Focus 580; Personal Finance

Good morning welcome to focus 580 This is our telephone talk program My name's David Inge. Glad to have you with us this morning we're also Welcome back to our show one of our group regular folks who show up here every month. Yesterday David Scinto He's president and CEO of Strategic Capital Bank and he is here with us to talk about investing and money management and usually has a few things to say here to start out he says. He'll be talking a bit about the stock market and then after that if you have questions about that or anything else that comes under the heading your personal finance You're certainly welcome to call us so we get things underway by saying Good morning and welcome back. Well good morning David and as always it's a genuine pleasure to be with you. I'd like to spend a few brief minutes visiting with you and our audience about a very volatile and unsettling stock market. Obviously stock market pain and stock market gyrations are evident everywhere. And let me give you just well three examples this year of stocks with really household names that have in my opinion caused Well severe pain. Let's take AT&T for example Now that's a stock that's always been considered a

bellwether stock. It always was referred to as a stock for widows and orphans that's how safe that stock was always treated especially with its dividend yield and its 52 week high was 61. The stock is currently trading around 20. That's a two thirds drop in shareholder value for people who hold AT&T. How about Procter and Gamble Now that's surely a household name. All of us use some of their products the 12 month high on Procter and Gamble was about one hundred one thousand dollars a share in the 12 month low was fifty two dollars per share a drop of more than 50 percent. Currently the stock is trading in the high 60s to low 70s still a 45 percent drop from its previous highs. And what about that Nasdaq that so-called stock market of the world that stock market of the future or all the high tech plays are in evidence. Well blood is everywhere in the Nasdaq including for example Microsoft the 12 month high was one hundred

twenty dollars per share and the 12 month low was forty eight dollars a share. That's an approximate 60 percent drop in value. Again the stock has recovered a bit and it's now currently trading in the $70 range. And finally one of my all time favorites Priceline dot com. Now that's what I would refer to as a full blown investor nightmare. And just last night after the evening television news when I think they're still counting votes and commentators William Shatner the spokesman for Priceline was exhorting me to visit Priceline dot com purchase some plane tickets hotel tickets I think automobiles gasoline you name it. I'm supposed to purchase it or bid on it at Priceline dot com so I can get away from my dream vacation 12 month high on the stock. How about this one hundred and $4 a share. Current Price three bucks. The math on this stock is pretty darn simple. A 97 percent decline a

97 percent disaster. A 97 percent debacle. Now let's talk plainly about stocks and utilize some historical perspective. First volatility or large price swings now the fancy name is volatility. Let's call it large price swings is not a recent or new phenomenon. Second during any year if we take a look at it from an historical perspective it is perfectly normal and in fact it is an expectation that stocks will move in a trading range of at least 20 percent from their highs to their lows. In fact the 20 percent trading range from highs to lows is more the rule than the exception. And third because of extreme price volatility has experienced this year. Owning an index or owning an asset class will likely reduce these extremes and reduce your paper losses and know what I refer to them as paper losses in down years. For example more than 50 percent of the

stocks that comprise the S&P 500 Index have suffered losses of 30 percent or more. Most of them frankly are 40 percent or more. Yet the S&P 500 index through yesterday's close if you just simply own the weighted index it's down only six and a half percent for the year. That's a lot more comfortable than 40 45 or 50 percent. Additionally in very difficult stock markets there are always certain asset classes or indexes which shine. For example small company indexes and mutual funds which buy the smallest stocks in the Russell 2000 are enjoying gains of 2 to 10 percent this year in spite of what's happening in the rest of the market. Real estate investment trust indexes those referred to as Rietz are still up over 20 percent for the year as an asset class. Obviously it pays to be effectively diversified to be well represented in these asset classes. Now something else to remember.

Stock market investing is still very much counter intuitive. Everybody loves to buy stocks talk about stocks when the market is moving up and stocks are expensive. Everybody's happy the cocktail talk is what stock did I buy. How much money did I make. But most of us hate the market when stocks are moving down and shares of great companies are cheap everybody says whoa I don't want that company the stock market is terrible. I better run over to the treasury market and buy some Treasuries or CDs. And when stocks are moving down and shares are significantly cheaper than they were in the past that's precisely the time that we should load up on shares of great companies or indexes. That is that when companies or indexes are selling at what I refer to as fire sale prices as a further example many people feel as though they missed the great run up in the Nasdaq. The Microsoft's the oracles the Ciscos. Well folks all of those

gains that were earned this year and really over the last 12 months in the Nasdaq 100 have been a racist. And the index can easily be purchased now. It's actually 25 percent cheaper today than it was on Jan. 1. Now I might not be a mogul or a Philadelphia lawyer or even a Hot Shot money manager but I do know one thing. If I could buy something 25 percent cheaper than it used to be I feel a lot more comfortable about buying it now than when I was paying 25 or 50 percent more for that asset. Remember the astute investor is in the share accumulation business. The shareholder who accumulates the most shares at the end of the game is going to be declared the winner. Now that might not be the case with votes that may work somehow differently but that I think is David Inge's area and not my area. But remember we're in the sheer accumulation business when it comes to investing and when shares are cheap it's a lot easier to load up and

buy more shares. Now there seem to be several factors which in my view is accounting for the recent performance of the market. First of all it's no secret that corporate profits are slowing and that is indeed a very real concern for investors because ultimately companies have got to make some money. Companies have got to pay some dividends. Companies have got to show some substantial earnings or at least earning increases so people will be drawn to those stocks. And it's pretty clear from the most recent reports that are coming out. You don't have to look any further than the Wall Street Journal today to see that many companies are suggesting in advance of December 31 numbers that earnings are slowing are going to be worse than earlier predictions. For example Daimler Benz and Chrysler today had a lot of lead articles about slowing profits at Chrysler. People being removed thrown out of office all kinds of shenanigans going

on there. Second. Many investors fear an even further erosion of corporate profits as our economy is slowing down. Look we were growing early in the year at about a four and a half percent rate. That was the annual growth rate. That's a pretty substantial rate. The most recent numbers are suggesting that that's been at least halved and that we're growing now at approximately 8 2 percent rate. If that as of September 30th corporate America is now concerned about the R word about a potential recession and recessions are not generally good especially as you're going into them if you can figure out when we're coming out of them that's when the stock market really booms. Thirdly on Wednesday of this week Alan Greenspan's comments were still very tough and really gave very little hope in the short run for an easing of interest rates to spur consumer spending. And already retailers are beginning to worry a whole lot as we approach the holiday season and consumer confidence continues to

ebb and grow weaker. That's not a good thing when our economy our GNP is driven at least two thirds of it by how many dollars we seem to spend in the catalogs and over the Internet and all of those fancy stores for all of those products that you and I need or at least my daughter who is now a freshman at the University of Illinois claims that she needs. But in any event I guess she needs some of those things forth. There's no question that higher oil prices have had some impact but almost all of the statistical studies that have been done to date show that even with the kind of oil prices that we have even with the anticipated high oil higher heating prices that may add at maximum five tenths of 1 percent to over to our overall inflation rate. Greenspan's still worried about inflation. He's worried about inflation. It's very difficult for him to lower interest rates the Fed funds rate and a lot more dollars and a lot more consumer spending still fighting inflation

and a tight labor market. We still have a very tight labor market especially where we need high tech and talented educated people. And that market stays tight and we have. There is no question that corporations are paying more money for these people and that ultimately has to be somewhat of a drag on corporate profits especially in the case where productivity gains are slowing. Up to now higher expenses higher labor costs have been more than offset by tremendous productivity gains in this technological area especially as a result I think of Y2K and all of the billions if not trillions of dollars spent in anticipation of that huge productivity gains actually took place as a result of all of that spending but now it appears that productivity is slowing a bit. We've got higher oil prices we've got a tight labor market. All of these things could be a drag if you will on corporate profits. That means

stocks are unhappy. They may stay squeaky and unhappy. And finally to some degree and I really think it's to a lesser degree uncertainty as to who the world's going to be on Pennsylvania Avenue in January. Well that probably is having some effect but I really don't believe it's the kind of effect that the other economic circumstances are having. But in spite of all of this weighty news remember stock market investing is a long term commitment. If we think of it in periods of 20 years or more. A well diversified stock portfolio in any consecutive 20 year period of time outperformed the most astute investor in fixed income. You could put all your money in CDs all of your money in treasuries and you can't find a 20 year consecutive period in American financial history where such a portfolio would have outperformed and effectively diversified portfolio of stocks and mutual funds markets move inherently

higher. I don't know the direction of the next thousand points the next 2000 points. And frankly I don't care a whole lot because I'm a long term investor but I know the next direction of the next 10000 15 20 thousand points and that's higher. And I truly believe when companies are on sale and there's a lot of companies on sale there's a lot of mutual funds and indexes on sale. It's not a bad time to back up the pick up truck. And put a little load in the back of that pickup truck and mine a few more shares. I can only tell you that that's what I'm doing personally that's what I'm doing for our clients we bought Thursday we bought Friday we're buying today and will continue to selectively buy especially in areas that we think are undervalued. So there you have a David just a little bit of a story history on the stock market in a little bit of what I think is just good old fashion common sense. All right our guest this morning David SUNO. He's president CEO strategic capital bank and he is on the program once a month on a Friday and we do this show about money

management if you have questions about investing in financial planning. Whatever it is that you're thinking about whether that is your retirement it is sending your children to college whatever your financial goals are. I know that if you call in ask questions Dave will give you his advice. And then of course you might want to go out and seek out other advices. But we want you to Obviously you want to be careful. But if you want to call and talk with him you can do that 3 3 3 9 4 5 5. That's for here in Champaign Urbana toll free 800 to 2 2 9 4 5 5. Well I'm sure as we have discussed before one of the best avenues maybe the best avenue for most investors if they want to buy stocks is mutual funds so that they can have the appropriate diversity because as given the examples that you gave of how volatile individual stocks are you want to spread that out. So us spread out your risk. OK so. There are though a number of ways that you can do this. There woulda been a time when maybe the one of the easiest and best things you could have done was buy say the

S&P 500. Of course I'm assuming that AT&T Procter and Gamble or Microsoft or their magine that imagine that. And so maybe buying the biggest companies baby now it's not the best Reggie. Well interestingly enough it's one strategy and everyone should have some exposure to the S&P 500 but it's only one asset class. And there are 10 or 15 other asset classes. If you were to have the largest companies in the world you need to have the smallest companies in the world. For example people don't realize this but over the last two years smaller companies have far outperformed large companies. The three years before that it was S&P S&P S&P three years ago who had heard of the Nasdaq. Anybody even talking about the Nasdaq. Well the Nasdaq 100 the 100 biggest companies on the Nasdaq really are an asset class all of to themselves. So the point is one has to be effectively diversified. Look at all of these different asset classes and once you look at all of the asset classes. You can see am I under represented one particular asset class. Is that an expensive asset class and if it is not. Is this an appropriate time to add to my position that particular area whether it's

us large US small international whether it's technology all of these different areas need to be represented in some senses in your portfolio. We could now go out and buy something that something like a total market index which means you're essentially I'm not quite sure how they do this but essentially you're investing in everything now. Are there advantages when you set that next to looking at various sectors and essentially doing the same thing but being in different fund. There is a there's something very important to understand when you buy a Total Market Index which really really sort of mirrors the Wilshire 5000 the Wilshire 5000 now is really made up of about 900 600 companies that call the United States their home. So when you buy the total market index you have a weighted average of those 900 600 companies the problem is because it is a weighted average. Your dollar that you are putting in that index is heavily weighted into the S&P 500 the biggest of the big companies. So the truth of the matter is that for every dollar you put in a

total market index probably 90 percent plus is just in the S&P 500 because those companies are so much larger than all the others. So it is one strategy with a portion of your money. But by utilizing just the total market index you are not getting the additional exposure and the weightings that are so important in small companies in the Russell 2000 in the ninth and tenth decile for example of the New York Stock Exchange. So you're really short changing yourself because when you compare the total market index to the S&P 500 it's really difficult to tell the difference when you compare the risks and the returns. All right we have callers and we'd welcome questions the number here in Champaign Urbana 3 3 3 9 4 5 5 Also we have a toll free line that's good anywhere that you can hear us. That's 800 to 2 2 9 4 5 5 and we will start with a caller in Urbana and this would be in line number one.

Hello. A call there line 1. Good morning. Good morning. My daughter is a teenager. She received the gift of General Electric stock recently. She's going to. Stablish raw fire and with a portion of the gift should she so some of the stock can incur the capital gains tax and start her IRA with a stock index. Or just have an IRA composed of the shares. Well now we have to be a little bit careful here because she received the G.E. shares as a gift is that correct. And do the G.E. shares have a pretty low stock basis. I expect so. OK because Was this a gift from a relative. Yes. OK the rule is that if she received it from a relative her basis is either the basis that the relative had in the stock or the price of the stock on the day it was gifted whichever is lower. So let's

say that the basis in the stock was 30 dollars and you're following what is it selling at currently. I don't know. OK well let's let's say it's I don't follow the stock individually but just any stock. Let's just say it's $100 make it easy. So that would be a 70 dollar capital gain if you sold the stock. And is it a substantial number of shares. Fairly OK is it in the thousands of dollars. OK well it may well be that if this was taxed at your daughter's rate it is likely to if she doesn't have a lot of other income at the actual rate that she would be paying on that maybe only 10 percent. Again you'd have to check that out with your accountant but it could be as low as 10 percent which would not be very very. Oh frightful worrisome etc.. More importantly if you are thinking that you are going to take this G.E. stock and you are simply going to pour that into an IRA I think you're going to find you're not going to be

able to do that. OK you just can't take an asset that you already own and pour it into an IRA that won't work. When you go to an IRA company and you're starting in establishing a new IRA brand spanking new You're going to establish that with cash and then buy an asset through them. All right. So about the best you could do is. Well there are some complicated strategies where you could buy and sell your position within 30 days but I don't really recommend that. I think what you want to find out is if you are truly interested in diversifying and I'm a great believer in diversification you know and I think you're on the right track with an equity index maybe even a total market index or two index is a large one and a small one to begin with and you need the cash from G.E. I think your accountant may convince you that you're only going to be facing a 10 percent tax on the gain and for using that money then to establish the IRA. Now I would suspect that she's going to establish a Roth IRA right. OK that's a good idea. But what a wonderful thing

to have a 14 year old start a Roth IRA and not only has the money grow tax free that when you take it out at least under current law you're not going to be taxed on it either. And you can also save up for money for a first time home buying situation where you could take as much as say $10000 out of a Roth IRA no penalty. Use it for a down payment on a home. Lots of advantages to a Roth IRA. Yeah. OK. Thank you very much for. Your advice and Frank be IOL for this noble program. All right well thank you for the call. We had somebody who asked a question off the air and was just curious whether you were familiar with a book titled The Coming Internet Depression which apparently has been written by a guy who is an economics editor at Business Week and in this book he as I'm looking here at what it says on Amazon in this book it says that he's making the argument that there will there is an inevitable downturn coming in the Internet

economy that could drag the rest of the economy down with it. And are you familiar with the book or whatever like that either with the book I'm high. I think the thesis is certainly not unreasonable. I'm I really get concerned when I hear about the doom and gloom or the doom and gloom ors have been out there forever. I've been a perennial optimist. No question that when you're looking at the Nasdaq you start to wonder even about the Amazon Dot coms one of the world are they going to turn a profit. You know billion dollar even trillion dollar capitalized companies when in the world are they going to turn a profit they has to come when they turn a profit and that's a that's a serious problem for Internet companies and Internet providers to turn a profit on e-commerce their product through their advertising through their billing whatever. However when I think about for example the Nasdaq 100 in addition to the giant companies we're really talking about the giant technology companies the hardware companies the companies that are actually providing the bells the whistles the hardware if you

will for the Internet world I'm a lot more interested in those kinds of companies whether it's the Microsoft or the oracles the Ciscos I think those kinds of companies are companies that are going to survive. They're going to prosper it cetera. I think that the major issue for a lot of these companies is the amount of government regulation. Certainly something that has had a major chilling effect on the Nasdaq has been the attempted break up of Microsoft and that whole. Situation remains to be played out I think it changes dramatically under a Bush administration really do I think that whole thing changes because of the at least Bush vent toward less regulation especially in the in the commercial sphere. So I'm a little bit hesitant to go along with Doom ors and bloomers because you know a lot of books but usually doesn't turn out to be that way. And but certainly we've seen some correction we continue to see some correction and it's very very difficult to invest in companies that have been around for a while and

still have yet to turn a profit. I would agree with that part of the thesis. All right. We're already a little bit past the midpoint here. Our guest is David Scinto he's president CEO strategic capital bank. He's here monthly on the program it's always a Friday we do these shows on personal finance and if you have questions you can call us if you're here in Urbana where we are 3 3 3 9 4 5 5. That's for local folks here for Champaign Urbana but it would be a long distance call use the toll free line that's 800 to 2 2 9 4 5 5. And another caller here it is in or they are in Urbana here Lie number two. Hello. Yes I am running a dog breed rescue program. And I have filed for incorporation and received. I'm in the process of now filing for charitable status. And I have two two related questions. First of all assuming that I use yes it is a charitable status. Somebody told me that the deductions would be retroactive or that I could treat it as a charitable

organization from the date of filing. That's my first question my second question is. Since I spend a great deal of money on this dog rescue program is it best to dump a large chunk of money into this incorporated group and then have that group essentially purchase the food etc for the animals or it can one just as easily buy things like food and heartworm medication etc and deduct it from urine. Those are very good questions the first question and I'm 90 percent certain. But again I would suggest that you talk with your accountant or your lawyer who is helping you with this. Generally the charitable status that you've applied for is retroactive to the date of your filing. So that would be number one. Is there a lot of people who may be

desirous of donating to your organization but are waiting for your 5 0 1 designation right when you filed for your 5 a one under what sub graph Did you file. Did you file a 501 c something. Yes someone sees receipt 3. All right so if you filed for a 5 a 1 C3 how long ago did you file. I was just going to file this week. Oh he just filed this week. Yeah well it takes a good while. I doubt you may be anywhere from as if you were on the fast track. 90 days. Yeah now I understand that. I'm just trying to understand once I get some money. I mean once I get that status what's the best way for me to use for my taxes auction services should I put a chunk of money into the corporation or should I simply deduct as I purchase food etc for the animals.

I think it's it's a lot. It's. Easier. First of all whether you receive this status or not if you're going to have to file as a profitable organization let's say it's a nonprofit It's a nonprofit but you certainly you've already have the nonprofit status. Yes. All right. I think it's easier than you may consider and again this is a question for your accountant because I'm really not certain of how many dollars we're talking about the Income Expense flow. I would think that you might be advised are these monies coming out of your personal monies. Yes. So you're going to be giving these monies. I really think that you might want to loan these monies to the organization as opposed to capitalize the organization so that you have a way of getting paid back out of this money. And then this money is now sitting in the organization and you have a note receivable the organization has a note payable and of course then the organization itself are buying these products and remember there may be some

sales tax advantages right. If the organization is buying it as opposed to you're buying it personally and it clearly would be a necessary an ordinary expense for the corporation. So I think that might be a better mousetrap. From what you are telling me but I would urge you do you have competent accounting advice. I sure hope so. OK then rely on that advice. Oh and why don't you see if that idea might make some sense. I'm a little leery of you taking a lot of your personal capital and capitalizing it putting it in to this organization. I prefer. Her that you may for example loan the money to this organization. But if I loan a duke and I deduct it from my income tax. Well no you don't deduct the loan. It's like if you loaned me money. It's not a deduction from your personal income tax would be a deduction from your personal income tax.

But my whole problem is that I think I mean literally thousands of dollars a year into this and I'm trying to see if I can get some tax relief as a consequence. Well the way you would get the tax relief obviously is that all of the expenses that you sink into this are deductible either personally on a schedule C if that's the way you're doing it now. But even if you loan the money to this corporation the corporation then gets all of the breaks. So there wouldn't be any income tax owing. And the end you would still have your note receivable you would still be owed money. I think I think you ought to go down that route with your accountant and check that out. OK thank you very. Right thank you. We'll go on here the next caller is in downs and that would be our line number four. Hello. Hi. I want to know what you would do with $20000. Today we have the biggest chunk and sort of a general stock fund we've got some global some foreign some telecom

high tech. And what would you do with $20 $2000. Sorry. Twenty thousand dollars to day to day. Are you willing to commit long term to the stock market. Yeah you're a stock market investor. Yeah. Are you represented in large cap value and small cap value positions. A not small cap small cap value. Yeah. You're not in that. No that's where I would go. OK I would go into small cap value are you into small cap. No. OK that's that's probably where I think those are the two asset classes that you should be looking at. And of that twenty thousand I would have 12000 of it in small cap value and 8000 of it in small cap. Okay. And I wouldn't even mind if you averaged in over the next 12 months into that position what do you have anything specific. Well I think you could go to Vanguard small cap value in Vanguard small company.

Okay Okay thank you very much. Yes very good. And back to champagne. One number one hello. Oh hello. Have a new question What is the difference between cap and camp. Will small cap the way I think of small cap. Is the market if you take a look at the New York Stock Exchange the biggest 500 companies are typically called the S&P 500 Those are the big cap. Then there is this mid cap. The next 500 companies are kind of called the mid-cap companies. Now the big cap companies you take a company like General Electric which is just a huge huge company if you multiply the total number of shares outstanding times the current value of that stock you're talking about billions if not trillions of dollars of value in a stock. Follow me. Yeah that's a big company. The midcaps are the next 500 after the biggest 500 and then the next 2000 are called the Russell 2000. Those are some of the smaller companies but any more in terms of their market size their market size because

maybe as much as say a billion dollars that used to be a lot smaller. So that's the Russell 2000 and that's typically called the small cap stocks but they're not so small cap anymore so when I think of small cap what I'm really thinking of is what a lot of people refer to as micro cap or at least maybe the 25 or 30 percent of the Russell 2000 the smallest ones the Russell 2000 and the smaller companies on the Russell 2000 may have market size of only 200 to 500 million dollars that's considered a small company. Now that would so that's my definition of small company. In addition small cap value simply says look let's look at all of the small companies within some range of market size and then let's buy the ones that are cheapest that we view as the cheapest and cheapest is defined as when we compare the price of a stock to its liquidation

value. In other words if you liquidated a company and you would get a dollar per share for that liquidation and the company was selling at $2 per share and another company that you could liquidate and get a dollar it was selling at $4 per share. Then I'd like to buy the company that is only selling at $2 per share. Twice its liquidation value as opposed to accompany it selling it for five six seven or eight times its liquidation value. So when you hear the term value investor or a small cap value fund or even a large cap value fund what you're referring to is trying to find the companies that are selling on the cheap within a specific range. That's called a value play and over long long periods of time and I'm talking 15 or 20 year periods of time typically value strategies outperform just regular strategies and small cap value strategies actually outperform large cap value strategies.

So as an asset class as an area to invest I certainly would want to have some of my money in small companies and small cap or small company value and think Oh well thank you I'm not sure I have 20 years left but I know you sound like you do. You have to play it like you do. One more question and I don't know if this is a fair question is. You said you were buying and I was wondering what it is that you're buying. Well we continue to buy institutional asset classes and as a money manager the particular asset class funds and indexes that we buy in order to access those it takes somewhere between two and a half and five million dollars so even I as an individual and not able to buy those unless I essentially utilize the buying power among all of our clients. But you can really accomplish the same thing by looking at mutual fund companies that have a number of indexes. And again I I don't have an interest in Vanguard but I think Vanguard does a very very good job in offering

a series of indexes in fact including a small cap value fund. A small company fund a large company fund a large cap value fund and even I think their total international index is a good fund as well as their emerging markets. So while you can do exactly what we're doing you can get fairly close by buying these passive strategies in other words you don't have a manager who's saying should I buy AT&T today and sell Procter and Gamble. No I'm just going to own all of them within a specific range. And some of them are go up and some of they're going to go down but over long periods of time I'm better off holding a larger basket of these companies than owning one or two or three or four or five that could blow up at any point in time. So I think you could go to the vanguard website or the call vanguard at their 800 information number and they certainly can give you all kinds of good information on the various asset class or index funds that they offer.

One last question I noticed as I look at those that the two stocks that do exceedingly well in the indexes are health and energy. And I was wondering if you think that's going to continue. You know I don't have an opinion. I think over the next 20 years it will continue and energy over the next 20 years will be good. But day to day week to week month to month and I have I have no opinion about it. I do think that it's very difficult to buy one or two companies and simply do their own. Well actually what you're talking about is a sector fund you're really not talking about an index fund you're talking about a sector fund like a Fidelity energy or Fidelity health care. That's OK. Just understand the bet you are making that those can be very volatile and they can be hot and they can be just as cold. And if you have a place for it as part of your diversified strategy in your portfolio that's OK. But once you have it you've got to hold it. You can't you know get

scared when it starts to drop. So that's my only caution with sector funds. OK. Well thank you. I think you we have about 10 minutes left in this part of focus 5 a talk with David Scinto. He's here every month with us to answer your questions about money management and if you have some thoughts or some concerns or questions about investing in the financial planning you can give us a call 3 3 3 9 4 5 5 here in Champaign Urbana toll free 800 2 2 2 9 4 5 5. The next caller is in Urbana and they're on line number three. Well I'm a lawyer I have two questions One is that they go I find information about no load index funds that are offshore and the second is that in the notify that invests in the following. Fight it in person and you can get 35 hours of in total bond index at 65 to 70 percent in total stock index.

Well those are those are great questions I think what you will find with reference to your second question. OK that then Guard has life stage portfolios and the life stage portfolios advance guard typically will have similar percentages to what you just asked about. They use some of their index funds so they have something called moderate conservative aggressive and I think there are four of them as I remember and maybe either the third or fourth most aggressive sort of fits our asset allocation. Okay and then of course I think probably if you search the Morningstar universe they really track most of the no load mutual funds. There is a there is a book in the commerce library at the University of Illinois I think it's called the no load. Index monitor. OK. And I think you could look up almost every no load in that as well too to get

information. Certainly if you went to the commerce library I'm quite certain that you could look up almost every no load index fund. Take a look at the vanguard life stage portfolios other mutual fund companies now have life stage portfolios. The difference is whether you want active managers or passive managers and if you're into the indexing approach I think you want to look at Vanguard life stage portfolios. OK. OK. And the question is basically if I want to get a fee only. We are getting down here from it and all about him being in other words you want to feel only advisor who can provide you financial planning and investment advice. Right there are some. The answer is yes I would look for someone who represents themselves as a certified financial planner and ask whether or not they would

visit with you on a fee only basis. OK you are not interested in buying products from them. OK check their credentials and make certain that they tell you up front what they charge a certified financial planner is bound by a series of practice standards and codes of ethics so they will disclose most of these things up front to you in writing before you choose to retain their services. OK. And how much charge Typically one would pay walkable. I would think that you would be in the range of anywhere from one hundred twenty five dollars to $200 an hour or competent advice and undergoing a $200 hour. Yes OK. And so you have about. And $850000 seen that doctor be a good day w thanks. Yes I think for spending an hour with someone to give you advice I think that's very intelligent especially with the kind of money that you're desirous of investing in the

market makes perfect sense. OK I get back a lot. OK thank you. And again to another urban a person here lined one hello. And while I have what I hope is a simple question to treasuries that are held with an IRA account the question has to do with money. When it's ultimately withdrawn it's taxed at the state level. You know that this is kind of a loan for a source of income being at the Treasury. The answer is No it doesn't matter if it doesn't matter whether you're in stocks bonds treasuries municipal bonds whatever you're in when that money comes out of a traditional IRA and I presume you're talking about a traditional ally or a that money is going to be subject to ordinary income tax at your highest marginal federal income tax rate. No question about it. Yeah. This is my question. OK thank you. And the caller really raises a good question because remember that if you are in invest or in direct obligations of federal government treasury notes Treasury bonds Treasury bills or a mutual

fund that holds just Treasury notes bonds and bills that interest is free from state income tax not free from federal income tax when you buy a Treasury instrument you still pay federal income tax. But you would be free free from state income tax. Therefore if you were going to buy a one year treasury or a two year Treasury note that paid 6 percent and you were comparing that simple interest rate with a two year certificate of deposit that maybe paid six point two or six point three. One would have to take into consideration. The impact on state income tax rates because certificates of deposit the interest earned is subject to both federal and state income tax rates Now fortunately in Illinois we do have a fairly low state income tax rate compared to a lot of other states. So it's not as onerous it becomes a big issue. However if you're living in a state where you might be paying seven eight nine 10 percent state income

tax rates. Obviously though if you are involved inside an IRA where that asset is sitting inside an I or a so long as that asset is inside an IRA it's totally irrelevant. He grows in a tax deferred environment. And of course in a traditional IRA when you pull money out hopefully after age 59 and a half or maybe even seven and a half when you're required to pull money out then it becomes taxed and it really doesn't matter whether you are sitting in an index a Treasury a piece of real estate whatever. Whenever you take it out something else that people often don't understand about an IRA let's say that when you're 70 and a half and you now have to start taking money out of an IRA maybe you are in a financial instrument that is illiquid or maybe it's in a stock that you don't really want to sell and take the money out. Generally your plan administrator or your custodian of your IRA that's the sponsor of your IRA especially when it went to is the case of

securities. You might for example have them transfer out 25 shares of a stock or 100 shares of the stock. That way you haven't sold the stock you it's just like getting cash. So whatever that fair market value is but then you have the stock in your hands and your bases in that stock is whatever you paid it out at. Maybe a couple thousand dollars or five thousand dollars and then you can still hold the stock. If you don't want to sell it for a long time I guess that the appeal for treasuries to people would be that they certainly paid a respectable rate of interest. Yes they were extremely safe. You know as Larry said Leave that the U.S. government was not going to collapse you know your money was OK. Do treasuries make much sense anymore. Treasuries have a place in a portfolio but not so much from an interest rate perspective but more as a hedge against stocks. Another words when you look at an asset allocation if you are allocated this year 70 percent stocks 30 percent fixed income that 30 percent fixed income in short term treasuries CDs or whatever fixed

income really acted as a wonderful moderating hedge if you will against a nasty little stock market. So I looked at fixed income more as a hedge against long term returns in the stock market and short term downturns in the stock market. Remember that when you invest in fixed income you have several risks. Obviously one you don't have is a default risk with the federal government. That's a good one. But the biggest one you have is interest rate or inflation rate risk. It's sort of the same thing consumer risk. And that is that you're going to always be paid back in cheaper dollars so almost every academic study that I've looked at in fact frankly every academic study that I've looked at suggests that it makes very very little sense when it comes to fixed income investing to go out beyond five years. You just don't get a high enough rate of return for tying your money up for that additional quarter of a percent or 1/2

percent versus the volatility of the instrument in case you have to sell it. And taking into consideration how cheap dollars you're getting paid back in the people who buy long term treasury instruments are typically insurance companies who know exactly what kind of costs they have what kind of actuarial experience they have and they offset some of that risk against long term treasuries but their holders of those treasuries they're not buyers and sellers. Well we will have to leave it there I'm sorry we have a couple people now calling in but we're out of time for this time around. But next month they will be back and will do it again. David Stern president CEO strategic Capital Bank thank you. Thanks it's always fun.