September 30, 2002

The current downturn has lasted 25 months so far compared with 21 months for the 1970s bear market, according to Ibbotson Associates. They say the magnitude of the latest decline is slightly worse: a cumulative total return of negative 44.70% from August 2000 through September 2002 on the S& P 500 stock Index, including dividends compared with a negative 42.6% return from December 1972 through September 1974. Many investors hoped they would never experience a market downturn as steep as that of the 1970s. Now that we are in that territory, however, some fund companies have been harking to the painful history of the 1973-74 bear market to comfort and encourage investors.

Mr. Gately of Vanguard said that while many of today’s investors have seen their stock market losses partly offset by positive bond returns, investors in the 1970s were “doubly hammered”. That is both stocks and bonds were in negative territory. Other managers are even making a case that now is the time to be buying.

I encourage you to sit tight, let us monitor your asset allocations and watch your sector weightings and let’s ride out this storm (and possible war).

Since the market peak of 2000, funds that track the S& P 500 Index have lost investors 46% of their money compared with a loss of 37% for the average actively managed US diversified stock fund, and have under performed active funds since 1998. What a switch! Many journalists have rallied for these funds due to their low cost, and returns that exceed the active management of a money manager. Well, the money managers are showing that their value and higher fees are worth it in this down market. Gus Sauter, who manages the Vanguard Group is threatening to take the unprecedented step of changing many of the benchmarks Vanguard uses in its stock-index funds.

How low can the yields on cash go? With money market yields in the 1-2% range, everyone is looking for alternatives. We have done research on some excellent online banks that are paying higher yields, as well as fixed annuities with no surrender charges. I am very skeptical of some of the new mutual funds that let you profit from the upside of their fund but guarantee your principal for five years. How do they do it? They buy bonds (which will limit their upside) or insurance and they also have very high fund expenses. I don’t see the value in these new types of funds.

Left to themselves some clients can be their own worse enemies when it comes to investing. Chances are they’ll say that they want to adhere to a long term, buy and hold philosophy, but when it comes to actual investing they often act according to short term influences. If investors really were investing for the long term, the average redemption rate would not be more than 10%, which translates into a 10-year holding pattern according to a recent study by Financial Research Corporation. But the average redemption rates were 31.1% in 2000, or an implied holding period of just 2.9 years. That’s up from 18.6% or 5.5 years, in 1996.

In 1975 an IBM 370-168 mainframe cost $3.5 million. Today a personal computer with an Intel Pentium chip retails for about a thousand bucks and is at least 100 times faster. Also late in 1975, a first class postage stamp cost 10 cents and the 10 year Treasury yielded 7.8%. Today the stamp cost 37 cents and the 10-year Treasury yield is 4.8%. Regardless of how much lower this equity market has to go, does anyone really believe you are safer in bonds? Obviously the bond yields alone would not have given you the funds to maintain purchasing power. Stocks and bonds are a necessity to keep up with inflation and taxes.

Even though the estate tax exemption is now $1 million per spouse, there are still reasons to have a living trust. Most of you have your children as trustees or a corporate trustee such as a bank or trust company. We have witnessed several people who have inherited wealth and a bank or trust company is managing the money as if it were their own and not managing it in the client’s best interests. I now have a relationship with Santa Fe Trust Company (www.santafetrust.com) as well as others that will work with my clients as a trustee only and allow you and your beneficiaries to choose the money manager of your choice. Please review your trust documents and call me if you would like to change your corporate trustee to an independent trustee that will serve the needs of your family.

Financial advice online is either too narrow to be useful or too complex to be understood by most consumers, according to a report by Forrester Research, an independent technology research firm. I am putting a course together to help educate people of the basics of financial planning. Keep checking my website (www.afdadvisors.com) for an upcoming schedule of teleclasses on financial planning. I see a terrible need in this country for financial planning information and I expect these classes to fill up fast as I am limiting enrollment. Email us if you or your friends would like to receive a schedule of upcoming classes.

Want to know whether your nest egg (or what’s left of it) will see you through retirement? Let us do a Monte Carlo analysis. Instead of basing calculations on one average rate of return, we can generate thousands of computer simulations of what may actually happen to your assets over a given period of time. You will be presented with your portfolio’s probability of success. If you are unhappy with the percentage, you can adjust savings, withdrawal rates, or your investment mix to help increase your chances of success For example, an individual with assets of $300,000 expects to save $10,000 annually before retiring in 20 years and has a 30-year life expectancy. His goal is to achieve an annual return of 9% before retiring and 5% thereafter, which is higher than his estimate of inflation at 3.5%. Assume further that he prefers to hold a conservative low risk portfolio in meeting his retirement needs, which he estimates will require $53,000 a year. To determine his odd of achieving this goal, 100 simulations were performed (we can do up to 5,000). The results indicate that he has slightly less than even odds, less than a 50-50 chance of achieving his goal. If he is willing to tolerate a slightly more aggressive portfolio having moderate risk, the chances of attaining his goal are significantly enhanced to a 76% probability. . Please contact us if you are interested in this analysis.

As the end of the year approaches, I will be looking to harvest tax losses for your benefit. It is very important to all of you who might be subject to AMT (alternative minimum tax) to make your appointment before the end of the year for tax planning.

During the fourth quarter, the Iraqi question will have a significant impact on oil prices as well as the stock market. There is a lot of uncertainty in this world right now, and I hope to continue to bring you fresh ideas and a clear understanding.

In this season of Thanksgiving, I want to express my thankfulness for the referrals you have sent and your support in our services.

-Fern Alix LaRocca CFP® EA