LWA NEWS

Kathrin Gschwend, one of our senior financial planners, will retire at the end of August.   Kathrin joined our firm over eight years ago and has been a very valuable member of our team.  We are extremely grateful for all her years of excellent service.  We will certainly miss her, but wish her well as she begins her retirement.  She’s promised us that she will visit often.

We are pleased to announce a new addition to our team.  Jodi Cirignano will join us as a financial planner in August.  She comes to us from Ernst & Young, LLP, where she was a manager in their Risk Management and Regulatory Advisory Services practice.  We are very excited to have Jodi join our firm. 

We are very proud to tell you that Diahann has been named to Worth Magazine’s 2002 list of  “The 250 Best Financial Advisers in America” for the fifth time.  Many thanks for the heart warming nominations from several of you. 

We are also proud that LWA has been named to Bloomberg’s latest list of the top 250 wealth management firms.  The firm was ranked 43rd of the 251 leading independent, financial advisory firms selected by Bloomberg, based on average client-account size as of December 31, 2001.

Diahann was quoted in the June/July issue of Real Simple Magazine.  The article entitled, “Trading Pay for Passion,” discusses the personal and financial issues an individual faces when they consider a major career change. 

Here’s an interesting piece of news for all our golf lovers – Diahann hit a hole-in-one on July 4th .   No need to worry about her joining the LPGA yet. J

Diahann is scheduled to appear on CNBC’s “Make Your Money Work” segment of Power Lunch on  July 17th, August 19th  and October 1st.

Questions and Answers in A Crazy Market Environment

I have spoken to many people over the last few months.  Many of them were clients, some were professional peers, some were reporters and some were people met while traveling.  The thing that really came through to me was the common questions that everyone has asked  me.  I have tried to answer these questions based on my knowledge and experience.  I hope they help in understanding this crazy market environment.

Why do you advise taking losses?  Shouldn’t we just wait for the market and/or investment to recover?

We call it harvesting losses in taxable accounts.  What we mean is selling one investment and purchasing a comparable investment so that you end up in the same place in terms of your investment portfolio.  In other words, you still own the same type of investment or remain invested.  However, you end up with a loss that can be used to shelter capital gains going forward and up to $3,000 in ordinary income.  The losses can be carried forward on your income tax return from year to year if you have no gains to offset them.  So, you maintain your investment portfolio and are able to shelter income from taxes in current and future years.  When you have losses, you come out ahead by harvesting them. 

Should I cut back on my expenses?

Many of us have had to review our spending in the current environment.  I think we are all well-served to review what we are spending and look at where we can save.  Reducing spending will help preserve capital while we wait for the market to regain its footing.  If you are in the wealth building phase of your life, this is a great time to increase your savings and buy investments at a very low price.  If you are retired and living on your invested assets, this is a good time to take a look at your spending compared to your overall income and invested assets.  If you are spending more than 5% of your invested assets, you are spending principal at this stage.  Just as you were adding to principal during the 90s, now you are using that reserve to live on.  That means, the more you are able to reduce expenses, the more principal you will preserve for the future.

Looking backward is always easier than looking forward.  The reason we have diversified portfolios is because we don’t have crystal balls.  When you try to move from one investment type to another, you can find yourself chasing returns.  Chasing returns typically leads to missing out on the better returns in different areas.  An example of this would be selling Large Cap Value Funds in 1999 and buying Large Cap Growth Funds since Value Funds were losing money and Growth Funds were doing so well.  Of course, right after that in 2000 and 2001 Value was the best return and Growth was losing money.  Investing in both makes a lot more sense over long periods of time.

Shouldn't I just invest in CDs or money markets? My performance might have been better.

There are going to be periods of time when CDs and/or money markets perform better than the stock market.  This is certainly true of the recent period.  Investing in CDs or money market funds or short-term bond funds makes sense for cash reserves or for cash that may be needed within a year or two.

They don’t make sense for a portfolio that needs to grow over a long period of time and keep pace with inflation.  If you are earning 5% before-tax in a CD and pay 40% in taxes, your after-tax return drops to 3%.

But capital gains are only taxed at 20% which means that even if your return is only 5%, your after-tax return is 4%, so you come out ahead. 

Why should I pay investment fees when my portfolio is not making money?

Investment fees cover many things including monitoring market performance, evaluating current and new funds, review of overall investment allocation, rebalancing, handling cash needs, ongoing reports, and tracking of individual investment performance.  It is even more important to maintain the disciplines of investing in a declining market than it is in a growing market.  You still need to rebalance your investments and make changes as they are required.  In addition, we are here to help you understand the issues of the markets and the economy.  We are also available to reevaluate planning issues should they arise.

This is a really good time to look at the history of the markets.  As scary as this market has been, history tells us that we are at a turning point in the stock market.  I know the news media has made a big deal out of not having total capitulation.  But I believe when you have really high volume on major down days in the market, that is exactly what we are seeing. 

Historically, when we come close to a bottom of a bear market, people are then convinced that the market will go down forever.  I think we have reached this point and fully expect a more stable and positive market over the balance of the year.  Selling at this stage would more than likely cause you to miss the opportunity to begin to regain losses that have been incurred.  That means instead of buying low and selling high, you end up selling low and not participating in the next rally.

Why didn't you tell me to get out of tech stocks earlier (2 years ago)? Should I cut my losses and get out of technology stocks or funds now?

We all knew that tech stocks could not go up forever.  What we didn’t know is when they would go down and by how much.  Tech stocks, like all investments, have cycles.  Tech stocks will rise again, the only question is when.   Whether you should sell tech stocks and/or funds that you hold depends on how much and whether or not it makes sense to take the loss.  This decision should be made on a case-by-case basis.

There are really three levels of development and ongoing tracking of investment portfolios.  The first and the most important is the asset allocation.  This means determining how much you should have invested in what type of investment in order to achieve a targeted return over a long period of time.  This allocation must be reviewed periodically to make sure it is doing what you expect it to do.  The second level is rebalancing periodically to bring the investments back into line with the target.  The 3rd level is reviewing individual investments to make sure they are doing what we expect them to do.  Index funds and iShares are foundation investments in specific categories that form the base of the investment program.  You add actively managed funds in order to add a little higher potential return.

The other reason for using these index funds is that they have low expenses and they are more tax efficient than most mutual funds.

Why are some mutual funds tax inefficient and what does that really mean?

Some mutual funds are very active in terms of buying and selling or what we call turnover.  They turn over the portfolio frequently which generates capital gains.  All of the capital gains that a fund generates must be paid out by the end of the year as distributions.  That means that the fund may pay out high gains even in a year where it did not really make money for its investors.  These gains are then taxable income if the fund is held in a taxable account.  That is one of the reasons we use funds such as DFA tax efficient funds and iShares that experience lower turnover and therefore distribute lower capital gains. 

Getting out of the market would be a good option if we had a crystal ball that would tell us when we need to get back into the market.  Unfortunately, history shows that individuals who missed just a few days during early rallies lose a lot in potential return.  As painful as the long-term philosophy has been in the recent bear market, it would be even more painful if you didn’t have the opportunity to get some of these losses back by remaining in the market.  Diversification and long-term holding work even in bear markets.  Markets such as this one do require a little more patience.

ENJOY THE REST OF YOUR SUMMER…  AND KEEP IN TOUCH.  WE REALLY DO LOVE TO HEAR FROM YOU!

back