Sunday, January 6, 2008

Jersey Benefits Advisors Newsletter Winter 2008

Market Watch

After a year of increased volatility and some major financial upheavals, the stock market still managed to finish in positive territory, despite some setbacks along the way. Overall, it was a year that saw many actively managed funds surpass the indices, index related mutual funds and ETF’s.

The Dow Jones Industrial Average ended 2007 with a gain of 6.4% at 13,264.82, while the S&P 500 only managed a gain of 3.4% to close at 1,468.36. The NASDAQ Composite was up 9.8% for the year, closing at 2,652.28 while the NASDAQ 100, an index of primarily technology stocks, managed to turn in the best performance of the year with an 18.7% gain. The Dow Jones Utility Average also had a stellar performance adding 16.6% for the year, while the Russell 2000, which had been on fire recently, had a –2.7% return for 2007.

The market reacted to the Fed’s latest 25 basis points cut in interest rates with a thud in December, mainly because traders wanted a 1/2 point cut. It seems like the traders might have missed the bigger point, because historically, the third in a series of rate cuts by the Fed is a charm for the market. In the year after three successive rate reductions by the Fed, the DJIA has gained an average of 18%. This has happened 14 times since 1921, according to Ned Davis Research. Stocks have risen with striking consistency after three rate cuts, except in 1930, at the onset of the Great Depression, when the Dow fell nearly 40% that year. Let’s hope history is on our side in 2008.

There has recently been a great deal of talk about the possibility of a recession, characterized by two or more successive quarters of negative GDP growth. According to a recent article in the Wall Street Journal, most economists polled put the risk of recession at around 38%, while John Lonski, chief economist at Moody's says, "The odds of a recession right now are just under 50-50." Gary Pollack a Managing Director at Deutsche Bank Private Wealth Management says," The economy will skip a recession because the decline in housing will be offset by increases in exports and government spending." As you can see from the various opinions it is almost impossible to know when or if the economy will slip into recession. Recessions are generally confirmed after the fact, so the best thing investors can do is be aware of the possibility of recession and understand the implications for their investments. Markets usually decline during recessions and assets can be bought at lower prices. If you don't NEED to sell anything during a market downturn, think about adding to and diversifying your investments.

The new year should see further volatility in the markets as investors reassess the risks they are willing to take with their investments. You can be sure there will be fewer subprime mortgages underwritten, and a paltry market for collateralized mortgage obligations. Real estate will probably continue to decline through 2008, as builders cut back on new projects. The number of housing starts many economists feel are needed to lessen the glut is about 500,000 per year, down from 2.6 million at the peak of the housing boom.

This should be an interesting election year as politicians pander to the plight of the plethora of homeowners facing foreclosure in 2008.

Mutual Fund Performance For 2007 VS 2006 And 5 Year Average

The list of funds below is a representative sample of client’s holdings recommended over the years. Many of you will recognize core holdings and sector funds from your account. Notice how returns fluctuate year to year, but the 5 year average remains very strong.

Is The Time Right For a 529 Plan?

Are you a parent or grandparent with a newborn or young school-aged child in the family? Saving money for college expenses is a goal I hear many young parents express, and one of the best ways to build tax-advantaged savings for college is the 529 plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs.

The 529 plan, legally known as a “qualified tuition plan,” is sponsored by states, state agencies, or educational institutions and is authorized by Section 529 of the Internal Revenue Code. Changes in the tax code were made in 2006 making permanent the provision that earnings in a 529 plan are tax free upon withdrawal when used for education expenses. This has resulted in eliminating any change in status for earnings for the 529 plan and made it the premier savings vehicle for college savers.

There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan. There are differences between pre-paid tuition plans and college savings plans, and each individual family needs to determine which plan may be right for their needs. Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.

College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.

DOLLAR COST AVERAGING through a systematic savings plan is an excellent way to build up an account without a sizeable minimum investment. This is the way many company retirement plans function. Saving a portion of our pay each month is very important. Company sponsored pension plans are one method to save and should be used for retirement. Other systematic investment accounts, SUCH AS ROTH IRA’S, TRADITIONAL IRA’S, COVERDELL ACCOUNTS, 529 PLANS, BROKERAGE ACCOUNTS AND ANNUITIES can be opened, some for as little as $50 per month, and debited directly from your checking or savings account. For more information, just call to set up an appointment. REFERRALS ARE ALWAYS WELCOME.

John Kaighn

Jersey Benefits Advisors

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