Asset Planning, Inc Comments
Fourth Quarter 2002
Every big accomplishment is a series of little accomplishments. To achieve maximum success, you must accept that progress is made one step at a time.
2003 brings new higher limits for 401k and 403b contributions. You will be allowed to contribute $12,000 this year and $3,000 is the contribution limit for your IRA. The estate tax application exclusion remains at $1,000,000.
If you have a taxable account with us, we have matched realized gains with losses for 2002 and took additional losses, where it was applicable, to offset income. The current limit to realize an additional loss is $3,000; the same limit has been in effect for thirty years. I am hoping the new Republican House and Senate will take action to increase this limit. It could be effective for 2002 and your taxes to be filed by April 15, 2003.
Success seems to be largely a matter of hanging on after others have let go.
-William Feather
Enough is enough. This coming March will be three years since the market peaked and began the infamous decline into the bear cave. The S&P has had negative returns for the last three years. 2000 was � 9.33%; 2001 was �12.15% and 2002 recorded a loss of �21.23%. The 5- year annualized return for the S&P 500 index is �0.54.
Bear markets can occur for three different reasons. First, prices of shares may simply decline as a reflection of a downturn in the economy and corporate earnings. Second, excessive valuations can collapse, as they did for many growth stocks over the past three years. Third, misguided government policies, political or major bank failures can paralyze the financial system.
The recent bear market has been more severe than the economy alone can explain. There's clearly been a correction in stock valuations. But, we haven't seen the pervasive problems in the economy that make for chronically depressed stock prices. Economic slumps almost always end within two years -- and corrections for overvalued P/Es rarely last longer than three years.
Everything seemed to point to recovery in the economy by the fourth quarter of 2002, but the fear of war with Iraq and North Korea weighed heavily on everyone�s mind. When the market fundamentals finally showed improvement, the political agenda kept the market from a sustained rally. I do believe we have been through the worst now and I look for positive returns in 2003. The first day of trading in 2003 brought a 3.5% return to the Dow, S&P and the NASDAQ exchanges. Stocks are clearly less overvalued than they were at the start of 2000. Corporate scandals and fraudulent accounting are being investigated and cleaned up. And we're doing more to stop terrorism than we were a couple of years ago. Dare I say there is recovery ahead?
The current comments from the managers at Longleaf Partners are as follows: The return on ownership significantly exceeds the return on lending for the first time in many quarters, and equity earnings �coupons� are ultimately taxed at long-term capital gains rates and grow, while bond coupons are taxed at ordinary rates and are fixed. These numbers do not necessarily signal the end of the bear market, but the deck is now stacked in favor of long-term equity investors.
You don�t get points for predicting rain. You get points for building an ark.
�Louis Gerstner, Chairman of IBM
Tidbits
Beverly passed her CFP exam in November so congratulations are in order. We have also expanded our staff to add Joanne Liu as a research analyst and a Para planner to assist with financial planning. We now have a Medallion Stamp Guarantee available in the office (free of charge) when you need to have a signature guaranteed. I was a speaker at CSULB this past quarter. It was fun to go back on campus to meet with students that have selected finance as their chosen field. You will also notice a new format to our quarterly statements that better reflect the diversification we try to achieve with each portfolio.
Looking ahead� I will be on vacation April 14 to 20, 2003. IRA and SEP contributions need to be made early so they are posted by April 10. Plan ahead for all contributions and tax filings. I will be spending the tax-filing day on a golf course with my family.
I have written my resolutions and have worked on an action plan to map out how to achieve the goals that I have set for 2003. Have you written yours yet? It is never too late to begin dreaming, setting and reaching for new goals. I have just finished my monthly review of each portfolio and made notes for changes in 2003. Interest rate changes may be ahead and holdings will be changed to stay ahead of rising rates.
Our greatest fear is not that we are inadequate, but that we are powerful beyond measure. It is our light, not our darkness, that frightens us. We ask ourselves, who am I to be brilliant, gorgeous, handsome, talented and fabulous? Actually, who are you not to be? You are a child of God; your playing small does not serve the world. There is nothing enlightened about shrinking so that other people won�t feel insecure around you. We are born to make manifest the glory of God within us. It is not just in some; it is in everyone. And, as we let our light shine, we consciously give other people permission to do the same. As we are liberated from our fear, our presence automatically liberates others. �Nelson Mandela Inaugural Speech
Happy New Year 2003!
Sandra C. Field, CSA. MBA, CFP
Worrying is like a rocking chair, it gives you something to do, but it gets you nowhere. (Glenn Turner)
At a recent conference I had the opportunity to meet the former presidential candidate Steven Forbes. I also met Nobel laureate Bill Sharpe. Sharpe invented the Sharpe Ratio, a way to evaluate the risk-reward tradeoff on a stock or fund with a single number. Sharpe invented style analysis, (value, growth) a way to use mutual funds returns to explain their behavior. Sharpe won the Nobel Prize for economics in l990 for inventing the Capital Asset Pricing Model in the early l960�s. This model explains the volatility of a stocks systematic market risk as well as a specific companies risk, and thus laid the framework for much of Modern Portfolio Theory. When I began my undergraduate degree in finance in the l970�s, I studied Bill�s work. When I finished my Masters in the l990�s, I was again studying Bill�s work. The analysis I do on an everyday level comes from Bill�s work. It was a great honor to meet this man and glean his insight on the current market conditions and the outlook for the market in 2003.
My brief tirade�
The market seems to be in a holding period right now. The general economic data released is showing favorable signs of recovery. However, the market is skittish due to terrorism at home, political unrest and corporate scandals. We seem to be waiting for the next announcement of accounting restructuring or �the next shoe to drop�. The summer doldrums are upon us.
What do Enron, World Com, Tyco International, Xerox, ImClone, Dynegy, Adelphia Communications, Merrill Lynch & Co, Global Crossing and Computer Associates International all have in common? They have had many visits by the SEC and some should have their Boards of Directors sharing a jail cell. I am disgusted by the amount of corporate fraud that has n taken place among some to the top corporate executives in the US. I think the Boards of Directors should be held accountable for this fraud and many of the executives should be charged with fraud and prosecuted to the fullest extent. I wish the SEC would investigate each company that has loans outstanding to board members in excess of $250,000. It is unbelievable that many of these companies loaned millions of dollars to their board members, then filed bankruptcy and collapsed. The president of World Com had an outstanding loan of $400 million dollars. It is disgraceful.
�One of the major reasons why people are not doing well is because they keep trying to get through the day. A more worthy challenge is to try and get from the day. We must become sensitive enough to observe and ponder what is happening around us. Let life and all of its subtle messages touch us. Often, the most extraordinary opportunities are hidden among the seemingly insignificant events of life. If we do not pay attention to these events, we can easily miss the opportunities.� Jim Rohn
The All Weather Investment Approach
Investors are like sailors on a long voyage. They should want to take that voyage on a well-engineered ship with a captain and crew who follow time-tested principles and have a disciplined decision-making process. Since the ship will not be able to dock in a safe harbor each night, it must be able to ride through the storms and high waves that come its way. The captain and crew must try to anticipate the weather and storms to the best of their ability to make sure the ship allows for a long successful voyage.
The point of investing is to put money to work today in order to get more back tomorrow. We are trying to build a sturdy ship capable of successfully sailing a long voyage with an experienced crew and a cargo that includes a mix of industries and companies all selected for their value. Of course, we can not know exactly how successful the trip will be. However, following an investment discipline day after day should help assure that the cargo will grow in value as the voyage proceeds.
The above analogy has been paraphrased from Shelby Davis, of Davis Advisors. He described the journey we are on, so perfectly, I wanted to use his example. It is a long journey that tests our patience, beliefs and ability to stay the course, with no safe landing in sight. The captain and crew we have chosen are all experienced mutual fund managers that have been through the rough seas before and will be able to guide us to a successful destination, given the time to weather it through. I, too, am tired of wearing my life jacket but am confidant that the seas will calm, so I continue to look ahead.
House Passes Permanent Estate Tax Repeal
On June 6, the House passed a bill (H.R. 2143) that would make permanent the estate tax repeal provision in last year's tax cut law. H.R. 2143 repeals the sunset provision in last year's tax cut law that would reinstate the estate tax after December 31, 2010. Making the estate tax repeal permanent is projected to cost the federal government an estimated $99 billion in lost revenue over a 10-year period. Democrats offered a substitute amendment to permanent repeal of the estate tax. The Democratic alternative sought to increase the exemption amount for individuals to $3 million and $6 million for couples by January 1, 2003, and was estimated to cost $5.3 billion over a 5-year period. This proposal, however, failed to obtain the necessary votes for final passage.
H.R. 2143 now goes to the Senate for consideration and is likely to face opposition. There is discussion among senators to combine the estate tax repeal bill with other permanent tax cut provisions such as marriage tax relief and the exclusion from federal gross income for payments made to victims of the holocaust under the Nazi regime. The debate promises to be lively.
Think ahead and look ahead. Focus on the positive and the future,
Sandra C., Field, CSA, MBA, CFP
Economists have been busy lately, revising earnings estimates and projections of growth for 2002. Gross domestic product, GDP, the broadest measure of the economy�s health, grew at an annual rate of 1.7% in the last quarter of the year. That was the best growth return of the entire year.
These latest GDP reports reinforce the view that the recession that began last March has ended and turned out to be one of the mildest recessions of record. We are starting to look at the recovery of the economy. While I would prefer a more stable, steady annual growth rate of 3%, some local economists are now predicting between 4 and 6% for the coming year. We have already seen manufacturing begin production again as inventories have been sold off.
Consumer spending, which accounts for 2/3 of all economic activity in the US, continued its pace and grew at a rate of over 6%. The consumer never stopped spending during the recession and perhaps was the reason why the downturn was mild.
My educational message today is on price-to-earnings (PE) ratios
At the top of the market two years ago, many stock commentators were saying that the PE ratios of the stocks were too high and the market should be avoided. Some are now saying that PE ratios are too high and the market should be avoided. How can they be saying the same thing when the market is at two very different levels?
The PE ratio is the price of the stock divided by the earnings of the stock. If XYZ Company is selling at 50 per share and the earnings are estimated to be $2.00 per share, the PE ratio is 25. A PE ratio of 25 is historically on the high side for economists. Now let�s assume the market is advancing and XYZ company has risen in value to $75 per share in anticipation of future growth and earnings improving. Now the PE ratio is 75/$2 =37.5 Many of the growth technology companies had PE ratios of 50 or 100 during the first quarter of 2000. If the market has corrected and the prices have fallen, how can economists again say that PE ratios are high?
When the economy began to falter, sales began to slow and companies were not projected to be earning the profits they were capable of during the previous year. Earnings of the companies were revised downward, reflecting the more realistic view of depressed sales. Lets go back to XYZ company with the share price of $50 with a revised estimate of earnings to be $1.00 per share, instead of $2.00 and now the PE ratio is 50/1= 50. Again, this may appear the PE ratio that is too high. Think about the ratios of the stocks in l930, the year after the great depression, a period in time that had the highest PE ratios. Most of the companies did not have earnings (or they were a negative number) so the stock prices divided by fractional earnings would again give very high PE ratios.
Where are we now? I believe we have a market with many stocks near their 52-week lows. I also see earnings on companies beginning to improve and analysts are beginning to revise their earnings estimates upward as sales are beginning to improve in many sectors of the economy. This means the security prices will begin to rise and earnings will also rise, thus bringing the PE ratios back in line. So, do not be confused when you hear or read that PE ratios are to high and the market is still overvalued. Most people only focus on the price of the security when making that statement forgetting those low earnings could be the culprit.
The area that concerns me is the continued unrest in the Middle East. As the hopes of peace in that area look more remote, the cost of crude oil is climbing. As the cost of oil increases, it will have a trickle down effect on transportation and fuel costs. We are already seeing higher gas prices and I hope this does not stall the recovery. The leisure sector is then impacted, as it will cost more to fly or drive to your vacation destination. The economic impact is always secondary and minor compared to the escalating loss of lives. Pray for peace.
State of California Tax Update
California still has not conformed to the new Federal tax law changes passed last fall but some progress has been made. The California Senate passed S.B. 657 that would conform state law to the 2001 Federal law. The California Senate Revenue and Taxation Committee has also approved another nearly identical conformity measure, A.B. 1122. Hopefully the two houses will be able to agree on one of the bills or some combination of the two. This has the most direct bearing on the IRA contributions for 2002 where Federal law permits $3000 and California allows $2000. We will keep you updated on this.
�Opportunities come to those who set out to meet them�
As always, we look forward to keeping in touch with our clients. Please keep us updated with changes in your goals, lives and financial situations.
Sandra C. Field, CSA, MBA, CFP
First the Good news�..
I
am very pleased to announce the addition of another financial planner
to our team at Asset Planning, Inc. Diane, Carol and I welcome Beverly
Cox to the staff. I have known Bev for several years as we have played
golf together. We have also worked on several projects together over
the last year. Our philosophies about financial planning and
investments are similar and I am sure she will be a great addition. Bev
brings fifteen years of experience to the firm. Her bio is posted on
our web site.
In local events, I should be featured in the LA
Times on Tuesday, October 15 in a new �money makeover� column. I just
finished another �One on One� for the OC Register (copy enclosed) and
was quoted on the front page of the OC Register following the latest
fed rate cut. I remain on a panel of experts for their mutual fund
quarterly review, published on 9/30/01. This keeps me on my toes!
And then the Bad news�.
This
has been a quarter like no other ever experienced by the American
people. We are at war due to an attack on our own land. It still seems
unbelievable and incomprehensible.
Where is our economy now?
When people and businesses stopped buying new items, companies stop
ordering parts and supplies for products and let their supply or
surplus inventory be sold without replacing it. When companies are not
producing at the same level as before, due to lower projected sales,
layoffs of workers and cut back on expenses occur. This is the scenario
that we have all seen since the beginning of the year.
The
stock market values the price of stocks by looking to future earnings
and sales of a company and tries to determine what it will be worth.
When the market saw the earnings potential of companies being reduced,
it lowered the prices of the stocks through sales until the current
estimates equaled the value of the stock. In short, the market declined
and was staying that way since there was no good news on the horizon.
For the first time in several months, I was seeing positive signs
coming from the manufacturing sector. In the days surrounding the
attack, numbers were released that showed manufacturing orders were
increasing as companies began placing new orders. This meant that
things were picking up. This could have been just what was needed for
the market to look forward to increased sales, thus rising stock
prices.
Then the attacks came and America virtually stood
still for several days trying to comprehend what had happened. In this
aftermath of human and business destruction, we find damage to the
economy. The travel, insurance and leisure industries were hard hit.
The layoffs from these industries will continue until Americans go back
to flying and traveling as we did before. This will only come when we
feel safe to do so. I know we will never feel as safe as we did before
the attacks, but we will return to our way of life as we knew it. In
time, we will resume taking vacations and going to conferences and
doing business as we did.
I met with clients in the weeks
following the attacks and one theme stood out in each meeting. They
felt guilty for worrying about their portfolios when human lives had
been lost. Some clients emailed me to see how I was doing, giving me
support. Some brought in checks to deposit to their accounts, wanting
to support the market by purchasing, instead of selling, stocks in
uncertain times. We displayed our flags, lit candles and cried together
to get through these past weeks. I miss my dad more and wish he were
here to tell me more stories about how he fought twice as a Marine for
our American freedom, many years ago. I watch our Armed Forces ready to
fight a new war, knowing action must be taken.
How the market
will react is still an unknown. I am encouraged by the markets behavior
in the last week, with most stocks and funds rising. Historically, the
stock market recovers well following major events such as this. Some
portfolios saw their values rise 5 to 7% in the week following the
quarter end. I continue to monitor the funds very closely and stay in
contact with the fund managers. We do have the strongest economy in the
world and America is the greatest Nation. We will recover and prosper
in 2002.
Please call if you have questions or wish to schedule a meeting.
God Bless,
Sandra C. Field, CSA, MBA, CFP
You�ve probably heard or read of them - state ponsored 529 college
savings programs. There are others available as well; the newly
enhanced Education IRA and the old favorite, UGMA and UTMA accounts.
Determining which type of savings plan is right for you depends on
several factors. Among them: your income, the child�s age and how much
you�ll be relying on financial aid. In some cases, your best option may
be to take advantage of more than one account. I�m going to focus on
the 529 today.
Let me begin by sharing a great website with you.
It is www.savingforcollege.com and is authored by Joe Hurley, It is
full of timely, pertinent information and articles that will expand on
what I�m writing here.
The recently passed Tax Cut made
tremendous improvements to higher education finance. The new law
substantially raises the amount that can be contributed to education
accounts. It�s increased the number of people eligible to save and
makes 529 plans even more appealing. Currently, earnings accumulate on
a tax-deferred basis and withdrawals from these accounts are taxed at
the child�s rate. Starting in 2002, they will be free of federal taxes!
Yes, you read that correctly, tax-free withdrawals (if it�s for
qualified educational expenses).
529 plans are named for the
section of the tax code that created them in 1996. The vast majority of
the plans allow nonresidents to participate, which means you can choose
virtually any state�s plan regardless of where you live or where your
child is likely to attend school.
Unlike Education IRAs, 529s
have NO income limits or age restrictions, so anyone can participate.
You could even set one up for yourself. Some plans will let you invest
more than $200,000 per beneficiary, and there are no annual limits.
And, if your child doesn�t end up using the money � maybe she�s
received a full scholarship � the assets can be transferred to a
sibling or first cousin.
You, as a parent, could open a 529 for
your children, and grandparents could have one for the same children.
You, the donor, are the owner of the account. Your child is the
beneficiary. You remain in control of the monies over the account�s
lifetime. You decide when withdrawals are taken and for what purpose.
If your child uses some of the funds for higher education and is
through, with money to spare, you can name another beneficiary and
start the routine all over again. As long as the beneficiaries are some
form of blood family member you can change beneficiary as needed.
The
changes to 529 plans that begin next year could literally buy you an
extra year of college. Let�s say you invest $60,000 in a 529 plan for
your son. Assume the account doubles in value by the time he heads off
for school, representing a $60,000 gain. Under the previous rules that
profit would have been taxed at the child�s 15% tax rate, reducing the
account by around $9,000. That�s nearly a year�s worth of tuition and
expenses at a public college. Now, that $9,000 stays available for
tax-free withdrawal for those same expenses.
So what if your
only beneficiary decides not to go to school? There�s no time limit on
this account, you could change the beneficiary to your spouse, who
always wanted to return for his/her Masters. You could let it sit and
grow while the child works for a few years and then decides to go to
school, or if not that, decides to get married and has a child of their
own.
You could then change the beneficiary on that account to
your newest grandchild and it lives still in its tax-deferred state.
And if you are feeling generous, you could change ownership of the
account to your child (who is now fully grown and very responsible). Of
course, there may be gift tax consequences to that last part, so don�t
do anything without checking with us. The point is that it is flexible.
Worst
case, what happens if your child doesn�t go to college, or if there�s
more in the account than is ultimately needed? Federal law requires
that the 529 plans charge you a penalty if a withdrawal isn�t used to
pay qualified higher education expenses. Based on IRS guidelines, most
states will collect a penalty of 10% of the earnings portion of the
�nonqualified� withdrawal. This means you�ll get back 100% of your
principal and 90% of your earnings.
That penalty, however,
will be charged at your income tax rate not the student. The penalty is
usually not charged if you terminate the account because the
beneficiary has died or become disabled or if you withdraw funds not
needed for college because the beneficiary has received a scholarship.
The
gift and estate tax treatment of an investment in a 529 plan is, to
quote Joe Hurley, �a good news, bad news situation�. The bad news is
your contribution is treated as a gift to the named beneficiary for
gift tax and generation skipping transfer tax purposes and so you need
to be aware of this exposure especially if you are making other gifts
to the beneficiary during the same year.
The good news is that
your contribution qualifies for the $10,000 annual gift tax exclusion
and so most people can make fairly large contributions without
incurring the gift tax. If you make a contribution of between $10,000
and $50,000 for a beneficiary, you can elect to treat the contribution
as made over a five calendar-year period. This allows you to utilize as
much as $50,000 in annual exclusions to shelter a larger contribution.
The money (and the growth of your account) gets out of your estate
faster than if you made the contributions every year. There are more
details to be discussed if this applies to you, but I�m sure you get
the idea.
There�s more to know especially about the potential
impact on financial aid qualifications and the sunset provisions
inherent in this new tax law. If you are interested in discovering if a
529 plan makes sense for you or your family, please email or give the
office a call.
Beverly Cox, IAR
