Economic Recovery is Still on Track
As mentioned in the July newsletter, many signs were there pointing to a recovery in the US economy.  No economic indicator ever moves in a straight line, and this recovery is no exception.   Just about all the indicators are still saying that the recovery is on track.

Markets had a Tremendous 3rd Quarter
Amid all the doom and gloom that Wall Street and the media have been showering onus here are the returns from the last quarter1:
  • US Total Stock Market went up 11.6%,
  • US Total Bond Market appreciated a respectable 2.4%
  • International markets had a spectacular 17.9% return.

Stay in the Market – Timing is Impossible to get Right!
No one can successfully time the market – most of the “experts” got it wrong again! Stick to the simple philosophy of staying invested in low-cost index funds, and rebalance periodically.  By jumping in and out of the market, our emotions are apt to get it all wrong by buying high when there is euphoria in the markets, and selling low when it seems like the end of the world.  It is supposed to be the other way around, isn’t it?

Bond Market Bubble?
There are trillions of dollars that are gushing into bonds and bond funds, as the average investor is cowed into submission that the stock market is going nowhere and short-term savings accounts are paying next to nothing.  Investors are ploughing their money into all sorts of bond funds, and in the quest for yield, bond funds are taking on more risk than they should.  Don’t get me wrong, I am not against well-managed low cost index funds, but many bond funds are reaching into riskier areas than they should, and when interest rates go up (not if, but when), there could be a lot of grinding of teeth, when “safe” bond funds lose some of their value. Remember we invest in the bond market to reduce the risk of loss, not to make a lot of money with them. If the bond portion of your portfolio has outperformed, it is time to take money off the table and reallocate into sectors that have underperformed (rebalancing).

Cheaper is Better
Recently Morningstar came out with a report that found that over the last 50 years, the funds with the lowest costs produced higher returns than the most expensive funds. Sound pretty obvious, if you consider a low cost fund which charges you say 0.10% in annual expenses compared to one that levies a 1.50% charge.  The expensive or actively managed fund has to overcome an expense hurdle of say 1.40% for every year over that period – a pretty tough hurdle to beat!  The report is even more commendable considering that Morningstar promotes its “star” system, which does not take into account a fund’s expenses.

Vanguard Cuts Fees
Vanguard which generally has the lowest cost mutual funds and ETF’s (ExchangeTraded Funds), has lowered its fees even further.  Previously, you had to invest $100,000 in a fund to qualify for the lower charges of their Admiral shares.  The new minimums for Admiral Shares are now $10,000, which are in line with Fidelity’s Spartan funds minimums.

2011 Taxes?
All bets are off regarding what is going to happen to taxes next year.  If congress doesnothing between now and the end of the year, the tax cuts of 2001 and 2003 are set toexpire on January 1, 2011.  This is what will happen to tax rates next year unless something is done by Congress:

  • Personal Income Tax Rates will Rise:
    • 10% bracket rises to 15%
    • 25% bracket rises to 28%
    • 28% bracket rises to 31%
    • 33% bracket rises to 36%
    • 35% bracket rises to 39.6%
  • Long-Term Capital Gains Tax Rates will Increase:
    • 10% & 15% tax brackets, rate goes from 0% to ordinary income tax rate.
    • All other brackets, rate goes from 15% to ordinary income tax rate.
  • Dividend Tax Rates (Qualified):
    • 10% & 15% tax brackets, rate goes from 0% to ordinary income tax rate. 
    • All other brackets, rate goes from 15% to ordinary income tax rate.

No one knows whether the existing tax rates will be extended, but it may be a good time to review your tax situation before the year-end in conjunction with your portfolio rebalancing.  Consult with your tax professional for specific advice regarding your tax situation and I can help you on the investment side.

Personal Notes
Our vacation in August to St. Pete Beach, FL, was wonderful and the beaches oil free.For these rain-starved NM desert rats, the summer rains in FL provided welcome moisture!  We stumbled upon a great deal for a few days R&R in Rancho Mirage, CA, later this month.  Also looking forward to spending some time with family in GreenValley, AZ, along the way. Please contact me for a review meeting if needed.  As I continue to welcome new clients, please feel free to pass this newsletter on as seems appropriate.   My website at has information for those interested in my financial planning services.


1 Returns from June 30, 2010 to September 30, 2010 using the following proxies for the market: Vanguard Total Stock Market ETF (VTI), Vanguard Total Bond Market ETF (BND) & Vanguard Total International Stock Index Inv (VGTSX).  Returns include reinvestment of dividends and capital gains.