March 31, 2002

Only 59% of Stock funds posted gains in the first quarter according to Lipper compared with 98% in the 2001 fourth quarter. Even including the poor stock returns in 2000 and 2001, the S&P 500 index returned an average of 14.43% a year between 1990 and 2001; that’s well above the 10.31% annualized average for the previous two decades. Bonds, too, outperformed history handily, returning an average of 9.65% each year since 1990, more than double the 4.56% annualized average since 1926, according to Ibbotson Associates, a Chicago research firm. But- consider a portfolio invested 60% stocks and 40% bonds, someone investing $10,000 in that portfolio in 1990 would have ended last year with $37,628 Ibbotson states, but if that same portfolio were to grow at the pre-1990 average rates of returns, an investor would have earned just $24,581. We are unlikely to duplicate the successes that made much of the gains of the past two decades possible.

A Bill in congress would require financial professionals to disclose their relationships with the companies that they analyze. The Enron scandal was no surprise to me. I saw the writing on the wall for years. It is unfortunate that the core business of the accounting profession has such few profits in it that they must resort to management consulting with the same firms that they audit in order to make profits.

The fact is that there are conflicts of interest in almost every thing we do. To find and regulate these conflicts is a nightmare and going down the wrong path. I firmly believe that the only way to resolve future conflict of interest problems in any profession is full disclosure. Full disclosure gives the recipient the information about the risks that they would incur right up front. It also holds firms that disclose accountable and it holds the firms that receive the service responsible for the risks that they choose to take. Fee-only Investment Advisors have a fiduciary responsibility to their clients and have always practiced full disclosure. But what is full disclosure and what is not full disclosure? Um… there lies the dilemma. As the fee-only practitioners eat away at the market share of commission based planners, the commission based planner is doing everything possible to blur the lines between fee-only and commission based planning. We have heard of fee offset, fees and commissions, fee rebates, and just about every other imaginable term out there. The public deserves clarity not confusion.
We are all disillusioned by the returns shown by many international funds. From 1996-2001, they returned only 1.17% a year compared with 10.5% a year in the U.S., as measured by the Russell 1000 which tracks the movement of the 1,000 largest stocks on U.S. exchanges.

I think it is misleading to believe that international diversification is no longer appropriate because we have a global economy. Some of the world’s best companies are based outside the United States. "From 1986-2001, a period that includes the strongest bull market for U.S. stocks in history, U.S. stocks alone would have returned 14% a year and a stock portfolio with 25% in international equities would have grown 13.10%. However, the risk would have been lower in the diversified portfolio: 15.50% standard deviation versus 14% respectively," writes James Jornlin of Frank Russell Investment Co. Clients accustomed to viewing rapidly appreciating investment statement balances now conclude they need help to achieve their investment goals. As a result, clients are receptive to advice and continue to seek it out. A recent study by Dalbar Associates showed that 2/3 of American Households with income greater than $50,000 used a paid Advisor in the last year. "Households are interested in more than simply investment performance, "says Myra Rothfield, of Schwab Institutional, "they are looking for a broader array of services to grow, protect and ultimately transfer their wealth in the most efficient manner."

The last year has been a perfect demonstration of the need for ongoing retirement planning. The changes in some of the underlying assumptions on which retirement plans were based, and the environment in which we are all living have shocked both retired clients and those still planning for retirement. The need for reappraisal of assumptions and adjustment of retirement programs is obvious and something I will be doing for clients in this year’s reviews.

I can’t thank you enough for sticking it out and riding out the storm and participating in the recovery. Our clients benefit from the chronic underperformance that most investors realize by chasing last year’s winners. Dalbar association notes that from 1984-2000, the average stock fund delivered an average annual return of 14% while the average stock fund investor earned only 5.3% a year. This shocking underperformance is the consequence of decreasing holding periods as investors constantly chase last year’s winners. We are glad that our investors have resisted this irrational and wealth destroying tendency.

The full impact of the tax overhaul enacted last year won’t be felt until later in the decade as the provisions are phased in. This year is the beginning year of that phase-in and many of you are allowed larger contributions into your retirement plans. The coordination of all of these plans is extremely important. Most people look at each portfolio as an individual portfolio with it’s own performance. In financial planning, that is never the case. We look at all of your portfolios- Brokerage, IRA, Roth IRA, 401K, 403b, 457, Keogh, etc. as one big portfolio even though you receive performance statements for each individual portfolio. I normally have you bring in your retirement plan statements to your review and I analyze them with your other portfolios. I feel that this once a year review is not enough to keep track of these portfolios and the investment options that are offered to you. I can now manage those assets for you with a separate contract that will allow me to analyze and recommend investment choices in your retirement plans as it pertains to your whole portfolio and your goals. You will also be able to receive a statement showing the performance of all of your portfolios on a quarterly basis. This additional service will be critical to your portfolio’s health since the majority of you contribute to and have a majority of your wealth in these plans. I will be calling you and offering this new service to you.

"For as long as space exists and sentient beings endure, may I too remain, to dispel misery of the world." –Shantideva

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