June 2013 Investment Update

How Safe Is Your Life InsurancePolicy?

So you’ve finally sat down with your financial advisorand answered important questions, such as do youneed life insurance, how big of a policy do you need,and what type makes the most sense for you. Onething you don’t want to happen after purchasing yourlife insurance policy is to find out the company thatsold you the policy has run into financial trouble. Ifyour insurer went out of business, not only would yoube uninsured, but you would also have to reapply for anew policy at a potentially more expensive rate due toyour age and health.

Fortunately, there is a system in place to ensure thatpolicies remain in force even after the issuingcompanies become insolvent. All 50 states, plus theDistrict of Columbia and Puerto Rico, have life andhealth insurance guaranty associations that step in tomake sure that policyholders aren’t left holding thebag if their insurance company becomes insolvent. Innearly all states, the limits of coverage are $300,000 for

life insurance death benefits and $100,000 for the netcash value of the policy. Some states even have limitsas high as $500,000 for both. Coverage is provided bythe guaranty association in the state in which thepolicyholder resides, even if he or she purchased thepolicy elsewhere.

For customers who hold policies worth more thantheir state guaranty limits, one option is to buymultiple policies within those limits from differentcompanies to reach the desired total amount. So,instead of buying a $1 million policy from a singlecompany, you could buy $250,000 policies from fourdifferent companies. The downside is that not only isthis somewhat inconvenient, but it also might result inpaying more than you would for a single policybecause of the additional fees involved, not to mentiondifferent premium rates. Consult your financial advisorto explore all your options.

Investment Update June 2013 2

How Can Grandparents Help withCollege Costs?

If your grandchildren are fortunate enough to have youchip in with their college costs, there are a few thingsyou need to be aware of before you start writingchecks.

The most straightforward way for a nonparent to helpa student pay for college is with a cash gift. Gift taxrules in 2013 allow any individual to give anotherindividual up to $14,000 per year ($28,000 from acouple) without the gift counting against the lifetimeestate tax exemption. A problem with this approach isthat your contribution will be taken into considerationwhen the student applies for need-based financial aid.Cash given directly to a student the year before he orshe applies may be considered student income,reducing need-based aid by as much as 50% of theamount given. Furthermore, money held in thestudent’s name is treated as a student asset, reducingaid by another 20%. Cash given to the parents alsocounts against financial aid, albeit at a much lower rateof up to 5.64%. To potentially avoid any financial aidimpact with a cash gift, keep in mind that the FreeApplication for Federal Student Aid takes intoaccount income from the prior year in determiningneed-based aid. Hence, consider giving the moneywhen you know the student will not be applying foraid next year.

Another approach is to offer to help pay back thestudent’s loans. By waiting until the student is donewith school, you avoid financial aid concerns and helpease his or her debt burden as the student enters theworkforce. This strategy may be particularly useful forstudents with subsidized loans, which don’t begin toaccrue interest until after graduation.

Grandparents may also open a 529 college-savingsaccount in the name of a student. One of theadvantages of this approach for the account owner (thegrandparent) is that many states offer income taxdeductions on 529 contributions, though you musttypically make the contribution to your home state’splan in order to earn the deduction. Another benefit isthat the IRS allows a five-year acceleration of the gifttax exclusion for such contributions, allowing anindividual to contribute as much as $70,000 in a singleyear to a 529 in a student’s name. A disadvantage to

this approach is that distributions from a 529 ownedby someone other than the student or his or herparents are counted as student income and may reducethe amount of need-based financial aid available by$0.50 for every dollar distribution. Waiting to use 529distributions from a grandparent-owned account untilthe student’s final year is one way to avoid thisproblem.

One final option that some grandparents mightconsider is paying tuition directly to the university onthe student’s behalf. This has special appeal for thosewho want to give large amounts but who are worriedabout gift tax consequences. The good news is thatpayments made directly to the university to covertuition are exempt from the gift tax, althoughadditional costs such as room and board are not.Unfortunately, direct tuition payments may be countedas either income against the student’s financial aidallocation (reducing it by 50%), or as a financialresource available to the student (reducing financial aiddollar-for-dollar). Hence, this only makes sense forstudents who are not concerned about need-based aidor if the payment is made during the final year ofschool.

Tax law is ever-changing and can be quite complex. Itis highly recommended that you consult with afinancial or tax professional with any tax-relatedquestions or concerns. An investor should consider theinvestment objectives, risks, and charges and expensesassociated with municipal fund securities beforeinvesting. More information about municipal fundsecurities is available in the issuer's official statement,and the official statement should be read carefullybefore investing. 529 plans are tax-deferred collegesavings vehicles. Any unqualified distribution ofearnings will be subject to ordinary income tax andsubject to a 10% federal penalty tax.

Investment Update June 2013 3

The Fake Tweet Mini-Crash

On April 23rd, 2013, the Associated Press’ (AP)Twitter account was hacked, sending a message thatthe president was injured in an explosion at the WhiteHouse. This fake tweet resulted in a rapid decline ofroughly 1% in the financial markets, fuelingspeculation that high-frequency trading was the mainculprit. Although the market recovered quicklyfollowing the hoax, it reminded investors of the flashcrash from May 2010 or Knight Capital Group’scomputer glitch in 2012. In the end, this mini-crashhad little to no effect on the long-term investor. Whilea mini-crash like this raises questions about repeatoccurrences in the future, making it hard for investorsto overlook, ignoring short-term price fluctuations andfocusing on the value of investments may be the bestpolicy for long-term investors.

Making Up for Retirement Shortfalls

Given the backdrop of economic uncertainty and therise in both life expectancy and medical costs,prospects look difficult for those facing retirementshortfalls. Fortunately, a financial advisor can showyou how pulling these key levers can help yourretirement nest egg last.

Work Longer: Working longer is one of the easiersolutions for those facing retirement shortfalls,allowing you to contribute to your savings for a fewmore years.

Reduce Spending During Accumulation Years: One ofthe best ways to save more is to spend less. Settingexplicit goals with a financial advisor, having a clearunderstanding of your net worth, and carefullytracking expenses are essential to reducing yourspending.

Reduce Planned Expenses in Retirement: Yourretirement nest egg may last longer if expenses, such ashome costs during retirement years, are reduced.

Optimize Your Asset Allocation: As you nearretirement, a portfolio that is too conservative can bejust as risky as one that is too aggressive. Retirementcan be a 30-year prospect, long enough to consider aspecific allocation to stocks, which, although they aremore volatile, offer higher return potential over time.

Delay Taking Social Security: If you’re healthy andexpect to live long, waiting until age 70 to receiveSocial Security benefits can result in a higher payout.

Returns and principal invested in stocks are notguaranteed. Please keep in mind that diversificationdoes not eliminate the risk of experiencing investmentlosses, and that investing in securities always involvesrisk of loss. Please consult with a financial professionalfor advice specific to your situation.

Investment Update June 2013 4

Monthly Market Commentary

Economic data, corporate earnings, and corporateforecasts continued to be a mixed bag even as the S&P500 rallied past 1,600 in April. Markets reactedfavorably when central banks made announcements toaddress some of the market weaknesses (Europeanbankers reduced their target interest rate and the Fedaffirmed that it had no plans to reduce itsinterventions in the near future). Markets did crash onApril 23 in a matter of minutes, albeit briefly andtemporarily, when the AP’s Twitter account washacked and sent a fake tweet, causing a swift dropreminiscent of the 2010 flash crash. Overall,Morningstar economists believe that the U.S.economy is neither booming nor busting. Nothing inthe numbers would indicate that much has changedwhen looked at from a year-over-year, averagedbasis—the underlying 2% growth rate continues to belargely unchanged.

GDP: First-quarter real GDP in 2013 grew by 2.5%,well below the 3%-plus expectation that manyeconomists had, but still much better compared withan abysmal fourth-quarter growth of 0.4% in 2012.GDP growth was mostly dragged down by continuedpoor government spending and a larger-than-expectedtrade deficit. Unfortunately, the worst of thegovernment impact may still be ahead of us, since thefirst-quarter numbers do not include any impact fromthe sequester.

Employment: April’s total non-farm payroll growthbeat expectations, with 165,000 jobs added. Moreimportantly, sharp revisions in the March andFebruary employment numbers saw an impressive netpositive revision of 114,000 jobs. Despite all this goodnews, careful analysis shows more of the same slowand unsatisfying growth, stuck between 1.9% and2.1% (three-month year-over-year average) for nineconsecutive months. The unemployment rate in Apriledged down slightly to 7.5% from 7.6% the monthbefore.

Housing: On a year-over-year basis, all 20 markets inthe Case-Shiller Index saw price appreciation inFebruary, although the growth was not evenlydistributed across cities. Phoenix, San Francisco, LasVegas, and Atlanta all grew by more than 15%, while

other cities such as New York, Chicago, and Bostongrew by less than 5%. Inventories are still very tight ata time when demand is up because of an improvedeconomy, leading to higher home prices. Higher pricesshould continue to bring more houses on to themarket and bolster consumer confidence. In addition,higher home prices have caused more homeowners tostep up their remodeling expenditures, and should alsoallow more potential employees to move to new citiesfor employment opportunities.

Manufacturing: According to data from Markit, aworldwide research firm, manufacturing in Aprildeclined in the U.S., China, and Europe. The datashowed monthly acceleration and improvementthrough January 2013, after which three months ofdecline brought it back to where it started inNovember. Morningstar economists believe thatseasonality and a slumping commodities cycle areresponsible for the softness worldwide, and not the all-important consumer-demand factor, which drivesmanufacturing. However, the impact of manufacturingon the macroeconomic picture tends to be strongest inextreme boom-or-bust situations. The U.S. economyis currently doing neither at the moment.

Auto: Auto sales in April dropped modestly to 14.9million units from 15.25 million units in March 2013,but this was still better than the 14.1 million unitsfrom April 2012. Morningstar’s auto sector analystsare not overly concerned with the sequential decline asfluctuations are normal, and there are still plenty ofreasons to buy a new vehicle, such as low interest ratesand a recovering housing market. They continue tomaintain full-year sales expectations of 15.2 to 15.5million units.

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Monthly Market Barometer

1 Month, ending April 30, 2013. The U.S. Marketreturned 1.74% (YTD 12.94%).

The Morningstar Market Barometer provides avisualization of the performance of various stockmarket indexes. The color scale (red for losses andgreen for gains) allows you to assess which areas of themarket performed strongly and which areas showedweakness for the time period analyzed. The nine-square grid represents stocks classified by size (verticalaxis) and style (horizontal axis). There are threeinvestment styles for each size category: small, midand large. Two of the three style categories are “value”and “growth” while the central column represents thecore style (neither value nor growth characteristicsdominate). Large-caps account for the top 70% of thecapitalization; mid-caps represent the next 20%; andsmall-caps represent the balance.

©2013 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is notwarranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arisingfrom any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar MarketCommentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder.