a beneficiary between the ages of 65 and 69 earns in wages over $17,000. The earnings threshold will rise to $25,000 in 2001, $30,000 in 2002, and then rise thereafter in conjunction with increases in the average wage. Because the repeal is retroactive till Jan.1, 2000 about 415,000 working seniors will get refunds for the money already deducted this year from their Social Security checks.

Big talk at the NAPFA conference in Minneapolis - Monte Carlo. No, I am not talking about gambling with investors' money! Monte Carlo simulations are a way to show ranges of outcomes based on minor changes in variables. Traditional financial planning does not introduce clients to the probabilities that they will run out of money before they die, because the tools we use don't account for the reality that the inflation rate and investment returns vary from year to year. These tools are deterministic. I am looking into Monte Carlo programs to help clients make decisions based on the laws of probability instead of fear. For instance, a client could find out the probability of his assets lasting until he died, assuming he spent $50,000 or $100,000 a year. Or a hypothetical client could find out that if she saved 6% of her monthly salary, she would have a 5.7% chance of reaching her retirement goals versus if she saved 12%, then she would have a 96.8% change of meeting her goals. The magic of Monte Carlo lies in the fact that we can generate thousands of outcomes, using different rates of return, rates of inflations, and in some cases, rates of mortality. Anybody can make good decisions with certainty. It's making good decisions in the face of uncertainty that's the real trick. I hope to give you a better tool for understanding the uncertainty with these programs.

I hope you will like the new design of my quarterly reports. This is only phase 1. The historical data is being entered into our new system and will, hopefully be ready for the next quarter. Please email me with feedback on anything you would like to see in the quarterly reports. The new system will be better at tracking dividends and withdrawals and contributions.

Have a great summer!
Fern Alix LaRocca, CFP® EA