May 2008 - Posts

• The Wrong Ways to Approach Life Insurance

  Overview:  In this lighthearted article, we look at two surveys and a prominent company collapse that help demonstrate some of the misconceptions people have regarding insurance.    ------------------------------------------------------------------------------------------- Misconception 1: The Likelihood of Collecting a Policy Is a Factor in Buying A common reaction to discussing life insurance needs is to assume most people have the need for coverage. However, many people are unsure who should (or should not) be covered. A 2005 survey by the Life and Health Insurance Foundation for Education helps demonstrate this point. The survey asked which of five fictional characters was most in need of life insurance: Batman, Spiderman, Marge Simpson, Fred Flintstone or Harry Potter. Holy Preconceived Notions, Batman! It seems respondents put a little too much emphasis on the dangers faced by each character. Spiderman and Batman were chosen as the two characters most in need of life insurance, garnering 28 and 18 percent of the vote, respectively. Neither character, however, demonstrates a large need for life insurance. Peter Parker (Spiderman) has no dependents and his significant other, Mary Jane, is an accomplished actress and model who would not need to be supported after his death. Bruce Wayne (Batman) is not married, has no dependents and is exceptionally wealthy. He does not appear to have any need for life insurance. Fred Flintstone, on the other hand, may show the greatest need for life insurance. Fred, who finished third in the survey at 16 percent, is the primary wage-earner for his family, and his wife and daughter would need support if he met the grim reaper. Harry Potter finished fourth with 15 percent of the vote. His battles with evil wizards and his games of Quidditch may put him in a high-risk category, but he has no parents or siblings, and thus no one who would be affected financially by his demise. And, lest we forget, James and Lily Potter did leave Harry a vault filled with gold at Gringotts Wizard's Bank! Poor Marge Simpson. Just like on the long-running television show "The Simpsons," she gets little respect for how much she means to her family. Marge received 11 percent of the vote, placing her last among the characters in the survey. (Note: 18 percent chose none of the above or don't know.) However, Marge's role as the family's caretaker should not be understated. Her husband, Homer, works full-time at the nuclear plant, and the few times he has had to take care of the family have ended in near disaster. Marge's premature death would mean the family would at least need a caretaker for the three children and help around the house. The likelihood of collecting a policy should not be a major determinant in how much life insurance a person needs. Generally, people need life insurance if they have dependents who will be affected by their untimely death. Misconception 2: Similar Situations Need Similar Policies Identifying who needs life insurance can be tricky enough, but for those who need it, how much is enough? A separate survey by the LIFE Foundation in 2006 illustrates another common misconception regarding life insurance. The survey involved asking people which of five TV dads needs the greatest amount of life insurance: Cliff Huxtable, Tony Soprano, Mike Brady, Ray Barone or Homer Simpson. In another triumph of danger over need, mob boss Tony Soprano received the most votes with 25 percent. There's little doubt he has the most dangerous occupation, but he is also likely "self-insured" by having large amounts of money stashed away. Mike Brady, on the other hand, received the fewest votes among the TV dads, finishing with just 10 percent. This happened despite Mike being the sole breadwinner supporting his wife, their six children and a housekeeper. When choosing life insurance, people need to take the whole picture into account. Instead, completing a full assessment of life insurance needs would be the most practical way to approach the subject. Attaching a number to the need requires an in-depth look at each individual's situation, such as income, assets, debts and current and projected major expenses. Misconception 3: Big Companies Must Be Great Companies In the 1980s, Executive Life Insurance Company grew to be one of the top 20 companies in the insurance industry. Yet things weren't as they seemed. The company was heavily invested in junk bonds, with about 66 percent of its assets in such investments. At the time, the industry average for junk bond holdings was 6 percent of assets. Toward the end of the decade, Executive Life's parent company was forced to take a $515 million charge due to its bond portfolio declining. Junk bonds continued to decline, and in April 1991, California regulators seized control of Executive Life, marking the largest failure of an insurance company at that time. "A new era began on April 11, 1991, when Executive Life, a large company based in California, was taken over by insurance regulators. The public then learned it is possible for a major company to fail," said Joseph Belth, editor of The Insurance Forum. Should the public have seen this coming? That depends on what information was available. The company's financial troubles were being disclosed, and some people were indeed cashing out their policies. On the other hand, the insurance ratings system sent policy holders mixed signals. A.M. Best issued an A rating, meaning excellent, to Executive Life, though it said the company could be downgraded. Standard & Poor rated the company BBB, meaning good, and Moody's gave it a Ba2 rating, meaning questionable. Granted, the ratings systems have changed considerably since the collapse of Executive Life. For example, A.M. Best upgraded its rating system less than a year after regulators took over Executive Life. Still, the insurance company's collapse highlights that size is not a big factor in choosing a life insurance company. "You should buy from a financially strong insurance company," Belth said. "Doing so increases the likelihood that the policy's benefits will be paid when they fall due." Conclusion Meeting with a financial advisor can help address any confusion about insurance and risk management needs. Specifically, a financial advisor can help determine the need for and amount of coverage and the appropriate companies to pursue. A financial advisor can also review older policies to ensure those policies are still relevant and adequate to handle current and future needs.   This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting or tax advice. Copyright © 2008, Buckingham Family of Financial Services. All rights reserved. This material may not be copied or distributed (electronically or otherwise) without the written consent of Buckingham Asset Management. The products or services described herein are available to US citizens and residents only and the information contained is intended for such persons only. No information contained herein is an offer to sell. Investors should read the prospectus of a security prior to making any investments. Please contact us if you have any questions at 314.725.0455. Posted May 30 2008, 07:19 PM by Jim Cornfeld

• What to Do With Your Company-Sponsored Retirement Plan

  Overview: As more members of the baby boomer generation enter retirement, tremendous amounts of wealth are being transferred in the form of retirement plans. The following discusses options investors should consider regarding their retirement plans. --------------------------------------------------------------------------------------------------- Introduction The baby boomer generation describes the population born between 1946 and 1964, estimated to be about 80 million individuals. A July 2006 report by the Government Accountability Office stated that the wealthiest 10 percent of boomers averages $1.2 million in retirement accounts and makes up more than two-thirds of the estimated $7.6 trillion of retirement savings. As these individuals enter retirement, the result is potentially the largest transfer of wealth from company plans to individually controlled accounts in history. Options For individuals leaving their jobs, there are three basic options for how to handle the assets in their company-sponsored retirement plans: Keep the funds in a company-sponsored retirement plan, either with the previous employer or with a new employer if switching jobs. Roll over the funds to an IRA. Withdraw the funds in a lump-sum distribution. It is important to understand the advantages and disadvantages of each before choosing an option. Option 1: Leaving the Money in a Company-Sponsored Plan Some of the advantages of keeping assets in a company-sponsored retirement plan (whether it is left in an old plan or transferred to a new plan) include continued tax-deferred growth without penalties and the fact that participants can borrow against the funds. Also, some plans do not require participants to take distributions after they reach age 70½ as long as they continue to work, thus allowing for longer periods of tax-deferred growth. A significant disadvantage to leaving the funds in a plan is that individuals give up control and flexibility. For example: Investment choices are often limited to those selected by the employer plan. s For some plans, participants over a set retirement age may be forced to start taking distributions according to guidelines mandated by the plan. Many plans do not allow the stretch options that IRA rules permit. Stretching an IRA involves the account passing to a beneficiary after the account holder's death and the beneficiary taking distributions from the IRA based on his or her life expectancy. The guidelines of the plan are subject to change. One of the major benefits of leaving assets in a company-sponsored retirement plan used to be that they would be protected from bankruptcy proceedings, while IRAs would not. However, the U.S. Supreme Court ruled in April 2005 that IRAs can also receive the same federal creditor protection in bankruptcy proceedings as qualified plans. Option 2: Rolling Funds Into an IRA A retirement plan rollover allows for continued tax-deferred growth and more control and flexibility over retirement funds when leaving a job. There are two types of rollovers: A direct rollover occurs when assets transfer from an employer-sponsored plan directly into a rollover IRA. An indirect rollover is when the employer-sponsored plan issues a check payable to the former participant, who distributes the money to an IRA within 60 days. It should be noted that choosing an indirect rollover involves the chance that the check is not deposited within an IRA during the 60-day window. Investors who miss that window may be subject to mandatory state or federal withholding taxes as well as a 10 percent penalty. Benefits of a rollover to an IRA include: Investors have numerous investment options, allowing them to customize their investment choices to meet their personal needs and risk tolerance. The assets will continue to grow tax-deferred. Consolidating several employer-sponsored plans into one IRA makes management simpler and easier. For example, each plan will have its own distribution requirements and withdrawal options. Investors who re-enter the workforce can roll the funds back into a new company's plan. IRAs may offer individuals and their beneficiaries more flexible and tax-favored distribution options than a retirement plan. Option 3: Taking a Lump-Sum Distribution The lump-sum distribution option may be enticing because it gives individuals instant access to the cash in their retirement plan and gives them the most flexibility with how to use it. For example, it may be an easy solution for paying off debt, covering expenses between jobs or making a much needed (or wanted) purchase. For individuals with a large percentage of company stock in their retirement plan, the IRS gives them a special tax break for taking a lump-sum distribution of this stock. Called the Net Unrealized Appreciation (NUA) rule, individuals are allowed to pay ordinary income tax on the original cost of the stock rather than its fair market value at the time of withdrawal. Once the stock is sold, the individual pays taxes at the 15 percent capital gains rate on this appreciation only. If the stock were instead rolled into an IRA, this tax break would be lost, and the value would be subject to ordinary income tax rates when IRA funds are distributed. However, the costs for choosing the lump-sum option are perhaps the steepest of any of the options. For example: The plan may require a 20 percent mandatory withholding for federal income taxes from the distribution. In addition, the federal tax liability could be greater as the distribution may significantly increase taxable income in the year taken. A 10 percent distribution penalty will be added to the taxes for participants under age 59½. The distribution will result in the loss of tax-deferred growth of the assets. Thus, if there is no immediate urgent need for the cash and the NUA rule does not apply, there is little reason for taking a lump-sum distribution out of the tax-deferred environment and subjecting the funds to taxes and potential penalties. Summary The rise of account-based defined contribution plans (not to mention the uncertainties about Social Security) makes retirement security more dependent on individual saving and rates of return. As a result, investors may need to become more educated about financial issues, both in accumulating sufficient assets and in learning to draw them down effectively. Part of that could involve investors seeking help from their investment advisor regarding their retirement plans.   This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting or tax advice. Copyright © 2008, Buckingham Family of Financial Services. All rights reserved. This material may not be copied or distributed (electronically or otherwise) without the written consent of Buckingham Asset Management. The products or services described herein are available to US citizens and residents only and the information contained is intended for such persons only. No information contained herein is an offer to sell. Investors should read the prospectus of a security prior to making any investments. Please contact us if you have any questions at 314.725.0455. Posted May 20 2008, 06:43 PM by Jim Cornfeld

• Equity Markets and Recessions

  Overview: With the U.S. economy showing several signs of recession, investors may be tempted to move assets out of equity markets and into historically safer investments. The following discusses how equity markets have behaved before, during and after recessions and why moving assets may not be in investors' best interests. -------------------------------------------------------------------------------------- How do stocks perform before, during and immediately after economic recessions? What about the performance of small-cap and value stocks? One way to address this question is to consider the historical record. We did, and here is what we found. We examined the periods six months prior to a peak in economic activity, the recession that followed and the six months following the trough in economic activity. The period of recessions varied from as short as seven months (January 1980 through July 1980) to as long as 17 months (November 1973 through March 1975, and July 1981 through November 1982). The study covers the period 1945-present and includes 11 different recessions. For the purposes of this study, we used the definition of a recession as provided by the National Bureau of Economic Research (NBER): "The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales." The results can be seen in the table below. Monthly Average Return for All Periods   Six Months Before Peak During Contraction Six Months After Trough Market minus T-Bill -0.35% 0.20% 1.69% Small-cap minus large-cap 0.25% -0.01% 0.92% Value minus growth 0.35% 0.38% 0.37% Source: Dimensional Fund Advisors The "Market minus T-Bill" row shows the equity premium, or the performance of U.S. stocks in aggregate. The negative average equity premium for the six months preceding a peak explains why economists view the stock market as a leading economic indicator: A drop in stock prices generally precedes (and helps forecast) an economic downturn. It is important to understand the direction of this relationship. Economists look to the stock market for an early indication of where the economy is headed. Alas, this does not work in the other direction: As we shall see, an investor (or advisor) cannot tell where the stock market is going, based on the observed performance of the economy. The equity premium has been positive on average (0.20 percent per month) during economic recessions. So, even if we knew that a recession was just about to begin, the historical data would provide no good reason to move assets from stocks to bonds. More importantly, the months immediately following an economic trough have been exceptionally good for stocks. The opportunity cost of missing the stock returns in those months was several times greater than the cost of having been fully invested in stocks in the months preceding the peak in economic activity. The table shows that neither small-cap stocks nor value stocks are leading economic indicators, as both premia have been positive on average during the six months preceding a peak. Small-cap stocks underperformed large-cap stocks by a minimal margin, 0.01 percent per month on average. In many cases, the cost of changing the allocation (adopting a large-cap bias) would be of the same order of magnitude. And, just as for stocks in general (the equity premium), the opportunity cost of not being exposed to small-cap stocks in the months immediately following the end of recessions would have been substantial, 0.92 percent per month on average. Finally, by examining the value premium, we see that it does not seem to be related to economic cycles at all - at least on average across all recessions included in the study. Over the entire period, the value premium was about the same, on average, in the months leading up to recessions, during the recessions themselves, and in the months immediately following the recessions. How can this information be used? During the past few months, investors may have experienced significant losses in their equity holdings. Recent losses, coupled with reasonable suspicion that the economy may be headed toward recession (or in recession already), have many investors concerned about their equity positions. Some investors may be tempted to sell their equity holdings and move into fixed income, or transition from a small-cap or value tilt to a large-cap or growth tilt, far from their target IPS allocations. The data shows the inherent danger in selling out of stocks in times of weak economic performance. Given the extreme difficulty of accurately predicting when the economy is at a trough and on its way to recovery, investors may not only sell at a bad time (when prices are low), but also miss out on the substantial gains that, on average, follow a recession.   This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting or tax advice. Copyright © 2008, Buckingham Family of Financial Services. All rights reserved. This material may not be copied or distributed (electronically or otherwise) without the written consent of Buckingham Asset Management. The products or services described herein are available to US citizens and residents only and the information contained is intended for such persons only. No information contained herein is an offer to sell. Investors should read the prospectus of a security prior to making any investments. Please contact us if you have any questions at 314.725.0455. Posted May 14 2008, 10:10 AM by Jim Cornfeld

• All the Tea in China

  Overview: Recent hot investment trends have favored markets in China and India, and given a cold shoulder to the trouble-plagued U.S. real estate market. Should investors try to capture gains and avoid losses by reallocating in response? Among our critical roles as our clients' investment advisor is to encourage them to tune out trends and focus on the long-term. ----------------------------------------------------------------------------------------------                                       History teaches that in investing, patience and fortitude -- or benign neglect -- are more beneficial than activity. To rephrase the familiar admonition: "Don't just do something, stand there!" - Charles Ellis,  Winning the Loser's Game A couple of decades ago, it was Japan. Japan gave way to technological innovation and all things "www." Before that, there was the golden age of -tronics. Even when capital markets formed back in the 1600s, among the first corporate stock offerings ever - the Dutch East India Company - was quickly all the rage. Some things never change. These days, it seems that renewed interest in the economies of India and China have caught the attention of Wall Street, with the usual pressures to "buy now!" A few lucky investors will no doubt have their success stories. We allow them their 15 minutes of fame, even as we advise clients to ignore any temptation to reallocate their portfolios in response. Among our primary roles as a trusted investment advisor is to reinforce that long-term investing is not about placing bets. It's about relying on carefully managed, globally diversified portfolios to pursue long-term investment objectives while minimizing the accompanying risk. This is the game at which we want to help investors win. Often, the best way to do so is to hold firm. Not yet convinced? Consider two additional observations. Stay Ahead of the Game With our approach to portfolio construction, we typically help investors spread their equity portfolio across a broad range of globally diversified markets. And we help them keep it diversified via disciplined rebalancing. Thus, if an emerging markets allocation (China, India, etc.) makes sense for an investor, he or she already is positioned to capture its gains in a goal-based, cost-effective manner. As such, passive investors who may worry that they're missing out on a hot trend can remember that, quite the opposite, they are likely already there ahead of the crowd (to the degree that it is appropriate for their individual investment objectives). The Grass Isn't Always Greener Last year, those interested in marketing timing were heard inquiring about investment opportunities in India and China, and eschewing holdings in the real estate asset class based on a troubled U.S. real estate market. How did such an approach fare? At the end of the first quarter for this year: The MSCI Emerging Markets India Index (USD) returned -27.1 percent (minus 27.1 percent). The MSCI Emerging Markets China Index (USD) returned -23.7 percent. (minus 23.7 percent). Both were down more than any broad-based asset class, in most cases by more than double. The only asset classes that provided positive returns were commodities, fixed income ... and real estate. Even if the data weren't quite so conveniently supportive of our point, we would continue to counsel investors to ignore the latest stock market beauty contest and stay the course with their carefully constructed investment plan. There is simply too much academic evidence and too many clear illustrations throughout history indicating that the "sure thing" of today too often becomes tomorrow's sure example of a past investment foible.   This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting or tax advice. Copyright © 2008, Buckingham Family of Financial Services. All rights reserved. This material may not be copied or distributed (electronically or otherwise) without the written consent of Buckingham Asset Management. The products or services described herein are available to US citizens and residents only and the information contained is intended for such persons only. No information contained herein is an offer to sell. Investors should read the prospectus of a security prior to making any investments. Please contact us if you have any questions at 314.725.0455. Posted May 01 2008, 06:59 PM by Jim Cornfeld