EVOLVING FINANCIAL CONCERNS

TIPS FOR YOUR MUNI BOND PORTFOLIO

Whether you’re just investigating municipal bonds or are reviewing your current muni bond portfolio, consider the following guidelines.

Compare the returns from municipal bonds to other types of bonds. Since the interest income may be exempt from federal, and sometimes state and local, income taxes, your marginal tax bracket is a significant factor in deciding whether municipal bonds are appropriate for your situation. Make sure to determine how a muni bond’s yield compares to the after-tax yield on a comparable taxable bond. To do that, calculate the tax-equivalent yield for the municipal bond. If you’re not investing in a municipal bond issued within your resident state, which also exempts income from state and sometimes local income taxes, the calculation is fairly straightforward: the taxable equivalent equals the tax-exempt interest percentage divided by one minus your marginal tax bracket.

Don’t simply select the bond maturity that offers the highest yield. Since interest rate changes can significantly affect your bond’s market value, it may make more sense to select a maturity that coincides with when you need the principal.

Look at the bond’s call provisions. The terms of call provisions can differ significantly between issues. While you can’t change those provisions, you can select bonds with provisions that are the most favorable to you.

Review the bond’s credit quality. Since 1940, approximately .5% of all municipal bonds have defaulted (Source: The Bond Market Association, 1999). While municipal bonds defaults are rare, they do occur, so carefully review the credit quality of muni bonds before purchase. You may want to stick with investment-grade ratings, which means that the issuer is considered financially stable and unlikely to default. Ratings of BBB or higher from Standard & Poor’s and Baa or higher from Moody’s are considered investment grade.

Hold a diversified portfolio, consisting of at least seven to nine different issues. You can start out with fewer than that, but your ultimate goal should be to hold a diversified portfolio.

Don’t hold too many different bonds. While you should ensure adequate diversification, an excessive number of individuals issues becomes an administrative struggle. For each issue, you need to ensure that interest payments are received, reinvest the interest, and monitor credit quality, maturity dates, and call dates.

Consider bonds issued in your resident state. Purchasing muni bonds issued in the state you reside in means that your interest income is also exempt from state, and perhaps local, income taxes.

Search until you find a bond that meets your criteria. With over 1.5 million different bond issues issued by over 50,000 municipalities (Source: The Bond Market Association, 1999), you should be able to find one that meets your particular criteria.

Review your holdings periodically. Review the credit ratings of all your municipal bonds at least annually to make sure the quality hasn’t deteriorated. Check the call provisions so you aren’t surprised by a call in the coming year. Also, review your holdings to see that they are still consistent with your overall investment objectives and asset allocation plan.

If you would like to review your muni bond portfolio or would like assistance selecting municipal bonds, please call at (800) 878-4036.

STATISTICS THAT AFFECT THE MARKETS

For those that follow the bond and stock markets, it’s readily apparent that the release of significant economic indicators can cause major fluctuations in the markets. But what impact those announcements will have can seem confusing at time — sometimes good news causes the stock market to go down and vice versa. A closer look at three major statistics may help explain why:

Inflation. The most common measure of inflation is the consumer price index (CPI), which is released the fourth week of every month for the preceding month. The CPI is a measure of the average change in prices paid by urban consumers for a fixed basket of goods and services. The weightings of the various categories in the basket of goods and services are based on estimates from the Consumer Expenditure Survey.

This is a closely watched statistic since the Federal Reserve (the Fed) is committed to keeping inflation under control. Any sign of increasing inflation is generally met with concern that the Fed will respond by increasing interest rates.

Unemployment. Statistics regarding unemployment are some of the most timely statistics generated by the government – figures are typically released within a week of month end. Thus, unemployment is also a closely watched statistic, since it quickly signals broad-based changes in the economy. Strong employment figures indicate a strong economy, which can help the stock market. However, numbers that are considered too strong may hurt the stock market, since it raises concern that the Fed may increase interest rates to cool down the economy. Weal numbers can cause bond prices to rise in anticipation that the Fed might decrease interest rates to stimulate the economy. Currently, unemployment rates are hovering close to 30-year lows.

Gross Domestic Product (GDP). GDP is a measure of the goods and services produced by the nation and includes consumer spending, business investment, government spending, and net exports. Approximately three weeks after the end of the quarter, the government announces the annual growth rate of GDP. Under 2% is considered low growth, 2% to 5% is considered moderate growth, and over 5% is considered high growth that is difficult to sustain. When the GDP is significantly higher than expected, stock and bond markets are adversely affected, since it is feared that the Fed will raise interest rates to slow down the economy. On the other hand, if a recession is feared, strong GDP numbers can be viewed as good news by the markets.

How the markets react to these three statistics is often based on current concerns and expectations. If there is concern that the Fed might raise interest rates, any news supporting that view is likely to cause downward pressure on the markets. On the other hand, when there is concern of a recession, any news that the economy is stronger than expected is likely to help the markets. If you’d like to discuss this topic in more detail, please call.

SPENDING YOUR RETIREMENT NEST EGG

One of the more critical decisions you’ll make after retirement is how much to withdraw annually from your nest egg. Without careful analysis, you may withdraw too much or too little. There are two basic approaches to this decision:

Spend no more than the annual income or the total return. This leaves your principal intact so that savings are never depleted. Spending the annual income involves spending only dividends and interest. Many individuals using this approach tend to emphasize fixed-income securities for predictable income. The danger is that not enough will be allocated to growth investments, so that over time inflation can erode the real value of the portfolio.

Spending total return involves spending any capital gains as well as dividends and interest. Since capital gains can fluctuate significantly from year to year, withdrawals are typically based on long-term average returns for the portfolio. Individuals using this approach are more likely to allocate larger percentages of their portfolio to growth investments. Use a conservative long-term rate of return, however, so that too much is not withdrawn annually.

Withdraw a certain percentage of the portfolio’s value. The first approach might not work if you can’t afford to leave your principal intact. Thus, a withdrawal percentage should be calculated based on your life expectancy, the long-term rate of return on your investments, an expected long-term rate of inflation, and how much of your principal you want left. Use conservative estimates in these calculations so your portfolio is not depleted. Periodically, reevaluate your answer to make sure the amount you are withdrawing is still reasonable.

If you’d like help deciding how much you should withdraw, please call us at (800) 878-4036.

YOUR SUBSTITUTE TEACHER

After reading the newsletter, if you have any questions on any of the topics covered, or would like more information, please call me at (800) 878-4036. Or if you have any friends, relatives, or co-workers who you think could benefit from reading my newsletter, let me know. I would be happy to include them on my mailing list.

With the hectic pace of life today, it’s hard to set aside time to plan for the future. Most of us probably have the goal of providing a comfortable life for our children and eventually enjoying a financially worry-free retirement, but with all the other demands for our money it is hard to save as much as we should.

However, it is important to plan ahead so you will be prepared to enjoy your retirement years. Even though the thought of financial planning may seem overwhelming, there are many resources that can make this process easier for you. The crucial component is commitment by you and your spouse to understand and implement your financial plan.

Sometimes women are hesitant to take an active role in understanding their investment portfolios, assuming their husbands will take this responsibility. However, women need to learn what investments they own and why, and contribute to decisions regarding the portfolio. It is important for both spouses to be involved in the process so that they work together as a team and feel comfortable with the decisions made.

My goal is to help you meet your goals for retirement. If you ever have questions about your investments or would like to discuss an issue, please call me at (800) 878-4036. And remember, even though it seems like planning for retirement is one more thing to fit into your already hectic schedule, taking the time now can help you meet your goals in the future.