JULY 2007 INTRODUCTION We are pleased to send you the Summer issue of the Newsletter. The lead article makes reference to a number of individuals, many close to retirement age, who are doing some exciting things. This is followed by a piece based on research by Morningstar on how investors lose money. Then there are articles on the premium increases that are being instituted for Medicare Part B, on a book about the 12th and 13th century Maimonides, and a review of Exchange Traded Funds (ETFs). The final three segments are oriented more specifically around O&A - and those of us who work here. -David W. Otto, Editor WHAT CAN WE ACHIEVE? The following quotation, from the recent commencement challenge given by Russell Osgood, President of Grinnell College, got me thinking. Grinnell is a small place in a large world but wisdom, and happiness and even transcendence can shine from small places into the darkness of a vexed world. Remember always not only who you are but what you can be; not how bleak things are but how splendid they should be; and not the sadness of things missed or lost or gone by but the hope and glory of what you and all of us together can achieve. What an inspiration for college graduates beginning to use their education and talents to make the world a better place! But Osgood's comments led me to think also about how this challenge could relate to older people who have already made many of the big life decisions. Several examples came to mind: people who have continued doing their life's work after normal retirement age; others who have taken a bit of a turn which builds on - but is different from - what they have been doing for some period of time; and four dedicated nurses who wanted to do something difficult for the welfare of others. I Mary and I have been part of a group that has gathered every year since 1965, when we were all in graduate school. Originally we got together for Thanksgiving, but in more recent years it has been for several days in June. This year 12 of us met in Boothbay Harbor, Maine. Part of our tradition is to take time to go around the circle to hear people's reflections on the past year, or their points of view about an issue that is particularly important. A theme this year was the question of what comes next. One person has taught high school English for 45 years and will retire in another year. He is giving some thought to teaching in an international school, perhaps in Jordon. Another has done psychotherapy with highly disturbed individuals. She is not sure what she will do as she winds down her practice, but knows she is best with people one-on-one. An option she is exploring is tutoring kids in a public school. Another member gave a great deal of time even when he was working to an organization dedicated to identifying smart kids from severely disadvantaged homes, and getting them tutoring and whatever else they needed in high school in order to be prepared and supported as they applied to competitive colleges. He is now mostly retired, but he continues his dedication to New Jersey Seeds. And another has worked in education for all his professional life. He is in the process of launching a program called "Prepare the Future," whose first goal is to "ensure a quality public education for all children that each of us wants for our own children and grandchildren." The long term goal is not modest: it is to raise $200,000,000 to help get education in the U.S. back on track. II This spring at the annual national NAPFA (National Association of Personal Financial Advisors) Conference in Chicago, the prestigious Robert Underwood Award (named after one of the early pioneers in the Fee Only field of financial planning, who died at a relatively young age), was presented to one of our own members. NAPFA does not present the award every year, and as often as not it is given to someone outside the organization. Both Arthur Levitt, the former head of the Securities and Exchange Commission, and Eliot Spitzer, when he was Attorney General for the State of New York, have received the award. This year it went to Richie Lee, from Dallas, Texas. Richie was not only one of the founders of NAPFA and a past President, but he has continued to come to all the conferences and to make himself available to consult with his peers, including folks who are new to the field of financial planning. Because the presidency of NAPFA gives a person so much national exposure, past presidents have often developed even more successful practices and become less active in the organization. Not Richie. He has worked in this field for more than 40 years and his organization is more than 10 times as large as O&A. Still, he finds time to answer questions and consult with any planner who wants his time. III Near the end of this Newsletter is a description of The Prouty Century Bike Ride and Challenge Walk, in which my family and I will again participate. ("Century" refers to the fact that the longest route is the 100 mile bike ride.) While "The Prouty" raised $1,250,000 for cancer research in one day last year, it started much more modestly, with four nurses who had a small goal: to honor Audrey Prouty. What follows was written by one of the nurses. Twenty-six years ago, I began my first professional nursing position at Norris Cotton Cancer Center [part of Dartmouth-Hitchcock Medical Center]. I was just a year or two out from nursing school. It was exciting and terrifying at first but I soon observed that the Cancer Center was a very special place…. One patient was particularly amazing. Audrey Prouty was 54 years old. She had ovarian cancer and her goal was to be married to her husband for 25 years. She lived nine years with her disease and met her goal to be married for 25 years by two weeks. Audrey was very kind to her caregivers. When she noticed us having a bad day she would come out into the hall and hug us. During the year I knew and cared for her she showed remarkable courage and strength. Audrey co-wrote her epitaph with her husband and died within days. Before she passed, a group of us told her we wanted to keep her memory alive by doing something hard. The four of us decided to honor her courage by riding our bikes 100 miles through the White Mountains. Our purpose would be to raise funds for cancer research. None of us had every ridden more than 20 miles. Our goal that first year was to raise $2,000. We raised $4,000! (To read more about Audrey Prouty and others go to the web site www.theprouty.org and click on "See Our Video…") IV Does all of this have to do with financial planning? At O&A we understand that our initial job with clients is to focus on how to move from the present through the rest of their lives with as much confidence about financial security as is possible. We begin with that goal because people usually come to us for the first time with some "problem" or "issue" that focuses on finances. Once we have satisfied the initial request, we may move on to talk more broadly about monetary goals. Since money is a tool, we often expand our discussions with clients to look both at ways to use their money wisely, and at how to be wise in employing their other resources and talents. HOW TO LOSE $$ Individuals who manage their own money frequently underperform the market. Recent research by Morningstar shows how this can happen. Morningstar, the mutual fund research firm, used their analysis of the Fidelity Select Technology Fund because it provides a dramatic illustration. They discovered that the ten year annual return for the Fund was a very respectable 8.8%. However, when they factored in the amount of money the fund was managing on a month-by-month basis, they discovered that the average investor lost 4.4% annually during those ten years. How can that be? What follows is the Morningstar explanation. The variable that made all the difference was how much money the Fidelity Select Technology Fund was managing at any given time - and that amount changed dramatically. In brief, the Fund had very good returns when they had a small amount of money, and very bad returns when they had a lot of money. Morningstar pointed out that, as often happens, after the Fund had performed very well, investors rushed in with more money. The Fund then performed poorly for three years in a row, at the end of which investors took money out of the Fund, only to have it perform well again. Losing 4.4% annually for ten years is bad enough. But while a few investors did fine, many lost even more. Those who invested for the entire ten years, as reported above, made 8.8% annually. But those who invested at the beginning 2000 and sold at the end of 2002 saw a $1,000 investment turn into $306, losing an average of 32.6% per year for three years. Even an investor who held that 2000 investment of $1,000 through the end of 2006 had only $552 left, losing 8.1% per year. What this research at Morningstar suggests is that it is much easier for investors to lose money than make money because so much of investing is counterintuitive. It seems so logical to go with a winner - to buy a fund that has just made 130%, because those managers seem to know what they are doing. In fact, the research clearly shows that a fund that has made 130% should be looked at carefully to consider selling at least some of the investment. Likewise, on the surface it may seem logical to completely ignore a fund that has just lost 30% per year for three years, but in fact, the research of the Fidelity Fund indicates that that would have been a good time to buy the fund. "Buy low and sell high" is easier said than done. It is often the individual investor, working on his own and nervous, who is unable to follow such advice. MEDICARE B Medicare, as all senior citizens know, is set up with Part A and Part B. The first covers most hospital costs and is paid by the government. The second is for outpatient care, part of which is paid by the participant. Each year the Part B premium goes up for everyone (it went up $5.00 per month to $93.50 on January 1, 2007). However, the U.S. government announced last year that seniors who elect to take Part B and who make more than $80,000 for an individual or $160,000 for a couple, will be charged a higher premium than the rest. The higher premiums will be phased in over three years. For 2007 the income related premiums will increase in steps, but go as high as $161.40, depending on the extent to which an individual's income exceeds the $80,000 or $160,000. The highest premiums will be paid by 1% of the beneficiaries who have modified adjusted gross incomes of more than $200,000 (individual) or $400,000 (couple). The reason for this increase in Medicare Part B is probably obvious. The government, like everyone else, is reacting to higher medical costs by trying to limit the effects of those increased costs. Historically, participants in Part B have paid 25% of the cost of the insurance, with the government picking up the additional 75%. The increases in premiums, combined with certain increases in deductibles, are designed to actually reduce the percentage which Medicare pays in order to make Medicare sustainable into the indefinite future. The Part B premiums will increase again in 2008 and 2009. Because these premiums are tied to increased costs, the amount that beneficiaries will pay in future years is only an estimate. However, the estimate for 2009 is that the base monthly rate will be $116.50 (up from $93.50 this year), but will go as high as $372.60 for individuals/couples with incomes of $200,000/$400,000. This increase in premium is probably manageable for most people in 2007. It remains to be seen if there will be concerns as 2009 approaches and the increases jump significantly, even though it will affect only a small part of the population. RAMBAM'S LADDER Several years ago I read an influential book titled Rambam's Ladder, written by Julie Salamon. So last year when the Vermont Community Foundation invited me to a dinner where she was speaking, I jumped at the chance to hear her. "Rambam" was the nickname of the highly regarded Maimonides, a rabbi, physician, and philosopher who was born in Spain in the 12th Century. An interesting man, he wrote many works, among them The Guide of the Perplexed, where he examined the puzzle of why some people seem to be drawn to evil, while others seem to be drawn to good. He also encouraged cultural exchanges among Christians, Jews, and Muslims. In addition, Maimonides wrote a brief but important treatise on philanthropy, where he described motivations for giving as rungs on a ladder. The rungs include giving "less than is proper," giving only when asked, giving before being asked - but doing so with a sense of superiority that invites the recipient to feel inadequate, giving to someone you know - but doing it anonymously, and, giving the gift of self-reliance. The last rung is illustrated with the story of the fisherman who did not satisfy the beggars' requests or fish, but rather taught them how to fish so they would never be hungry again. Maimonides concluded with a puzzle. Why do some people give easily while others do not? He said this puzzle is similar to the question of how two children being born of the same parents can have dramatically different talents. Rambam did not see this as a moral question, but rather as a question of nature. Some seem to come by generosity naturally, while others have to learn it. The latter group will probably never reach the upper rungs of the ladder, which is just fine with Maimonides, so long as they pursue generosity to the extent to which they are able. If you would like a copy of this book on the nuances of giving, please call the office and we will arrange to have it sent to you. MUTUAL FUNDS vs. ETFs While may of our readers will not be interested in this distinction, we've gotten enough inquiries that it seems we should say something about ETFs. Exchange Traded Funds (ETFs) have become popular among investors. ETFs are index funds that trade like stocks. The value is calculated several times a minute (the calculation is done on the basis of the various securities in the index that the ETF is tied to), and the actual price at which the ETF trades is always very close to the calculated value. There are hundreds of ETFs at this point, and virtually all of them are some variety of index fund. While the indices can be highly specific (perhaps the best known are the single country fund indices), the biggest percentage of ETF investments are placed in more traditional index funds such as the S&P 500, the Dow Industrial Average, etc. Much has been written about the advantages of ETFs. John Markese, PhD, president of the American Association of Individual Investors, has offered a seminal article on comparing ETFs with mutual funds. For those who are interested, we will be happy to send a copy of the article. For most readers, however, the concluding paragraph of that article will be sufficient: The bottom line: in the index arena, avoid getting caught up in the mutual fund vs. ETF debate. Instead, concentrate on creating a diversified portfolio and applying appropriate portfolio weightings for your time horizon, risk tolerance, and portfolio goals, and then turn to either mutual funds, ETFs, or a combination - it really makes no difference. THE PROUTY In July of 2006, David completed a 100 mile bike ride to raise money for cancer research. The 26th Annual Prouty Century Bike Ride & Challenge Walk will be held on July 14 this year, and he plans to do the ride again. In fact, the entire New England part of the family will be participating, although some will ride shorter distances. The routes go through the Upper Valley of VT and NH and include more hills than a rider wants to think about. The Prouty goal last year was to raise $1,000,000, even though the most that had been raised previously was $750,000. Because of a whole lot of people, including some very generous sponsors of our team, they went way over the top and raised $1,250,000. This year the goal is $1,500,000, and David is again hoping that some of the Newsletter readers will sponsor him (or other members of his family) and contribute to the cause of cancer research for which the Prouty event exits. To learn more, go to www.theprouty.org, then go to "Sponsor Participant" and type in "David Otto." If you then go to "My Team Page," you will see a picture of our team after riding last year. In the picture are (left to right): David, Mary, Eliza, Carter, Susan, and Jeff, the surname of the last four being Goodell. The picture has a sign of the amount we raised last year, which was our first year: $6,085. This year we have set a goal of $8,000. Since the Newsletter is coming out so close to the day of the ride, you should know that donations will be accepted for a month or so after the ride. Thanks for considering this worthy cause. BREAKING NEWS Although we have yet to see the actual announcement, we have been informed that Otto and Associates has been named, for the 8th year in a row, a "Top Dog" by Bloomberg's Wealth Management Magazine. Actually, in previous years they have sometimes used other names, such as "Champions" and "Superstars." But a "rose by any other name would smell as sweet." It is nice to be recognized by outside evaluators, but, in truth, the evaluations we get from our clients are even sweeter. OFFICE MATTERS David attended two back-to-back conferences in Chicago in early May. The first conference, which lasted a day and a half, had two special speakers, one of whom analyzed hedge funds and the other of whom was Woody Brock, an economist that addresses this group each time we meet, every six months. The next gathering, the annual NAPFA conference, had many speakers addressing the broad range of financial planning issues. In addition, Chicago's long standing improvisational group, Second City, was featured at the dinner the final evening. Deborah has also attended several conferences recently. The Financial Planning Association of New York held its Annual Spring Forum in late April. Sessions included retirement account distributions, an economic panel, and talks by two different industry observers on the present and the future of the financial planning industry. She also attended a seminar on the best and worst retirement planning ideas and, with David, a session on fundamental indexing, and how it is different from traditional indexing. In April, Judy and her husband, Joe, spent eleven wonderful days in Italy, staying in Rome, Sorrento, and Positano. Highlights included day trips to Pompeii, Capri, Amalfi, and Ravello. David joined Mary in June to celebrate the 125th anniversary of the founding of her hometown of Holstein, Iowa. This north-German Iowa town continues to have an incredible spirit and focused identity, as they honor older citizens and welcome new people into the community. Vacation schedules for the office are anything but firm except for David, who will be in Maine for the entire month of August. However, he has high speed internet connections there and will keep in touch with the office many days by phone and email. Judy and Deborah expect to be in the office most days. In any case, phone calls and emails will be returned promptly, generally within a day.