The following article by Adam Meyerson is taken from the Hillsdale College newsletter, Imprimus. The article is available as a pdf file, The Generosity of America.

Adam Meyerson has been president of The Philanthropy Roundtable since 2001. From 1993 to 2001, he was vice president for educational affairs at the Heritage Foundation. He served as editor-in-chief of Policy Review from 1983 to 1998, prior to which he was an editorial writer for the Wall Street Journal and managing editor of The American Spectator. Mr. Meyerson graduated summa cum laude from Yale University in 1974, and completed all requirements but the dissertation for a doctorate in international business from the Harvard Business School.

The following is adapted from a speech delivered in Washington, D.C., on January 8, 2010, in the “First Principles on First Fridays” lecture series sponsored by Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship.

In 1853, a professor and preacher named Ransom Dunn set off on a two-year journey to raise funds for Hillsdale College, a young institution of higher learning in southern Michigan. Ransom Dunn would ride on horseback for 6,000 miles through the farm communities of Michigan, Wisconsin and Minnesota, and altogether he raised $22,000—the equivalent of about $500,000 today. The rural families then populating the upper Midwest were not rich. They were braving the winters and struggling to make a living on what was then the American frontier. But these families were willing to part voluntarily with $10, $50, $100 apiece—the highest contribution was $200—to support Hillsdale’s mission—a mission set forth in the College’s Articles of Association, whose authors proclaimed themselves “grateful to God for the inestimable blessings resulting from the prevalence of civil and religious liberty and intelligent piety in the land, and believing that the diffusion of sound learning is essential to the perpetuity of these blessings.”

We can learn several lessons from the horseback rides of Ransom Dunn. To begin with, charitable giving in America has never been the exclusive province of wealthy people. Throughout our history, Americans from all walks of life have given generously for charitable causes. Indeed, the most generous Americans today—the group that gives the most to charity as a proportion of their income—are the working poor.

Second, unlike many of those seeking donations in the charity world today, Ransom Dunn did not raise funds for Hillsdale by appealing to donors’ guilt, or by urging them to “give back” to society. Instead, he appealed to their ideals and aspirations, their religious principles, and their desire to create an institution of learning in the upper Midwest. Hillsdale was also an important center of anti-slavery teaching, and Dunn appealed to the convictions of people who sought an end to this great evil in our nation.

Third, the tradition of private generosity in America has always been central to our free society. Voluntary donations from the farm families of the Midwest made it possible for Hillsdale to be independent, which in turn gave Hillsdale the freedom to challenge prevailing cultural and political wisdom. Following another private institution, Oberlin, Hillsdale was the second American college to grant four-year liberal-arts degrees to women. Founded at a time when Michigan public schools were officially segregated by race, Hillsdale was also the first American college to prohibit in its charter any discrimination on the basis of race, religion or sex. Without the independence that comes from private support, Hillsdale would not have been able to provide this leadership.

The creation of Hillsdale College was similarly part of a larger philanthropic movement to create an educated citizenry, with the character and the knowledge to govern themselves as a free people. In his book The Americans, the late Daniel Boorstin, former Librarian of Congress, wrote about the great age of college creation in the 19th century. Every town in our decentralized republic wanted its own college, both to promote economic opportunity and to encourage citizen leadership. Boorstin cites an amazing statistic: in 1880, the state of Ohio, with three million inhabitants, had 37 colleges; by contrast, England, with 23 million people, had four degree-granting institutions. It was philanthropy that enabled colleges across America to grow and flourish.

This tradition of private support for education has continued in the 20th and 21st centuries, even as government has assumed a much greater funding role through federal student loans and scholarships, scientific research grants, and state appropriations. The growth of the modern research university received an enormous boost from philanthropists such as Johns Hopkins, Leland Stanford, and James Buchanan Duke. Private support has continued to sustain Hillsdale’s independence by enabling it to forego state and federal government support altogether. Charitable giving has also helped to create entire new fields of academic study. We owe the field of law and economics to the John M. Olin Foundation. And the Whitaker Foundation launched the field of biomedical engineering, which has been so important in providing new limbs for the wounded veterans of Afghanistan and Iraq.

Today, Americans voluntarily give over $30 billion a year to support higher education, and—thanks in part to philanthropy—America has the best colleges and universities in the world. Even our great flagship state universities depend on private contributions for much of their excellence. The University of Virginia, for instance, receives more revenue from private gifts and endowment income than it does from Virginia state appropriations. And in a time of state budget cuts and the stifling impulse toward sameness that results from bureaucratic rules, public universities across the country rely on private contributions for many of their unique attributes and distinctive achievements.

I have dwelt at length on higher education, but I could offer similar remarks about museums and orchestras, hospitals and health clinics, churches and synagogues, refuges for animals, protection of habitat, youth programs such as scouting and little league and boys and girls clubs, and grassroots problem-solvers who help the needy and homeless in their neighborhoods. Private charitable giving sustains all of these institutions and gives them the freedom to make their own decisions.

Private charitable giving is also at the heart and soul of public discourse in our democracy. It makes possible our great think tanks, whether left, right or center. Name a great issue of public debate today: climate change, the role of government in health care, school choice, stem cell research, same-sex marriage. On all these issues, private philanthropy enriches debate by enabling organizations with diverse viewpoints to articulate and spread their message.

We usually hear about charity in the media when there is a terrible disaster. For example, after Hurricane Katrina, we heard about the incredible outpouring of private generosity that amounted to $6 billion. What gets less attention is that Americans routinely give that much to charity every week. Last year Americans gave $300 billion to charity. To put this into perspective, that is almost twice what we spent on consumer electronics equipment—equipment including cell phones, iPods and DVD players. Americans gave three times as much to charity last year as we spent on gambling and ten times as much as we spent on professional sports. America is by far the most charitable country in the world. There is no other country that comes close.

Reasons for Our Generosity

I would briefly like to discuss three reasons why America is the most charitable country on earth.

First, we are the most religious people of any leading modern economy. The single most important determinant of charitable giving is active religious faith and observance. Americans who attend church or synagogue or another form of worship once a week give three times as much to charity as a percentage of their income as do those who rarely attend religious services. One-third of all charitable giving in America—$100 billion a year—goes to religion. Whether we are Jewish, Protestant, Catholic, Mormon, Muslim, or some other faith, we Americans have the freedom to support our own religious institutions, and this philanthropic freedom has been intimately linked to our religious liberty. But the giving by regular religious worshippers is not limited to their own churches. They also give more to secular charities than do those who never or rarely attend religious services.

A second reason America is so charitable is because we respect the freedom and the ability of individuals, and associations of individuals, to make a difference. Americans don’t wait for government or the local nobleman to solve our problems; we find solutions ourselves. One of my favorite examples of this is the subject of a forthcoming Hollywood movie called The Little Red Wagon. In 2004, after Hurricane Charley, a six-year-old boy in the Tampa area named Zach Bonner wanted to help the families who had been left homeless. Pulling his little red wagon, Zach went door to door for four months and collected 27 truckloads of supplies, including tarps and water.

The third reason for our extraordinary charity is that philanthropy is such an important part of our nation’s business culture. Wealth creation and philanthropy have always gone together in America. They are reflections of the creativity and can-do spirit of a free society. From Benjamin Franklin, who founded the first volunteer fire department, to Andrew Carnegie, who brought public libraries to communities across America, to Bill Gates, who is seeking to eradicate malaria, great business entrepreneurs have sought to be great philanthropists. It’s not just because they have the money. It’s because they have the leadership and the passion to innovate and to build institutions, and the analytical skills to assess what works.

Let me give you three brief examples.

As many of us know from John Steinbeck’s The Grapes of Wrath, the exodus of homeless farm families from the Great Plains in the aftermath of the Dust Bowl was one of the largest migrations and human tragedies in our history. But thanks to the pioneering plant research and outreach to farmers by the Samuel Roberts Noble Foundation—founded by an oilman in Ardmore, Oklahoma—agriculture is thriving in Oklahoma today, and we don’t have dust bowls any more in the Great Plains.

When Tom Siebel sold software giant Siebel Systems to Oracle, he decided to apply his business and marketing skills to another cause—fighting the devastation of Crystal Meth. He created and financed the Montana Meth Project, and as a result teen Meth abuse in Montana has fallen by 63 percent in three years. Now philanthropists in other states are seeking to replicate these extraordinary results.

The late Don Fisher and his widow Doris were the philanthropic architects of the Knowledge is Power Program, which is a network of 80 schools across the country where low-income children excel. They were also the earliest large-scale supporters of Teach for America. Using the same principles that enabled them to build the Gap retail chain, the Fishers have built extraordinary philanthropic brands.
These philanthropic achievements have all been made possible by freedom. For over 200 years, Americans have enjoyed the freedom to decide where and how to give away their money—freedom to sustain cherished institutions or to create new ones. And this freedom to give has in turn been central to independent decision-making throughout our society.
Threats to American Philanthropy

But this freedom to give is now under serious threat. Let me mention three kinds of proposals coming from Capitol Hill, the IRS, state governments, and sometimes from the charitable sector itself, that should be of concern to all Americans.

The first threat comes in the form of one-size-fits-all governance and regulatory proposals that would limit the diversity and independence of the charitable world. In 2003, for instance, Eliot Spitzer, then Attorney General of New York, proposed a prohibition on foundations with less than $20 million in assets. His rationale was that there were too many foundations for regulatory authorities to monitor and police. In 2004, the staff of the Senate Finance Committee proposed that tax-exempt status for charities and foundations be renewed every five years and be contingent on accreditation. In 2007, a top IRS official gave a series of speeches proposing that the IRS evaluate the effectiveness and the governance of public charities and foundations. In 2008, the California State Assembly passed a bill requiring large foundations to disclose the racial, ethnic, and gender composition of their staffs and boards, as well as those of their vendors and grantees. And just two months ago, the Congressional Research Service published a report calling for a new oversight agency for charities and foundations.

The second threat is the increasingly common argument that foundation assets are “public money” and that decisions about grant-making are subject to political control. This argument was made most recently by a prominent member of Congress, Xavier Becerra. He referred to the tax-favored treatment of charitable giving as a “$32 billion earmark” and warned foundations that Congress has an obligation to ensure that philanthropic assets advance the public good.

The Philanthropy Roundtable recently published a monograph that took strong issue with this public money argument. It reviewed the legal history of tax-favored treatment for charitable giving, and it showed conclusively that foundations and other charitable organizations do not lose their private character when they benefit from favorable tax treatment. Moreover, as Chief Justice John Marshall wrote in 1819, in the case of Trustees of Dartmouth College v. Woodward, the grant of a state charter does not render a non-profit corporation and its assets subordinate to that state. Foundations and other charities do have public purposes, and state attorneys general do have the parens patriae power to enforce foundations’ adherence to their stated charitable purposes. But this does not mean that charitable organizations must serve the same ends as those of government or that government may unduly intrude in their governance and other decision-making.

A historic covenant has governed foundations—namely, that they must use their charitable assets for genuinely charitable purposes. Foundation trustees cannot use those assets to fund their daughters’ weddings, for instance, or their favorite political candidates. But so long as they use their assets for charitable purposes and follow some basic disclosure rules, foundations should have wide discretion to choose where to give their money and how to make their charitable contributions.

The third threat to the freedom of American philanthropy is in the form of proposals that would restrict what kind of giving is considered charitable. A growing number of such proposals, for instance, would limit the charitable deduction to direct help for racial minorities and low-income families and communities. Those are worthy purposes for charitable giving, but they are not the only worthy purposes. Americans of all races and income levels can benefit from giving to religious institutions, colleges and universities, hospitals and medical research, the arts, the environment, and many other causes that would not fall under some of the narrow definitions being proposed. Government should not be picking winners and losers in philanthropic giving. Americans should make their charitable decisions themselves.

*    *    *

The late Milton Friedman once wrote, “Freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. . . . Economic freedom is also an indispensable means toward the achievement of political freedom.” We can similarly say that freedom in philanthropic arrangements is an end in itself, but is also an indispensable means toward the achievement of political freedom.

Each of us should think about how we can make a difference with our own charitable contributions, following the examples of Zach Bonner with his little red wagon and the generous Midwestern farm families who helped to build Hillsdale College. And our federal and state governments, for their part, should respect and defend the freedom that is vital to the great American tradition of generous giving.

As you consider different strategies, remember the difference between expected and unexpected inflation. Asset prices already reflect the market’s expectations about future inflation, given all available information. Inflation may turn out to be worse than expected, and this risk of unexpected inflation is what some investors may want to manage.

Hedging vs. Total Return Strategies
Investors can prepare for unexpected inflation by following one of two basic strategies—

1. Hedging the immediate effects of inflation, or;
2. Earning a total return that outpaces inflation over time.

Hedging involves choosing assets whose value tends to rise with inflation. Although holding these assets may reduce the total return of a portfolio, the positive correlation with inflation can help an investor keep up with rising consumer prices, at least over the short term. (Correlation refers to the co-movement of asset returns. When two assets are positively correlated, their returns tend to move together; when negatively correlated, their returns are dissimilar.)

Candidates for hedging include retirees, fixed income investors, and others who would experience a diminished living standard during an inflationary period. These investors are willing to forfeit long-term growth potential for more immediate inflation protection.

In a total return strategy, an  you attempt to outpace inflation by holding assets that are expected to earn higher real (inflation-adjusted) returns. For this strategy to work you have to be willing to give up short-term inflation protection for an opportunity to grow real wealth. Younger investors are typically well suited for this strategy because they have many years until retirement and expect their earnings to advance faster than the inflation rate. As they save and invest for the future, they can accept more risk through greater exposure to higher-return assets, such as stocks.

To insulate a portfolio from unexpected inflation risk, you may employ some combination of stocks, short-term fixed income, and Treasury Inflation-Protected Securities (TIPS) with both strategies. Let’s consider each of these:

Stocks
Stocks have provided a positive inflation-adjusted return over the long term. From 1926 through 2008, the total US stock market, as measured by the CRSP 1-10 Index, outpaced inflation by an average of 6.16% per year.1 To achieve this higher expected real return in stocks, however, an investor had to accept more risk, as measured by greater volatility in returns, and endure some periods when stocks did not outpace inflation. As a result, stocks may be less effective for hedging short-term inflation and more suitable for investors who want to beat long-term inflation by earning a higher total return.

Some investors assume that high inflation leads to lower stock market performance, while low inflation fuels higher stock returns. In reality, inflation is just one of many factors driving stock performance. US market history since 1926 shows that nominal annual stock returns are unrelated to inflation.

Fixed Income (Bonds)
Higher inflation can hurt bondholders in two ways—through falling bond market values triggered by rising interest rates, and through erosion in the real value of interest payments and principal at maturity. This inflation exposure tends to impact the prices of long-term bonds more than those of short-term bonds, and investors can mitigate the effects of rising interest rates by holding shorter-term instruments.

Many types of investors may benefit from holding short-term bonds. When interest rates are climbing, a portfolio with shorter-term maturities enables an investor to more frequently roll over principal at a higher interest rate. This can help inflation-sensitive investors keep up with short-term inflation and enable total return investors to reduce portfolio volatility, which can lead to higher compounded returns and growth of real wealth.

Treasury Inflation-Protected Securities (TIPS)
Issued by the US government, TIPS are fixed income securities whose principal is adjusted to reflect changes in the Consumer Price Index (CPI). When the CPI rises, the principal increases, which results in higher interest payments. At maturity, you receive the greater of the inflation-adjusted or original principal. The inflation provision enables TIPS to preserve real purchasing power and hedge against unexpected inflation.

TIPS are generally a good short-term inflation hedge since principal is adjusted for changes in the CPI. They are also a good portfolio diversifier for some long-term investors due to their negative correlation with equities and relatively low correlation with most types of fixed income assets. TIPS were introduced in 1997, so these correlations are based on a relatively short sample period.

However, keep in mind that TIPS prices also have been affected by changes in real interest rates, so TIPS may not track inflation one-to-one in the short term or over longer periods of time. In fact, TIPS can lose market value if real interest rates increase.

Commodities
Commodity futures, as well as oil and gold (which is now being pitched on every TV channel on the dial), are perceived as effective inflation hedges because their returns are positively correlated with inflation. But commodities are more volatile than stocks, and their returns do not always rise with inflation because of this significant volatility. So adding these assets to a portfolio may increase real return volatility, which could offset the benefits of hedging.

You should also consider the economic argument against holding commodities. Unlike stocks, commodity futures do not generate earnings or create business value. They are essentially a speculative bet in which there is a winner and loser at the end of each trade. Moreover, a broad-based stock portfolio already has significant commodity exposure through ownership of companies involved in energy, mining, agriculture, natural resources, and refined products.

Summary
While the media have featured divergent opinions and theories about the effects of recent government actions on inflation, no one really knows how consumer prices will respond to the complex forces at work in the economy and markets. You should carefully review your financial circumstances and investment goals before making changes to your portfolio.

As you assess your exposure to a high-inflation scenario and form a strategy that reflects your financial goals and risk tolerance, consider that:

• Expected inflation is built into asset prices. In our view, markets efficiently integrate all known information into prices. Thus, current prices already reflect expectations of future inflation. Only unexpected news will affect the inflation outlook.

• Hedging unexpected inflation has a cost. Investments traditionally regarded as effective short-term inflation hedges have lower historical returns than stocks—and some have much higher volatility.

• Volatility matters. Evaluating assets solely on their ability to track inflation disregards the effect of volatility on returns and risk. Some assets that are positively correlated with inflation have large return variances, and adding these to a stock and bond portfolio may increase overall volatility.

Even with the prospect for higher inflation, investors who take a total return approach may be better served than those who choose assets based on correlation with the CPI. By choosing assets with higher expected long-term returns and maintaining broad diversification, investors can seek to grow real wealth and preserve the purchasing power of their dollars.

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Endnotes
1 Real return calculation:  (1+CRSP 1-10 Index return)/(1 + US CPI)-1. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca stock exchanges. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

Disclosures
Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics.

Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes.

CRSP is a non-profit center that also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26,500 stocks, both active and inactive. OTC bulletin board stocks are not included.

The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money.

Diversification neither assures a profit nor guarantees against loss in a declining market.

The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party.

by Bob Veres

All of a sudden, it seems like everybody in the financial planning world is talking about Roth IRAs and Roth conversions.  In fact, an article in Financial Planning magazine–one of the trade magazines in our world–recently proclaimed 2010 “The Year of the Roth.”

What’s the big deal?  Roth IRAs are interesting to professionals for several reasons.  With traditional IRAs (and qualified plans like 401(k)s), the money goes in untaxed, and you pay ordinary income taxes whenever you take money out of the account–which might be years in the future.  The Roth reverses this; your contribution is made with after-tax dollars, but then there’s no tax whenever the money is distributed.  If you believe, as many financial professionals do, that tax rates are going to go up in the future, then paying taxes now and eliminating future taxes provides a net gain.

It could get better.  Having money in a Roth account gives you a lot more control over your tax bracket in retirement.  For instance, you might take out just enough from your IRA distributions to fill the 15% bracket, and then take the rest of your living expenses out of your taxable accounts and Roth.  Another version of this kind of planning might help higher-income retirees avoid the brackets where Social Security income is taxed.

Another interesting thing about Roths is that, unlike traditional IRAs, they don’t have any minimum distribution requirements once you turn age 70 1/2.  So long as the money remains in the account, both Roths and traditional IRAs give you the benefits of tax deferral, which eliminates a significant drag on the growth of your money.  If you can afford to keep your money in the Roth account, and take retirement income from other sources, then the deferral can go on longer.

Alas, the Roth account will still be subject to estate taxes, and your heirs (not your spouse) will have to take required distributions each year once they inherit your Roth account.  But they won’t have to pay taxes on the distributions they receive–a nice additional gift for your children or grandchildren.

In the past, the only people who could set up a Roth IRA were those with less than $100,000 in taxable income, which eliminated a lot of the taxpayers who would benefit the most from all these features.  But now, as of January 1, anybody can open up a Roth IRA.  Most of the conversation in professional circles is about Roth conversions; that is, converting the money in your IRA to a Roth or taking a rollover distribution from a company retirement plan directly into a new Roth that you set up.

Should you do this?  Unfortunately, that’s a complicated question, since any money moving from a traditional retirement account to a Roth requires you to pay taxes on the money in the traditional account.  Some of that can be deferred; with any conversion that takes place in 2010, the tax obligation can be split between the 2011 and 2012 tax returns, which represents a (very) short-term loan from the IRS.  So professional advisors are looking at individual situations, looking for portfolio losses that can be used to offset the tax burden, projecting tax brackets over the next three years and a host of other issues, including how long each person will have the money in the Roth account, and where the money to pay the taxes will come from.  (If you have to pay the taxes out of the IRA, then you lose the value of future deferral–not good.)

Another issue is: Do we trust Congress to keep its promise not to tax Roth distributions in the future?  Few of us ever expected to pay taxes on Social Security payments.

Fortunately, the law allows for partial Roth conversions–moving some of the money over, rather than all of it–and also lets you reverse the conversion (professionals call it a recharacterization) any time before October 15 of the year after the conversion.  All of this means that the conversion decision, and the amount to convert, will probably be different for you than it is for the person next door, whose decision will be different from the family down the street.

Meanwhile, you have to wonder how alert are the people who write our tax laws.  Under the current rules, single persons earning more than $105,000, and joint filers over $167,000, are sternly prohibited from making a full contribution to their Roth account.  If you earn more than $120,000 (single) or $177,000 (joint), you’re forbidden to make them at all.

But…  People in these income brackets are perfectly free to make a traditional IRA contribution–and the law says they can immediately turn around and convert the money into a Roth account.  Does that make sense to you?

An article in the December 31 issue of the Wall Street Journal makes a point that many of us in the financial planning world have long suspected.  It says that the CGM Focus fund was the top performing mutual fund, by far, over the past ten years, generating an annualized return of more than 18% a year since January 1, 2000.

Now here’s the punchline: the average investor in this top-performing fund lost an average of 11% a year over the same ten year period.

How is it possible for investors to lose their shirts in a fund that posted outsized returns?

Most planning professionals know the fund’s manager, Ken Heebner, as a swing-for-the-fences investor, somebody prone to huge runups and equally scary drops.  A Chicago-based investment research firm called Morningstar–whose data is used by most financial advisors–calculated what is called the “dollar-weighted” return of the CGM Focus fund, which gives a picture of what investors in the fund actually experienced.  If you had bought and held Ken Heebner’s portfolio throughout the 2000s, you would indeed have received returns of 18% a year.  But the fund was so up and down that investors were alternately panicked and selling out or optimistic and crowding back in.

The article says the most dramatic example came after the fund was up 80% in 2007.  Investors flocked in, putting $2.6 billion into the CGM portfolio–just in time to catch its equally-dramatic 48% drop through the end of 2008.

There have been credible studies showing that the average investor underperforms the market, and this illustrates exactly how it happens.  Right after an investment generates strong returns, people tend to jump on the bandwagon–and then they experience the subsequent return to reality.  When an investment is struggling, people tend to abandon it, and miss out on its recovery.  Missing the upside and catching the downside, consistently, is human nature, perfectly understandable behavior.  But it inevitably leads to dismal investment results–as it did for the battered, unhappy, money-losing investors in the best-performing mutual fund of the 2000s.

Great, actually. The Emerging Markets asset class is the most volatile broad asset class there is. How was the performance last year when it seemed the whole world was going down the toilet during the first quarter? Here are the returns for four discreet Emerging Markets mutual funds from Dimensional Fund Advisors:

Fund Name                                            Symbol         2009 Total Return
DFA Emerging Markets Core              DFCEX                    83.58%
DFA Emerging Markets Small Cap     DEMSX                   99.74%
DFA Emerging Markets Value            DFEVX                    92.28%
DFA Emerging Markets Portfolio       DFEMX                    71.77%

Were these highly concentrated portfolios with great stock picking? No. These are all very broadly diversified passively-managed asset-class funds. The chart below shows approximately how many stocks were in each of these funds during 2009. The interesting fact here is that the most concentrated (which cannot, under anyone’s analysis be considered a concentrated portfolio) was the poorest performer – if you can call a one year return of 71.77% poor.

Fund Symbol         Approx. Number of Stocks
DFCEX                                         2719
DEMSX                                        2100
DFEVX                                         1924
DFEMX                                          640

Sure, these guys had downside movement during 2008 commensurate with the upside in 2009. This indicates in stark relief the value of sticking with your asset allocation model and then rebalancing the portfolio. Those who did so over the past couple of years are back to being whole again or close to it.

So what is the take away here? Volatile asset classes, purchased broadly and managed passively, and rebalanced appropriately will enhance the risk adjusted returns of an investment portfolio and put more money in an investor’s pocket over time. It requires discipline during excruciatingly painful market moves, and it pays off.
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Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (310) 395-8005; on the internet at www.dimensional.com; or, by mail, DFA Securities LLC, c/o Dimensional Fund Advisors, 1299 Ocean Avenue, Santa Monica, CA 90401. Mutual funds distributed by DFA Securities LLC.

Forbes magazine reports on a collosal failure at Wal-Mart to put their employees first in the administration of their 401(k) plan. Who is the big winner? Merrill Lynch, who else? This is how Wall Street works. I hope this is a wake up call to many Americans who are being fleeced by the likes of Merrill Lynch in their retirement plans. I encourage you to take a good look at your plan, find out how much is being paid from your assets compared to what you could get it for – if employee benefit is on the top of the list rather than broker benefit.

For the whole Forbes story go to Wal-Mart 401(k) Pays Retail

IR-2009-114, Dec. 8, 2009

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.

Some of these changes include the following:

Special Charitable Contributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders: Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2009 count for 2009. This is true even if the credit card bill isn’t paid until 2010. Also, checks count for 2009 as long as they are mailed in 2009 and clear, shortly thereafter.

• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.

• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2009 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.

• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.

• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

For additional information on charitable giving:

* Charities & Non-Profits
* Publication 526, Charitable Contributions.
* On-line mini-course, Can I Deduct My Charitable Contributions?

Cash is often not the most effective thing to give. Appreciated securities are a more efficient choice.

I know the thought is that the market is down, how could there be appreciated securities out there? Well, you might be surprised to find that there are many broadly diversified US Stock mutual funds that have a year-to-date return in the high 20% to the high 30% range. There are also funds specializing in the Emerging Markets that are pushing 80% for their year-to-date returns.

For those individuals lucky enough to have bailed out of the market before the bottom and then bought back in near the bottom on March 9, 2009, (a strategy I don’t recommend because it usually fails) they should have returns that far exceed those identified above.

So, what’s this got to do with giving? Give away some highly appreciated shares instead of cash. You will avoid the capital gains tax, which, if you have owned the security less than 12 months, will be taxed as ordinary income at your personal income tax rate.

As an illustration, let’s assume you are in the 35% Federal tax bracket and you want to give your favorite charity $10,000.  The charity will get $10,000 and you will get to write off a $10,000 donation that will save you $3,500 in taxes.

But, what if you give your favorite charity $10,000 worth of shares you purchased during the past year instead? The charity gets $10,000 worth of stock, you get to write off the $10,000 donation plus you avoid the income tax you would otherwise pay when you sell those shares.

Let’s assume you have a 50% gain in value. In the case of short-term gains, you would save $1,750 in income taxes and if you wait for long term gains with the 15% capital gains bracket you would save $750 in capital gains taxes.

So, in either case the charity gets $10,000 but on your side of the transaction cash will only get you the charitable deduction; but giving securities will get you both the charitable deduction and the avoidance of some capital gains taxes as well.

If you want to pursue this strategy, hurry. The transaction must be completed prior to January 1, 2010 for it to work for this year’s income tax reporting.

This won’t work if you try to donate from an IRA or other retirement plan. It has to be done from a taxable investment account.

I wish you joyful giving, Merry Christmas and a most happy new year ahead.

“It is more blessed to give than to receive.” – Jesus (Acts 20:35)

When members of the U.S. Senate finally head home this week, they will be leaving the future of 50 individual and business tax breaks in limbo. All expire at the end of 2009.

Among the disappearing breaks are the research tax credit and an annual alternative minimum tax “patch,” which keeps 23 million additional middle-income Americans from being forced into calculating and paying the dreaded AMT. (For 2009, with the patch in place, 4 million upper-middle- and high-income families will pay AMT.)

Most of the fading-out-50 can, and likely will, be reauthorized retroactively, creating an inconvenience for some taxpayers, but not the same sort of mess as Congress’ failure to resolve the future of the estate tax. The estate tax will expire at the close of Dec. 31 and Democrats are pledging to resurrect it retroactively, leading to all sorts of potential legal problems, as well as some planning opportunities for wealthy families.

Among the expiring individual tax breaks: the deduction for state and local sales taxes for itemizers (which benefits mainly residents of states that don’t impose an income tax); the additional $1,000 deduction for real estate taxes for those who claim the standard deduction; the $4,000 deduction for college tuition; and a special $250 deduction for teachers who spend their own money on classroom supplies.

For the rest of the story go to Forbes

November’s numbers actually outperformed the 0.7% expected by many economists.

The positive performance came from improvements in the interest rate spread, building permits for residential homes, initial unemployment claims, and average weekly hours. These were more than enough to offset the negative contribution of supplier deliveries, and consumer expectations.

The six-month growth in the index has slowed somewhat in recent months — to 4.7 percent (about a 9.6 percent annual rate) in the period through November, but it remains substantially higher than the increase of 1.2 percent (a 2.4 percent annual rate) from November 2008 to May 2009. In addition, the strengths among the leading indicators have remained widespread in recent months.

All this indicates a positive economy into 2010 – although the general mood among economic forecasters remains tepid.