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A Monthly Newsletter Source of Financial Sources • Looking Long-Term: The Winslow Green Index,
A Green-Screened, Equal-Weighted Index of 100 Stocks, • "Believable" Investment Misinformation Is a Danger to Long-Term Retirement Goals • Health Savings Accounts (HSAs) Have Useful Applications for Small Business Owners • Real Estate Investments Are Still Excellent Way to Diversify • How to Choose an Excellent Mortgage Lender… • No One Wins When You Sacrifice Retirement to Send Kids to College, But You Can Set Expectations About Education Funding • The Offer of Comprehensive Wealth Management Means You Had Better be Prepared to Keep Careful and Extensive Notes Looking Long-Term: The Winslow Green Index, BOSTON, MA -- The Winslow Green Index (WGI) is a "green-screened" equal-weighted index of 100 stocks of U.S.-based corporations. In January 2006, the index was up 9.59% compared to 8.91% for the Russell 2000, 9.62% for the Russell 2000 Growth, 2.55% for the S&P 500 and 4.56% for the NASDAQ. From its inception in August 1999 through January 2006, the WGI has risen 156.5% compared to a .1% rise for the Russell 2000 Growth, 64.8% rise for the Russell 2000, 3.7% drop for the S&P 500 and 12.6% drop for the NASDAQ. Constituents of Winslow Green Index were selected by Winslow Management Company, portfolio managers for the Boston-based Winslow Green Growth Fund (WGGFX). Winslow believes that the index's history indicates that investors can benefit from better performance when a green standard is applied to their stock picks. The average market capitalization of companies in the index is $10.45 billion. They were originally selected in July of 1999 on the basis of environmental factors, including, but not limited to, minimal environmental footprint, compliance with environmental
regulations, presence of a proactive environmental policy, and products that benefit or minimize harm to the environment. The performance of the index is calculated every month, and index members are updated quarterly. Companies are removed if they are no Jackson W. Robinson is founder and portfolio manager for the Winslow Green Growth Fund (WGGFX), Winslow Management Company LLC, Boston, MA. Winslow focuses on small growth companies with big, new ideas. The media can reach Jack Robinson by calling Nicolé Keane, director of marketing, at 617-788-1608 or nkeane@winslowgreen.com. The Winslow Green Index does not represent actual trading in a client or proprietary account. A list of companies in the Green Index can be obtained by contacting Winslow Management Company at 866.804.5414. The Russell 2000 Index Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The Russell 2000 Growth Index is an index that measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Standard & Poor's 500 is an index made up of 500 blue chip stocks. The index is commonly used to measure stock market performance. The NASDAQ Composite is an index that covers the price movements of stocks traded on the NASDAQ stock market. One cannot invest directly in and index. Past performance is not indicative of future results. "Believable" Investment Misinformation Many investment "truths" seem to go unchallenged but are in fact, very clearly just myths. Buy and hold investing is a good long term strategy, economists are good at predicting the markets, diversification will protect you from losses, compounding is the eighth wonder of the world, missing the best days each year can be devastating, probability and risk are the same thing, and chasing performance will work; just to mention a few. It is important to debunk these myths. Buy and hold is a proven strategy for the stock market. The 1976 Ibbotson study and later updates are convincing evidence that buy and hold is a valid strategy for stock market investing. That is until you realize that you might not have an 80 year horizon to make your investment wealth. Most human beings have a good 15, maybe 20 years, to accumulate their retirement nest egg. During the 80 years of the Ibbotson study there were many 15 year periods where a buy and hold approach would have resulted in significant losses. After big losses, it takes a long time to break even. Remember, breaking even is not a successful strategy. How long will it take to break even from 2000? So far, it's been 6 years; how old are you? Economists are good at predicting the markets. It is odd that one of the components of the Index of Leading Indicators (designed by economists) is the performance of the stock market. The truth is, however, that the stock market predicts the economy. In 1973, a young economist named Alan Greenspan stated, “Now may be the best time in history to buy stocks.” This proclamation was made just days before the beginning of the 1973-74 bear market that took the S&P 500 Index down over 48% in a little less than 2 years time. Diversification protects against losses. Harry Markowitz won a Nobel Prize in 1990 for his groundbreaking research on diversification (modern portfolio theory) in 1952. The simple explanation of this theory is that by diversifying across a wide range of asset classes, one will not be devastated by a significant decline in any particular asset type. Bottom line, Markowitz advocated investing in portfolios, not individual securities. Peter Lynch, former successful manager of Fidelity's Magellan mutual fund said, "Diversification is not a guarantee against losing money, it is just a guarantee that you won't lose all your money at one time." Compounding is the eighth wonder of the world. In the stock market, there are many years when prices go down and those down years can destroy an investor's wealth quickly. Negative compounding requires exceptional returns over the following years just to recover. Wall Street doesn't like this kind of math. If you experience a decline of 33%, you must have a gain of 50% to break even. Breaking even is not exactly the best means available to avoid the devastation of bear markets. If you miss the 10 best days each year you will not perform as well as the market. This is certainly a true statement. It is commonly touted to further convince you that you must invest for the long term. Another statement that is also true is "if you miss the worst 10 days each year you will greatly outperform the market." Studies have shown that missing the worst 10 days each year will offer exceptional returns, significantly better than the market, and much better than those generated by missing the 10 best days each year. For the period 1979 through 2004 (25 years), using the S&P 500, a buy and hold strategy yielded a return of +10% per year. If you had the misfortune of missing the best 10 days for each year, your annualized return would be -10%, significantly worse than buy and hold. Convincing, isn't it? However, if you missed the 10 worst days of each year, your annualized return would be +38% per year. Of course, both of these scenarios are hypothetical and neither are a realistic investing strategy, but the point is that missing the down days is much better than missing the up days. Probability and risk are essentially the same thing. The dependence on statistics (probabilities) for investment forecasting is widely covered in the media and by many analysts. Usually the statistics are only used to add support to their current market hypothesis. Investor's understanding of probabilities is usually not good. There’s the story about offering someone a chance to win at a game by telling him he will guarantee his winning 5 times out of 6. Most eagerly accept such odds. That is, until you tell them that the game is Russian roulette. The focus then shifts to the risk of the loss, not the probability. Most investors forget to incorporate risk into their decision making process when the truth is, managing and assessing risk is tantamount to investment success. As Thomas Gilovich says, "odds are you don't know what the odds are." Chasing performance will work. Performance chasing can also be devastating to investment health. A manager might outperform or under perform their benchmark, but often, the benchmark is inadequate for the manager's style. Past performance is not predictive, it is only a measure of how a manager achieved past success (or not). Success (or failure) can be attributed to style (growth, value, large cap, small cap, etc.), economic conditions, bull/bear markets, etc. Past performance is about hope, which is a comforting companion but a poor indicator of the future. One should adopt an investment philosophy that realizes the market has its good periods and its bad periods, and the philosophy adjusts to them as needed. A technical approach that follows the intermediate trends of the market with strong risk management offers a peace of mind dividend. Each of these examples shows us where human frailty translated into investment errors and how perceived "common knowledge" is taken for granted. We cannot afford to accept investment-related information that we understand as "common knowledge" if that "common knowledge is not accurate. Look at the myths and find an investment advisor who understands them and whose investment practice debunks them on a daily basis. Gregory L. Morris is a portfolio manager for PMFM, Inc., managing their PMFM Core Advantage Portfolio Trust mutual fund. Prior to this role, Greg served as a Trustee and Advisor to the MurphyMorris ETF Fund and as Treasurer and Chief Executive Officer of MurphyMorris Money Management Co. Greg has been a technical market analyst for almost 30 years. Greg is also an accomplished author and has written two books on technical market analysis with McGraw-Hill. A third edition to his best-selling (16th printing) "Candlestick Charting Explained" will be released in March, 2006, and his second book, "The Complete Guide to Market Breadth Indicators," was published in September, 2005. 706-579-1392 Health Savings Accounts (HSAs) Have Useful Applications Health Savings Accounts (HSAs) offer both insurance coverage and a long-term, tax-free investment opportunity. An HSA is a high deductible health insurance policy with tax-free growth on the contributions made to the account. You pay annual premiums on an HSA, but you get a dollar for dollar deduction for the premiums from your adjusted gross income on your tax return. HSAs are a viable option for sole proprietors and small business owners both individually and for employees. Money in the HSA can be invested in stocks, bonds and mutual funds. 1. You can cover your insurance deductible and other medical expenses with funds from the HSA. For more information, go to the Department of the Treasury Website at http://www.ustreas.gov/offices/public-affairs/hsa/pdf/HSA-Tri-fold-english-06.pdf Blue Cross is a major player in providing HSAs and most insurance providers will offer HSAs. The insurance companies do not care where the account is held. Schwab and the other big brokerage houses are not rushing into the field because the accounts will be so small. Banks, though are forming insurance companies to enable them to offer this service and because they are geared up to handle many small accounts. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfs@usinternet.com. Real Estate Investments Are Still An Excellent Way to Diversify The Yale Endowment, managed by David Swensen, was able to achieve returns of over 16% a year for the last 10 years without one negative year. One of the core reasons the endowment achieved this peer beating performance was its allocation to real estate. When stocks fell, real estate gains offset those losses. Diversification is everything. A REIT Index fund would provide exposure to real estate including office properties, warehouses, malls and apartments. The history of real estate suggests that it does well in inflationary times and pays a healthy cash flow as a result of leases. An allocation of up to 20% in real estate is not out of line considering the long-term historical returns. Rebalancing a portfolio to maintain that allocation would reduce risk and stop loss protection on a REIT Index Exchange Traded Fund would also reduce volatility. The second home has also been a source of significant appreciation in the last 10 years in many areas of the country. Bubble or not, the long-term expectation for US real estate is good. In retirement, many people are capturing real estate profits by selling the highly appreciated big house and replacing it with a smaller condo or home in a resort area. There are many ways to capture the gains with little or not tax. Consumers should be aware that they can buy real estate using some of their IRA or 401K money. They could use those accounts to buy land or individual rental income, residential real estate. They could convert IRA accounts to Roth IRA accounts and have tax free growth in real estate all of their lifetimes and stretch out tax free withdrawals over the lifetime of their children and grandchildren. Consumers will demand and receive lower cost reverse mortgages allowing them tax free access to their home equity in retirement while maintaining the growth potential of the allocation to real estate. As boomers retire and live longer than any generation before them, competitive priced reverse mortgages will become a huge part of lifetime income planning. Remember when Japan’s economy was booming and they were buying up huge amounts of real estate in Hawaii and California? Where do you think the new millionaires in China and India will invest the real estate part of their portfolio? In the safest, most secure place in the world they can find with the greatest potential for growth. All the demographics point to continued growth in the demand for real estate through 2050. Of course, past performance is absolutely no guarantee of future returns and risk may not be rewarded in the next, inevitable, short-term decline. Consumers interested in real estate investments should avoid the tenants-in-common deals which are filled with huge costs and conflicts of interest. Investing in public real estate securities like REIT Indexes or individual properties that you control offer the greatest potential reward. As rates rise in tandem with inflation, historically two things happen – bonds fall and higher inflation means higher real estate prices and rental income. Consider less in bonds and more in real estate over the next few years, but diversification also means having plenty of liquidity to carry you through unpredictable, temporary declines. Avoid highly leveraged real estate at all costs unless you are willing to throw your money together with thousands of other very smart people who lost everything because of mortgage debt. Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, their families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925 seth.pearson@verizon.net How to Choose an Excellent Mortgage Lender… The last few years of low interest rates, together with the tremendous growth in equity and in home values has resulted in the arrival of unscrupulous and predatory mortgage lenders, whose goals were to earn a great deal of money through multiple unethical mortgage transactions. These bad lenders give all mortgage lenders a bad name by willfully taking advantage of consumers. Unethical lenders will give clients prepayment penalties without their knowledge, higher than market interest rates because of their minority or elderly status, or adjustable rate mortgages when they were expecting a fixed rate mortgage. On the other hand, ethical lenders who have the best interest of consumers in mind will take a financial planning approach when working with borrowers. One source of highly skilled mortgage lenders is the Certified Mortgage Planning Specialist Institute (CMPS Institute), who work with mortgage lenders who are willing to study for the CMPS designation. (www.cmpsinstitute.com). The professional mortgage lender will be able to help you navigate the complicated waters of the hundreds of mortgage products available today. They will be able to show you, using computer programs with your specific data, the impact of your mortgage choice on your long term net worth. If you are choosing an adjustable rate mortgage (ARM), they can show you the exact increase you might expect if interest rates rise. An ethical mortgage lender will consult on wise uses the consumer may make on the unprecedented amount of home equity available to them because of the tremendous growth in home values. An unethical mortgage professionals is: a. A lender who claims to have a 1% interest rate (these are often teaser rates that only last for one month and result in negative amortization after the first month). If you suspect you've been scammed or that a lender is 'predatory' you can report them through: Lenders should use their position of influence and importance in a borrower's life to make a positive difference by showing borrowers how to change their financial habits in ways that help them achieve financial freedom. Contact the CMPS Institute to find an ethical mortgage lender in your area. Gibran Nicholas is Chairman and founder of the CMPS Institute, located in Ann Arbor, MI, a national training and certifying organization to help mortgage professionals bring a financial planning approach to the mortgage process. Since the launch in August of 2005, the Institute has grown to nearly 1,000 members nationwide. Nicholas is also CEO and founder of Nicholas & Co. Mortgage Planners, also based in Ann Arbor, MI. He is the author of Wealth Equity, a 5 1/2 hour DVD educational course to help homeowners, buyers and investors understand the mortgage, home buying and real estate investment process. He can be reached at 734-531-0180 or gibran@cmpsinstitute.org. No One Wins When You Sacrifice Retirement to Send Kids to College, A common misconception among the middle class is that failure to pay for a child's college education is a form of child abuse. This is simply not the case. Those who pay partially or completely for their own education gain a great sense of accomplishment. If you sacrifice your retirement savings for your child's education, you take the chance of then becoming dependent on your children for support later in life. A key to college education is setting expectations. In grade school, point out that an education allows many financial alternatives for enjoying life. In middle school, help your child understand that higher education isn't free and discuss options for saving for college. Once a child is starting high school, you can be specific about costs and explore schools and financial alternatives. This should receive the same serious discussion as choosing a major, where to live and campus safety. Even if you feel you can pay fully for your child's college, don't promise too much. So many things -- divorce, a poor economy, losing a job, family illness, poor investment choices -- can impact your ability to write a check for college. Keep in mind, also, that a college education isn't right for everyone. Too many young people go to college because they have not been given any choice in the matter. They graduate with a degree they do not want, and start a career they hate. Or they flounder through college with bad grades and no sense of direction or accomplishment. Any education dollars, whether spent by you or your child will have a greater return if the education gives your child a way to earn a living doing something the child loves. Linda Leitz, CFP, Pinnacle Financial Concepts, Inc., Colorado Springs, Colorado, is author of “The Ultimate Parenting Map to Money Smart Kids,” as a book or as a CD. She specializes in helping families and individuals meet their long- term financial goals. She also helps those in the midst of divorce resolve financial issues through her company Divorce Solutions, Inc. She can be reached at 719-260-9800 or Linda@brightleitz.com. The Offer of Comprehensive Wealth Management Means You Had Comprehensive wealth management firms had better be clear on the “comprehensive” part of their offer to their clients and understand the risk of stating and writing that you are a full service firm. Accurate and complete checklists, careful meeting notes and copies of letters to your clients, as well as to the custodians of your clients' assets will come into play when any number of events occur. For example, several areas that can be problematic for a comprehensive planning firm involve action steps recommended and not taken regarding beneficiary forms of all kind, estate planning and long term care insurance. Recently, a financial advisor received a call from the girlfriend of a client who had unexpectedly died. She wanted to know what arrangements had been made for her by her boyfriend. The advisor knew that his efforts to get the boyfriend to fill out the beneficiary forms for his IRA (a $1.5 million asset) had never been successful. He had discussed this with the boyfriend twice in person, and had sent two beneficiary forms to be filled out and mailed to the custodian. He had kept a record of his calls to the custodian to see if the form had been forwarded. It had never been completed. He also kept records of his in person conversation with the client to the effect that he did not want his girlfriend to get all of his money, but in fact wanted to support a local library with a bequest. Later, the girlfriend's attorney called to ask why there were no beneficiary forms, asking whether the firm failed in its fiduciary duty to the client. It became clear that the quality of the advisor's notes might make it into court. Still later, the girlfriend called to say she had found the beneficiary forms filled out to her benefit, but they had never been mailed. In the state where this deceased client had lived, in the absence of directions, the IRA assets will go the nearest blood relatives. The boyfriend's sister, from whom he was estranged will more than likely get the assets, but not before a court fight where this advisor may be required to appear. The attorney son of an advisor's client called to find out why he had not insisted that his parents take out long term care insurance. The father's stroke and related care was in danger of decimating his Mom and Dad's assets. In fact, the advisor's notes showed that he had convinced his clients to take out a policy and they had done so. But his notes also showed that they had informed him they cancelled the policy because it was too expensive. Advisors must also believe only what they can see in documents, not what their clients tell them. This is not because client's are deliberately untruthful, just very often mistaken about having completed tasks such as adjusting beneficiary forms in their taxable account to benefit their second wife, when in truth, the first wife's name is still on the account. Even worse, your client is in a major corporation's 401(k) plan, and assures you that he has the proper beneficiaries on his account. Unless you can see that for yourself on a copy of his beneficiary statement, it might not be true. Advisors are not allowed to access their client's 401(k) account information at their corporation and must rely on up-to-date copies of such things as beneficiary forms. A common error for clients is to believe that their homes are correctly titled to their estates, but in fact, despite thoughtful and expensive estate planning, the proper titling was never achieved. Advisors all know that they cannot make their clients do something they do not wish to do. However, if you make a practice of taking extensive notes and not accepting assurances by your clients about facts you cannot see on paper, you protect yourself and your clients and can be justifiably proud of the "comprehensive" part of the services you offer. Jeff Lancaster is a principal of Bingham, Osborn & Scarborough LLC (BOS) 415-781-8535 a San Francisco and Menlo Park, California-based registered investment advisor with approximately $1.5 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. BOS has eight principals plus eighteen team members working on behalf of their clients, including seven credentialed portfolio managers with direct client contact and eleven operations, administration, finance, compliance, and systems staff with responsibilities related to client accounts. jeff.lancaster@bosinvest.com.
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