I use this strategy because year in and year out there are very few actively managed funds that consistently beat the indexes when you factor in their expenses.  David Swenson, chief investment officer of the Yale University Endowment Fund says "When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there's almost no chance that you end up beating an index fund.  The odds are 100 to 1."  But you are guaranteed to incur higher costs by pursuing a non-index stragey, so you will be highly likely to end up earning less by trying to beat the market.  
 

Over the holidays, I had oportunity to finish a book that further reinforced this approach.  I highly recommend it to any of you with a little spare time on your hands.  It's called The Little Book of Common Sense Investing, and it's by John Bogle, the founder of Vanguard.  Bogle highlights a couple of stats that I think you'll find interesting. 

 

According to Bogle, the average actively managed fund's performance is 2.5% below the S&P 500 index after expenses.  Doesn't sound like much, does it?  But if you think about an initial hypothetical investment of $10,000 over a 50-year period with the index returning 8%, that would mean the average actively managed fund returned only 5.5%.  In 50 years, the simple investment in the stock market would grow to $469,000 while the investment earning only a 5.5% return grew to only $145,400.  Big difference, eh?

 

At this point, you're likely thinking, well, I'll pick the best actively managed fund with the best proven track record of market-beating returns.  Unfortunately, that's not easy to do.  Bogle studies a couple of different 20-year time periods and identifies the top 20 mutual funds.  Then, he looked at the next year following the 20-year time period, and how many of the top 20 were in the top 20 the next year?  You guessed it.  None.  Not very good odds of picking the winner, but 100% chance of incurring higher costs.

 

If you're not a current client and are wondering how your investments measure up in terms of costs and performance, you can give me a call to set up a complimentary, no-obligation get acquainted meeting.  I provide second opinions on your current portfolio, or we can just start from scratch in creating the right investment strategy for you.

Required Minimum Distributions have been suspended for 2009.  This is good news for people that are 70 1/2 or older, have their IRAs invested in the market, and don't need to take money out this year for living expenses.  It allows more time for recovery of those balances instead of forcing a sale at a low point.  Tax-free distributions from an IRA to a charitable organization have also been extended to December 31, 2009. 

The IRS has set the mileage rate for 2009 at $.55 per mile.  This is down slightly from the $.585 per mile in the second half of 08, but still quite good given the low gas prices we're currently experiencing.

 

The SEC voted to regulate equity-indexed annuities as securities last month.  They had previously been exempt because they were considered an insurance product.  This change is good news because it should bring increased transparency to the fees and commissions associated with these products.

FDIC insurance got a lot of visibility last fall when the limits were temporarily raised, but there are still a lot of questions out there.  If you want more details on what's covered and what's not, you can check out this post on my website.

 

Some are also still hesitant to place their savings in online banks because of perceptions that they may not be as stable as a brick and mortar bank.  But as long as those banks carry FDIC insurance, you should be ok.  And they are currently providing some of the highest interest rates in the market, so you might be missing out if you're not taking advantage of this opportunity.  Online banks can be great places to stash an emergency fund.

 

Roth 401(k) programs don't give you a current tax deduction, but they provide the opportunity for all of your earnings on the contribution to grow tax-free.  In a traditional 401(k), all of your earnings will be taxed at regular income tax rates once withdrawn.  Which makes the Roth 401(k) a terrific deal in many situations.   There are of course things to watch out for, so this is a good financial planning opportunity to really run the numbers.

 

Increasing your monthly Social Security retirement benefit is one of the main reasons you might want to withdraw your application and reapply. According to the SSA, most retirees file for Social Security benefits early, often at age 62. But the drawback to claiming benefits early is that your monthly benefit will be substantially less than it would be if you wait until full retirement age, or longer, to collect. For example, if your full retirement age is 66, your monthly benefit at age 62 will be approximately 25% less than it will be if you wait until your full retirement age of 66 to collect, and 43% less than if you wait until age 70. (Source: SSA chart, Effect of Early or Delayed Retirement on Retirement Benefits)

Once you have a clearer picture of your retirement income needs, you may decide to withdraw your initial application and reapply when you're older, so that you may receive a higher monthly Social Security benefit (adjusted annually for inflation) for the rest of your life. In addition, if you're married, your spouse will generally receive the greater of his or her own retirement benefit or your monthly benefit (including any cost-of-living increases) in the event of your death, so increasing your retirement benefit may translate into more survivor protection for your spouse.

You may also wish to withdraw your Social Security application if you decide to work and your income is enough to reduce or even eliminate your Social Security benefit, or if your Social Security income is increasing your tax liability.

 

You can withdraw your initial benefit application by filing Form SSA-521, "Request for Withdrawal of Application" at your local Social Security office. However, there is a pretty big catch. If you withdraw your application after you begin receiving benefits, you're required to return--in a lump sum--all of the money that Social Security has paid you over the years. But any interest or investment earnings you've received as a result of saving or investing those benefits is yours to keep. If you paid taxes on the benefits you're now paying back, you may be eligible for an income tax credit or a deduction. You can find more information about the tax consequences in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Not everyone will come out ahead by withdrawing an application for retirement benefits, then reapplying--you'll need to consider your own financial circumstances. Obviously, the requirement to pay back benefits will limit the number of people who can take advantage of this opportunity. And even if you can afford to pay back your benefits, you must be willing to accept the risk that if you die, you or your spouse may not recoup the amount you've paid back. But reapplying for benefits may be worth considering if you need to maximize your lifetime income and provide higher survivor's benefits for your spouse.

 

Put together a kit that contains some cash and checks, a list of important contacts (e.g., your insurance agent), and copies of important documents, including identification cards, birth and marriage certificates, insurance policies and inventories, wills, trusts, and deeds. Make sure your kit is stored in a safe, secure place in your home, is easy to reach and carry, and is water and fire proof. You'll want to stash enough cash (or a credit card) to pay for immediate expenses such as gas, food, and lodging.

Tip: While you're at it, you might also keep your most precious items in the kit, such as your photo albums and family heirlooms.

Take some commonsense precautions to safeguard your home, business, car, boat, and similar assets against damage from wind, water, fire, or other damage. For example, install an emergency generator and paperless drywall, keep loose objects (e.g., grills and patio furniture) secure, cut down overhanging tree limbs, park your car in the garage, and invest in storm windows, doors, and shutters.

Take inventory

IOUSA is a must-see documentary about America's addiction to debt. 

 

It's on CNN this weekend. 

 

I'm going to be setting my DVR.  For showtimes, click here.