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The last time these criteria were met was in 1997, an excellent year for stocks. If they are not met next month, however, it does not mean that investors should expect a rotten 2006. Since 1997 there have been five negative Januaries that nonetheless began positive years for the Standard & Poor's 500-stock index. That number includes the current year, which will show a gain in the index unless stocks sink this week. But Ms. Yamada has concerns about the market that extend past January. Volume has been falling on each rally, especially in rising stocks, a sign that buying is weakening. And the time cycles that she follows suggest that a market top is near. "It's a very mixed picture out there," she said. "The four-year cycle is turning down and could take you part of the way into 2006. It could provide a little bit of a negative draft." But she does like some industries, including energy, mining, railroads and engineering. If there is a market pullback, she said, those sectors "would be the ones we would want to move into." Those that she would rather avoid include automobile manufacturing, broadcasting and publishing. Whether such a pullback will occur may become known in just over a month. Her indicator "is something we play around with," Ms. Yamada emphasized, "but if January is off to a roaring start, you probably have a bull market ahead of you."
"I'm concerned about small caps, which have begun to lag," said Stuart Schweitzer, global markets strategist at J. P. Morgan Fleming. Small caps can be very sensitive to changes in interest rates, while midcaps are more insulated from such movements. Some analysts expect that the Fed will continue to raise interest rates at least through next spring. Midcaps certainly sprinted ahead of small caps this year. The Russell 2000 index - a common proxy for small-cap stocks - is up 5.35%, compared with a 13.9% gain in the Russell Midcap index. And many investors are betting that midcaps will keep outperforming the small fry next year. In the first three quarters of 2005, investors put more than $21 billion into midcap mutual funds, while putting less than $3 billion into small-cap funds, according to Lipper. Opinion is more divided over how large caps will fare in 2006. This year, the S&P500 is up 4.68%, and investors took more than $50 billion out of large-cap funds in the first three quarters. Mr. Schweitzer said he thought that large stocks in general - those in the S&P500, but not necessarily the biggest - might outperform midcap stocks. But he predicted that the performance gap between large and midsize stocks would be modest when compared with that between large and small stocks. Some strategists say the heavyweights are undervalued. The 25 largest companies in the S&P500 account for 43% of the earnings. At the end of 2003, they were also 43% of its market capitalization. But that figure has fallen steadily, to around 40%, said Henry McVey, chief United States investment strategist at Morgan Stanley. Although Mr. McVey said he thought that money would eventually move back into megacap companies - as the largest are often called - he said that many of these companies would need to restructure before they could lure investors back. Meanwhile, he is advising investors to lean toward midcaps. But Satya Pradhuman, the chief small-cap strategist at Merrill Lynch, who analyzes trends for companies valued below $8 billion, says he sees a fundamental shift away from domestic megacap stocks and toward a host of asset classes that include small-cap and midcap stocks, but also emerging-market debt and equities, high-yield bonds and private equity funds. "This is a bigger trade," he said. "Investors are looking at these other asset classes because they aren't confident in earnings growth."
As it has turned out, the dollar appreciated 13% against the euro and the Japanese yen, reducing the gains of American investors overseas. But even against this headwind, Americans owning foreign stocks have done just fine in 2005, demonstrating the folly of making investment decisions based solely on currency bets. The average Latin American stock fund has soared around 58%. The average Japanese stock fund has rallied by nearly 37%. Now, as 2006 approaches, currency analysts again predict dollar weakness. A recent survey by Merrill Lynch found that money managers think the dollar will depreciate the most among major currencies next year. But the reason for Americans to continue investing abroad - after shoveling an estimated $149 billion into overseas equity funds this year - isn't that the dollar is expected to weaken. Instead, investors should focus on why the dollar could fall in 2006. Overseas economies, with the exception of Western Europe's, are expected to grow much faster. That worries the dollar bears. Morgan Stanley forecasts that U.S. GDP will expand by 3.8% in 2006. But Latin America is expected to grow by 4.1%, and the emerging economies of Central and Eastern Europe by 5.3%. And Asia, excluding Japan, could soar 6.2%. What's more, currency experts think that the focus of the market will shift from the surprising strength of the domestic economy to simmering concerns here at home. Merrill Lynch calculated what it called a global misery index - a gauge that factored in, among other things, a nation's inflation and unemployment rates, economic growth, budget balance and current account balance. Based on recent data, it showed that the United States' misery index was worse than those of all other Group of 7 industrialized nations. That is a knock on the dollar, but there are plenty of others. Consider that this year, the dollar benefited from the Homeland Investment Act, which gave corporations a one-time tax break in 2005 for returning to the U.S. profits generated from overseas operations. David Kotok, chief investment officer at Cumberland Advisors, estimates that $300 billion to $500 billion in foreign profits have been repatriated this year. Of that, $100 billion to $150 billion may have been converted from euros to dollars, bolstering the dollar. "Whether that's half the reason for the strengthening of the dollar or a third, I don't know," Mr. Kotok said. "But I do know that it's a one-time event," as this tax break will go away in 2006. Another big reason that the dollar appreciated last year was that the Federal Reserve methodically lifted short-term interest rates throughout the year. The Bank of Japan kept its rates steady all year, while the European Central Bank lifted them once, on Dec. 1, for its first increase in five years. As a result, said Robert Doll, president and chief investment officer at Merrill Lynch Investment Managers, "the U.S. became a more attractive place to park capital." Yet this catalyst for dollar strength is expected to weaken in the first half of 2006, says Jack Ablin, chief investment officer at Harris Private Bank. But investors banking on a weak dollar should keep things in perspective. For starters, William King, chief investment officer for currencies at Putnam, notes that, in historical terms, "dollar strength persists for a period of time after a tightening cycle is over." What's more, neither the European Central Bank nor the Bank of Japan is likely to raise rates sharply in the near term. Japan is still climbing out of a deflationary funk. As for Europe, real economic growth in the region is expected to come in below 2% for 2006, and any aggressive moves by its central bank could stall an already sluggish economy. This is why even the bears expect the dollar to remain relatively strong throughout the first half of next year. "Though we are bearish on the dollar, we don't see a catalyst for the euro or yen to rally until late in 2006," said Alec Young, equity market strategist at Standard & Poor's. And the dollar could again surprise investors. Jeffrey Young, head of currency research at Citigroup, says that one of the biggest risks to his bearish view of the dollar is that an end to Fed tightening could lead to a shift back into United States equities by global investors. That, in turn, could prop up the dollar. For all of these reasons, Cumberland Advisors' Kotok said he thought that investors would be wise to focus less on the dollar and more on growth in making their decisions on global asset allocation. Currently, he recommends a significant allocation to foreign stocks because of the higher economic and profit growth rates he expects abroad - again, with the exception of Western Europe. He is recommending that half of investors' equity portfolios go to foreign holdings. Last year at this time, he was recommending a 35% to 40% weighting overseas. "Stick with growth rates and fundamentals," Mr. Kotok said. And if it turns out that the tailwind of dollar weakness ends up propelling American investors to even greater gains, all the better.
Arturo Estrella, an economist at the Federal Reserve Bank of New York, contends that an inverted yield curve "has predicted essentially every U.S. recession since 1950 with only one 'false' signal." Mr. Estrella and Frederic S. Mishkin, a professor of banking and financial institutions at Columbia University, have built an econometric model that relates various levels of the yield curve with the probability of a recession within 12 months. With the rate on 10-year Treasury notes now just about half a percentage point higher than that for three-month Treasury bills, the researchers' model calculates a 10% to 15% probability of a recession within the next year. That probability would grow to about 25% if the difference in rates disappeared, and would grow even further if the curve inverted. So what is there to debate about the yield curve, given its apparently impressive forecasting record? Many economists say that monetary conditions have changed markedly. Mr. Goldstein speculated that if a recession followed an inverted yield curve today, it would be for reasons other than those that led to economic slowdowns after the curve inverted in previous decades. In the high-inflation years of the late 1970's and early 80's, for example, inverted yield curves resulted from the Federal Reserve's aggressive monetary braking. By contrast, the Fed's rate increases over the last two years have been very gradual, and have occurred in the context of low inflation expectations. Apparently that was at least part of what Mr. Greenspan had in mind when he said that the yield curve had lost its forecasting power - that "the markets have become far more complex" than they were in previous decades. Robert Stambaugh, a finance professor at Wharton, offered another reason: there have been few recessions over the last 50 years - just nine, according to the National Bureau of Economic Research. This sample size is not big enough to support much confidence in any statistical conclusions. These doubts about methodology do not support Mr. Greenspan's confident assertion that the yield curve has lost its forecasting ability. Instead, they suggest that economists need to be cautious in drawing any conclusion. According to John Cochrane, a finance professor at the University of Chicago, the small sample size makes it very difficult "to determine what the relationship in the first place was between an inverted yield curve and recessions, much less to know if that relationship may have changed recently." Fed Chairman Alan Greenspan has said that an interest-rate inversion might not signal an economic slowdown. The implication is that the bond market has its own special issues these days. Some on Wall Street believe that demand for bonds has remained robust, keeping yields down, because of a global savings glut — meaning that so much money is looking for a place to go that investors in effect are forced to out-compete one another for bonds, depressing returns. Others see a "catastrophe markdown" in yields on government bonds: Rates stay low because many investors are permanently poised to rush into the securities as a haven should a disaster occur, such as a financial calamity or a massive terrorist attack. Some analysts also contend that bond yields have softened because the market believes inflation has been vanquished in the long run, the jump in energy prices notwithstanding. Government bond returns have averaged 2.3 percentage points above the inflation rate since 1926. If inflation falls back to, say, 2%, a 4.44% bond yield would look fairly generous. Of course, there's another possibility here that every investor has to keep in mind: It could well be that the economy will stay strong, the Fed under new Chairman Ben Bernanke will keep lifting short-term rates, and longer-term interest rates will rise as well, keeping an inversion from happening.
PowerShares Capital Management has been the main innovator in this arena. It has started a series of index funds that it calls X.T.F.'s and whose goal is to beat benchmark indexes. Their ETF's mirror custom-built indexes based on so-called Intellidexes, created by a quantitative unit of the American Stock Exchange. In these formulations, stocks in an existing index are sifted and ranked for potential capital appreciation. Each stock is scored by using 25 variables such as cash flow, earnings growth, share-price momentum and timeliness. The 100 top-ranked stocks make up the custom index, with the added requirement that sector weightings parallel the broader index. If 20% of an index is composed of financials, so is the Intellidex for that index. PowerShares offered the first two of these funds at the beginning of May 2003. From their start, both have run well ahead of their index bogeys. Its flagship core fund, Dynamic Market Portfolio, is up 70% since it started, compared with a 39% gain for the S&P500 over the same period. Its Dynamic OTC fund, has climbed 75%, while the Nasdaq 100 index is up 53%. In a variation on the theme, Pimco started two hybrid equity mutual funds at the end of May. The funds, called Fundamental Index Plus and Fundamental Index Plus Total Return, are based on a proprietary index of large-capitalization companies that also seeks to outgun the S&P 500. Both contain a small bond component but are mainly built around the Research Affiliates Fundamental Index, developed by Robert Arnott. The index uses sales, cash flow and other fundamental factors to come up with the 1,000 largest American companies "measured by the size of their footprint in the economy, not on their share price. While the S&P500 dropped by a cumulative 11% from 2000 to 2004, the RAFI notched a total return of 45% over the same five years. The S&P's market-cap metric, Arnott said, causes it to consistently overweight highfliers and to underweight bargain-priced shares. In that respect, the "S&P500 gets whipsawed by every bubble when it inflates and when it deflates," he said. FTSE has recently begun to publish daily updates of the RAFI. WisdomTree Investments, formerly called Index Development Partners, says that it will enter the ETF arena with its own custom index funds. "We have found better indexed products with less risk" than the indexes, said Jeremy Siegel, the Wharton School finance professor and frequent investment commentator. WisdomTree has several funds that are awaiting approval from the SEC. Still, the idea of consistently outperforming established indexes without taking on extra risk draws skepticism from some people. Steven Schoenfeld, the chief investment strategist for the quantitative division of Northern Trust Global Investments, said the PowerShares approach was a form of "quasi-active indexing" with "bets, intended or unintended" in the portfolio. The traditional index playbook is discarded when a significant component of active management is added. "If you're getting into one of these funds to outperform, you should also know you can underperform," Mr. Schoenfeld said. He said he doubted that the PowerShares flagship fund could outperform over a full market cycle, "because the factors that let it outperform in the past will not stay the same." Burton Malkiel, the Princeton economics professor and author of "A Random Walk Down Wall Street," offered a similar critique. He says RAFI has an orientation toward value and small-cap stocks, "which is what the last five years in the stock market were all about." The overwhelming outperformance of Mr. Arnott's fundamental index versus the S&P500 from 2000 through 2004 "reflects the peculiar characteristics of the post-bubble stock market, and is not a formula for future outperformance."
A year ago, for example, Tobias Levkovich, Citigroup's top stock-market strategist weighed in with his prediction: "The shift to large-cap [stocks] did not pay off in 2004. . . We think it will in 2005." Mr. Levkovich argued that the largest companies had stronger balance sheets than small companies and also that their shares traded at lower prices relative to company earnings. Close, but no cigar. So far this year, the Dow, one measure of large-stock performance, has risen just 0.9%. The S&P500 is up 4.6%. The Russell 2000 index, which tracks small stocks, has gained a bit more: 4.8%. What went wrong for large-stock boosters? Small stocks generally do better while the economy is ramping up. And the economy's momentum continued in 2005, despite predictions that things would cool down as the Fed raised interest rates. As a result, earnings and revenue growth have been better for smaller companies than for larger ones. At the same time, the dollar was strong all year, reducing investors' appetite for the shares of big U.S. companies that get a significant portion of their earnings in foreign currencies. But Mr. Levkovich again is saying that large stocks will rule -- in 2006. And this time, many more investors are on board, including some large hedge funds that have shifted into large stocks in the last month or so, helping these stocks lead the market higher recently. "Admittedly, large-cap-oriented investment strategies have not worked thus far," Mr. Levkovich acknowledges. But giant stocks haven't been this cheap relative to small stocks in 20 years in relation to expected earnings of both categories, according to Citigroup. Larger companies also have built up a hefty amount of cash and are beginning to take steps to give it back to investors through share buybacks and dividends, all of which could help these big stocks rise in the next year. "With strong free cash flow and clean balance sheets, these companies seem poised to provide higher payouts," Mr. Levkovich says. Here's another prediction that went awry in 2005 but may come true in 2006: weakness in the U.S. dollar. The U.S. dollar scored a 7% rise this year versus a basket of foreign currencies, according to Merrill Lynch. One reason the dollar did so well: the Fed kept boosting interest rates, even as foreign central banks sat on their hands. That encouraged global investors to shift into dollar-based investments. And uncertainty in Europe, including youth riots in France, didn't help the euro. At the same time, a change in U.S. tax law allowed U.S. companies to bring home over $200 billion of locked-up profits from overseas at a lower tax rate, which they converted to dollars. Meanwhile, many oil-producing nations used their bursting coffers to buy dollar-denominated investments. But the Fed may be close to its last interest-rate increase, while foreign central banks might move their rates higher, helping those currencies rise against the dollar. But "the greenback's longer-term bear market will likely resume in 2006" says David Rosenberg, a Merrill Lynch economist. A falling dollar would help [large-cap] U.S. companies that export goods. Foreign stocks and international-stock mutual funds also would be aided. Another long-running prediction that should comie true: a falloff in the housing market. Experts predicted it in 2004 and 2005, but housing prices kept rising. Lately the housing market has slowed. That could affect many consumer stocks, especially those that depend on discretionary spending. One last prediction for the new year: a rise in capital spending by corporations in areas including technology and new plants. Technology stocks would clearly benefit. "The combination of strong growth from enterprise spending coupled with attractive valuation points toward the information-technology sector delivering the best returns in 2006," says David Kostin, a Goldman Sachs analyst.
In the previous 12 months, from mid-2003 through mid- 2004, worldwide mutual fund assets grew by $2.1 trillion. All this happened while mutual funds were struggling out from under the ugliest scandal in their 80-year history. Assisting their continuing dominance, mutual funds are ideally suited for use in employer-sponsored retirement plans such as 401(k)s in the United States. One prime attribute of ETFs, continuous trading throughout the day, is of little value in 401(k)s. Hedge funds, with their sophisticated style and image, simply aren't compatible with the 401(k) format.
Most investors knew what "diversification" meant, but little else. Investors also frequently failed to take basic protective measures such as reading prospectuses and checking on the disciplinary history of their brokers. The one bright spot: 90% read their monthly account statements. "We are encouraged that people understand the need to go over their account statements carefully to make sure that everything is in order," SIPC President Stephen Harbeck said. "But these findings indicate just how big a job remains." The survey, conducted in late November, asked more than 2,000 adults whether they were active or passive investors. To focus the study on only the most sophisticated investors, the rest of the survey was given to the 635 who identified themselves as active investors — those who said they chose their own stocks, bonds and advisors. Still, 83% failed the 12-question test [91% of women, 77% of men]. To pass, investors needed to get three of four behavior questions and six of eight knowledge questions correct — a 75% score. The Behavior Responses The four behavior questions required yes answers to: Do you [1] have a financial plan, [2] read your monthly account statements, [3] read prospectuses before you invest and [4] have you checked out the disciplinary history of a broker. Most active investors have a financial plan. And the vast majority are reading their account statements. But few read prospectuses and fewer look to see if their broker has been disciplined by regulators. Only about half of investors said they'd ever read a prospectus for either a mutual fund or an IPO. These documents disclose items such as the fees they would have to pay, historical investment returns and risks of investing in the funds. Only 36% of active investors checked their broker's background. Of those who didn't check, 61% said they trusted their broker, 22% didn't know how to check backgrounds, and 9% said their broker told them not to bother. For those who did not read their monthly statements, 13% said that did not understand them, 38% said they were too busy to do so, 20% relied on others to review them, and 14% said they trusted their broker or financila planner to keep track of things. Investors can check their broker's disciplinary history either by calling the National Association of Securities Dealers' hotline at 800-289-9999 or visiting the group's website: Go to http://www.nasd.com and click on the "Investor Information" tab at the top of the page, and then the link "Check Out Brokers & Advisers." Investors need to know the broker's full name and the name of the firm where the advisor works. If they have the broker's license number — the CRD number — the broker's record can be accessed with just that number and his or her last name. The Knowledge Responses [1] At a time of rising interest rates, the value of existing bonds drop as the rates rise. But only 41% of those surveyed said they understood this relationship. Twenty-eight percent thought bond prices would instead rise with interest rates, and sixteen percent thought bond prices would remain the same when interest rates rose. 48% of men answered corectly, but only 34% of women. [2] More than 80% of respondents believed that some organization insured them against investment fraud losses. Although SIPC will return securities held by a brokerage firm to the investor if the firm goes bankrupt, no group insures against investment fraud losses. 41% of surveyed investors mistakenly thought the FDIC, which protects bank deposits, would step in to cover investment fraud losses. 42% thought the SEC was their insurer. [3] Just 39% of those surveyed properly identified a "no load" mutual fund as the type of fund that's sold without a commission or sales charge. 38% answered incorrectly and 23% answered "don't know". [4] A minority of 39% of those surveyed understood how sales fees and commissions work in the no-load mutual world. [5] A majority of 61% correctly understand that financial planners, advisors or brokers are paid in direct relation to the amount and type of investments they sell. But 17% thought advisors were paid based on the quality of their advice, and 11% thought they were paid only if their clients make money. [6] A majority of 57% could correctly define a prospectus. 29% thought a propectus was a quarterly profit/loss statement. [7] About 67% of investors understood that stocks have had the best long-term return for investors, compared to those who incorrectly identified CDs [14%], bonds [11%] and savings accounts [2%]. Seven percent answered with a don't know. 75% of men answered stocks, but only 56% of women did. [8] I thought this question sucked. You were asked the correct description of diversification from three choices: {A} the process of lowering potential resk of loss by spreading assets across different types of investments [the correct answer and 74% of responses]; {B} a means of increasing your chances of hitting the jackpot [6% of responses]; or {C} a means of increasing commissions owed for owning too many stocks or mutual funds [4% of responses. DANG! All three are correct. 14% [correctly?] answered "don't know". I should note again that all comments on these pages in grey bold italics are those of the editor, Factoids. There was one last question on attitudes, and I thought this question sucked too. Those surveyed were asked which of two statements best describes their attitued about risk. 24% agreed with the statement "If you take risks, you could end up with nothing for your retirement years, so you avoid taking risks. 69% agreed with "Taking risks in long-term investments is essential if you are to build a retirement nest-egg." It appears their definition of risk is investing in anything other than government bonds and CDs. And such a portfolio risks losing money to inflation. You would never get any capital appreciation - and thus you risk never reaching your financial goals because you were way to conservative. This is the first I have heard of the Investor Protection Trust, and if this is the best they can do with OUR money given from OUR brokerages to educate US, then I think they give they money back to the brokerages, so the brokerages can give us a rebate, a discount, or something. The Investor Protection Trust looks like a waste of money - OUR money.
In mid-October, the Social Security Administration announced a 4.1% increase in benefits for 2006. All you had to do to collect it was wait by your mailbox. Of course, you had to be among the 47 million retirees, disabled workers, dependents and survivors receiving Social Security benefits. It was the largest increase in more than a decade. Many seniors felt a large increase was overdue. Many also noted that the increase would be much reduced by the 13.2% increase in the Medicare Part B premium and the new premium for Medicare Part D for prescription drug coverage. The average benefit check, $963 in 2005, will increase $39 to $1,002 in 2006. However, since the Medicare premium will increase from $78.20 a month to $88.50 a month, or $10.30, the net increase will be only $29 a month. That's not a lot of money. But the real trouble begins when those who work compare the changes in their paychecks with changes in retiree paychecks. Workers received average pay increases of 3.5% this year. Next year is expected to bring more of the same. Worse, just as retirees can complain that medical insurance expenses are squeezing their real increases, workers with private health insurance are also facing higher premiums and higher deductibles in private health insurance. You can see just how nasty this is getting by comparing changes in the official cost-of-living index since 2000 with changes in Social Security benefits and changes in workers' wages. For this year and next, Social Security benefit increases have beaten average worker wage increases. If you look back to 2000, workers and retirees are neck and neck. Worse, income increases for both are slightly behind the increase in inflation for the period. For all those who are deemed "rank and file" workers, all the benefits of increased productivity are going to someone else. And if workers look over to the retirees, who are no longer dealing with job stress, downsizings, outsourcings and all the other miseries of life in corporate America, they are likely to start looking for a better deal. We could stop here and note that everyone, retirees and workers, appears to be losing out. Only top-dog bosses and top-gun employees are getting real wage increases. But there is a more important point: It is expected that retired workers' Social Security benefits keep pace only with inflation. That's how the system was designed. It is not expected that workers' wages keep pace only with inflation. Long-term, workers' wages are supposed to rise with productivity and inflation. That's how each generation has enjoyed a higher living standard than the previous generation. So far, this century isn't looking too good.
[1] Seek out tax-advantaged accounts - The easiest way to save on taxes is to stash money in accounts that aren't taxed until retirement, like 401(k)'s and IRAs. Yet nearly 30% of workers eligible to invest in 401(k)'s don't do so, according to a study by Hewitt Associates. "Not only does this save you taxes, it reduces your adjusted gross income," said Cal Brown, vice president for planning for the wealth management firm The Monitor Group. "And if you reduce your AGI, you will save more in taxes than just the taxes you save from making additional 401(k) contributions." Reducing income below certain levels permits you to take advantage of certain benefits. For example, if your household AGI for 2005 exceeded $145,950 (or $72,975 if you are married and filing separately), your itemized deductions are generally reduced by 3% of the amount over that threshold. Reducing AGI can also help investors, especially those with incomes approaching $150,000, to avoid the dreaded alternative minimum tax. [2] Lock in some losses - By selling stock or mutual funds that are trading at a loss, you can realize capital losses, which can be used to offset gains elsewhere in your portfolio, thereby reducing your tax bill. What if you don't have any capital gains to speak of this year? You may still want to take a loss now, because you can use it to reduce up to $3,000 in ordinary income this year and can carry the remaining loss forward for as long as you live. [3] Don't just sell losers; replace them - If you plan to sell an investment that is underwater, it's important to "study the opportunity costs" of being out of a sector or the market, says Rande Spiegelman, vice president for financial planning at the Schwab Center for Investment Research. Recent history has shown that being out of the market for even a couple of months can be costly. Over the last two years, for instance, the Russell 3000 total stock market index has risen 5.4%, on average, from the beginning of December to the end of February. An easy way to sell losers but to remain fully invested is to consider an exchange-traded index fund that tracks the sector of the stock that you're dumping. If you wanted to sell shares of Merck, you immediately replace it with shares of the Healthcare Select Sector SPDR or the iShares Dow Jones U.S. Healthcare Sector Index fund - both ETFs that track major health care indexes. By investing in a similar but not "substantially identical" investment, you avoid the IRS's wash-sale rule, which says investors cannot take advantage of realized losses if they go into the same investment within 30 days of selling. [4] Don't buy an immediate tax bill - Don't buy a mutual fund in late November or December, because mutual funds distribute capital gains at that time. Be particularly careful this month of stepping into real estate funds, natural resources sector funds, domestic value portfolios, small-cap portfolios and emerging-markets stock funds. According to the fund tracker Morningstar, these categories have some of the highest potential capital gains exposure. Tax-efficient funds are considered a relatively safe bet. But be sure to hold these investments outside a tax-advantaged account because they are already tax-efficient. [5] Make charitable donations from your winners - You can give an appreciated stock to a charity and claim the full market value at the time of the donation. The charity can then sell the stock without tax consequences. It's one of the few win-win options the IRS provides to investors. So don't waste the opportunity.
To understand Asness' and Casscells' argument, consider the following statement: "Based on analyst estimates for 2006, earnings on the S&P 500 next year are likely to total $X, which results in a P/E ratio of Y. That's right in line with that ratio's historical average of about 15." Did you catch the sleight of hand inherent in it? According to Asness and Casscells, the problem with this reasoning is that it compares a P/E ratio calculated using forward earnings with past P/E ratios calculated using trailing earnings. Since analysts invariably project earnings to grow, P/Es based on forward earnings will always be lower than those based on trailing earnings. A legitimate historical comparison therefore requires comparing current and past P/Es that are all calculated using trailing earnings - or comparing today's with historical ratios when all are calculated based on forward earnings. Consider first the ratio calculated using trailing earnings. For the trailing four quarters, according to S&P, reported EPS for the S&P500 have totaled $67, which results in a current P/E ratio of 18.7. Between 1871 and 2003, according to Asness and Cascells, the median of P/E ratios calculated in this way is 13.7. Based on trailing earnings, therefore, the stock market's current P/E suggests that the market is 36% overvalued. Consider next the ratio calculated using forward earnings. According to S&P, analysts are projecting total operating earnings per share for 2006 to be $88.59, which yields a P/E ratio of 14.2. The median of comparably-calculated P/E ratios for the 1871-2003 period is around 11, according to estimates from Asness and Casscells. So according to this approach to calculating P/E ratios, the market is 29% overvalued - not as overvalued as in January. The problem with above-average P/E ratios is that they leave the market particularly vulnerable to shifts in investor psychology. That's just another way of saying that risk is above average in the market right now. This doesn't mean that the market must go down. But it does mean that, at a minimum, the market is unlikely to provide high enough returns to adequately compensate investors for the risk they incur by being investing in stocks at current levels.
To gauge the chances of beating the market, I look at the results of the Vanguard 500 Index Fund (VFINX), which over the past 10 years, it has beaten all but 23% of these competing funds, according to Morningstar. As the record of Vanguard 500 suggests, an index fund will beat roughly three-quarters of comparable actively managed funds over any 10-year stretch. For market junkies, those don't seem like daunting odds. After all, with a little work, they should be able to make it into the top quarter, right? That might be true if these market junkies were buying just one fund. Problem is, to build their desired portfolios, investors often purchase five, six or even a dozen funds. Moreover, most of us are investing for a lot longer than 10 years. Figure in those two factors, and suddenly the odds of winning become almost insurmountable. To understand why, consider some calculations by Allan Roth, a certified financial planner with Wealth Logic. Mr. Roth ran a "Monte Carlo" simulation comparing the results of two sets of portfolios, one that included index funds incurring total expenses equal to 0.25% of assets each year and the other consisting of actively managed funds that cost 2% annually. Most actively managed funds have published annual expenses that are closer to 1.5%. But once you figure in trading costs, which aren't included in published expense ratios, the tab could easily hit 2%, especially if you invest in foreign or small cap funds. Mr. Roth's Monte Carlo simulation not only considers performance in a slew of market environments, but also takes into account the possibility that some actively managed funds will beat the market. The result? Suppose the two sets of portfolios each consisted of just one fund. According to Mr. Roth, the chance that an actively managed fund will beat an index fund over one year is 43%. But Mr. Roth notes, "the more funds you pick and the longer the time period, the worse the odds get." Indeed, with a single actively managed fund, the chances of beating an index fund shrink to 31% over five years, 25% over 10 years and 13% over 25 years. But suppose that the two sets of competing portfolios consist of five funds. Suddenly, the odds of an actively managed-fund portfolio beating an indexed portfolio shrink to 35% over one year, 18% over five years, 12% over 10 years and just 5% over 25 years. As you add more funds, it gets even worse. It's like gambling in Las Vegas. If you make enough bets in which the odds are against you, eventually mathematics is almost certain to triumph over luck. If you own 10 actively managed funds, your chances of beating an indexed portfolio are 29% over one year, 11% over five years, 6% over 10 years and a scant 2% over 25 years. Mr. Roth notes that the odds of beating an indexing strategy would look even worse if you figured in taxes and investors' bad timing. Related Bad Timing Can Cause Index Investing to Go Bad - Sonya Morris, CPA, MorningStar, In a Flat Market, Active Managers Have an Edge - Meg Richards, Associated Press
A: You might start by canning the tax preparer, as "use zero as your basis" guarantees that you not only overpay taxes and lay out the absolute maximum for your original investment, but you double-pay taxes for any annual distributions you've reinvested over two decades. Internal Revenue Service rules require a "good-faith estimate" of cost, something that can be defended and justified. Technically, in the case of an audit, Uncle Sam will want some confirmation from the firm or your original purchase slip. But even Uncle Sam would not presume that you got the shares for nothing. What's more, making a savvy good-faith estimate will not make you audit bait. If you know how much you invested and the year in which you first bought the fund, the management company should be able to provide at least the average price for that year, plus a distribution history since then. That information can become the foundation for developing that good-faith estimate of your cost. (For more information on fund distributions and taxes, check out IRS Publication 564.) Moreover, keep pushing the fund firm, going up the ladder from phone reps to supervisors. The firm has a responsibility to help.
The standard advice is "Don't buy a distribution". If you're planning an additional investment, wait until afterward to buy. Unfortunately, that strategy can cost you more in missed opportunities than any taxes you may save. Suppose you decided around mid-October last year that you wanted to put $10,000 in the Hypothetical Fund, and then noticed that the fund was planning a year-end gains distribution amounting to 5% of its assets. In order to avoid a taxable distribution of $500 on your $10,000, you held back until mid-December. Well, as it happened last year, the Standard & Poor's 500-stock index jumped 10.4%, and the Nasdaq composite index 13%, between Oct. 22 and Dec. 15. That turned out to be all the Nasdaq's gain, and almost all the S&P 500's gain, for the whole year. The Nasdaq finished 2004 with a net total return of 9.1%, the S&P 500 with 10.9%. If the Hypothetical Fund posted a 10% return in the late October-mid-December stretch, you gave up $1,000 in paper profits to duck a distribution half that size. On that distribution you might have owed $75 to $125 in taxes, depending on which state you live in. Also, the amount you reinvest increases your cost basis, reducing the tax bill you will owe when you eventually sell. Last year may not have been typical. Let's look at what has happened in 2005. From Oct. 18 through Nov. 25, the S&P 500 climbed 7.9% and the Nasdaq composite 10.2%. Again this year, that's a lot to give up to save yourself a tax headache.
A study of fund data from 1962 to 1999, published last December in The American Economic Review, a quarterly publication of the American Economic Association, found "strong evidence that fund size erodes performance," particularly in funds that specialize in small-capitalization stocks. In late October, the replacement of managers at Fidelity Magellan and Fidelity Growth and Income put a spotlight on the sluggish performance of two well-known big funds. Magellan was "Exhibit A" for the difficulties of sustaining good performance at large funds, said Russel Kinnel, director of mutual fund research at Morningstar. Some fund executives and managers agree that deploying huge sums of cash can be a problem. "Large funds can be challenging," said Dwight D. Churchill, a senior vice president at Fidelity Investments. Judy Vale, co-manager of the Neuberger Berman Genesis fund, the fourth-largest of all small-cap funds, said: "We're running a race with a Cadillac strapped to our backs." But Ms. Vale's fund still ranked in the top 4th percentile of all small-cap blend funds for the 12 months ended on Nov. 29. And the superior performance of such a deep-pocketed fund is more the rule than the exception. In the 12 months through Nov. 29, 14 of the 20 largest actively managed stock mutual funds produced above average results. American Funds' Growth Fund of America, with $116 billion in assets, returned 14.8%, putting it in the top 13th percentile of all large-cap growth funds. Big funds that focus on small-cap stocks can face particular obstacles in investing assets, but 16 of the 20 largest such funds produced better-than-average results. The Columbia Acorn fund, the asset leader, was in the top 12th percentile of small-cap growth funds. Among index funds, a higher asset total can actually improve performance by spreading expenses over a larger investor base. But as managers have to invest ever larger sums of cash, they face a choice: to buy a wider variety of stocks or to increase positions in stocks they already own. There are dangers in each approach. Finding more stocks may require dipping down into second-tier investment ideas. But loading up on existing positions concentrates risk and is especially difficult for managers of small-cap funds. When large holders of a thinly traded stock begin to sell, their mere presence in the market can drive down the value of their shares. "You throw a million shares onto the market, it will affect the price," said Chuck McQuaid, lead manager of Columbia Acorn. But Mr. McQuaid and other successful managers have found ways to offset such burdens of size. To ensure a steady flow of high-quality ideas, Columbia Acorn has decentralized stock-picking. Four senior analysts share authority to write buy or sell tickets with the two portfolio managers; 20 analysts and portfolio managers help. The use of multiple autonomous managers has been offered as an explanation for the remarkable success of the Growth Fund of America. But some other portfolios in the American Funds family that employ multiple managers have had less impressive results, suggesting that there is no single formula for enhancing large-fund performance: its $77 billion Investment Company of America fund has produced below-average returns over the last one, three and five years. Worse yet, American's Washington Mutual fund was beaten by 76% of the other large-cap value funds over the last 12 months. Fidelity, meanwhile, is not about to abandon the single-manager model, Mr. Churchill said, despite the mediocre performance of large funds like Magellan, Growth and Income and Equity-Income. Instead, Fidelity is working to expand the research resources available to managers of asset-rich funds. What else can large-fund managers do to overcome the drag of size? Sometimes, doing less may work best. John A. Gunn, president of Dodge & Cox, is also portfolio manager of its big Dodge & Cox Stock fund, which ranks in the top 16% of all large-value funds. Limited trading has helped produce those results, Mr. Gunn said. "If we were a high-turnover manager, there'd be no way to do this," he said. Large-cap value funds hold stocks for an average of 1.6 years, according to Morningstar. But in 2004, Dodge & Cox Stock had turnover of just 11 percent, meaning that its average holding period was nine years. Low turnover limits the trading costs that eat into shareholder returns. And large funds that trade often have to pay more to buy and get less when they sell. That is because their big-fish market presence, particularly in shallow small-cap markets, will influence price.
But there's a catch. As people grow older, their cognitive ability tends to diminish - a gradual decline that presumably affects decision-making in all facets of life. In investing, the researchers concluded, it makes older people less capable of picking market-beating stocks. The net result - at least for those who trade individual stocks of their own choosing - is that overall investment performance declines steadily with age. The study - "Does Investment Skill Decline Due to Cognitive Aging or Improve With Experience?" - was done by two finance professors at the University of Notre Dame, George M. Korniotis and Alok Kumar. For their study, the professors obtained access to an extensive database at a major discount brokerage firm containing the stock holdings and trades in more than 75,000 accounts between 1991 and 1996. The researchers were not given the names of any account owners, just some demographic characteristics, including age, income, wealth, occupation, marital status and gender. The brokerage accounts were self-directed, so the professors said they believed it was safe to assume that each account's holdings and transactions reflected its owner's decision-making. First, the good news about the research. The professors did find evidence that most investors learn as they age. Older investors were less likely to make all-or-nothing bets on a single stock or sector, for example; their portfolios tended to hold significantly more stocks than those of younger investors. Older investors were also less likely to reflexively sell winning stocks and hold losing ones, regardless of the stocks' prospects; this tendency is a common one and it can be very costly. On both of these particular scores, aging turned out to improve returns, adding about 0.7% a year to the performance of the average 65-year-old's portfolio, according to the researchers, relative to the average 30-year-old's. Now the bad news. As far as stock-picking goes, investors seem to get worse as they grow older. No age group was able to consistently pick market-beating stocks. But investors' stock picks tended to lag the market by ever-increasing amounts as they grew older. The researchers concluded that it was most likely caused by the cognitive decline associated with growing older. "Effective and timely reaction to new information is one of the key defining characteristics of investment skill" according to the professors. In terms of portfolio performance, the negative effects of impaired stock-picking ability outweighed older investors' other advantages. The professors found that the average 65-year-old investor's stock picks lagged behind those of the average 30-year-old investor's by 1.8% a year. The overall effect of the aging process was for 65-year-olds to have an average annual return about 1.1% lower than the typical 30-year-old's. Because every age group in their study trailed the market, the researchers believe that all investors should favor index funds. This advice becomes increasingly important as investors grow older. The professors' study does contain a silver lining: the stock market may actually perform better as the population gets older. This tantalizing prospect depends on a number of assumptions. Fundamentally, they said, if older investors are aware of their declining investment skill, they may demand a higher premium for investing in the stock market. Consequently, stock market returns may increase as the population ages. They concede that this particular consequence of their study is tentative, and they are working on further research to test it. But it at least holds out the prospect that the aging of the enormous baby boom generation won't be entirely bearish for the stock market. The extant empirical evidence from the behavioral finance literature indicates that older investors exhibit weaker disposition effect [the selling of winners too early and holding losers too long] (Dhar and Zhu (2002)), hold better diversified portfolios (Goetzmann and Kumar (2004)), and exhibit lower degree of over-confidence. Furthermore, these behavioral biases decline as investors learn and gain more experience (e.g., Goetzmann and Kumar (2004), Feng and Seasholes (2005)). Older investors are also less prone to gambling type activities in the stock market (Kumar (2005)). Additionally, theoretical models of portfolio choice (e.g., Bakshi and Chen (1994), Samuelson (1991), Campbell and Viceira (2002), Cocco, Gomes, and Maenhout (2005), Gomes and Michaelides (2005)) posit that the riskiness of investor portfolios would decline with age due to decreasing investment horizon and increasing risk aversion. Taken together, the evidence suggests that older investors are likely to make relatively more conservative and more efficient investment choices. Consistent with the theoretical predictions of life-cycle and learning models, we find that older and more experienced investors hold less risky portfolios, exhibit stronger preference for diversification, trade less frequently, and exhibit greater propensity for year-end tax-loss selling. Additionally, consistent with the psychological evidence, we find that older investors exhibit worse stock selection ability and poor diversification skill. How can investors exhibit stronger preference for diversification but weaker diversification skill? Goetzmann, Li, and Rouwenhorst (2005) show that the total portfolio variance can be reduced by increasing the number of stocks in the portfolio and by a proper selection of stocks such that the average covariance (or correlation) among stocks in the portfolio is lower. Variance reduction through proper stock selection reflects “skill” while addition of stocks in the portfolio without lowering the average portfolio correlation is more likely to reflect a “passive” form of diversification. While researchers generally agree that stock market participation rates increase with age, the evidence on the impact of age on allocation to equity is mixed. For instance, consistent with the theoretical predictions (e.g., Samuelson (1991), Campbell and Viceira (2002), Cocco, Gomes, and Maenhout (2005), Gomes and Michaelides (2005)), Yoo (1994) finds a “humpshape” for the share of wealth invested in equities, where it increases in working life and decreases after retirement. Other studies (e.g., Bodie and Crane (1997), Heaton and Lucas (2000), Agnew, Balduzzi, and Sunden (2003)) have also shown that age has a negative effect on the allocation to equities. However, using similar data, Poterba and Samwick (1997) show that stock ownership and portfolio shares increase with age but remain constant for older investors. Additionally, Ameriks and Zeldes (2004) find no evidence of gradual reduction in portfolio shares with age.
An economic model linking demographic trends to inflation-adjusted U.S. housing prices and interest rates - which proves to be largely accurate for the period since World War II - "gives a gloomy view of house prices going forward," according to the study. "In the near term, house prices will peak in level terms sometime between 2005 and 2010," and the model shows they begin to collapse by 2015, the study said. "Following the peak, house prices decline over 30% in value over the next 50 years." But that long-term projection may be wrong if workers remain in the labor pool past the age of 65 or by sufficiently large productivity gains in the U.S., the study said. Martin said his model is limited by the "unrealistic assumption" that people older than 65 make no contribution to productivity. Martin also finds a correlation between long-term U.S. interest rates and U.S. population changes. "Going forward, long-term interest rates continue to decline until around 2020," his study's model suggests. "The rise in interest rates following the year 2020 reflects the dying off of the baby-boom generation." The Fed economist says his correlation of population trends and housing prices is borne out by post-World War II trends in Japan, the U.K. and Ireland. "Demographics, if not the only driver, appears to have played a significant role in the run-up in house prices in Japan in the 1980s and appears linked to the decline in house prices over the 1990s," the Fed study says. The model suggests house prices in Japan will decline further through 2010. Because the U.K. had a second - albeit smaller - post-World War II baby boom in the mid-1960s, the model suggests housing price appreciation there will slow in the years ahead but won't turn negative until about 2010. The Fed study considers Ireland as an example of a country where its modeling shows a more bullish outlook for housing prices. Reflecting the country's relatively young population, the model indicates house prices won't decline there until 2023. Related 30 Years of Housing Market Data - Mark Gilbert, Bloomberg Monthly Employment Stats
Rebuilding efforts in New Orleans and along the rest of the Gulf Coast helped send construction employment up by 37,000 jobs. Payrolls in professional and technical services, which includes engineers and architects, ballooned by 22,000 in November. The leisure, lodging and restaurant businesses added 39,000 jobs in November after declining the previous two months, primarily as a result of business closures in the Gulf Coast. Service industries, which include retailers, banks and government agencies, added 165,000 jobs last month after a decline of 10,000 in October. Manufacturers created 11,000 jobs after a 15,000 gain in October, the biggest consecutive increase since May 2004. Economists expected the number of factory jobs to rise by 5,000, according to the Bloomberg survey. The average workweek for non-management employees fell by 0.1 hour to a seasonally adjusted 33.7 hours in November. The manufacturing workweek declined by 12 minutes to 40.8 hours and overtime fell by 6 minutes to 4.5 hours. Average weekly hours for production workers fell 6 minutes to 33.7 hours. Economists surveyed by Bloomberg expected the workweek to hold at 33.8 hours. Workers' average hourly earnings rose to 3 cents to $16.29, a 0.2% increase that matched the median forecast. The earnings data is for non-supervisory production workers, which account for 80% of payroll employment. Average weekly earnings fell 0.1% to $549.98 from $550.60 in October. Compared with a year ago, weekly earnings were up 3.2%.
The professions, which exclude managerial jobs, did even better -- although here there is evidence that transportable services lost out to foreign labor. At 28.5 million, professions as a whole gained 1.8 million since 2000. Not surprisingly, the biggest gainer was health care, which added 1 million, to 6.9 million. But while there are still many more people in the U.S. working as engineers than as lawyers, the gap between the two fields continues to narrow. In fact, the loss in the one neatly matches the gain in the other. At 1.7 million workers, legal occupations added 300,000 since 2000; at 2.5 million, engineering jobs declined by 300,000. On the other hand, the hard sciences added 200,000 jobs over this same period, to 1.1 million. And probably the fastest-growing managerial job category in the U.S. is computer and information systems. With nearly 400,000 people holding this type of job in '05, computer-related work in general, at 3.6 million, eked out small gains. Over the past 10 years, the number of computer-related jobs in the U.S. has more than doubled. At 9.2 million, factory jobs fell by 2.2 million since the year 2000. While it's hard to sort out how much of it was due to rising productivity, foreign competition was probably the main factor involved. But blue-collar work is hardly going extinct. The decline in factory employment was more than offset by increases in construction (+1.9 million), installation and repair (+0.5 million), and transportation and trucking (+200,000). In fact, BLS data recently marked a first: There are now more construction workers in the U.S. than factory workers (9.4 million versus 9.2 million). Perhaps the most shocking statistic: There are now 30,000 economists in the U.S., 9,000 more than in 2000 -- an increase of 30% in less than five years. And yet gross domestic product grew by less than half that rate. Time to downsize? Just the Facts Milestones are Tuff to Jump Aaron Lucchetti, WSJ 12-05 The Dow has been peering at the lofty 11,000 milestone for more than four years and has been within striking distance of it for days, but investors can't seem to push it over the top. Consider what happened the last time the industrial average flirted with 11000. The blue-chip index last settled above 11000 on June 7, 2001. But in the prior two years, it had climbed through the mark 19 times, only to fall back down again. Is the 20th time a charm? Likewise, the industrial average has cleared the 10000 hurdle 24 times since first doing so in 1999. And after it settled above 1000 for the first time in 1972, it took an additional 30 tries over the next decade until in 1982 it stayed above the millennial mark for good, according to The Wall Street Journal's Market Data Group. Gadgets Use 15% of Home's Electricity Terry Maxon, Dallas Morning News 12-25 Many video game players, mobile music players, computers and TVs have the ability to keep sucking down electricity even when they're not in use. These gadgets now account for 15% of electricity use, triple the share in 1980. By 2015, the government estimates, personal electronics will consume a third of all electricity use. Power adapters get much of the blame, because they stay plugged in and drawing current whether in use or not. There are now five adapters for every American, according to the EPA. PDAs, cellphones, BlackBerries and digital cameras all these get their power from power adapters. It's like termites attacking your house: It isn't the size of each bug. It's the number of bugs and the time they spend munching away. Power adapters typically draw 1 watt or more. A 27-inch Sony TV built in 1987 pulls about 4.7 watts of power when off vs. 125 to 145 watts when it's on. There are some televisions that pull as much as 12 watts an hour in standby. The 27-inch Sony, used with a 1999 Panasonic VCR, 2002 Phillips DVD player and recent model Motorola digital cable box, pulls about 24 watts combined when all are turned off. The Motorola box by itself continuously drains more than 11 watts, on or off. The way people can save with power adapters is to simply unplug them when you're done using them. And consumers can research the average power usage for devices, particularly energy-hungry televisions, if they want to pick a more efficient model. 10 Wheelers - a New Trend Jim Davenport, AP 12-24 Some truckers are converting to wider tires that let them replace dual tires with single tires, turning their 18-wheeler rigs into 10-wheelers to reap fuel and weight savings. The tires can save 4 percent to 10 percent on fuel. Fuel consumption in trucks can vary as much as 35% depending on whether a leadfoot or lightfoot is behind the wheel, so fuel savings have been elusive. But the dual tires are lighter and can shave 730 pounds off a trucks weight, helping trucker stay within legal weight limits and that lets trucking companies haul more cargo. Mounted on an aluminum rim, the tires can run $1,250 or more, twice a traditional tire's cost. Michelin has marketed the tires in the U.S. since 2000. Trucking companies are accustomed to sending both kinds of worn tires off to be wrapped in new tread two or three times during their life spans. Michelin spokeswoman Lynn Mann said some of its tires can last more than 800,000 miles with its retreading process.The tires have a downside. For instance, a flat puts the truck on the side of the road, while trucks with dual wheels blow by on the interstate. But that will be less of a problem as trucking companies embrace technology that monitors tire pressure. Quick Facts, Stats & Opinions Foreigners spent record sums buying our stocks and bonds in 2005, snapping up more than $1 trillion worth through October, according to Treasury Department data. At the same time, Americans have never been more eager to send their own capital abroad. In the first 10 months of the year, U.S. investors bought a record net $127 billion of foreign stock and bond mutual funds, up 67% from the same period in 2004, according to Financial Research Corp. By contrast, U.S. investors' net purchases of domestic stock and bond funds fell to $75.8 billion in the first 10 months, down 41% from a year earlier. (Tom Petruno, LA Times 12-25) Last year, U.S. personal-trust assets grew to $1.19 trillion, nearly doubling from $658.71 billion in 1998, according to VIP Forum, a research group. Driving that trend: a wave of baby boomers approaching retirement who are looking for ways to pass assets to heirs while avoiding tax hits. Trusts fall into two chief categories: "irrevocable," which means a trust's creator generally can't undo the trust, and "revocable," which allows the creator to change the provisions. An irrevocable trust is for those worried that they might be hit with estate tax, since the tax man may not consider some of those assets part of your estate. About two-thirds of all personal trusts are revocable living trusts, according to Tiburon Strategic Advisors. That is because they are useful to avoid probate and to designate someone else to manage your property if you become incapacitated. They are called "living" trusts because they go into effect while you are alive. (Rachel Emma Silverman. WSJ 12-24) Four million taxpayers are expected to pay the AMT for the current tax year. If Congress doesn't move to restrain the tax, this number would jump to 21.6 million taxpayers in 2006, and married couples with gross taxable income above $45,000 would be subject to the AMT. In the current year, married couples begin to pay the AMT at $58,000. For those who have to pay the AMT, the government collects an average of $2,770 more in taxes from each person, according to the U.S. Department of Treasury. (Robert Guy Matthews, WSJ 12-15) The S&P 500, for instance, enjoyed an annualized return of 11.12% since December 1969, compared with 10.42% for Morgan Stanley's EAFE index. A combination of the two would have achieved superior results, says Northern Trust's Steven Schoenfeld. A portfolio with 30% of its assets in the EAFE Index and 70% in the S&P 500, rebalanced annually to maintain those levels, would have returned 11.18%, but with less volatility than a portfolio that was entirely U.S. or foreign. (Craig Karmin and Ian McDonald, WSJ 12-15) More than 850 of the nation's mutual funds last year lowered the management fees they charge investors, up from 239 in 2003, according to a study expected to be released today by Lipper. This year, the number of funds with such cuts is on pace to hit 700. The median, diversified U.S. stock fund's total expense ratio was about 1.45% on June 30, down from 1.5% at the end of 2003, according to Lipper. With more than $4.66 trillion invested in U.S. stock funds, according to ICI, the fee reduction amounts to big cost savings for the nation's millions of fund investors. Some of the biggest cuts came in fund categories that tend to have the highest expenses. Expense ratios for the median global stock and sector funds, for example, were about 1.74% on June 30, down from 1.85% and 1.88%, respectively, at the end of 2003. (Ian McDonald, WSJ 12-14) A number of online tools have sprung up to help investors take advantage of the funds' increased disclosure and help them productively comb through the wealth of data. Check out indexuniverse.com, a free site that has a screening tool for index funds and ETFs. The National Association of Securities Dealers (nasd.com) site has a mutual-fund expense analyzer shows the total dollar cost of holding a specific fund for a certain period, breaking down sales charges and redemption fees. A breakpoint search tool shows how much an individual must invest in a certain fund to receive any discounts on sales charges. In 2004, 92 million individuals owned mutual funds, which accounted for nearly 20% of U.S. households' financial assets, according to the ICI. (Eleanor Laise, WSJ 12-14) A combination of this year's low-single-digit stock returns and bigger tax bills is sparking the stepped-up interest in tax-managed funds. More than $1.1 billion has flowed into these funds in the first 10 months of 2005, according to Financial Research Corp. By contrast, investors last year pulled $743 million out of these funds. Lipper says there were 77 tax-managed funds at the end of last year, up from 42 in 1999, while assets rose to about $40 billion in 2004 from $26 billion in 1999. Still, tax-managed funds account for just a small fraction of the $2.94 trillion invested in mutual funds through taxable household accounts. (Eleanor Laise, WSJ 12-08) Index funds have drawn $28.3 billion, or 20% of the total $141.3 billion, in net mutual-fund investments in stock funds as of the end of the third quarter, according to Financial Research Corp. That's up from just 8.2% of the total in 1995. FRC includes ETFs in its index category. (Laura Johannes, WSJ 12-05) More than $400 million in advertising in 2004 has made Viagra, Cialis and Levitra, among the best-known drug brands in the United States, and their combined global sales reached about $2.5 billion last year. But the number of new prescriptions for the drugs has fallen steadily this year. Doctors wrote about 10% fewer new prescriptions in October than they did in October of 2004. As many as half of men over 40 have at least mild or occasional impotence, but Pfizer estimates that only about 15% of those men get prescriptions for Viagra, Cialis or Levitra in a given year. (Alex Berenson, NY Times 12-04) Josh Peters, editor for Morningstar's Dividend Investor newsletter, now has about one-third of his model portfolio in bank stocks. He says stocks such as Bank of America Corp. (4.4% yield) and U.S. Bancorp (4.0%) have the capacity to raise their dividends "8% to 12% annually, almost indefinitely." Other banks in his portfolio: Fifth Third Bancorp, National City Corp. and First Horizon National Corp. All yield between 3.8% and 4.6%. (Jeff Opdyke, WSJ 12-02) Monday afternoon, the yields on the two-, three- and five-year Treasuries hit 4.32 percent at the same time. That's what's known as a flat yield curve. At one point in Tuesday's bond trading session, the gap between the two- and 10-year hit six basis points, or hundredths of a percentage point. At the beginning of 2004, the same gap was 250 basis points. Fresh data proves housing speculation continues to run rampant with the help of low mortgage rates: New-home sales hit a high in October, even in the face of rising mortgage rates and record-high inventories. This gives justification for the Fed to keep hiking. It would seem the Fed can't normalize the housing market without inverting the yield curve. (Danielle DiMartino, Dallas Morning News 11-30) A young Bill Cosby, fresh from college, attempted to stump his grandmother with a question about whether the glass was half empty or half full. She was not stumped. "Depends on whether you're pouring or drinking" she said. (Sam Smith's Favorite Quotes: http://prorev.com/quotes.htm) Prepping for New Year's Eve Toasts and Quotes To whom the Twelve Months, that have recently pass'd / Were as harsh as a prejudiced jury - Still, fill to the Future! and join in our chime / The regrets of remembrance to cozen, And having obtained a New Trial of Time / Shout in hopes of a kindlier dozen. ~Thomas Hood The future belongs to those who believe in the beauty of their dreams. ~ Eleanor Roosevelt An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves. ~Bill Vaughan How to Open a Bottle of Champagne Chill the bottle to 42-45° Fahrenheit - this will take 30 minutes on the top shelf of the frig, 15 minutes in an ice bucket, or 10 minutes if it is ice and water. Champagne that is too warm will foam and spill when you uncork the bottle. Dry off the bottle a bit so you can get a good grip. Take the foil off the top of the bottle so that the wire cage is totally free. There are two schools of thought on dealing with the wire cage. Some prefer to loosen it and others go all the way and remove it. The only danger to removing the wire protector entirely is that some bottles have enough pressure built up to have the cork pop when the cage is taken off. This shouldn't happen, but you may have shaken the bottle a bit too much while handling it...or it may have built up a bit too much pressure while waiting to be opened. Leaving the wire cage in place will keep the cork in place. With the bottle upright, drape a towel over the top of the bottle. With the towel there, even if the cork does pop out, it will be caught in the towel... it also catches any champagne that spills. Lay the thin part of the towel draped bottle in your hand and get a good grip on the cork. Angle the bottle away from everyone. With your free hand get a good grip on the fat part of the bottle. Slowly turn the bottle while you hold onto the cork. Gently turn the bottle until you hear a little "pop". The noise comes from the carbon dioxide escaping. That's the gas that makes the bubbles. A loud pop means that you've let out too much of the gas - usually with a good bit of the champagne! (Margaret Chiffriller, Chiff.com) Sparkling wine can be stored upright. The pressure in the bottle creates a hundred % humidity in the head space and keeps the cork moist. A bottle of sparkling wine will serve 2 for dinner or 4 to 6 before dinner. There are six glasses in a bottle. (Domaine Carneros) International Alternatives to Champagne Spanish Cava, produced using the same méthode champenoise used in France’s Champagne region, is affordable, yet sophisticated. The Italian sparkler Asti Spumante has a poor reputation, but there are many fine examples of this pretty, frothy, inexpensive wine. Made from the Moscato Canelli grape, they’re apricot-scented, lightly sweet, and low in alcohol. A German Sekt (pronounced zekt). They run the gamut of quality. The top Sekts, labeled Deutscher Sekt or marked with a vintage or grape variety, and are racy, elegant wines. (Leslie Brenner, LA Times & www.wineanswers.com) The Best $16-$20 Sparkling American Wines [A] Roederer Estate Brut. The leanest, meanest, most-elegant wine of the bunch. crisp and dry style. It's made by the same company that produces Cristal. [B] Mumm Cuvee Napa. Cordon Rouge with an American accent. It explodes with bold aromas and teases with a dash of sweetness. [C] L. Mawby Blanc de Blanc. A lighter-style wine with a storm of fine little bubbles and crisp fruit with pleasing acidity. [D] Piper Sonoma Brut. One of the lightest styles, with lively flavors and lean acidity. [E] Chandon Blanc de Noirs. With an ever-so-pale pink tint and cherry aromas, it is fairly full-bodied, the most festive of the bunch. [F] 1995 Shady Lane Brut. A full-bodied Michigan wine with the almond, butterscotch character that comes with age. For serving with real food. [G] 1995 Pacific Echo Blanc de Blancs. It's 100 percent chardonnay -- rich and full-bodied. (Detroit News food writer Kate Lawson, Homestyle editor Judy Diebolt, and wine writer Sandra Silfven) Toasts and Quotes - Original Content That the pace of the bad things can quickly pass, we can experience the good things more slow The rainfall must come, for there are some who need it, but it need not come often with storms. To the slings and arrows of outrageous fortune, may this year find us far better armed. Home Page Previous Factoid Top Sites
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