Hope you had an enjoyable Holiday Season. Happy New Year and best wishes for a successful and prosperous 2011.
Review of Market in 2010
Just about all major sectors of the market had positive returns last year. The overall US stock market appreciated 15.5%1, International stocks gained 6.6%2 and the overall bond market went up 6.1%3. Note all of these returns include capital gains and dividends reinvested, which the media generally tend to ignore. Real Gross National Product (GDP) for 2010 is expected to clock in at a healthy 4%, after the recession ended in the 3rd quarter of 2009. The important unemployment number, which is a lagging indicator, has dropped to 9.4% from 9.8% in December (the biggest monthly decline since 1996). Hopefully 2011 will be a better year all around for most people!
Hardly a Lost Decade
Pre-retirees who continuously held a 401K at Fidelity for the past 10 years, more than doubled their account balances. Obviously, this increase in value is not just due to the market, but contributions helped, and by the nature of 401K contributions, participants were hopefully contributing regularly during good times and bad (dolla rcost averaging). I agree with James M. MacDonald, president, of Fidelity’s Workplace Investing Group, when he said, “A disciplined, systematic savings approach in a diversified portfolio has been the key to building a sizable nest egg for many pre-retirees during one of the most volatile decades in history.”4
Most Financial Advisors are Pathetic Market Timers!
A study by TD Ameritrade5 illustrates that the 4,000 advisors that use their brokerage service, time the market badly. In October 2007 (the recent market high) these advisors’ client portfolios had 74% invested in stocks. Fast forward to March 2009 (market bottom) the stock portion dropped dramatically to 49%, just in time to miss the start of a 105% rise in the market!6 Individuals, who market time, probably performed just as badly, but there are no definitive statistics available showing this. Instead of trying to time the market, take the emotions out of investing, and periodically rebalance your portfolio. Tune-out the noise from the talking heads on TV and the “experts” in the papers, they don’t have a clue about market timing – no one does!
Taxes and Estate Taxes
After weeks of arguing over the details, the Bush-era tax rates have been extended for two more years. All existing tax rates and exemptions stay the same including:capital gains and dividends, itemized deductions and personal exemptions, education breaks, AMT patch, higher education expenses and business provisions. There is one new break for workers who pay Social Security tax; it has been cut from 6.2% to 4.2% on wages up to $106,800 for 2011.
The estate tax was restored retroactively to January 1, 2010, and continues through December 31, 2012. The top rate is 35% and the exclusion is raised to $5 million ($10million for married couples). Estates of those deceased in 2010 have the option of applying the estate tax and receiving a step-up in basis on property passing to heirs or having no estate tax, but no step-up in basis of inherited property.
We enjoyed our time in Rancho Mirage, CA, and Green Valley, AZ. The highlights were the Saguaro National Park in Tucson and the Joshua Tree National Park near Palm Springs – spectacular scenery and flora! We may get away for a couple of short trips to take my son snowboarding and try out Roberta’s new snowshoes! On January 25, I will be volunteering with other NAPFA advisors, giving advice during the Jump-Start Your Retirement Plan Days event. It has always been fulfilling manning the phone during this annual event.
Please contact me for a review meeting if needed. As I continue to welcome newclients, please feel free to pass this newsletter on as seems appropriate. My websiteat www.MadeyskiFP.com has information for those interested in my financial planning services.
1Vanguard Total Stock Market ETF (VTI)
2Vanguard Total Intl Stock Index Inv (VGTSX)
3Vanguard Total Bond Market ETF (BND)
5Source: TD Ameritrade presentation to the FPA National Conference on 10/10/2010, courtesy of Allan Roth, www.MoneyWatch.com, 10/29/2010
6Vanguard Total Stock Market ETF (VTI) from 3/9/2009 to 1/12/2011 (www.Finance.Yahoo.com)