Wednesday, July 20, 2005

Vacation & New Home

I will be on vacation from July 20th through August 6th. I will be checking e-mail and voicemail, but don't expect any quick responses - I'll be focusing on the beautiful Caribbean!

On a separate note, I moved my family to Murrieta California. Orange County home prices were just to out of control for me to want to purchase something. We were able to build a 3,000 sq. ft. home on a big lot for less than the price of a condo in Orange County. Don't panic, I am not leaving the O.C. I will still make my way into the OC once or twice a week to meet with my wonderful clients. I will still be available to all of you and I am not closing my office in Laguna Hills, it will remain open (though I may end up sharing it with somebody)!

So far even with the heat we love it out here in Murrieta. We live on a cul-de-sac and my son has about a dozen friends he can play with at any one time! So far three neighbors are putting in pools and I suspect a couple others will as well.....this is great because it means I don't have to spend MY money on a pool!!

What really amazes me is that we paid less per sq. ft of living space for this home than we did our townhome five years ago in Aliso Viejo. I am of the opinion that OC prices are simply to high, maybe they won't crash, but it is doubtful they will continue at anywhere near the pace of the past few years........of course what do I know, I have been wrong about real estate for past two years now!

Best wishes to all, I'll be checking e-mail and voicemail while sailing on the Caribbean, just don't expect any quick responses!!


Meridian Quarterly Review

June 30th 2005

The year through June 30th has been pretty much flat. The major U.S. Index the Standard and Poors 500 was down about .77%. REIT’s were the shining stars of the quarter as they recovered from their first quarter slump and surged nearly 15%. I am of the opinion that the run in REIT’s is about over and that new allocation made to REIT’s should be small. Existing allocations should be trimmed to match your individual Investment Policy Statement.

A diversified portfolio of stocks and bonds was up about 1% as of June 30th; once again a diversified portfolio has beat out the S & P 500. While I am happy that a diversified portfolio has continued to hold its own and outperform the major indexes you should know that this won’t always be the case. Occasionally the marketplace goes crazy and favors individual asset classes such as large growth stocks (for which the S & P 500 is a good proxy). For example, during the period between 1995 and 1999 the market as represented by the S & P 500 had an annualized return of 28.30% versus a diversified portfolio return of only 16.22% (only!). While most people would have been thrilled earning 16% annually most were extremely unhappy because they trailed the market by over 12% annually for those five years. The following table shows the difference in dollars an investor would have had with each strategy at the end of the period (1999) had they invested $10,000 in each strategy in 1995:

S & P 500 Diversified Portfolio

$34,800 $21,200

As you can see the market based portfolio had over $13,000 more in it at the end of year five; nearly 64% more than the diversified portfolio. I remember the media and all the wire house brokers talking about the death of diversified portfolios and that large cap growth stocks were the only place to invest an individual’s money. They turned out to be totally wrong and lost investors billions of dollars because they strayed from the number one rule of investing, diversification.

During the period of 2000 – 2004 the Standard & Poors annualized return was -2.46% while a diversified portfolio of stocks was up on average 10.41%, a near perfect reversal of the previous five years. The diversified portfolio returned on average almost 13% per year more during this five year period. The period taken as a whole (January 1995 – December 2004) saw the S & P 500 average 11.87% annually, while a diversified portfolio averaged 13.28%. Over the ten year period the diversified portfolio performed better and with much less fluctuation. At the end of the ten year period a $10,000 initial investment (starting January 1995) in each strategy would have yielded the following results:

S & P 500 Diversified Portfolio

$30,700 $34,800

My point with all of these statistics is not to make your eyes rollback into your head but to demonstrate two things. First, diversified portfolios don’t always win in the short term, they may drastically under-perform the overall market; but those who persevere should be aptly rewarded. Second, a diversified portfolio has less risk and more potential for return. A long term investor is better off in a well diversified, low-cost, index based portfolio than following the latest trends or listening to Wall Street.

We may be entering into another period where diversified portfolios under-perform; if we are this is a perfect time to take stock (no pun intended) and hunker down for the long run.

Enclosed are your quarterly statements, please let me know if you would like to meet to go over them in person.

Please refer to the Meridian Monthly e-mail for the latest on what is going on in the world of finance and what is going on in my life. If you are not receiving the Meridian Monthly e-mail please e-mail me at and let me know.

I Finished My Masters in Financial Planning!

Very few planners in the United States have a Masters degree in financial planning and very few have the credentials that I have. I promise to continue to make education a top priority so as to always be the most qualified financial planner you know.

The program I went through was the Masters of Science in Financial Planning through The College for Financial Planning. I started the program nearly five years ago and expect to have the degree conferred in September.

It has been a long and sometimes ardous process. I spent every weekend this year working on finishing up this program and am glad it is now behind me. Now I can take a nap instead of studying on Saturday and Sundays!

Thanks again for everyone's support.


Monday, July 18, 2005

Forum - Roth 401(k) on the Horizon--Worth the Effort

Forum - Roth 401(k) on the Horizon--Worth the Effort

Some great technical details about the upcoming Roth 4011(k)/403(b) option. I believe this is a great change and will add a lot of flexibility to financial and estate planning.


Tuesday, July 12, 2005

Real Estate Investment Trusts Increase 15% in 2nd Quarter

Well, I was wrong again. For the past year I've been pulling back on REITs in client portfolios. Nothing major, just rebalancing to a target allocation or lowering the target allocation (where it used to be 10% of equities, it would now be 5%). In new portfolio's I haven't even added an allocation. Normally I don't mess with my target allocations as I'm a buy and hold policy kind of guy. The REIT run just seemed overdone....imagine my surprise when I looked up some of the major REIT funds and found them up 14-15% during the second quarter.

Do I regret my decision, not really. Would I have liked to earn the 15%? Sure, but it is irrelevant. REIT's are now yielding between two and five percent, way below there normal 7% and they just seem way overpriced, especially with interest rates trying to rise (a whole other story). I am not changing my mind and jumping back in, REIT's are still overpriced in my eyes, if the prices fall and bring yields back to the 6% range, perhaps I'll start nibbling again...until then, I'll take the chance of being wrong.


Evaluate 403(b) Plan Sooner, Not Later

Evaluate 403(b) Plan Sooner, Not Later

This is the same article as posted below, but this time it appeared in the Washington Post. The article appeared in hundreds of papers across the United States!


Tuesday, July 05, 2005

Evaluate 403(b) Plan Sooner, Not Later

Evaluate 403(b) Plan Sooner, Not Later

A good article for teachers which quotes yours truly! My quotes have literally been featured in hundreds of newspapers across the country including The Wall Street Journal, Smart Money Magazine, The Kiplinger Letter, Kiplingers, the Orange County Register, the San Diego Union Tribune, and many, many others.

Scott Dauenhauer, CFP