Cyber Monday 2010

(2010-11-29) by David John Marotta

The retail industry has tagged today "Cyber Monday." Like the term "Black Friday," which describes the Friday after Thanksgiving, Cyber Monday refers to the Monday three days later. Just as Black Friday is considered the biggest traditional shopping day, Cyber Monday is supposed to see a significant spike in online sales.

The description "Black Friday" has been around a long time and was named to mark the day that retailers become profitable, moving on their balance sheets from the red into the black.

The National Retail Federation's Shop.org division made up the idea of Cyber Monday to generate media coverage for their online retailers. The scheme worked. The mainstream media picked up the story and reported Cyber Monday as if the name had been around for years. Retailers are often trying to create the next big thing by generating media hype and exaggerating existing trends.

Not that the trend wasn't there. The first year it was claimed that traffic was up 35% on retail websites. Since then, sales on Cyber Monday appear to be diminishing. According to comScore, a marketing research company, in 2006 online spending jumped 25%. But in 2007 it was up 21%, 2008 up 15% and last year only up 5%.

Mondays historically have been the best shopping day of the week for Internet retailers. Originally many Americans only had access to a high-speed Internet connection at work, so the Monday shopping frenzy was a wave of pent-up demand from the weekend. Now that we can shop on our smartphones waiting for our friends Thursday evening at the coffee shop, Mondays have lost their importance.

On the calendar, Cyber Monday isn't even in the top-ten online shopping days. Those occur between December 5 and 15. This year December 13 marks the start of the last week when procrastinators can still make their purchases and leave enough time for online retailers to ship the items. Shoppers keep pushing the day back as they have grown more confident their packages will arrive before Christmas. So, at least for a few more days, you can hit the snooze button on your Christmas shopping.

Cyber Monday was a brilliant idea to promote online shopping and jump-start the online shopping season by a few weeks from its actual peak. Having found that a longer holiday season translates into bigger profits, retailers like to extend every holiday season. The holiday season is now a four-month blast of marketing genius. Thanksgivoween and Hanukwansmas extend clear through the entire month of Septoctnocember.

Online sales and services will continue to compete with brick-and-mortar companies. The best firms offer both, leveraging what they have physically and multiplying it manifold through their online presence. Some sales and services can't be accomplished effectively online, but many can. A business in Charlottesville, Virginia, has lower overhead and expenses than its online competition in California or New York. And sometimes a small city like Charlottesville can only support certain businesses if they can sell to the world.

Toys and video games show the most increase in online sales during the holiday season, followed by consumer electronics, computer hardware and software, jewelry, gourmet food, furniture and home decor.

According to Experian Hitwise, an online competitive intelligence service, the top-ten retail websites are Amazon.com, Wal-Mart, Target, JC Penney, QVC.com, Sears, Macy's, BestBuy, Overstock.com and Toys 'R' Us. Amazon's share was by far the largest with 14% of the sales traffic.

You might think these Internet retailers would be great investment opportunities, and you would be right. Collectively they have been averaging 4.90% over the S&P 500 for the year ending October 31, 2010. Half have underperformed the market with the other half overperforming. But two of them have wildly overperformed, pulling the average up. Amazon.com appreciated 39.1% and Macy's appreciated 36.1% since last year. The worst performers were Overstock.com, down 13.8% and JC Penney down 12.7%.

Take advantage of their low prices, and moderate your spending this holiday season. Stay on track with your savings. Don't let the hype of the retail holiday season jeopardize the progress you've made toward reaching your financial goals.

from http://www.emarotta.com/article.php?ID=427

Should You 'Sell in May and Stay Away'? Revisited

(2010-11-22) by David John Marotta

Last May I wrote a column asking if you should "sell in May and stay away." I suggested it would be better simply to "rebalance in May and call it a day." Looking backward it wasn't bad advice. Looking forward, I suggest saving and investing significantly between now and next May.

The original saying began in Britain as "Sell in May and go away, stay away till St. Leger Day." The final horse race of the British equivalent of the Triple Crown takes place on St. Leger Day, in the second week of September. In the United States, September and October historically are considered dangerous months to invest. In addition, St. Leger Day is unknown here. So the date of reentering the markets has been pushed to the end of October, causing the rule to also be known as the "Halloween indicator."

Since 1950, September has been the only month averaging a negative return, due to severe losses in 1974 and 2002. This year September was the best month for the S&P 500, which appreciated 8.92%.

October, contrary to popular opinion, is a typical month with an average return of +0.82%, despite the 21.5% loss in 1987 (Black Friday) and the 16.8% loss in 2008. This year October had a nice gain of 3.8% for the S&P 500.

The traditional wisdom suggests selling on May 1. But since 1950, May has performed well with an average return of 0.80%. This year May was terrible, dropping 7.98% on the S&P 500. Selling on May 1 would have avoided the worst month for the year.

My own study shows that since 1950, May through October has contributed a 3.16% return; November through April has contributed 8.44% for an annual return of 11.60%. If you sell in May, you have to be able to get a six-month Treasury return better than 3.16%. Considering trading costs and capital gains taxes, that's difficult.

This year the S&P 500 only appreciated 0.74% in May through October, underperforming the historical averages. You could not have done better in Treasury bills or money market. You would only have earned 0.06%.

Although the S&P 500 did not do very well over the summer months, other indexes performed better. After dropping 11.37% in May, the MSCI EAFE Foreign Index regained all that and more, ending the period up 5.97%. Despite the meltdown of the euro in May, foreign investments have still outperformed U.S. stocks. Emerging markets have performed even better. Between May and October they were up 10.15%.

Although the return of the S&P 500 has been disappointing, a more broadly diversified portfolio fared better. Year to date through the end of October, the S&P 500 is up 7.84%, the MSCI EAFE Foreign Index is up 5.12% and the MSCI Emerging Markets Index is up 14.24%. A diversified portfolio of half U.S. stock, a third foreign and a sixth emerging markets averaged 8.00% for the year on a buy-and-hold strategy. But rebalancing once at the end of May boosted your return to a whopping 13.94%. The reason is that these three indexes have not moved in sync this year. The S&P 500 did the best for the first four months, appreciating 7.05%. Even in May the S&P 500 did not drop as much as foreign investments. Rebalancings at the end of May meant selling out of the U.S. stock, which was only down 1.50%, and buying into the EAFE Index, which was down 12.08%, and the Emerging Market Index, which was down 5.36%. These foreign indexes rebounded heartily. Asset allocation means always having something to complain about. This past summer it was the S&P 500. Meanwhile your rebalanced portfolio allocated more to foreign stocks.

When the markets are volatile, the bonus on account of rebalancing is greater. Rebalancing every month does not produce the greatest bonus. Rather the greatest bonus is produced by rebalancing just after large movements, such as the foreign meltdown in May. And then the bonus is only gained by diehard contrarians eager to buy what everyone else is selling.

Rebalancing is not a magic bullet. Rebalancing at the beginning of May was 0.45% worse than the 8.00% buy-and-hold strategy, but rebalancing at the end of May was 5.94% better. On average, rebalancing boosts returns by about 1.6% annually.

If a seasonal ebb and flow to market returns really exists, it may be as simple as observing when cash is tight and not flowing into the markets. In February bills from the holidays arrive, and many people are gathering cash to pay their taxes. Summer vacations strap many families, resulting in high expenses in September. Only after bills are paid can money flow back into the markets.

In contrast, December sees large profit-sharing bonuses put into the markets, and pension funds are often invested in January. In the early spring, people are funding their retirement accounts.

Whatever the reasoning, this is the season to be invested. Returns from November through April are historically more than twice those of May through October.

The lessons are clear. Save. Invest. And rebalance regularly.

from http://www.emarotta.com/article.php?ID=426

Coping with College Expenses (2010-11-15)

Coping with College Expenses

(2010-11-15) by Matthew Illian & David John Marotta

An old axiom states that nothing is certain except death and taxes. But now we have to add the skyrocketing costs of a college education.

According to the most recent College Board Annual Survey of Colleges, the sticker price of a college education keeps rising, faster than the price of groceries, health care and almost everything else in the basket of goods used to determine the Consumer Price Index (CPI). In the last 10 years, in-state tuition and fees at public four-year colleges increased 5.6% annually on top of a CPI growth of 2%. The average estimated total expenses for a current public in-state four-year student are an astounding $81,356.

If you were blessed with the birth of a child recently, you will need to save $430 monthly to pay for in-state college tuition, fees, room and board. Double this rate to cover the full costs at the average private institution. And this doesn't even include money for a cell phone, pizza, room decor or other stuff that college students deem "necessities."

Most students don't pay full price for college. In 2009-10, undergraduate students received an average of $12,894 in financial aid, split almost equally between loans and grants. Grants are the most attractive because students are not saddled with a repayment plan after college. Federal grants make up 26% of total aid. Institutional college grants account for 17%, state grants for 6% and private and employer grants (scholarships) for 4%.

Students are graduating with larger debt loads than they were 10 years ago. Public four-year college borrowers graduate with an average of $19,800 in debt; their nonprofit private college counterparts graduate owing $26,100. This private college debt is 17% more than it was 10 years earlier, even after accounting for inflation. In addition, a growing percentage of all college debt is unsubsidized and begins accruing interest immediately.

Our experience suggests not all college degrees are created equal. In May, the New York Times profiled a recent graduate of New York University who majored in women's and religious studies. With more than $100,000 in debt, she is struggling to repay her loans, meet her living expenses and regretting her selection of an expensive private school.

Students will have to make more astute education choices. Today's global marketplace places more value on hard skills such as engineering, computer technology, teaching and finance. Technical degrees and certificate programs will become commonplace. A liberal arts education will likely diminish in popularity and become more focused at the elite institutions. More students are likely to begin their education at lower cost community colleges and complete a four-year degree at schools that specialize in their concentration.

Parents may feel overwhelmed about the amount they need to save for college. But college education is one of the two lifetime investments for which we approve borrowing money (the other is a home mortgage). Students should plan to graduate with a debt load no higher than half of what they can reasonably expect from their first year's salary. For example, those with a starting salary of $40,000 should keep their debt at or below $20,000. Thus graduates can dedicate 10% of their annual salary to school debt and pay it off in five years.

New parents should immediately begin saving $430 a month for college. Alternatively, a onetime $50,000 investment should cover tuition, fees, room and board at an in-state college 18 years from now.

Giving a child the gift of a college education and a debt-free start to adulthood is one choice. Other parents believe their children should participate in financing their college education and can apply the 50/50 savings approach. Parents commit to saving half of the money needed, and their children commit to the other half. Students participate by working hard in high school, applying for scholarships, taking summer jobs, seeking out work study opportunities and accepting reasonable loan levels.

The support of grandparents can help tremendously. The vast majority of the college accounts that we manage are owned and funded by grandparents. Instead of buying the latest gadgets for their grandchildren, they make annual contributions to a college savings account. If the grandparents own the account, it has the added advantage of not being included as a resource on the student's financial aid forms.

The 529 plans are still the most cost-efficient way to save for college expenses. If the grandparents are Virginia residents, they are entitled to a $4,000 state tax deduction, which saves them $230 each year per account. Or they could each open one account for their grandchild and double the savings. This money grows tax deferred and is tax free when withdrawn, akin to a Roth IRA. The 529 plans have the additional benefit of an upfront state tax deduction.

Virginia has the largest 529 plan in the country, perennially ranked in the top five across the country. VEST, the Virginia Education Savings Trust, is marketed directly to the public. Another plan, CollegeAmerica, is offered through financial advisors. It has different share classes, some of which have loads that make them unattractive. But no-load shares are available through fee-only financial advisors. CollegeAmerica allows advisors to create their own asset allocation mix from a few dozen different funds.

We do not recommend prepaid college tuition plans. At best, they match college inflation, and if used at an out-of-state institution, returns are based on money market rates, which are abysmally low right now.

The plethora of decisions can be intimidating. The nonprofit NAPFA Consumer Education Foundation is offering a helpful presentation titled "Advantages of College 529 Plans for You and Your Grandchildren" at the Charlottesville Senior Center at 1180 Pepsi Place on Thursday, November 18, from 5:30 to 6:30 p.m. with a question-and-answer session to follow. The talk is free and open to the public. Bring your questions!

from http://www.emarotta.com/article.php?ID=424

When Donating a Dollar Only Costs Five Cents (2010-11-08)

When Donating a Dollar Only Costs Five Cents

(2010-11-08) by Beth Nedelisky & David John Marotta

According to a poll published last month by Fidelity Investments, Americans are likely to give the same amount or less to charity in 2010. But Virginians are fortunate to have a reason to donate 23 times more to charity this year.

Virginia offers tax credits in exchange for donations to nonprofit organizations serving the truly needy. More than 200 charities have been designated Neighborhood Assistance Programs (NAPs).

Donors to these approved charities are eligible to receive a Virginia tax credit for 40% of the value of their total contribution. Thus a gift of $1,000 to a NAP qualifies for a $400 Virginia tax credit. For some taxpayers, a donation to a NAP may yield total federal and state tax savings worth nearly 96 cents for every dollar they give away.

NAPs provide health care, education, housing, job training and food to the poorest people in our communities. Included in the list are large organizations such as the Virginia chapters of Habitat for Humanity, Boys & Girls Clubs, and The Salvation Army, as well as smaller ones like the Soho Center for Arts and Education.

To be eligible for the 40% Virginia credit, individuals must contribute a minimum of $500. A $500 gift to a NAP is eligible for a $200 Virginia tax credit. Donors may give cash or marketable securities. Gifts of merchandise, services or real estate are not eligible.

Remember that a tax credit is far more valuable than a deduction because it reduces your total tax bill dollar for dollar.

Businesses are also encouraged to donate. They can receive tax credits for professional services donated to an eligible charity as well as for real estate, materials, cash and stock donations. Businesses must donate $1,000 or more to be eligible for the 40% credit. They cannot receive more than $175,000 in tax credits per year.

The beauty of the Neighborhood Assistance Program is that it allows Virginians to give even more generously to help their communities. Virginians in the top federal tax bracket can donate $1,000 to a NAP and receive the equivalent of $957.50 in total federal and state tax savings. With such significant tax savings, people can give 10 or 20 times more than they had planned.

Let's assume Mr. Monopoly has a share of highly appreciated stock worth $1,000. Instead of selling the stock and paying the capital gains tax, he decides to give the stock directly to charity. By transferring the stock to a NAP, Mr. Monopoly avoids federal capital gains taxes of $150. He can take a deduction of $1,000 against his income, saving him $350 on his federal income taxes. Thus far his tax savings are $500, but they don't stop there. On his state return, Mr. Monopoly's gift yields savings of $57.50. Plus he received a $400 tax credit from the NAP. In all, Mr. Monopoly receives a total of $957.50 in tax savings. What began as a $1,000 stock gift actually cost him only $42.50.

The big tax savings allow donors to give more to charity. Instead of donating a stock worth $1,000, Mr. Monopoly could consider giving stock valued at $23,529, a donation worth more than 23 times his original gift. Assuming the stock had a low cost basis, the real personal cost of such a gift would be closer to his original gift amount of $1,000.

Even if you are in a lower federal tax bracket, your tax savings may still be significant. For many middle-class Virginians, the total tax savings generated through a gift to a NAP is likely to be worth 60% of the gift amount.

To receive tax credits for your donation, first contact the charitable organization and determine if it has any remaining tax credits to allocate to your gift. If tax credits are still available, fill out the Contribution Notification Form and send it to the organization. The charity will orchestrate the transfer of the tax credits to you. After submitting the paperwork, you will receive a tax credit certificate. At tax time, attach the certificate to your return.

The Department of Social Services and the Department of Education manage the transfer of the credits. Each qualifying charity is assigned a set number of credits annually. Your donation might not receive a credit if the charity has already given away its share. But if you receive more tax credits than you need this year, you can carry them forward to future years.

If you want to make charitable donations to a NAP, don't wait until the end of the year. Applying for the tax credits does require some extra effort. Your gift and the corresponding paperwork must be complete by year-end to receive the credit for 2010.

Links to the charities that qualify as NAPs are available on our website at www.emarotta.com/nap. Give generously this year to help Virginians in need. The dollars you donate will only cost you pennies.

As part of the nonprofit NAPFA Consumer Education Foundation, we are offering a presentation titled "Philanthropy Isn't Just for the Rich" at the Charlottesville Northside Library at 300 Albemarle Square on Thursday, November 10, from 7:00 to 8:00 p.m. with a question-and-answer session to follow. The talk is free and open to the public.

from http://www.emarotta.com/article.php?ID=423

Wealth Management Is In Your Control (2010-11-01)

Wealth Management Is In Your Control

(2010-11-01) by David John Marotta

For many people, tomorrow's midterm elections feel like a political struggle over which they have very little control. It seems as though the outcome will determine the economics of the country for many years to come. Many feel similarly helpless to direct their own success. Nothing, however, could be further from the truth.

Even the smallest changes you make can have a significant impact on your future. Applying the principles of wealth management depends on exercising what psychologists call an "internal locus of control." In other words, through your own behavior and actions, you can take charge of your financial life.

Successful wealth management depends almost entirely on your choices, habits and hard work. It's based on the principle that very small changes can have a very large effect over either a 45-year working career or a 30-year retirement.

For example, pricey lattes have garnered a bad reputation in financial presentations. They have come to symbolize the fact that Americans should be saving and investing instead of spending mindlessly and spiraling ever deeper into debt. The budget-busting reputation of the caffeine habit is well deserved. My wife uses a cold brew Toddy coffee system. It produces a less bitter coffee concentrate that keeps fresh for a week. Mixed with milk, syrups or just plain water saves $4.75 per serving.

It may seem insignificant at first glance, but saving $4.75 is one of those small changes that have a large effect over time. If you save $4.75 early in your working career, you can invest it. Averaging an 11% return, that $4.75 will grow 100-fold to more than $475 between ages 20 and 65. In this case the effect of saving money when you are young removes the decimal and gains 100-fold.

Saving and investing the cost of a latte every day adds up to even more impressive numbers. Investing $4.75 every day between ages 20 and 65 grows to $475,000. That's a half a million dollar latte habit. Small daily efforts to save have large cumulative effects.

A slight increase in your investment return has a similarly large impact on your retirement savings.

In the financial world, a single percentage point is broken into hundredths of a percent. Each hundredth is called a "basis point." Basis points are abbreviated "bps," which is then shortened into the financial slang "bips." Some in the financial world will kill for 10 bps. That's how important they are.

For every additional 1% you earn over your working career, you can retire 7 years earlier or 50% richer. That is a huge effect for just 100 basis points. Every extra basis point of return over your working career allows you to retire 25 days earlier. The slightest rate of return can save you 142 hours of extra work.

Extra basis points can be found everywhere. The average portfolio's expense ratio can be reduced by about 80 basis points. Rebalancing your portfolio annually adds 160 basis points. Putting the right investments in the right investment vehicles is worth 100 basis points each year. Roth conversions, tax management and asset allocation are all worth hundreds of basis points.

In his book "Why Smart People Do Stupid Things with Money," financial advisor Bert Whitehead asks readers to identify factors that will have an impact on their financial future. In each case, the item under your control is the one that will have the greatest influence on your financial well-being. These variables include taxes, diversifying your investments across all asset classes, being a savvy shopper, how much you earn, the stability of your relationships, the house you purchase and the percentage of your income you allocate to permanent savings.

Small changes in each of these have exceptionally large effects on net worth. Saving for college in a 529 plan can provide half of a college education in appreciation. Foreign investments can boost your returns a few percent each year. Countries with the most economic freedom and emerging market countries can boost your returns a few more percent. The proper insurance coverage can save you from being wiped out financially. Tax Management can reduce the head wind of growth on your net worth. And estate planning can avoid the 55% estate tax on millions of dollars.

So by all means vote wisely in tomorrow's election. But learn to live wisely too so you can achieve your life goals. To find a fee-only advisor to help you define the changes you need to make in your personal finances and help support you in the process, visit the National Association of Personal Financial Advisors at www.napfa.org.

from http://www.emarotta.com/article.php?ID=422