Tax Forms May Trickle In

You should receive by mail various tax forms that you will need to prepare your return.

Many of the forms you’ll need — such as Form 1099 (which includes interest income, dividend income, miscellaneous income, among other income types) — should have been in the mail to you by January 31. But please be patient. Tax reporting requirements often allow providers extensions.

Other forms, such as Form 5498 (which reports your IRA contributions to the IRS) is filed by your IRA trustee or issuer — not you. They have until May 31 to complete and mail it to you.

So, not every form will arrive in the mail at the same time. In some cases, mailed forms will have to be revised in order to accurately reflect tax related items. If that is the case, the form will be reissued and re-mailed to you with the “corrected” box checked.

Good Time to Revisit Your Investment Plan

Something else to keep in mind while you’re gathering tax paperwork and completing your return is conducting a simultaneous review of your investment portfolio. Doing so may reveal strategies you can use to reduce your tax liability. Some strategies may have a direct impact this year, while others may be implemented over the next several years, depending on IRS rules.

We recommend a coordinated tax and investment planning process working with you and your tax advisor. Please contact us at your earliest convenience to schedule an appointment.

Jurassic Park postage stamp

Today’s ‘New Normal’

“The pace of change in our economy and our culture is accelerating,” says Fast Company. The leading chaos contributors are new technologies that enable greater social interaction and more widespread mobile commerce.

The result: “Our visibility about the future is declining,” states the article. It’s difficult to weigh risk and opportunity as change comes from many directions.

Consider:

• Smartphones. “Just five years ago, three companies controlled 64% of the smartphone market: Nokia, Research in Motion and Motorola,” says Fast Company. Today, two different companies are at the top: Samsung and Apple.
• Advertising and publishing. We’ve seen the rise of deal-of-the-day provider Groupon, and the fall of bookseller Borders.
• Political mapping. Participation by users on Twitter and Facebook can affect candidates’ strategies for election, kill a bill in Congress, affect a charity’s fund-raising ability and contribute to a revolution in Egypt.
• Entertainment. Cable TV is losing ground to streaming TV, due to products from Apple, Roku, Sony, Netgear, Netflix and Microsoft. (The Wall Street Journal, “Must-Stream TV,” January 7-8, 2012, p. D2.)
• Leadership positions. A decade ago, who could have seen the rise of Facebook (845 million regular users at the time of its IPO filing)? The fall of Blockbuster? The return of Brazil as an economic powerhouse? The downgrade of U.S. government debt?

“The pace of disruption is roaring ahead,” says Fast Company. “The next decade or two will be defined more by fluidity than by any new, settled paradigm; if there is a pattern to all this, it is that there is no pattern. The most valuable insight is that we are, in a critical sense, in a time of chaos.”

Chaos is a topic of interest to me as a wealth manager. I prefer that clients be structured in their approach to financial planning, and not in a state of flux when considering their investment opportunities. This is especially important in the current market environment, which is full of flux.

• “Stock market volatility has been a little higher than average over the past few years,” wrote Forbes contributor Rick Ferri in his January 17, 2012 column entitled, “Markets Haven’t Changed, But Maybe You Should.”
• The New York Times article, “The New Normal—Violent Market Swings” (updated online September 12, 2011), also notes that increased volatility is evident in the markets. The article adds that some financial historians think the markets “are in a ‘new normal’ of permanently heightened volatility.”

Chaos Implications

For companies …
The goal is to restructure to handle fluxing marketplaces and customers. For example, General Electric, one of America’s most successful companies, is a classic hierarchical business institution facing change. The company wants its managers to expand their peer networks and learn new ways to adapt. “We need to systematize change,” says GE’s chief marketing officer Beth Comstock as quoted by Fast Company. “There’s a need to be less hierarchical and to rely more on teams.”

For people …
The key is to be open to change. “Command-and-control hierarchical structures are being disintegrated,” says danah boyd (spelled with lower-case letters), a social scientist with Microsoft Research. “There’s a difference between the old broadcast world and the networked world.” GE’s managers met recently and viewed presentations entirely on iPads—reportedly a company first. The technology is viewed as a driver of one’s ability to adapt. “How many of you use the same cell phone from five years ago?” stated a GE exec. “The world isn’t the same, so we need new parameters.”

For investing and retirement planning …
Investors, near-retirees and retirees should expect change. Avoid trying to map every detail of where you think the markets are heading—thinking that’s possible, when it isn’t. “Ambiguity is rising to unprecedented levels,” says Fast Company.

Longtime clients know that I’m a strong proponent of planning, not of reacting. The financial planning process, I believe, can help one think through long-term needs and goals and take appropriate steps to achieve them. Smart planning can set up parameters, which can help one avoid making panicky investment decisions.

So then, as chaos reigns, add structure to your investment and retirement choices by maintaining your financial planning process. And in the meantime, have fun trying out new things …

• Take a Kindle Fire out for a spin. (See my December 2011 post, “I Read an Article, and I Believe I’m Seeing the Future.”)
• Open a Twitter account (it’s free), and tweet a thought.
• If you have an iPhone or an iPad, download a free app called Flipboard, and use it to read the news and catch up on culture in one of most original ways I’ve ever seen.

We can’t afford to be sentimental about the past. “Do we really want to return to a world of just three broadcast channels?” says a Fast Company Fluxer. I don’t think so. But I do think the world of financial planning is just fine. No need for change there, because it’s possible, I believe, to be deliberate and methodical in these volatile times.

Disclosure
Mention of specifics companies in this article is not to be construed as a solicitation for or a recommendation to buy or sell securities in those companies. I do not personally have an investment position with any of the companies mentioned in this article. They are mentioned here solely for illustrative purposes.

The American Association of Long-Term Care Insurance (AALTCI) and the U.S. Congress hope to make more people aware of the risks and costs associated with long-term care. Here are some national average cost figures:

• $85,775/year for a private room in a nursing home,
• $75,555/year for a semi-private room in a nursing home and
• $39,240/year for an assisted living facility.
• $20/hour for at-home care.

Source: 2011 Johns Hancock Financial Cost of Care Survey conducted by LifePlans

AALTCI urges Americans to buy LTC insurance before age 65 to avoid the high costs associated with waiting. Factors that affect the cost of LTC protection include your age and health.

• Good health could help secure discounts that may not change even if your health does in the future.

I recommend taking some steps that can help protect you against the financial risks associated with long-term care. This involves putting together a retirement plan that includes planning ahead for long-term care expenses.  Call our office today to create or review your retirement plan and discuss the importance of planning for long-term care.

Of course, I read the article on my iPad2, which is ironic. This article is about Jeff Bezos, Amazon’s resilient and innovative CEO. The article says that he “Owns the Web.” So, I’m sure Bezos read the piece on a Kindle Fire, his bet on the future.

Jeff Bezos, CEO, Amazon*
You don’t hear quite as much about Bezos as you do about former Apple chairman Steve Jobs. There’s a best-selling book out on Jobs. Jobs is even profiled in the same print edition of Wired (see page 230, “The Revolution According to Steve Jobs,” for reflections on Jobs’ legacy.) But in my opinion, I think you’re going to hear more and more about Bezos and his view of the world.

Jeff Bezos, CEO, Amazon

Kindle Fire, Bezos says, “is the culmination of the many things [Amazon.com has] been doing for 15 years.”

He’s thinking that Kindle Fire will set the world ablaze. I read how Kindle Fire is considered by many to be the first serious challenger to the dominance of iPads. This season, Kindle Fire ($199 at retail) is making its mark in stores, in ads and on TV, and of course on Amazon’s website.

But the story isn’t really about the devices, Kindle and iPad. It’s about cloud computing and the ability of users to access content. The story is about touch-screen technology and the move away from the mouse. It’s about users being delighted by the staggering amount of media they can now access in the palm of their hands.

Touch screens allow your fingers to swipe, stroke and flick your way through the Web and through apps. I remember the technology being new in the ’80s and ’90s. This time, it’s here to stay.

The future is here – iPad and Kindle Fire are powering it. Our book and audio collections now exist in cyberspace, in what technologists call “the cloud” — the collection of online storage where digital media is kept. “The cloud” is just a bunch of computers used for storage. In it, Netflix stores your movie downloads. NASA uses it for its Jet Propulsion Labs. So does the Harvard Medical School. In fact, they all use Amazon’s cloud storage services.

So, you can now tote the content you own (or rent). You just need a device to stream live content or download content. Kindle is built to stream. iPad, iPod and iPhone had been built to download, but Apple has introduced iCloud and with it is moving toward the streaming model like Amazon.

This is what amazes me …
Normally, tech companies move like lightening. They have to. Rapid-fire changes in engineering design, material costs and production make the life of a tech product and product category tenuous. The tech world lives in the moment. I’m not saying technology companies don’t plan or consider long-term goals and market trends. However, they live in a world of immediacy. Standards change quickly. Gadgets come and go. When you design and manufacture them, you have second, third and fourth iterations already in the pipeline just as the first generation device hits the stores.

Bezos sees things differently. After reading the Wired article, he strikes me as a long-term player. He thinks of technology not in the form of devices, but services…

• “Indeed, Bezos doesn’t consider the Fire a mere device, preferring to call it a ‘media service,’” the Wired article states.

Bezos takes pride in Kindle Fire’s design. More important, though, is its function. “He really sees it as an advanced mobile portal to Amazon’s cloud universe,” the article says.

Wherever you go, your device can access “the cloud” to stream books, music and video. Upgrade your Kindle Fire, and you still have access to your content. “Replacing the hardware is no more complicated or emotionally involved than changing a flashlight battery,” the Wired article states. With the right subscriptions, you can watch episodes of Lost today. Then, 15 years from now, you can still watch those Lost episodes on your “Kindle Fire15,” the version I imagine would be out at that time. “What we really built is a fully integrated media service. Hardware is a crucial ingredient in the service,” Bezos says, “but it’s only a piece of it.”

A big piece of Bezos world is low margins
The lower, the better. “We’re a company very accustomed to operating at low margins,” Bezos says. “We grew up that way. We’ve never had the luxury of high margins, there’s no reason to get used to it now.”

Amazon works the “high volume + low margin” formula very well. As the company enters each new market, it uses this formula. But, it’s willing to make the necessary investments so as to succeed. For example, many may credit Amazon with permanently changing the physical bookstore business, and I would agree. Yet, in moving into e-publishing, Bezos understands the need to structure the business for the long term. “We believe that some of the royalty streams being paid for e-books are not high enough,” he says. “That’s why, in our Kindle Direct Publishing program, if you price your book between $2.99 and $9.99, we give you 70 percent of the revenue.” Think about that. In doing business with authors, Bezos will give a 70-percent share for their book rights. Of course, that lowers Amazon’s margins, but Bezos feels he can sell a lot of books. Time will tell whether or not the model will work in direct publishing. But I like how Bezos has a clear strategy and sticks to it.

Not in it for the quick strike
So, then, in Bezos I see a company founder who’s not in it for the quick strike. Here today, cash out tomorrow. No. Bezos wants to build something. He wants his work to last.

I think you can see that there are some principles here that translate into the world of financial planning. My world.

• Focus your planning on the long-term.
• Keep an eye on expenses.
• Don’t make investment choices simply for “quick strike” opportunities.

More Jeff Bezos quotes …
On customer service: “Our version of a perfect customer experience is one in which our customer doesn’t want to talk to us. Every time a customer contacts us, we see it as a defect. I’ve been saying for many, many years, people should talk to their friends, not their merchants. And so, we use all of our customer service information to find the root cause of any customer contact. What went wrong? Why did that person have to call? Why aren’t they spending that time talking to their family instead of talking to us? How do we fix it?”

On staying focused: “I like to say, ‘Maintain a firm grasp of the obvious at all times.’”

On being patient: “In some cases, things are inevitable. The hard part is that you don’t know how long it might take, but you know it will happen if you’re patient enough. E-books had to happen. Infrastructure web services had to happen. So you can do these things with conviction if you are long-term-oriented and patient.” “I like invention. For me, it feels like the rate of change on the Internet today is even greater than it was in 1995. It’s hard for me to imagine a more exciting arena in which to invent. And so, it’s pretty easy to wake up excited.”

* My disclosure …
I want you to know that I personally do NOT have any investment positions with Amazon stock. I am not making a recommendation for you to buy Amazon. I simply am recommending that you think broadly and long-term.

Only ¼ of what’s needed

According to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for the 2/19/11 Journal article, many boomers will not be able to maintain their household’s standard of living in retirement. The median 401(k) account balance is less than ¼ of what’s needed. The analysis assumed people need 85 percent of their working income after they retire to maintain their standard of living.

“The 401(k) generation is beginning to retire, and it isn’t a pretty sight,” concluded the article’s writer, E.S. Browning.

2012 contribution limits

The ultimate goal would be to contribute the maximum amount allowed by the Internal Revenue Service.

• For 2012, contribution limits for 401(k)s will increase to $17,000, up from $16,500 in 2011, according to the IRS.
• Catch-up contribution limits for those ages 50 and over will remain $5,500.

Click the image or this link to learn more: 2012 Retirement Plan Contribution Limits.

New: Contribute 15% of your salary

The Journal article noted that Vanguard Group, one of the biggest providers of 401(k) plans, has changed its advice on how much people should save:

• Vanguard long advised people to put 9% to 12% of their salaries – including the employer contribution – in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.

• Now Vanguard urges people to increase their contributions up to 15% of their salaries, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.

I have long stressed the importance of having a 401(k) or other defined contribution plans to an individual’s overall retirement plan. This latest analysis suggests it would be good to meet with a qualified advisor to see how your retirement plan is doing.

That’s because if you own a profitable business, and you plan to purchase equipment, property or vehicles for the business, you may be able to claim a Section 179 deduction and decrease your tax liability, so long as you have placed the qualifying asset in service this year.

Form 4562 from the IRS says:

• The maximum section 179 expense deduction currently is $500,000 ($535,000 for qualified enterprise zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2 million.
• For tax years beginning after 2011, the increased section 179 expense deduction limit of $500,000 and threshold amount before reduction in limitation will no longer apply.
• The 100% special depreciation allowance will not apply to most property placed in service after December 31, 2011.
• For tax years beginning after 2011, the definition of section 179 property will no longer include certain qualified real property.

More information, including any future developments affecting Form 4562, such as possible new legislation, will be posted at irs.gov/form4562. Please contact your CPA or tax specialist for assistance, since neither Bonnett Wealth Management nor Securities America provides tax advice.

1. Qualified Charitable Distribution (QCD).

This year IRA owners and beneficiaries age 70½ or older can make a tax-free Qualified Charitable Distribution of otherwise taxable dollars from an IRA to a qualified charitable organization. QCDs are limited to $100,000 per year, per IRA owner or beneficiary, but they also satisfy your Required Minimum Distribution (RMD) up to $100,000.

2. Donation of appreciated stock.

The 0% capital gains rate on long-term investments has been extended for taxpayers in the 10% and 15% tax brackets. So, if you have adult children in these tax brackets you might consider gifting your appreciated stock. Your child can have taxable income up to $34,000 this year (or $68,000 if married and filing jointly) and not have to pay capital gains tax.

3. Increased gift exclusions.

The gift exclusion has been increased to $5 million for both 2011 and 2012. The estate rate is currently 35%. So, gifting assets today can potentially relieve your estate from needing down-the-road appreciation to cover future taxable events.Unless Congress acts, the gift exclusion will drop back to $1 million and the estate tax rate will increase to 55 percent on January 1, 2013.

These gifting strategies represent reasonable opportunities. If you act before December 31, 2011, you could receive sizeable tax relief for the 2011 tax year. At press time, these tax breaks were slated to end December 2012.

Please talk with your tax advisor before making any decisions. Our office can work with you and your tax advisor to create a gifting plan that fits your financial situation. In fact, we highly recommend that you coordinate your tax and investment planning processes.

Nebraska City is beautiful. It’s a town with a lot of history, several interesting museums, Arbor Day Farm, apple orchards, vineyards, an Arnold Palmer-designed golf course, and more. Here are the 7 things my family loves most about Nebraska City:

1. The Lied Lodge.

In mid October, we spent a weekend at the Lied Lodge & Conference Center. We try to get to Nebraska City every year, but we don’t always spend the night. So, this was a special trip.

The entrance to Lied Lodge is impressive. The lobby has huge timbers, 30-foot high ceilings and a grand two-sided fireplace flanked by leather chairs and rocking chairs. We all love to swim, and Lied Lodge has a beautiful, indoor pool.

2. Family time.

Here’s the Bonnett family. That’s Claire (age 8), Penny (11 months) Jake (age 9) and my wife, Susie. We love to visit as many parks in Nebraska City as we can. They have lots of trees and plenty of grassy areas.  Bonnett family competitions come down to two favorites: swinging contests and flag football.

3. The trails and boardwalks.

Exit Lied Lodge from the back and in 5 minutes you’re in deep forest. Here, the deer roam plentifully. A variety of trails, boardwalks and bridges make it easy to stay close to nature and also find your way through the woods. The boardwalk shown here is part of the trail leading from the Lied Lodge & Conference Center to Arbor Day Farm, which has a Tree Adventure, apple orchards, vineyards and indigenous Nebraska prairies.

4. Picking apples.

Claire loves our activities in Nebraska City, but for her I’d have to say it’s all about climbing the apple trees and trying to pick the highest apple.  Jake, the good brother that he is, enjoys eating the apples that Claire picks. The whole family enjoys sampling all of the different varieties of apples.

5. The Discovery Ride at Arbor Day Farm.

Arbor Day Farm is just a treat. Here in one place, you can learn about the history of the Arbor Day Foundation, watch movies about trees, learn the scents and sounds of the forest and climb a 50-foot tree house. The most recent addition to Arbor Day Farm is the Discovery Ride, a cabbage-covered wagon ride through the orchards and vineyards. The ride included a tour guide, who shared the history of the area.

6. Getting a free pine tree to plant.

The Lied Greenhouse is very educational. Here, we got a close-up view of growing seedlings, and we got two free Colorado Blue Spruce to take home. Every year, it’s very important for Jake to get his free tree, and that was no different this year as well.

7. Relaxing by the Lied Lodge fireplace.

After day-long excursions in Nebraska City parks and on trails, the family loves heading back to the Lied Lodge’s Olympic-size swimming pool. The Lodge also has a sauna and Jacuzzi.

But a highlight for us is sitting beside the Lodge’s huge, two-sided fireplace. Hearing the crackle of wood and feeling the warmth of the hearth is great for relaxing, reading, and visiting as a family. The Lodge has rocking chairs, leather reading chairs and mission-style chairs – all cozy and comfy.

Susie and I enjoyed driving through the countryside and being together as a family. It felt good to get away from city pressures and schedules and to set aside our phones for a bit. Jake and Claire enjoyed themselves thoroughly.

In football, it’s easy to second-guess the quarterback. But making investment decisions is not so simple. However, recent research from Fidelity Investments shows that investors who “stay in the pocket” perform well — to the tune of 50% and 64% growth in their 401(k) account balances.

I’m going to show you 2 charts.

• The first chart shows that investors who held onto their shares of stock grew their account balances far more than those who sold their stocks. (50% growth v. 2% growth)
• The second chart shows that investors who maintained regular 401(k) contributions grew their account balances far more than those who panicked and stopped making regular contributions. (64% growth v. 26% growth)

This information is gleaned from a Fidelity Investments study of workplace defined contribution data.* It was based on nearly 20,500 company defined-contribution plans and more than 11.6 million record-kept participants.

Just to be clear, the growth rates mentioned above and below are for the entire period of the study, October 2008 to June 2011, and are not average annual growth rates.

Here’s the first chart. Notice the difference between those investors who sold their stocks and those who didn’t …

Source: Fidelity Investments.*

• The “2 percenters”: According to the study, investors who pulled out of the stock market in 2008/2009 during a severe bear market saw only 2% growth over the 33-month, October 2008 to June 2011 period. They reduced their positions to zero and scrambled to the perceived “safety” of cash positions. Later, when the market recovered, their cash account balances grew but at a rate less than inflation.
• The “50 percenters”: In contrast, those investors who maintained their investment strategy for equities — those who “stayed in the pocket” — experienced 50% growth in their 401(k) account balances over the October 2008 to June 2011 period. Their stock positions grew, big time, when the market eventually recovered.

Thus, a study of the actions of Fidelity 401(k) participants — during the market decline of 2008-2009 — confirms that even during the most volatile market activity, investors who maintain a diversified asset-allocation strategy, and do not pull out of equities, tend to be rewarded when the equity markets rebound. In other words, investors who “stay in the pocket” and do not panic and scramble do well.

Here’s the second chart. The lesson is to shrug off a poor market environment and keep making investment contributions …

Source: Fidelity Investments.*

Did you notice the difference between the two investor mindsets?

• The “26 percenters”: Investors who stopped contributing to their 401(k)s saw their account balances grow 26% over the October 2008 to June 2011 period.
• The “64 percenters”: In contrast, investors who continued their pattern of making regular contributions to their 401(k)s experienced account growth of 64% over this same 33-month period of study from October 2008 to June 2011.

The take-away. A long-term investment approach can be highly rewarding. In contrast, short-term thinking can cost an investor significantly, as was the case with investors who panicked in 2008/2009.

My interpretation of the Fidelity study suggests these 3 action-steps:

1. Have a solid investment game plan that encourages behavior leading to the following two steps.
2. Do not scramble or panic during a stock market downturn and liquidate your stock positions.
3. During a downturn, keep making regular contributions to your investment accounts.

Of course, the Fidelity study reflects past performance. That’s no guarantee of future results. Stocks can continue to go down in value for a prolonged period of time. But if and when stock values come back, the study shows that investors can get caught “out of pocket” and miss out on sizable performance gains. That’s what I’d like to see you avoid.

So, call my office. I’d recommend that you reexamine your investment strategy at least annually and definitely whenever your personal situation changes. It may be time to talk things over.

*Fidelity Investments study of workplace defined contribution data based on nearly 20,500 plans and more than 11.6 million record-kept participants as of June 30, 2011, and do not include tax-exempt accounts and non-qualified plans, but does include plan data from the Fidelity Advisor 401(k) Program. Participants who changed their equity allocations to 0% between Oct. 1, 2008, and Mar. 31, 2009 (the lowest months of the market downturn) and maintained this allocation through June 30, 2011, experienced an average increase in account balance of only 2% through June 30, 2011. Participants who dropped to 0% equity but then returned to some level of equity allocation after that market decline saw an average account balance increase of 25%. Those who stayed with an asset allocation strategy inclusive of equities (i.e., continuous participants September 30, 2008 through June 30, 2011) realized an average account balance increase of 50 percent during the same period.

Participants who stopped contributing to their 401(k)s during the same market decline of 2008-2009 experienced an average increase in their account balances of 26% through the end of the second quarter of this year. Those who continued making regular contributions experienced an average increase in their account balances of 64%.

Data provided for illustrative purposes only. Figures shown are past results and are not predictive of results in the future. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so you may lose money. Investing for short periods can make losses more likely. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should consider their willingness to keep investing when share prices are declining. Indexes are unmanaged and returns do not reflect sales charges, commissions or expenses.

Storyline: For many, the move to the Big Ten is intimidating.

• Big Ten schools boast student bodies as large as 62,000 and football stadiums seating 100,000+. Michigan’s “Big House” holds 114,800+.
• The total National Championships (for all sports combined) at Big Ten schools numbers into the hundreds.
• In football, the Big Ten is known for its gritty, physical style of play. Each Big Ten team has the potential to be a handful.

The Huskers’ October 1 trip to Madison, Wis., led to a 48-17 loss to the Wisconsin Badgers. On October 8, Husker Nation welcomed Ohio State to Lincoln with a 34-27 win. The schedule continued with Minnesota (41-14 win away), Michigan State (24-3 win at home), Northwestern (28-25 loss at home) and Penn State (17-14 win away), Michigan (45-17 loss away) and finally a November 25 win against Iowa at home (20-7).

Bottom Line: It’s hard to predict how well the Huskers will do. Long-term, however, I think the Huskers will do great because they have a great program.

Storyline 2: In a manner of speaking, the stock market has moved to a new “conference.” The topsy-turvy markets are playing under a new set of conditions, and many investors are intimidated. Here’s why:

• A polarized and stymied political landscape, as evidenced in Congress’s July debt-ceiling fiasco.
• Heightened stock price volatility.
• A struggling slow-growth economy.
• European debt worries.
• Unemployment contagion, as evidenced by Bank of America’s recent layoff of 30,000 workers.

While this is not typical of my clients, I hear of many stock investors retreating — selling sizeable portions of their stock holdings. In my opinion, this is a mistake. Long-term, I believe it’s good to be “in play” with stocks.

REASONS STOCKS ARE ATTRACTIVE
1. Investors need stocks to beat inflation long-term. You could just keep your money in 180-day CDs (the average annualized return for 180-day CDs for the 20 years ending August 31, 2011 was 3.75%) — except that you would barely stay ahead of inflation. (See related post on the tax effects on CDs).

Even when modest, inflation cuts significantly into buying power. Stocks help defray inflation’s toll. Whereas inflation has averaged 2.55% for the past 20 years, the performance of the S&P 500 Index (unmanaged and unavailable for direct investment*) has averaged 7.94% over that same period. So, most investors need some equities exposure in their portfolios.

Data provided by American Funds and Thomson Reuters*

2. Corporate profits are showing double-digit percentage gains. According to second-quarter reports, corporate profits are running at double-digit percentage gains on a year-over-year basis for the majority of S&P 500 Index companies. This, coupled with the Federal Reserve’s easy-money policy and ongoing fiscal stimulus programs, bodes well for continued good earnings results.

3. Stocks are cheap. Price/earnings multiples are just over 14. Forward P/E multiples, which use forecasted earnings, are less than 12. In his article, “Don’t Panic About the Stock Market,” (The Wall Street Journal, August 8, 2011, p. A15), Burton G. Malkiel, professor emeritus of economics at Princeton University, says the multiples of 14 and 12 respectively are “low relative to historical precedent.” He adds: “My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States.”

4. Long-term forecasts look good. Jason Zweig, columnist for The Wall Street Journal, recently interviewed John C. Bogel, founder of the Vanguard Group. In his September 10-11, 2011 column, Zweig reports Bogel as saying that stocks are likely to generate an average annual return, including dividends, of around 7% in the next 10 years. Of course, no one can forecast the market perfectly. But, Bogel is an astute market observer and, speaking of the decade ahead, he says that “your money [in equities] will double.”

5. You likely have time on your side. Professor Richard Sylla, a financial historian at New York University’s Stern School of Business, studied stock market returns going back to 1790. Looking forward, Sylla sees a stock market recovery “with a 6.5% average annual return,” according to The Wall Street Journal, Sep. 12, 2011, p. C1. Of course, past performance is no guarantee of future results. Sylla is simply suggesting that investors take a long-term view. “To worry about reacting to what is going on when you are not going to be using this money for 20 years,” Sylla says, “is kind of silly.”

STOMACH VOLATILITY

An industry journal, InvestmentNews, reports Pimco’s Neel Kashkari as saying that now is the time to stock up on stocks. “Volatility is here to stay,” Kashkari says in a September 12, 2011 InvestmentNews article. “[Investors] need to be able to stomach that volatility — but if they do and they can, we think they’ll be rewarded.”

Very Bottom Line: The Huskers face challenging football ahead. In no way are they in retreat. Quite the contrary, the team embraces hard work and has a great game plan and coaching staff in place. As an investor, you can operate in much the same way. Face the short-term challenges by having a good long-term game plan that fits your personal interests and needs.

Stay the course. As always, I’m available to discuss your investments on the phone and in person.

* Data provided for illustrative purposes only. The S&P 500 with Monthly Dividends data assumes dividends and capital gains are reinvested, and that the initial investment is not subject to sales charge. Neither Cert. of Deposit – 180 Day nor Consumer Price Index figures demonstrate the effects of income and capital gains taxes.

Figures shown are past results and are not predictive of results in the future. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so you may lose money. Investing for short periods can make losses more likely.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should consider their willingness to keep investing when share prices are declining. Indexes are unmanaged and returns do not reflect sales charges, commissions or expenses.