Psychologists have found that most people won’t pay more than $20 to play the game given the risk of getting heads in the first few tosses, despite the potential for extraordinary winnings as the game progresses (you win $537 million on the 30th toss). Buying into the Facebook IPO is similar to playing this coin toss game in the sense that the potential payoff is enormous but the game (or continued success, in the case of the company) could end soon. Even the fastest-growing companies can experience reversals in their stock prices in a short period of time, e.g. the 8% one-day drop in Amazon stock last week following their earnings announcement.

At the high end of the price range indicated in the prospectus, Facebook would be valued at $100 billion at IPO. In comparison, another technology high-flier, Google, is currently valued at $190 billion (8 years after its IPO). If Facebook’s valuation increased to $190 billion over the next 10 years, the shares would deliver a 90% cumulative gain or an average annual return of just 6.8%. In other words, the high current valuation limits the long-term potential upside. While investors in Facebook’s IPO could reap rich rewards, the odds would be more in their favor if the initial valuation of the stock were lower. Read more…

• Starting in the 2011 tax year, custodians will report cost basis to the IRS relating to the sale of equities purchased on or after January 1, 2011.

• For the calendar year 2012, custodians are mandated to expand reporting to include sales of mutual funds, exchange-traded funds (ETFs), and dividend reinvestment plans (DRIPs) purchased on or after January 1, 2012.

• For the 2013 tax year, the reporting will include the sale of fixed income securities purchased on or after January 1, 2013.

These changes will impact investors’ tax return filings with new forms and requirements. Schwab has provided resources regarding changes to their revised 1099 Composites: FAQs regarding the new 1099 and a sample 1099 Composite.

Dimensional Fund Advisors (DFA) has recently written an article examining just this question. Their data analysts crunched the numbers and found that over a longer period (May 1982 to October 2011), Value Trust actually underperformed its benchmark by 0.08% per month. More importantly, DFA’s analysis shows that neither the shorter period of outperformance, nor the longer period of underperformance, is statistically significant. So, even twenty-nine years of data is not sufficient to establish active manager skill or lack thereof.

What does this mean for the individual investor? Our conclusion is that investors are better off buying broadly-diversified, index-type funds that capture asset class returns at a lower expense ratio than more expensive, actively-managed funds which offer no proof of superior performance. This is precisely the approach espoused by Dowling &Yahnke since our inception. We build well-diversified investment portfolios for our clients at a low cost and in a tax-efficient manner, using a combination of individual securities and low-expense, no-load funds. This is a proven approach for achieving long-term investment success.

Please click here to read the full DFA article.

Dale Yahnke is currently being featured in a public awareness campaign regarding the RIA industry. The multimedia campaign, entitled “RIA Stands for You,” was created and funded by Charles Schwab & Co., Inc. (Schwab). The goal of the campaign is to clarify and distinguish the role of registered investment advisors within the financial services industry. Read more about the RIA Stands for You campaign at RIA Stands for You.

What would compel anyone to rappel down a 33-story high-rise building?  Answer:  a great cause such as Kids Included Together.  Dowling & Yahnke’s executive assistant, Lauren accepted the challenge.  The professionals strapped her into the harness and had her test it on the stairwell.  Then she took the elevator to the 34^th floor and prepared to rappel down the side of the building.  The descent to the ground did not take long, but the view of downtown San Diego leaves you wanting to hang around.

The crowd below was entertained with activities as they cheered for each rappeller.  The crowd gave extra encouragement and support to rappellers with disabilities who were assisted by professional rappellers.  The joy was apparent in all the rappellers’ faces as they completed their descent and touched the ground.  Dowling & Yahnke is grateful to be a part of such a successful event.

Dowling & Yahnke proudly supports numerous organizations in San Diego and recently went “Over the Edge” with Kids Included Together (KIT).  KIT is a non-profit organization committed to children with disabilities.

Click here to view the article in its entirety

Markets can be volatile.  In recent memory, we have seen many periods of similar volatility: Black Monday in 1987 (a 22.6% drop in the Dow Jones Industrial Average in one day), the tech wreck of the early 2000s, the 9/11 terrorist attacks, and the global financial crisis of 2008-2009.  Short-term fluctuations are often driven by behavioral tendencies:  selling risky assets when bad news or uncertainty prevails and buying risky assets when confidence abounds.  This maxim has rung true in each of these historical periods, as well as, we believe, over the last week.  It is in these periods, however, that investors benefit most from a long-term perspective, resisting the urge to react emotionally, and instead focusing on the four pillars of successful investing:  diversification, low costs, tax efficiency, and discipline.  We encourage our clients to continue to embrace this long-term perspective during these periods of volatility.

An allocation to bonds proved beneficial over the trading week following the debt ceiling deal, from August 2^nd through August 8^th, with all major segments of the bond market (municipals, U.S. Treasuries, and global bonds) exhibiting positive returns.  Many of our clients have balanced portfolios with significant exposure to high-quality bonds.  The bond component of these portfolios functioned as designed in an adverse stock market.

We believe that stocks remain a compelling investment for those with a reasonably long time horizon.  The current consensus earnings estimate for the S&P 500 Index in 2011 is approximately $96. The S&P 500 Index closed on August 8, 2011, at 1119, equating to a price/earnings (P/E) multiple of 11.7, well below the historical average of 16.4.  This low valuation exists despite healthy corporate profits, buoyed by strong international sales, trimmed payrolls with little wage pressure, and cost efficiencies.  Corporate balance sheets contain over $1 trillion in cash reserves.  Companies can potentially use this trove of cash to repurchase stock, raise dividends, make acquisitions, and/or expand operations, all of which have the potential to increase shareholder value.  From an income standpoint, the S&P 500 dividend yield stands at 2.3%, compared to the 10 year U.S. Treasury yield of 2.3%, based on data at the close of trading on August 8, 2011.  On a fundamental and relative basis, stocks remain attractive and will likely reward investors who hold them at current levels.

A natural inclination at this moment might be to sell stocks and buy bonds, gold, or hold cash.  Unless short-term liquidity is needed, maintaining an allocation to stocks and resisting the desire to sell shares remains, in our opinion, the prudent thing to do.

We have been monitoring the developments in Washington very closely. The final outcome of this process is likely to have an impact on portfolios, but it is impossible to determine whether that impact will be positive, negative, or neutral. What is important is to have a well-diversified investment portfolio with a risk profile that is aligned with your particular time horizon and ability to withstand volatility. Turbulence caused by singular events, be they Y2K, the Asian flu pandemic, 9/11, or the debt ceiling debate, has little bearing on your long-term investment experience. We fully acknowledge that this long-term perspective can be difficult to maintain in today’s world of nonstop news coverage from a multitude of outlets.

Like many of you, we have been watching this debate in recent days with a mixture of apprehension, frustration, and even outright anger at the seeming lack of leadership and inability to compromise among lawmakers. While an up-close glimpse into “how the sausage is made” in Washington is rarely a pretty sight, we are very encouraged by the new emphasis on fiscal discipline that Americans have demanded of their lawmakers. Much remains to be done, and a complete solution will in all likelihood need to consider additional tax revenue and cuts to entitlement spending (Social Security and Medicare). We hope and expect that the deal under consideration by Congress is just the start of this process, and that government will return to a more fiscally responsible course in the coming months and years. Part of our job is to help our clients learn to have reasonable expectations and to live within their means. It is time to expect the same of our government.

Perhaps the most difficult question is how much do I need to retire?  This is a difficult question because it doesn’t have a simple answer.  The answer varies from person to person depending on retirement spending needs and available post-retirement income.  Your needs may be completely different from those of your friends or neighbors.  One way to estimate your needs is to look at your current income.  The old rule of thumb was that you would need 80% of your pre-retirement income during retirement.  So, if you were earning $100,000 per year prior to retirement, you would need annual income of around $80,000 afterwards to maintain your lifestyle.  This old rule assumed you would need less income in retirement because you would have fewer expenses.  You would no longer have a mortgage, children to support, or commuting costs, for example.  The problem is that these are pretty broad assumptions.  Research shows that some people spend just as much, or even more, in retirement than they did while working.  They may travel extensively, buy a second home, take up an expensive hobby, or face a serious medical condition that significantly increases their health care expenses.  

Thus the 80% rule of thumb is just a starting point.  It is important to look at your unique circumstances in gauging your retirement spending needs.  What will your expenses look like? Will you pay off your mortgage prior to retirement?  Will you move to a cheaper place to live, downsize your home, or make any large purchases?  What is your life expectancy (how long does your money need to last)?  On the flip side of the coin, you also need to consider your sources of income once you are retired.  Will you receive a traditional pension?  What is your estimated Social Security benefit?  Do you expect to receive an inheritance?  How much have you saved for retirement in your taxable account, IRA or employer retirement savings plan?  Once you’ve tallied your expenses and expected income, you then have to account for inflation.  By comparing expected income with desired spending goals, you will get a good idea of how much, if any, your portfolio will have to supply in the way of annual post-retirement income. 

This may seem like a daunting task but your Dowling & Yahnke investment advisor can help guide you through the necessary steps and develop a plan that will meet your goals.  Depending on how close you are to your last paycheck, you may need to save more than you have been or you may need to reduce your retirement spending expectations.  We conduct a thorough retirement analysis for our clients to gauge where you are relative to your objectives and whether you need to make any adjustments to increase the probability of reaching your goals.   If you haven’t already taken this important step, let us create a retirement plan for you.