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Dear Shareholder:
A Sea Change in Interest Rates; Has it Arrived?: Our Tax-Free Income Series in each state are up in price from 3% to as much as 7% over their lows earlier this year. The two new funds in Alabama and Mississippi are up a little over 7%. If these levels hold at this point, and go no higher, this means folks in the highest Federal tax bracket are going to make a 12% to 15% annualized total return before taxes on their investment for the year. Whether prices hold at this point or continue to rise, remains to be seen. But it is beginning to look like a trend.
For the year to date ending September 5th the Dow was down 1.6%, the S&P up 1.6% (coincidentally the same number) and the Nasdaq Composite down 1.4%.
Lets face it; there are times when you would rather be in bonds, and, so far, this year is turning out to be one of those times. Most of this price rise has come since the latter part of May. It may continue, but with occasional setbacks from time to time.
Exiting at the Wrong Time: Just as in the 1994 bond market decline, we had shareholders who bailed out right at the bottom of this market decline, and who have now probably missed a big part of the rebound. While the assets of all our funds have been fairly stable throughout this decline, which began in February 1999 and lasted almost sixteen months until May 2000, this has not been because there were no redemptions. About three months after the decline in bond prices began, we saw our net number of accounts stop growing and start declining. Some of our smaller, less sophisticated shareholders were beginning to withdraw their money. Meanwhile, a number of our larger accounts began to quietly (and wisely) add money as the share price dropped.
Remember, you buy bonds for the income, not to make money on the price. Sure, the price will rise at times as it has done recently, and it will fall at times, as it did last year. When the price falls, that is when you can buy a greater income for your dollar. When prices are high your income per dollar of new investment is low, and that may be the time to consider other alternatives for investing new cash.
An Interesting Mix: Logan Foster is our key man for helping shareholders who need advice on any of a variety of investment subjects. In recent months, as he has talked to shareholders who were uneasy about the possibility of further price declines, he came up with an idea that makes a lot of sense to me. The average shareholder quite naturally wants the higher yield of the Income Series, but the lower price volatility of the Short-to-Medium Series. That, of course, is "having your cake and eating it too". Logan has suggested to these folks that they might put half their money in the Income Series, and half in the Short-to-Medium Series. If you do this you still have about 94% of the income, but only about 72% of the price volatility. These are our Kentucky fund numbers, but the figures are similar in Tennessee and North Carolina. (As yet, we do not have a Short-to-Medium Series in Mississippi or Alabama, but we expect to later.)
Some Tidbits from Others: Michael Cowes, writing for
InvestmentNews has some interesting historical facts about the stock market. He tells
us equities have risen on an average of 11% a year compounded since 1926. To show you how
much recent results affect such an average, take out the last five years and this number
drops to 9%. But if you are an investor who happens to buy at a stock market peak
(maybe now?), how long will it take you to average 11% per year? Answer: The average time
to get back to 11%, buying on the peak before all bear markets since 1926 is 18 years
4 months. Of course, individual instances are both longer and shorter. For example, if an
investor had jumped in the market just before the October 1987 crash (a 34% decline), it
would have taken 8 years and 5 months to return to an 11% average return. But the July
1998 drop of 19% would have taken only eight months to recover to 11%. But finally, how
long would it have taken to average an 11% gain if you bought just before the
September 6, 1929 crash? Answer, it's now September 2000 and you still wouldn't average an
11% return!
I would remind you that taxes are important. An 11%
before-tax average return since 1929 would really be only about 6-8% after
taxes, assuming a 3% dividend rate and the wide variation in income tax rates over that
period of time. Tax-free bonds have a place in almost every portfolio. They offer relative
price stability as well as an attractive income. Remember, it's not what you get that
counts, it's what you get to keep.
But none of us would have any worries about the stock market if we had listened to Will Rogers. Rogers said, "making money in the stock market is easy. You buy stocks, and when they go up you sell them. If they don't go up, don't buy them!"
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