Brighton Bulletin
Issue: 16 December 2009
Happy New Year!

We all enter each new year with the belief that this year will be better than the last, no matter how good last year was. 2009 turned out better than 2008, admittedly not a difficult task, and it certainly doesn't seem like much of a stretch to assume that 2010 will exceed 2009.

We entered the year with the economy on the verge of another "Great Depression" and panicked media reports that the world had changed as we know it thanks to the global financial crisis. However, we survived and moved forward. In fact, equity markets closed out the year up roughly 19% while fixed income markets also performed well. Further, we saw strong performance from financials and real estate - two sectors many had written off as dead. We can never under-estimate the resiliency of human beings.

I'm currently reading "SuperFreakenomics" and the authors, I believe, make two points that will play a significant roll in 2010. First, human nature is extremely difficult to change and second, humans are remarkably sensitive to incentives. Taking the first, as the economy declined into recession during late 2007 and persisted through much of 2009, many, including myself, made much about the ability of consumers to spend money. This is critical because consumer spending accounts for roughly 70% of our gross domestic product. However, evidence suggests consumers didn't stop spending all that much. Financing for spending declined - consumers could not borrow on their homes and many were unemployed, but by November consumer spending had exceeded the prior peak at more than $10 trillion and was actually UP 2.8% year over year. Again, human nature is remarkable difficult to change. To the extent that consumers continue to spend in 2010, the economic recovery will continue to improve.

Taking the second point, humans respond to incentives, both positively and negatively. We've seen evidence of this in 2009 via the "Cash for Clunkers" and "First-time Homebuyers" credits. What incentives will we see in 2010? What effect will these incentives have on consumers, businesses and investors?

I will be watching spending to confirm the recovery has "legs" and will be watching inflation. I believe 2010 will be an improvement on 2009 but not without testing our resolve. I stated in January of 2009 I expected the S&P 500 to close 2009 around 950. I was off by 100 points (over 10%). I wouldn't be surprised if we see 950 at some point during 2010 though. As resilient as we are, as difficult as it is to change our nature, we don't like be disappointed and I think we may be disappointed by near term corporate earnings performance.

Equities still offer promise and we're not taking clients out of them but we are hedging exposures to be sure we manage downside risk. Take care of your own portfolios similarly if you agree with my assessment. Even if you don't, hedging downside risk is always prudent.

Enjoy 2010! Expect great things and make them happen!
Start Planning Now!
It's never to early to open a 529 account


529 college savings plans are tax-advantaged college savings vehicles and one of the most popular ways to save for college today. Much like the way 401(k) plans revolutionized the world of retirement savings a few decades ago, 529 college savings plans have revolutionized the world of college savings. As of March 2009, there were over 11 million 529 plan accounts. (Source: College Board's Trends in Student Aid 2009)

 

529 college savings plans offer a unique combination of

features that no other college savings vehicle can match:


· Federal tax advantages: Contributions to your account grow tax deferred and earnings are tax free if the money is used to pay the beneficiary's qualified education expenses. (The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate and subject to a 10% penalty.)


· State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for

contributions or a tax exemption for qualified withdrawals.


· High contribution limits: Most college savings plans let you

contribute over $300,000 over the life of the plan.


· Unlimited participation: Anyone can open a 529 college

savings plan account, regardless of income level.


· Professional money management: College savings plans

are offered by states, but they are managed by designated financial companies who are responsible for managing the plan's underlying investment portfolios.


· Flexibility: Under federal rules, you are entitled to change

the beneficiary of your account to a qualified family member

at any time as well as rollover the money in your 529 plan account to a different 529 plan once per year without

income tax or penalty implications.


· Wide use of funds: Money in a 529 college savings plan

can be used at any college in the United States or abroad

that's accredited by the Department of Education and,

depending on the individual plan, for graduate school.


· Accelerated gifting: 529 plans offer an excellent estate

planning advantage in the form of accelerated gifting. This

can be a favorable way for grandparents to contribute to their grandchildren's education. Specifically, individuals can make a lumpsum gift to a 529 plan in 2010 of up to $65,000 ($130,000 for married couples) and avoid gift tax, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.


Although 529 college savings plans are a creature of federal

law, their implementation is left to the states. Currently, there

are over 50 different college savings plans available because

many states offer more than one plan. You can join any state's 529 college savings plan, but this variety may create confusion when it comes time to select a plan. To make the process easier, it helps to consider a few key features:


· Your state's tax benefits: A majority of states offer some

type of income tax break for 529 college savings plan

participants, such as a deduction for contributions or taxfree

earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to the in-state 529 plan only. So make sure to find out the exact scope of the tax breaks, if any, your state offers. You want to find a plan with a wide variety of investment options that range from conservative to more growth-oriented to match your risk tolerance. To take the guesswork out of picking investments appropriate for your child's age, most plans offer aged based portfolios that automatically adjust to more conservative holdings as your child approaches college age.

 

Remember, though, that any investment involves risk, and past performance is no guarantee of how an investment will perform in the future.

 

· Fees and expenses: Fees and expenses can vary widely

among plans, and high fees can take a bigger bite out of

your savings. Typical fees include annual maintenance

fees, administration and management fees (usually called

the "expense ratio"), and underlying fund expenses.


· Reputation of financial institution: Make sure that the

financial institution managing the plan is reputable and

that you can reach customer service with any questions.

With so many plans available, it may be helpful to consult an

experienced financial professional who can help you select a plan and pick your plan investments, giving you peace of mind. In fact, some 529 college savings plans are advisor-sold only, meaning that you're required to go through a designated financial advisor to open an account.

Always carefully read the 529 plan issuer's official materials before investing.
Year-end Planning
Computer A public service reminder - as you sit down to review your performance for 2009 and plan for 2010, know that help is just a phone call away!

We have the resources to assist you as you review your asset allocation, your investment options, plan your 2010 spending and consider the big events still to come - college, weddings, retirement.

Don't go it alone - we stand ready to help!
As always, I hope you find this Bulletin useful. Feel free to forward to anyone you believe may also find it beneficial. As well, feel free to contact me to discuss any financial questions or concerns you may have.
 
Sincerely,
 

John P. Middleton, CFA, CAIA
Brighton Financial Planning, Inc.
908-892-5958
john@brightonfinancial.com
In This Issue
Start Planning Now!
Year-end Planning
File the FAFSA!
OSU
File the FAFSA!
If you have a high school senior in the household, file the FAFSA as soon as possible. The website should be updated for the 2010-2011 year already.

Keep in mind, that filing early does not guarantee you'll receive any form of financial aid. However, the earlier you file, the better. Check out www.fafsa.ed.gov for more information and to start the filing process.