Cedar Financial Advisors-News and Views

What a difference a year makes…

The 2009 Callan Periodic Table of Investment Returns was recently published. A link to the Periodic Table is here. BlackRock also publishes a table, which I prefer because the table includes a Diversified Portfolio. A link to the BlackRock 2009 table is here.  You can also click on the thumbnail image below.

Some observations:

• Large Cap Core, AKA S&P 500 Index, swung from a -37% loss in 2008 to a 26.5% gain in 2009, while fixed income, AKA Aggregate Bond Index, provided a steady return of 5.2% in 2008 and 5.9% in 2009.
• The Diversified Portfolio is composed of 35% of the Barclays Capital US Aggregate Bond Index, 10% of the MSCI EAFE Index, 10% of the Russell 2000 Index, 22.5% of the Russell 1000 Growth Index and 22.5% of the Russell 1000 Value Index.
• It’s impossible to predict with any certainty which asset class will “win” in 2010.  Where are all the pundits who predicted a 26.5% return for the S&P 500 in 2009?
• The Diversified Portfolio returned 20.8% in 209, or 78.5% of the S&P 500 all equity asset class.

The table is a pictorial view of the benefit of a diversified portfolio, which consistently provides relative returns in the middle of the pack.  It’s important to own a mix of stocks, bonds, and cash, diversified across multiple asset classes to reduce the volatility of returns in a portfolio.  You can see this by comparing the Diversified Portfolio returns to those of any single asset class over the years.

Tags: Asset Classes

January 2010: Tim helped the Ebers family with a Portfolio makeover, published in Money Magazine.  You can read about the Ebers family and the advice I provided here.

If you made charitable gifts or purchased tax-deductible memberships to any of Oregon’s arts, heritage and humanities based non-profits this year, There’s still time to receive a generous tax credit provided by the Oregon Cultural Trust.

The Oregon Cultural Trust is building a permanent endowment fund for culture, providing grant awards to cultural organizations throughout the state, and working to increase participation in cultural programming.  Since 2002, the Trust has raised $17million in contributions, including $3.37 million in fiscal 2008.

The Trust is funded by private contributions from individuals and corporations who:

1. donate to any number of non-profit cultural organization
2. make a matching gift to the Oregon Cultural Trust.

To take advantage of the Cultural Tax Credit for the 2009 tax year, a donor must follow these steps:

Step One: Contribute any amount to one or more of Oregon’s qualifying non-profit cultural organizations during 2009.  (A searchable list of 1200 qualifying organizations can be found at www.culturaltrust.org)

Step Two: Make a matching gift to the Oregon Cultural Trust before December 31^st, 2009. You can donate on-line at their secure website www.culturaltrust.org

Step Three: Take a 100%, dollar-for-dollar tax credit against your Oregon Income Tax equal to your gift to the Oregon Cultural Trust up to $500 for individuals, $1,000 for couples filing jointly or $2,500 for Oregon corporations.

To illustrate: A couple who makes a $1,000 contribution to Oregon Public Broadcasting and a $1,000 contribution to the Oregon Cultural Trust will receive a $1,000 tax credit on their Oregon Income Tax, a $1,000 deduction on their state income tax and may receive a $2,000 federal deduction. The tax benefits of charitable contributions depend on your personal tax situation. You should consult your personal tax adviser if you have any questions.  Further information about the Oregon Cultural Trust can be found at www.culturaltrust.org or by calling the Trust at 503-986-0088.

It’s that time of year, and it’s more important than ever to review your plan to ensure you are getting the best value and minimizing your total cost based on your specific health care services and prescription drugs used.

The Oregonian has a good Oregon Medicare overview and resource guide, courtesy  of Brent Hunsberger.  You can read the guide here.  The  Oregon Senior Health Insurance Benefits Assistance (SHIBA) has published a comprehensive Oregon Medicare guide which is available online here.

Prescription drug costs are typically a significant component of total Medicare costs, and the total annual cost for a given list of drugs varies significantly from plan to plan.  Many plans are raising rates, and increasing the cost of drugs in the plan.  If you have added or changed your prescription list this year, it is imperative that you review your drug plan.  Kiplinger has published a handy guide to using the Medicare prescription drug plan finder here.

Tags: Medicare

Risk management is a integral part of  a comprehensive financial plan.  Your health, family, and home are important and need to be kept safe. Join NAPFA-Registered Financial Advisor Roseann Bove, CFP, CLU in a NAPFA consumer education webinar on November 6th, 2009 at 11am pacific.  Roseann will provide information on how you can protect the things you have through life, health and medical insurance.  Click here to RSVP for the webinar.

You can learn more about this and other upcoming NAPFA consumer education webinars here.

Tags: NAPFA

If you are an Intel employee, you should find this post informative.

Earlier this year Intel shareholders approved a Company proposal to exchange underwater employee options for new options at a lower strike price. Unlike Google, who granted their employees a 1 to 1 exchange with perfect timing, the Intel options exchange is designed to be a “value for value” exchange. Intel updated the Tender Offer documents today to include the preliminary exchange ratios, which are shown below.

Intel has provided an online tool (My Option Exchange) to model different scenarios and decide, on per-grant basis, to accept or reject the Exchange. The tool has a modeling feature that allows you to use different assumptions about Intel’s stock price growth. The tool will show the “cross-over point.” It’s the point at which your current options would be worth more than the new options.

Source: sec.gov

Decision Factors

The employee presentation states that the decision factors include:

1. Current Grants – Understand the details of your current grants (# of options, grant price, expiration date)
2. New Grant – Terms of new grant (4 year vesting, expire 7 years from grant date, exchange ratio)
3. Stock Price Growth – expectations for the future value stock price
4. Value – potential option future value

Let’s include several more decision factors:

1. Tenure – how long do you expect to remain employed at Intel?  What is your view of your job and organization future prospects?
2. Retirement – do you plan to retire within the next 2 to 7 years?  Are you eligible for Rule of 75?  If so, special considerations apply.
3. Risk tolerance – what is your appetite for risk?  Would you rather have an increased likelihood of a moderate gain or the current likelihood of a larger gain? How would you feel if your current option(s) expired worthless when the new option would have provided a gain?
4. Cash flow – do you have a high priority need for extra taxable income or can you afford to treat the options as variable income?

The Bottom Line

The key variables in the analysis are your forecast of the annual stock price growth rate and your risk tolerance.  History is not a useful guide since the 10 year historical stock price trend is declining.  A reasonable assumption is that Intel future stock growth will be in line with other domestic large cap growth companies.  Semiconductor companies have historically had cyclical growth, with stock price swings larger than the broad market.  Beta, a measure of volatility of a stock relative to the broad stock market, is currently 1.2 for Intel.  For example, if your large cap growth asset class forecast is 9%, then the Intel forecast is 9% * 1.2 = 10.8%.  You will get significantly different projections based on changes on the assumed growth rate, and the sensitivity of the crossover point to changes in the growth rate will vary by stock grant.

The decreased time value of older grants that are closer to expiration is reflected in the higher exchange ratio than for new grants at a similar exercise price.  Since you can exchange on a per-grant basis, you can keep some of the existing grants to capture a portion of the upside potential if you are a “true believer” in significant expected future growth.

One more thing – the exchange ratios are preliminary and could change if there is a significant change in Intel stock price during the offer period.  Earnings are announced on October 13, during the offer period.  Be sure to re-visit your decision after the final exchange ratios are announced about 10 days before the exchange window closes.

Standard & Poors recently released the Midyear 2009 results for the Standard & Poor’s Indices Versus Active Funds Scorecard (SPVIA).   The report is now published semi-annually, and the key findings are summarized below.  The prior report was published for year end 2008 data, and reviewed on this blog post.  You can read the full report here.

• As a result of the market volatility over the past year, domestic and international equity funds have performed in line or marginally ahead of
  benchmarks. However, both taxable and tax exempt fixed income funds’ asset weighted returns trail benchmarks by large margins.
• for the past five years through June 30, the S&P 500 beat 63% of actively managed large-cap funds, compared to 71.9% in the prior report
• The S&P MidCap 400 outperformed 73% of mid-cap funds, compared to 79.1% in the prior report
• S&P SmallCap 600 outperformed 57% of small-cap funds, compared to 85.5% in the prior report
• The five-year data is unequivocal for fixed income funds. Across all categories except emerging market debt, more than three-fourths of active managers have failed to beat fixed income benchmarks. Similarly, five-year asset-weighted average returns are lower for active funds in all but two categories
• Active management advocates will take some comfort in the latest data, which shows a active managers ahead in some categories on an asset-weighted basis, and an improvement in the fund-weighted data compared to the last report.

We often hear of the benefits of active management in times of market stress and volatility.  One common assertion is that an active manager can alter a portfolio’s makeup to invest in defensive stocks or in cash to in anticipation or during a bear market. However, a recent Vanguard research paper determined that active managers “have not consistently delivered superior performance relative to a benchmark during such periods.”  Higher costs, stock picking, and market timing again proves to be a difficult hurdle to overcome, in any market environment.

Brent Hunsberger, the personal finance columnist for The Oregonian, tackled the often complex topic of annuities in his Sunday column.  My take: immediate annuities have a role in retirement income planning.  However, it’s important to understand the embedded costs and  “apples to apples” cash-equivalent yield of a variable annuity with a Guaranteed Lifetime Income Benefit before making a purchase decision.

By Brent Hunsberger, The Oregonian August 22, 2009

…It’s apparent why they’re popular and being hawked aggressively by agents. Last year’s stock market dive sent investors scurrying for cover. Still others grappled with the (real) risk that they might outlive the money they set aside for retirement.

One of their refuges: Fixed annuities. Sales of individual fixed annuities increased by 39 percent in the first half of 2009, according to LIMRA. Variable annuity sales dropped 26 percent.

This is good news in a sense. Fixed annuities pay you a rate that won’t change in the future, no matter how the insurance company invests it. Variable annuities had been all the rage, but they often weren’t the financial deal that owners thought they were getting.

“The guaranteed income is compelling to a lot of people, especially in this environment where people are looking for safety and predictability,” said Tim Kober, a fee-only financial planner at Cedar Financial Advisors in Portland. “The question becomes, at what cost.” …

Read the entire article at OregonLive.com

The Illinois State Treasurer’s office has reached a tentative agreement with Oppenheimer Funds to recover $77 million of the $85 million that plan participants lost in the Oppenheimer Core Bond Fund.  Details at this link.

Negotiations with Oppenheimer Funds include Oregon, but there hasn’t been any official communication yet from the Oregon 529 College Savings Plan.

This news bodes well for Oregon 529 plan participants who held college savings in the Core Bond fund, which lost 38 percent in 2008.

Hat Tip to Jim Blankenship, CFP ®, author of the Getting Your Financial Ducks In A Row Blog, for the Illinois info.

June 2009: Tim is quoted at Kiplinger.com in an article entitled “7 Ways Your Money Will Never Be the Same” An article about the changing investment landscape.

Read the full article

Update: Jeffery Kosnett, Senior Editor, discusses his article on ABC news

7 Ways your money will never be the same