Book Review: The Support Economy

The Support Economy: Why Corporations Are Failing Individuals and The Next Episode of Capitalism

By Shoshana Zuboff and James Maxmin

This husband-and-wife team Zuboff's a Harvard professor and author of In the Age of the Smart Machine, and Maxmin's the former CEO of Volvo and Laura Ashley give socialist utopians of yesteryear stiff competition with their manifesto for a more personalized capitalism. They strive for the pop socioeconomics of a David Brooks or a Malcolm Gladwell, but their heavy academic style may disenchant some readers before their thesis's more radical parts kick in.

Over the last two centuries, they argue, an increasingly efficient economy, coupled with a rise in democratic thinking and growing access to information, has opened up life's possibilities to increasing numbers of people. Because participation in the consumption-based economy is unavoidable, the general public looks to markets to provide "deep support" in their quest for individualization, but "are routinely punished for being complex psychological individuals in a world still fitted out for the old mass order." This macroeconomic structure treats people as either employees or consumers and inevitably hurts their feelings. Zuboff and Maxmin would eliminate the "little murders" of customer service interaction by replacing the current transaction-based model with a form of "distributed capitalism" based on a customer-supplier relationship, so semi-anonymous customer service reps will be replaced by "advocates" fully emotionally involved in their clients' needs.

It's not clear how society will make its way to the authors' dream of a fully automated lifestyle, or what life will be like for blue-collar workers and manual laborers. Pundits who celebrated the Internet's potential to thoroughly revolutionize the economy, however, will no doubt rally behind these impractical visions.

Credit: Publisher's Weekly

Retirement Matters: Is Your 401(k) Working For You?

Eighty percent of our retirement income will come from our savings in retirement plans and other after tax savings accounts. The bulk of this money will come directly or indirectly from employer sponsored 401 (k) accounts. However, most Americans pay little attention to this most important portion of savings. Many of us are guilty of spending very little time analyzing our 401 (k) investment allocations and fund selections, very few people actually review the plan costs with their sponsors and some do not even attempt to maximize their contributions to the plan. As participants in any retirement plan, you have the right to have quality investment selections in nearly every asset class at a reasonable cost.

Your 401(k) can be one of the best investments you will ever make. And if your employer is matching, it is a real “no brainer” When an employer offers 401k matching, they are guaranteeing that they will match a certain percentage of your contributions. A common match is 50 cents on the dollar. That means if you put one dollar into your 401k plan, they will match your contribution by putting 50 cents in. You just made 50% on your investment!

Now you see why it is important to maximize your contributions. The 2007 maximum contribution is $15,500 and if you are age 50 or older, you can make an additional catch up contribution of $5,000. Perhaps one of the biggest mistakes investors make is to pull back on their 401 (k) contributions because the market or their portfolio is doing poorly. However, every time the investor puts money into their 401(k), they are making a guaranteed profit up front. Besides, when the market goes down, most investors benefit because you begin buying assets at a lower cost!

I must disclose one important detail about this wonderful investment: Some companies do not have quality investment selections, while others do not have the appropriate asset classes covered. As an example, Fidelity 401(k)s are limited to mediocre funds (most have new managers) in a single fund family. And there are some plans and investment vehicles that charge very expensive fees to participate. If you fall under any of these, talk to your Plan Administrator and ask them to look into new plan options. They have a fiduciary requirement to provide you with quality plan investments at a reasonable price.

1st Portfolio, Inc. offers a retirement plan consulting service designed to bring professional, unbiased plan consulting combined with competent objective investment advice to the trustees and the participants of the plan.

Book Review: Leadership

Leadership By Rudolph W. Giuliani

I read this book back in 2002, but decided to pull it out again in light of the 2008 presidential elections. It makes for an excellent read from a historical perspective and also provides some insight on the author. -MR

From Publishers WeeklyNew York's celebrated former mayor explains how he used specific management strategies to run the city and handle crises in this captivating memoir. Giuliani's minute-by-minute account of his actions on September 11-trying to coordinate rescue efforts and reassure the populace while reeling from the deaths of firefighter friends he'd spoken to just minutes before-is harrowing. Other anecdotes are equally forceful, as when Yasser Arafat arrived uninvited to Giuliani's U.N. anniversary celebration, and Giuliani insisted on making Arafat leave while attempting to avoid an international scandal. Giuliani's main advice to leaders: surround oneself with talented people, hold daily meetings to keep everyone on track, define the core mission and make sure procedures and policies serve that mission efficiently, demand accountability from everyone (including oneself), show loyalty to employees and become knowledgeable about all subjects related to one's organization or business.

Federal Reserve Update

The Fed met in late March and decided to keep interest rates unchanged at 5.25%. This was expected and the market read the statement to mean that the Fed is no longer biased towards hiking interest rates. Subsequent to the announcement future interest rate cuts were priced into the fed funds market. This reinforced the notion that the Fed would keep the U.S. economy out of recession. The notion of an easier Fed policy diminished, though, when the full minutes from the recent meeting were released. The minutes revealed that the Fed Governors still believe inflation risk remains and could even require additional rate increases.

The strong employment report in early April seems to confirm the Fed’s inflation wariness and subsequent to the release of the minutes the likelihood of a Fed rate cut occurring declined significantly in the future’s markets. Currently, economists are debating as to whether the economy is in a mid-cycle slowdown or on its way to recession. The current market volatility is caused by this uncertainty. Stocks typically do well during mid-cycle slowdowns (which we are at the very least experiencing now), as a refreshing pullback in demand relaxes inflation pressures and allows for lower interest rates. However, history shows us that stocks don't fare so well if the economy doesn’t just slow down, but actually contracts.

Estate Tax Summary

Here is a quick summary of current federal estate tax rates. Be sure to consult your attorney before taking any recommendations listed below. If you have not updated your will and estate plan within the past 3 years, make an appointment with your attorney today!

Current tax laws concerning federal estate taxes provide an applicable exclusion amount of $2,000,000 per person. Don’t forget about your life insurance policy! This means that each person can give away during life up to $1,000,000.00 or at death a combined total of $2,000,000.00 worth of property, without any taxes being due and payable.

On May 26, 2001, Congress passed “The Economic Growth and Tax Relief Reconciliation Act of 2001,” which provides for the applicable exclusion amount to increase over time as follows:

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Additionally, current federal tax law provides for an unlimited marital deduction. This means that you may transfer an unlimited amount of property between you and your spouse without incurring any federal estate taxes. Combining the applicable exclusion amount with the unlimited marital deduction means that a married couple can have a combined estate of $4,000,000.00, which passes tax-free at the death of the second spouse. The tax rate on any amount in excess of $4,000,000.00 starts at forty-six percent (46%). To ensure utilization of the $2,000,000.00 applicable exclusion amount, both of you should have property worth at least $2,000,000.00 held in your own names or revocable trusts and not with rights of survivorship.

A typical plan to fully utilize both $2,000,000.00 applicable exclusion amounts for a married couple is to place $2,000,000.00 in a bypass trust at the death of the first spouse. The bypass trust typically provides that all income is payable to the surviving spouse and the Trustee may invade principal for the spouse’s health, support, maintenance and education. Upon the spouse’s
death, the principal is payable to the children outright or in continuing trust, free of any estate tax even on the appreciation of the assets in the credit shelter trust. The balance of the estate in excess of $2,000,000.00 is given outright to the surviving spouse and the surviving spouse, at his or her election, may place this additional inherited amount into his or her own revocable trust. Alternatively, the balance may be held in further trust. Upon the death of the surviving spouse, all of the survivor’s property is passed on to the children, either outright or in a continuing trust. The $2,000,000.00 in the bypass trust created upon the first spouse’s death, together with all appreciation therein, is not taxable again in the surviving spouse’s estate.

Warren Buffet on International Investing

Each year I look forward to reading Warren Buffet’s annual report to the shareholders of Berkshire Hathaway. The 76 year old Buffet is the Chairman of Berkshire Hathaway, a holding company that owns a diverse group of subsidiaries.

With an estimated net worth of $28 billion, Buffet is one of the ten richest men in the world and considered by many to be the best investment analyst ever. In the past, he has stuck primarily with US investments, but as he says in his report to shareholders, things are changing.

In reference to the $2.2 billion dollars he made on currency exchanges and the nearly $3 billion earned on his investment in PetroChina, Buffet said, “As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. . . the U.S. had $.76 trillion of pseudo-trade last year - imports for which we exchanged no goods or services (only money).” By doing this, Buffet said, “the US necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy, but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.”

Buffet continued, ”The ‘investment income’ account of our country – positive in every year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card.

And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay for ever-increasing amounts of interest on interest.” In addition to our trade imbalance, non-U.S. companies are gaining ground in areas traditionally considered U.S. based businesses. As an example, the world’s largest producer of steel and the largest supplier of beer are US Steel and Anheuser Bush, right? Wrong. Mittal Steel, owned by an Indian and headquartered in the Netherlands, is the world’s largest steel producer. U. S. Steel is the 7th largest producer of steel behind six other non-U.S. companies. InBev, the result of a merger of a Brazilian company AmBev and a Belgium company, Interbrew, is the largest producer of beer in the world. Anheuser Bush is the third largest, behind InBev and SAB/Miller, a South African company.

The world’s best companies continue to make huge investments outside the U.S. We must follow their example and do the same. Over the past 5 years, the EAFE Index, has had an annualized compounded return of 16% compared to a return of just 7% for the S & P 500. A balanced investment portfolio must include a heavy dose of non-U.S. investments.

Buffet summarized his thoughts on this issue by stating, “It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future, U.S. workers and voters will find this annual “tribute” so onerous that their will be a severe political backlash. How that will play out in the markets is impossible to predict – but to expect a “soft landing” is wishful thinking.”

Sector Performance Report 3-31-07

The utilities sector posted the strongest 12 month trailing return of nearly 28%, followed closely by the telecom sector at 24% annual return. The worst performing US sector in the past 12 months was the IT sector at just under a 3% total return.

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Market Summary

A recent Wall Street Journal article depicted investors riding on a rollercoaster called the “Volatiler”. Quite appropriate, since the S&P 500, like most roller coasters, ended in the same location it started. The first quarter of 2007 moved up over 2% and down over 3%, more than a 5% delta, much like the “Volatiler”. In contrast the EAFE Index (a market value weighted index of the largest companies in Europe, Australia, and the Far East designed to measure overall conditions of overseas markets) posted another excellent quarter, up 3.5%. Over the past 12 months, the S&P 500 and the EAFE were up 11.8% and 20% respectively.

Going forward, the market is likely to remain quite choppy. The housing market slowdown, which may be worsened by the growing debacle in the sub-prime mortgage market and tighter lending standards, is of chief concern to the market. Warnings by homebuilders and new federal investigations into lending practices have the market on edge as do concerns that these problems may spread into the broader economy. Further, a spike in oil prices amid growing Iranian tensions is adding fuel to the fire. These inflationary pressures are likely to keep the Federal Reserve in limbo in the short run but may allow for a drop in rates by the end of the year.

Volatility in the market creates ideal conditions for portfolio rebalancing. Make sure you do not have all your eggs in one basket or you may find yourself in the hole!

Book Review: The Black Swan

The Black Swan: The Impact of the Highly Improbable
By Nassim Nicholas Taleb

Four hundred years ago, Francis Bacon warned that our minds are wired to deceive us. "Beware the fallacies into which undisciplined thinkers most easily fall--they are the real distorting prisms of human nature." Chief among them: "Assuming more order than exists in chaotic nature." Now consider the typical stock market report: "Today investors bid shares down out of concern over Iranian oil production." Sigh. We're still doing it.

Our brains are wired for narrative, not statistical uncertainty. And so we tell ourselves simple stories to explain complex thing we don't--and, most importantly, can't--know. The truth is that we have no idea why stock markets go up or down on any given day, and whatever reason we give is sure to be grossly simplified, if not flat out wrong.

Nassim Nicholas Taleb first made this argument in Fooled by Randomness, an engaging look at the history and reasons for our predilection for self-deception when it comes to statistics. Now, in The Black Swan: the Impact of the Highly Improbable, he focuses on that most dismal of sciences, predicting the future. Forecasting is not just at the heart of Wall Street, but it’s something each of us does every time we make an insurance payment or strap on a seat belt.

The problem, Nassim explains, is that we place too much weight on the odds that past events will repeat (diligently trying to follow the path of the "millionaire next door," when unrepeatable chance is a better explanation). Instead, the really important events are rare and unpredictable. He calls them Black Swans, which is a reference to a 17th century philosophical thought experiment. In Europe all anyone had ever seen were white swans; indeed, "all swans are white" had long been used as the standard example of a scientific truth. So what was the chance of seeing a black one? Impossible to calculate, or at least they were until 1697, when explorers found Cygnus atratus in Australia.

Nassim argues that most of the really big events in our world are rare and unpredictable, and thus trying to extract generalizable stories to explain them may be emotionally satisfying, but it's practically useless. September 11th is one such example, and stock market crashes are another. Or, as he puts it, "History does not crawl, it jumps." Our assumptions grow out of the bell-curve predictability of what he calls "Mediocristan," while our world is really shaped by the wild powerlaw swings of "Extremistan."

In full disclosure, I'm a long admirer of Taleb's work and a few of my comments on drafts found their way into the book. I, too, look at the world through the powerlaw lens, and I too find that it reveals how many of our assumptions are wrong. But Taleb takes this to a new level with a delightful romp through history, economics, and the frailties of human nature.

Credit: Chris Anderson

Asset Allocation: Avoid Picking Individual Stocks

I recently attended an economic presentation by Dr. Gene Fama of the University of Chicago, the leading champion of the efficient market theory and a favorite to win the Nobel Peace prize one day. Dr. Fama stated, “I’d compare stock pickers to astrologists, but I do not want to bad-mouth astrologists.”

One of the biggest mistakes individual investors make is following the advice of the media, a stock broker or money manager on individual stock picking. Why is it that every year Money Magazine selects its top stocks to beat the market and never reports on how they performed the next? Why does Fortune Magazine list different “top money managers” each year and forgets to tell you about their selections of previous years. Why does CNBC run experts with differing opinions 14 hours per day and never tracks their recommendations? The reason is that it sells magazines and ad space!

Let’s look at some of Fortune Magazine’s “All Star” stock picks in their July 2000 edition:

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In the January 2000 issue of Time Magazine, Amazon founder Jeff Bezos was declared man of the year. If you purchased Amazon in January of 2000, your stock lost 75% of its value within a year. This year’s person of the year is “you”! The ramifications of this prediction are a little scary. This phenomenon is not limited to just stock picking either. Money Magazine’s “timely” June 2005 issue touted the virtues of buying residential real estate and denied the existence of any housing bubble. According to the magazine, “These days, everybody knows someone who has made money in real estate, and rising prices have become a national preoccupation. We are a wealthier country than we have ever been, so it makes sense that we would spend more on real estate, pushing prices to new highs. After a l l , F e d e r a l R e s e r ve Chief Alan Greenspan complained of "irrational exuberance" in 1996, more than three years before the stock boom ended in tears.”

I feel truly sorry for those that followed that advice. Once a financial trend hits the main stream, it’s generally time to get out. Over the past 20 years, money managers failed to beat their market bench marks over 80% of the time. This leaves just 20% of money managers or stock pickers beating the market on an annual basis. The problem is that different managers beat the market each year.

There is very little consistency with these managers beating the market from year to year. On the occasion that one of these star managers floats to the top, so much money flows into their portfolio that it creates a drag on future investment performance. Maybe if we can locate these emerging managers, we can beat the market more consistently. So how do we find these guys? When Peter Lynch, arguably one of the best stock pickers ever, retired from his job as manager of Fidelity Magellan, he and the executives at Fidelity spent an enormous amount of time and money scouring the investment world for the best money manager. Three money managers later, Fidelity Magellan has underperformed its bench mark index by exactly the management
fee it charges. What makes us think we can pick a good portfolio manager when Peter Lynch and Fidelity cannot?

What about the great stock picker Warren Buffet? According to Buffet, he may find 2 or 3 good stock ideas every couple of years. Mutual fund companies typically hold 150 to 250 stocks. How does a mutual fund manager find 200 good ideas? I guess they simply select 2 good ideas and 198 average ideas. Buffet also inserts himself into the management of the good ideas he selects, a likely boon to his returns. This does not happen in the traditional portfolio managementindustry. So, if we can’t pick stocks that consistently beat the market and we can’t pick managers that consistently beat the market, what should investors do? Stop trying to beat the markets! Put your savings to work and earn a market rate of return. As investors, we are entitled to the market return. Anything less is our own mistake. How do we get this?

In order to answer this, we need to understand some basic facts about what the “market” is and risk. Here is a table showing the typical market asset classes and their performance over the previous ten years.

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As you can see, different asset classes perform differently from year to year. Many times one year’s winner is the next year’s loser. By diversifying among these asset classes in such a way that meets your individual risk tolerance, you can obtain market returns with an appropriate amount of risk. This can be done by purchasing index funds and exchange funds that mirror the asset classes. Now, if we simply select the asset mix that meets risk and return profiles, we can earn the market return and go play golf!

If you need help, don’t hesitate to call. This is our specialty!!!

Real Estate Corner

The real estate market softened considerably during 2006. There have been pockets of depreciation in certain parts of the country and in the higher priced homes. I have seen drops of as much as 15% from recent peaks in the same markets. However, the overall market seems to have stabilized. We have not as yet experienced a significant broad based drop in home prices.

The Mortgage Bankers Association referred to 2006 as “A Normalization of the Housing Market”. In the aggregate, residential real estate seems to have remained roughly the same as a year ago. Home sales were lower by 10%, with new homes falling by 17% and existing homes falling by 8%. (This excludes data from December 2006, which will not be released until the end of January).

According to the Office of Federal Housing Enterprise Oversight, “US Home prices rose in the 3rd quarter, but the rate of appreciation declined significantly and some areas experienced declines. Nationally, home prices were 7.73% higher in the third quarter of 2006 than they were a year earlier.” Idaho topped the list of states with an annual increase of 17.5%, while Michigan, home of Ford and GM, was at the bottom with a slight price decline.

In our local market, the average sales prices of homes in Northern Virginia declined 4% in November compared to a year ago. Homes are also taking longer to sell, averaging 85 days on the market compared to just 35 days a year ago. There were also 30% fewer home sales than a year ago. One of the most interesting phenomenons is the switch from a seller’s market to a buyer’s market. Over the past 5 years, buyers have been paying on average 2% less than the listed price. However, in 2006, this number has increased to 7%.

I expect 2007 to be a true buyers market with sellers willing to provide handsome concessions and lower prices to entice buyers. If rates move north of 6.75%, there may be some true housing depreciation. Most economists however, are still expecting a soft real estate landing with a flat market over the next 2 years.

Sector Performance Report 12/31/06

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Market Summary

2006 turned out to be a terrific year for most investors. Stocks rose more than Wall Street analysts predicted after the Fed. halted 2 years of interest rate increases while energy prices fell 22% from their high in July. The S & P 500 was up 14%, the Dow Jones Industrial Average was up 16% and the NASDAQ moved up 9% for the year. Overall, the equities market performed remarkably well in spite of pressures from higher interest rates and energy prices.

In writing this newsletter, I reviewed my predictions from last year and would like to report the results. I suggested large cap stocks with high dividends or “value stocks” would have a big year. In fact, this asset class was up 23%. I also suggested the Fed would stop raising rates after another 1/2% increase. The Fed did stop, but not until after raising short-term rates another 1%. I suggested the energy and real estate sectors were due for a correction. I was way off here. The energy sector posted a strong 21% return beating the S & P 500 by 7%.

The real estate market was mixed. Commercial real estate continued to post excellent returns while residential real estate fell considerably. As for mortgage rates, I predicted a 1/2 % increase in rates. As predicted, 30 year fixed rates mortgages did increase from 6.25% to 6.75%; however, they came back down to 6.25% ending the year where they started.

For the record, my predictions are done mainly for sport. Predicting short term economic trends is more luck than skill and my predictions should not be acted upon at home. Market timing should never be substituted for sound asset allocation and rebalancing strategies.

Expectations for 2007 That thought in mind, let’s see what may be in store for 2007. As the current economic cycle matures, I expect larger stocks to perform better. This sector has been an underperformer since the late 90’s and is due for a good year. 2007 may be the year the S&P 500 and Large Cap growth stocks out perform all other asset classes. I also expect Healthcare and Financials to be in the top US sectors. As for rates, the market is pointing to a 50 basis point drop by the Fed and mortgage rates to lower by about 1/2%

Book Review: The Alchemist

The Alchemist: A Fable About Following Your Dream by Paulo Coelho

Paulo Coelho's enchanting novel has inspired millions of delighted readers around the world. This story, dazzling in its simplicity and wisdom, is about an Andalusian shepherd boy named Santiago who ventures from his homeland in Spain to North Africa in search of a treasure buried in the Pyramids.

Along the way he meets a beautiful, young gypsy woman, a man who calls himself a king, and an alchemist, all of whom point Santiago in the direction of his quest. No one knows what the treasure is or if Santiago can surmount the obstacles along the way through the desert. But what starts out as a boyish adventure to discover exotic places and worldly wealth turns into a quest for the treasures only found within.

Lush, evocative, and deeply humane, Santiago's story is an eternal testament to following our dreams and listening to our hearts. - Taken from www.santjordi-asociados.com

This is an excellent little book about following your heart. Read it with your children and enjoy a wonderful fable. –Michael Rebibo

Retirement Planning

Does Your 401(k) Plan Have All the Elements of a Successful Retirement Plan?

Planning and saving for retirement is a major financial issue for most Americans. We spend decades worrying about whether or not we will have enough money saved for the goal of being financially independent. One of the best tools to improve our odds of successful retirement is our company retirement plan. Since most companies today offer only defined contribution plans (primarily 401(k) and Simple Plans), we will focus on the key aspects of successful defined contribution plans. This is written for the plan sponsor/trustee, usually the owner or top executive in smaller businesses or the human resources director in larger organizations.


The key elements of a successful Retirement Plan are as follows:

Compliance: A successful retirement plan is in compliance with all necessary testing and government filings, distributes all legally required information to participants first and is administered exactly as the plan document is written. The fiduciaries of the plan, the trustees, members of the plan committee and members of the board of directors, meet the fiduciary requirements mandated under ERISA, the federal law that regulates retirement plans. Fiduciaries must exercise the “care, skill, prudence, and diligence” of an experienced fiduciary in fulfilling his/her duties. Fiduciaries are responsible for what they “should know” about investments-as opposed to what they actually know. More than one court has said, “A pure heart and empty head are not enough”. All plans should have an Investment Policy Statement which will assist the fiduciaries in meeting these stringent requirements.

Participation: This is the litmus test for a successful 401(k) plan. Average participation rates vary by industry and wage levels. The overall participation rate across all industries is about 75%. A successful plan will have higher than average participation rates.

Savings Percentage: The more money people put aside in their 401(k), the greater their chance for a secure retirement. Also, the higher the rate, the easier it is to pass discrimination testing. The overall average employee deferral percentage is between 6% and 8%.

Asset Allocation/Investment Selection: A 401(k) is fundamentally a long term savings and retirement plan. The difference between 6%, 8% and 10% rate of return over 20-, 30- and 40- years can be enormous. Asset allocation, or the relative percentage a participant puts into cash, bonds, and stock, is the fundamental investment decision and can have a huge impact on the funds available for retirement. Each plan must have the appropriate investment classes available to meet the Prudent Investor standards.

Investment Performance: In addition to having the appropriate investment options, the absolute and relative performance of the investments must be monitored at least annually against the appropriate benchmarks. In addition, high cost plans drain away returns from participants’ accounts.

Costs and Administrative Efficiency: It is the plan sponsor’s fiduciary duty to insure that the fees of the plan are “reasonable”. Many plans have fees buried inside the underlining mutual fund investments that increase overall fund costs. In order to know whether or not a plan's costs are reasonable, the plan sponsor must know what the actual costs are. This requires some due diligence on the part of the sponsor. An annual review of plan expenses will assist in determining reasonability.

Ask yourself the following questions:

1. Was your retirement plan provided to you by an objective party other than an insurance company, investment brokerage house or other commission oriented firm?

2. Are you happy with the performance of the funds in your plan? Are you or your investment advisor able to select from the best funds available in the market today? Are you or your advisor reviewing the performance of your funds and comparing them to their corresponding bench marks on an annual basis?

3. Have you reviewed the total costs of your retirement plan, both disclosed and undisclosed?

4. Does your retirement plan provider acknowledge the fiduciary responsibility under ERISA sections 3(38) and 405(d)(1)?

5. Is your overall participation rate in excess of 75%?

6. Is your overall savings rate in excess of 6%?

7. Does your plan have an Investment Policy Statement? Is this reviewed annually?

If you answered no to any of the above questions, consider having 1st Portfolio provide you or your company with a qualified plan review. We help plan sponsors make their plans more successful by increasing participation and savings rates and helping participants allocate their assets in an age and risk-appropriate manner. We also assist plan sponsors in meeting their fiduciary obligations by assisting them with the investment selection and monitoring process as well as in controlling and lowering the total cost of the plan. We provide our business services in a transparent manner openly discussing our fees and avoiding any real or perceived conflicts of interest. We act as fiduciaries to the plan, always keeping the interests of the participants and their beneficiaries as our top priority.

Children & Money: Instill the Value of a Dollar at an Early Age

Most children today do not actually know where money comes from. Think about how different the world is from our childhood. While technology has greatly simplified our monetary transactions, it has created a significant disconnect for our children. Items are seldom purchased with cash; rather we use a magical plastic card to fulfill their material wants. Paychecks are deposited automatically into banking accounts, while money appears to be earned simply by typing a secret code into an Automated Teller Machine. Bills are paid electronically or automatically. To top it all off, there is very little taught in school on the subject of money. How are our children to learn?

When my son was five, we ordered him a scooter off the internet. As soon as I completed the transaction, he sprinted down to the mailbox to look inside. He came back disappointed to learn that the scooter had not magically appeared in the mailbox. I had to explain not only how the financial transaction occurred, but also how the order was fulfilled and then eventually mailed to our home. The instant gratification world our children and most of us live in does not prepare us for the long-term focus required to manage our money and create wealth and prosperity.

What can we do? Here are a few ideas to get you started:

1. Break the spending habit.

2. Explain how money flows through the economy. For example, “Our money is earned by creating some sort of value in our community. The greater the value created, the greater the money earned. This money is generally deposited directly into our account via electronic credits. Some of the money earned is immediately saved in a different investment account for our future. Some of the money is given to our favorite charities and/or our religious organizations. What is left is ours to spend on our way of living. We use credit cards to buy things but pay them off each month with the money we earn. If we spend too much, we have to pay the credit card company interest. This makes it harder for us to pay our expenses the next month”.

3. Consider replacing the allowance, an “entitlement concept”, with specific payments for specific services. In other words, let them earn their “allowance”. One of my clients implemented this with his children. The children asked if they were able to reduce the household utility bills by a percentage, could they keep 50% of the savings. Although the kids wanted to eat dinner in the dark and kept turning the lights out on their parents, they were able to cut the bills by $30 per month and kept $15 for themselves!

4. Open a savings account with their money. You can take them down to the local bank or better yet, open a mutual fund.

5. Teach them about interest and compounding! After completing the above step, your children will truly begin to understand this.

6. With the exception of birthdays and holidays, require your children to buy all or part of the items they really want. Teaching your children to earn money and buy the things the want will help them to develop the skills that will last them a lifetime.

7. Suggest they begin giving some of their savings to charity. If possible, let them experience your giving directly.

8. Teach them that it’s a “round world” that we live in. The more you give, the more get. Another similar concept is to “Pay it Forward”.

9. Together, learn how to sell things on eBay. This will provide them with many valuable tools that will help them in the future.

10. Teach them the importance of planning for their future. As we all know, a failure to plan is a plan to fail. Encourage them to save money for their future. If they are old enough to earn money outside the home, have them open a Roth IRA. Have them save up for the really big things they want. If you have your child save up for that new X-Box, they will develop a sense of accomplishment, take better care of their belongings and begin to appreciate the value of a dollar.

Market Summary

The legendary Dow Jones Industrial Average Index reached a record high of 11,750 in September. It reached this magical peak only for a few seconds during the day and closed below the record. In fact, if you take inflation in to account, we are still a long way from a record. The DJIA index would need to be around 13,000 if you adjusted for inflation. You need to go back to January of 2000, during the peak of the dot com era, to find the market in a similar range. Today’s record comes with an abundance of caution. Investors and consumers share concerns over the high cost of energy, the war in Iraq and a weakening real estate market that threatens to knock the footings off the economy and send us into recession.

As usual, there is very little consensus as to whether we will pierce through this long standing market top into new higher territory in the months and years to come, or will we plunge into recession as we did in 2001 after the last time we reached this record. What we do know is this: relative to company earnings, the prices of US stocks as a whole are considerably cheaper than they were in 2000. In addition, the fall out from the Enron and WorldCom corporate disasters has eliminated a significant amount of corporate waste.

The S&P 500, the index measuring the 500 largest US stocks by their market capitalization was up a 5.2% for the quarter, while the EAFE Index (a market value weighted index of the largest companies in Europe, Australia, and the Far East designed to measure overall conditions of overseas markets) was down -2.92% over the same period. Year to date, the S&P 500 and the EAFE idecies were up 8.79% and 10.06% respectively. Why the big jump? Fed Chair Ben Bernanke and his friends at the Fed finally stopped raising rates. This, coupled with a drop in energy prices created a new market euphoria. Debt payments and energy costs have a huge impact on consumer spending.

Sector Performance Report 9-30-08

The 12 month trailing returns for the energy sector fell to zero while the telecommunications, health and financial sectors rebounded strongly after being in the cellar for a few years. As so often is the case, last year’s winners are this year’s losers.

Book Review: It's Not About the Bike

It's Not About the Bike: My Journey Back to Life
by Lance Armstrong, Sally Jenkins

This is a fantastic read about Armstrong’s struggle with cancer only to recover and win the Tour de France. It’s a great motivational book that shows that if you truly believe, you can accomplish almost anything. –Michael Rebibo, CFP®

Estate Tax Summary

Here is a quick summary of the current federal estate tax laws. Be sure to consult your attorney before taking any recommendations listed below. If you have not updated your will and estate plan within the past few years, make an appointment with your attorney today!

Current tax law concerning federal estate taxes provides an applicable exclusion amount of $2,000,000 per person. This means that each person can give away during their life up to $1,000,000 or at death a combined total of $2,000,000 worth of property, without any taxes being due and payable.

On May 26, 2001, Congress passed “The Economic Growth and Tax Relief Reconciliation Act of 2001,” which provides for the applicable exclusion amount to increase over time as follows:

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Additionally, current federal tax law provides for an unlimited marital deduction. This means that you may transfer an unlimited amount of property between you and your spouse without incurring federal estate taxes. Combining the applicable exclusion amount with the unlimited marital deduction means that a married couple can have a combined estate of $4,000,000, which passes tax-free at the death of the second spouse to die. The tax rate on any amount in excess of $4,000,000 starts at forty-six percent (46%). To ensure utilization of the $2,000,000 applicable exclusion amount, both of you should have property worth at least $2,000,000 held in your own names or revocable trusts and not with rights of survivorship.

A typical plan to fully utilize both $2,000,000.00 applicable exclusion amounts for a married couple is to place $2,000,000.00 in a bypass trust at the death of the first spouse. The bypass trust typically provides that all income is payable to the surviving spouse and the Trustee may invade principal for the spouse’s health, support, maintenance and education. Upon the spouse’s death, the principal is payable to the children outright or in continuing trust, free of any estate tax even on the appreciation of the assets in the credit shelter trust. The balance of the estate in excess of $2,000,000.00 is given outright to the surviving spouse and the surviving spouse, at his or her election, may place this additional inherited amount into his or her own revocable trust. Alternatively, the balance may be held in further trust. Upon the death of the surviving spouse, all of the survivor’s property is passed on to the children, either outright or in a continuing trust. The $2,000,000.00 in the bypass trust create upon the first spouse’s death, together with all appreciation therein, is not taxable again in the surviving spouse’s estate.