Issue 1
When Should You Change Your Asset Allocations?
W
hen you’re stuck in traffic,
do you ever switch lanes
only to feel that the longer,
slower lane you just left speeds up?
When you change how you divide
up assets in your portfolio, you may
end up with the same result. For
example, if you fuel-up on energy
stocks, among the most coveted
shares in early 2006, and sell your
stock in lagging airline companies,
you could theoretically be doing it
just when oil prices are on the brink
of an unexpected dip and tourism
makes a comeback.
No one can reliably predict
which asset class will move up or
down, so it’s better not to tinker
too much with your portfolio.
Instead, diversifying long-term
investments over a broad range of
asset classes—the equivalent of
driving in multiple highway lanes
simultaneously—is a good solution
for riding out market fluctuations.
Still, there are times changing
your asset allocation is prudent. Here
are several:
Life events. If you lose your
spouse, sustain a disabling injury, or
go through some other life event,
you may need to adjust your
portfolio. A retiree living off
investment income, for instance, is
likely to need less income after a
spouse dies, and that might permit a
larger commitment to stocks. Or, if
you must retire five years earlier
than you expected due to a disability,
you could consider lightening up on
speculative assets.
What’s happening in your
family can also influence your asset
allocation. Suppose your daughter
is in the midst of a complicated
divorce and comes home with
your two grandchildren to live with
you. Suddenly, you find yourself
helping to support three additional
family members. Income, rather than
capital appreciation from equities,
may become more important.
Getting divorced yourself or
receiving an inheritance are two
other examples of family matters
that may affect your personal
investment policy.
Goal adjustments. As you come
closer to achieving certain financial
goals, you might consider reducing
risk in your portfolio. Getting ready
to retire or buy a house may mean
reducing your allocation to stocks
in favor of safer, fixed-income
investments. Similarly, if you’re
saving for your son’s college
education, you may want to scale
back your commitment to equities as
he nears college age.
Judgement calls. Even if you
work in an industry and feel you
have special insight into stocks,
talk to us before allocating an extra
amount to that sector. The same
holds true in the event that an asset
class is a bargain compared to
historical norms. Using careful
judgement in such cases to make
an extra allocation to an asset class
is prudent.
While your portfolio should be
rebalanced periodically so that you
scale back on assets that have risen
sharply in value and buy more of
those that have dipped, sticking with
an investment plan for the long haul
can be the ticket to getting rich
slowly. We’d be glad to review your
portfolio with you to ensure it’s
well-suited to your objectives. ●
Investing In China
according to Morningstar. But only a
dozen or so funds focus exclusively on
China or invest more than 10% of assets in
Chinese holdings, mostly because risks are
great and the pickings slim, says
Morningstar’s Dutta. “There just aren’t
that many Chinese stocks a fund could
own, because of restrictions on foreign
ownership and the difficulty of conducting
adequate due diligence,” he says.
Rather than investing in a fund that
holds only Chinese stocks, it may make
more sense to buy a diversified emerging
markets fund, whose manager isn’t
restricted to Chinese companies. Placing a
small portion of a portfolio in emerging
markets stocks often is a sensible
approach. But you should expect setbacks
now and then.
The potential for political unrest is
likely to grow as China’s closed
Communist-controlled political system
increasingly comes under pressure to open
up. Meanwhile, with a banking system not
open to public scrutiny, corruption and
secretive corporate dealings are bound to
be exposed as this economic giant makes
its shift toward capitalism. Currency risk,
therefore, is another significant risk.
Despite its risk, China remains an
intriguing market. But you’ll need a longterm perspective and strong stomach when
your investment tumbles, as it is likely to
do from time to time. ●
(Continued from page 1)
The Communist government
maintains majority interests in most
Chinese companies, and “minority
shareholders’ rights are not always a
priority,” says Gao. Chen says Chinese
companies still have a long way to go in
terms of improving corporate governance
and disclosure, as well as abiding by
international laws and accounting
standards. “Transparency is key for foreign
investors,” Chen says. “And transparency
for the most part is lacking in China.”
Still, with one-fifth of the world’s
population being Chinese and the rapid
growth of the economy, this is not a market
to be ignored. More than 1,100 U.S.-based
mutual funds, out of a universe of some
6,500, have exposure to Chinese assets,
©2007 API
* The MSCI China Index is an unmanaged index of
Chinese stocks only available to foreign investors,
and the Hang Seng index is an unmanaged index
comprised of stocks representing the 33 largest
companies in China. You cannot invest directly in an
index. Your return in an investment that attempts to
mimic an index’s performance may be worse than
an index’s.
Before making any investments in a mutual fund or
ETF, always read the fund’s prospectus, which can
be obtained by calling our office or from the fund
company directly.
Investing In China: Weigh
The Risk Against Rewards
Welcome To Our
New Quarterly
Newsletter!
ith the Chinese stock market
plummeting 9% in a single day
this past February, is it time for
bargain hunting? Maybe, but proceed with
caution. China, as it has always been, is
intriguing but shadowy, alluring but risky.
“China’s economic fundamentals are
tremendous,” says Arijit Dutta, a mutual
fund analyst at Morningstar, the Chicagobased research firm. However, making
money from China’s surge requires
judgment, caution, and a limitation on
what you’ll put at risk.
In 2006, China’s economy expanded
an astounding 10.7%, about
triple the rate of U.S.
economic growth. The
Hang Seng index—the
benchmark for Hong
Kong’s stock exchange—
soared, as did stock prices on
China’s two mainland exchanges,
where values nearly doubled in 2006,
according to the MSCI China Index.*
This performance suggested that, after
years of speculation and hope, China’s
potential as a global economic giant was
beginning to be realized.
China’s middle class, 150-million
to 200-million strong, still represents only
a fraction of the country’s total population
of 1.3 billion. But it’s expected to double
in size in the next five years, creating
more new consumers than the world
economy has ever seen from one country.
Already, China’s retail sales rank third in
the world behind only the U.S. and Japan.
And China is the globe’s fastest-growing
technology market, with record sales of
computers and cell phones. Spending
on homes, cars, and vacations is also
growing quickly.
The global investment community is
elcome to the first issue
of our new quarterly
newsletter, Wealth
Matters. This publication is another
way for Heritage Wealth Advisors to
keep you informed about topics
affecting your wealth.
This newsletter will explore a
broad range of financial planning
issues. It will focus on some of the
most interesting problems we assist
clients with daily. Inside, you will
find stories about investing, estate
planning, taxes, retirement planning,
and insurance.
We are committed to educating
and informing you about what is
happening in the financial
marketplace and how it relates to
your financial situation. Hopefully,
these articles will give you ideas
and solutions to think about in
establishing a well-planned course
to achieve your goals.
We welcome the opportunity to
speak with you about this newsletter.
If there is a topic that you would like
to see covered or if you have questions
about any of the articles; please do not
hesitate to call us. And if you have a
friend who would enjoy receiving the
newsletter, please tell us and we would
be happy to send them a copy. We are
excited about this publication and look
forward to any comments you may
have about it.
W
taking notice. Many professional investors
remain cautious, having been burned in
China’s boom of the early 1990s, which
went bust largely because of tight
government controls. Since then,
however, Beijing has moved from
socialism toward capitalism, says Richard
Gao of Matthews International Capital
Management, advisor to several Asian
mutual funds. While the political system
remains under single-party Communist
rule, a wave of privatization resulted in
several huge initial public offerings in
2006. The Bank of China’s IPO
in Hong Kong in midsummer 2006, for
example, raised $11 billion.
“Reforms in state-owned
enterprises, the banking sector,
and housing have made the
whole economy more efficient
and productive,” says Gao.
Against this backdrop, Zhiwu
Chen, professor of finance at Yale
University and a China expert, favors a
broad array of sectors including retail,
financial, travel, technology, energy, and
alternative energy. “The window of
opportunity is large,” he says. Despite
this, Chen warns investors to limit their
exposure, allocating only a small portion
of a portfolio to China.
One problem is China’s confusing
mix of share classes and rules of
ownership. Class A shares, traded
exclusively on exchanges in Shanghai and
Shenzhen, are mostly inaccessible to
foreign investors, who tend to own Class
H shares, listed in Hong Kong, or
American depositary receipts traded in
New York. Foreigners must pay a steep
premium on their shares.
(Continued on page 4)
W
Charitable Giving Through Insurance
T
he need for life insurance, once
obvious as a way to protect
your family, may decrease as
your wealth expands. But rather than
simply letting an old policy lapse, you
could redirect the benefits from your
heirs to a charity. Or you might want to
buy new life insurance to compensate
other beneficiaries for a
philanthropic gift that reduces
their inheritance. Here are
several potential strategies.
Changing beneficiaries.
This is the simplest way
to go, and it lets you call
the whole thing off if
you change your mind.
But merely making a charity the
beneficiary of an existing policy has
several limitations. You don’t get any
tax benefit while you’re alive, and the
nonprofit you’re supporting also
doesn’t gain until your death.
Moreover, because you continue to
own the policy, the proceeds will be
potentially taxable as part of your
estate, though your heirs should be
able to deduct the value of the
charitable gift.
Giving away existing insurance.
This can work whether you have a
term or whole-life policy, though the
pros and cons vary by type of
insurance. In either case, the basic
strategy is the same. You transfer
ownership of a policy to a charitable
organization, which can then name
itself as beneficiary. With term
insurance, this gift has little or no
current value, greatly limiting your
charitable deduction. But if you choose
to keep paying the
premiums,
you can
deduct
the
amount
you give each
year, and
assuming the
policy remains
in force,
the charity
gets the death
benefit. The gift
of a whole life
policy, in
contrast, will
earn you an
immediate
deduction
for the
insurance’s
current cash
surrender
value, which
could be substantial. In addition,
you could take responsibility for
future premium payments, thus
earning ongoing annual deductions.
Meanwhile, your chosen philanthropy
benefits from greater flexibility than
it would have if it had received a
term policy. It owns an asset it could
choose to cash in at any point, or
it might be able to borrow against
the policy.
Buying new insurance to offset
a gift. Suppose you’d like to make a
big charitable gift during your
lifetime—say, to endow a chair at
your alma mater. The president of the
college will be your new best friend,
and you’ll get a major charitable
deduction, subject to IRS limits, for
the value of the cash or securities
you gave away. But to make sure
your other heirs are none the poorer
for your philanthropic splash, you
could purchase a new life policy
equal in value to the assets you gave
away. And if you place the new
insurance in an irrevocable life
insurance trust, the proceeds won’t be
subject to estate tax.
There could be several creative
variations on these basic themes—for
example, creating a charitable
remainder trust that pays you a lifetime annuity you use to fund an
insurance policy for your heirs. We
can work with you and your attorney
to craft a philanthropic plan that fits
your needs. ●
Why A Financial Plan Can Make You Happy
R
emember what it felt like to get
that first-ever paycheck? What
about the first time you made a
tidy profit on a well-chosen stock?
Chances are you don’t get the same kick
today. When you’ve gotten accustomed
to success and having money becomes
old hat, it may hinder your happiness
and satisfaction, say psychologists and
economists. A well-thought-out
financial plan can help.
“The key to being happy isn’t how
much you earn,” said George Lowenstein,
an economist at Carnegie Mellon
University. “Happiness comes from
gaining control over your finances and
figuring out what to do with your money.”
Several studies during the past five
years confirm that you can’t put a price
on happiness:
● The same level of personal
happiness was experienced by the very
wealthy individuals on the Forbes 400 list
and by members of Kenya’s Maasai tribe,
a herding people without electricity or
running water, according to a University
of Illinois study.*
● In a University of Michigan survey,
lottery winners and inheritors of sudden
wealth had similar experiences. Within
a few months or years, all that extra
cash lost its ability to boost
overall contentment.*
● In numerous reports, psychologists
have found that gains in wealth often
leave us feeling we’re getting nowhere—
because even though we have more, we’re
not gaining on our peers.
● Six-figure earners are no happier
than those who make $50,000, according
to a survey by economists at the
University of Chicago. For those who
were surveyed, once basic needs were
met, additional assets didn’t result in
greater contentment. And greater access to
luxuries only fueled the need for more and
more and heightened peer competition.
Yet even if money can’t buy
happiness, few of us would turn down the
chance to increase our bottom lines. So
exactly what are we seeking? “It's
physically impossible for a piece of paper
like money to make you happy,” writes
career coach Pamela York Klainer in her
book, How Much Is Enough? Harness the
Power of Your Money Story. “Instead,
what makes people happy is the feeling of
security money brings.”
How secure your wealth makes you
feel depends in part on how you use it.
Economists at Harvard University have
found that income accounts for only 1%
of happiness; health, family, and community rank far higher in helping make us
happy. Yet when you combine income
with those values, income rises on the
scale. That’s where a financial plan comes
in. Ideally, it will help integrate money
with values.
To succeed in providing a road map
As Exchange Traded Funds Become More Sophisticated
Managing Them Requires More Care
n their early incarnations, exchangetraded funds (ETFs) were the soul
of simplicity. Like index mutual
funds, ETFs typically track market
benchmarks, giving self-directed
investors a low-cost way to achieve
returns in line with the performance of,
say, the Standard & Poor’s 500 stock
index. Yet an ETF built around a broad
index is usually more tax efficient and
has lower expenses than a similar index
mutual fund; moreover, because ETFs
trade like stocks, they can be bought or
sold whenever markets are open. As
more ETFs become available, however,
they’ve become increasingly complex
and expensive, making it more difficult
expense ratios for some new ETFs are 70
basis points (0.7%) or more, compared
with less than 10 basis points for many
broad-market ETFs. And ETFs bring
another cost—trading commissions. The
smaller your investment in a particular
ETF—and by their nature, specialty ETFs
should make up only a sliver of your
overall portfolio—the more significant
trading costs become.
These caveats don’t mean a
particular specialty ETF doesn’t deserve a
place in your portfolio. Depending on
your goals, risk tolerance, and timetable,
using an ETF to invest in, say, private
equity might be appropriate. Money is
flooding into private companies, and
I
to integrate them into a portfolio.
Much of the problem involves socalled specialty ETFs based on newly
designed or exotic indices. Typically, an
ETF packager will come up with specific
screening criteria—to be included in an
index, for example, a stock might need to
pay dividends or meet certain
capitalization requirements. In launching
the new fund, the investment company
will present the results of “back-testing”
showing that such an index would have
had an outstanding record during a
specified historical period. While in
some cases that may continue to be a
winning formula, great (and theoretical)
past performance could also reflect
developments unlikely to be repeated.
Some indices may be too narrow or
esoteric to serve as the source of a stable,
well-diversified ETF. One private equity
ETF, for example, is based on an index
with less than three dozen components—
a far cry from the hundreds in the S&P or
another broad-based, well-established
benchmark. And low trading volume of
relatively illiquid shares can lead to wide
spreads between the bid and asking price
of an underlying security in the ETF and
to performance that deviates significantly
from the index.
Meanwhile, creating specialty
indices and finding component
companies can be costly, and annual
because private equity tends not to track
the performance of public markets,
adding this asset class to a portfolio
could enhance diversification. But
making a call on a specialty ETF means
considering many factors about the fund
and your portfolio.
It’s wise to understand an ETF’s
investment objectives, risks, and
expenses before you invest, and to read
the fund’s prospectus. We’re here to help
you make sense of all this, provide you
prospectuses and give any you
information you need to understand these
increasingly complex instruments and
our recommendations about how to use
them in your portfolio. ●
to happiness, however, a financial plan
must do far more than specify asset
allocations, explains George Kinder in
his book, The Seven Stages of Money
Maturity. An effective plan should help
shape your success according to your
short- and long-term goals and personal
values. In addition, because it’s tailored
to your individual needs, a plan can
mitigate the extent to which you feel
you must measure yourself against
your peers.
For example, if you want to travel
during retirement and provide your kids
with a good education, you can develop
a plan structured to maximize college
and retirement savings opportunities.
Similarly, if you feel strongly about certain causes or institutions in your community, you can put together a carefully
structured charitable giving plan. Consider a lottery winner who donates some
of his windfall to charity —he or she will
likely feel greater long-term satisfaction
than someone who uses the entire
winnings to finance personal luxuries.
“We’re now realizing that we have
been too focused on the financial aspects
of decision-making rather than the
emotional ones,” says Stephen Butler,
president of Pension Dynamics
Corporation, a California-based pension
consulting firm. “Understanding
emotions may represent a far greater
contribution to the well-being of those
preparing for, or enjoying, retirement.”
Of course, you have worked
extraordinarily hard to achieve success
and deserve to treat yourself to a
spontaneous shopping spree or luxurious
vacation every now and then. But when
everything happens in the context of a
well-considered financial plan, you’ll
feel better about those special “occasions
of consumption,” as economists call
them—and that can elevate overall
contentment and satisfaction.
Come in to talk with us about
your hopes and dreams. Together we
can create a financial road map to
help achieve them so you can enjoy
happiness and fulfillment. ●
*The University studies cited in this article used a similar
equation to measure happiness: Happiness = reality –
expectation. Generally, respondents were asked to rate
satisfaction and success in certain aspects of their lives
on a numerical scale.
Charitable Giving Through Insurance
T
he need for life insurance, once
obvious as a way to protect
your family, may decrease as
your wealth expands. But rather than
simply letting an old policy lapse, you
could redirect the benefits from your
heirs to a charity. Or you might want to
buy new life insurance to compensate
other beneficiaries for a
philanthropic gift that reduces
their inheritance. Here are
several potential strategies.
Changing beneficiaries.
This is the simplest way
to go, and it lets you call
the whole thing off if
you change your mind.
But merely making a charity the
beneficiary of an existing policy has
several limitations. You don’t get any
tax benefit while you’re alive, and the
nonprofit you’re supporting also
doesn’t gain until your death.
Moreover, because you continue to
own the policy, the proceeds will be
potentially taxable as part of your
estate, though your heirs should be
able to deduct the value of the
charitable gift.
Giving away existing insurance.
This can work whether you have a
term or whole-life policy, though the
pros and cons vary by type of
insurance. In either case, the basic
strategy is the same. You transfer
ownership of a policy to a charitable
organization, which can then name
itself as beneficiary. With term
insurance, this gift has little or no
current value, greatly limiting your
charitable deduction. But if you choose
to keep paying the
premiums,
you can
deduct
the
amount
you give each
year, and
assuming the
policy remains
in force,
the charity
gets the death
benefit. The gift
of a whole life
policy, in
contrast, will
earn you an
immediate
deduction
for the
insurance’s
current cash
surrender
value, which
could be substantial. In addition,
you could take responsibility for
future premium payments, thus
earning ongoing annual deductions.
Meanwhile, your chosen philanthropy
benefits from greater flexibility than
it would have if it had received a
term policy. It owns an asset it could
choose to cash in at any point, or
it might be able to borrow against
the policy.
Buying new insurance to offset
a gift. Suppose you’d like to make a
big charitable gift during your
lifetime—say, to endow a chair at
your alma mater. The president of the
college will be your new best friend,
and you’ll get a major charitable
deduction, subject to IRS limits, for
the value of the cash or securities
you gave away. But to make sure
your other heirs are none the poorer
for your philanthropic splash, you
could purchase a new life policy
equal in value to the assets you gave
away. And if you place the new
insurance in an irrevocable life
insurance trust, the proceeds won’t be
subject to estate tax.
There could be several creative
variations on these basic themes—for
example, creating a charitable
remainder trust that pays you a lifetime annuity you use to fund an
insurance policy for your heirs. We
can work with you and your attorney
to craft a philanthropic plan that fits
your needs. ●
Why A Financial Plan Can Make You Happy
R
emember what it felt like to get
that first-ever paycheck? What
about the first time you made a
tidy profit on a well-chosen stock?
Chances are you don’t get the same kick
today. When you’ve gotten accustomed
to success and having money becomes
old hat, it may hinder your happiness
and satisfaction, say psychologists and
economists. A well-thought-out
financial plan can help.
“The key to being happy isn’t how
much you earn,” said George Lowenstein,
an economist at Carnegie Mellon
University. “Happiness comes from
gaining control over your finances and
figuring out what to do with your money.”
Several studies during the past five
years confirm that you can’t put a price
on happiness:
● The same level of personal
happiness was experienced by the very
wealthy individuals on the Forbes 400 list
and by members of Kenya’s Maasai tribe,
a herding people without electricity or
running water, according to a University
of Illinois study.*
● In a University of Michigan survey,
lottery winners and inheritors of sudden
wealth had similar experiences. Within
a few months or years, all that extra
cash lost its ability to boost
overall contentment.*
● In numerous reports, psychologists
have found that gains in wealth often
leave us feeling we’re getting nowhere—
because even though we have more, we’re
not gaining on our peers.
● Six-figure earners are no happier
than those who make $50,000, according
to a survey by economists at the
University of Chicago. For those who
were surveyed, once basic needs were
met, additional assets didn’t result in
greater contentment. And greater access to
luxuries only fueled the need for more and
more and heightened peer competition.
Yet even if money can’t buy
happiness, few of us would turn down the
chance to increase our bottom lines. So
exactly what are we seeking? “It's
physically impossible for a piece of paper
like money to make you happy,” writes
career coach Pamela York Klainer in her
book, How Much Is Enough? Harness the
Power of Your Money Story. “Instead,
what makes people happy is the feeling of
security money brings.”
How secure your wealth makes you
feel depends in part on how you use it.
Economists at Harvard University have
found that income accounts for only 1%
of happiness; health, family, and community rank far higher in helping make us
happy. Yet when you combine income
with those values, income rises on the
scale. That’s where a financial plan comes
in. Ideally, it will help integrate money
with values.
To succeed in providing a road map
As Exchange Traded Funds Become More Sophisticated
Managing Them Requires More Care
n their early incarnations, exchangetraded funds (ETFs) were the soul
of simplicity. Like index mutual
funds, ETFs typically track market
benchmarks, giving self-directed
investors a low-cost way to achieve
returns in line with the performance of,
say, the Standard & Poor’s 500 stock
index. Yet an ETF built around a broad
index is usually more tax efficient and
has lower expenses than a similar index
mutual fund; moreover, because ETFs
trade like stocks, they can be bought or
sold whenever markets are open. As
more ETFs become available, however,
they’ve become increasingly complex
and expensive, making it more difficult
expense ratios for some new ETFs are 70
basis points (0.7%) or more, compared
with less than 10 basis points for many
broad-market ETFs. And ETFs bring
another cost—trading commissions. The
smaller your investment in a particular
ETF—and by their nature, specialty ETFs
should make up only a sliver of your
overall portfolio—the more significant
trading costs become.
These caveats don’t mean a
particular specialty ETF doesn’t deserve a
place in your portfolio. Depending on
your goals, risk tolerance, and timetable,
using an ETF to invest in, say, private
equity might be appropriate. Money is
flooding into private companies, and
I
to integrate them into a portfolio.
Much of the problem involves socalled specialty ETFs based on newly
designed or exotic indices. Typically, an
ETF packager will come up with specific
screening criteria—to be included in an
index, for example, a stock might need to
pay dividends or meet certain
capitalization requirements. In launching
the new fund, the investment company
will present the results of “back-testing”
showing that such an index would have
had an outstanding record during a
specified historical period. While in
some cases that may continue to be a
winning formula, great (and theoretical)
past performance could also reflect
developments unlikely to be repeated.
Some indices may be too narrow or
esoteric to serve as the source of a stable,
well-diversified ETF. One private equity
ETF, for example, is based on an index
with less than three dozen components—
a far cry from the hundreds in the S&P or
another broad-based, well-established
benchmark. And low trading volume of
relatively illiquid shares can lead to wide
spreads between the bid and asking price
of an underlying security in the ETF and
to performance that deviates significantly
from the index.
Meanwhile, creating specialty
indices and finding component
companies can be costly, and annual
because private equity tends not to track
the performance of public markets,
adding this asset class to a portfolio
could enhance diversification. But
making a call on a specialty ETF means
considering many factors about the fund
and your portfolio.
It’s wise to understand an ETF’s
investment objectives, risks, and
expenses before you invest, and to read
the fund’s prospectus. We’re here to help
you make sense of all this, provide you
prospectuses and give any you
information you need to understand these
increasingly complex instruments and
our recommendations about how to use
them in your portfolio. ●
to happiness, however, a financial plan
must do far more than specify asset
allocations, explains George Kinder in
his book, The Seven Stages of Money
Maturity. An effective plan should help
shape your success according to your
short- and long-term goals and personal
values. In addition, because it’s tailored
to your individual needs, a plan can
mitigate the extent to which you feel
you must measure yourself against
your peers.
For example, if you want to travel
during retirement and provide your kids
with a good education, you can develop
a plan structured to maximize college
and retirement savings opportunities.
Similarly, if you feel strongly about certain causes or institutions in your community, you can put together a carefully
structured charitable giving plan. Consider a lottery winner who donates some
of his windfall to charity —he or she will
likely feel greater long-term satisfaction
than someone who uses the entire
winnings to finance personal luxuries.
“We’re now realizing that we have
been too focused on the financial aspects
of decision-making rather than the
emotional ones,” says Stephen Butler,
president of Pension Dynamics
Corporation, a California-based pension
consulting firm. “Understanding
emotions may represent a far greater
contribution to the well-being of those
preparing for, or enjoying, retirement.”
Of course, you have worked
extraordinarily hard to achieve success
and deserve to treat yourself to a
spontaneous shopping spree or luxurious
vacation every now and then. But when
everything happens in the context of a
well-considered financial plan, you’ll
feel better about those special “occasions
of consumption,” as economists call
them—and that can elevate overall
contentment and satisfaction.
Come in to talk with us about
your hopes and dreams. Together we
can create a financial road map to
help achieve them so you can enjoy
happiness and fulfillment. ●
*The University studies cited in this article used a similar
equation to measure happiness: Happiness = reality –
expectation. Generally, respondents were asked to rate
satisfaction and success in certain aspects of their lives
on a numerical scale.
Issue 1
When Should You Change Your Asset Allocations?
W
hen you’re stuck in traffic,
do you ever switch lanes
only to feel that the longer,
slower lane you just left speeds up?
When you change how you divide
up assets in your portfolio, you may
end up with the same result. For
example, if you fuel-up on energy
stocks, among the most coveted
shares in early 2006, and sell your
stock in lagging airline companies,
you could theoretically be doing it
just when oil prices are on the brink
of an unexpected dip and tourism
makes a comeback.
No one can reliably predict
which asset class will move up or
down, so it’s better not to tinker
too much with your portfolio.
Instead, diversifying long-term
investments over a broad range of
asset classes—the equivalent of
driving in multiple highway lanes
simultaneously—is a good solution
for riding out market fluctuations.
Still, there are times changing
your asset allocation is prudent. Here
are several:
Life events. If you lose your
spouse, sustain a disabling injury, or
go through some other life event,
you may need to adjust your
portfolio. A retiree living off
investment income, for instance, is
likely to need less income after a
spouse dies, and that might permit a
larger commitment to stocks. Or, if
you must retire five years earlier
than you expected due to a disability,
you could consider lightening up on
speculative assets.
What’s happening in your
family can also influence your asset
allocation. Suppose your daughter
is in the midst of a complicated
divorce and comes home with
your two grandchildren to live with
you. Suddenly, you find yourself
helping to support three additional
family members. Income, rather than
capital appreciation from equities,
may become more important.
Getting divorced yourself or
receiving an inheritance are two
other examples of family matters
that may affect your personal
investment policy.
Goal adjustments. As you come
closer to achieving certain financial
goals, you might consider reducing
risk in your portfolio. Getting ready
to retire or buy a house may mean
reducing your allocation to stocks
in favor of safer, fixed-income
investments. Similarly, if you’re
saving for your son’s college
education, you may want to scale
back your commitment to equities as
he nears college age.
Judgement calls. Even if you
work in an industry and feel you
have special insight into stocks,
talk to us before allocating an extra
amount to that sector. The same
holds true in the event that an asset
class is a bargain compared to
historical norms. Using careful
judgement in such cases to make
an extra allocation to an asset class
is prudent.
While your portfolio should be
rebalanced periodically so that you
scale back on assets that have risen
sharply in value and buy more of
those that have dipped, sticking with
an investment plan for the long haul
can be the ticket to getting rich
slowly. We’d be glad to review your
portfolio with you to ensure it’s
well-suited to your objectives. ●
Investing In China
according to Morningstar. But only a
dozen or so funds focus exclusively on
China or invest more than 10% of assets in
Chinese holdings, mostly because risks are
great and the pickings slim, says
Morningstar’s Dutta. “There just aren’t
that many Chinese stocks a fund could
own, because of restrictions on foreign
ownership and the difficulty of conducting
adequate due diligence,” he says.
Rather than investing in a fund that
holds only Chinese stocks, it may make
more sense to buy a diversified emerging
markets fund, whose manager isn’t
restricted to Chinese companies. Placing a
small portion of a portfolio in emerging
markets stocks often is a sensible
approach. But you should expect setbacks
now and then.
The potential for political unrest is
likely to grow as China’s closed
Communist-controlled political system
increasingly comes under pressure to open
up. Meanwhile, with a banking system not
open to public scrutiny, corruption and
secretive corporate dealings are bound to
be exposed as this economic giant makes
its shift toward capitalism. Currency risk,
therefore, is another significant risk.
Despite its risk, China remains an
intriguing market. But you’ll need a longterm perspective and strong stomach when
your investment tumbles, as it is likely to
do from time to time. ●
(Continued from page 1)
The Communist government
maintains majority interests in most
Chinese companies, and “minority
shareholders’ rights are not always a
priority,” says Gao. Chen says Chinese
companies still have a long way to go in
terms of improving corporate governance
and disclosure, as well as abiding by
international laws and accounting
standards. “Transparency is key for foreign
investors,” Chen says. “And transparency
for the most part is lacking in China.”
Still, with one-fifth of the world’s
population being Chinese and the rapid
growth of the economy, this is not a market
to be ignored. More than 1,100 U.S.-based
mutual funds, out of a universe of some
6,500, have exposure to Chinese assets,
©2007 API
* The MSCI China Index is an unmanaged index of
Chinese stocks only available to foreign investors,
and the Hang Seng index is an unmanaged index
comprised of stocks representing the 33 largest
companies in China. You cannot invest directly in an
index. Your return in an investment that attempts to
mimic an index’s performance may be worse than
an index’s.
Before making any investments in a mutual fund or
ETF, always read the fund’s prospectus, which can
be obtained by calling our office or from the fund
company directly.
Investing In China: Weigh
The Risk Against Rewards
Welcome To Our
New Quarterly
Newsletter!
ith the Chinese stock market
plummeting 9% in a single day
this past February, is it time for
bargain hunting? Maybe, but proceed with
caution. China, as it has always been, is
intriguing but shadowy, alluring but risky.
“China’s economic fundamentals are
tremendous,” says Arijit Dutta, a mutual
fund analyst at Morningstar, the Chicagobased research firm. However, making
money from China’s surge requires
judgment, caution, and a limitation on
what you’ll put at risk.
In 2006, China’s economy expanded
an astounding 10.7%, about
triple the rate of U.S.
economic growth. The
Hang Seng index—the
benchmark for Hong
Kong’s stock exchange—
soared, as did stock prices on
China’s two mainland exchanges,
where values nearly doubled in 2006,
according to the MSCI China Index.*
This performance suggested that, after
years of speculation and hope, China’s
potential as a global economic giant was
beginning to be realized.
China’s middle class, 150-million
to 200-million strong, still represents only
a fraction of the country’s total population
of 1.3 billion. But it’s expected to double
in size in the next five years, creating
more new consumers than the world
economy has ever seen from one country.
Already, China’s retail sales rank third in
the world behind only the U.S. and Japan.
And China is the globe’s fastest-growing
technology market, with record sales of
computers and cell phones. Spending
on homes, cars, and vacations is also
growing quickly.
The global investment community is
elcome to the first issue
of our new quarterly
newsletter, Wealth
Matters. This publication is another
way for Heritage Wealth Advisors to
keep you informed about topics
affecting your wealth.
This newsletter will explore a
broad range of financial planning
issues. It will focus on some of the
most interesting problems we assist
clients with daily. Inside, you will
find stories about investing, estate
planning, taxes, retirement planning,
and insurance.
We are committed to educating
and informing you about what is
happening in the financial
marketplace and how it relates to
your financial situation. Hopefully,
these articles will give you ideas
and solutions to think about in
establishing a well-planned course
to achieve your goals.
We welcome the opportunity to
speak with you about this newsletter.
If there is a topic that you would like
to see covered or if you have questions
about any of the articles; please do not
hesitate to call us. And if you have a
friend who would enjoy receiving the
newsletter, please tell us and we would
be happy to send them a copy. We are
excited about this publication and look
forward to any comments you may
have about it.
W
taking notice. Many professional investors
remain cautious, having been burned in
China’s boom of the early 1990s, which
went bust largely because of tight
government controls. Since then,
however, Beijing has moved from
socialism toward capitalism, says Richard
Gao of Matthews International Capital
Management, advisor to several Asian
mutual funds. While the political system
remains under single-party Communist
rule, a wave of privatization resulted in
several huge initial public offerings in
2006. The Bank of China’s IPO
in Hong Kong in midsummer 2006, for
example, raised $11 billion.
“Reforms in state-owned
enterprises, the banking sector,
and housing have made the
whole economy more efficient
and productive,” says Gao.
Against this backdrop, Zhiwu
Chen, professor of finance at Yale
University and a China expert, favors a
broad array of sectors including retail,
financial, travel, technology, energy, and
alternative energy. “The window of
opportunity is large,” he says. Despite
this, Chen warns investors to limit their
exposure, allocating only a small portion
of a portfolio to China.
One problem is China’s confusing
mix of share classes and rules of
ownership. Class A shares, traded
exclusively on exchanges in Shanghai and
Shenzhen, are mostly inaccessible to
foreign investors, who tend to own Class
H shares, listed in Hong Kong, or
American depositary receipts traded in
New York. Foreigners must pay a steep
premium on their shares.
(Continued on page 4)
W