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April 21, 2005 Dear Client: The popular press has exaggerated the negative performance of equities this year. Following the tremendous returns of the last two years, it is reasonable for the markets to let off some steam. The Wall Street Journal has an explanation each day: if stocks go up, it's due to the growing economy (increased profits), if markets go down, it's the growing economy (detrimental inflation). Take your pick. In a continuing effort to demystify bonds we present a real-life example of a bond we purchased in February in several clients' accounts. On February 18, 2004 we bought a General Motors Acceptance Corp bond:
Interest rates declined since the original issue of this bond, so we had to pay a premium to buy the bond. We paid $101,515.
Notice that we can say "our total return will be". Unlike the returns on stocks or mutual funds, a bond purchase allows the buyer to lock in a return rate at purchase. The value of the bond will fluctuate daily, depending on current market conditions. Unlike bond traders who are looking to realize gains from these fluctuations, an investor who holds a bond until maturity will earn a pre-determined return. This fluctuation makes it difficult to assess your account's performance month-to-month. In fact, if rates increase during your holding period, you will not see a positive return reflected in your account total until the bond reaches maturity. The performance should be evaluated over a period of time extending through the bond's maturity. As a bond nears maturity, the performance of the bond will approach the final rate of return you locked in at purchase. Our bond strategy for the last two years has been to select:
Together these bond sub-classes provide protection from rising market interest rates and the declining value of the U.S. dollar relative to the Euro. Beneficiary designations I'd like to share a few experiences I've heard that illustrate the importance of keeping up to date with beneficiary designations. In one case, "Mary" cared for her elderly and infirmed mother in the last years of her mother's life. Mary's mother recently died. The bulk of the estate was in the form of an annuity. The beneficiary designations on the annuity were out of date: Mary's estranged brother was the sole beneficiary of the annuity. Mary was the designated beneficiary of a much smaller retirement account. Although it was not her mother's intention, the majority of the assets were inherited by Mary's brother. In another case, "Susan" and "Bill" came in for an initial meeting. Susan and Bill had high-paying jobs. They were saving a sizeable amount of their income for their teenage children's college expenses and for their own retirement. Susan's father had recently died, owning a large IRA. Susan was the only child and sole beneficiary of her father's estate. The beneficiary designation on the father's IRA was left blank, causing the estate to be the beneficiary of the IRA. The father's will named Susan the sole beneficiary of the estate, so she received the IRA as her father intended. But, by law, the IRA had to be distributed to Susan within 5 years of her father's death. About 50% of the IRA distributions would be lost to taxes. If Susan were the IRA's named beneficiary, she could have spread the distributions out over her lifetime. Or if her father had named the children as beneficiaries, the money could have paid for their college expenses with very little tax. In a final example, "Roger" had long ago named his three children as equal beneficiaries of his life insurance policy. One of Roger's children, "John," had died several years ago. The policy distributed the benefit in halves to his two living children. But Roger's wishes had been for John's children to receive John's one-third share of the policy. Beneficiary designations control the flow of assets at the owner's death. The beneficiary designation is the only way to control the disposition of life insurance policies and retirement accounts. We will contact you shortly to check the designations on accounts managed by Grubman Financial. For other assets, we recommend that you review your primary and contingent beneficiary choices, and verify that they match your intentions. If you have any questions, please do not hesitate to contact us. Regards, Audrey Grubman
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