November 2008 Newsletter

Waddell & Reed Geoffrey S. Morse Financial Advisor 4218 S Steele Street Suite 215 Tacoma WA 98409 (253) 474-9555 gsmorse@wradvisors.com

<!– –> <!– ACCOUNT Handling Market Volatility To find out more click here. Handling Market Volatility Conventional wisdom says that what goes up, must come down. But even if you view market volatility as a normal occurrence, it can be tough to handle when it’s your money at stake. Though there’s no foolproof way to handle the ups and downs of the stock market, the following common sense tips can help. Don’t put your eggs all in one basket Diversifying your investment portfolio is one of the key ways you can handle market volatility. Because asset classes typically perform differently under different market conditions, spreading your assets across a variety of investments such as stocks, bonds, and cash equivalents (e.g., money market funds, CDs, and other short-term instruments), has the potential to help reduce your overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another, but diversification can’t eliminate the possibility of market loss. One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class (e.g., 70 percent to stocks, 20 percent to bonds, 10 percent to cash equivalents). An easy way to decide on an appropriate mix of investments is to use a worksheet or an interactive tool that suggests a model or sample allocation based on your investment objectives, risk tolerance level, and investment time horizon. Focus on the forest, not on the trees As the market goes up and down, it’s easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Although only you can decide how much investment risk you can handle, if you still have years to invest, don’t overestimate the effect of short-term price fluctuations on your portfolio. Look before you leap When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. The small returns that typically accompany low-risk investments may seem attractive when more risky investments are posting negative returns. But before you leap into a different investment strategy, make sure you’re doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon. For instance, putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity (the opportunity to easily access your funds) may be the right strategy for you if your investment goals are short-term (e.g., you’ll need the money soon to buy a house) or if you’re growing close to reaching a long-term goal such as retirement. But if you still have years to invest, keep in mind that stocks have historically outperformed stable value investments over time, although past performance is no guarantee of future results. If you move most or all of your investment dollars into conservative investments, you’ve not only locked in any losses you might have, but you’ve also sacrificed the potential for higher returns. Look for the silver lining A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices. One of the ways you can do this is by using dollar cost averaging. With dollar cost averaging, you don’t try to “time the market” by buying shares at the moment when the price is lowest. In fact, you don’t worry about price at all. Instead, you invest money at regular intervals over time. When the price is higher, your investment dollars buy fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. For example, let’s say that you decided to invest $300 each month towards your child’s college education. As the illustration shows, your regular monthly investment of $300 bought more shares when the price was low and fewer shares when the price was high: Although dollar cost averaging can’t guarantee you a profit or avoid a loss, a regular fixed dollar investment may result in a lower average price per share over time, assuming you continue to invest through all types of markets. You should consider your financial ability to make ongoing purchases, regardless of price fluctuations, however. (This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.) Don’t stick your head in the sand While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check up on your portfolio at least once a year, more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. A financial professional can help you decide which investment options are right for you. Don’t count your chickens before they hatch As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it’s easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad times. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return. The accompanying pages have been developed by an independent third party. Forefield’s content and information is provided for informational and educational purposes only. Neither Forefield Inc. nor Forefield Advisor provides legal, tax, insurance, investment or other advice and should not be relied upon for such purposes. Waddell & Reed does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific financial planning and investment needs, please discuss your individual circumstances with your Financial Advisor. The accompanying pages may include information regarding retirement plans, estate planning, business planning or a variety of other topics that involve tax and legal issues beyond the scope of Waddell & Reed’s area of practice and expertise. Such information is intended to explain or illustrate planning topics, options or strategies that you may wish to consider in advance of, or at the time of, seeking the assistance of legal and/or tax advisors in implementing your plans and should not be considered as an authoritative or comprehensive explanation of any of the particular planning topics, options or strategies described. The information in the accompanying pages describes the general aspects of various planning topics, options or strategies but does not necessarily address all the pertinent facts and issues of your personal situation. Waddell & Reed does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice or may be relied on for the purpose of avoiding any federal tax penalties. The selection of appropriate planning options or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. It is important that you retain the services of legal counsel to plan and implement any legal documents that you may require and that you consult a tax advisor for an explanation of the tax effects of any particular planning options or strategies on your personal financial situation. Waddell & Reed financial advisors are able to offer insurance products through arrangements with insurance companies. Guarantees provided by insurance products are subject to the claims-paying-ability of the issuing insurance company. Prepared by Forefield Inc. Copyright 2008 Forefield Inc.

The Death of Reason

Even though it is not official, one thing is certain:  the United States of America has allowed itself to be taken over by an electorate that votes with its emotions rather that its reason.

We have elected a man that, although an inspiring speaker, has no significant experience for the job we have hired him for.  We have elected a man that wants to change the very foundational concepts that this country was founded upon.  No more free markets.  No more freedom of opportunity.  We have let our emotions take over.  It feels good to think that someone will take care of things for us.

We have traded away equality of opportunity for equality of outcome.  And despite the rhetoric, it is not about making sure that the least of us are taken care of–it solely about making sure that no one, except the right people, has any more than anyone else.  That is the real immorality of progressivism/socialism/communism/Marxism.  Instead of being a system that promotes success, it is a system that demands success be shared, that success is a right–even to those that haven’t earned it.

So now we have said we want a system that takes from some to give to many–in effect, punishing success.  How long can this last?  Hopefully not more than two years.  Once people realize that the system will no be able to sustain itself, we just might go back to a more reasoned, more moral system where opportunity abounds, success is encouraged–and thus spreads to all, and personal responsibility is the rule.

Until then, welcome to the National Socialist Democratic Republic of America.

October 2008 Newsletter

Waddell & Reed Geoffrey S. Morse Financial Advisor 4218 S Steele Street Suite 215 Tacoma WA 98409 (253) 474-9555 gsmorse@wradvisors.com

Variable Annuities To find out more click here. Variable Annuities Some basics A variable annuity is a contract between you (the purchaser) and an insurance company (the issuer). In return for your premium payments, the issuer agrees to make periodic payments to you (if you elect this option), beginning either immediately or at some future date. Annuity premium payments are made with after-tax dollars and are not tax deductible. That’s why it’s often advisable to fund retirement plans like 401(k)s and IRAs first. However, if you’ve already contributed the maximum allowable amount to these plans and want to save more toward your retirement, an annuity can be an excellent choice. You can pay your premiums in one lump sum, or you can make a series of payments over time. There’s no limit to how much you can invest in an annuity, and your funds grow tax deferred until you begin taking distributions. Once you begin withdrawing from your annuity, you’ll pay taxes (at your regular income tax rate) only on the earnings, since your contributions to principal were made with after-tax dollars. As with a qualified retirement plan, a 10% tax penalty may be imposed if you withdraw from an annuity before age 59½. Annuities are designed to be very long-term investment vehicles. In most cases, you’ll pay a penalty for early withdrawals. And if you take a lump-sum distribution of your annuity funds within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. As long as you’re sure you won’t need the money until at least age 59½, an annuity is worth considering. Your investment choices are varied As the purchaser, you can designate how your premium dollars will be allocated among the investment choices (often called subaccounts) offered within the variable annuity. A variable annuity’s subaccount choices will be described in detail in the fund prospectus provided by the issuer.   With the exception of a guaranteed subaccount, variable annuities don’t offer any guarantees on the performance of their subaccounts. You assume all the risk related to those investments. In return for assuming a greater amount of risk, you may experience a greater potential for growth in your earnings. However, it’s also possible that the subaccounts will perform poorly, and you may lose money, including principal. You should consider purchasing a variable annuity only if you’re willing to assume the risk inherent in investing. How a Variable Annuity Works In the accumulation phase, you (the annuity owner) send your premium payment(s) (all at once or over time) to the annuity issuer. These payments are made with after-tax funds, and you may invest an unlimited amount. You may choose how to allocate your premium payment(s) among the various investments offered by the issuer. These investment choices, often called subaccounts, typically invest directly in mutual funds. Generally, you can also transfer funds among investments without paying tax on investment income and gains. The issuer may collect fees to manage your annuity account. These may include an annual administration fee, underlying fund fees and expenses which include an investment advisory fee, and a mortality and expense risk charge. If you withdraw money in the early years of your annuity, you may also have to pay the issuer a surrender fee. The earnings in your subaccounts grow tax deferred; you won’t be taxed on any earnings or capital gains until you begin withdrawing funds or begin taking annuitization payments. With the exception of a fixed account option where a guaranteed* minimum rate of interest applies, the issuer of a variable annuity generally doesn’t guarantee any return on the investments you choose. While you might experience substantial growth in your investments, your choices could also perform poorly, and you could lose money. Your annuity contract may contain provisions for a guaranteed* death benefit or other payout upon the death of the annuitant. (The annuitant provides the measuring life used to determine the amount of the payments if the annuity is annuitized. As the annuity owner, you’re most often also the annuitant, although you don’t have to be.) Just as you may choose how to allocate your premiums among the subaccount options available, you may also select the subaccounts from which you’ll take the funds if you decide to withdraw money from your annuity. If you make a withdrawal from your annuity before you reach age 59½, you’ll not only have to pay tax (at your ordinary income tax rate) on the earnings portion of the withdrawal, but you may also have to pay a 10% premature distribution tax. After age 59½, you may make withdrawals from your annuity proceeds without incurring any premature distribution tax. Since annuities have no minimum distribution requirements, you don’t have to make any withdrawals. You can let the account continue to grow tax deferred for an indefinite period. However, your annuity contract may specify an age at which you must begin taking income payments. To obtain a guaranteed* income stream for life or for a certain number of years, you can annuitize which means exchanging the annuity’s cash value for a series of periodic income payments. The amount of these payments will depend on a number of factors including the cash value of your account at the time of annuitization, the age(s) and gender(s) of the annuitant(s), and the payout option chosen. Usually, you can’t change the payments once you’ve begun receiving them. You’ll have to pay taxes (at your ordinary income tax rate) on the earnings portion of any withdrawals or annuitization payments you receive. * All guarantees are subject to the claims-paying ability of the issuing company. The accompanying pages have been developed by an independent third party. Forefield’s content and information is provided for informational and educational purposes only. Neither Forefield Inc. nor Forefield Advisor provides legal, tax, insurance, investment or other advice and should not be relied upon for such purposes. Waddell & Reed does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific financial planning and investment needs, please discuss your individual circumstances with your Financial Advisor. The accompanying pages may include information regarding retirement plans, estate planning, business planning or a variety of other topics that involve tax and legal issues beyond the scope of Waddell & Reed’s area of practice and expertise. Such information is intended to explain or illustrate planning topics, options or strategies that you may wish to consider in advance of, or at the time of, seeking the assistance of legal and/or tax advisors in implementing your plans and should not be considered as an authoritative or comprehensive explanation of any of the particular planning topics, options or strategies described. The information in the accompanying pages describes the general aspects of various planning topics, options or strategies but does not necessarily address all the pertinent facts and issues of your personal situation. Waddell & Reed does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice or may be relied on for the purpose of avoiding any federal tax penalties. The selection of appropriate planning options or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. It is important that you retain the services of legal counsel to plan and implement any legal documents that you may require and that you consult a tax advisor for an explanation of the tax effects of any particular planning options or strategies on your personal financial situation. Waddell & Reed financial advisors are able to offer insurance products through arrangements with insurance companies. Guarantees provided by insurance products are subject to the claims-paying-ability of the issuing insurance company. Prepared by Forefield Inc. Copyright 2008 Forefield Inc.

August2008 Newsletter

Waddell & Reed Geoffrey S. Morse Financial Advisor 4218 S Steele Street Suite 215 Tacoma WA 98409 (253) 474-9555 gsmorse@wradvisors.com

Balancing Your Investment Choices with Asset Allocation To find out more click here. Balancing Your Investment Choices with Asset Allocation A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s right for you. Getting the right mix The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio’s returns. There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types. Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn’t guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face. Balancing risk and return Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start. Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances. Many ways to diversify When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio. Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held. Asset allocation strategies There are various approaches to calculating an asset allocation that makes the most sense for you. The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to. Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called “market timing,” is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed. Some people try to match market returns with an overall “core” strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management. Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio. Things to think about Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account. Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep. Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns. Even if your asset allocation was right for you when you chose it, it may not be right for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too. The accompanying pages have been developed by an independent third party. Forefield’s content and information is provided for informational and educational purposes only. Neither Forefield Inc. nor Forefield Advisor provides legal, tax, insurance, investment or other advice and should not be relied upon for such purposes. Waddell & Reed does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific financial planning and investment needs, please discuss your individual circumstances with your Financial Advisor. The accompanying pages may include information regarding retirement plans, estate planning, business planning or a variety of other topics that involve tax and legal issues beyond the scope of Waddell & Reed’s area of practice and expertise. Such information is intended to explain or illustrate planning topics, options or strategies that you may wish to consider in advance of, or at the time of, seeking the assistance of legal and/or tax advisors in implementing your plans and should not be considered as an authoritative or comprehensive explanation of any of the particular planning topics, options or strategies described. The information in the accompanying pages describes the general aspects of various planning topics, options or strategies but does not necessarily address all the pertinent facts and issues of your personal situation. Waddell & Reed does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice or may be relied on for the purpose of avoiding any federal tax penalties. The selection of appropriate planning options or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. It is important that you retain the services of legal counsel to plan and implement any legal documents that you may require and that you consult a tax advisor for an explanation of the tax effects of any particular planning options or strategies on your personal financial situation. Waddell & Reed financial advisors are able to offer insurance products through arrangements with insurance companies. Guarantees provided by insurance products are subject to the claims-paying-ability of the issuing insurance company.   Prepared by Forefield Inc. Copyright 2008 Forefield Inc.

Economic Stimulus “Rebates”

With checks arriving any day, there is much talk concerning the economic stimulus package.  Many are calling for recipients to spend the money to help the economy keep moving.  Other reports talk of the money being used to pay down debt or used to enhance savings.

While these are all good for individual family situations, they are all the same thing for the general economy.  Whether you spend the money on gasoline, a new gadget or toy, or you invest the money with your broker or in your retirement account, it is still going into the economy.  The only place I think it may be a bad idea to but the money is toword debt.  Unless the debt is high-interest (i.e. double digit) it makes more sense to invest the money for yourself.  Some may ask why.  Quite simply, you are almost always going to have debt.  And debt is not always a bad thing–if you manage it correctly.  Also if you constantly try to pay down your debt, especially the lower interest kind, you will never have a chance to save for yourself.  Let’s look at some numbers.

Imagine you are a married family of four (if this describes you it shouldn’t be too difficult) and you had more than $3000 of income last year and you paid taxes.  This means you will receive a rebate of $1800.  Sure you could buy something–a new computer, TV, gas for the summer trip–but if you saved that money, it could stack up to big money.  And depending on where you invest it, you could actually save on future taxes.  How much would this add up to?  Assuming an annual investment return of 8%, 10 year value is $3,886, 20 year value is $8,390, 30 year value is $18,113.  Pretty significant totals from just a small $1800 investment.  Just think what investing that much every year could do for you!  In case you were wondering, after 30 years it would add up to $238,335!

Would you like to double your pleasure?  Take your rebate money and invest it in a traditional IRA.  You will get a tax deduction for that contribution and the growth will be tax-deferred until you withdraw that money in retirement.  Or invest it in a Roth IRA and that growth will be tax free when you withdraw it in retirement.  Additionally, with the increase in the contribution limits for IRAs/Roth IRAs, it is possible to really develop a nice nest egg.  Don’t hesitate to ask me any questions or get in touch with your local financial advisor.

“Takings” Freedom Day

Since it is Tax Freedom Day according to The Tax Foundation (www.taxfoundation.org), I have decided to hopefully make it hit home a little harder.  In case you don’t know what Tax Freedom Day is, it is the day each year that the average US taxpayer has stopped earning their aggregate tax bill for the year and is now earning money for themselves.

What if, instead of having your taxes taken out by your emloyer, included in your escrow payment on your house, or included in the bill at the restaurant/grocery store/laundromat, you had to write separate checks to each governmental institution that these taxes were owed to?  Most business owners understand this concept, but the majority of Americans do not.  It’s virtually invisible, so it has much less effect than having to pay these “takings” out of pocket.  By the way, simple math tells us that a Tax Freedom Day of April 23rd is equivalent to 31% of our wages “taken” by various taxing authorities.  I would venture to guess that the uproar over having to actually pay out of pocket for each of these levels of government would nearly cause a revolt.  If nothing else, there would be a serious call for major auditing of budgets and possibly more importantly, a complete overhaul of tax codes and methods at every level.

Why is this important, you may ask?  It is one of my goals as a financial advisor to help make sure that my clients are taking advantage of every tax break and method of tax abatement that they are legally entitled to.  But it’s not just about saving on taxes now.  As noted in a previous post, the best financial plans incorporate long-term strategies for tax planning.  Maybe that involves a Roth IRA.  Maybe it involves cash value life insurance.  Maybe it involves maximizing the equity in your home.  Long-term planning will help develop strategies and solutions for these and a host of other issues.