One year later

Last week marked the one year anniversary of the bear market low.  Money invested last year at this time grew by an amazing amount.  According to Morningstar's indexes, large cap was up 65%, mid caps were up 74% and small caps were up 87% with value stocks beating growth stocks.  Small cap value returned the best results with an increase of 109%.  So what have we learned (if anything).  First, don't panic sell--as that usually happens at the low point in the market.  Second, have a diversified portfolio with plenty of liquidity, by liquidity I mean, money you can get your hands on instantly without having to sell in a lousy market.  Only those with ample liquidity can withstand the claws of a bear market.  There are other lessons but these are the most important--lessons we keep having to learn over and over again.

In case you were wondering.....

The number of U.S. households with a net worth of $1 million or more, not including primary residence, increased 16% to 7.8 million last year, according to a report released Tuesday by Spectrem Group, a Chicago research company. The increase last year follows a 27% decline in millionaires from 2007 to 2008.


Similarly, the number of ultra-wealthy households, which have a net worth of $5 million or more, rose 17% to 980,000 last year.

February Results & ROTH Conversions

The market made a nice comeback during February.  There has been much volatility, wide swings from day to day--which is why looking at your nest egg every day can be stressful!  So don't do it!  There is no reason to be looking at your portfolio that much--all it really does is make you much more emotional about your money when we want to be rational.  Probably the biggest news last month was the Federal Reserve Board raising the discount rate (the rate at which banks can lend from the Fed) to .25%.  That's right, .25%.  The market was a little rattled by this action as it symbolized the beginning of higher rates to come.  We still have a long way to go it seems to me.
There has been much talk about the ROTH conversions which are now unrestricted by the amount of income you have in any one year.  Generally speaking, the conversions are optimal for those who really don't need their IRA assets and who have the money to pay the tax on the conversion outside of the IRA.  Though many of the articles out there seem to support the idea that young investors in particular should be utilizing this conversion tactic, I am still on the fence about it.  I think there is some reasonable risk that 30 or 40 years from now when you start using the money in the ROTH that it will be taxed in some way.  That's the problem with the tax advantaged vehicles--the tax code could always change...especially if there ends up being huge amounts of money in these ROTH accounts.  If you want me to look at your specific situation to see if it makes sense for you to convert, please send me an email.  There are may variables that come into play.

Here are the February results:
The Monthly Index Report for February 2010

Index	Feb-10		YTD	Description
S&P 500 Index*	2.9%		-1.0%	Large-cap stocks
DJIA*	2.6%		-1.0%	Large-cap stocks
Nasdaq Comp.*	4.2%		-1.4%	Large-cap tech stocks
Russell 1000 Growth	3.4%		-1.1%	Large-cap growth stocks
Russell 1000 Value	3.2%		0.3%	Large-cap value stocks
Russell 2000 Growth	4.4%		-0.3%	Small-cap growth stocks
Russell 2000 Value	4.6%		1.6%	Small-cap value stocks
EAFE	-0.7%		-5.1%	Europe, Australasia & Far East Index
Lehman Aggregate	0.4%		1.9%	U.S. Government Bonds
Lehman High Yield	0.2%		1.4%	High Yield Corporate Bonds
Calyon Financial Barclay Index**	1.1%		-0.8%	Managed Futures
3-mo. Treasury Bill	0.0%		0.0%
All returns are estimates as of February 26, 2010. *Return numbers do not include dividends.** Returns are estimates as of February 25, 2010.

WOW rates are low....

I thought I would share what many of you have already noticed in your money market funds--the yields are LOW.  According to Barron's, the average money market fund is only earning .03% and the average tax free money market fund is at .02%.  Remember, money market funds, savings accounts and checking accounts are not investments.  Over long periods of time the earnings on these types of accounts do not even keep up with inflation.  However, the reason we keep money in these accounts is to provide liquidity--ready access to cash that is risk free.  For this benefit, savers receive paltry returns.  One of the most frequent questions I get is what to do with this money when rates are so low--the answer is: how much risk are you willing to take?  If you can stand some risk, we can buy bond funds and perhaps some stock funds.  But if you don't want to lose any money--guess what, you're stuck with these abyssmal rates.

Stock Market vs. Bond Market

Every opportunity I get I will continue to talk about the different markets, specifically the stock market and the bond market.  When you hear folks talking about "the market" they usually are referring to the stock market.  A stock represents ownership in a public company.  A bond on the other hand is a debt obligation of whoever issues the bond: it could be the U.S. government, it could be corporations, it could also be government agencies.  In general, bonds have less price volatility than stocks and are considered more conservative (this is a general statement as there are many different types of bonds, some of them quite risky).  What you really need to know from this brief post is that the two markets typically move in opposite directions.  For example, last week "the market" (the stock market) was DOWN .71% and the bond market was UP .31% (both returns are based on Morningstar indexes).  The rule of thumb for diversifying portfolios is to have your money invested in BOTH the stock market and the bond market.  The percentage of each that you should own will be dependent on your specific circumstances including how much risk you are willing to tolerate and what assumed returns your financial plan dictates for you.

Results of a bank study

A study conducted by Union Bank found that most people believe financial stress negatively affects health.  The study also indicated that 60% of those surveyed felt they were not doing what they could to get themselves financially educated but believed that being fiscally fit is as important as being physically fit.  The article lists some very good suggestions for those starting out with the financial planning process or just a reminder for those who already are on the right track.  Read the article here:
https://www.unionbank.com/company_information/company_information/news/press_release_index/press_releases/study_confirms_financial_stress.jsp


Thanks to one of you for sending this to me--I always like to pass this good information along!

Charitable Deductions for 2009

From the IRS:
People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service. Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.