Sigcat Software Showcase 1992/SIGCat Software Showcase 1992 - CD-ROM Strategies.ISO/research/docs/winter89.txt

Text File | 1992-03-02 | 18.1 KB | 334 lines

Tofias
Fleishman
Shapiro                                              Winter
& Co., P.C.                                          1989

Certified Public Accountants

205 Broadway, Cambridge, MA 02139 ■ [phone] ■ 66 Pearl Street,
Portland, ME 04101 ■ [phone]


PERSONAL FINANCIAL PLANNING QUARTERLY

THREE DIMENSIONS OF DIVERSIFICATION PART II: DIVERSIFICATION ACROSS TIME

Diversification is a highly effective means of reducing investment
risk and may be applied across investment assets and management styles,
as described in Part I. Diversification across time is a third strategy
for reducing investment risk and may be achieved by the use of any one
or more of four methods.

     ■ Buy and Hold. Time diversification is much more important when
       investing in volatile securities, such as stocks, than in more stable
       ones, because over long time periods the variability of return inherent
       in the volatile security tends to be smoothed and the risk of loss
       reduced. For this reason, investment in securities such as stocks with a
       time horizon of less than five years is generally considered speculative
       Buying and holding high quality securities over the long term has been
       demonstrated in numerous studies to provide a competitive rate of return
       relative to many more active investment strategies. It is also one of
       the easiest ways to achieve diversification across time.

     ■ Dollar Cost Averaging. Dollar cost averaging is a conservative
       technique for participating in equities with reduced concern about
       downward price fluctuations. Used consistently, this strategy can
       actually capture benefits from temporary market corrections.

       Dollar cost averaging is the practice of investing a fixed amount
       of money in common stock or stock mutual funds at regular intervals,
       without regard to the price of the securities being purchased. In the
       presence of market fluctuations this method of investing is guaranteed
       to lower the average cost paid per share, because more shares will
       always be purchased when prices are low and fewer when prices are high.
       All that is required is discipline and consistency in the amount and
       timing of the periodic investments.

       Dollar cost averaging is most suitable for an investment program
       having a time horizon of several years. It is not an appropriate
       technique for use with emergency funds or other monies where liquidity
       is required, since forced sales would violate the method and disrupt its
       effectiveness. When used in connection with the purchase of individual
       stocks, it may result in greater transactions costs than a lump sum
       investment. For this reason, a no-load mutual fund is a better choice of
       investment vehicle. Aggressive growth funds are ideal, since their price
       volatility magnifies the benefits obtainable.

       When there is a substantial lump sum amount available for immediate
       investment in equities, a variation of dollar cost averaging may be
       effective in reducing market risk. Instead of investing $50,000 in a
       single transaction, an investment of $10,000 a month might be made for
       each of five months. Although some potential gain is sacrificed should
       the market move steadily upward, downside risk from a falling or erratic
       market is reduced.

       Other variations of dollar cost averaging are based on the same
       principle of regular periodic investing and may be simple (buy the same
       number of shares each period regardless of price) or more complicated
       (have both a stock fund and a money market fund and maintain a constant
       ratio between them). The method of dollar cost averaging described above
       will result in a lower average price per share than the first of these
       variations, and little, if any, improvement in performance will be
       gained from the complication of a second fund.

     ■ Staggered Maturity Investing. This technique reduces risk and
       enhances return when investing in bonds and other fixed income
       securities. Instead of investing an entire amount in bonds having tong
       maturities, which increases risk, or in bonds having short maturities,
       which reduces yield, equal face value amounts of bonds having varying
       maturities are purchased. With a fairly large amount to invest, one
       might buy ten different bond issues, with the first maturing in one
       year, the second in two years and so on through year ten. The portfolio
       would then have an average maturity of five yews. With a somewhat
       smaller amount, one might buy only five different issues with maturities
       spaced two years apart. The technique can also be applied to CD's over a
       shorter time horizon. It reduces risk by providing funds for
       reinvestment on a regular basis, thus protecting against rising
       interest rates, while locking in rates at some longer maturities to
       increase yield and hedge against falling interest rates.

     ■ Cyclical Investing. Cyclical investing is, in some ways, similar
       to market timing. One difference is that it is based on traditional
       relationships between investments and economic cycles, rather than on
       outcomes anticipated by technical indicators. Another is that whereas
       market timing focuses on relatively frequent switches between a volatile
       security, usually an aggressive stock mutual fund, and cash, movements
       in cyclical investing may encompass virtually all asset categories, and
       changes occur less frequently.

Historically, the economy has cycled repeatedly between recovery,
growth, inflation and contraction. The current phase of the economy and
impending changes may be loosely determined on the basis of certain
economic indicators (statistical information regularly published by the
government). For example, during the recovery phase, investment is made
in stocks in anticipation of price rises due to increased business
activity. As growth proceeds, real estate and/or gold may be favored as
a hedge against impending inflation. When inflation nears its estimated
high, bonds could be bought to lock in related high interest rates for
the long term. Bonds and/or cash equivalents could be held during the
contraction until the beginning of the next growth phase.

The discipline imposed by the various forms of diversification
described above is helpful in preventing investment decisions based on
fear or greed. While diversification will not maximize investment
return, it will optimize risk-adjusted return.

CUTTING CAR INSURANCE COSTS:

Automobile insurance premium costs have increased sharply in recent
years, especially in major urban areas. In some instances, such as for
younger drivers (under age 25) and those with less-than-perfect driving
records, premium costs threaten to become prohibitive Rising most
rapidly is the cost of liability coverage, which provides protection
against damage awards arising from lawsuits in connection with your
vehicles use Despite rising costs, however, premium savings can be
achieved through careful planning and policy selection as described
below.

  1. Shop among several insurers when selecting a policy and obtain
     competitive quotes on policies with identical features in order to
     compare rates. Remember that service when a claim arises is as important
     as premium savings, so check the reputation of companies under
     consideration with friends, relatives and your state's insurance
     department.
  2. Buy only needed coverage The basics are liability (protection
     against the claims of others), collision (protection of your car's value
     while it is being driven) and comprehensive (protection of your car's
     value against vandalism and other damage while it is not in motion).
     Many policies include provisions for emergency road service (towing),
     accidental death and medical insurance, for which you pay extra, but
     which may duplicate coverage you already have Bear in mind that some
     states mandate certain coverages or levels of coverage, and it is
     necessary to comply with these requirements.
  3. Increase your deductible amounts in connection with collision
     and comprehensive coverages to a level which you can reasonably afford
     to self-insure. Doing so will substantially reduce premium costs while
     continuing to protect against severe or catastrophic losses.
  4. Select a car with a good claims record. Insurance companies base
     premium costs on loss records, which tend to be higher with sporty
     models than with larger, more family-oriented vehicles.
  5. Take advantage of all discounts for which you may be eligible.
     Among the most frequently offered are those for good driving records,
     multi-car coverage and few miles driven annually.
  6. Protect your driving record. Drive safely!

NEW MEDICARE PROVISIONS IN A NUTSHELL

The Medicare Catastrophic Protection Act, signed into law on July 1, 1988,
substantially expands Medicare benefits, particularly those payable in the
event of a catastrophic illness. Under the act, the entire cost of these new
benefits is placed on those who are eligible to receive new benefits, whether
or not such benefits are actually received. Major features of the Act's
provisions are highlighted below.

What it Covers:
  ■ Inpatient hospital care for medical conditions is unlimited after
    a $564 annual deductible amount, effective beginning in 1989.
    Psychiatric hospital care continues to be limited to a 190 day lifetime
    total.
  ■ Physicians fees will be covered as before, with Medicare paying
    80% of "reasonable charges" and patient co-payments of 20%. However,
    beginning in 1990, there will be a $1,370 ceiling on out-of-pocket
    co-payments, other than payments to physicians for charges above
    Medicare's definition of "reasonable." ■ Prescriptions for both
    intravenous and organ transplant drugs will continue to be covered in
    1990, with all prescription drugs being covered beginning in 1991.
    Coverage and deductibles will be as follows: 1990 - IV drugs 75%,
    immunosuppressives 50%, deductible $550; 1991 - all drugs 50%,
    deductible $600; 1992 - all drugs 60%, deductible $652; 1993 - all drugs
    80%, deductible $652.
  ■ Skilled nursing care may be provided in an appropriate facility
    for up to 150 days, with no prior hospitalization required and a
    co-payment of $20.00 per day for the first eight days, effective in
    1989.
  ■ Home health care may be provided though visits by a skilled nurse
    practitioner up to 6 days a week for 38 days with a deductible of $75.00
    and a 20% of reasonable charges co-payment. Respite care (professional
    patient care to relieve unpaid caretakers) up to 80 hours a year is
    covered under the same terms, except that out-of-pocket costs are
    limited to $1,370.
  ■ Hospice care is covered for an unlimited number of days, instead
    of the prior lifetime limit of 210 days.
  ■ Nursing home care is covered for only 150 days per year (up from
    100 days) with a 20% patient co-payment during the first 8 days. Medical
    care must be needed; custodial care is not covered. The requirement for
    an immediately preceding hospital stay has been waived.

What It Costs

Medicare recipients and eligible persons will pay for the enhanced
coverage through a "supplemental" federal income tax, actually a surtax.
The amount of the surtax in 1989 is $22.50 for each $150 of income tax
liability, up to a cap of $800 per individual or $1,600 per couple. The
surcharge amounts and individual caps for subsequent years are as
follows: 1990 - $37.50, $850; 1991 - $39.00, $900; 1992 -$40.50,$950;
1993 - $42.00, $1,050.
%g c1.pcx; Medicare Surcharge

%g c2.pcx; Medicare Cap

Medicare part B annual premiums will include an additional drug
premium and will rise from $297 in 1988 to $373 in 1989, $428 in 1990,
$500 in 1991, $529 in 1992, and $571 in 1993.

%g c3.pcx; Medicare Annual Premiums

1989 SOCIAL SECURITY FACTS:

Benefits. Beginning in January, 1989, benefits to current
recipients will increase by 4%. The maximum monthly benefit will
increase to $899 for an individual retiring at age 65 or $1,349 for a
couple both of whom are over 65. (The maximum benefit may be higher for
persons who do not receive benefits until they are older than age 65.)

Tax Rate. The Social Security tax rate for employees and their
employers remains at 7.51% each. The self-employment tax rate remains at
13.02%.

Taxable Wage Base. The wage base on which taxes are imposed rises
from $45,000 to $48,000.

Maximum Tax Amount. The maximum Social Security tax is $3,379.50
each for employees and employers and $6,249.60 for self-employed
persons.

Earnings Limit. The 1989 earnings limit for recipients of Social
Security is $6,480 for persons under age 65 and $8,880 for those age 65
through 69. There is no earnings limit for recipients age 70 or above
(Social Security benefits are currently reduced by $1.00 for every $2.00
earned by recipients above the limit.)


UNBUNDLED STOCK UNITS: A NEW INVESTMENT PRODUCT

Corporations must be financed either with equity, debt or some
combination of the two, and debt appears to be increasingly popular
Current corporate tax laws favor debt financing by providing a deduction
for interest expense but none for dividends.

One result of the increased emphasis on debt is the trend to
leveraged buy-outs of corporations. Another is the recent introduction
of a new investment product called an "unbundled stock unit." Several
companies have announced plans to exchange common stock for such units,
which have three aspects - a bond paying a fixed coupon rate equal to
the exchanged stock's dividend rate, a preferred share entitling its
owner to any future dividend increases, and a certificate which, in
effect, gives the holder the right to participate in any future price
appreciation in the company's common shares which remain outstanding.

In theory, the "unbundling" of the income and growth components of
common stock allows investors with differing objectives more choices
with regard to investing in the issuing corporation. Not coincidental is
the expected rise in the corporation's earnings consequent to tax
savings. (The bond's interest payment is deductible, while the stock's
dividend was not.) Moreover, the reduced equity and increased debt on
the balance sheet makes the corporation less attractive as a take-over
candidate. As with any new investment product, it may be wise to defer
buying such units until they have been around long enough for potential
problems to be identified and resolved.

RETIREMENT PLANNING: ACHIEVING AND MAINTAINING FINANCIAL INDEPENDENCE

The emphasis of personal financial planning takes different forms
during various life stages. Its impact is never more striking than on
the retirement years, when it can make the difference between comfort
and destitution.

"Financial independence" is the financial freedom to choose to
work or not to work. It is the freedom from the "need" to work. In most
instances, such freedom can be achieved through adequate planning, if
planning is begun early. Consideration must be given to a variety of
issues and concerns specific to the pre-retirement and retirement years,
including:

     1. The individual's current financial position;
     2. Adequacy of anticipated income to cover post-retirement
        expenses;
     3. Adequacy of health insurance coverage;
     4. Allocation and performance of the investment portfolio;
     5. Elimination of indebtedness;
     6. Possible relocation of residence;
     7. Control over the final disposition of assets.

The first step is to quantify the retirement goal, i.e., a $5,000
monthly after-tax income level at a retirement age of 65. One can then
use the current financial situation along with certain assumptions
concerning inflation and earnings rates to determine how much must be
put aside on a periodic basis to meet the specific retirement goal. In
performing this analysis, it is important to consider anticipated cash
flows from qualified retirement plans, Social Security, other
(non-qualified) retirement funds and investment assets which may be
available at retirement. In addition, potential tax consequences or
opportunities should be considered. Current circumstances and
anticipated needs should be periodically reevaluated, since changes may
occur before or after retirement.

If the periodic savings level required to meet the specified
retirement goal is in excess of the individual's cash flow capacity, the
goal may be adjusted, either with regard to the monthly income amount or
age of retirement. Alternative or supplementary actions are to reduce
the current standard of living in order to increase savings and/or to
accept additional investment risk to increase investment return.

During the retirement years adequate health insurance coverage is
crucial. It is important to familiarize oneself with the provisions of
current coverage and determine whether it will continue after retirement
under the same terms. Continued health insurance coverage is one of the
most important retirement assets, since catastrophic illness can drain
assets and reduce living standards. Private coverage should supplement
and be coordinated with Medicare.

The investment portfolio should be reviewed as one approaches the
retirement years. In general, the overall risk level should be reduced
by a gradual shift from growth assets to fixed income assets of high
quality. However, decisions should be based upon individual
circumstances. The portfolio should be periodically reviewed throughout
the retirement period.


The technical information contained in this publication is of a
general nature. Consultation with our personnel is recommended before
taking action based upon any of this information.