ibf - updates - 2009 (q2 v1.1)

Copyright © 2009 by Institute of Business & Finance. All rights reserved. v1.1

QUARTERLY UPDATES

Q2 2009

Quarterly Updates

Table of Contents

ECONOMICS

U.S. FEDERAL DEBT 1.1

CHARACTERISTICS OF ECONOMIC RECOVERY 1.2

MUTUAL FUNDS

ACTIVE FUNDS VS. INDEX FUNDS 2.1

FINANCIAL PLANNING

SEQUENCE OF RETURNS CAN MATTER 3.1

CONSERVATIVE, MODERATE AND AGGRESSIVE PORTFOLIOS 3.1

BACK-TESTED WITHDRAWAL RATES 3.2

WORDS OF WISDOM 3.3

SOCIAL SECURITY: MAKING THE MOST OF YOUR BENEFITS 3.4

BOOKS ON ―MUST READ‖ LISTS 3.9

WEBSITES 3.10

ANNUITIES

INCOME ANNUITIZATION 4.1

LIVING BENEFIT GUARANTEES 4.1

ANNUITY CONTRACT STRUCTURE 4.2

2007 VARIABLE ANNUITY SALES 4.2

STOCKS AND BONDS

MARKET TIMING 5.1

2008 INTERESTING FACTS ABOUT STOCKS 5.1

HUGE STOCK DECLINES 5.2

EARNINGS ESTIMATES 5.3

MUNICIPAL BOND AND TREASURY YIELD SPREAD 5.4

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ECONOMICS

ECONOMICS 1.1

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IBF | GRADUATE SERIES

1.U.S. FEDERAL DEBT

The table below shows that during the 1950s, it took $1.36 of debt to generate $1.00 of gross

domestic product (GDP). In the current decade, it now takes $5.81 of debt to generate that same

$1.00 of GDP (source: Ned Davis Research). In addition to the figures below, the Congressional

Budget Office (CBO) projects another $10 trillion in additional debt from 2010 through 2019.

U.S. Federal Decade Debt

Decade Change in Debt GDP Change Debt to GDP

1950s $338 billion $248 billion 1.4

1960s $752 billion $491 billion 1.5

1970s $2.8 trillion $1.7 trillion 1.7



2000-2008 $27.2 trillion $4.7 trillion 5.8

The average maturity for all U.S. Treasury securities outstanding is 4.7 years, the lowest in 25

years. In comparison, average maturity for public debt is 14 years in the United Kingdom, with

maturities in most other European nations averaging around 10 years. The U.S. has to continue to

roll over this debt as it comes due, meaning it is not just the ongoing deficit that has to be

financed, but all existing Treasuries as well. This leaves us vulnerable to having to fund debt

much more expensively if yields investors demand continues to climb.

The dollar remains the world’s reserve currency, accounting for 64% of global foreign exchange

reserves (versus the euro’s 26%). Imagine any private company maintaining an AAA rating

when the dominant global reserve country has a lower rating. It is simply not practical.

Many countries have run disturbingly high debt-to-GDP ratios but have seen them come back

down over time and without calamity. We even have our own example: The U.S. total debt-to-

GDP ratio was 125% after World War II, but had come down to 25% by 1980. Another example

would be Japan, which has maintained a high ratio of 150%–180% for the past decade.

The only way to manage our debt is to concentrate on both components of the equation—keep

spending in check and maximize economic growth, which in turn reduces the debt ratio by

increasing tax revenues. In other words, rising economic growth helps both numerator (debt) and

denominator (GDP).

ECONOMICS 1.2

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CHARACTERISTICS OF ECONOMIC RECOVERY

The National Bureau of Economic Research—largely seen as the official dater of

recessions—is typically late to the economy’s funeral, but even later to its rebirth. As you

can see in the table below, for the past four recessions, it has been a full 15 months, on

average, between actual recession end dates and the official NBER declaration.

Pinpointing a recession’s end is as much about semantics as anything else. For investors,

using foresight can make the difference between profiting from the turn and sitting on the

sidelines while it unfolds.

End of Recession Announcements Lag

Recession

Length

NBER

Announces

Recession

Start Date

“Miss” (lag)

in Months

NBER

Announces

Recession

End Date

“Miss” (lag)

in Months

1/80—7/80 6/3/1980 5 7-8-1991 12

7/81—11/82 1/6/1982 6 7-8-1983 8

7/90—3/91 4/25/1991 9 12-22-1992 21

3/01—11/01 11/26/2001 8 7-17-2003 20

12/07—? 12/1/2008 12 ? ?

Average 8 months 15 months

History shows the steeper the recession, the steeper the recovery. According to ISI

Group, there is an 80% correlation between depth of recession and first year of growth. In

the past, a –3% recession has typically seen 7% growth during the first four quarters of

recovery. Unfortunately, the math for stocks does not work as cleanly, with the

relationship between bear-market depth and subsequent bull-market height much more

tenuous.

When businesses start adding back capacity, they signal they are thinking about hiring

again. Ned Davis Research notes a 0.76 correlation coefficient between lending standards

and spending on equipment and software (the key component of capital spending). The

S&P 500 has seen its exposure to globalization increase, with foreign sales as a

percentage of revenue for the index jumping from 33% in 1995 to 41% in 2008.

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MUTUAL FUNDS

MUTUAL FUNDS 2.1

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2.ACTIVE FUNDS VS. INDEX FUNDS

During momentum-driven markets—when investors abandon fundamentals and chase hot

stocks or sectors—index funds generally outperform their actively managed peers. The

reason? Unlike active funds, index funds hold most or all of the stocks in their benchmark

indexes, most of which are capitalization-weighted

(stocks with a higher overall market value have a greater influence on an index’s

performance). So investors chasing performance drive up these indexes, in turn boosting

index funds.

Witness the past two momentum markets: First, the Internet bubble of the late ’90s, when

active funds suffered by holding fewer tech stocks than their benchmark indexes; then,

the liquidity crisis of 2007–2008, when anxious investors sold off everything but

Treasuries. As all stocks plummeted, active funds underperformed index funds due to

generally higher management fees. However, after a momentum-driven market has run

its course, investing fundamentals usually return to favor, and actively managed funds

typically regain the upper hand. The chart below illustrates the relative performance of an

all-stock portfolio consisting of average-performing (within their categories) actively

managed funds during and immediately following momentum-driven markets.

Note that actively managed funds have rebounded after underperforming through most of

2007 and 2008. The table below shows how actively managed U.S. stock funds have

fared against S&P 500 Index funds.

Market Downturn Active Funds vs. Index Funds

Internet Bubble

5/1/1997 to 2/29/2000

-6.7%

(active underperformed indexing)

Post-Internet Bubble

3/1/2000 to 12/31/2001

+2.8%

(active did better than indexing)

Liquidity Crisis

7/1/2007 to 12/31/2008

-1.2%

(active underperformed indexing)

Post-Liquidity Crisis

1/1/2009 to 4/30/2009

+1.3%

(active did better than indexing)

MUTUAL FUNDS 2.2

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In addition to looking at relative performance and market expectations, consider the

following to decide whether index funds or actively managed funds (or both) make sense

for you. Consider index funds if: [1] You lack the time or desire to research and monitor

funds. [2] You are content to match the overall market, not beat it. [3] You want lower-

cost funds. Index funds typically have lower expense ratios. [4] You are investing in a

taxable account. Index funds are typically more tax-efficient than active funds.

Consider actively managed funds if: [1] You have time and interest to research and

monitor funds. [2] You want to beat the market. Long term, top funds may outperform

their indexes (though active funds can underperform as well). [3] You want more

downside protection. Some active managers strategically increase cash holdings in times

of distress. [4] You are looking for broader diversification. In categories such as bonds,

active funds may provide more diversification.

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FINANCIAL PLANNING

FINANCIAL PLANNING 3.1

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3.SEQUENCE OF RETURNS CAN MATTER

Surprisingly, for the growth-oriented investor, the sequence of gains and losses often

times makes no difference, the ending value is identical. For example, if you take the

annual total return figures of the S&P 500 for the period 1968 through 2007, the

annualized return is 10.53%. If you reverse the order (meaning 1968’s return becomes

2007’s return, 1969’s return becomes 2006’s return, etc.), annualized returns still average

exactly 10.53%. Standard deviation is also the same in both cases, 16.3%.

However, if money is taken out each year, the sequence of gains and losses becomes

very important. For example, using the same period (1968-2007), an initial investment

of $100,000, and then withdrawals of 5% inflation-adjusted each year, the initial

investment grows 150% (excluding the annual income stream). If you reverse annual

returns as described above, original principal grows 1,300%. As a side note, standard

deviation is still the same, 16.3% annually.

CONSERVATIVE, MODERATE AND AGGRESSIVE PORTFOLIOS

From 1970 through 2007, a moderate portfolio (60% stocks) experienced returns

somewhat similar to an aggressive portfolio (95% stocks). The composition of each of

these three portfolios is as follows: 50% large cap stocks, 20% small cap stocks, 25%

EAFE stocks and 5% cash (aggressive); 35% large cap stocks, 10% small cap stocks,

15% EAFE stocks, 35% Barclays Aggregate Bond Index and 5% cash (moderate); 15%

large cap stocks, 5% EAFE stocks, 50% Barclays Aggregate Bond Index and 30% cash

(conservative).

Portfolio Returns [1970-2007]: Conservative, Moderate and Aggressive

Conservative Moderate Aggressive

Annualized average 8.5% 10.4% 11.3%

Best single year 22.8% 30.9% 39.9%

Worst single year 0.1% -12.9% -23.8%


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BACK-TESTED WITHDRAWAL RATES

Designing and implementing a successful withdrawal program for retired clients is

critical. In recent years, more attention has been given to topics such as the appropriate

allocation and a sustainable withdrawal rate. One concern advisors have is validity of

historical time frame selected and how much results would vary if the time frame began

or ended a couple of years earlier or later (capturing a particularly good or bad period in

the market).

The table below shows the 25 rolling 25-year periods from 1959 through 2007. Although

every 25-year period is included in the computations, there are still two valid

considerations not answered: [1] would results be different if the starting period were

1958, 1955 or some year in the 1960s and [2] how different are results if the rolling

period is 10, 15 or 20 years instead of 25 years. A number of the advisor’s clients may

not have the patience to consider a 25-year hold; others may believe they will not live

another 25 years or their financial picture is likely to change drastically during the next

10-15 years (e.g., death of a spouse, need for nursing home, unexpected medical

operation, etc.).

The beginning point can make quite a difference. For example, a retiree starting a

$100,000 retirement portfolio at the beginning of 1998 would have had $104,790 by the

end of 2007; if the starting point was the beginning of 1999, the ending value would have

been just $84,350 (note: both examples assume a 5% annual withdrawal rate, increased

by 4% each year and a portfolio mix of 60% in the S&P 500 and 40% in the Lehman

Brothers U.S. Aggregate Bond Index). It should be pointed out that S&P 500 returns in

the late 1990s and early 2000s were very volatile (e.g., 1998 = 28.6%, 1999 = 19.5%,

2000 = -10.1%, 2001 = -13.0%, 2002 = -23.4% and 2003 = 26.4%).

From 1959 through 2007 there were 25 rolling 25-year periods. The ―stocks‖ used below

represent S&P 500 returns; ―bonds‖ are the Citigroup Long Term High Grade Corporate

Bond Index. Portfolios are rebalanced annually. The withdrawal rate increases 4% each

year to offset inflation. For example, if $100,000 were initially invested and 5% were

taken out each year, the first year’s withdrawal would be $5,000, $5,250 the second year,

etc.


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Odds Of Not Running Out Of Money

All 25-year rolling periods from 1959 through 2007

rate of

withdrawal

100%

stocks

60% stocks

40% bonds

50% stocks

50% bonds

40% stocks

60% bonds

100% bonds

4% 100% 100% 100% 100% 84%

5% 100% 100% 88% 76% 64%

6% 72% 56% 56% 56% 44%

WORDS OF WISDOM

Emotion always trumps reason.

One cannot overstate the role of luck when it comes to investing.

Someone smarter will always have a view opposite yours.

The market always has the last word.

Negatives about an investment are usually given too little attention.

Entrenched trends tend to last longer and deeper than anticipated.

Virtually everything good about the market is the result of time.

Self-confidence is a sign of inexperience; humility is a sign of wisdom.

The purchase price is more important than what you bought.

In an overvalued market, a sell-off is needed to resume its upward trend.

Humans tend to forget past mistakes; this enables gurus to gain recognition.

Losses are inevitable; taking big losses is unacceptable—use stops.

Accept the fact that a stock will always go down when you buy it.

A stock usually goes up after you sell it.

Hold onto the winners and weed out the losers.

The only way to prevail against market professionals is to invest long term.

Humans are not emotionally wired for success.

Traders give up a huge advantage: the market’s long-term upward bias.

The emotional component of a stock is hard to measure but easily ignored.

The color of the market is grey, not black or white.

The best investment advice is ―stay healthy.‖


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SOCIAL SECURITY: MAKING THE MOST OF YOUR BENEFITS

Whether you are approaching retirement or already retired, you probably have questions

about how to maximize your Social Security benefits. Here are answers to some

important frequently asked questions:

Are Social Security payments based on average lifetime income?

Social Security benefits generally are based on the average of your 35 highest years of

earnings. Years in which you had low earnings or no earnings can be counted to bring the

total years of earnings up to 35. Most people need 10 years of work (40 credits) to qualify

for benefits.

I will turn 62 soon. If I wait to start Social Security until age 66 I will have missed

out on four years of benefits that I could have invested. Doesn’t it make sense to

take the money early?

The answer depends largely on how long you expect to live. Starting Social Security

early reduces benefits, but it also means you will receive monthly checks for a longer

time. On the other hand, starting Social Security later results in fewer checks over

lifetime, but those checks will be larger. Theoretically, it should not matter when you

start as long as you have an average life expectancy. But, in reality, about half of us will

live longer than average.

There is a breakeven point at which it can make sense to wait. A big factor in your

decision is how long you expect to live. If you’re in good physical shape, do not have any

chronic illnesses or bad habits, and have a history of longevity in your family, then the

general rule of thumb is that you should wait as long as possible to collect benefits. You

will receive your largest benefit by delaying retirement until age 70, so it never makes

sense to wait past that age.

If you do not expect to reach average life expectancy, then it might be better to take the

money early. Do not forget to consider your spouse. If your spouse earned less than you

did during your working lives, and you expect that your spouse might live longer than

you, then think about whether it makes sense for you, the higher-earning spouse, to

postpone benefits in order to maximize your spouse’s Social Security survivor benefits.


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Is it true that if you start taking Social Security at age 62 the monthly amount will

automatically increase once you reach full retirement age?

For benefit purposes, the Social Security Administration (SSA) defines the full or normal

retirement age (NRA) as between 66 and 67 for people born in 1943 or later. Collecting

benefits before your NRA will result in a permanent reduction in your monthly Social

Security check. SSA will give you an annual cost-of-living increase, but that is it. The

only exception would be if you are married and your spouse earned more than you did to

the point where 50% of benefit exceeds what you would otherwise receive based on your

own earnings record.

I am retiring early and want to avoid going back to work. I am almost 62, debt-free

and will have enough to live on if I take Social Security early. Should I take Social

Security early and avoid tapping my 401(k) and IRA?

There are a couple of moving parts here. In isolation it can make financial sense to

postpone receiving Social Security as long as possible—assuming you have the discretion

to do so, are in good health and expect to beat average life expectancy. Also in isolation,

it is generally best to postpone tax-deferred account withdrawals for as long as you can.

That leaves taxable-account money, which is typically the preferred place to start, all else

being equal. But if you need extra money to live on at age 62 and the only choice is

between taking early Social Security or tapping tax-deferred retirement accounts, then

you need to crunch the numbers to see what makes sense.

Basically, it depends on how much return you expect to earn on your tax-deferred

investments, such as your IRA and 401(k). The higher the expected return, the more

sense it makes to leave that money alone and take early Social Security for the additional

cash flow needed. The level of return that favors going one way or the other will vary

depending on facts and circumstances—your benefit and life expectancy, for example.

For someone who expects to live a long life, an expected return on tax-deferred assets

below 5% or so would likely favor postponing Social Security as long as possible, while

an expected average annual return on tax-deferred accounts above 5% would generally

favor taking the early Social Security and postponing tax-deferred account withdrawals

for as long as you can.

I have heard something about repaying the Social Security Administration for

benefits I’ve already received and then restarting benefits later at a higher amount.

Is this possible? Does it make sense?

It is possible. If you previously elected to receive early Social Security benefits at a

reduced rate you have the option of paying back to the government what you have

already received and then restart benefits at a later date to take advantage of a higher

payout.


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For example, let us say you elected to receive early benefits at age 62 and you are now 65

and thinking of going back to work. You could stop receiving Social Security, pay back

the three years’ worth of benefits you received, go back to work, and then wait until age

70 to restart your benefit checks at a higher level. Paying back prior benefits is similar to

buying an annuity, except you do not have to pay any interest on the benefits you have

already received and there are no fees.

As to your second question—whether it makes sense to take advantage of this option—it

depends on your tax situation, your age and life expectancy. Of course, you also have to

come up with the repayment money. For important details about repaying benefits read

the SSA publication, If You Change Your Mind. If you determine it makes sense to repay

your benefits, you can get the process going by filling out Form 521, Request for

Withdrawal of Application.

I'm already collecting Social Security. Will going back to work affect my benefits?

If you have not yet reached your full or normal retirement age (NRA is between 66 and

67 for those born in 1943 or later), earning a wage could reduce your benefits. For

example:

If you go back to work before the year you reach your NRA, $1 in benefits will be

deducted for each $2 you earn above the annual limit ($14,160 in 2009).

In the year you reach your NRA, $1 in benefits will be deducted for each $3 you earn

above a higher limit ($37,680 in 2009), but that is only counting earnings before the

month you reach your NRA.

Starting the month you hit your NRA, your benefits are no longer reduced no matter

how much you earn.

You can estimate how much your annual benefits will be reduced by using the SSA’s

Retirement Earnings Test Calculator. Also see the SSA publication, How Work Affects

Your Benefits.

Are Social Security benefits taxable?

Your Social Security benefits may be taxable, depending on modified adjusted gross

income (MAGI). As your MAGI increases above a certain threshold (from earning a

paycheck, for instance), more of your benefit is subject to income tax, up to a maximum

of 85% of your benefit. For details about benefit taxation see IRS Publication 915, Social

Security and Equivalent Railroad Retirement Benefits.


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Is it true non-taxable income (such as Roth IRA withdrawals or municipal bond

interest) is included when determining income to calculate taxes on Social Security

payments?

Up to 85% of your Social Security benefit could be taxable, depending on your modified

adjusted gross income (MAGI). Your MAGI is your regular adjusted gross income plus

any tax-exempt municipal bond interest you earned. You do not have to pay federal

income tax on muni bond interest—it is just being included for purposes of calculating

tax on your Social Security benefits.

Roth IRA withdrawals are not included in income for purpose of figuring the tax on

Social Security. But any taxable money you withdraw from a traditional IRA (or convert

from a traditional to a Roth IRA) is included in your regular adjusted gross income and so

would affect the taxability of your Social Security benefit.

After you calculate your MAGI, add half of your Social Security income to it. Once you

have calculated your income as described above, see the table below to find out what

percentage of your Social Security benefit is taxable. The ―Income‖ column is modified

adjusted gross income.

Filing Status Income (MAGI) Social Security Taxation

Single, head of household < $25k All SS income is tax-free.

$25k to $34k Up to 50% of SS is taxable.

> $34k Up to 85% of SS is taxable.

Married filing jointly < $32k All SS income is tax-free.

$32k to $44k Up to 50% of SS is taxable.

> $44k Up to 85% of SS is taxable.

For more information please see IRS Publication 915, Social Security and Equivalent

Railroad Retirement Benefits.


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I will be 66 in 2½ years and my wife will be 64. She will collect on her earnings

record at age 62. At age 64 she will want to collect half of my Social Security

benefits. I have tried to figure the amount, but I am not sure. I will be receiving

about $2200 per month at age 66. Can you tell me how much my wife will receive

when she is 64?

If you begin collecting Social Security at age 66, your wife would then be eligible for

50% of your benefit. Assuming her full retirement age is also 66, she would incur a

13.33% penalty because she would only be 64 when you start receiving your Social

Security.

There is a potentially better strategy, sometimes called the ―62/70 split,‖ where the lower-

earning spouse begins drawing at age 62 based on his or her own earnings record, and the

higher-earning spouse waits until age 70 in order to receive the maximum benefit.

Assuming both of you expect an average life expectancy, or greater, this strategy will

generally maximize your Social Security cash flow over both of your lives. Keep in mind

that, once both you and your spouse reach age 65, odds of at least one of you reaching

age 90 are greater than 60%, on average. So, as the higher wage earner, it could make

sense for you to postpone benefits for as long as you can, up to age 70.


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BOOKS ON “MUST READ” LISTS

The chairperson of Bedford Oak Partners once said, ―Put all of Warran Buffet’s annual

stockholder letters together and you probably have the greatest book on investing ever

written.‖ In fact, you can access these annual letters since 1977 by going to

BerkshireHathaway.com. The table below lists 20 books that appear on most financial

writers’ and managers’ ―must read‖ lists.

20 Well-Respected Books On Investing

Against the Gods

by Peter Bernstein

The Informed Investor

by Frank Armstrong

Annual Letters to Stockholders

by Warren Buffett The Intelligent Investor

by Benjamin Graham

The Battle for the Soul of

Capitalism

by John Bogle

The Little Book That Beats the

Market

by Joel Greenblatt

Beating the Street

by Peter Lynch and John Rothchild The Only Guide to a Winning…

by Larry Swedroe

The Coffeehouse Investor

by Bill Schultheis The Only Investment Guide…

by Andrew Tobias

Contrarian Investment Strategy by David Dreman

A Random Walk Down Wall Street

by Burton Malkiel

The Essays of Warren Buffett

by Warren Buffet Stocks for the Long Run

by Jeremy Siegel

Fooled by Randomness

by Nassim Nicholas Taleb Unconventional Success

by David Swensen

The Four Pillars of Investing

by William Bernstein Winning on Wall Street

by Marty Zweig

The Future for Investors

by Jeremy Siegel Winning the Loser’s Game

by Charles Ellis


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WEBSITES

Listed below is a web site summary that can aid advisors in their daily practice. The sites

are grouped in the following categories:

Market Statistics REITs Tax Information

Mutual Funds and ETFs Personal Finance Insurance Products

International Retirement Planning Federal Government

Bonds Estate Planning Economic Data

MARKET STATISTICS

DOW JONES INDEXES

[www.djindexes.com] [cost: free] Extensive database of historical returns and composition of U.S. and foreign Dow

indexes, including correlations for various styles of investing. Information can be

downloaded into Excel.

MSCI BARRA

[www.mscibarra.com] [cost: free] Morgan Stanley calculates over 100,000 equity, hedge fund and REIT indexes, including

U.S. and foreign indexes. MSCI tables show daily, monthly, quarterly and 1-10 year

performance figures. The numbers reflect U.S. dollar and local currencies. Information

can be downloaded into Excel.

RUSSELL

[www.russell.com] [cost: free] Daily, monthly, quarterly and annual equity returns for the U.S., Japan and Canada plus a

number of other foreign indexes as well as the Russell 2000, the most widely used U.S.

small cap index. Select periods and indexes can be downloaded.

STANDARD & POOR’S

[www.standardandpoors.com] [cost: free] Extensive historical and current performance data for a wide range of U.S. and foreign

S&P indexes. The site includes a FAQ section for each index.


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WILSHIRE ASSOCIATES

[www.wilshire.com] [cost: free] Wilshire has a number of proprietary indexes broken down by style and size. A built-in

calculator displays returns for multiple indexes at the same time.

MUTUAL FUNDS AND ETFS

AMERICAN STOCK EXCHANGE

[www.amex.com] [cost: free] The site includes a number of statistics on each ETF, including price, expense ratio,

performance, portfolio holdings and distributions. One section highlights ETFs that have

reached new highs or lows. News articles on ETFs are ranked by date of publication.

There is also an educational section that includes a list of frequently asked questions

(FAQs).

ETF CONNECT

[www.etfconnect.com] [cost: free] This is one of the most comprehensive ETF sites. The advisor can search by ticker

symbol, asset class, taxation or region. Hundreds of data points for each fund are

included (e.g., dividend history, price, objectives, asset diversification, expense ratios and

performance). SEC filings and links to news stories are also included. There is an

educational section that provides answers to FAQs.

MORNINGSTAR

[www.morningstar.com] [cost: free for 14 days; $160 year] Ratings for each fund covered by Morningstar plus over 150 statistics such as index and

category comparisons. Paid subscribers can access reports on over 2,000 funds plus use

different filters. The site includes an ETF screener based on eight criteria for over 800

ETFs. The ETF section also includes an ―ETF Quickrank‖ which places a fair value

estimate on the fund. Mutual fund family reports cost $90 per year.

MSN MONEY

[www.moneycentral.com] [cost: free] Access to over 12,500 mutual funds with over 200 data fields that can be used as filters or

for comparison; includes past performance, management, risk and fund allocation. Over

70 criteria that can be used to select funds; the database includes return and risk data on

over 800 ETFs.


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SMARTMONEY

[www.smartmoney.com] [cost: free 14-day trial; $110 a year] Unlike other sites, this one uses information from Lipper and includes archived articles

from Smart Money, published by The Wall Street Journal. Risk measurements, sector

weightings, performance charts, fund ratios and Lipper ratings. Data on over 800 ETFs

and screening of 50 criteria is included. The advisor can also review recent articles about

ETFs.

YAHOO! FINANCE

[www.finance.yahoo.com] [cost: free] Basic Morningstar data and screening on over 16,000 funds. The advisor can find out

about management, risk levels and fund holdings. Advisor can compare and contrast

performances of funds and indexes. E-mail account can be set up for automatic price

alerts on any fund. Top-performing ETFs are also included.

ZACKS

[www.zacks.com] [cost: free] This site has extensive statistics on over 12,000 mutual funds plus screens that can be

used by the advisor. The site offers over 150 data fields, up to 50 statistics can be used to

compare one fund against another. The charting feature incorporates a Java-enabled

custom analysis.

INTERNATIONAL

ADR

[www.adr.com] [cost: free] One of the best sites on ADRs; advisors can search by type, country, industry, ticker,

name or exchange. Search results are displayed in a table that displays financials and

earnings expectations. International news and announcements help the advisor keep

abreast of overseas markets.

BNY MELLON DEPOSITARY RECEIPTS

[www.adrbny.com] [cost: free] For ADRs maintained by Bank of New York Mellon, this is the site of choice. Advisors

are also able to pull up information on other ADRs as well as holding company

depositary receipts (HOLDRS). Summary tables include symbol, CUSIP, exchange

conversion ratio, country of origin and date of last update. Links provide the advisor with

additional sources of information.


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CIA WORLD FACTBOOK

[www.odci.gov/cia/publications/factbook/inex.html] [cost: free] This site has links to the CIA’s annual publication on foreign country data. The advisor

can learn about every government, country and territory in the world. The economic

review section covers GDP, labor, unemployment rate, budget, debt, currency and

exports.

EUROLAND

[www.euroland.com] [cost: free] Includes data on 25 European markets (e.g., charts, news, financial statements and

currency converter). The advisor can create ―watchlists‖ and have the information

presented in English or different European languages.

SITE-BY-SITE

[www.site-by-site.com] [cost: free] One of the best organized web sites for international markets. The included links cover

news, economic data, central banks and commentary.

BONDS

FINRA BOND MARKET DATA

[www.finra.org/marketdata.com] [cost: free] The Financial Industry Regulatory Authority (FINRA) provides real-time quotes on

corporate bonds based on recently reported trades (e.g., price, credit rating, quantity,

yield, 90 days of trading history and one year of weekly highs and lows. Whether or not a

commission was charged is also included. The advisor can track 100 different issues at a

time. A separate section provides education on bonds, bond investing and bond trading.

INVESTINGINBONDS

[www.investinginbonds.com] [cost: free] This site is designed for the individual investor. Strategies, real-time pricing and

educational information on corporate and muni bonds are included. Corporates and

municipals that have traded more than four times the previous day are shown, along with

their history and number of trades. Advisors will find the ―benchmark spread‖ of

particular interest.


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TREASURYDIRECT

[www.treasurydirect.gov] [cost: free] For advisors dealing in U.S. Treasury securities, including TIPS and savings bonds, this

site allows government direct on-line commission-free purchases. The client can also set

up their account for interest reinvestment and the sale of the securities before maturity.

There is extensive coverage of all forms of savings bonds, tax features and current rates

for new issues.

REITS

REITS

[www.reit.com] [cost: free] This site, sponsored by the REIT trade group, NAREIT, is for the individual investor and

advisor. Anyone can access index and individual REIT returns and make comparisons to

other REITs in the same sector. A separate listing of REITs within S&P indexes, REITs

with dividend reinvestment programs, stock purchase plans, REIT mutual funds, REIT

closed-end funds, REIT ETFs and registered but non-exchange-traded REITs are

included. The advisor can also view a map to see which REITs have properties in a

specific state. There are extensive features for education, including articles and

brochures.

REITCAFE

[www.reitcafe.com] [cost: free] A sponsor-supported site offers podcasts and conference calls with REIT executives and

analysts. Regulatory commentary plus news on REITs and the industry are included. The

advisor can also access statistics on REIT indexes, volatility and index correlation graphs.

A weekly newsletter is available at no cost.

PERSONAL FINANCE

BANKRATE.COM

[www.bankrate.com] [cost: free] This site focuses on current interest rates for mortgages, bank CDs, credit cards, personal

loans and fixed-income products. A number of finance calculators are included to decide

things such as whether mortgage financing is a good idea or how much should be saved

for a child’s education.


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CNN/MONEY

[www.money.cnn.com] [cost: free] The advisor can access a large number of articles on financial and retirement planning,

educational accounts, taxes, banking, loans and insurance. The site provides for a

comparison of home loans, mortgages and bank CDs.

MSN MONEY

[www.moneycentral.msn.com] [cost: free] Virtually every aspect of financial planning is covered for the novice. The investor can

also access finance calculators and articles.

SMARTMONEY

[www.smartmoney.com] [cost: 14-day free trial; $110 year] Designed for the individual investor, this site has an in-depth library of articles on all

aspects of personal financial planning. There is also extensive coverage about small

businesses, health care and elder issues. Your client can compare products.

YAHOO! FINANCE

[www.finance.yahoo.com] [cost: 30-day free trial; $130 year] This site is designed for the individual investor and includes a large number of ―how to‖

articles. Links to tools, calculators, product comparisons, banking, loans, insurance and

taxes are also featured.

RETIREMENT PLANNING

T. ROWE PRICE

[www.troweprice.com] [cost: free] The advisor can help a client decide a number of retirement issues (e.g., whether a given

level of income is likely to last until death). The site concentrates on using qualified

retirement accounts and IRAs. The ―Retirement Income Calculator‖ is excellent but

limited in its flexibility.

VANGUARD

[www.vanguard.com] [cost: free] The ―Lifetime Spending Analyzer‖ simulates a number of historical markets to determine

whether or not a specified income stream can be maintained throughout retirement. The

site includes a number of well-written articles and worksheets on retirement planning.


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ESTATE PLANNING

FINANCIAL PLANNING TOOLKIT

[www.finance.cch.com] [cost: free] The site provides a technical and complex approach to every aspect of estate planning,

sponsored by Commerce Clearing House, a well-known provider of tax and legal

information for advisors, lawyers, accountants and other professionals.

CRASH COURSE IN WILLS AND TRUSTS

[www.mtpalermo.com] [cost: free] Estate planning attorney Michael TPalermo provides an easy-to-understand but detailed

explanation as to what everyone should know about wills, trusts and estate planning.

NOLO PRESS

[www.nolo.com] [cost: free] The layperson can find articles written by Nolo about estate planning, wills, trusts,

taxation and probate issues.

TAX INFORMATION

H&R BLOCK

[www.hrblock.com] [cost: free] This site provides tips on how to reduce taxes. H&R Block also publishes tax preparation

software, TaxCut.

INTERNAL REVENUE SERVICE

[www.irs.gov] [cost: free] The advisor can download IRS tax forms and instructions. Almost every issue on taxation

is covered and most of the information is easy to understand. There is also a FAQ section

and instructions on how to file electronically.

SISTER STATES TAX DIRECTORY

[www.sisterstates.gov] [cost: free] This is an excellent one-stop source that links the user to tax forms, information and

publications for all 50 states.


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TURBOTAX

[www.turbotax.com] [cost: free] This tax preparation site provides an explanation of a wide range of tax issues and

strategies. The site’s sponsor publishes the most popular tax preparation software in the

nation, TurboTax.

INSURANCE PRODUCTS

INSURANCE INFORMATION INSTITUTE

[www.iii.org] [cost: free] This is an industry-sponsored source, allowing the advisor to search for companies in his

or her state. The site includes consumer web videos on life insurance and annuities.

INSURE.COM

[www.insure.org] [cost: free] A consumer-oriented site that provides insurance quotes plus ratings from A.M. Best,

S&P, Moody’s and Fitch. There is a separate section on long-term care and annuities.

Life insurance needs can be estimated; an explanation of the tax consequences of

surrenders, loans and early payouts are also discussed.

KATT & COMPANY

[www.peterkatt.com] [cost: free] A fee-only life insurance advisor sponsors this site; his library includes detailed articles

written for advisors and consumers.

LIFE HAPPENS

[www.lifehappens.org] [cost: free] The non-profit organization, Life and Health Insurance Foundation for Education,

describes the basics of life insurance and can help the consumer decide between term and

whole life. A ―care map‖ shows average daily nursing home costs for each state. Online

videos explaining insurance basics are also available.

LIFE INSURANCE

[www.lifeinsure.com] [cost: free] The advisor can obtain several life insurance quotes without providing personal

information. This quote service explains how premium rates are calculated. A blog and

video section discusses life insurance and recent news.


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NAIC

[www.naic.org] [cost: free] The National Association of Insurance Commissioners (NAIC) is the organization of

state insurance regulators. The advisor is able to find information about life insurance,

long-term care and annuities for a specific state. Some publications can be downloaded

while other brochures can be ordered (e.g., The Life Insurance Buyer’s Guide, A

Shopper’s Guide to Long-Term Care Insurance and Buyer’s Guide to Fixed Deferred

Annuities).

FEDERAL GOVERNMENT

FEDERAL DEPOSIT INSURANCE CORPORATION

[www.fdic.gov] [cost: free] Detailed information about FDIC coverage and what to do if a bank fails.

FEDSTATS

[www.fedstats.gov] [cost: free] This is a link to over 100 federal agencies, covering a wide range of topics such as

population trends, health care costs and foreign trade.

PENSION BENEFIT GUARANTY CORPORATION (PBGC)

[www.pbgc.gov] [cost: free] A federal government agency provides protection to qualified defined benefit plans. If a

defined benefit plan fails, PBGC takes over the administration of the plan and provides a

minimum payment schedule for the plan’s participants. The advisor can also find out if a

specific plan is covered by PBGC.

SOCIAL SECURITY ONLINE

[www.ssa.gov] [cost: free] The Social Security website provides detailed information on all Social Security

programs and benefits (e.g., how to apply for benefits, benefit levels, etc.).

U.S. DEPARTMENT OF LABOR

[www.dol.gov/ebsa] [cost: free] The Department of Labor’s web site on pension plans, including participant rights and

what to do if the employer goes bankrupt.


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U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

[www.sec.gov] [cost: free] The government’s online source for filing required securities reporting, including mutual

fund reports and filings. A fund’s annual report, 10-K and prospectus can be retrieved

from this site. One of the site’s links allows consumers to check on individual brokers,

brokerage firms and investment advisors.

ECONOMIC DATA

BUREAU OF ECONOMIC ANALYSIS

[www.bea.gov] [cost: free] The advisor can obtain articles and analysis on the U.S. economy on either a national,

regional or industry group basis. Current economic news from around the world is

included.

FEDERAL RESERVE

[www.federalreserve.gov] [cost: free] Each of the 12 Federal Reserve district banks has their own proprietary collection of data,

articles and analysis. The St. Louis district bank board maintains the primary database for

the Federal Reserve board with an emphasis on monetary policy.

FREE LUNCH

[www.economy.com/freelunch.com] [cost: free] An economic and financial database sponsored by Moody’s. The information can be

downloaded directly into Excel.

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ANNUITIES

Annuities 4.1

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4.INCOME ANNUITIZATION

The lawsuits clients read about are newsworthy because they are rare, unusual A 2007

study by Wharton and New York Life Insurance shows an income annuity can provide an

income stream for life at a cost of as much as 40% less than a traditional stock, bond

and cash mix. Someone who needs a $1 million next egg can maintain the same lifestyle

by purchasing a $600,000 lifetime annuity. A 65-year-old male who annuitizes $600,000

will receive about $86,000 a year, while $1 million invested in a traditional securities

portfolio would generate $40,000-$50,000 annually, depending upon the withdrawal rate.

LIVING BENEFIT GUARANTEES

The cost of a variable annuity living benefit ranges from 0.15% to 1.10% in annual fees;

this is on top of the typical costs that range from 0.7% to 2.0%. There are three basic

types of living benefit riders:

Guaranteed Minimum Income Benefits

Guarantees a minimum level of income, as long as you annuitize the contract at the

payout phase. If contract value exceeds living benefit, you can take a cash payout or

annuitize the larger value to generate greater income. This living benefit is suited for

someone who plans on annuitizing his contract.

Guaranteed Minimum Withdrawal Benefits

Guarantees withdrawal of a certain percentage of account every year for a specific

number of years. Lifetime withdrawals guarantee a smaller annual payout but payment

for life. This benefit appeals to investors who do not want to annuitize but still want

minimum income guarantees.

Guaranteed Accumulation Benefits

Guarantees that after a set number of years (usually 10), account will be worth a

minimum level, even if subaccount values decline. The vast majority of these riders limit

investment options to one or more asset allocation models (typically with an 80%

maximum exposure to equities). Annual income benefit ranges from 4% to 7%. This

benefit is attractive for investors concerned about principal loss but want to invest in

stocks.

Some insurers, such as Northwestern Mutual Life, do not offer any kind of living benefit

rider. The company believes proper asset allocation can provide the same benefits that

riders do.

Annuities 4.2

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ANNUITY CONTRACT STRUCTURE

According to Advanced Sales Corp. (ASC), from 2002 to 2006, 38% of variable annuity

contracts were improperly structured (i.e., who should be annuitant, owner and

beneficiary). The most common shortcoming has been not naming any beneficiary. The

second most common mistake was naming someone as beneficiary other than the person

who was intended to inherit the contract, usually the client’s spouse. There are over 600

different variable annuity contracts. Four simple rules to keep in mind: [1] every annuity

pays out when any owner dies, unless spousal continuation is allowed; [2] with an owner-

driven contract, death of annuitant means nothing—there is no death benefit payout; [3]

with an annuitant-driven contract and sole annuitant dies, contract must pay out and [4]

every rule can have an exception.

2007 VARIABLE ANNUITY SALES

Sales of variable annuities for 2007 totaled just under $180 billion, a 15% increase from

2006. Total assets under management (AUM) were $1.5 trillion by year-end 2007. Over

70% of variable annuity sales went to products issued by the top 10 companies. The top

15 companies, ranked solely by new sales for 2007, were:

Top 15 Sellers of Variable Annuities for 2007

[1] AXA Financial/MONY [6] Prudential/Skandia [11] AIG Sunamerica

[2] MetLife [7] John Hancock Life [12] Jackson National Life

[3] TIAA-CREF [8] ING [13] Nationwide Life

[4] Hartford Life Insurance [9] Ameriprise Financial [14] AEGON/Transamerica

[5] Lincoln National Life [10] Pacific Life [15] Allianz Life

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STOCKS AND BONDS

Stocks and Bonds 5.1

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5.MARKET TIMING

The main factor working against market timing is that stock gains often come in quick,

intense bursts. Miss enough of them and you lose all of the long-term advantages of

owning stocks. Remember 2004? It was a good year for stocks, with the S&P 500 index

returning 11%. However, the rise was hardly smooth. From January through October 25

of that year, the S&P 500 was actually slightly down. Three-quarters of 2004's return

came in the following 14 trading days. Predicting such sudden market turns requires an

impossibly high degree of accuracy.

For market timing to be an effective investment strategy, you have to be right twice: once

when you sell to exit the market, and again when you buy to re-enter. Being correct on

the first call is challenging, but twice in a row is even more difficult. Although

professional market timers—those who offer informed buy/sell advice to their clients—

often claim success, decades of research have found little theoretical or empirical

evidence that active market timing works. Indeed, a study that analyzed the five-year

performance of 25 experienced professional timers found luck to be just as important as

the timers' skill in determining performance results. While market timers can reduce

portfolio volatility (simply by being out of the market for periods of time), researchers

have found no evidence that they consistently boost returns.

Since 1926, the S&P 500 has had a positive quarter 68% of the time. Just 15% of quarters

had declines greater than 5%. Keeping some portion of your portfolio invested in the

stock market throughout market cycles will let you reap the potent benefit of long-term

capital growth.

2008 INTERESTING FACTS ABOUT STOCKS

Last year was the single worst for the S&P 500 since the Great Depression—1931 to be

exact. There were 253 trading days in 2008; how many days was the market (S&P 500)

up versus down? Remarkably, on 126 days the market rose and on 126 days the market

fell (with one flat day). So then what drove the overall massive market decline? The

skewing of the down days: The average up day increased 1.6%, but the average down day

decreased 1.9%. In addition, there were 42 days (nearly 17%) when the market rose or

fell by more than 3%: 19 were up and 23 were down.


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Clearly, volatility was off the charts, particularly following the Lehman Brothers

bankruptcy in September 2008, with 18 single-day moves of at least 5%. There had only

been 17 such moves in the prior 53 years. In October, stocks enjoyed two of the six

biggest one-day percentage gains in history—but gave back all of the gains, and then

some. Four of the 20 biggest daily percentage declines in history occurred during the last

four months of 2008.

HUGE STOCK DECLINES

When reviewing the 10 worst calendar year total returns for the S&P 500, take comfort in

knowing that the average subsequent five-year annualized total return was 10.8%, with

all five-year periods in positive territory—even those that began with 1931’s 43% drop

and 1974’s 27% fall. The market generally bottoms before the economy. Typically when

the stock market is bottoming, the economic news is still dire.


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EARNINGS ESTIMATES

According to Ned Davis Research, from 1984 to October 2008, estimated earnings versus

actual reported earnings, have varied quite a bit; more often than not, estimates have been

too optimistic—as shown in the table below.

Year Estimate Was Off By….

1984 20%

1986 10%

1988 -10% (actual earnings were better than expected)

1990 32%

1992 10%


1996 10%

1998 10%


2002 30%



2008 40%

Surprisingly, low expected earnings per share (EPS) usually translate into higher stock

returns. The Ned Davis Research table below covers the period from the beginning of

1980 through February 2009. As you can see, when expected EPS is high, returns have

suffered.

Expected EPS Growth S&P 500 Gain Per Year

> 14.2% -3.4%

4.2% to 14.2% 6.5%

< 4.2% 11.7%

Buy/hold 6.8%


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MUNICIPAL BOND AND TREASURY YIELD SPREAD

Historically, AAA-rated municipal bonds have traded at yields between 80-85% of

Treasury bonds with similar maturities. From 2008 to February 2009, the number hit a

December 2008 peak of 203% down to 150%, meaning municipal bonds were yielding

more than municipal bonds with the same maturity and similar safety. From 1999 to

February 2009, there were only three periods when municipal bond yields were higher:

2003-2004, 2005-2006 and 2008-July 2009.

Even excluding private insurance, default rates on municipal debt have historically been

very low. Most issuers, especially general obligation (GO) bonds, have many protections

and guarantees even if they face revenue shortfalls, budget problems or expenditure cuts.

GO bond issuers pledge their full faith and credit to bond payments, including full taxing

authority and guarantee they will raise taxes to support bonds even at the expense of

other obligations.

Revenue bonds are secured by a public service or enterprise, such as a water or sewer

utility. For core, essential services, revenues for these types of bonds have generally

remained strong. While history is not a perfect future guide, consider:

[1] According to a Moody’s Investors Service study completed in March 2007, only one

Moody’s-rated GO or water/sewer obligation bond has defaulted since 1970, and it

quickly recovered in full.

[2] When New York City nearly filed for bankruptcy in 1975, it deferred payments on

some short-term notes, but did not default on long-term debt—nor did Cleveland in 1978.

No other recent bankruptcy (Orange County in 1994 or Vallejo, California in 2008,

among others) has led to a default on GO bonds.

[3] Since 1970, 40 rated municipal obligations have defaulted, with an overall cumulative

default rate over any 10-year span of 0.3% for investment grade municipals (not

including GO and water/sewer bond), compared to 0.5% for AAA-rated corporate bonds.

[4] During the Depression, defaults did rise—15% of total state and local government

debt defaulted between 1929 and 1937, according to a National Bureau of Economic

Research study. Actual permanent loss of principal, however, was only 0.5%.


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[5] When you buy individual municipal bonds, it is important to fully understand the

issuer, the security pledged to bondholders, and risks particular to the type of

municipality. Security does vary, and there are tens of thousands of individual bonds and

bond issuers outstanding. It is especially crucial for bonds carrying lower—or in some

cases no ―unenhanced‖ bond ratings (ratings without considering bond insurance),

especially in the BBB/Baa category and below. Generally, IBF does do not recommend

purchasing bonds with no underlying issuer rating.

[6] General obligation bonds: The most common muni bond type and generally

considered to be the most secure. Issued by states or smaller entities, including school

districts, cities and towns.

[7] Water/sewer revenue bonds: Second to GOs in safety because of services provided,

they are generally recession-resistant. Households need water and sewer services, no

matter the cost.

[8] Other enterprise bonds: Includes solid waste services, toll roads, airports, mass

transportation, bus districts or other services. These can be more volatile, depending on

the service provided.

[9] Special tax bonds: Secured by dedicated taxes, like a sales tax or household

assessment. Ratings tend to reflect the size and depth of the tax base as well as coverage

and legal protections.

[10] Lease-backed bonds: Often called certificates of participation (COPs), these are

secured by the pledge of a municipality to make lease payments to a trustee for use of a

building or other asset it owns and leases back for its own use. Slightly less secure than

GOs.

[11] Nonprofit healthcare bonds: Among the higher-risk municipal issuers due to

business challenges and competition; these also tend to carry lower ratings.

ibf - updates - 2009 (q2 v1.1)

Documents

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federal debt

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