“If the Fed had not stepped in, we would have had pandemonium,” said James Melcher, president of the New York hedge fund Balestra Capital. There was the risk of a total meltdown at the beginning of last week. I don’t think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system.”   

Fed’s rescue of Bear halted derivatives of Chernobyl

The following graph demonstrates how much in funds you need to set aside to have one million dollars. The longer time period you have, the less you will need to set aside. However, it is crucial that you set aside something and establish the savings habit. Constantly look for ways to put your savings program on cruise control. Payroll deduction is ideal for this, such as profit sharing plans in the workplace, known as 401k plans. These are perfect accumulation vehicles. Those in the public sector often have equivalent programs and non-profits use 403b plans. Seek these programs out. Also, ask if deferred compensation programs are available. Even the simple savings bond program goes a long way to propelling you on your goal. You first need to establish this accumulation habit to have funds.

Once you have built up sufficient funds, you can then seek out better performing investments. An accumulation program that works really well for many investors is to have money automatically withdrawn from their checking account every month and deposited into an investment account such as a well performing mutual funds, variable annuity, or brokerage account.

When investing into a mutual fund, make sure that the managers that built the track record are still managing the fund today. If they leave, retire, or start underperforming for more than two years, seek out another experienced mutual fund quickly.

When looking for good performing funds, do not hesitate to call the mutual fund companies. Ask them which of their funds in the best performing. When first starting out, avoid sector funds that invest into only one area of the market, as they are too volatile.

An index fund is a good place to start. Index funds remain the lowest-cost, lowest-maintenance form of investing for an individual. An S&P 500 index fund is one of the easiest ways to get started investing. It is based on the actual S&P 500 index, which has risen an average of 10% over the last 75 years. Most mutual fund companies have a fund that is based on the S&P 500.

Take time and think out what you really wish to accomplish. Think and breathe it. Go to a place within you and dare to dream. Feel with emotion and think with logic on what you really hope to accomplish in this life. Then dare to write out that dream on paper.

Does your mission statement seem logical and realistic? Do your words resonate with real possibilities?  Revisit your written goals with an abundance of honesty, confidence, and sincerity. Decide what price you are really ready to pay to achieve these goals. Only then should you draft your final personal mission statement. Make sure it is one you wish to live with since you will be relying on it over the coming years. Love your mission statement and believe in it and it will work!

A great mission statement is well thought out and well written. Consider corporations which have relied on mission statements for years. A good mission statement will list corporate values and objectives in a simple and forthright manner. It will convey to the employees and management alike the true goals of the corporation.

A mission statement also serves as a great reminder. If you or your company is getting away from the mission statement you will soon experience stress and conflict within your organization. The further away you travel from the mission statement the more problems will surface. This is because you or your organization is creating conflict by giving or allowing conflicting priorities and objectives.

If you have a hard time keeping to your mission statement, then you need to seriously consider changing your mission statement to suit your needs and the situation. This does not mean you change your statement each month, but you do change your mission statement only after giving it careful and prudent consideration. If your situation has changed to the point where your current mission statement will no longer allow for growth or satisfaction then perhaps it needs changing.

Giving thought to your personal mission statement. Your true values must be addressed. Stating that you wish to make a lot of money is not enough! You need to weave in your personal values and that of your family and societies if applicable. Include your financial life in your statement which will help you achieve your financial goals.

For instance, compare the following two mission statements for a heating and cooling contractor.

Mission Statement A: To accumulate a lot of money so I don’t have to work any more.

Or let’s take a more personal statement that weaves in his deepest values.

Mission Statement B: To provide for my family to the degree where we all enjoy security and financial freedom both today and in the years to come. In creating wealth I will strive to provide my customers with the best and most professional service. I will offer consistency of service and execution of same. I will price my services at the higher end as quality is always remembered long after price is forgotten. I will be professional in my dealings with customers and competitors alike. I will never succumb to lying or half-truths. I will always do more than I am paid to do and let the customer know exactly all the duties and services I performed. Each job site will be left cleaner than how I found it and the safety of myself and other workers will always be a priority.

In order to prevent misunderstandings with my customers I will always quote a job or project realistically and ask for half of the funds up front and the other half upon completion. This will help alleviate any misunderstandings. Further more, I will set aside 10% of each job completed for my personal retirement.  I will strive to be seen as the competent, honest, and quality contractor that I am.

In order to insure my financial freedom, I will set aside at least $1,000 per month as follows; $500 will be invested into my Davis New York Venture mutual fund and $500 will be allocated between my Roth IRA and profit sharing plan. In 20 years assuming a 12% rate of return, I will have accumulated one million dollars.  I also will have my home paid off within 20 years since I have a 20 year mortgage.

Now which mission statement do you think will motivate this contractor more?

Each and every one of us should create a personal mission statement. As stated, make sure it addresses three important issues

• Does it agree with your deepest held personal values?
• Does it follow your heart?
• Does it make sense financially?

Decide now what your mission statement will be. Do it now! Keep to it and success will be forthcoming. Why? Because creating a personal mission statement will allow you to be in tune with yourself.

One of the biggest reasons people fail is that they inadvertently carry and nourish doubt within themselves. This doubt is caused by two major factors: not staying true to what we really believe in and not having a written plan for ourselves.

Everyone should list their goals and objectives, along with the steps needed to accomplish them. This will help in slaying the many doubts that spring up so often in the course of each day.  Those doubts not only undermine our confidence but also cause us to lose focus.

In my next post, I will explain how to incorporate your mission statement into your own personal financial plan.

Speaking of inflation; be aware that the odds are tilting in that direction and in a big way. If you have not already refinanced your home mortgage to a fixed account then you should seriously consider doing so in the next six months. In short, the U.S. government, states, municipalities and individual Americans are spending too much money that they don’t have. Our trade deficits are increasing, not decreasing, and all of this is inflationary. We are paying for a war with borrowed money and at the same time pushing through more benefit programs with enormous future price tags. Also, no increase in federal taxes to offset these current and future expenses is on the horizon. Politicians are asleep or in denial and this means things will get worse before they get better.

The government is stating that all is well and we will grow ourselves out of this dilemma. I quote from the Treasury Economic Update as of 8/03/07:

“The U.S. economy and the job market are healthy, with sustained job growth, low unemployment, and rising wages. Solid fundamentals will support continued growth in household spending and business investments.”

“Household spending: Consumer spending has been affected by increased energy and food prices and weakness in the housing sector, but the job market is healthy and should continue to boost incomes and support household consumption.”

“Real Wages Increased 1.3 percent Over the Past 12 Months. This translates into an additional $444 above inflation for the average full-time production worker.”

These financial stats sound great until you factor in reality. For instance, while job growth occurred the Treasury fails to tell us that most of these jobs were in the lower end of the service industry and not in the higher paying manufacturing sector. Household spending has been affected as the Treasury states, but they don’t go into detail on the ramifications of increased energy expenses nor do they discuss what can happen when consumers are underwater on their mortgages; when their mortgage loans exceed the value of the house. This real estate drop could be the starting spot for consumers to finally slow down in their spending since they won’t have easy access to money. Possibly the start of a different economic cycle and the real reason the Federal Reserve dropped interest rates! Also, while real wages may have increased a little for the average full time production worker that will not affect the economy at all. The reason? Higher gas prices, higher insurance and medical expenses, and credit card debt quickly ate up that increase and then some.

It is crucial to look at the big picture and in this case it is the global economy. We remain convinced that investing on a global basis with companies that make consistent earnings is the way to go. When these companies pay dividends and have global exposure that really gets us excited. We also love dealing with mutual fund managers who have years of experience and are value oriented.

Hoping for the best is not a financial planning option! Hope is not a plan. Plan for the best but be prepared for the worse. That is why we have added several elements of protection to all our portfolios.

We all know that the equity markets offer great protection long term against the ravages of inflation but with that comes enormous volatility. What if there were ways to cut down dramatically on that volatility and also to place some guarantees in your portfolio, wouldn’t it be in your best interest to do so? That is all I am saying. Review with us your portfolio, your entire portfolio so we can make sure that you will sail through any rough waters with a minimal amount of discomfort.

We have taken many steps with our current clients that have protected them in various ways and will continue to do so. You may wish to let your friends and family members know that your planner is the planner with a plan!

The markets however, are dynamic, moving, and ever changing. The factors leading to this are that people, companies, and countries make up and influence the markets. What appears normal and status quo today may be outdated and out of the norm six months from now.

Adding to this are the problems that appear that no one sees coming. A few examples of past incidents such as terrorism, accounting scandals, market panics and manias, wars, and gas shortages. What will be the new problems that we don’t see coming? It is anybody’s guess but top on my global list will be water shortages in many areas, fossil fuel shortages, medical crises such as an unpredictable flu strain or worse, continued terrorism using newer techniques unknown to us, currency crises of several countries since money seems no longer to be backed by much, and geo-political tension with the advent of several newer countries possibly possessing atomic weapons. Hint, think Iran and North Korea.

If that was not enough we need to look at the problems facing just our country alone such as a large trade deficit, a large budget deficit, raising medical prices, lack of funding for future social security benefits and Medicare benefits, and an aging population. Compounding these problems and making them far worse is a complete lack of backbone in our politicians to address any issue of real importance with integrity and substance. In short, our politicians are not really solving any problems lately!

If this wasn’t enough, how about our increasing reliance on a service economy? Who thought up that one? What person or think tank would see that as the way to grow a country into prosperity? History has shown that you must offer something of substance and value over time to receive good things back such as a living wage for your people and a prosperous country for future generations. A service economy will only last so long. I note that Japan and Germany have not abandoned their manufacturing economies and they are exporting far more than they import! Our service economy reminds me of a luxury car sitting in the driveway with no gasoline in the tank. It may look pretty but it will serve no real purpose in getting you to where you want to go!

Keep in mind the recent release of hot air out of the residential real estate market shows how vulnerable we are. Not to mention that the equity markets have been moving too far ahead of their 200 day moving averages, or that some big money folks are getting out of the market. But, before you think that I am a little negative, read on…

While I feel that heads of many public corporations are paid way too much in compensation, I believe many of these large corporations are enjoying tremendous free cash flow. And where there is free cash flow there are profits! Profits usually lead to increased share prices. Add to this the continued liquidity in the markets. Both here in the U.S. and abroad, there simply is no shortage of cash. Private equity groups have also been illustrating this fact with a good amount of corporate buy outs recently. Imagine a private equity group buying out Chrysler. No one saw it coming. Note, that current P/E ratios are not at all excessive for large companies such as those making up the Dow Jones Industrial Average and companies making up the S&P 500. In fact, many growth stocks are now looking cheaper than value stocks. This is occurring due to normal market rotation. Many investors were chasing smaller size companies and also investing into mostly value style company stocks.

Actually, market rotation is the normal course of events. It occurs when investors go from side of the boat to the other. First, they may be invested into only large size companies, and then they wake up and realize that those stocks are overvalued. So you guessed it…they head over to smaller size stocks which had not participated in the great rally of 1981-1999. So once they run up the prices there (which they have), then it is back to large cap stocks. Likewise, investors loved the American equity markets in the 80s & 90s, yet lately they have been in love with the foreign markets. So, expect that love affair to lessen in the next few years and for investors to rediscover what’s good about American companies. So what is good about the American companies? Think earnings, established management teams in place, a strong rule of law in our land, and importantly the probability of consistent dividends to be had in the near future. As baby boomers get older I expect many large American companies to focus more on paying out dividends. That is a good thing, since baby boomers will need the money to live on during retirement.

In my opinion many large American companies are priced at attractive prices. However, having said that, you can not fight the market. If you attempt to buy and hold these stocks you may miss out on other investments that will outperform them in the near term and also see your current holdings drop during that time. So how do you play this type of market? Very carefully!

While I like the markets, I am very cautious at this point in time. Why? Currently I feel the leadership of the Federal Reserve is employing a policy of tight money and also are keeping us in the dark. While they state this want to fight inflation by increasing interest rates they also state that they are in no hurry to do so. So this thought line automatically cancels out an interest rate drop which would be so great for the housing market and the stock markets. Why would they proceed with this course of action? They do not want to see the stock market explode upwards with speculative gains based solely on an interest rate drop nor are they sad that the recent bubble in personal real estate has started to deflate. In short, the Federal Reserve has us in a place that is equal to a flip of the coin. Heads, they lower interest rates and the stock and housing market goes up, or Tails, they increase interest rates to fight inflation, increase the value of the dollar but risk sending us into a recession due to the weak housing market.  Make no mistake; any interest rate increase would pummel the housing market just as it tries to stabilize. So here we are…facing a flip of the coin. Does the Federal Reserve lower interest rates or increase them. Keep in mind that even if they do nothing that still will be a decision that has consequences. Too much hanging on one factor if you ask me.

So once again, how does one play this type of market? Carefully and by focusing on global growth and income with a value bent. Ignore the hype and only buy companies making money and paying some of that money out in the form of a dividend. Also, do not ignore good bond managers and importantly think global bonds as well to protect yourself from a further drop in the dollar. I have some common sense suggestions:

• We have been moving our clients into balanced asset allocation models with notable bond positions and international equities.
• We have reduced our clients’ equity exposure (remember the Wall Street adage, “Pigs get fat, hogs get slaughtered.”)
• We have used several investment strategies that stress dividend paying stocks with a value bent.
• We are using proven fund managers, who have experience with these types of markets. Think of the top names in the bond and equity management business.
• We have transferred market and financial risk to insurance carriers who have the financial strength to guarantee that those investors involved will always get a minimum income stream for the rest of their life (and spouse if elected) regardless of market downturns.
• We follow what is working in the markets and move with it if it makes sense and move away from what is not working.
• Taking into account as much as possible the global macroeconomic trends we invest into those items that look bullish over the future. Hint, Foreign REITS are one example.

While I think these steps will allow our clients to fully participate in the markets with far less risk than other investors will face, there are no guarantees. Only by evaluating what your true comfort level is and designing a portfolio to suite your needs can we hope to maintain a strong relationship with our clients. And make no mistake that is our intention.

Here in Michigan we go from cold to hot. A few weeks of more temperate weather thrown in just to increase the cost of our wardrobe. The reality here is that you need two or three different wardrobes just to get by. You need thick warm winter clothing to survive our long winters, fashionable summer wear such as shorts and sandals to survive our hot summers, and then, of course, nice stuff for in between. So my wife is correct, there is always more shopping to do!

I hope this newsletter finds you and your families doing well. These times are so very special in Michigan as we all break out of our habituation mode and try to accomplish everything in 100 days of nice weather. Hmm… reminds me of road construction here! l winter we have to put up with potholes, and then in the hot weather we have to wait in line as they tryto repair all of them at the same time. Seriously, due to our short summers, we try and make our gardens perfect, work on our bodies hoping to get into that bathing suit that has been sitting in our dresser for the last ten years, and tend to explore our state and country in too short of a time frame. Sometimes I need a vacation from taking my vacation! Many smiles.

Recent market volatility is a concern to all of us. See my article describing my thoughts on this matter. Also, we will be sending a special middle of the year tax newsletter soon, since there have been so many important changes. As you know, almost all investment decisions have tax implications. So we need to take those into account sooner rather than later.

I give thanks every day for the wonderful clients we have. You have given us the highest compliment possible by remaining our client and referring others to us. We are in the process of preparing a new brochure on our firm explaining our philosophy and how we are different than most financial firms.

However, I feel it is incomplete without real life client testimonies. In that light, I am announcing a small contest. I would like to know what you like best about us and about your experience with us over the years. The top three endorsements will be rewarded with dinner tickets to Red Lobster. (Has this man no shame!) Really, it will help us express to others what we are about and give me real feedback on how we are doing. So if you are in the mood please let us know your thoughts with a kind word or two! I will announce the winners by first name and last initial in our next newsletter. Of course we want to hear about that but don’t expect that to get into the brochure! Hah, Many thanks!

My daughter returns to visit me from Israel next month. I will be glad to have her back even if it is just for a month. I understand her attachment to that country. It is an ancient land but a young country. That makes for a strong feeling when younger people visit there. they are very easily able to be swept up in the strong emotion of nation building. Israel has only been in existence since 1948. Hard to believe but true!

Many of you are aware that my mother Edith has been ill and I appreciate your concern. As you may remember my mother worked in our office for many years doing our filing, so she is aware of all of our clients by name and many she knows quite well since clients come in for reviews several times a year. She loved the job since she is a people person. She has set an example for me by showing how important people are in our lives. She sincerely likes everybody! To her, the real purpose in life is getting to know people and sharing with them the small things tht make life interesting, fun, and worth living. Just to update you , she is growing crazy with her garden at this time of year. While many retirees are moving from a home to a condo she did the opposite. As she said, “A garden may not add years to my life, but it will add life to my years.” I really appreciate that thought, and feel good knowing that I will be getting fresh organically grown vegetables over the summer!

Many clients tell us how they miss Sandy so I want to update you on her doings. She did taxes for many of our clients and will continue to do so in future years. Sandy has a strong accounting background and is enjoying using those skills in auditing companies in her new position. She is unique in that she has an accounting mind but is not introverted like many accountants. As you know she is an exceptional person in that she is outgoing and loves people. She is doing great in her new position and making new friends all over the country. She looks more relaxed than ever and is involved in exciting work every day. Her only complaint is she misses working and spending time with our clients. She will be at many of our company functions if you wish to catch up with her.

Mike completed his annual bike ride for the American Diabetes Association known as the Tour de Cure. Mike rode 50 miles on Sunday, June 10, 2007 raiding funds for the association. I appreciate our clients who contributed to Mike’s efforts. As you may be aware, my company matched all donations made by our clients. I sincerely want to thank clients who made Mike’s cause their cause. I am aware that many of you give to your own charities, organizations, and churches, so it was appreciated that you were able to spread some funds to others.

Mike stands ready to assist any client that desires to communicate with any of their investment holdings websites. The best example I can give is the client that wishes to check the status of their investment holdings with such companies as National Financial Services, Fiserv, Calamos, Franklin, MetLife Investors, etc. Please be aware that Mike also handles our website www.CenterForWealth.com and our client software department which allows him to prepare reports for client’s holding from Morningstar and Thomson Financial. These software programs would cost the individual client thousands a year in fees. You can however, obtain an analysis of your holdings from us for free. If you wish an updated summary of your investment holdings please contact our office and Mike will get one out to you. Or better yet, make an appointment for a financial review and let’s cover your investment questions, estate planning needs, and lfe financial matters in detail.

-Terry 

In recent years, many variable annuity contracts have begun to offer certain “living benefit” guarantees. In fact, more than 85 percent of variable annuity contracts sold today offer one or more living benefit guarantees.

If you are concerned about market volatility or running out of money in retirement, you might want to learn more about the guarantees available with some variable annuities for an additional cost.

Fixing the Variables

Adding a guaranteed minimum withdrawal benefit to a variable annuity contract would ensure that the contract owner could withdraw a fixed percentage 9 usually 5-7percent) of the premiums paid until 100 percent of the premiums paid had been withdrawn, even if the contract’s underlying investments were to lose money.

A guaranteed minimum income benefit would ensure that when the contract owner is ready to collect retirement income payments for life, they would be based on a minimum payout base even if the contract is worth less than this minimum because of poor investment performance. These payments continue for life-again, regardless of investment performance.

A guaranteed minimum accumulation benefit would ensure that the contract value would not fall below a specified minimum - usually the premiums paid - after a certain number of years, regardless of how the underlying investments perform.

Withdrawals of annuity earnings are taxed as ordinary income and may be subject to a 10 percent federal income tax penalty if made prior to age 59 1/2. Surrender charges may also apply during the contract’s early years. Any guarantees are contingent on the claims-paying ability of the issuing company.

Variable annuity sub-accounts fluctuate with changes in market conditions. When an annuity is surrendered, the principal may be worth more of less than the original amount invested.

variable annuities are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Of the three main barriers that most people face when trying to reach their financial goals - taxes, inflation, and procrastination- the first two are practically guaranteed to occur, but the latter has the potential to be the most costly, yet is the easiest to overcome.

Why do people procrastinate when preparing for their financial future? Here’s a look at some common reasons.

Fear of bad decisions
People often procrastinate because they are afraid. “You miss 100 percent of the shots you never take, ” hockey great Wayne Gretzky said.

When it comes to making decisions- such as how much to invest, where to invest, and what to do with underperforming investments - there will always be the risk of making wrong choices. but even bad decisions can be more valuable than no decision at all because they present a learning opportunity.

Lack of knowledge
Many people think they don’t know how to pick a suitable investment because this difficult task usually required educations and experience.

One way to avoid this problem is by seeking professional guidance. Although there is no assurance that working with a professional will improve investment results, a financial professional who focuses on your overall financial objectives can help you consider options that could have a substantial effect on your long-term financial situation.

Poor time management
The day-to-day demands of having a career, raising a family, and maintaining a home often take precedence over investment needs. Most people schedule time to get the oil changed, visit the dentist, and get their hair done. Why not then schedule regular appointments to review investment matters and measure the progress made toward financial goals?

Time is one of the key ingredients to financial success, and procrastination can potentially cost you thousands of dollars. Squandering time is one mistake from which many people never recover.

Life has been good around here as we have stayed very busy from the start of the year throughout tax season. Yes, we have five seasons in our life. Spring, Summer, Fall, Winter, and Tax Season. We stay busy during tax season gathering information for our clients so they can send off some funds to help our friends in Washington who always seem to need more money. Many of you have told us how you appreciate being able to get all of your information in a timely fashion from our office as it makes doing your taxes much easier. We also have several people working with us that do taxes for that purpose. It makes life easier for all concern. So a special thanks to Sandy Park, Leanna (Williams) Kavanagh, CPA, Mark Wojcik, CPA, and Don Tuttle, J.D., CPA, for doing taxes for our clients.

I spent a week during March in Fort Worth, Texas, visiting family but feel I need another week somewhere where both the air and water are warm. Hmm. Sounds like Florida for me. Mike has been staying busy during the winter months with a few ski trips and then in March he spent St. Patrick’s Day weekend in New Orleans with his brother Carl (Sandy’s son). They told me they behaved and if you knew Mike well enough you would know that to be true. Carl is now back in Iraq as a medic attached to the 89th Cavalry Regiment. We wish him a safe return.

Mike will be doing his part in helping the American Diabetes Association with their annual Tour de Cure for diabetes fundraiser in June. The bike ride leaves from Brighton and will involve 50 miles of riding to raise funds. I am proud to aid him with a donation. As you may know my company Center for Wealth Preservation, has been a proud sponsor of this cause and others such as the Special Olympics for many years. I respect people who give to just causes and support their local communities. So for all of you that are givers, my hat’s off to you.

Changing Cycles
Spring is the time of year for renewal. I am always amazed at the life that springs forth after laying dormant for so long. Just a short while ago I recall looking out my window at the backyard and not seeing any life at all, just a cold, white blanket of snow covering the earth with the bare limbs of trees standing still. Now we are seeing buds on trees and birds returning. Spring has always been my favorite season as it gives one hope and a waiting expectation of greater things to come.

Looking at this cycle of life my thoughts drift to the markets. It is evident that our economy moves in cycles as do the stock and bond markets. Our economy and the global economy are constantly changing. With changing cycles in the economy and the weak housing market I see the possibility of a recession on the horizon. This would favor a portfolio of more bonds and high dividend paying securities like utilities. Of course in contrast to this, we also are seeing higher commodity prices around the world which can be inflationary.

What a contrast. It goes with one of my favorite sayings, “The hardest time to invest is now.” This saying makes the point that it is hard to decide what is best to do with an investment dollar today. We can all look back and say what we should have done a year from now! Add to this the power of human emotions on investing and you can see how we can have markets that move up and down so much. So in summary, we remain diversified using proven strategies, proven managers, and adding an element of protection whenever possible.

At times like this, it does me well to travel a little. It always gives me a perspective on what is going on in this world. So in that light, I want to discuss some global thoughts with you. As many of you may know my wife is from South America. It is there that I truly see the effects of the global economy. I see an explosion in their standard of living in almost all of their countries such as Peru, Brazil, Chile, and Colombia. Natural resources such as oil, tin, copper, and timber are driving their economies as is low cost manufacturing. Imagine, Brazil is now the third largest producer of commercial aircraft in the world. The company called Embraer (stock symbol ERJ) is third behind Airbus and Boeing. Their stock has recently doubled in value. The reason? China’s Hainan Airlines just gave them a contract worth nearly 3 billion dollars. That’s right, an order for a hundred jets gives Embraer nearly three billion dollars in sales. Makes you wonder what Detroit companies could do with that type of money! Perhaps we should start making aircraft again like we did during World War II. In fact, we have been making a lot of money in South America over the last few years by owning an index fund that tracks the larger companies there and in Mexico. This exchange traded fund goes by the symbol ILF and tracks the S&P 40 index, which consists of Latin American stocks, similar to a smaller version of our S&P 500 index. I worry that this index will not continue its fine performance but when I look at the fundamentals such as a normal price to earnings ratio of 16, and a dividend yield of over 2% it does not seem overvalued. However, that insight and $1.00 buys you a cup of coffee. Now, are you ready for a surprise? Bilateral trade between Latin America and China has doubled over the last fi ve years and should hit $80 billion dollars this year. Estimates are by the year 2010, bilateral trade with South America and China should hit over 100 billion dollars. But enough about South America, what about China?

The China Syndrome
Many clients ask me why we are not investing more into China. While I do love international stocks and even some of the emerging market countries, I am nervous about direct investment into the two most populated countries on this planet, China and India.

The recent correction in China may have gotten some people’s attention but I think more volatility is to follow. I prefer indirect investments into China versus direct ownership of their stocks. For instance, you can find many fine large American companies as well as European and Japanese companies that will profit from China’s economy. Your money however is safer in these countries as they have well established stock exchanges, banks, and a longer track record of working with investors.

It’s time to examine the widely held belief that China is destined to surpass the US as an economic power. Their growth is truly impressive however it needs to be pointed out that we and Europe established much of their manufacturing for our benefit. We tapped into their cheap labor markets and the ability of China to produce goods without the extensive pollution controls and labor laws of our countries. I am not proud of this fact but it is the reality.

Remember, China still considers themselves to be a communist nation. That being said, it seems dangerous to over commit your investment dollars to them. Like Japan originally did, China is starting off by doing mostly manufacturing of low cost items yet they will need to transition into the higher technology growth area to create more sustainable profits in the future. I feel their low labor advantage will be lost in this area as machines do much of this type of work. Also, I don’t see other countries giving up this profitable slice of the pie.

In short, they are polluting their country dramatically, and this will cost their society many dollars in the near future. They will find it much more expensive to produce goods once they start implementing pollution controls and once they start dealing with a more middle class society that demands a fair wage for a full day of work. Most Americans don’t know that China’s cities are very polluted and their rivers foul with direct sewage dumping and heavy industrial waste products such as mercury.

One of its strengths is its population of over 1 billion people. But, this is an aging population due to their government policy of one child per family. This country has tremendous growth potential but not without growing pains. Consider that most of their companies are partly owned by the government so they could find themselves facing their own people as these folks struggle to improve their lifestyles. Imagine, these people turning against their own government as they strive for a higher standard of living.

In Summary
China is not a western nation! Their economy suffers from dramatic and deep corruption. They do not have the established rule of law via an organized court system and protection for individual’s property rights as we and many of the industrial nations do. The miracle of their economy could very well turn on them.

People should keep in mind while China controls a lot of dollars via their reserves system holding billions of U.S. debt notes, we hold power over them via our trade policies. As they could hurt us by not buying our debt securities we can hurt them by placing trade restrictions on them. So while pundits are predicting a sharp downturn in the U.S. dollar because China may sell off their U.S. reserves, I feel a downturn in the Chinese economy is just as likely and more certainly more painful for them. Be cautious investing into this region and be ready for some global upsets in the near future. Hopefully both our countries will endeavor to get along instead of fighting each other economically. Otherwise, this would truly be bad for the global economy.

Dividends and Capital Gains
The centerpiece of TIPRA is a two-year extension of the temporary lower tax rates on dividends and capital gains (through 2010). Dividends and long-term capital gains are taxed at a maximum 15% rate for Americans in the upper marginal income tax brackets. For taxpayers in the 10% and 15% brackets, the tax rate is 5% through 2007 and zero through 2010. Without the extension, dividend income would have been subject to rates up to 35%, and long-term capital gains would have been taxed at a maximum 20% rate in 2009.

AMT Relief
An exemption that helped many middle income taxpayers avoid the alternative minimum tax in 2005 was increased and extended through 2006. The new exemption levels are $62,550 for joint fi lers and $42,500 for single filers. Also extended was a provision that allows some taxpayers to claim many nonre- fundable personal credits to offset AMT liability. These include the dependent-care credit, the credit for the disabled and elderly, the credit for interest on certain home mortgages, and the Hope and Lifetime Learning credits for qualified education expenses.

Roth IRAs
Currently, only joint and single fi lers with modified adjusted gross incomes of $100,000 or less are eligible to convert a traditional IRA to a Roth IRA; income taxes are due on the amount converted. TIPRA changed the eligibility rules: Beginning in 2010, individuals will be able to convert a traditional IRA to a Roth IRA regardless of income or filing status. The new law also allows taxpayers who make the conversion in 2010 to spread the tax liability over two years (in 2011 and 2012).

Distributions from traditional IRAs are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to reaching age 59 1/2. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least fi ve tax years, and the distribution must take place after age 59 1/2 or be due to death, disability, or a fi rst-time home purchase (up to a $10,000 lifetime maximum).

For the past several years, tax-law changes have occurred with surprising regularity. To benefit from them, it’s important to stay informed and to understand how you may be affected.

INHERITED IRAs

Special rules for spouses
You may treat an IRA inherited from your spouse as if you were the original owner. You may contribute to it (if you’re eligible to make IRA contributions), name your own beneficiary and even roll it over into another IRA. You also may delay distributions from an inherited traditional IRA until about age 701⁄2, and delay Roth IRA distributions indefinitely.

* But note that if you do choose to treat it as your own, you will be subject to the 10% early withdrawal penalty if you are under age 591⁄2.

All other beneficiaries
If you inherit an IRA from anybody else, you need to make annual withdrawals starting by the end of the year following the year in which the person dies, or you must withdraw the entire amount within fi ve years. Distri- butions to IRA benefi ciaries are exempt from the 10% penalty that normally applies to withdrawals taken before age 591⁄2. If the decedent had started taking required minimum distributions (RMDs), then you usually must continue withdrawals based on your own life expectancy. If the decedent hadn’t started taking RMDs, then you must make annual withdrawals to empty the IRA over your life expectancy or withdraw the entire amount within five years.

*Required minimum distributions (RMDs) from traditional IRAs generally must begin by April 1 of the year after you reach age 701⁄2. Roth IRAs are not subject to RMDs during your lifetime.

1. Which of the following is one of the three nationwide consumer reporting companies?
A) Equifax
B) Experian
C) TransUnion
D) All of the above

2. What would make the best password for your online bank or credit-card account?
A) 12345
B) Your mother’s maiden name
C) A random password using both
numbers and letters
D) The last four digits of your Social
Security number

3. If you suspect that your identity has been stolen, after contacting the three major credit bureaus, you should:
A) Notify the Federal Trade Commission
B) Report it to the FBI
C) Call the Department of Homeland Security
D) Get Sam Spade on the case

4. As long as you physically have your credit cards, they’re in no danger of
being used fraudulently.
A) True
B) False

Answers:
1. D) All of the above.
Consumers can request one free credit report from each of the three credit bureaus every 12 months. To obtain a free copy of your credit report, go to www.annualcreditreport.com.

2. C) A random password using both numbers and letters.
Identity thieves can discover your Social Security number and mother’s maiden name
and get easy access to your accounts. And the consecutive numbers “12345” might be fi ne for your luggage but not for your financial records.

3. A) Notify the Federal Trade Commission.
The FTC maintains a national database of ID theft reports. The agency can also help you determine the steps to take to restore your name and credit.

4. B) False.
In many cases, a thief may need only your credit-card number and expiration date to
make purchases, without having the physical credit card itself. You should diligently
check all bank and credit-card statements for fraudulent purchases and notify your credit card company or bank immediately if you suspect illegal activity on an account.