Since 1979, when the National Bureau of Economic Research began to formally announce the beginning and ending dates of U.S. economic recessions, the U.S. economy has fallen into recession five times. In each case, the recession was between six months and one year old before the NBER was able to detect it and announce its beginning date. The bureau took an average of 15 months after a recession was over to announce when it had ended.

Recessions take a psychological toll that almost certainly spills over into the early months of a recovery. Because it can take so long for the NBER to determine when a recession began or ended, people who delay financial decisions until they are certain a recession is over are at a disadvantage because they may be operating on old information.

The NBER is a venerable organization whose role as the nation’s official recession timekeeper is widely accepted. Nonetheless, its methods are little known by the investing public. Placing too much faith in the NBER’s recession/recovery announcements without understanding what they mean may result in false assumptions and poor decisions.

Peaks and Troughs

Even though most (but not all) recessions have included two or more quarters of negative growth in gross domestic product — the widely accepted benchmark of a recession — the NBER has a more stringent definition. It prefers to focus on broader measures of economic activity, defining a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”¹

In the NBER’s language, the economy travels through a business cycle that is marked by peaks and troughs. A peak in economic activity represents the end of an expansion and the onset of a recession. A trough represents the end of a recession, when economic activity reaches a low point that is followed by sustained growth.

When You Least Expect It

This means that many recessions occur when they are least expected, when the economy is operating at peak levels. For example, when the recession began in December 2007, the unemployment rate was 4.9% and real gross domestic product was growing at 2.1%.² This also means that a recovery often begins at the darkest moment, when production, income, and employment are at their lowest levels.

The NBER has garnered widespread respect because it has rarely had to revise a business cycle date. It makes no attempt to announce recessions or recoveries quickly, but waits long enough so that the timing is not in doubt.

The NBER uses an array of tools and measurements to identify peaks and troughs in the business cycle, but perhaps its most important tool is hindsight, something investors don’t have the luxury to consult. Making financial decisions only when you believe the economy is on solid ground could mean missing opportunities in the critical early months of a recovery.

1) National Bureau of Economic Research, 2008
2) Bureau of Labor Statistics, 2009; Bureau of Economic Analysis, 2009

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If you have a current will, count yourself among the minority of Americans who have done their heirs an important service.¹

A will’s primary purpose is to help convey titled property. It’s not a good place to communicate your wishes regarding personal matters or to provide specific instructions for your survivors in the event that something were to happen to you.

A letter of instructions, while not a legal document, can help your family cope during a difficult period by providing information that has no place in a will — such as the location of the will itself.

Where’s the Will?

A letter of instructions doesn’t need to be an eloquent treatise on the meaning of life and the importance of family. Its job is to guide the survivors, so it can take the simple form of a list or the casual tone of a letter to an old friend.

Here are some common topics to address:

• Where to find important legal documents,including wills and trusts, birth and marriage certificates, insurance policies, deeds to real property, and vehicle titles
• Bank and retirement account numbers, and the location of safe-deposit boxes and tax returns
• Contact information for people to notify, such as lawyers, accountants, and clergy
• A list of creditors and any bills that need to be paid in order to keep the household running smoothly
• Instructions for the funeral and any pre-arrangements with a funeral home and/or cemetery
• Your wishes for the distribution of personal possessions, jewelry, heirlooms, and other keepsakes

Once you have drafted a letter of instructions, tell key family members where it is kept and leave copies with trusted advisors. Take the time to review it regularly to help ensure that it contains the latest information.

1) FindLaw.com, 2008

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There’s nothing wrong with wanting to work in retirement, regardless of the reason. But if you decide to earn some extra income, make sure you understand how it will affect your Social Security benefits.

Working Before Full Retirement Age

If you begin collecting benefits anytime between age 62 and the beginning of the year in which you reach your full retirement age for Social Security, any wages you earn from a job or self-employment are subject to the earnings test, in which $1 of your benefits will be withheld for every $2 you earn in excess of the annual earnings limit ($14,160 in 2010; see example below). In the year in which you reach full retirement age, any income earned prior to your birthday will reduce your benefits by $1 for every $3 you earn over the annual limit ($37,680 in 2010). Once you reach full retirement age, your benefits are no longer affected if you continue working.

They Withhold Benefits, But You Get Them Back

When your income exceeds the earnings limit, it’s your responsibility to inform Social Security. Social Security will not adjust your monthly benefit amount but will withhold all benefits until the reduction has been fully applied (see example).

If it seems unfair to withhold benefits just because you are working, consider this bright spot: When you reach full retirement age, the benefits you lost to the earnings test will be credited to you in the form of a higher monthly benefit.

If you expect to work in retirement, let that influence your decision about when to begin collecting benefits. You may eventually recover the lost benefits, but be prepared to go several months at a time without a benefit check.

1) Employee Benefit Research Institute, 2009

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A disability can send expenses sky-high while drastically reducing income, placing a newly disabled breadwinner’s family in a difficult position. One way to help protect against the financial ruin that a disability can bring is through disability income insurance.

Insuring Your Income

A disability income insurance policy can replace some of your salary, up to the policy limit, if you should suffer an illness or injury that makes it impossible for you to continue working. The benefits of an individual policy can last for a set number of years or until you reach retirement age, and they usually are not taxable if you paid the premiums yourself.

Some disability insurance policies pay a benefit if you are unable to perform your current occupation, whereas others pay out only if you are unable to perform any type of job. Although many employers offer group disability plans, the benefits from these plans may replace a smaller portion of income than is possible with an individual policy. Furthermore, benefits from an employer-provided disability policy are generally taxable.

Most people insure their cars, homes, and expensive jewelry. Consider insuring what may be your most valuable possession: your ability to earn a living.

1) 2009 Field Guide, National Underwriter

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Growth and value stocks have taken their lumps along with the rest of the market, but over the past 20 years these two asset types have experienced similar gains (see chart).

However, the returns from growth and value investments in any given year are not always closely correlated. Maintaining a balance of growth and value investments may help you add a new dimension of diversification to your portfolio. A good first step is to understand the key differences between these investing approaches.

Going for Growth

Growth stocks are associated with companies that tend to have a strong historic growth rate as well as strong growth potential. These companies usually don’t offer dividends because profits are typically reinvested in the company.

A growth company might have an advantage in a rapidly growing new industry or be on the verge of a major breakthrough. Because growth stocks can offer high potential rates of return, they may carry significant risk, which should be considered carefully before investing.

Vetting Value

Value stocks are typically believed to be undervalued by the market. Good candidates are often firmly established companies with solid earnings, but the market has not yet recognized their potential. A value stock investor strives to buy shares of these companies at a bargain price with the expectation that the broader market will eventually realize the companies are a good investment, potentially causing the share price to rise. Value stocks may or may not be a good source of dividends.

The return and the principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve a higher degree of risk. Diversification does not eliminate the risk of investment losses; it is a method used to help manage investment risk.

Some investors swear by growth or value investing. But by picking the best opportunities from both types of investments, you may be able to broaden your return potential while spreading risk over a more diversified portfolio.

For more information contact Sarah Tolson by visiting GirlsJustGottaHaveFunds.com.

When the market takes a dive, are you more likely to change course or stay the course? What about when the market is rising? Are you more likely to follow the crowd and buy more, or do you maintain your investing strategy?

If the answer to the first question is “change course” and the answer to the second is “follow the crowd and buy more,” you could be letting your emotions drive your behavior. Emotional reactions can cause investors to buy high during the exciting phase of a market bubble and to sell low during a downturn when panic sets in, exactly the opposite strategy of what rational investors are supposed to do.

Although the ability to analyze situations quickly and make on-the-spot, emotion-based decisions was necessary to survive and thrive in cave-man days, it generally is not appropriate when investing in the stock market.

Fear of loss and anticipation of gains are strong human emotions that have been studied not only by behavioral finance researchers but also by neuroscientists. Now independent research studies suggest that two areas of the brain — one that controls fear and another that seeks reward — may be behind emotional investor behavior.

Fear Factor

In one study of why some people turn down gambles that are likely to lead to gains, researchers at the California Institute of Technology and their colleagues examined the reactions of patients who had a genetic condition that damaged a structure of the brain known as the amygdala, the brain’s “fear center,” compared with the reactions of a control group without amygdala damage. In a series of monetary gambles in which the participants had different possibilities of losing or gaining money — equal probabilities of winning $20 or losing $5 (which is a risk many people would take) or winning $20 or losing $20 (a risk many people would reject) — the patients with damage to the amygdala invariably chose the riskier option. In fact, the participants with amygdala damage demonstrated no aversion to monetary loss, which contrasted with the more cautious control group. Researchers concluded that “a fully functioning amygdala appears to make us more cautious.”¹

Although loss aversion has been observed in many economic studies, “this is the first clear(scientific) evidence of a special brain structure that is responsible for fear of such losses.”²

Pleasure and Greed

At the other end of the spectrum, a team of Japanese researchers found that greed is influenced by an area of the brain called the striatum, which is described as a “major reward-related brain structure.” Winning a financial reward increased activity in this area, but so did the simple possibility of monetary gain. The higher the risk, the greater the amount of activity in the striatum.³

A Quantitative Difference

Does this mean that emotion has no place in prudent investment decision making? Although a healthy sense of fear and a drive to succeed are necessary for sound decision making, these emotions may not always guide investors in the right direction and could end up in losses over the long run compared with a more disciplined approach.

Nature has hard-wired us for survival, but relying too much on our natural impulses can end up causing monetary harm. You may be able to avoid some common mistakes and help achieve your goals by basing your financial decisions on a sound investment strategy that takes into consideration your time horizon, risk tolerance, and personal circumstances.

1) Reuters, February 8, 2009
2) PhysOrg.com, February 8, 2010
3) Science Daily, November 19, 2009

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What do you do when an investment performs beyond your expectations? That might sound like a silly question, but take a moment to think it through: Should you sell it? Hold on to it? Increase your position?

Believe it or not, a significant investment gain, especially one from an unexpected source, can pose a risk to your progress toward long-term goals if it’s not handled appropriately.

Small-Cap Conundrum

Small-cap investors faced the conundrum posed by outsized returns during the early months of the market rally that began in March 2009. Small-cap stocks were outperforming their large-cap brethren — which is not unusual during a recovery that follows an abrupt downturn. During the first six months, they gained 43% compared with 28% growth in large-cap companies (see chart).

A 43% gain in six months is enough to get most people’s attention, especially when their other investments are underperforming. But what would be the smart thing to do with an investment that has performed so well? It depends on your goals and the role the investment was originally playing in your portfolio.

Have Your Goals and Risk Tolerance Changed?

Consider a hypothetical investor whose financial goals, time horizon, and risk tolerance call for only 10% of his portfolio to be in small-cap stocks. Due to an unusual growth spurt, small caps suddenly accounted for 20% of his portfolio because they grew faster than his other investments.

If he holds the small-cap stocks, he may be carrying more risk than is suitable for his situation because he’s become overexposed to one type of asset. (Remember, his strategy called for only 10% in small caps.)

If he buys more, especially if he sells some other type of asset to raise the money, he is chasing performance and ignoring the role that small caps (and the asset he sold) play in his portfolio. If the growth spurt turned out to be unsustainable, the extra risk he assumed could come back to haunt him.

If he sells some of his winners, he’s likely to experience tax consequences, but he could use the proceeds to make additional investments in support of his long-term goals.

Most people would find it difficult to sell shares that have posted large gains. But a decision to sell should depend on what role the assets were playing in the portfolio, rather than on how much the shares had grown in value.

For more information contact Sarah Tolson by visiting GirlsJustGottaHaveFunds.com.

A survey of investors 65 and older found that 17% were unwilling to take on any investment risk.¹ Another 19% said they were willing to take only below-average risk, even though they knew it meant they were giving up the opportunity to pursue higher-than-average investment gains.²

Yet 58% of people in this same group also said their investment goals included generating current income.³ How is it possible to generate a retirement income without taking on too much risk? One way is by investing in fixed-income instruments, usually debt securities. But even these instruments pose some risks that investors may not be comfortable with.

An alternative is to purchase a long-term retirement income vehicle from an insurance company. Although no financial instrument is entirely without risk, the guarantees offered by a fixed annuity can help address the concerns of even the most risk-averse investors.

Fixed for Life

An annuity is a contract with an insurance company that provides a guaranteed income at some point in the future, after the contract has been funded with premium payments. If you are concerned about earning the highest possible investment return, an annuity may not be for you. But if you are interested in a guaranteed income or a guaranteed interest rate, you may want to consider the role an annuity could play in your portfolio.

Annuities are flexible and can be shaped to help meet your individual needs. For example, you could choose an income that lasts for a specified period, for the rest of your life, or for the lives of you and another person. Or you might choose to earn a specific rate of return for a guaranteed period, possibly with the opportunity to lock in a higher rate, depending on market performance.

The amount of income paid by an annuity depends on variables that include the amount paid in premiums, the contract’s rate of return, the age and gender of the contract holder, and the number of years over which income payments will be received.

Annuities have contract limitations, fees, and expenses. Any guarantees are contingent on the claims-paying ability of the issuing insurance company. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. The earnings portion of annuity withdrawals is subject to ordinary income tax.

A source of guaranteed income may help remove some of the uncertainty associated with volatility in the financial markets. It’s possible that annuitizing a portion of your savings may allow you to enjoy your retirement years with less concern that you might outlive your money.

1–3) Investment Company Institute, 2008

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After a drought of initial public offerings over the past few years, the IPO market finally began to perk up in the second quarter of 2009 (see chart). If the pace continues to accelerate, it could be a promising signal for investors.

Private companies seeking to raise cash may choose to “go public” by offering shares of ownership on a stock exchange. When a company offers new shares to the public, it’s called a public offering. A great deal of attention focuses on the conditions that draw companies to make their debut or “initial” public offering.

Although it can be difficult for individual investors to get in on an initial offering, IPOs can serve as a useful indicator of the outlook for the stock market as a whole. Companies that want to go public will typically wait for market conditions that could fetch a high price for their shares. Because start-ups are seen as more risky than established firms, investors may give an IPO a cool reception when overall confidence levels (and stock prices) are down.

Predictably, IPOs all but disappeared as the nation battled a recession and a bear market in 2008. It’s no coincidence that the IPO resurgence in 2009 coincided with a stock market rally that began in March of that year.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Although investing in an IPO may not be appropriate for many investors, it’s still a good idea to keep an eye on the pace of new offerings. Signals from the IPO market may yield clues about the health of the broader investing climate.

For more information contact Sarah Tolson by visiting GirlsJustGottaHaveFunds.com.

A guaranteed investment? Actually, it’s no joke. Variable annuities, which are insurance contracts that offer an opportunity to pursue investment gains, give contract holders the ability to purchase guarantees to help protect against downside risks. Although the guarantees come at a price, consider the potential value of these benefits.

Guaranteed minimum accumulation. Regardless of the performance of the underlying investments, the contract value will maintain a minimum level after a specified term. This level is usually equal to the amount of premiums paid.

Guaranteed minimum income. When the annuity owner begins taking retirement income, the payment will be based on the greater of either the actual contract value or a minimum payment amount.

Guaranteed minimum withdrawals. A fixed percentage (usually between 5% and 7%) of the annuity premiums can be withdrawn annually for a specified period (including the owner’s lifetime), regardless of market performance.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

Withdrawals of annuity earnings are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.

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.

1) Money, December 2009
2) InvestmentNews, June 22, 2009

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