The Annual Houston Asset Management, Inc. “Cost of Loving Index”  reports very stable prices for Valentine gifts this year.  Favorite Valentine presents including a Dozen long-stemmed roses delivered and Godiva chocolates in a heart shaped box showed increases averaging 1.79% per year and 1.44% per year for the last four years for Valentines Day.  The “Cost of Loving Index”  which annually tracks the cost of Valentines gifts finds great news for Lovers everywhere.  Six of the nine gift items the Index tracks showed increases of less than 2% per year over the last four years.

If your Valentine is a wine lover you are in luck, the California Chardonnay Simi tracked by the Index showed a price increase of only .55% per year over the last four years.

The price of that sexy designer nightie you had in mind for your Valentine only went up 1.13% per year from 2006 to present.

“While the cost of loving may have it’s price, it is always worth it” says John Payne and Bob Frater, creators of the “Cost of Loving Index”.  The Index has been compiled since 1979.  A complete Valentine’s Day 2010 Index is reported below:

Around tax time, your attention is particularly focused on your finances and assets.  The current status of the economy can be unsettling and knowing how you can be prepared has become very important.  As you start working on your taxes, you’ll probably be reminded of some of the milestones that occurred during the previous year.  Did you recently move?  Has your relationship status changed?  Did you have a baby?  Are you now taking care of your parents?  Did you get a raise at work or change jobs?

If any of these milestones have occurred in the last year, they can affect how you should structure your long-term financial goals.  These events, as well as many others, can change the focus of your investment goals.

This is where we can help you.

Certainly, the past year may have raised questions or concerns, especially given the instability in the economy and stock market. Separately, your objectives or circumstances may have changed.  It wouldn’t hurt to have a financial eye review your goals with you to make sure you’ll still be able to achieve them.  Our primary concern is your financial well-being – let’s make sure that your investments are in order and that you won’t be facing any unexpected surprises.

Per our discussion on the show January 7^th , like any other industry, financial planning is not without its jargon, credentials, and licenses.  Unfortunately, this alphabet soup of initials tends to confuse people within our industry, not to mention clients.  Therefore, it might be of benefit to explain some of the primary qualifications.

There are basically three categories: 

§         A Designation (like a MBA) proves an individual has demonstrated a specified level of professional and/or educational competence. 

§         A License or Registration (like a driver’s license) means an individual has satisfied the requirements of some governmental agencies (that sometimes include levels of testing or education). 

§         Associations are professional organizations that provide membership benefits and networking opportunities.

DESIGNATIONS

§         Certified Financial Planner^Ò (CFP^Ò) is a registered trademark of the Certified Financial Planners Board of Standards (CFPBS).  An individual must be approved to use the CFP^Ò marks and must complete a six-part (18 credit) curriculum covering general financial planning, investment, insurance, estate planning, taxes, and pensions. The courses are taught at over 100 universities across the country; however, all requirements and examinations are administered by the CFPBS, who actually own the CFP^Ò trademark and assures continuity across the nation in regard to the education content.  To hold a CFP^Ò designation, an individual must pass a two-day examination, have been in the financial services industry for three years, and abide by a Code of Ethics.

§         Certified Public Account (CPA) is a designation awarded to an individual who has passed a two-day examination covering tax and accounting procedures. 

§         Certified Life Underwriter (CLU) and Charter Financial Consultant (ChFC) are designations awarded by the American College in Pennsylvania.  These are oriented to the life insurance industry. 

§         Attorney is a person who is licensed to practice law and has passed the State Bar examination.  Attorneys who specialize in specific areas of law pass additional exams are referred to as “Board Certified” in a specialty.

§         Titles such as “Trust Officer”, “Financial Consultant”, or Vice President” have no education or licensing requirements.  These titles should be considered not as standards of competency, but only as job descriptions.

REGISTRATIONS & LICENSES

§         Registered Investment Advisor (RIA).  The Securities and Exchange Commission (SEC) require any individual or corporation providing financial planning advice for a fee to be registered at the federal or state level.  This person or corporation must fully disclose historical background, compensation, etc. and are subject to periodic review of books and records by the Securities and Exchange Commission and the State Securities Boards. 

§         Registered Representative  An individual who sells securities (stocks, bonds, mutual funds, REIT’s, and UITs) is registered with FINRA and a broker/dealer firm.   As part of the registration process, securities professionals must pass examinations administered by FINRA to demonstrate competence in the areas in which they will work. These mandatory qualification examinations cover a broad range of subjects on the markets, as well as the securities industry and its regulatory structure, ensuring a minimum level of understanding and expertise.  For a general securities registration, an individual would need to pass the Series 7.

§         Registered Principal A Representative who oversees the Registered Representatives of the Office of Supervisory Jurisdiction (OSJ) of the broker/dealer.  This individual has successfully completed an administered FINRA exam in order to supervise.  For a general securities supervisor registration, an individual would need to pass the Series 24.

§         Registered Assistant  A staff person who has passed the securities examination to be a Registered Representative (Series 6 or 7) but cannot solicit transactions, make recommendations, or render investment advice.  This person can place unsolicited orders, give market quotes and respond to client inquiries. 

§         Real Estate Broker  An individual who sells real estate must complete 60 hours of college level courses with 12 of those being real estate courses, pass the state real estate exam, be registered with the State of Texas, maintain eight hours of continuing education per year, and subscribe to the TREC Code of Ethics. 

§         Insurance Agent  An individual who sells insurance must pass an exam covering the state regulations in regard to insurance, and is licensed with the state.  They must complete 15 hours of approved courses per year. 

ASSOCIATIONS

§         Financial Planning Association (FPA) This professional association is the result of a merger between The Institute of Certified Financial Planners (ICFP) and The International Association for Financial Planning (IAFP) associations. The FPA’s members are CFPs^Ò or are in process of becoming CFPs^Ò.  This organization is based in Denver and has approximately 13,000 members.  The Financial Planning Association® (FPA®) is a leadership and advocacy organization for those who provide, support and benefit from financial planning. One of their most recognized resources is PlannerSearch, a unique tool that allows the public to find a financial planner who will deliver advice using an ethical, objective, client-centered process; use it at www.fpaforfinancialplanning.org. 

§         National Association of Personal Financial Advisors (NAPFA)  This organization is for Fee-Only comprehensive financial planning professionals. Individuals join NAPFA to enhance skills, market services and be a part of a collective, influential voice on matters that affect them and their clients. Through the “Find an Advisor” search function, NAPFA offers consumers access to truly comprehensive, strictly Fee-Only financial advisors. www.napfa.org

If you have funds in a retirement account, you’ve probably been advised not to withdraw that money until you’ve reached minimum retirement age of 59 ½. This is sound advice, as there is typically a 10% penalty fee in addition to income taxes due at the time of withdrawal. But did you know that there are ways to withdraw funds without incurring this extra fee?

The Internal Revenue Code has a section called a 72(t) that allows “substantially equal periodic payments”. By using 72(t), it stipulates that funds may be withdrawn penalty-free from an IRA or qualified retirement plan at any age prior to age 59 ½.

To qualify for this treatment, the withdrawal must be part of a series of substantially equal periodic payments determined by the participant’s life expectancy or the joint life expectancy of the participant and a designated beneficiary (typically the spouse). There are three approved and accepted methods for receiving these payments, all of which result in a different sum paid to you. In each, you must pay ordinary income taxes on the withdrawal, but you will not have to pay the 10% “excise tax” due to a premature distribution.

Does this sound confusing? “Complex” is probably a more descriptive word. There are several tricky aspects to engaging a 72(t) and incorrectly calculating the correct annual withdrawal amount may negatively affect you.  In fact, once such a plan is established, changes or modifications to a 72(t) program may incur severe penalties from the IRS. Investors should note that distributions taken under a 72(t) program may be subject to surrender charges and/or early redemption fees based upon the type of investments held within the qualified plan. 

This article is merely an invitation to open a discussion regarding what options are available. It is important that you work with a financial advisor who understands all the “complexities” and can explain them to you frankly and in language you can understand.

Have you ever gotten a virus? If so, your doctor probably recommended the basics: get some rest, drink plenty of fluid, and take Ibuprofen as needed. If all goes as expected, you should be back on your feet in about 10 days. The problems afflicting the current market – the subprime mortgage crisis, the credit crunch, and an economic downturn – are similar. There is no quick fix. You just need to remember the basic principles of investing:

• Adopt an appropriate asset allocation strategy: A well-allocated portfolio includes diverse types of assets—such as stocks, bonds, cash, real estate, and others—that respond differently to market events. In general, an investor’s allocation should become less aggressive as he or she gets older. However, longer life expectancies and varied retirement ages make it important to assess your individual needs carefully. You should review your asset allocation each year and make changes as needed.
• Select diverse investments: If your doctor recommended that you drink lots of liquids, you could have ginger ale, orange juice, water, tea, or other options. It’s the same with investing. Each asset class includes many sub-classes. For example, a portfolio may include stocks of larger or smaller companies in the United States or overseas. Owning a variety of investments within an asset class can help reduce overall fluctuation in the value of a portfolio, even if it does not protect against loss in a down market.
• Avoid selling low and buying high: More than a few investors have “sold low” and “bought high” because their investment decisions were driven by emotion. Unfortunately, these investors often miss opportunities in the marketplace. If you’re tempted to move to cash, consider this: eight of the 10 biggest one-day percentage gains in the history of the Dow Jones Industrial Average occurred during the Great Depression[1].
• Take advantage of falling share prices: There is an upside to a down market. You have an opportunity to buy additional shares of companies at significantly lower prices. In fact, investing a set amount of money at specific intervals can be a simple and effective way to overcome the emotion of investing. 
• Keep a long-term perspective: If knowing that your investments were chosen for the right reasons—based on your goals, time frames, and risk tolerance—does not relieve your market jitters, try looking at the bigger picture. During the last century, there have been 21 periods of recession in the United States. The shortest lasted for six months, from January to July of 1980; the longest for 43 months, from August of 1929 to March of 1933[2].  More importantly, each recession was followed by a period of expansion.

No matter how unnerving the market’s downturn, history supports the idea that staying the course—with a well-allocated and diversified portfolio selected for your risk tolerance and investment horizon—is a sound way to pursue long-term financial goals. If you would like to review your portfolio or have questions about recent events, please call us. We look forward to talking with you about the potential opportunities of the current market.

Note: With any investments, past performance is not a guarantee of future performance. Risks associated with investing include the potential for declines in investment values due to market losses.

2009 has been one of those years that remind us what a roller coaster ride the stock market can be.  It has also illustrated that the media and the general public usually do the wrong thing at the worst possible time.

We started last year with the S&P 500 sitting at 903.25, a far cry from the 1,468.36 that we started at in 2008.  Twelve months ago, you couldn’t turn on the TV or radio without being bombarded with reports of fear and further economic turmoil.  As generally is the case, the media was selectively reporting the negative, providing for a self-fulfilling prophecy of further decline.  Unfortunately the masses having endured a devastating 2008, fell victim to emotion and began to flood the proverbial sidelines (cashed out). With fundamentals tossed to the wayside the emotional reactions cascaded, liquidations snowballed and the market continued to plummet to a low of 676.53 on March 9^th. 

The individuals who had moved out of the market during the spiral received affirmation that they had correctly “timed” the market and effectively reduced their loses.  Regrettably the vast majority had grown comfortable on the sidelines among their peers soaking up the negative views presented by the media, after all “this time was different.”

Last year, we gave our clients a chart, showing the results of an investment in the S&P 500, one year and two years after the bottom in each of the last eight market corrections.  We summarized in saying; “The average rate of return one year after a correction is 36.47%.  The average 2-year increase 53.86%.”  Many of them came to our subsequent review meeting with that January Letter in hand, asking if we thought that this type of recovery was really possible “this time”.

On March 10^th the roller coaster began its upward charge with the momentum that, so far, has exceeded the average we told our clients about last January.  We finished the year with whiplash as the S&P 500 gained greater than 64% off the March lows to close at 1,115.10!

It is often been said that, “the market climbs a wall of worry” and the last 9 months of 2009 illustrated this point well.  Those who were able to wade through the “noise” and manage their urge to move to more conservative positions were ultimately rewarded as the S&P 500 returned greater than 23% for the 12-month period.

The hardest part of investing is controlling the natural urge to sell when the market is cratering and to buy when the market is euphoric.  Ten years ago we entered a new decade in euphoria near the peak of the tech bubble.  Caution had long since been thrown by the wayside.  Any recommendation for diversification was met with skepticism, as technology was the only place to be. 

Today we enter a new decade rattled from the two bubbles of the previous decade and justifiable fear of the unknown to come.  The average investor still has ground to cover before breaching their October 2007 highs and many are no better off than they were in January 2000.  Consumers are stretched, banks are still suffering even though they are better prepared today than one year ago, and let us not forget the challenges the politicians in Washington face.

We believe there are three big issues that will foretell the short and long term outcome of this situation.

1)      Today our government has attempted to shorten this recession by infusing billions of dollars into our economy.  With less than half of the initial Stimulus Package actually spent, our economy has clearly started to turn.  Several of the first stimulus initiatives will end in the next few months.  Will the economy be strong enough to continue in the right direction?

2)      A long-term fundamental change is the “de-leveraging” of the world.  As we have discussed before, the bulk of these problems were caused by giving some people credit that they shouldn’t have had.  These problems were magnified by financial institutions who underestimated the risk of “Guaranteeing” these loans, and over leveraged themselves.  These problem loans involve real people with real houses.  If a homeowner couldn’t pay his mortgage when he had a job…giving him more time now doesn’t fix the problem.  Homeowners and financial institutions that cannot meet their financial obligations must have “natural and logical consequences”, not bailouts.

3)      The last is the repercussions we will have to deal with from “Unintended Consequences”.  Many of us drive too fast and save time in the process.  The Unintended Consequences that we readily accept are increased gas consumption and a greater likelihood of an accident.  The same thing is true when a corporation over leverages or the government spends money it doesn’t have.  Regardless of how pure the motive, the decisions made now will have long term impacts on the future.  Hopefully the Unintended Consequences will not be worse than the current problems we are setting out to solve. 

As we begin a new decade, take a minute to put yourself in the shoes of someone on the brink of the 1940s.  During the previous decade they had endured the Great Depression and were now facing a level of uncertainty, worry and fear that we cannot fathom today.  Over the ensuing 70 years they would see wars, a president assassinated, scandals, the collapse of several of the largest (“too big to fail”) institutions in the country and multiple terrorist attacks (both home grown and from abroad).  Through it all, the capitalistic and entrepreneurial spirit of the people of this great country continued to persevere. 

So to those who are convinced that, “this time is different,” we say you are correct.  The variables have changed.  However the outcome is up to us.  Do we pursue the good example of those before us and venture into the uncertainty of the unknown in order to benefit from new discoveries that are unimaginable today?  Or do we succumb to the fallacy and pessimism presented by the media that “this time is truly different?”

We stand here at the beginning of a new decade, optimistic that history will repeat itself and that we will continue to overcome the adversities in our path. 

As we enter this new decade we appreciate the privilege of being available to assist you in aligning your portfolio with your goals and objectives in the years to come.

We thank you for the opportunity to be of service.

Investing involves risk including the potential loss of principal.  No investment strategy, including diversification or asset allocation, can guarantee a profit or protect against loss in periods of declining values.  Past performance is not a guarantee of future results.  Indexes are unmanaged and investors are not able to invest directly into any index.

The purpose of the Economic Report is to detail the economic and market forces that have helped shape returns for the preceding three months. For this report, however, a longer term view is warranted. Not only did the fourth quarter of 2009 cap off a volatile year, it brought to a close a potentially historic decade.  Looking at the decade as a whole provides some necessary context for recent performance and helps set expectations for the months ahead.

First, let’s consider performance, which was strong for the third straight quarter. The S&P 500 Index returned 6.04%[i] for the fourth quarter and a robust 26.46% for the year as a whole. This performance is all the more remarkable considering that the market bottomed in March 2009, with the S&P 500 down over 25% from the beginning of the year through March 9^th.

As encouraging as 2009’s performance was, the following chart provides some sobering context. Despite the strong finish, total return for the S&P 500 Index was down approximately 10% for the decade. 

Numerous commentators have debated the current market’s similarities to previous secular bear markets, including the early 1970s and the 1930s.  The British newspaper the Financial Times[ii] even went so far as to argue that the recently completed decade was the worst in the history of the financial markets.  The UK, European and Japanese markets saw similar weakness during the decade.

Do not imagine, however, that the gloom universal. For the emerging markets, the previous decade has been one of enormous success, particularly for Russia, China and India. According to estimates provided by Ned Davis Research, Inc[iii], Russia has enjoyed a secular bull market dating from October 1998 that has seen an 18.0% average annual return in real terms. India, since April 2003, has enjoyed a 25.1% average annual real return, while our nearest neighbors, Canada and Mexico have enjoyed longstanding secular bulls for most of the decade.

China in particular has seen ten years of unprecedented growth. Hamish McRae estimated in the British newspaper The Independent[iv] that China has grown from the world’s sixth or seventh largest economy to the second largest, behind only the United States. (China, according to McRae, is now the world’s largest automobile manufacturer, having recently nudged ahead of the US.)

So what does all this mean for US investors? What is the way forward? Here are a few major lessons the longer-term view provides.

We are in a secular bear market

With two speculative bubbles (technology and housing) sparking major slumps and flattening the decade’s returns, it is clear that the last ten years have been a secular bear market. The question is – are we still in one? Recognizing the transition from one secular environment to another is extremely difficult. According to some analysts, including Ned Davis Research[v], the current secular bear has not completely unwound. If you share their secular outlook, it may make sense to balance exposure to the current rally with defensive strategies and diligent risk management.   

Economic power is realigning

The United States is still the world’s leading economic power and we believe its financial markets are still the strongest, most liquid and transparent. However, if current trends continue, it will make little sense to call China, India and several other Asian and Latin American economies “emerging”. Rather they may soon be taking their place alongside the developed world on a substantially more level playing field than we saw in the 20^th century. At the very least, the secular bull market in many of these economies, coupled with the secular bear in the developed economies, argue strongly for more global exposure.

Government policies and capital market structures will likely evolve

Federal government response to the Great Depression of the 1930s and the capital market regulation that followed dominated our economy for decades. With the economic recovery still in development and policy responses still ongoing, it is impossible to determine the ultimate impact of the financial crisis. It seems likely, however, that your investing future will require careful navigation in potentially uncharted waters for some time to come.

It is clear that we are in a period of extraordinary complexity where professional management, a global perspective and careful risk management are critically important. We thank you for the trust you have placed in us and we will continue to work hard to navigate the challenges and opportunities on your behalf.

This chart shows the potential growth of $100 invested in the S&P 500 index from 1/1/2000 to 12/31/2009. The S&P 500 (a registered trademark of the McGraw Hill Companies) is an unmanaged basket of 500 stocks that are considered to be widely held and thus believed to be a good indicator of overall market performance.  This index of common stocks is weighted by market value. The performance of the S&P 500 does not reflect the application of fees. It is not possible to invest directly in an index.

The content of this market update was prepared by Genworth Financial (2010-015746A).

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results.

International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.