Happy New Year 2001

Happy New Year! Let's hope so. The year 2000 certainly wasn't. The technology stock- dominated NASDAQ Composite Index lost 39.29% for the year. (The average technology mutual fund lost 33.80%.) This was the biggest loss for any major index since 1931. The Dow Jones Industrial Average lost 6% for the year, it's worst year since 1981. The S&P 500 Index lost 9.10% for the year, it's worst year since 1977. Who did well? Treasury bonds, utility and energy funds, small cap value funds, health care funds, real estate funds and financial funds. All had double-digit gains for the year.

The 2000 decline was a tolerable setback for well-diversified investors who rode the stock market bull for years. For the 10 years through 2000 the average stock fund return an average 14.67% a year according to Lipper, Inc. That's well above the 11% annual returns that investors have been told to expect from stocks over time.

The average bond fund both taxable and non-taxable averaged 7.70%. This was the first year that bonds have outperformed stocks since 1992. The Treasury Reserve will work hard to avoid a recession, which is defined as when the GDP (Gross Domestic Product) declines for at least two consecutive quarters. This will improve the outlook for corporate bonds this year.

In March, when the tech boom started to crack, funds sold large amount of shares to lock in gains before they disappeared. But that also set the stage for big distributions going out to many investors this year. For example, small cap growth funds have announced distributions amounting to 15.70% of their NAV (net asset value) so far this year, compared with 5.10% of NAV for small cap value funds, say Lipper, Inc. and growth funds have had the poorest returns. So don't be surprised at those huge distributions on your 1099B forms.

While the U.S. market is looking uncertain, the European market is looking stable. The euro is up 16% against the dollar since October 2000. Analysts are predicting zero growth for U.S. corporate earnings compared to 8% in Europe even as the economy slows there. U.S. multi-nationals derive about 33% of their profits from the overseas markets, while only 15% to 20% of European corporate earnings come from business outside Europe.

Get ready for the refinance boom. Rates were lowered to 6.5% and there is expectation that they will fall a full percentage point to 5.5% by summer. Make sure that your credit rating is up to snuff by going to www.equifax.com or www.myfico.com.

On January 12, 2001, surprise legislation was made that affects IRA distribution rules. The proposed regulations will have a significant impact on estate and charitable planning for retirement plan assets. The IRS says taxpayers can use either the old or the new proposed regulations in figuring minimum distributions for the year 2001. Final regulations aren't expected to be implemented until January 1, 2002. The overhaul means all of the books, manuals, and IRS publications to describe minimum distributions rules are obsolete. I am studying this legislation now and will be contacting those financial planning clients that this will affect.

Attention, all Incentive Stock Option holders! This downturn in the market could be a great opportunity to you to exercise your options, keep the alternative minimum tax low and start the holding period for the low long-term capital gain tax rate. Review your holdings or call me to discuss in detail.

The medical directive that I have been handing out to clients called "The Five Wishes"is now updated and approved for use in California. I will be handing these out at annual reviews. If anyone else would like one, go to www.agingwithdignity.org.

Don't forget that we have moved! My website should be up and running by the end of February at www.afdadvisors.com so check it out and email me with any comments or suggestions.

Have a Healthy, Happy, and Prosperous New Year!

-Fern Alix LaRocca CFP® EA