Interest Rates and the Fed

Due to the financial crisis that began in 2008, interest rates are at extremely low levels. The Federal Reserve has currently set the fed funds rate at between 0 -.25% and this level is expected to be maintained for "an extended period."

This low-level of interest rates, along with current and future levels of government expenditures, has led many investors to question or consider the impact this will have on future inflation rates.

A member of the Federal Reserve Board of Governors, Kevin Warsh, wrote an Opinion column that was published in the Wall Street Journal on September 25, 2009. He stated that long-term inflation expectations are stable and an economic conditions are likely to warrant exceptionally low level of interest rates for an extended period of time.

He then focused on the future. He stated that "we are at a critical transition period," of an unknown duration and that "we must prepare diligently for an uneven road race ahead." What he was beginning to address was how the Federal Reserve would increase interest rates in the future, to avoid inflation rates to rise to levels higher than desired.

In the past, when the Federal Reserve would increase interest rates, it has at times done this in .25% increments every few months. His comments indicate that once the Federal Reserve anticipates that it is the appropriate time for such an increase in interest rates, this may not be the pattern that they implement. He stated "that prudent risk management indicates that policy likely will need to begin normalization before it is obvious it is necessary, possibly with greater force than is customary..."

While the raising of interest rates may not occur for a while, we view these comments as positive. As the Federal Reserve had to act creatively during the inception of this crisis, the implication of these comments is that they will attempt to be proactive and take action to avoid much higher than normal levels of inflation in future years.

We cannot anticipate or predict future interest rates. In the structuring our fixed income portfolios, we purchase what is referred to as a laddered portfolio, which means that we will buy securities over a somewhat even period of time, rather than placing a significant bet as to how and when interest rates will change. Further, as appropriate to a specific client, we have been investing for a number of years in both TIPS (Treasury Inflation Protected Securities) and commodity mutual funds, both of which provide hedges against significant rises in inflation. We have been investing in both of these asset classes for a number of years and feel that they should be included in most investors portfolios.

Social Security: No 2010 Increase?

Preliminary estimates indicate that Social Security recipients may not receive an annual increase, when payment figures are released for 2010.

Social Security payment increases are based on annual inflation. Currently, the federal formula for inflation reflects negative inflation for 2009, so there would not be an increase when the government decides on the 2010 change. It is possible that the government may evaluate this situation and make a change in the rules, as many of the real costs that recipients incur have increased. The major reason that the 2009 inflation factor is negative is the significant decline in the price of oil from 2008 to 2009.

This is a further update to a June, 2009 post, which predicted the same trend.

Good Decision. Good News.

The reappointment today of Federal Reserve Chairman Bernanke by President Obama is clearly good news, for the country and the worldwide financial markets.

While some of his decisions can be criticized, Bernanke has shown decisiveness and creative thinking in trying to deal with the unprecedented financial challenges of the past 2 years. His background and studying of the Great Depression has proved to be fortunate for the country, as this valuable learning of prior historical lessons has been the foundation for his policy making.

A change in Fed leadership at this time would have clearly been detrimental to the financial markets, at least in short run. Bernanke has well earned the continuity of a second term and it provides for stability in the leadership of the financial markets, which is of utmost importance.

Here Comes the Judge...Against the Wrong Fund?

The Supreme Court will soon be hearing a case involving Harris Associates, Inc. (advisory firm of the well respected Oakmark family of mutual funds), due to shareholder litigation over the mutual fund expenses charged by these funds.

This is an important topic, as many mutual funds charge fees that we think are way too high. For example, for US stock mutual funds that we generally use, the expense ratios are .10% - .40%, depending on the type of fund. Industry averages for comparable funds are usually between 1.00-1.50%. Thus, our clients may be paying 1% less in mutual fund fees than an industry average fund, not including our advisory fee.

This case going to the Supreme Court may be good, from the standpoint that it may raise awareness of how expensive so many mutual funds are (which most investors are not even aware of). However, it is unfortunate that the case is being brought against the Oakmark family of funds, as their expense ratios are at the lower end of the range, near 1.10%. There are many fund families that charge much higher fees, in addition to front or back end loads (sales charges).

Part of our investment philosophy is to control whatever costs that we can control. We cannot control the direction of the stock market, but we can control the expense ratios for our clients, by our selection of mutual funds with lower costs. Utilizing very low cost mutual funds, without sacrificing investment performance, is a win-win for our clients.

When we meet with new prospects, one of the things we do is to perform a “portfolio analysis” of their current investments, which includes reviewing the costs of their existing investments. We feel it is important for clients to understand all the fees they are paying and recognize that their current investments may have far higher annual costs, which they are not aware of. This is frequently an eye opening experience.

For the mutual fund industry, this Supreme Court case may become an eye opening experience!

Resources and Readings

Note: These titled posts ("Resources and Reading") are intended to be informative and helpful, of items I have read or seen. I am not taking political positions, just providing the reference to something I've seen that I consider worthwhile, about the current affairs of our country and the world, which you may find informative or helpful.


Tom Friedman, New York Times: He has been traveling in Pakistan, Afghanistan and near Iran in recent weeks. His series of articles on these experiences have been clear, short and highly informative articles about what is going in in those parts of the world. Very valuable reading. Columns dated from around July 20th - ? (he is still in that area).

Health Care Reform: status changes daily, so I have not posted about this or the tax implications, as they would be outdated within a day of the post. However, for a timely explanation of the current status/stalemate, see Paul Krugman in NY Times (7/27/09) and Robert J. Samuelson in the Washington Post (7/27/09). Krugman is clearly a liberal and in favor of reform of some type. His article I cited is a good update on the current status of the Democratic party in-fighting.

Spotted in Sports Illustrated, 7/27/09, page 16: "In an ad on the (Detroit) Lions' website for streaming video of old games, fans of the team, which went 0-16 last year, were exhorted to RELIVE THE 2008 SEASON." Why??

We Are Pleased to Announce....

We are pleased to announce that Wasserman Wealth Management, LLC was named as the second largest Wealth Management firm in Michigan which is affiliated with a CPA firm and has a CPA within the wealth management firm. The rankings, based on the above criteria and assets under management as of December 31, 2008, were published in the July, 2009 issue of Accounting Today.

We thank our clients for their loyalty in helping our firm grow.




And now for the legal disclosure:

The ranking may not be representative of any one or all of Wasserman Wealth Management’s clients’ experiences because the rankings reflect only the size of the firm. Past performance is not a guarantee of future results. Investments involve risk, including the risk of loss of principal.

Gadgets and Things

I thought I would write about something different...the technology that I use and my firm uses. If you have any questions or would like more information about any of the following, let me know.

I would be the last person someone would have described as a techie a few years ago, but am now incorporating many different types of technology in many business and personal parts of my life.

Amazon Kindle: This is an electronic book reader, and more. With this device, almost any book can be instantly downloaded electronically to the reader, anywhere in the country. It eliminates carrying many books on trips and you can always have something to read with you (was a great way to read the Buffet biography, which was 1,000 pages plus). I also use this to read trade magazine articles. My office emails selected articles directly to the Kindle, so that they can be read whenever I want to. Books can be sampled, so I can read a chapter or two to learn what the general concept of what an author is saying (great to learn Tom Friedman's latest thinking). Magazines are also available. I currently subscribe to Atlantic Monthly and Newsweek for a fraction of the print versions.

IPhone: I have to give credit to my son for encouraging me to get this phenomenal device. It is so much more than a phone and Ipod. I download podcasts of many types; news and interviews, Leimberg Services (tax, financial and estate planning updates), technology updates and more.

A big hit for the Iphone are the "apps" which are available. I'm not much of a gamer. My apps include Toodledo (tasks, to do list management), Ifitness (workout information, data collection, design your own exercise program), and Grocery IQ (learned about this from a recent NY Times article and it is amazing!). Amazon's website can be accessed and my Kindle can be read from the Iphone.

Voice Dictation Software: In the office, I use "Dragon Naturally Speaking" to "write" letters, emails and sometimes, these posts. It is an incredible time-saver and the technology seems to be steadily improving, meaning the program is able to more accurately type what I'm saying. If you "write" a lot, you may find this very valuable.

Cash or Credit? You may be very surprised

You pull into gas station. The price is $2.45 per gallon to pay by credit card or $2.35 for paying in cash. What do you do? How do you pay?

Most of us have gotten very used to paying for gas by credit card, almost exclusively, in recent years. In the past few months, gas stations have started to charge a $.10 differential between paying by cash or credit card. I have a feeling that most people are continuing to pay by credit card, because that is what they are used to doing.

Like our approach to investing, before you pay at the pump, you should consider the evidence and make a rational decision. The additional $.10 charge to pay by credit card, at current gas prices, is a premium of 4%. So by using your credit card, it is costing you 4%.

Even if you are participating in almost any type of credit card reward program, you will probably not be able to recoup anywhere near this 4% added cost. Thus, you will save money by paying in cash and not by paying with your credit card.

This may require a change in what you are accustomed to doing. But rationally, it is the correct strategy.

For readers of this blog who are not currently clients of our firm, this is similar to an investor who has been using a traditional brokerage firm (and their "strategies") and has not considered the academic evidence that supports our investment philosophy. They are used to what they've been doing and they are comfortable with it. It may not necessarily be in their best interest, but they haven't considered an alternative strategy.

So the next time you fill up your tank, think about your choices.... and hopefully you'll make the rational one.

Thoughts About Oil

Various thoughts and information about the price of oil and it's impact:

• Prices of a barrel of crude oil:
• One year ago: $136/barrel
• February 2009: $45-50/barrel
• Early June, 2009: $73/barrel
• July 8, 2009: $61/barrel

• In another example of the unpredictability of the financial markets, the price of crude oil has dropped for 6 straight days, declining by 16% during these 6 days. That is a huge change. I don't think that two weeks ago, anyone would or could have predicted this steep decline over such a short time period. The lesson for investors should be that you cannot predict the future accurately (and then try rely on these predictions for investment decisions).
• The steep decline was partially a reaction to the increase in unemployment figures that were released last week. The thought was that if more people are unemployed and companies are not hiring, there will be less demand or use of oil in the future. Based on supply and demand basics, with less anticipated demand, the price would go down.
• However, the drop in the price of a barrel also means that gas prices will go down. For our economy, this is good. Consumers will have more to spend on things other than gas. The cost that companies will incur will also be less, which is good. The downside to reduced oil prices is that reduces the movement towards more efficient vehicles and investments in alternative energy.
• Other interesting items:
• Saudi Arabia cut the official price for exports to the US on Sunday. The Wall Street Journal indicated that this would mean more oil being shipped from Saudi Arabia to the US.*
• OPEC future demand estimates have declined. They predict a decline in 2030 oil usage to 105 million barrels a day, which is an 8 million barrel decrease from the same estimate a year ago (a 7% decline).*
• OPEC's demand forecast for 2013 also dropped by 5.7 million barrels a day. *

* Wall Street Journal, Oil's Rational Retreat, July 8, 2009

College Financial Aid Form Simplication Coming

The U.S. Department of Education announced recently that the Free Application for Federal Student Aid (FAFSA) will be shorter in length and more user friendly. The government uses this application to determine a student’s eligibility for financial aid, as well as, most colleges use it to gauge a student’s financial needs.

The Department of Education has promised to reduce the number of questions by 25% and to reduce the online screens from 30 to 10. The changes to the form include eliminating questions that don’t apply to a specific student, providing quicker estimates and streamlining information from the IRS. Some of the changes are currently in place with the rest to follow over the next few months.

Beginning in January, students will have easier access to income information from the IRS when applying on-line (which 98% of students do) for the spring semester. The goal is for tax return information to be downloaded from the IRS to the FAFSA form, which will save time and increase accuracy.

Go Figure

As a long time reader of Sports Illustrated, "Go Figure" is the name of one of my favorite features. "Go Figure" is a collection of interesting and surprising statistics.

Investment News, a publication for financial advisors, had the following items in their "Go Figure" section in the June 15, 2009 issue:

*80% of institutional investors (professionals, pension plan managers, etc.) thought the S & P 500 index will return to 1,200 by the end of 2011. It is currently around 895. That would be an increase of 34% from today's level.

*However, in an Associated Press poll, 52% of the people surveyed thought that now is a bad time to invest in stocks.

While we do not believe in crystal balls and cannot predict the future, think about the above 2 figures. If an item is on sale, people are more likely to buy it. However, when it comes to stocks, many people will invest only when it "feels right."

Our role as financial advisors is to help our clients have the discipline to adhere to their financial plans. We assist our clients in being able to stick to their planned asset allocation. This discipline can lead to buying low and selling high.

So even if it does not "feel right" to be invested in stocks now, we think it makes sense for investors, after analyzing and determining an appropriate investment plan, to purchase stocks now or maintain their stock positions for the long run. By doing this, if the market does increase as many professionals above predict, our clients will benefit. They will not benefit by sitting on the sidelines waiting for "the right time to invest."

We'll check back in 2011 and see who is right!

Social Security Projections

Recent Congressional Budget Office (CBO) publications and Obama administration comments indicate that Social Security payments may not increase in 2010. This would be the first time in three decades that there may not be an increase.

The lack of a cost of living adjustment may be compounded by increases in Part B Medicare premiums and drug coverage premiums. Thus, many Social Security recipients may find an overall decrease in their net checks during 2010.

The lack of Social Security increase would be due to very low levels of inflation over the past year.

The Trend Against Active Management

One of our core stock investment philosophies is that it is difficult to pick active money managers, in advance, who will outperform their respective benchmarks, over a long period of time. Active managers are those that try to pick the best stocks because they think they can outperform others.

The academic evidence against the success of active management, and for passive management, is very strong. An article in today's Wall Street Journal* stated that "a growing number of big investors are concluding that stock and bond pickers failed to add any value during the market turmoil and are shifting to index funds."

"Active managers have not given us the added performance in a down market that we hoped for," stated Bill Atwoood, executive director of the $9 billion Illinois State board of Investment. He expressed disappointment with both large and small stock managers.

The evidence that we have reviewed over time shows that this trend prevails in markets over time, in the US, International and Emerging Markets, particularly if taxes and trading costs are considered.

For more information on our investment philosophy, please contact us.

* Wall Street Journal, 6/22/09, "Active Managers Get the Cold Shoulder"

A Perspective from the Other Side

For stock investing, we adhere to a "passive" strategy, which is based on the strong and extensive academic evidence which shows that "active" money managers do not outperform their respective benchmarks over a long period of time.

In a recent Wall Street Journal article,* the Journal said "while the Standard & Poor's 500 index was down about 38% in 2008, the vast majority of actively managed stock funds lagged behind that mark."

One of the top active money managers in the business, Bob Rodriguez, of the FPA Capital mutual fund and past Morningstar Fund Manager of the Year, said, "Let's be frank about last year's performance. In a word, we stunk. We managers did not deliver the goods and we must explain why...If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk."

We agree, which is one of the fundamental philosophies of our investment strategy. We do not think that over a long period of time, investors can consistently identify, in advance, managers who will outperform the market.

Rodriguez was further quoted: "If portfolio managers and analysts cannot recognize the greatest credit blowoff in the last 80 years, when will they?...If active managers continue to adhere to their old practices, we should see a contraction in the active mutual-fund management universe in the next five to 10 years."

Besides questioning the benefits of active management, Rodriguez is also providing another example of the problem with active management, which is that you need a fund manager. Rodriguez is taking a one year sabbatical from his fund "to recharge his batteries" beginning on January 1, 2010. While he may very well deserve the time off, his investors hired him based on his past record and now he will not be steering the ship. Fund managers and their staff of analysts are continually changing jobs. So why do investors pay for active management?

To learn more about the advantages of our strategy, please contact us.

*Wall Street Journal, June 5, 2009, Fund Track

Did you know that .....?

• Many asset class categories are up 20 or 30% for the 2nd quarter of 2009, as of June 10, 2009 (for the period 4/1/09-6/11/09). The media focused great attention on the downward losses of the stock market, but much less has been publicized about the increases since March, 2009.
• Bill Gross, one of the top active bond managers in the world, recently took over the management of one of his firm's closed-end fixed income funds, which lost 45% during 2008. The huge loss by the PIMCO High Income Fund is an example of how many fixed income investors, thinking they were invested for stability, got terribly burned in 2008. The fund was invested in high yield corporate bonds, which is another way of saying they were not holding good quality,investment grade bonds of short maturities (which is what we invest in for our clients).
• Interest rates on US Treasury bonds have increased dramatically in recent weeks and months. relative to the lower levels they were at. For example, since March 11, 2009, the yield on a 5 year bond has increased by almost 1%, from 2% to 3%. The 10 year bond yield has increased from 3% to 4.18%. For investors holding long term bonds, a rise in interest rates will cause a huge loss in the principal value of their bonds. For example, Morningstar reported on June 11 that long-term government bond funds were down more than 19% year to date, through June 10, 2009. We advise our clients to hold short term fixed income investments. Please contact us to review your bond holdings, as investors holding long term bonds may be facing huge principal losses in the future, if interest rates continue to rise.
  

Tax Efficient Funds a Thing of the Past? Not for us.

A recent article* by Morningstar.com cited that a number of major mutual fund firms were closing some "tax efficient funds." The reasons for the closings were that the funds had not attracted sufficient dollars, that investors may not feel these funds are needed or that they are too "gimmicky."

We strongly disagree and feel that tax efficient mutual funds are very appropriate for taxable investments (investments that are not in retirement plans or IRA accounts). One of the primary benefits we can provide to our clients is the proper placement of their investments in the most tax advantageous investments. The tax efficient stock mutual funds that we recommend pay special attention to strategies that minimize the taxes that would be incurred by their shareholders. They do this by utilizing various trading strategies, tax loss harvesting and making sure that the timing of stock sales is most tax effective (such as paying attention to long term v. short term tax selling). Most regular stock mutual funds pay minimal attention to these issues.

The lack of investor attention and interest in tax-efficient funds is reflective of many investors' short term memories. Just a few years ago, and certainly in the late 1990s, mutual funds and managed brokerage accounts generated huge taxable gains and distributions. While many mutual funds may hold tax losses now, that will not always be the case. Investors should continue to utilize tax efficient mutual funds, as that will provide them with the best opportunity for maximizing their after-tax investment return.



*Morningstar.com, Fund Times, May 25, 2009

Diversification is Still Working!

While most stock markets throughout the world and specific sectors in the US declined during 2008, the effects of diversification (and it's benefits) can again be clearly shown so far in 2009.

By diversification, we mean more than just owning lots of different stocks. We feel it is important to own different baskets of stocks of different size companies, both in the US and throughout the world.

As of May 28, 2009,

• The S & P 500 Index (of US Large company stocks) was up just under 2% for the year,
• Many international markets are up between 10-20% and,
• Emerging markets are up over 30-40% for 2009

This is why we continually recommend broadly based, globally diversified portfolios. We think it is important that most investors have a significant weighting of their stock portfolio in investments outside of the US.

While many investors will review these figures sometime during 2009 and decide that now is the time to "jump into international and emerging markets," we have maintained our weightings in these markets and may begin to take these gains as opportunities to sell some of the gains. That way we continue to try to "buy low and sell high."

FDIC Extension and Impact for You

The FDIC announced recently that FDIC institutions (banks, generally), are now insured up to at least $250,000 per depositor through December 31, 2013.

This is a significant lengthening of the expanded FDIC insurance coverage. When originally announced in October, 2008, the expansion from $100,000 per depositor to $250,000 was to expire on December 31, 2009.

The impact of this on investors is that they should continually review and evaluate interest rates and fixed income choices. You may be surprised by the results. Based on current interest rates, it may be advantageous for even a very high tax-bracket investor to purchase a CD rather than a high quality (AA) municipal bond, for a two or four year maturity. With the extended FDIC insurance, there is no risk with the CD and it should pay a higher after-tax yield than a high quality municipal bond.

This again emphasizes that a fixed income portfolio should be constantly monitored and evaluated, as interest rates and the regulatory environment can create unanticipated opportunities.

Similarly, there is almost a 1% interest rate increase in purchasing a 7 year TIP (Treasury Inflation Protected Security), rather than a 5 year maturity. This is a unique opportunity. For the additional 2 years, the market is providing an excellent interest rate reward.

New Tax Changes: Business

This is a summary of the business provisions of the Stimulus Bill signed into law today by President Obama. See the preceding post for Personal/Individual provisions.

Bonus Depreciation: First year 50% bonus depreciation has been extended through 2009.

Section 179 Expensing: Increased the amount of first year depreciation expensing up to $250,000. Note that a business must be profitable to utilize this provision.

Change in Estimated Taxes: While we will need further clarification, "qualified individuals" (defined as those who have adjusted gross income of less than $500,000 and more than 50% of their income comes from a business with less than 500 employees) can make 2009 estimated tax payments of only 90% of their prior year (2008) liability, rather than 100% of the liability. We are not sure yet how this will interact with the general rule that requires estimated taxes of 110% of the prior year tax for individuals with AGI of greater than $150,000.

There are other, very specific or targeted provisions. The above items should be the ones affecting most businesses.

New Tax Changes: Personal

This is a summary of some items in the 2009 Stimulus Bill which relate to individuals. Most of the items have very specific income phaseouts, so please consult with us as to whether these affect your specific situation.

Home Buyers Credit: For homes purchased between January 1, 2009 to December 1, 2009 a credit of up to $8,000 is available for a taxpayer who has not owned a US principal residence in the prior three years. The amount of the credit is 10% of the purchase price. This replaces the prior law, which provided a $7,500 credit for homes purchased between April 9 to December 31, 2008. That credit must be repaid over 15 years or less.

New Car Sales Tax Deduction: Sales-tax for a new car or truck purchase up to the cost of $49,500 may be deducted "above the line" and not as a Schedule A deduction, so it is more beneficial. This phases out, beginning at adjusted gross income of $125,000 and $250,000, respectively, for single or joint filers. This is effective for vehicles bought on or after the effective date, February 17, 2009.

Work Tax Credit: A temporary credit for 2009 and 2010 of 6.2% of earned income, up to a total credit of $400 for individuals and $800 for joint filers. This is retroactive to the beginning of 2009. The phaseouts for this provision are at $75,000 - $90,000 for individuals and $150,000 - $190,000 for joint filers. These benefits may be received by minor adjustments in federal withholding from paychecks, starting around June, 2009.

Higher Education Tax Credits: For 2009 and 2010, the maximum credit per student increases from $1,800 to $2,500 and the income phaseouts are increased significantly to $80,000 -$90,000 for single filers and $160,000-$180,000 for joint filers. Expenses are expanded to include textbooks.

Section 529 Plan and Computer Purchases: For 2009 and 2010, the cost of computers and related technology can qualify as section 529 plan distributions. Internet access charges and software are also covered, as long as they are not for sports or games.

AMT: As Congress has done in prior years, the AMT exemption has again been temporarily increased. We still anticipate that many taxpayers will continue to be affected by the AMT.

Social Security Tax Credit: Recipients will receive a $250 tax credit. This may be in the form of reduced withholdings or a check.

Energy Tax Credits: Homeowners who add energy-efficient windows, furnaces, heat pumps and air conditioners may be eligible for a tax credit of up to 30% of the costs, up to a total of $1,500. In the future, tax credits of up to $7,500 will be available for plug-in hybrids and battery power electric cars. These vehicles are not yet available.

Required Minimum Distributions: More Guidance

As discussed in my post dated January 29, 2009, no required minimum distributions will be required in 2009 for most individuals older than 70 1/2. Minimum required distributions will resume again in 2010.

The waiver of distributions for 2009 applies to recipients from IRA's, 401(k)s and 403(b)s. However, the exception for no 2009 distributions does not apply to distributions from defined benefit plans, which must take required minimum distributions in 2009.

Beneficiaries of inherited IRAs who are subject to the 5 year rule are also exempt from required distributions in 2009, so they will get 6 years (this applies primarily to non-spouses who receive inherited retirement funds).

The Case for our Investment Philosophy

While reviewing a prospective client's current portfolio, which we consider like a medical "second opinion," we again found real world evidence of the strength of our investment philosophy. (Note that we do not currently manage this part of the portfolio and this is only an example, but one that we have seen time and again).

The person's broker subdivided the account to be managed into three asset categories (large value, large growth and small growth). Beyond the fact that there are many other asset classes that should have been included, the portfolio commentary for 2008 provides very interesting reading. The broker hired or allocated the money into 3 separate funds. Each of the funds then hired 2 or 3 sub-advisors, to actually do the investing.

So this broker of a major brokerage firm, utilizing their vast resources, selected 3 managers. The 3 managers, again assuming used intensive research, each selected multiple sub-advisors. With all this research and diligence, all 3 funds failed to outperform their respective benchmark.

Over a longer time period, the results for this portfolio was no better, as the person's portfolio failed to beat the broker's benchmarks over the past one year, 3 years, 5 years or since inception in the 1990s, failing to beat their benchmark by 3-5% each year (as annualized).

While this is only one limited example, it provides further real-world evidence which academic research continues to show: that it is very difficult for active managers to beat their respective benchmarks, particularly over long periods of time.

Thus, by designing a portfolio with the objective of obtaining benchmark returns with far less in fees, investors have a greater likelihood to outperform active managers, over time. For more information on how we design such a portfolio, or to have us perform a "second opinion" on your portfolio, please contact us.

The detailed commentary:

For the large value asset class, the firm wrote: "The Fund outperformed its benchmark, the Russell 1000 Value Index, in the fourth quarter, but underperformed it for the full year." In mid-December, the Fund replaced one of the 3 sub-advisors that it had hired to manage the fund. (See more about this in my post dated January 28, 2009).

For the large growth asset class, "compared to the Fund's benchmark,...the Fund underperformed during the quarter, as well as for the full calendar year...The portfolio continues to be subadvised by three active managers...The three sub-advisors ended the year underperforming the benchmark."

For the small growth asset class, "the Fund's negative return was accompanied by relative underperformance versus the Fund's benchmark...for both the quarter and the year overall. The Fund is sub-advised by two active managers..." The active fund sub-advisors decided to overweight the portfolio in 3 sectors. "However, the stocks in which the sub-advisors invested underperformed stocks in the sector as a whole. Energy stocks within the small cap growth universe declined by nearly 50% during the quarter. The Fund's holdings in this sector underperformed the benchmark's sector return." This means the Fund's energy sector picks did even worse than the benchmark's 50% loss.

Snowball....Well Worth the Time

I highly recommend this book, Snowball, by Alice Schroeder, which documents Warren Buffett's life, including both his personal and business life. It is very long, but very worthwhile reading. Buffet is considered by many as the greatest investor of all time.

The book does describe Buffett's investment philosophy. Much can be gained by learning his important lessons of incredible discipline and patience, as well as how he has used past weaknesses in the market or specific companies to buy, yet be patient when others are greedy. However, much of the book discusses Warren's personal life, from his childhood newspaper delivery business (he built an "empire" as a teenager) to his relationship with Bill and Melinda Gates.

The title of the book represents Buffett's investment philosophy, that money invested and allowed to accumulate and compound over many, many years will "snowball" into even more money. He certainly has succeeded at this.

While I recommend this book, a previous book on Buffett by Roger Lowenstein, written in the 1990s, provides more information on the business side of Buffett and his investment decision making.

Tax Updates to come...but not yet

The House has already passed it's version of the Stimulus bill. The Senate is expected to approve it's version on Tuesday, February 10th. Then the bills must be reconciled and approved by both chambers, before the President can sign it (OK, that's Govt 101).

We will provide a summary of the major tax items once the final bill is enacted. You should not do any planning based on either the House or Senate version, as neither is law yet. For example, both bills contain legislation for the purchase of a new home, but they have very different provisions.

If you do have any questions, please contact us.

Have a Kindle Day!

Today, the Amazon Kindle 2 was announced. Last spring, I received as a gift the first version of Amazon's electronic book reader, Kindle. The second version appears to be only an incremental improvement of the first version of the Kindle, which is already a terrific technological accomplishment.

For those of you who are serious readers, the Kindle is a great device. I am able to carry many books (it can store hundreds), emailed documents and articles, and magazines all in a device that is smaller than most paperback books. You are able to read it without any glare or problems that come with reading a computer screen. It is very readable, inside or outside, even on a beach in the sun. The cost to download most books is $9.99 and is done in under a minute, from practically anywhere in the U.S. The text size is easily changeable, so it is great for those whose vision is declining.

If you ever want to see it, just let me know. And unfortunately, I don't receive any commissions from Amazon.

Tax Updates

Minimum Required Distribution rule change for 2009:
Almost anyone who is required to take a minimum required distribution in 2009, as a participant or as a beneficiary, does not need to take the distribution from their retirement plan or IRA in 2009. If you think this impacts you, consult with us or your tax advisor, as there may be planning opportunities. It may make tax sense to take some distribution for 2009, but less than you would otherwise be required to distribute.


Ford Hybrid Tax Credits:
If you order or purchase a new 2010 Ford hybrid vehicle by March 31, you may be eligible for a tax credit of up to $3,400 on your 2009 Federal tax return. The Ford Fusion and Mercury Milan are eligible for $3,400 credits, while the Ford Escape (which I own and love!) and Mercury Mariner are eligible for $3,000 credits. The credit amounts decrease after March 31.

Note that credits may be available from other automakers. This was recently announced, so I am posting this for informational purposes only.

Also, depending on your tax circumstances, particularly if you are affected by the AMT, you may not actually get the benefit of the credit upon the filing of your income tax return (that's why I've used the term "eligible" for a tax credit and have not stated that you "will" get a credit). So, keep in mind that even if you purchase a car eligible for one of these credits, you may not actually get the benefit of the tax credit. That's the tax code!

Recommended Reading

The first Saturday of March is a special day for me, as that is traditionally the morning when Warren Buffett's annual report and shareholder's letter is released (though last year he surprised me by releasing it late Friday afternoon). Reading his letters are invaluable. I will share some highlights of this year's letter when it is released.

As Buffett made a huge gift to the Bill and Melinda Gates Foundation, Buffet encouraged Bill Gates to write an annual letter, which was released earlier this week. It is fascinating reading and incredible, both in the poverty and medical problems in other parts of the world and the significant efforts that Gates and his wife Melinda are making, both financially and with their time, in an attempt to address and cure some of these problems.

For example, in 1960, almost 20 million children died under the age of 5, of the 110 million children born. In 2005, when more than 135 million children were born, fewer than 10 million children under the age of 5 died. Gates called this "one of the most amazing statistics ever." His Foundation is focusing on vaccines to cut the 10 million figure in half again within the next 20 years.

I highly recommend reading this report. It will give you an appreciation of how well off so many of us are, and the steps that Gates is taking to address many of the world's problems. For more information and the full annual letter, see http://www.gatesfoundation.org/.

In commenting on the world's economic issues, Gates wrote: "If you take a longer timeframe, such as five to ten years, I am very optimistic that these problems will be behind us. A key reason for this is that innovation in every field-from software and materials science to genetics and energy generation-is moving forward at a pace that can bring real progress in solving big problems. These innovations will help improve the world and reinvigorate the world economy."

If the Best Can't Pick 'Em, How Can You?

Each week, Morningstar.com publishes an article entitled "Fund Times," which writes about fund managers that have been fired, quit, changed jobs, etc., among other things.

On January 22, 2009, the lead article was that Vanguard was replacing a subadvisor (manager) for 50% of one of their actively managed funds, Vanguard Growth Equity. In early 2008, they replaced the other subadvisor, who managed the other 50%.

With all the resources that Vanguard has, why would they be frequently changing the managers of this mutual fund? This once again shows how difficult it is to predict the future success of active fund/money managers. Even Vanguard could not do it. Vanguard selected a certain manager a few years ago (presumably after lots of research by many professionals), based on their past performance, then the performance fell below their respective benchmark for a period of time and Vanguard decided to make a change.

Our philosophy is rather than trying to pick and chase a fund manager that will consistently beat a respective benchmark (which is extremely hard to do), we build a portfolio to match the benchmark for each asset class. In the long run, academic data shows that this will be the winning strategy.

Can You Judge a Book By It's Cover?

I'm not sure we have the answer to that, but we do know that you can judge or evaluate a financial advisory firm by the information and books that they read, or do not read. We value the importance of continually learning from prior financial history and the lessons that can be learned from reading other experts and certain journalists.

Books that we've read (and recommend):
Snowball, Warren Buffet's biography, by Alice Schroeder (Excellent background on his life)
Panic, by Michael Lewis, a collection of essays on financial crisis from the 1980s to now
A Demon of Our Own Design, by Richard Bookstaber
Investment Policy, Charles Ellis
Buffet: The Making of an American Capitalist, written in 1990s, Roger Lowenstein
When Genius Failed: The Rise and Fall of Long Term Capital Management, Roger Lowenstein
A Random Walk Down Wall Street, Burton Malkiel
Four Pillars of Investing and other books by William J. Bernstein
books by Larry Swedroe, Director of Research, BAM Advisor Services

I will post more to this list in the future. Many of the books that I read before we formed this firm were instrumental in developing our investment philosophy.

Daily or Periodic Reading
The Wall Street Journal (in print and electronically), daily, since high school
The New York Times, electronically
Morningstar.com
Nick Murray Interactive (online advisor's newsletter)
Information and commentary provided by BAM Advisor Services and Dimensional Fund
Advisors
Financial Journals: Investment News, Financial Advisor, Investment Advisor
Leimberg Services, an online subscription service which provides tax and estate planning updates
Some of our favorite journalists: Jason Zweig (WSJ), Roger Lowenstein (NY Times and others), Floyd Norris and Joe Nocera (NY Times)
Atlantic Monthly (now emailed monthly to my Kindle)

Welcome

Welcome to the Wasserman Wealth Management, LLC Blog (http://www.wassermanwealth.com/), where we intend to write and comment on wealth management, financial and tax matters, as well as non-financial items.

We hope this Blog provides timely, relevant information and insight for our current clients, prospective clients and referral sources.

If you have any suggestions or comments, please email me at bwasserman@wassermanwealth.com.

Enjoy!