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Portfolio > Mutual Funds

Time To Get Back In The Game?

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For investors who bailed out of the stock market when it started its two-and-a-half-year decline, now might be the right time to hop back in, according to financial advisors interviewed by National Underwriter.

During the last 12 months, the S&P 500 Index has risen by 12.49%.

Investors “should never have stopped looking at” stock mutual funds and stock sub accounts in variable annuities, says Stephan Cassaday, a certified financial planner with Cassaday & Company Inc., McLean, Va., a fee-based planning firm.

Of $360 million his company manages, roughly 80% is invested in stock and bond mutual funds, Cassaday says.

Clients should be in stock funds and, depending on tax bracket and other considerations, should conceivably hold sizable positions, says Phil Cook, a CFP with Cook & Associates, Torrance, Calif.

“The time to buy is when stocks are cheap,” he says, adding that stock investments through stock funds and stock sub accounts are now “cheap compared to what they were and, more importantly, to what they will be.”

And, compared to what other investment options are returning, Cook adds, stock accounts look good. For example, he says bonds are not providing the returns that match the risk a client is assuming; REITs will not be earning the returns they have been; and bank and CD accounts are offering insufficient returns.

For the client who wants to be invested in the stock market, Cook says he would recommend overweighting in small and mid-cap stocks because these sectors lead the market in an economic recovery.

An investment in a VA could be right for a client who is 45 or older, he says. For older investors, Cook recommends considering fixed sub accounts as well as stock sub accounts.

For younger investors, a VA could be an option if there is a good amount of accessible cash available and money will not have to be withdrawn, triggering surrender charges, he adds.

But for advisors to recommend a stock VA sub account over a stock mutual fund, “there has got to be a sure fit” because of the VAs higher compensation rates, Cook emphasizes.

In general, people probably should have never left the market, says Joseph Sciabica, a certified financial planner with Guardian Life Insurance Company, New York.

However, Sciabica qualifies that position with a caveat: A client has to be comfortable investing in stocks.

Sciabica tells the story of a 45-year-old teacher he was working with who recently came into a sizable sum of money and said he was most comfortable investing where he had safety even if it meant earning only 4-5% annually over the next 20 years.

When clients are amenable to investing in the stock market, Sciabica says he usually uses mutual funds rather than variable annuities because although the VA offers tax deferral, new tax laws for dividends and capital gains make mutual funds appealing.

The VA deferred rate can be as high as the marginal tax rate which can be 37% for the highest tax bracket, says Sciabica. For dividends and capital gains, the rate is between 15-20%, he says.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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