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FALL 2001 Newsletter


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Typically, before deciding how much to allocate to different investment categories, you answer several questions about your tolerance for risk. The recent stock market fluctuations have provided a real world test of your theoretical answers. You should now have a better understanding of your comfort level with risk, making this a good time to reassess your risk tolerance.

There are at least two components to your risk tolerance. One is the appropriate level of investment risk based on your personal situation. Factors such as your time horizon for investing, income level, total assets, debt levels, liquidity, and family responsibilities will affect that decision.

The other element is your emotional tolerance for risk. Even if your personal situation indicates a high level of risk, that may not be prudent if you don’t feel emotionally comfortable with that risk. How you’ve handled the recent stock market fluctuations should provide a good indication of your emotional comfort level with risk. How have you reacted during this volatile period? Have you taken the fluctuations in stride or have you been anxious about your portfolio’s value? Have you frequently calculated your portfolio’s value or only occasionally checked? Have you been tempted to sell all your stock investments or did you realize that this is just a normal part of the investing process? What would you do if the market continued to decline? How long could you withstand a declining market before feeling compelled to sell?

If you’ve had difficulty handling the recent market fluctuations, try to reduce your portfolio’s risk to gain more comfort. Some strategies to consider include:

  • Diversify your portfolio among several investment categories, including cash, bonds, and stocks, as well as within investment categories, such as owning several types of stocks. A properly diversified portfolio should contain a mix of asset types whose values have historically moved in different directions or in the same direction with different magnitudes. The theory is that when one asset class is declining, other assets may be increasing in value.
  • Stay in the market through different market cycles. Remaining in the market over the long term helps to reduce the risk of receiving a lower return than expected, especially for more volatile investments, such as stocks.
  • Become familiar with different investments and their risks. Over time, your comfort level with risk should increase as your understanding increases.
  • Maintain reasonable return expectations. Otherwise, you may become disappointed if an asset does not perform as expected.
  • Don’t accumulate cash, waiting for a large sum to invest. Many investors feel it is less risky to invest smaller sums rather than one large amount.
  • If you’re not sure you can handle the risk associated with more aggressive investments, start out by investing a small amount. Increase your exposure as your comfort level increases.

The recent stock market volatility has served as a check on how comfortable you are with your portfolio’s risk. If you need help managing that risk, please call us at (800) 878-4036.



Your investment strategy, including your asset allocation preferences, will give you a disciplined approach to making investment decisions. Before developing an investment strategy, however, you should answer some fundamental questions that will define your investor profile. Those questions include:

What are your overall investment objectives? Investors committed to growth are looking for appreciation of capital, with little concern for income from their portfolio. Total return investors want a balance of income and capital appreciation. Income investors are looking for interest or dividend income, with capital appreciation a secondary concern. Individuals concerned about preservation of capital are most concerned with protecting their principal.

What’s your investment time frame? Short-term investors need their money in a year or two, while intermediate-term investors are investing for two to five years. A long-term investor is investing for at least five years. Typically, stock investments should only be considered by long-term investors. Because stock returns can be volatile, it is important to invest through different market cycles to reduce the chances that you will receive a lower return than expected.

What is your risk tolerance? You should accurately gauge your tolerance for risk. If you take on too much risk, you may be tempted to sell an investment after a market downturn. See the article "How Are You Handling Risk?" for more details. Those uncomfortable losing more than 5% of their principal in a year have a low risk tolerance and should consider short-term cash investments. A person with a moderate tolerance could stand a loss of 6% to 15% and should consider bonds and high-quality stocks. A person with a high risk tolerance could withstand a 16% to 25% loss and should consider more aggressive investments, such as growth stocks.

What rate of return do you expect on your investments? Although past performance is not a guarantee of future results, reviewing historical rates of return for various investments will provide a rough estimate of returns you can expect. Keep in mind that returns typically reward you for the risks you are willing to assume. Thus, more aggressive investments usually have higher return potential.

Are you concerned with minimizing income taxes? Investors in higher tax brackets will want to consider investments that can help minimize income taxes. That might include municipal bonds, investments generating capital gains, and tax-deferred investments, such as 401(k) plans and individual retirement accounts. Various investment strategies can also reduce the taxes you pay, such as holding capital gain investments for the long term.

Your answers to these questions will help determine how you should allocate your portfolio among various investment alternatives. In turn, your diversification decisions will help protect your portfolio during market downturns and help to reduce your portfolio’s volatility.

If you’d like help evaluating your answers or with your investment strategy, please feel free to call us at (800) 878-4036.


Increasing debt levels can make it difficult to achieve your financial goals. If a significant portion of your income is going to pay interest on your loans, that leaves less available for saving and investing for your financial goals. While it may be difficult to achieve debt-free status when you own a home, it is a reasonable goal to owe no debts other than your mortgage. To help you with that goal, consider the following steps:

1. Stop incurring new debt. If you are truly committed to reducing your debts, you must stop incurring additional debt. Only use your credit cards if you can pay the balance off in full every month. If you don’t have cash for a purchase, wait until you can save the money.

2. Consider consolidating debts with a lower interest rate option. You may be able to transfer credit card and other debt balances to lower interest rate alternatives. However, don’t implement this strategy until you have step 1 under control. You don’t want to obtain a lower interest rate card and then start adding new balances to it.

You may also want to consider a home-equity loan to pay off your consumer debt. Home-equity loans typically carry lower interest rates than other personal loans and, as long as the balance does not exceed $100,000, interest paid on home-equity loans is deductible on your tax return.

3. Prioritize and pay down your debts. List all your debts and monthly payments, listing the debts from highest to lowest interest rates. Add up your minimum payments and then determine how much more you can add to pay down those debts. Rather than paying a little bit extra on all your debts, use these additional funds to pay off the debt with the highest interest rate. Once that debt is paid in full, start paying the debt with the next highest interest rate.

If you’d like help reducing your debts, please call (800) 878-4036.


The two basic investing styles are growth and value. While one style tends to perform better at any given time, the dominant style varies over time.

Growth investors look for stocks with earnings that are increasing faster than the overall market, typically at a 15% or higher annual rate. Generally, growth stocks perform best late in an economic expansion, when investors are seeking companies that can continue earnings increases despite a slowing economy. As growth stocks gain favor, investors tend to bid their prices up to lofty levels. Thus, the price/earnings (P/E) ratios of growth companies can be two or three times higher than the overall market. With those high valuations, investors often punish the stock significantly if actual results are even a little less than expectations. The recent rise and then decline of technology stock prices is a classic example of this pattern.

Value investors look for stocks with low market values based on earnings or assets. Value stocks typically sell at P/E ratios and at price-to-book values that are lower than the overall market. These stocks tend to perform better in the early stages of an economic recovery, when profits are easier to earn. Their prices also tend to hold up better during periods of market downturns.

So which style will excel in the future? Just as you can’t predict where the market is headed, it is difficult to determine when each style will dominate. Thus, it may make more sense to include both styles in your portfolio. That way, no matter what style dominates, it will be represented in your portfolio. Please call (800) 878-4036 if you’d like to discuss investing styles and their impact on your portfolio. Past performance is not a guarantee of future results.


Buying a home has long been part of the American dream. But before you get caught up in the excitement of looking for your dream house, there are some important financial decisions that should be made. Those decisions include:

How much should you spend on a house? An often-cited guideline indicates that your mortgage payment, insurance, and property taxes should not exceed 28% of your gross income. Nowadays, however, you can find lenders that let you spend up to 40% of your gross income on a mortgage payment. However, you want to make sure that you’ll still have money left over to put toward other financial goals and that unforseen problems won’t affect your ability to make your mortgage payment. Thus, rather than allowing your lender to dictate how much house you can afford, it’s a better strategy to review your expenses, deciding how much you’re comfortable devoting to a mortgage payment. Based on current mortgage interest rates, the amount you’re using as a down payment, and how long you want to finance the mortgage, you’ll then be able to calculate the maximum amount you should pay for a home.

How much do you have available for a down payment? Down payments on houses typically range from 5% to 20% of the total purchase price. A lower down payment makes it easier to purchase a home, but it also increases the size of your mortgage and thus your mortgage payment. You might want to consider a down payment of 20% of the total purchase price of the home. With that large a down payment, you don’t have to obtain private mortgage insurance, which typically runs from .25% to 1.25% of your total mortgage amount.

What type of mortgage should you obtain? The two main types of mortgages are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Fixed-rate mortgages are typically good choices for homeowners who plan on staying in their homes for many years. The fixed rate results in a fixed mortgage payment, making it easier to budget for other expenses. ARMs generally offer lower initial rates than fixed-rate mortgages, with the interest rate changing periodically based on a designated index. ARMs are often preferred by homeowners with rising incomes, those planning to move in a short time, and those who want the short-term cash flow benefits of lower interest rates. You may also want to consider a convertible mortgage, which allows you to switch from an ARM to a fixed rate, from a fixed rate to an ARM, or from the original fixed rate to a lower rate if rates decline.

What mortgage term should you select? The most common terms are 15 and 30 years. Thirty-year mortgages have lower monthly payments, but your equity builds slowly during the early years. Monthly payments for 15-year mortgages are typically 15% to 25% higher than for 30-year mortgages, but the mortgage is paid off so much quicker that the total interest costs are less than half. Interest rates on 15-year loans are also generally lower than for 30-year loans.

Before you get caught up in the excitement of finding your dream home, take time to work through these important home-buying decisions.



The purpose of a financial newsletter should be to inform, educate, and provide an overview of financial topics. Because each of my clients has different circumstances and needs, this newsletter will not discuss investment ideas pertaining to each individual’s specific situation. Rather, my objective is to help you think about your plans for your money and how I can assist you with your goals.

I also use this newsletter to keep you informed about how I do my job. My background, philosophy on investing, and financial review process are all important topics. So, from time to time, I will add an article discussing these areas.

Please understand that I cannot predict the future or guarantee that you will have a certain amount of money down the road. What I can do is work with you to create an investment portfolio structured to help you meet your financial goals. I then monitor the portfolio, meeting with you periodically to discuss your performance and make adjustments as needed.

I want to help you see the big picture — not only with regard to your portfolio, but also with regard to the market and how the economy functions. This newsletter is designed to help you learn about general financial topics and think about your portfolio in light of that information. Please feel free to call me at (800) 878-4036 any time if you have any questions.


As we have mentioned many times before, our greatest commitment to our clients is to provide them with education and service. This newsletter is one example of our commitment to education. Ideally, we would like to discuss these topics on an individual basis. Since this is not always possible, we have decided to use this format to provide information for you to make knowledgeable financial decisions.

As part of our commitment to service, we provide our clients with the following:

bullet Portfolio Reviews — We will review your current investments to determine whether they will help you meet your goals, objectives, and risk tolerance.
bullet 401(K) Plan Reviews — We will evaluate your 401(k) investment choices and help you select the ones best suited to your situation. We can also help you determine how much you should be contributing to the plan.
bulletInsurance Policy Reviews — We will review your life insurance, disability insurance, and any other insurance to determine whether you are adequately covered in all significant areas.
bulletCollege and Retirement Planning Evaluations — We will assist you in determining whether you are on track to reach your goals or if you need to save more.

We believe our ability to provide you with quality service is dependent on a strong, trusting relationship. That is why we focus so much time on education: educating ourselves about your situation and then educating you on the various alternatives available.

If you have any questions about a specific newsletter article, please call us (800) 878-4036 so we can discuss its implications. Additionally, if you have any questions about our services, please let us know.

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Last modified: January 30, 2017