Week of October 1, 2007

The Markets
 
September turned out to be a solid month for the markets as the Dow Jones Industrial Average rose 4.0%, the S&P 500 gained 3.6%, and the NASDAQ gained 4.1%, according to Reuters. It was also a big month for crude-oil futures as the price of a barrel of benchmark crude surged 11.4%. For the quarter, crude-oil futures rose 14.6%, while for the year they’re up 22.7%, according to MarketWatch.

With that kind of surge in oil prices, you’d think the stock market would feel the pinch, but so far, it hasn’t had much of an impact. As of last Friday’s close, the Dow was within 1% of its all-time high.

Maybe oil doesn’t matter much anymore?

Many of you will remember back in the 1970s when oil was the top story. Oil and gas prices surged, inflation got out of control, and the U.S. was mired in “stagflation.” It was so bad that in his 1974 State of the Union Address, President Nixon said, “Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.”

So how’d we do on that goal? Not very well. In 2006, about 60% of the petroleum consumed in the U.S. was imported from foreign countries, according to the Department of Energy. The good news is, we have become more efficient users of petroleum and as consumers, we only spend about 4% of our disposable income on gas today versus over 6% in 1980, according to The Wall Street Journal.

While higher oil prices hurt consumers in the pocketbook, it helps others in the petroleum business chain, such as oil companies and their various vendors, suppliers and investors. With the stock market chugging along, it appears that there are enough people “benefiting” (and we use that term loosely) from higher oil prices to keep the economy rolling and the stock market happy.
  

Source: Yahoo! Finance, Barron’s Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

IN THE RETIREMENT RED ZONE, the period five years before and five years immediately following retirement, even a short-term market downturn can have a significant impact on your future retirement income stream. Accordingly, to extend the football metaphor, just as they do when a team approaches the goal line and threaten to score, emotions tend to run high.

In fact, a new study entitled “Behavioral Risk in The Retirement Red Zone” identifies five dominant emotions – fear, regret, inertia, susceptibility, and aggressiveness – that can cause you to react to market uncertainty in ways that could harm your portfolio. Specifically, 80% of survey respondents registered high or moderate degrees of regret and 71% reported high or moderate degrees of fear, emotions that could cause you either to hesitate to take action or be less likely to take on necessary, managed risks.

Significantly, although the report sponsored by Prudential Financial, Inc. found that three of four investors are affected by their emotions to a moderate or high degree, only 35% believe emotions impact their investment decisions. Clearly, there’s still work to be done.

According to the study results, for most investors, the first step may be the most difficult. Because you are less likely to be swayed by emotions if you recognize that emotions can influence your decisions, simply understanding more about your decision-making can mitigate the effects of behavioral risk on your portfolio. So, open up to your spouse, friend, or family member, and, remember, we’re always ready to listen or answer questions.

HOW MUCH DO YOU NEED TO SAVE FOR COLLEGE? According to the “Upromise College Preparedness Report Card,” U.S. parents and teens tend to overestimate the cost of college. In the same way it’s difficult to gear up and begin a weight loss program if you have significant pounds to lose, the report speculates that the exaggerated perception of costs may overwhelm parents and contribute to inaction when it comes to college funding.

Specifically, the study found parents overestimate annual tuition and fees for a public, four-year university by more than four times the amount estimated by the College Board ($25,155 vs. $5,836), and those for a private four-year college or university by more than twice the College Board estimates ($46,712 vs. $22,218).  Interestingly, the study found that the median amount that parents say they could pay annually for college is nearly $10,000, an amount that would cover the average tuition costs of a public college or university, according to the College Board.

Although the importance of calculating a future income stream is stressed in retirement planning, it’s surprising how frequently that calculation is skipped over for college funding. Like anything in life, you likely will be more successful with college funding if you set a specific goal and develop a plan to achieve it…and we’re here to help.

Weekly Focus – Think About It

“I've got a theory that if you give 100% all of the time, somehow things will work out in the end.” – Larry Bird

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.