Week of December 17, 2007

The Markets
 
Another interest rate cut from the Federal Reserve was not enough to stop a downdraft in the stock market last week.

Mixed economic reports left some investors perplexed about the future direction of stock prices. Robert Dye, senior economist at PNC Financial Services Group, nicely summarized the current situation. He said, "If you take the stronger-than-expected economic data we saw (last) week in the form of retail sales and add to that the inflation data and then combine that with a somewhat ambiguous statement from the Fed, you get a picture as clear as mud."

Of course, anybody who has been investing for a long time understands that uncertainty comes with the territory. Within the same day, for example, we could get two economic reports with completely different implications. One report might suggest the economy looks great, while the other might suggest a recession is looming. That’s why we look at a variety of reports and try to determine if there are any trends in place, or, more importantly, any trends that may be stalling or reversing.

Investing is a bit like architecture in that there’s both an art and a science to it. Architects use their artistry to design a beautiful structure but they also have to work within known principles of physics to make sure the building doesn’t collapse. Since investing inherently involves uncertainty, there is some artistry involved in discerning ambiguous information, yet we also have historical information that may help us put new information in context.     

Sources: 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.

MAYBE IT’S THE ROCKY HOUSING MARKET, but American retirees plan to hang onto one of their biggest assets -- their homes -- rather than sell or downsize. According to the September 12, 2007 Principal Financial Well-Being IndexSM, the majority of American retirees (73%) plan to stay put in retirement.  The survey also shows that 21% of working Americans who are five years from retirement plan to keep their homes, at least at first.

The survey, conducted in the Summer of 2007 by Harris Interactive, also indicates that of the nearly two-thirds of workers (65 %) who own their primary residences, 36% have less than 20% equity built up in their homes. However, the majority of retirees (60%) have their homes completely paid off. It’s reassuring that most workers and retirees do not foresee the need to downsize in order to tap their home equity to help fund retirement.  What’s more, the majority of retirees and working American homeowners surveyed (78% of retirees and 76 % of workers) say they have not considered taking out a reverse mortgage.

Interestingly, however, the Index also revealed that more than two-thirds of workers (67%) and more than half of retirees (52%) are concerned about their long-term financial future. Asked what financial concerns keep them up at night, American workers and retirees differed on the issues. More than one-third of workers (3%) lose sleep worrying about their ability to enjoy the same quality of life during retirement, another 39% fret about whether they will be able to afford good medical care, and 32% worry about outliving their savings. As for retirees, the ability to afford good medical care (29%) also was their chief concern, followed by outliving savings (24%), and ability to pay for basic necessities (21%).

One issue that’s underscored by these types of studies is that it’s crucial to develop and implement an adequate retirement savings plan so that, whatever the market’s gyrations, you’ll be able to lead the life you want during retirement.

MOST OF US WOULD AGREE THAT WE SHOULD SAVE MORE MONEY, reduce our gas consumption, or even lose weight, but few of us look forward to the work involved in implementing these changes in our daily life. In psychology, this tension between what we know is good for us and the work involved to get it done is referred to as the “want/should conflict.”  In December 2006 research by Max Bazerman, a professor of business administration at Harvard Business School, examines what it takes to get us beyond balking at the work or sacrifice involved in making positive life changes.

Significantly, Bazerman found through four experiments that people are more likely to choose what they believe they should choose (for instance, save more) when the choice will be implemented in the future rather than in the present. What’s the rationale behind the phenomena Bazerman refers to as the “future lock-in?”  He surmises that individuals tend to think that their “future selves” will behave more virtuously than their “present selves,” making good-for-you changes easier to live with.

Bazerman points out that his research has implications for public policy, where citizens are often asked to consider binding policies that trade short-term interests for long-term benefits. He stresses that if policymakers advocate for reforms that would be decided upon in the present, but go into effect in the future, the “future lock-in” might encourage citizens to weigh a policy’s abstract merits more than its concrete costs.

Of course, there are personal finance implications, too. Let’s say, you know you need to sock more away for college. Rather than make a portfolio change today, put it on your calendar for next week.

Weekly Focus – New Year’s Resolutions?

If you want to increase the odds of following through on your New Year’s resolutions, identify the emotions and values that will drive your actions toward achieving them. If you cannot tie any emotions and values to your resolutions, that’s an indication that they are not very meaningful to you and your chances of following through are slim.

Creating resolutions that are backed with strong emotions and connected to deeply-held values will help increase your success rate.

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.