Your Retirement Welcome to Your Retirement, our monthly web-newsletter with information and education that can help you with your retirement planning efforts. We provide straight-forward, easy to understand, unbiased and candid information. Feel free to use this information and to also pass it along to your friends and associates. If you are interested in previous issues of this newsletter and additional information that can help you, be sure to check out our web site; retirementplanningconsultants.com or contact Robert R. Julian, at email@example.com. ® RETIREMENT PLANNING CONSULTANTS A Guide To Your Retirement Planning - Volume II - Number 1 Happy New Year! Best wishes for a healthful and prosperous new year. Retired seniors are ecstatic about a 2.7% increase in their Social Security benefits. Well, maybe semi or mildly or hardly ecstatic. The average monthly benefit will increase from $930 to $955 a year or $25 a month. However, a 17 percent increase in Medicare premiums will eat up $11.60 a month of that increase. So, the average retiree will have a net monthly increase of about $13 a month---about the cost of a hardly decent bottle of champagne to toast the new year. In February, the retiree and companion can use that increase to buy a couple of Big Macs as they contemplate how they will be able to handle the $100 - $200 - $300 or more dollars a month for taxes on their home. Those who toil in the market place will see the maximum amount of earnings subject to Social Security taxes rise to $90,000 from $87,900. Twelve Time-Tested Core Saving – Investing Principles: In our March, 2004 Newsletter we offered principle #1 ---Stocks (Stock Mutual Funds) offer the best opportunity to participate in the long-term growth of the economy. In April, principle #2—Buy only what you understand. In May, principle #3--- Invest in a combination of stocks for long term growth and bonds for stability and income. In June, principle #4---Asset allocation and diversification does matter. In July, principle #5---You can buy low and sell high. In August, principle #6---Market timing is a mistake. In September, principle #7 --Don’t chase hot performance. In October, principle #8--- Focus your efforts on what you can control. In November, principle #9---No such thing as risk-free investing. In December, principle #10 --- Stay With A Long-Term Perspective. January 2005
The Realities of Retirement: #5 In A Series: How Will Inflation Impact Your Retirement?
What You Should Know: What Would Rip Van Winkle Do?
Lazy – Low Maintenance Investing With Mutual Funds: #5 In A Series: Ted Aronson Portfolio
Our Planning – Saving – Investing For Retirement Workshops
Homework: Do You Know When You Will Be Able To Collect Social Security Benefits?
This Month’s Question: What Is An Efficient Market And What Does It Mean To You As An Average Investor?
A Retirement Diary: The Problem With Seeking Help With Your Investing
How Can I: Use A Reverse Mortgage For Income In Retirement?
Interesting Perspective: What Are Lifestyle Mutual Funds?
Sandy The Smart Saver: Saving And Investing With The Sopranos
Follow Up Report: Why Is Fidelity Cutting Some Of The Fees You Pay To Invest In Their Funds?
Quick Takes: #1: Why You Will Need More Income In Retirement Than What Social Security Will Provide. #2: Can An Actively Managed Mutual Fund Beat An Index?
Stock Market – Investment Humor
Coming In the February Issue: Should I Pay Off My Mortgage Before I Retire?
-2- 1990s, retirees living off a fixed income would have seen their standard of living cut by a quarter. And, retirees were hit even harder than the statistics suggest. "Retirees have a much higher inflation rate than the general population, largely because of medical costs," says Henry Hebeler, a retired engineer and author of "J.K. Lasser's Your Winning Retirement Plan." To find out how much money you’ll need in future years, multiply your first year’s retirement income (or the current year’s income, if you’re already retired) by the appropriate inflation factor in this table. For example, if your current annual income is $35,000 and you want to know how much annual income you’ll need in 15 years, if inflation is about 5%, multiply $35,000 by 2.08. The answer: $72,800. Q. How can – will inflation impact your retirement? How will you account for it in your plans? In Realities of Retirement, in our February 2005 issue, we’ll take a look at Is The 401(k) A Good Way To Save – Invest For Retirement? “ Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars worth of groceries. Today, a five year old can do it.” Henny Youngman (1906 – 1998), comedian What You Should Know: What Would Rip Van Winkle Do? Jason Zweig, in his Individual Investor column in the March 2004 issue of Money magazine, writes about a "Rip Van Winkle" portfolio. Rip, if you remember, took a nap and when he awakened some 20 years later, found a world that had changed. Zweig uses the Van Winkle story to illustrate the concept of investing for the long term. You know the drill---thoughtful asset allocation, diversifying our investments, think long term. We know it but far too many investors ignore this advice. Morningstar, an independent mutual fund rating agency, found that the typical investor will sell a mutual fund only 11 months after they buy it. Research also shows that the annual turnover at the New York Stock Exchange exceeds 100%----every share of a typical stock changes hands more than once a year. That, is hardly long term behavior Zweig states that many investors feel "the only way to invest for the long term is by constantly juggling our portfolios. Most of us know better but we can't help ourselves." The question that Zweig asks is "What if each of us had to invest so that, if we left our portfolios untouched for two decades, we could be assured in the end of having all the money we would need.“ investing. In December, principle #10 --- Stay With A Long-Term Perspective. Here is Principle #11: #11- Ignore The Noise . Fear and greed are behind many bad investment decisions. We buy on a hot tip or sell on knee jerk reactions to what we hear. Confusing information with knowledge can be dangerous. A long-term perspective is something you will never get from the up-to-the minute media – internet chatter that often passes for stock market commentary today. With all the news, talk and opinion, the temptation is that you should do something---buy, sell. Paying attention to the minute-to-minute movements, comments, and predictions of the market is at best useless and at the worst destructive. Emotional reactions can lead us to big mistakes. Concentrate on what matters and block out the noise. Is it really that important to know what a stock does on an hour-by-hour or a day-to-day basis? The right strategy never changes---irregardless of whether the bull is running or the bear is coming out of hibernation . “ There is no quick road to riches. And if someone promises you a path to overnight riches, cover your ears and close your pocketbook. If an investment idea seems to good to be true, it is too good to be true . Burton Malkiel. Professor of Economics at Princeton University, The Random Guide To Investing. Realities Of Retirement # 5 In A Series: How Will Inflation Impact Your Retirement? We are past the problems associated with double digit inflation from the late 70s ---but inflation has not gone away. In the past 10 years the average annual inflation rate was just 2.5%. Compare that with 5.1% in the 1980s and a runaway 7.4% in the 1970s. Inflation is a part of our lives. Prices for the things that we buy rise a little (PC’s) or a lot (gas), but they rarely go down. Because of inflation, each of your dollar’s purchasing power will be less each year. Two percent is considered “low inflation”. But, even 2 percent inflation impacts retirees. A 2 percent increase in inflation each year will reduce the purchasing power by 40 percent after 25 years and 55 percent after 40 years. Some people say that 3 percent is “mild” inflation. How “mild” is 3 percent? A 3 percent rate of inflation will cut the purchasing power of your income by one-third in just 11 years. Even at a conservative 3%, inflation will double your cost of living in 24 years, about the length of time people spend in retirement. Let’s bump that up one percent to 4 percent. With a 4 percent inflation rate, your cost of living will double in 18 years. With 4% inflation, if you need $40,000 a year now (2005), you will need $80,000 a year in 2023. Your retirement income will have to rise yearly just to keep you in the same place. The income that will provide a comfortable lifestyle in your first year of retirement will be eroded by inflation as the years go by. The spending power of a dollar was slashed by 51% in the 1970s, 39% in the 1980s and 25% in the 1990s, according to Chicago's Ibbotson Associates. Even in the low inflation
-3- It is well know that we are not a nation of patient investors. All we have to do it to take a look at our behavior in the 1990s. However, pension fund managers who are responsible for investing for the retirement of many of their defined benefit pension participants, know that in order to meet their objectives, they have to make sound judgments and think long term. The vast majority do not place quick bets on hot technology initial public offerings. Zweig points out that "The purpose of a pension plan is not to outperform the market or its competitors. Its only goal is to cover its liabilities---by insuring that retirees get the benefits they will need to live on.” And, that is policy that we, as the average individual investor, need to pursue. When we continually look at short term ( 3, 6 month) results of mutual funds and attempt to hop on the band wagon, we lose sight of our long term goal---developing a portfolio of investments that will help us to fund our retirement. We need to stop making knee jerk reactions of dumping what we have at the "first whiff of trouble.” Zweig adds that this is the worst mistake that most investors make. So, what should we, as the typical 'save for retirement' investor do? Zweig states that we should spare ourselves the trouble of chasing hot mutual fund managers and funds. "By holding an index fund, you automatically own all the stocks or bonds in a benchmark, all the time---no worries about whether the manager is fickle, fading or mortal.” So, what would Rip Van Winkle do? Just suppose that one day back in 1976, Rip invested his money in the S& P 500 Index Fund. According to the story, when he awakened at the end of 2004 and looked at his Wall Street Journal, what kind of numbers did he find? At the end of his 28 year nap, Rip found out that his investment had an annual increase of 12.9% And, if I know Rip, he would have smiled, closed the Journal, had a bite to eat and took another nap. “ When we set up my investment plan, I thought the objective was to fund my retirement.” Investor to stock broker Lazy – Low Maintenance Investing With Mutual Funds: #5 In A Series: Ted Aronson Portfolio Ted is one of the busiest and successful pension fund managers in America. His firm, Aronson+Johnson+Ortiz Partners, manages $15 billion in institutional assets. TheStreet.com calls him "the world's most honest money manager," a trait that explains why he's serving as chairman of the Association of Investment Management & Research, the preeminent professional organization for money managers, with 68,000 members. His firm is not known solely for its long-term record but also its performance based fee structure. This is a huge marketing advantage at a time when there is so much turmoil regarding compensation and fees paid to Wall Street firms. Aronson says, “We like to keep our costs low and clients can opt to tie fees to performance.” Why is Aronson called “the world’s most honest money manager?” He is not afraid to be critical of his own industry. “It's not easy to defend the fund-management industry's fee policies, especially during this past bear market," he says. "We
all tend to just suck money out of the system with nary a glance to fairness nor equity. Managers should share some of the risks of their clients. We're managers, not brokers.”
When it comes to his own taxable accounts, Ted puts all his money in a "super-diversified, balanced portfolio" consisting solely of index funds. "All of my family's retirement money is in our fund, but because it trades a lot, it's not suitable for taxable investments. So, all our taxable money is in Vanguard's no-load index funds."
Ted avoids actively managed funds because their administrative costs reduce returns. "Funds charge annual expenses of 1 percent or more. Then it costs another 1.5 to 2 percent to buy and sell their stocks each year. It's hard to imagine them doing anything but just following the crowd, because if they don't mimic the index, they'll get beaten by it."
The Ted Aronson Portfolio consists of 11 no-load, low-cost funds.
Domestic stock funds (40 percent): Ten-year average annual returns are about 10.5 percent for these five domestic stock funds with their one-year returns in the 13 percent range.
Overall, the portfolio's has been averaging over seven percent on the long-term.
“ Every day I get up and look through the Forbes list of the richest people in America. If I’m not there, I go to work.” Robert Orben, magician and professional comedy writer.
Homework: Do You Know When You Will Be Able To Collect Social Security Benefits? As you probably know, you now have to wait a bit longer to collect benefits. If you were born in 1938 or later, the age at which you will be able to obtain full benefits has changed. Do you know the age at which you will be able to obtain full benefits? Check out the numbers on page 9.
-4- the actual price of a security will be a good estimate of its intrinsic value." "Random Walks in Stock Market Prices," Financial Analysts Journal, September/October 1965. The random walk theory asserts that price movements will not follow any patterns or trends and that past price movements cannot be used to predict future price movements. Under the efficient market hypothesis, no investor should ever be able to “beat the market” or the average annual returns that all investors and funds should be able to achieve using their best efforts. Some experts then conclude that the best investment strategy is simply to invest your funds in an “index” mutual fund. Not all Wall Street professionals agree with this theory. Some call it "hogwash" and others refer to it as "malarkey." And that is why financial theories are subjective. There are no proven laws in finance – investments but rather a number of ideas that try to explain how the market works. There are those who say that technology gives the professional (actively managed mutual fund) the ability to quickly process all information that gives him an insight into a “surefire” method of achieving returns that are better than the market averages (indexes –passively managed funds). But, that is just a theory. Burton Malkiel, Professor of Economics at Princeton, one of the chief advocates of the efficient market theory states that “no scientific evidence has yet been assembled to indicate that the investment performance of professionally managed portfolios as a group has been any better than that of randomly selected portfolios.” Dan Wheeler in his column (Tools Of The Trade) in the September 2004 issue of Investment Advisor, states that the notion that a professional manager can “spot missed opportunities” is “a very appealing concept” but there is a catch. “Unlike an investor who owns the market and seeks the market return” ---an index investor---“an investor attempting to beat the market has a much tougher job. He or she must correctly determine which stocks are ‘good’ and worth owning and which stocks are ‘bad’ and should be avoided. By trying to beat the market therefore, you inherently take the risk that you will lose due to poor selection, poor market timing, or both.” So, the question is----Is trying to beat the market worth the risk of underperforming the market? Or does it just make more sense to simply take the return that the market will give by owning the broad market of index asset classes? “ Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry [and it's fund managers]. All three are trying to pull off elaborate hoaxes. But while Santa and the bunny suffer the derision of eight year olds everywhere, actively-managed stock funds still have an ardent following among otherwise clear-thinking adults. This continued loyalty amazes me. Reams of statistics prove that most of the fund industry's stock pickers fail to beat the market.” Jonathon Clements, Wall Street Journal Columnist Retirement 101: The Basics Retitrement 201: Advanced Concepts Retirement 301: Where Do I Save – Invest? Three brand new workshops specifically developed to help you to learn about, understand and utilize the basic concepts and principles of planning - saving - investing for retirement. “ The sessions made me think. Great instructor and leader.” Jane Greiner, Metro Transit, City of Kalamazoo, MI In order to have a comfortable retirement tomorrow , you need to develop your plans today . A comfortable retirement doesn’t just happen. It takes planning and we can help you. We can help you to develop a step-by-step process ; a saving - investing “road map.” We will provide you with straight-forward, easy-to understand, unbiased and candid information. We don’t get bogged down with financial jargon . We keep it simple . Over the years, we have helped thousands of people with their retirement planning efforts. Ninety-two percent of the participants in our recent sessions have rated the workshops as “good” to “excellent.” Each workshop participant receives a copy of our three (101 – 201 – 301) extensive workbooks (80 pages plus) that contains worksheets, questionnaires, charts, graphs and a full range of examples and illustrations what will help them to understand and use this information. With our thirty years of working – researching – teaching in this area, we know how to inform – educate and help people with their plans. Your retirement may be years away but planning for it shouldn’t be. Talk to the people in your benefits – compensation office about our workshops and ask them to get in touch with us so that we can bring our sessions to your workplace. If you’d like to see a brochure which details what we do in our three sessions, send us an email ---firstname.lastname@example.org This Month’s Question: What Is An Efficient Market And What Does It Mean to You As An Average Investor? My friend Sandy---you know, Sandy The Smart Saver---was telling me the other day about his cousin Elvis, the wannabe Millionaire. Elvis thinks he knows all there is to know about the stock market and how to invest. Elvis thinks an “efficient market” is a place where you can shop, find good prices and clerks that are helpful. That, of course, would be the explanation of an efficient market in a community but, an efficient market in the world of investing is a different matter. The Efficient Market Hypothesis evolved in the 1960s from the Ph.D. dissertation of Eugene Fama. Fama made the argument that in an active market that includes many well-informed and intelligent investors, securities will be appropriately priced and reflect all available information. “ In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market, at any point in time,
- 5 - work with is someone who is primarily concerned with your interests --- not his/hers. Perhaps the single best source of information is to find a friend who has had long-term success with a planner. A good number of experts suggest that you deal with a fee-only planner --- a professional who does not earn commissions from the sales of mutual funds, stocks and other related products. You should also ask him to fully disclose any conflicts that he has in presenting his/her information. Talk to a couple of them and determine who works best with you. Try to determine is they are straightforward, honest, knowledgeable, and will provide good service. A good rule of thumb is that you pay him/her by the hour---just as you would with your attorney, accountant and the other professionals you engage. Ask for an estimate of what it will cost before you engage him/her. “ Trust fears no trial.” Proverb How Can I: Use A Reverse Mortgage For Income In Retirement? A "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways----all at once, in a single lump sum of cash ---as a regular monthly cash advance --- as a "creditline" account that lets you decide when and how much of your available cash is paid to you --- or as a combination of these payment methods. No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older. If you would like to check out how much income you may qualify for, check out the Loan Calculator at AARP’s Reverse Mortgage page at www.aarp.org/revmort ). “ It’s not hard to meet expenses---they are everywhere” Old Saying Interesting Perspective: What Are Lifestyle Mutual Funds? Let’s face it. Investing in mutual funds can be confusing. You can select from over 10,000 + funds. There are different classes: money market, stocks, and bonds. There are different types of stock funds: growth, value, and blend. There are different sizes: large cap, mid cap, small cap. And you have index funds. Are you confused yet? And the fund families are coming up with new products to get your attention. One of the newest is a lifestyle fund. With a lifestyle fund, the industry has created a “fund of funds” that invests in various asset classes and these funds cover the complete spectrum from aggressive (100% in equities – stocks) to very conservative (20% in equities – stocks). The investor just has to select the lifestyle fund that matches their level of risk tolerance and let the fund go to work for them. A Retirement Diary: The Problem With Seeking Help With Your Investing A good number of studies have shown that most individuals who save – invest for retirement through their 401(k), 403(b) or 457 plan want advice on how to invest for retirement. The problem with this scenario is that when we meet with our (broker - advisor – planner) we have to determine whether we are meeting with an advisor – planner - a professional sales person. And, there is a real difference. Unfortunately, too many investors have discovered that Wall Street is not in business to provide the advice and guidance that many of us would like to receive. Wall Street develops and produces products---products that will sell and salespersons to sell those products. Back in the May 2004 edition of “Your Retirement”, we told you about our dealings with my old friend Sam (stock broker – mutual fund sales person). As I found out and as many, many other people who wanted advice – guidance, Sam was only interested in selling me a mutual (as in “shared in common”) fund product which supplied a good commission for his pocketbook (not “shared in common”). Sam is like too many sales persons. We may look to them for guidance and advice so that we can make sound investing decisions. The ads on radio, TV, magazines, newspapers continually tell us that will provide us with the expertise that will help us to reach our goals. But, the problem as I and too many others have discovered is that as soon as he/she discovers that there is a sale to be made, their advice is a product that generates money for the employer and a nice commission for himself. In making money from their transactions with us, too many of them ignore a built in conflict of interest that shapes their judgment and overlooks our best interests. The investigation into Wall Street professionals, investment bankers and a number of mutual funds over the past few years have revealed too many unethical, unsavory and illegal practices and judgments. They advertise that they will help us to reach our goals. But, in reality, they are in the business of marketing and selling. They are only sales persons and that is a unique difference. Estimates are that about 90% of us investors use commissioned sales persons. They are paid on a commission basis and that gives them a strong incentive to push products for which they will receive commissions and to push especially hard on products that will produce even higher commissions. I have read too many stories in too many publications where former sales persons discovered early on that they were not hired to provide sound advice and guidance that could help us to reach our goals but simply to sell products. So, the question you should be asking is --- should I work with people are are constantly looking for ways to help me with my concerns - needs - objectives? Or, should I work with people who are constantly looking for ways to continually sell products that will increase revenue for their firms and more income for their wallet? But, how do I know the difference? How do I find the person that can help me? Try to ensure that the person you
- 6 - These funds are targeted to an investor who wants to own only one fund that is specific to his/her investment objectives. They are typically labeled in the lines of conservative, moderate or growth. The whole point of a lifestyle fund is to just have one single investment. Some retirement plan sponsors have been using lifestyle funds as a default option when employees fail to specify how they want their 401(k) contributions allocated. Lifestyle growth funds will have a majority invested in stocks (for younger investors). Conservative portfolios will have the majority of its assets in bonds and other fixed income securities (for investors who are closer to retirement and need to reduce risk in their portfolio). Because of their bond – stock makeup, lifestyle funds may perform better in bear markets (going down) than a portfolio with only stock funds. This bond component has the potential to reduce volatility. There are a good number of investors who just don’t have the time to spend on researching and developing a portfolio of investments that can lead them to where they want to go. And this is the type of fund that may appeal to an investor who prefers to have an all-in-one fund that is appropriate for his/her individual situation. Where can you find additional information on lifestyle funds? On the internet, check out www.morningstar.com . Under funds and screening, enter either conservative allocation or moderate allocation and explore some of these allocation funds that have a solid 10-year track record. Mark Robertson, Senior Contributing Editor at www.better-investing.org tells us that you should “know what you own. Lifestyle funds can be an important component of your investing strategy. Seek low expense ratios. These funds are a little like putting your portfolio on auto-pilot and expense ratios should be substantially less than actively managed funds.” “ I’m living so far beyond my income that we may almost be said to be living apart.” E.E. Comings (1894 – 1962), Academy of American Poets Planning - Saving - Investing For Retirement Sandy Says: Saving and Investing With The Sopranos Hi, I’m Sandy The Smart Saver and I am here once again to give you some tips on Planning-Saving-Investing For Retirement and I am still taking a light-hearted approach and still trying to make the whole saving-investing for retirement process a “fun” event. And of course, I am still not your average squirrel. Come 9 O’clock on Sunday night, you know what I am watching on the tube. I’m checking out HBO and Tony and Carmela Soprano and the gang. I can’t believe it but one night there was Tony putting a plastic bag filled with money into a locked container outside the house. Then, on another episode, he goes outside and retrieves some money from a utility shed and gives the money to Carmela to cover some expenses. By that time, I really am confused. I mean, I store my acorns in a locked container just like Tony but I do that because some of my so-called friends try to steal my acorns and on top of that, the bank refuses to take my acorns. They prefer cash. I asked my friend Steve Goldberg who put together the Kiplinger Magazine issue of “Stocks ‘03” for his take on Tony’s saving habits. As you may surmise, Steve is not too keen on saving money in a locked container outside the house. I mean, as I noted to Steve, “There are only a couple of million people watching Tony and Company (who happen to live in New Jersey) who probably would like to go on a scavenger hunt on Tony’s front lawn and see what they can find.” I digress. Steve thinks (and I concur) that Tony would be better off investing his money in the market. Steve says that in spite of the downturn of 2000 – 2002, “In the six previous times over the past 100 years that the market has fallen 40% or more, subsequent after-inflation annualized returns (for 5, 10, 15, 20, and 30 year periods) have been well above the long-term 7% average.” Combah Tony --- let me give you --- well maybe suggest some advice. Those are pretty good numbers! I know you’re a busy guy --- putting bread on the table, keeping Meadow and A.J. under control, delegating assignments to the captains, debts to collect, garbage hauling contracts to be negotiated, arranging for some loans, those weekly therapy sessions with Dr. Melfi to treat your anxiety attacks and trying to deal with those nosey guys from the government who are looking over your operations. Carmela wants to know about the finances in the family---not the extended family, just those who live in the house. She wants you to make some ‘legitimate’ investments. I know you told her not to worry---“we don’t have those Enron connections.” That’s good. Far be it for me to suggest that you are involved in ‘illegitimate’ investments. I don’t really want any unannounced visits from your co-workers. Carmella says that you should consider investing in the market. And I agree. I realize that you may not feel that a long term 8 – 9 -10% return is what you are accustomed to. But, I do know how you like cash!!! Capesh? And please stop putting money into the locked container in the utility shed. Why not put it under the mattress? Did I really say “mattress”? I’m really going to be in trouble. Bada Bing!!! And, by the way Tony, I don’t need that loan that we talked about. “ A man is incapable of comprehending any argument that interferes with his revenue” Descartes (1596 – 1650), French mathematician, philosopher, and physiologist
- 7 - Follow Up Report: Why Is Fidelity Cutting Some Of The Fees You Pay To Invest In Their Funds? In our July 2004 edition of this report we looked at Is Fidelity Magellan A Good Investment Today? We looked at the size of the fund, the number of people who invest in it and the fees they charge. Back in September 2004, Fidelity created some news when they announced that they were cutting the fees that they charge on five of its index funds. In his newspaper column (9/5/2004) Bill Schultheis, a financial advisor and author of The Coffeehouse Investor, a book which deals with his super-simpler Investment Portfolio, questions the motives of Fidelity in cutting their fees. He states that “what the Boston-based mutual fund giant did do was cut the fees on five of its index funds in an attempt to highlight these offerings and kick-start its’ lagging sales of mutual funds across the nation.” For the past few years Fidelity has come in a dismal second to indexing giant Vanguard in the race to capture investors' assets. For the first six months of 2004 investors have poured almost twice as much money into Vanguard's lineup of mutual funds compared with Fidelity. Fidelity has a total of $41 billion in index funds---Vanguard has a total of $300 billion. Fidelity has historically promoted the stock-picking ability of its actively managed mutual funds, and has been known to ridicule - question the simple concept of indexing. Schultheis states, “Not willing to settle for second best, Fidelity, through its past actions, has shown it will go to great lengths to capture investor assets and fees, and has no qualms about carrying out unethical, if not illegal marketing tactics to get the job done.” A number of financial columnists have stated that the irony of Fidelity cutting fees on a few of its index funds is that its largest and most popular fund, Fidelity Magellan, is nothing but a closet index fund. So, why should you pay the Magellan fees for performance which has not matched index fund performance in the past 10 years or so? Schultheis adds that “Magellan, which now stands at $65 billion in assets, has a stated expense ratio of 0.76 percent, generating fees for Fidelity to the tune of about $508 million a year. A brief review shows that despite the fees, the fund has moved in virtual lockstep with the Standard & Poor's 500 Index, making it the world's largest closet index fund and its manager, Robert Stansky, a closet Coffeehouse Investor.” “ A closer look however, tells the rest of the Magellan story. This closet index fund has underperformed Vanguard's S&P 500 index fund on a total return basis by 20 percent over the 10-year period that ended June 30. I guess a yearly price tag of $508 million in fees doesn't buy what it used to.” Schultheis adds. “With its long history of aggressive marketing, Fidelity isn't about to encourage you to stay the course with your investment game plan in low-cost index funds. They would much prefer that you change your course and send them the money and eventually lock in the higher fees.” " Once you remove yourself from Wall Street's complete and total obsession with trying to beat the stock market average, and accept the fact that equaling the stock market average is a rather sophisticated approach to the whole thing, building a common stock portfolio becomes an immensely gratifying experience." Bill Schultheis, ``The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street and Get On With Your Life'‘ Quick Takes: #1: Why You Will Need More Income In Retirement Than What Social Security Will Provide The Social Security Administration tells us that the monthly average retirement check totals out to $930. If average household receives two of those checks --- or electronic transfers---each month, their income for month will be $1,860 and for the year it will be $22,320. Will $22,320 be enough? Depending on your total income and marital status, some of this income may be taxable. And, your health insurance rates might go up. Of course, having enough is a matter of individual circumstances and choices. Most people need a retirement nest egg to supplement their Social Security. “ Enough” means having a reasonably clear picture of what “enough” means to you. How long will you live? What will your expenses be? How much income will you have? And that is why, in your working years, you will have to make the tough choices about spending, saving and sound investing along the way. Most retirees know that income just from Social Security is not “enough.” More than one retiree has stated----“I saved and invested wisely. I didn’t want to retire and then find out that I had to go out and get another job. I made sure I had enough.” “ Money is something you’ve got to make in case you don’t die.” Max Asnas, founder of State Deli in New York City in the 1930’s #2: Can An Actively Managed Mutual Fund Beat An Index? According to their database, Morningstar, an independent mutual fund rating – research agency, states that the average tenure for a domestic equity (actively managed) fund manager is 4.6 year. A great deal of research over a good number of years has shown that a broad index fund is likely to have a better performance than about 70 percent of the actively managed competition. At the 3/4 mark (9/30/2004) the Vanguard Total Market Index fund did better than about 84% of the actively managed competition over a three year period---- 69% better over a 5 year period and 71% better over a 10 year period. A look at these figures seem to support the basic concept of the research. Sandy Cartoon Sandy: Camille, do you know what a commission is? Wife Camille: Of course. It is the only way to make money on the stock market---and that is why your broker charges you one. Sandy: Ouch and correct.
“ The more extensive a man’s knowledge of what has been done, the greater will be his power of knowing what to do.” Benjamin Disraeli, (1804 -1881), British novelist, politician, prime-minister and statesman
“ If you live to be one hundred, you’ve got it made. Very few people die past that age.” Gorge Burns, (1896 – 1996) Comedian
“ The secret of managing is to keep the guys who hate you away from the guys who are undecided.” Casey Stengel, (1890 – 1975) Baseball player and manager
“ The more you have the more you are occupied, the less you give. But the less you have, the more free you are.” Mother Teresa, (1910 – 1997) Beloved humanitarian known throughout the world for her charity towards the poor.
“ One can’t say that figures lie. But figures, as used in financial arguments, seem to have the bad habit of expressing a small part of the truth forcibly, and neglecting the other part, as do some people we know.” Fred Schwed, Where Are The Customers Yachts Or A Good Hard Look At Wall Street. A legend that has a visitor to Manhattan's financial district marveling at the wealth of the bankers and brokers, but wondering why their clients aren't all wealthy, as well.
“ Opportunity is missed by most people because it is dressed in overalls and looks like work.” Thomas Edison. (1847 – 1931 American inventor
- 8 - Stock Market – Investment Humor Q. What is a stock split? A. That is what happens when your ex-wife and her attorney decide to split all of your assets equally between themselves. According to Ibbotson Associates, a Chicago research firm, the S&P 500 Index returned an average annual return of 10.4% over a 77 year period from 1926 – 2003. How many actively managed funds can top that number? So, the question is-----Why would you place your hard earned dollars investing with an actively managed fund expert who has about a 30% chance of beating the index fund performance? Go figure. Coming In The February Issue: Should I Pay Off My Mortgage Before I Retire? This is a question that a good number of future retirees are asking. The strategy of many is to pay it off so that you will have less or no debt going into your retirement years. Some experts will tell you that if you base your choice solely on the math----the lower the rate of interest on your mortgage---it doesn’t make sense to pay it off. Why? If you can deduct the interest on your income tax return, you are using money from the bank to build your nest egg. And from the investing side----let’s says that you have a 5% mortgage---Some experts feel you can probably earn more than that by investing in a diversified portfolio of stocks and bonds and perhaps add real estate income investments. A good number of experts add that you should max out on your 401(k) and your IRA before you pay down the mortgage. But, don’t let the math argument be the only factor in coming up with your decision. In our February, 2005 edition of Your Retirement, we'll take a look at some of the other factors you should consider before you decide to become mortgage free.
- 9 - This newsletter intends to present factual up-to-date, researched information on the topics presented. We cannot make any representation regarding the accuracy of the content or its applicability to your situation. Before any action is taken based upon this information, it is essential that you obtain competent, individual advice from an attorney, accountant, tax adviser or other professional adviser. Information throughout this newsletter, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information . No party assumes liability for any loss or damage resulting from errors or omissions based on or use of this material. Retirement Planning Consultants provides a number of resources designed to help individuals make informed decisions on planning – saving – investing for retirement. We offer unbiased and easy-to-understand information from an impartial outside source. We’ve been doing that for almost 30 years. Our “Planning – Saving – Investing For Retirement” workshops have helped thousands of individuals. For additional information or if you have any questions, contact, Robert R. Julian, Retirement Planning Consultants, 313 Blackstone Avenue, Ithaca, New York 14850, (607) 255-4405, email: rrj1cornell.edu. Visit our website at retirementplanningconsultants.com Homework: The Age When Full Social Security Benefits Will Be Available For Those Born After 1938 Full Retirement Age + Months Source: Social Security Administration