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2004 Markets

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The stock market just finished a third straight week of gains. This is refreshing after a very volatile summer. Alan Greenspan announced in July that the FOMC will follow a "measured pace" in raising interest rates. Consumer confidence and economic growth both just made stronger showings than widely expected. The markets are now looking for some good news on oil prices, economic conditions and progress in Iraq.

Although the last three weeks have been welcome, the S&P is down .61 year to date. The tech recovery hit a sharp bump and the NASDAQ is down 7.51% for the year. The corporate bond index is up 2.89%.

Try focusing on a disciplined plan for saving and not the media noise about the markets.

-Benjamin Graham

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Scandal Update

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The SEC settled fraud charges with the San Francisco based Van Wagoner funds. The funds are paying an $800,000 fine for defrauding shareholders and mispricing securities. Garrett Van Wagoner must resign and not serve as an officer or director for any mutual fund for seven years. We have not recommended these funds for several years.

Since regulators exposed widespread illegal trading last year, mutual funds have paid around $3 billion in fines, returned some money to shareholders and reduced fees. However, Eliot Spitzer, Attorney General of New York, and his staff are reportedly still working on a long list of cases against fund managers.

The SEC voted 5-0 to ban "directed brokerage" fees. These occur when a mutual fund channels commissions to Wall Street firms that promote its shares. The SEC also approved greater disclosure on mutual fund managers’ pay and any conflicts of interest that exist.

The SEC is considering more rules to regulate the mutual fund industry. One is reportedly the ban on 12(b)1 fees. These fees, capped at 1%, allow a mutual fund to pay distribution and marketing fees out of fund assets. These fees have often been used to pay trailing commissions to brokers, which is in effect a hidden load. Wiiken & Gorman, as fee-only planners, never accept any load and would be delighted to see this fee banned or seriously revised.

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Identity Theft II

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This is the second of an ongoing series about identity theft. We hope the advice helps you avoid problems.

1. The Phish: If you get an e-mail that directs you to an official looking website where you are asked for a PIN or personal data, BE SUSPICIOUS. Up to 5% of consumers fall for these e-mails, known as Phish, because they believe Phish is from their bank. Legitimate banks do not ask for sensitive data in an e-mail. Go to www.antiphishing.org and report the e-mail.

2. Copy both sides of everything in your wallet. Keep the copy in a safe place in case your wallet is stolen. Having the contact numbers will save you time.

3. When you are writing checks to pay on your credit card accounts, put only the last four digits of the credit card number on the check.

4. Use a work phone number on your checks and NEVER imprint your Social Security number. If you have a PO Box, use that instead of your address.

Paying Off a Mortgage Before Retirement.

The decision on paying off a mortgage is both financial and emotional. Looking only at the numbers, the lower your mortgage rate, the less sense it makes to pay off the loan. The interest is deductible and you are using the bank’s money to build appreciation in your home. If your loan is 5% or lower, you can almost surely earn more by investing in a diversified portfolio. You would be better off maximizing your retirement contributions than paying off the loan.
Still, the freedom of not having a mortgage in retirement brings peace of mind. If you expect to be on a limited retirement income, a mortgage payment can feel burdensome. In that case you can combine the financial and emotional components. You can pay extra on your mortgage monthly to shorten the life of the loan.

Housing Bubble?

Based on surveys of homebuyers in 4 major cities, many buyers have exaggerated expectations of real estate values. Investors are shifting into real estate based on "irrational exuberance" and having been burned in the bear market. Yet many are not looking at real estate fundamentals.

The law of supply and demand in Northern California continues to drive up prices. While mortgage rates remain low, buyers can still manage to purchase. However, if mortgage rates rise, more will be priced out of the market or unable to pay their ARM loans. This could lead to a softening in prices, rather than a bursting of the bubble. Remember that areas with tight housing supplies tend to have more volatile markets, both going up and down. However, if you are investing for the long haul, this volatility could be your friend.

To ARM or Not to ARM

The average life of a mortgage is currently six years. Since adjustable rate mortgages (ARMs) carry lower interest rates than fixed mortgages, they may be appropriate for many buyers.

Homeowners who expect to refinance or sell their home within five years could save a lot of money by choosing a 5/1 ARM, where the interest rate is fixed for 5 years and then adjusts annually. This class of ARMs, known as hybrid ARMs, can carry fixed interest rate periods of up to 10 years.

Most borrowers focus on the possible increase in interest rates and ARM payments, which is a major risk. However, ARM payments will also drop when rates decline.

If an ARM suits your circumstances, look for one with low lender fees, low caps and no origination fees. Not all ARMs are the same, but you want to examine this tool at the same time you are reviewing fixed mortgages to be sure you have chosen the best loan.

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Mutual Fund News

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Fremont Funds: AMG, owner of the Managers Funds, has agreed to buy assets under management from Fremont. This includes Fremont Bond and US Microcap. This sale is a matter of concern coming on top of the recent SEC investigation into Fremont.

Status: We are no longer recommending the Fremont Funds pending a resolution with the SEC. We are deciding to sell or hold with clients on a case-by-case basis. Call if you wish to discuss these funds.

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Accessing Custodial Accounts

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Many parents open custodial accounts for their children without understanding the rules for accessing them. You can use the custodial account money for just about anything that benefits the child. This includes education, music lessons, his or her own car or transportation to college. However, the purchase must be for the child’s benefit alone! For example, the money should not be used for a down payment on a family home.

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Public Workers Can Save More For Retirement

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Full-time employees of California, its university system and some cities and counties can now contribute to two defined contribution plans for a total of $26,000 per year ($32,000 if over age 50.) The three types of plans included are 401(k), 403(b) and 457 plans. Your employer must offer two plans for this rule to work. The state of California operates a 401(k) and a 457 plan under the Savings Plus name. The University of California is now offering a 457 in addition to its 403(b.) Many more school districts and nonprofits are beginning to offer a second plan to their employees. If you are able to maximize contributions, this is an excellent opportunity to build tax-deductible retirement saving.

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Charitable Gift Annuities—Are They For You?

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We recommend that you come in for an annual review when you receive your postcard reminder. We want to review life changes, tweak your portfolios and update other planning issues, such as insurance and taxes. We encourage you to contact us between annual sessions via e-mail or phone. We are here to resolve issues as they arise.

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Management

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Wiiken & Gorman manages money in pension plans, IRAs, personal accounts, and trusts. We charge a retainer fee for portfolio development, monitoring and reporting. We also help with financial life planning issues that arise. Please call us if you would like to work with us in this capacity. The minimum portfolio size is $500,000 and we welcome your business.