College Financial Aid Form Simplication Coming

The U.S. Department of Education announced recently that the Free Application for Federal Student Aid (FAFSA) will be shorter in length and more user friendly. The government uses this application to determine a student’s eligibility for financial aid, as well as, most colleges use it to gauge a student’s financial needs.

The Department of Education has promised to reduce the number of questions by 25% and to reduce the online screens from 30 to 10. The changes to the form include eliminating questions that don’t apply to a specific student, providing quicker estimates and streamlining information from the IRS. Some of the changes are currently in place with the rest to follow over the next few months.

Beginning in January, students will have easier access to income information from the IRS when applying on-line (which 98% of students do) for the spring semester. The goal is for tax return information to be downloaded from the IRS to the FAFSA form, which will save time and increase accuracy.

Go Figure

As a long time reader of Sports Illustrated, “Go Figure” is the name of one of my favorite features. “Go Figure” is a collection of interesting and surprising statistics.

Investment News, a publication for financial advisors, had the following items in their “Go Figure” section in the June 15, 2009 issue:

*80% of institutional investors (professionals, pension plan managers, etc.) thought the S & P 500 index will return to 1,200 by the end of 2011. It is currently around 895. That would be an increase of 34% from today’s level.

*However, in an Associated Press poll, 52% of the people surveyed thought that now is a bad time to invest in stocks.

While we do not believe in crystal balls and cannot predict the future, think about the above 2 figures. If an item is on sale, people are more likely to buy it. However, when it comes to stocks, many people will invest only when it “feels right.”

Our role as financial advisors is to help our clients have the discipline to adhere to their financial plans. We assist our clients in being able to stick to their planned asset allocation. This discipline can lead to buying low and selling high.

So even if it does not “feel right” to be invested in stocks now, we think it makes sense for investors, after analyzing and determining an appropriate investment plan, to purchase stocks now or maintain their stock positions for the long run. By doing this, if the market does increase as many professionals above predict, our clients will benefit. They will not benefit by sitting on the sidelines waiting for “the right time to invest.”

We’ll check back in 2011 and see who is right!

Social Security Projections

Recent Congressional Budget Office (CBO) publications and Obama administration comments indicate that Social Security payments may not increase in 2010. This would be the first time in three decades that there may not be an increase.

The lack of a cost of living adjustment may be compounded by increases in Part B Medicare premiums and drug coverage premiums. Thus, many Social Security recipients may find an overall decrease in their net checks during 2010.

The lack of Social Security increase would be due to very low levels of inflation over the past year.

The Trend Against Active Management

One of our core stock investment philosophies is that it is difficult to pick active money managers, in advance, who will outperform their respective benchmarks, over a long period of time. Active managers are those that try to pick the best stocks because they think they can outperform others.

The academic evidence against the success of active management, and for passive management, is very strong. An article in today’s Wall Street Journal* stated that “a growing number of big investors are concluding that stock and bond pickers failed to add any value during the market turmoil and are shifting to index funds.”

“Active managers have not given us the added performance in a down market that we hoped for,” stated Bill Atwoood, executive director of the $9 billion Illinois State board of Investment. He expressed disappointment with both large and small stock managers.

The evidence that we have reviewed over time shows that this trend prevails in markets over time, in the US, International and Emerging Markets, particularly if taxes and trading costs are considered.

For more information on our investment philosophy, please contact us.

* Wall Street Journal, 6/22/09, “Active Managers Get the Cold Shoulder”

A Perspective from the Other Side

For stock investing, we adhere to a “passive” strategy, which is based on the strong and extensive academic evidence which shows that “active” money managers do not outperform their respective benchmarks over a long period of time.

In a recent Wall Street Journal article,* the Journal said “while the Standard & Poor’s 500 index was down about 38% in 2008, the vast majority of actively managed stock funds lagged behind that mark.”

One of the top active money managers in the business, Bob Rodriguez, of the FPA Capital mutual fund and past Morningstar Fund Manager of the Year, said, “Let’s be frank about last year’s performance. In a word, we stunk. We managers did not deliver the goods and we must explain why…If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk.”

We agree, which is one of the fundamental philosophies of our investment strategy. We do not think that over a long period of time, investors can consistently identify, in advance, managers who will outperform the market.

Rodriguez was further quoted: “If portfolio managers and analysts cannot recognize the greatest credit blowoff in the last 80 years, when will they?…If active managers continue to adhere to their old practices, we should see a contraction in the active mutual-fund management universe in the next five to 10 years.”

Besides questioning the benefits of active management, Rodriguez is also providing another example of the problem with active management, which is that you need a fund manager. Rodriguez is taking a one year sabbatical from his fund “to recharge his batteries” beginning on January 1, 2010. While he may very well deserve the time off, his investors hired him based on his past record and now he will not be steering the ship. Fund managers and their staff of analysts are continually changing jobs. So why do investors pay for active management?

To learn more about the advantages of our strategy, please contact us.

*Wall Street Journal, June 5, 2009, Fund Track

Did you know that …..?

  • Many asset class categories are up 20 or 30% for the 2nd quarter of 2009, as of June 10, 2009 (for the period 4/1/09-6/11/09). The media focused great attention on the downward losses of the stock market, but much less has been publicized about the increases since March, 2009.
  • Bill Gross, one of the top active bond managers in the world, recently took over the management of one of his firm’s closed-end fixed income funds, which lost 45% during 2008. The huge loss by the PIMCO High Income Fund is an example of how many fixed income investors, thinking they were invested for stability, got terribly burned in 2008. The fund was invested in high yield corporate bonds, which is another way of saying they were not holding good quality,investment grade bonds of short maturities (which is what we invest in for our clients).
  • Interest rates on US Treasury bonds have increased dramatically in recent weeks and months. relative to the lower levels they were at. For example, since March 11, 2009, the yield on a 5 year bond has increased by almost 1%, from 2% to 3%. The 10 year bond yield has increased from 3% to 4.18%. For investors holding long term bonds, a rise in interest rates will cause a huge loss in the principal value of their bonds. For example, Morningstar reported on June 11 that long-term government bond funds were down more than 19% year to date, through June 10, 2009. We advise our clients to hold short term fixed income investments. Please contact us to review your bond holdings, as investors holding long term bonds may be facing huge principal losses in the future, if interest rates continue to rise.

Tax Efficient Funds a Thing of the Past? Not for us.

A recent article* by cited that a number of major mutual fund firms were closing some “tax efficient funds.” The reasons for the closings were that the funds had not attracted sufficient dollars, that investors may not feel these funds are needed or that they are too “gimmicky.”

We strongly disagree and feel that tax efficient mutual funds are very appropriate for taxable investments (investments that are not in retirement plans or IRA accounts). One of the primary benefits we can provide to our clients is the proper placement of their investments in the most tax advantageous investments. The tax efficient stock mutual funds that we recommend pay special attention to strategies that minimize the taxes that would be incurred by their shareholders. They do this by utilizing various trading strategies, tax loss harvesting and making sure that the timing of stock sales is most tax effective (such as paying attention to long term v. short term tax selling). Most regular stock mutual funds pay minimal attention to these issues.

The lack of investor attention and interest in tax-efficient funds is reflective of many investors’ short term memories. Just a few years ago, and certainly in the late 1990s, mutual funds and managed brokerage accounts generated huge taxable gains and distributions. While many mutual funds may hold tax losses now, that will not always be the case. Investors should continue to utilize tax efficient mutual funds, as that will provide them with the best opportunity for maximizing their after-tax investment return.

*, Fund Times, May 25, 2009