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Investors look to a new decade
January 28, 2010

If you feel your portfolio hasn’t made much progress over the last ten years, you’re not alone. Historians may well look upon this period as a “lost decade” for investors.

It’s difficult to remember that the environment was completely different at the outset of this decade. As the 1990s came to a close and the world prepared to celebrate the start of a new millennium, economic optimism was peaking and the stock market was wrapping up two consecutive decades of superior performance.

What a difference a decade makes. From 2000 through 2008 (a nine-year period), the stock market generated an average annual return of -3.60 percent (based on the Standard & Poor’s 500 stock index, an unmanaged index of stocks). Thanks to a recovery in 2009, the average annual return for the entire decade will be slightly better than that, but still most likely in negative territory.

This came on the heels of what was probably the greatest bull market in the history of stocks. The S&P 500 index returned 17.55 percent on an average annual basis from 1980 through 1989, and 18.20 percent for the ten-year period that ended in 1999. This far surpassed the historic annual return for stocks, in the 9 to 10 percent range.

Though it might’ve been painful to endure if you were actively invested in the market in recent years, there is another way to look at it: you have survived one of the worst decades of stock market performance ever recorded.

Looking back at the history of the market, the only other decade in which stocks performed so poorly was the 1930s, the era of the Great Depression. In all other decades leading up to the 2000s, the broad market (as measured by the S&P 500 or comparable yardsticks) generated positive returns.

Watch for the tide to turn

The stock market reached its low point in the current cycle in early March, 2009. Still, the major measures of stock market performance, including the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index, are all still well below the peaks they reached in 2007.

Will the market malaise continue? Factors such as economic trends will have a lot to do with where stocks go from here. History, at least, may provide a glimmer of hope. The market, as measured by the broad S&P index, has never suffered two consecutive decades of poor performance. The negative markets of the 1930s were followed by the 1940s, which generated an average annual return of 9.17 percent (a period that included World War II).

The next weakest decade (until now) was the 1970s, an era of oil price shocks, the Watergate scandal and high inflation and interest rates. The S&P 500 returned just 5.9 percent on an annualized basis for that ten-year period. At the end of the 1970s, one business magazine suggested that equities might never again be considered an attractive investment.

Then came the booming 1980s and 1990s, a 20-year period where the market averaged a return of slightly less than 18 percent per year. The market’s past performance is not an indication of what you might be able to expect in the years to come, but there is some encouragement in the historical record. For stocks to match what has been the historical normal return, some catching up may need to occur in the years to come.

It is important to keep in mind that on a year-to-year basis, stock market performance remains fairly unpredictable. If you are able to maintain a long-term investment perspective, it is more likely that you can ride out the down periods in the stock market in order to benefit from the long-term potential equities can provide.

As you assess the performance of your own portfolio, you need to assess what mix of stocks (compared to other types of assets such as bonds, real estate and cash-equivalent investments) is most appropriate for you. This is an individual decision, based on your own investment time horizon and risk tolerance.

A new opportunity with Roth IRAs in 2010
January 21, 2010

When budgeting for retirement, it’s helpful to bear in mind that money in tax-advantaged accounts today could be subject to income taxes upon withdrawal. For this reason, many investors are looking to diversify their sources of income in retirement from a tax perspective. One vehicle to do so, the Roth IRA, will undergo important changes in 2010 which could potentially make it an attractive investment option for you.

The most noticeable feature of a Roth IRA is that earnings grow on a tax-deferred basis, but, if holding period requirements are met, all distributions can be received free of tax. That means all of the investment growth you accrue in a Roth IRA will potentially be yours to keep with none of the return lost to taxes.

Although you can make contributions to a Roth IRA on an annual basis (if you meet income requirements), you also have the ability to convert existing IRA or workplace retirement plan (such as your 401(k) plan) assets to a Roth IRA. There are immediate tax consequences when the conversion occurs. Any pre-tax contributions and all earnings built in the account being converted will be subject to current income taxes.

A different rule for 2010

A significant change in tax laws will occur effective at the beginning of 2010 when income limits related to a Roth IRA conversion are eliminated. Whereas, in the past, single filers with a modified adjusted gross income above $100,000, or married couples filing separate tax returns, were not eligible to complete the conversion, under the new rules, nearly everybody, regardless of income level, will qualify to complete a conversion.

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), in addition to removing the income limits for Roth conversions, also allows a unique opportunity for Roth conversions that occur in 2010 only. The law stipulates that any tax liability incurred as part of a Roth IRA conversion in 2010 can be deferred and divided into the 2011 and 2012 tax years. In other words, if $100,000 in assets were converted to a Roth IRA and subject to taxation, there would be no impact on your tax liability for 2010. Instead, $50,000 of the converted amount would be claimed on the 2011 tax return, and the other $50,000 of the conversion claimed on your 2012 tax return. The two-year spread of taxation is the default, but investors will have the option to claim the associated taxation in 2010.

Roth not an automatic decision

While the concept of generating a stream of income that is potentially free of income tax is appealing, a Roth IRA conversion is not necessarily the best choice for everybody. It is best suited for those who:

• don’t need access to money in the account for the first five years after the account is established (ideally, the holding period will be even longer to allow more tax-free growth in the account);

• are able to pay the tax due on the conversion from money that is not part of the account being converted (to keep as much money invested in a tax-advantaged way as possible);

• expect to be in a higher tax bracket in retirement, a clear benefit if tax-free withdrawals can be taken from a Roth IRA at that time.

There are additional considerations, such as the impact on your estate and the ability to leave your heirs with inheritance that could potentially be available to them on a tax-free basis for years to come.

Your decision to convert is reversible

If you are uncertain whether a Roth IRA conversion is right for you, the good news is that the government gives you the ability to choose a “do-over.” Suppose you decide to convert an existing IRA account to a Roth IRA in January 2010. As you are completing your 2010 tax return in 2011, you determine that the conversion was not in your best interests. You can still, up to your tax-filing deadline, including the extension period (as late as October 15th in the year following the conversion) choose to recharacterize your IRA dollars back to a traditional IRA, foregoing the Roth IRA conversion and the tax liability it would have created.

This is one of many variables that can come into play as you consider whether to complete a Roth IRA conversion. Research your options carefully, and be sure to consult with a tax advisor before making any decisions.

What’s so hard about going back to school? Paying for it
January 15, 2010

In light of the challenging job market, many people are wondering if now is the right time to go back to school. Whether to finish an undergraduate degree or enter into an advanced degree program, deciding to seek additional education may be the easiest part of the task. Much more challenging, particularly in these economic times, is finding a way to pay for it.

If you are currently working and up to the task of juggling school and office responsibilities, you may want to find out if your employer offers any type of tuition assistance program. Many companies are willing to either pay part or all of the tuition costs associated with higher education, or reimburse you for tuition at a later date if you remain with the company for a required period of time. If that option is available to you, college will be much more affordable, though it will require you to arrange your class schedule around your working hours.

Other funding options

If you have been laid off, check to see if there are funding opportunities in your community, your state or through the educational institution you plan to attend. In some cases, there may be education grants available to those who have lost their job and are seeking to further their education in order to improve future hiring prospects. Some communities have special programs to help adults fund education efforts.  As you consider your options, be sure to contact the financial aid office of the educational institution you are attending.

Standard college funding programs, such as grants, loans and even scholarships are available to non-traditional students as well as professionals who are looking to earn an advanced degree. The availability of grants (money that does not have to be repaid) is typically based on financial need, but you should consider applying to determine your eligibility.  Be sure to check all of your options, starting with a visit to the government’s education funding website, www.fafsa.org.

Other common ways to finance graduate education include trading out your services as a teacher, researcher or advising assistant in return for tuition and other expenses. You may find that your relevant experience and previous education are marketable skills a university can use in exchange for free or reduced tuition.

Plan ahead if you can

If you plan to return to school in the future, put yourself in a better position to make it happen by starting to save money toward that goal today. One option is a 529 education savings plan. The money you put away in a 529 plan is invested in mutual funds or similar products. You can choose among several investment options.

Earnings generated in the account are not subject to current taxation and when you take money out to pay for qualified education expenses, no federal income taxes are assessed (state taxes may or may not apply). If you change your mind and don’t go back to school, you can choose to apply the funds for the benefit of your children or others to help them pay for education expenses.

Investors look to a new decade
January 6, 2010

If you feel your portfolio hasn’t made much progress over the last ten years, you’re not alone. Historians may well look upon this period as a “lost decade” for investors.

It’s difficult to remember that the environment was completely different at the outset of this decade. As the 1990s came to a close and the world prepared to celebrate the start of a new millennium, economic optimism was peaking and the stock market was wrapping up two consecutive decades of superior performance.

What a difference a decade makes. From 2000 through 2008 (a nine-year period), the stock market generated an average annual return of -3.60 percent (based on the Standard & Poor’s 500 stock index, an unmanaged index of stocks). Thanks to a recovery in 2009, the average annual return for the entire decade will be slightly better than that, but still most likely in negative territory.

This came on the heels of what was probably the greatest bull market in the history of stocks. The S&P 500 index returned 17.55 percent on an average annual basis from 1980 through 1989, and 18.20 percent for the ten-year period that ended in 1999. This far surpassed the historic annual return for stocks, in the 9 to 10 percent range.

Though it might’ve been painful to endure if you were actively invested in the market in recent years, there is another way to look at it: you have survived one of the worst decades of stock market performance ever recorded.

Looking back at the history of the market, the only other decade in which stocks performed so poorly was the 1930s, the era of the Great Depression. In all other decades leading up to the 2000s, the broad market (as measured by the S&P 500 or comparable yardsticks) generated positive returns.

Watch for the tide to turn

The stock market reached its low point in the current cycle in early March, 2009. Still, the major measures of stock market performance, including the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index, are all still well below the peaks they reached in 2007.

Will the market malaise continue? Factors such as economic trends will have a lot to do with where stocks go from here. History, at least, may provide a glimmer of hope. The market, as measured by the broad S&P index, has never suffered two consecutive decades of poor performance. The negative markets of the 1930s were followed by the 1940s, which generated an average annual return of 9.17 percent (a period that included World War II).

The next weakest decade (until now) was the 1970s, an era of oil price shocks, the Watergate scandal and high inflation and interest rates. The S&P 500 returned just 5.9 percent on an annualized basis for that ten-year period. At the end of the 1970s, one business magazine suggested that equities might never again be considered an attractive investment.

Then came the booming 1980s and 1990s, a 20-year period where the market averaged a return of slightly less than 18 percent per year. The market’s past performance is not an indication of what you might be able to expect in the years to come, but there is some encouragement in the historical record. For stocks to match what has been the historical normal return, some catching up may need to occur in the years to come.

It is important to keep in mind that on a year-to-year basis, stock market performance remains fairly unpredictable. If you are able to maintain a long-term investment perspective, it is more likely that you can ride out the down periods in the stock market in order to benefit from the long-term potential equities can provide.

As you assess the performance of your own portfolio, you need to assess what mix of stocks (compared to other types of assets such as bonds, real estate and cash-equivalent investments) is most appropriate for you. This is an individual decision, based on your own investment time horizon and risk tolerance.

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