Financial Planning in the Millennium

1. Purpose: To focus on the financial planning issues that face us in the New Millennium.
   
2. Stock Market 101: History, risk/return, historical yields, and time value.
   
3. Retirement Investing: IRAs, 401(Ks), and 403(Bs). Mutual fund selection.
   
4. Elder Care Issues: Alzheimers. Long-term care insurance, durable power of attorney, and living wills.
   
5. College Financing: Custodial accounts.
   
6. Discussion: Questions and answers.

• The DJ began in 1896 with 12 stocks. This index was created by one of the founders of the Wall St. Journal, Charles Dow. He added the name of Edward Jones, his partner at the “Customer’s Afternoon Letter.”
  
• It grew to 20 stocks in 1916, and to 30 in 1928. The only original is GE.
  
• To determine the closing price: Add all of the 30 stocks, and divide by 0.34.
  
• The media refers to the Dow Jones as “The Market.” It closed on May 26, 1896 at 0.86. On May 24, 1999, it closed at 10,654.67.
  
• Here is a list of the Dow 30 stocks:
  Allied Signal
  Alcoa
  Disney
  Dupont
  Eastman Kodak
  Exxon
  GE
  GM
  Goodyear
  Hewitt Packard
  IBM
  International Paper
  Johnson & Johnson
  McDonald's
  Merck
  MMM
  JP Morgan
  Philip Morris
  Proctor & Gamble
  Sears
  Union Carbide
  United Technologies
  Wal-Mart

Stock Market Fundamentals:
Let's unlock the mysteries of the four major indices.

• Dow Jones Industrial Average. This index represents about 20% of the entire market capitalization.
  
• The S&P 500 Index is a broader mix of stocks, and is used as a general market performance barometer.
  
• The Nasdaq-AMEX Market Group: The Nasdaq (Over the Counter: OTC) is an electronic market that contains many new technology issues. If we think of the Dow 30 as the Industrial Age, the Nasdaq represents the Informational Age. The AMEX (American Exchange) is a trading floor market. These two merged in 10/1998.

S&P 500 Index:

• This index has a broader focus than the Dow Jones Index, and is a better market indicator.
  
• 18.5% of this index is in Technology.
  
• Top Ten Holdings: As of 1998.
  Microsoft: 3.5%
  GE: 3.4%
  Intel: 2.0%
  Wal-Mart: 1.9%
  Exxon: 1.8%
  Merck: 1.8%
  IBM: 1.7%
  Coke: 1.7%
  Pfizer: 1.6%
  Cisco: 1.5%
  

• Risk versus Return. Most of us are risk adverse, and will search for the safest investment. As we will see from the next slide, the safest investment has not always yielded the highest returns on a historical basis.
  
• Interest rates: Set by the Federal Reserve, not by the President or Congress. The Federal Reserve Board is a highly unknown but powerful entity that sets our monetary policies. One of the tools that they use to govern the economy is interest rates. When the economy is heating up, they raise rates to slow down activity. In contrast, when the economy is stagnant, they lower rates to stimulate growth, which place more money in circulation. These changes in rates have a direct effect upon the inflows and outflows into the stock market as a whole.
  
• Corporate earnings that meet or beat the estimates of Wall St. analysts. Unlike privately held firms, publicly traded companies have to report their earnings every 90 days. These earnings are the subject of intense scrutiny by Wall Street analysts who wield tremendous influence. If the analyst projects a certain earnings per share (EPS) figure, and the company announces a lower figure, usually there will be a sell off in that particular stock. Sometimes, a sell off in a market leader, such as Microsoft, can affect the rest of the market.
  
• Factors: Fundamental, Technical, and Psychological.
  The fundamental factor that moves the market is earnings. Whether you run a lemonade stand, or a software company, the bottom line is earnings. Are you making or losing money? How much debt is on your balance sheet? Do you have enough cash to cover anticipated expenses?
  
• Technical factors refer to how well the stock itself is doing against its own performance. For example, what was its price a year ago, or three months ago? Is the trend up or down? On a daily basis, is the stock price advancing or declining? Are insiders buying or selling their shares? These factors represent technical indicators.
  
• Psychological factors, which in our opinion are the most significant, refer to the emotional component of the market. Are investors bullish (positive) or bearish (negative)? Where do they think the economy will be in the future? Are their jobs safe, and can they make large ticket purchases without worry? Also, the global component needs to be addressed. The United States no longer is a financial island. Economic events in Asia, Africa, Latin America, and Europe affect our markets in ways that did not occur ten or twenty years ago. One of the reasons behind this global influence is the advent of the Internet. Information is exchanged in ways that were never imagined, and the individual investor has access to data that previously was the domain of the professional brokerage houses.

"The Risk Is Not The Market; The Risk Is Not Being In It."

• The following data is courtesy of Dr. Campbell Harvey, Professor of International Business. Duke University Fuqua School of Business.

How $1 compounded between 1925 and 1995.

• Small stocks: $3425.25.
  
• S&P 500: $973.85. (Historical annual return of 10.5%.)
  
• US Long term corporate bonds: $44.15.
  
• US Long term govt. treasury bonds. $30.68.
  
• 30 day treasury bills: $12.52.
  
• Inflation rate: $8.51.

"Get your facts first, and then you can distort them as much as you please." Mark Twain

Average annual rates of return from 1926 to 1996:

• Small Stocks: 12.5%
  
• Real Estate: 11.1%
  
• S&P 500: 10.5%
  
• Dow Jones: 10.0%
  
• Bonds: 5.2%
  
• Treasury Bills: 3.7%
  
• Inflation: 3.1%
  
• The above summary of historical returns appeared in the Wall Street Journal on 9/30/96 and listed Ibbotson Associates and Ned Davis Research as sources.
  
  
• The figures in the following chart represent 50 year, 20 year, 10 year, and 5 year annual percentage returns. The time frame is between 1948 and 1997.
  
• Small Company Stocks: 14.9%, 17.7%, 16.5%, 19.4%
  
• Large Company Stocks: 13.1%, 16.7%, 18.1%, 20.2%
  
• Foreign Stocks: N/A, 14.4%, 6.6%, 11.7%
  
• Long term Corp. Bonds: 6.1%, 10.3%, 10.9%, 9.2%
  
• Intermediate Govt. Bonds: 6.0%, 9.5%, 8.3%, 6.4%
  
• Treasury Bills: 5.0%, 7.3%, 5.4%, 4.6%
  
• U.S. Inflation Rate: 3.9%, 4.9%, 3.4%, 2.6%
  

  Source: Ibbotson Associates, Chicago, Illinois.
  Annualized Returns for Periods Ended 12/31/97.

Rule of 72:
72 divided by the interest rate determines the amount of time that it takes to double your money. What if you had $10 today? How long would it take to double?

• Bank: 3.0%. 72/3 = 24 yrs.
  
• S&P 500: 10.5%. 72/10.5 = 6 3/4 yrs.
  
• Large Stocks: 13.1%. 72/13 = 5 1/2 yrs.

Note:
I went into the audience, and flashed a $10 bill. I gave our clients four choices: 14, 15, 24, and 25 years. When the correct figure was given, I presented the individual with the original $10, and then "doubled" his money with another $10 bill. The audience applauded after the second gesture.

• S&P 500: Historical Rate of Return of 10.5%.
  
• How much a month at ages 25, 35, and 45 do you need to save to reach $1 million by age 65?

At 25: 40 years. Annual: $1784. Monthly: $148.67 x 20 = $71,310.
At 35: 30 years. Annual: $5003. Monthly: $416.92 x 30 = $150,090.
At 45: 20 years. Annual: $14926. Monthly: $1,243.83 x 20 = $298,520.

• IRAs, 401(Ks), and 403(Bs) are specialized retirement savings accounts that grow tax deferred.
  
• Since we are spending more years in retirement, proper planning has become essential.
  
• Social Security is not guaranteed to satisfy all of our needs.
  Individuals now bear the responsibility to manage their own retirement plans.
  
• In 1950, there were 16 workers for each retiree. In 2025, the ratio is projected to be 2:1.

• Federal Reserve Chairman Alan Greenspan does not like the idea of augmenting the Trust Fund with stock market investments, which further erodes your social security savings.
  
• Most of our SS savings are invested in treasury bills. As we saw earlier, these are not good long-term choices.

Assumptions:

• $30,000 salary.
  
• 28% tax bracket.
  
• Saving $3,000 per year at 10.5%.
  
• $115,000 difference after 25 years.
  
• Your savings grow without a tax bite.

• Maximum contribution of $2000 per year in earned income. You don’t pay annual taxes on capital gains, which is the prime benefit of the IRA.
  
• Tax deductibility: Up to $2000; however, if covered by a company pension plan, you can’t take the full deduction if you earn over: $30,000 for an individual return, and $50,000 for a joint return.
  
• Withdrawals can begin at the age of 59 1/2, but must start by 70 1/2. They are taxed as ordinary income.

Source: Mutual Fund Magazine: IRA & 401(K) Guide: February, 1999.

This program was named after Senator William Roth of Delaware.

Advantages over the regular IRA:

• Withdrawals are completely tax-free after age 59 1/2, and you can continue to make deposits past the age of 70 1/2.
  
• No mandated date to start withdrawals, and account balances transfer to your heirs tax-free.
  
• "Future First" by Legg Mason enables you to start with $50 per month.

Disadvantage: No annual tax write-off.

• To pay for certain college costs for yourself, a spouse, or (grand)children.
  
• Up to $10,000 to buy or build a house.
  
• Medical expenses that exceed 7.5% of Adjusted Gross Income (AGI).
  
• Transfer to a new Roth IRA. AGI must be less than $100,000.
  
• Funds must be in the account for 5 years to avoid the 10%
  early withdrawal penalty.

• A deduction from your paycheck before taxes.
  
• You can contribute up to 15% of pretax earnings up to a total of $30,000 per year, including employer matches.
  
• Money withdrawn from your 401(K) and 403(B), which is a plan for non-profits, is taxed as ordinary income at retirement, as long as you are over 59 1/2.
  
• You can start withdrawing when your plan allows; however, annual distributions have to be taken at 70 1/2.

1. Basing investment choices on recommendations of co-workers.
2. Choosing the safest investment, without understanding that all investments involve risk.
3. Assuming the most aggressive investment thinking will automatically produce the greatest return.
4. Allocating assets based on the number of available funds. For example, if the company offers 10 funds, putting 10% into each.
5. Putting most of your assets into company stock.
6. Not contributing to your 401(K) because you don’t like the choices. Even a poor plan is better than no plan.
7. Making investment selections without taking account what else you own. Look at your whole portfolio, including your spouse’s retirement plan.
8. Trying to time the market.
9. Taking money out when you leave a job. Roll it into an IRA.
10. Not maximizing your employer’s contribution.
Source: Harvard Financial Planners.

• Ric Edelman, author of "The Truth About Money," said regardless of your financial goals and risk tolerance, you should be putting all of your retirement money into stocks.
  
• 66% of 401(K) holders are invested in the Market or company stock. Kiplingers Magazine, May 1999.
  
• "The rates of returns on GICs and short-term corporate bonds are so low they barely keep pace with taxes and inflation. They often times do not."

• He is CEO of Berkshire Hathaway, which is a large holding company with several subsidiaries. 99% of his wealth is held in expensive BRK stock (Class A closed at $76,400 a share, and Class B at $2,470 a share, on 30 April 1999.)
  
• He invests and owns strongly managed, easy to understand companies: Coca-Cola, Dairy Queen, Disney, Exec. Jets, Flight Safety, FNMA, Geico, General Re, Gillette, McDonalds, See’s Candy, Washington Post, & Wells Fargo Bank.
  
• He does not invest in technology stocks, since he does not understand them, and can't project where they will be in five or ten years.
  
• Mr. Buffet has a net worth of $29.4 billion. His annual reports are legendary. "We like to eat our own cooking."
  
• BRK’s Annual Growth Rate from 1968-1998: 25.4.%
  ($1,000 has grown to $889,050.)

• During his tenure at the Magellan Fund, he outperformed the S&P 500 by 10.3%.
  
• $1,000 invested with him in 1977 grew to $21,000 in 1990.
  
• He believes that amateurs can beat the experts. "The best investing clues can be found at the mall, on the school playground, or at people’s workplace." He learned about Hanes Pantyhose, along with cosmetic and clothing stocks, from his wife and daughters.
  
• Know the story of a company, and invest in successful companies.

• There are over 613 fund companies in the United States that sell over 9000 funds.
  
• The first fund, Massachusetts Investment Trust, was created in 1924.
  
• 66 million Americans own mutual funds.
  
• Stock funds hold 54% of a total investment pool of $5.4 trillion dollars.
  
• 75% of mutual funds fail to beat the benchmark S&P 500 stock index.

• Investors Business Daily: Rates every mutual fund in the USA.
  
• Wall Street Journal: Has a daily mutual funds section.
  
• Barrons Magazine: Published weekly.
  
• Mutual Funds Magazine.
  
• Kiplingers Magazine.
  
• Morningstar Rating Service.
  
• S&P and Lipper Guides.

• Microsoft Research Wizard analyzes funds or stocks in layman's terms.
  
• Goals
  
• Size
  
• Holdings
  
• Performance
  
• Versus Peers
  
• Fund Manager
  
• Risk Profile

• Rated #1 by Barron’s Magazine.
  
• "6.8 million households invested online in 1998. The number will double to 13.8 million homes in the next three years."
  
• Are there any horse racing fans in the audience? Chris Ansley, who was trying to win the Triple Crown on Charismatic, has an interesting hobby away from the racetrack. He trades stocks on-line, and last year earned $1,000,000. By the way, Chris is a high school drop-out.

• Professional management and investment research.
  
• Portfolio diversification, which spreads your risk to a variety of industries.
  
• Many funds are commission free, which offers an economical way to invest.
• Most 401(Ks) are without sales fees.
  
• Dollar cost averaging: You can invest a fixed amount every month, and not worry about daily market fluctuations.

• Have you read a quarterly or annual report? These will tell you the portfolio mix; the prospectus often does not.
  
• Is it a load or no load fund?
  
• How many years has the fund manager been there?
  
• What is the fund's performance over the last 1, 3, 5, and 10 years?
  
• If your broker suggested it, how much of their money is invested?

3 Factors:
1. Your investment goals.
2. How much time it will take to reach those goals.
3. How much risk you can tolerate.

• Types of funds:
  Aggressive Growth, Asian, Balanced, Bond, Cash Reserve, Europe, Global, Growth, Income, Index, Large Cap, Latin America, Sector, Small Cap, and Value.>

Dart Board Example:
The audience was shown a dart board with the following choices:

• Fidelity Magellan
  
• Janus 20
  
• Legg Mason Value Trust
  
• Legg Mason Focus Trust
  
• Vanguard S&P 500 Index

• The largest mutual fund in the world, with over $90 billion in assets. It was managed by Peter Lynch from 1977 to 1990. Return of 2,000%. Magellan is only available via 401(Ks) & 403 (Bs).
  
• Top Holdings: 12/31/98. GE, Microsoft, AOL, Intel, Cisco Systems, Home Depot, MCI, Lucent, Wal-Mart, Merck.
  
• Rate of Return:
  1 yr. 34.96%.
  5 yr. 20.04%
  10 yr. 19.01%
  Sales Fee: 3%

• Concentrates on only 20 to 30 stocks, which can lead to volatility and high returns. Recently closed to individuals, but is still available via company sponsored retirement plans.
  
• Top holdings: 12/31/98. AOL, Dell, Microsoft, Time Warner, Nokia, Cisco, Pfizer.
  
• Rate of Return:
  1 yr. 79.35% (No typo!)
  5 yr. 29.14%
  10 yr. 25.58%

• "The purchase of securities that appear to be undervalued in relation to the long-term earning power or asset value of their issuers." Legg Mason
  
• Same fund manager since 1982: William Miller.
  
• Top Holdings: 12/31/98. AOL, Dell, Chase Manhattan, Berkshire Hathaway, Compaq Computer, FNMA, IBM, MCI.
  
• Rate of Return:
  1 yr. 48.04%
  5 yr. 32.01%
  10 yr. 20.92%

• "Your return is based upon the fundamental economics of the underlying business." Legg Mason
  
• Top Holdings: 12/31/98. Berkshire Hathaway, AOL, AMEX, Citicorp, Harley Davidson, International Speedway, Lloyds Group, McDonalds.
  
• This fund has a large holding in Berkshire Hathaway.
  
• This is an excellent opportunity to invest in the "Buffet Way" without a sizeable bankroll.
  
• Rate of Return:
  1 yr. 41.47%
  3 yr. 28.86%
  Since the date of inception in April, 1995: 26.72%.

• The ultimate choice for balance and diversification. 18.5% is in technology. $80 billion in assets; ranks 2nd in sales.
  
• Top Holdings: 12/31/98. Microsoft, GE, Intel, Wal-Mart, Exxon, Merck, IBM.
  
• Rate of Return:
  1 yr. 28.59%
  5 yr. 23.93%
  10 yr.19.00%

• A brain disease: It causes dementia, psychosis, and a complete loss of identity and bodily functions.
  
• A primary risk factor is age.
  
• Increasing age: From age 65 to 74, about 3 percent of people have Alzheimer's. From age 75 to 84, the figure rises to 19 percent. For those 85 and older, the fastest growing group of Americans, Alzheimer's will afflict 47 percent.
  
• 4 million Americans have this disease.
  
• It is estimated that over 70,000 families in the Washington, DC area are touched by Alzheimers.

• With 115 companies, shop around.
  
• Make sure you are eligible for coverage.
  
• Familiarize yourself with the policy.
  
• Understand how benefits will be paid: expense incurred vs. indemnity. A four year benefit period is recommended.
  
• Evaluate the financial health of the insurer with A. M. Best ratings.
  
• Consult with a knowledgeable advisor such as Stuart Eisen of Legg Mason Walker Wood.

• "A written document in which a competent adult individual (the "principal") appoints another competent adult individual (the "attorney-in-fact") to act on the principal's behalf. Durable means that the power remains in force for the lifetime of the principal, even if he/she becomes mentally incapacitated."
  
• You, not a Court appointed Guardian, decide who will handle your affairs.

• "A document that states how we wish to be treated, if we become incapacitated by illness, injury, or old age."
  
• You define how you want to be treated if incapacitated, whether or not you will receive life-support, donate organs, and who should (not) make medical decisions for you.
  
• You don’t have to name a specific individual or doctor to make decisions.
  
• Peace of mind. No painful decisions for your family.
  

• Is the overall environment hygienic?
  
• Do the residents look drugged, disheveled, or abused?
  
• Does the facility provide references from current or former clients?
  
• Is the staff responsive to your questions and concerns?
  
• Do they perform background checks on their employees? Unfortunately, resident abuse is a serious concern.

• 10 shares of Microsoft were purchased for the child of a good friend of mine.
  
• I opened a custodial account at Fidelity Investments, whereby I (the adult) manage the money for the minor until he attains the age of majority, which is 21 in the state of Maryland.
  
• In 3 1/2 years, the stock has split 3 times.
  
• The account now has 80 shares worth $6,480.
  
• In a savings bond yielding 6%, his money would have taken 12 years to double.
  
• At age 21, he will be given the account. His cost basis will be the original purchase price.
  
• Microsoft closed at $81 on 4/29/99. Since the IPO in 1986, the stock has split 8 times.1 share @ $21 has grown to 144 shares @ $81 = $11,664.

• You can contribute up to $500 per year for a child. There is no annual tax deduction.
  
• This is an ideal custodial account to open when a child is born, for the investment stops at age 18.
  
• $500 a year for 18 years at 10% = $25,000. (www.fincalc.com)
  
• Another custodial choice to prepare for the significant cost of higher education.

• The research provided in this presentation is for informational purposes only, and is not a recommendation to buy any products.
  
• AZTECH Corporation and the presenters are not liable for any financial losses incurred due to the research provided.
  
• Prior to any financial or legal decision, always consult with your investment advisor and attorney.

• This project was researched and composed by Steve Amoia.
  
• BJ Stanger, VP of Project Management, proofread the written document.
  
• William J. Gregg, Jr., Senior Field Services Engineer, supplied several investment magazines and articles.
  
• Stuart Eisen of Legg Mason Walker Wood (DC office) provided a variety of background information.

Charles Dow, the History of the Dow Jones Averages, Dow Jones Averages Chronology 1884 - 1995. http://www.cftech.com/BrainBank/FINANCE/DowJonesAvgsHist.html
Washington Post: 2/19/99. "Wall Street’s New Bullwhether." Page E1. Author: Tim Smart.
Nasdaq/Amex: http://www.nasdaq-amex.com/asp/majorindices_java.stm
Cumulative Wealth Chart: Dr. Campbell Harvey, Professor of International Business. Duke University Fuqua School of Business. http://www.duke.edu/~charvey/Classes/ba350/history/history.htm
Wall Street Journal, "Historical Returns." 9/30/96. Sources: Ibbotson and Ned Davis Research.
T. Rowe Price Retirement Research: http://www.troweprice.com/retirement/historical.html
Financial Calculator: http://www.fincalc.com
Future First: http://www.leggmason.com/Funds/LMFunds/lmfoc.html
"More Want To Exit Social Security." http://www.msnbc.com/news/248627.asp
"AIM Funds Retirement Planning: http://www.aimfunds.com/Education/Retirement/403bPlan/403bPlan.html
Morningstar 401(K) Series: Author: Kathryn Allyn.
http://www.morningstar.net/News/MS/FeatureP/401k/990319feature-1.msnhtml
"10 Common Mistakes of 401(K) Plans." Mutual Fund Magazine: IRA & 401(K) Guide: February, 1999, p. 37.
"Don’t Sell Your 401(K) Short." Comments by Rick Edelman.
http://cnnfn.com/quickenonfn/investing/9903/10/q_gic
Kiplinger’s Magazine, May 1999, "Ins and Outs of 401(Ks)."
Berkshire Hathaway Web Site: http://www.bershirehathaway.com
“The Peter Lynch Common Sense Approach.” http://tqd.advanced.org/3096/41pick1.htm
Wall Street Journal: 1/29/99. “Mutual Fund Industry Faces a Run for Its Money.” Author: Paul Lim.
Stockmaster. http://www.stockmaster.com
Yahoo Finance. http://quote.yahoo.com/
MSN Research Wizards. http://investor.msn.com/research/wizards
DLJ Online Brokerage: http://www.dljdirect.com/?msn99_txtgomez
“How to Invest on the Net.” Mutual Fund Magazine, April 1999, page 34.
Investors Business Daily, 2/17/99. “Stocks Provide Best Long-Term Return Superior Results Require Patience with Short-term Volatility.” Author: Dan Moreau.
“Build Your Own Mutual Fund Portfolio.” CBS MarketWatch. http://cbs.marketwatch.com/funds/feature/fp_chart5.htx?source=htx/http2_mw
Fidelity Magellan Fund: http://personal151.fidelity.com:80/gen/mflfid/3/316184100.html
Janus 20 Fund: http://www.janus.com
Legg Mason Value Trust Fund: http://www.leggmason.com/Funds/LMFunds/LMVTX.html
Legg Mason Focus Trust Fund: http://www.leggmason.com/Funds/LMFunds/lmfoc.html
Robert Hagstrom, Jr. “The Warren Buffet Way.”
Vanguard S&P 500 Index Fund: http://majestic.vanguard.com/FP/DA/0.1.Performance/012160635409161157/1178.69095?FUND_ID=40
“Estimated Prevalence of Alzheimer's Disease in the U.S." Millbank Quarterly (1990) 68:267. http://www.alzheimers.com http://www.alz.org
“Long-term Care Insurance.” Author: Stuart Eisen, Financial Advisor, Legg Mason Walker Wood, Washington, DC branch office.
Elder Web: Power of Attorney. http://www.elderweb.com/poa.htm The Living
Wills Registry (Canada). http://livingwills.com/lwdef.html
Microsoft Stock Info.: http://www.microsoft.com/msft/stock/splitfaq99.htm