The Power of Buy and Hold

When speaking with clients, there is a common perception that the market can and should be "timed." While dollar-cost averaging is a wise long-term strategy, unsystematic timing of the market will only cause you to miss the big up days that provide a bulk of returns in the first place. The article below from the Motley Fool illustrates this point nicely. The author calls a 5-standard deviation move "5-sigma." Quick statistics refresher: A 2-standard deviation move covers 95% of all observations in a normal distribution.

In a standard normal distribution, an event that occurs five standard deviations or more from the mean has about a 1 in 3,488,555 chance in happening -- fairly unlikely, in other words. Yet plenty of stocks have seen more than their fair share of these lightning strikes.

Over the past 56 years, the S&P 500 has seen 52 days with 5-sigma or greater movement, and three days in 1987 with changes that were 10-sigma or greater. Over the past five years, if you had invested in the S&P and held on to it, you would've seen a 23% return, or roughly 4% annually, not exactly something to get excited about. But if, instead of holding, you were jumping in and out and managed to miss the eight 5-sigma days (two of which were negative) over that time frame, then your annual return is slashed to 1%, a certifiably terrible performance.

Read the whole thing:

http://www.fool.com/Server/printarticle.aspx?file=/news/commentary/2006/commentary06110931.htm

Reagonomics at 25

Twenty-five years ago, Ronald Reagan signed the economic Recovery Tax Act, slashing income tax rates by 25% across the board. The top tax rate in the US in 1980 was an astonishing 70%. Dividends were taxed at 70% and capital gains at 50%. I doubt anyone under 50 remembers that US tax policy used to be virtually confiscatory. Whatever politics you practice, I doubt you would want to pay Uncle Sam more than two-thirds of your gross pay. Keep that in mind next time you visit the polls. Make sure you know the fiscal policies that your potential Congressman or Congresswoman supports.

401K/Pension Legislation Passes

It took federal lawmakers almost two years of debate, half a dozen stabs at earlier legislation and an end-of-session deadline to finally agree on a law designed to shore up company pension plans.

But buried in the 900-plus pages of the Pension Protection Act of 2006, signed by President Bush Thursday, are several tax provisions that will benefit individuals who do their own golden years saving.

The aim of the law is to boost the 30,000 defined-benefit plans run by employers that are now underfunded by an estimated $450 billion. Those plans must reach 100% funding, up from the current 90% requirement, in seven years. That could save taxpayers from funding a multibillion-dollar bailout of the federal agency that insures pension plans.

Read all the details.... http://articles.moneycentral.msn.com/RetirementandWills/PlayingCatchUp/BigChangesForYour401kRetirement.aspx?GT1=8473

College Education

Good news for for those who use 529's or Education IRA's to save for their children's education. Congress made the tax breaks associated with these accounts permanent. They were slated to expire after 2010.