Winter 2005 Summer 2004

Transcription

1 Winter 2005 Summer 2004 Features A Road Map for the New Year 3 Know Your Savings Potential 5 Focus on Funds Equity Investment and S&P 500 Index Funds 6 Lifestyles Rebalancing Investments 7 Risk Assessment Investment Strategy Quiz 8 Investment Know-How Your Investment Objectives 10 Newsstand Market Update 11 Retiree Corner 11 Fund Performance Update 13 Current news concerning your Savings Plan

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3 Feature A Road Map for the New Year Chances are the new year brought about some changes in your life. Maybe you set specific resolutions to lose weight, get in shape, kick a bad habit or set a budget. If budgeting was one of your goals, hopefully you considered your retirement plan contribution as part of that. If you didn t, why not take advantage of the freshness of the new year to chart your course for retirement? Whether your retirement is 30 or more years away or you are already picking out the perfect place to spend your retirement years, careful planning now can get you going in the right direction. Point of origin The first part of your retirement planning begins with where you are today. Take a look at your current financial situation. You need to consider your retirement planning as part of your whole financial picture. Are you carrying consumer debt on credit cards or at stores? What are your current spending habits? Are you making the most of Halliburton stock purchase options? How much are you currently contributing to your 401(k) plan? Can you increase this amount? By looking at where you are financially, you can determine how much you can invest. Sometimes even small changes can make a big difference. See Know Your Savings Potential on page 5 for examples. Destination Effective retirement planning requires that you know your destination because, as baseball great Yogi Berra is attributed as saying, If you don t know where you are going, you might end up somewhere else. The more specific you are in setting your financial goals, the better chance you have to reach them. Saying you want to save more money this year for your retirement is one thing. Saying you want to retire at age 60 with an annual income of $60,000 is another altogether. Although both goals may result in additional retirement savings, the latter is more likely to move you closer to the savings you need to retire. As you work through the numbers, remember that many advisors suggest you will need 80% to 90% of your pre-retirement income to continue your current lifestyle in retirement. continued on page 4 3

4 continued from page 3 Potential roadblocks Inadequate savings, unrealistic financial goals, poor budgeting and risk can be thought of as barriers to reaching your retirement goals. To travel more smoothly to retirement, consider: Your target retirement date Your retirement income goals Your current budget Your other savings for emergencies and major purchases Your income and investment potential Your investment risk tolerance Understanding and addressing these potential roadblocks can help you stay on the open road. higher returns). As you move closer to retirement, you might reallocate more of your investments into more conservative options, such as the Bond Index or the Fixed Income Funds. Stay the course Saving for your retirement can be difficult when you have immediate financial needs. But doing a little in a consistent manner is better than doing a lot sporadically. (To understand this, it is important to understand the power of dollar-cost averaging and compounding interest. See Know Your Savings Potential on page 5 for more information about how these concepts work to grow your investment.) Also, once you have begun saving for your retirement, stick to your plan. Reacting to market trends and trying to time the market can often result in costly detours on the road to your retirement. But that doesn t mean you shouldn t ever look at your map. Every year, re-evaluate your plan to make sure that your allocations are still moving in the direction and at the speed you need. IRS Contribution Limits for 2005 The IRS sets maximum amounts for contributions to your retirement and savings accounts. If you are over 50 years old, you may be able to make an additional catch-up contribution. Here are the amounts for Select your route Once you know where you are, where you want to go and what barriers you may find along the way, you can begin selecting your route by choosing funds to help you reach your goal. Basically, the farther away you are from retirement, the more aggressive you can be in selecting funds with higher risks (and the potential for Account Annual Annual Contribution Catch-up Limit Limit Traditional and Roth IRA $4,000 $500 SIMPLE IRA and SIMPLE 401(k) $10,000 $2,000 Regular 401(k), 403(b) and SARSEPs $14,000 $4,000 4

5 Feature Know Your Savings Potential Change is good... but dollars are better. And by investing according to a few financial concepts, you can turn your change into dollars faster. Rule of 72 The Rule of 72 is a simple investment rule that explains how long it will take to double your money at a particular savings rate. Divide 72 by the rate of return you expect on your investment. The result is the number of years it will take to double your initial investment. Let s assume you have $2,000 invested in a fund that averages an 8% return. You will double your money in 9 years (72 8 = 9). Dollar-cost averaging The power of dollar-cost averaging occurs when you invest your money consistently over time. As you invest, you will be buying more funds when prices are low and fewer funds when prices are high. Over a long period of time, you will find that the average cost of your overall investment will probably be lower than it would have been if you had not invested regularly. That is a good value for your investment dollar. Compounding The power of compounding is seen when you invest money and then leave your principal investment and its returns in the account to gain future earnings. Basically, it is an invest it and forget it strategy (where you continue to check that your investment is providing the returns you want). Your retirement account, where your principal is allowed to grow for years tax-deferred, is a great example of how compounding works. Retirement calculators often use the tool of compounding to estimate savings potential. Assume you have $10,000 invested in a fund that returns 10% annually, the stock market s long-term historic average rate of return. In five years, your money will grow to $16,105. In 10 years, you will have a balance of $25,937. In 20 years, your investment will have ballooned to $67,275. And that balance only takes into account the original investment and its returns. It does not include any additional investments you may make in the fund. Time value of money When you understand the time value of money, you will see each small purchase in a new way. For example, say you go to your local coffeehouse each morning on the way to work and buy a premium latte. You figure it is only $4 and can afford that luxury. Well, let s take a week s worth of that $4-a-day and invest it to see what your week s worth of coffee is actually costing you in future wealth. To get the future value of your week s worth of coffee, use this little formula: FV = pmt(1+i) n FV = future value pmt = payment i = expected rate of return n = number of years Let s make a few assumptions to fill in the formula. First, your payment is $20 ($4 x 5 days a week). Then, let s assume you are 30 years old and have 35 years (n) until retirement. Using the stock market long-term historic average of 10% for the rate of return (i), our formula looks like this: FV = $20(1+.10) 35. When you do the math, you get $562. And that is just for one week s coffee expenditure! Looked at that way, you might reconsider the number of grande half caf-half decaf double-whip no-fat mochas you have each week. Changing your allocation to put just a little bit more money into your plan could have some dramatic effects on your future savings. 5

6 Focus on Funds Equity Investment and S&P 500 Index Funds In this issue of Trust Talk, we will look at two of the funds that fall in the middle of the risk/return spectrum, the Equity Investment and the S&P 500 Index Funds. The following graphic shows where these funds lie on the risk/return spectrum: Large Cap Value Equity Small Cap Equity Lower Risk, Lower Return Fixed Income Bond Index General Investment Balanced S&P 500 Index Large Cap Growth Equity Halliburton Stock Higher Risk, Higher Return Equity Investment Non-U.S. Equity Mid Cap Equity We will continue to compare funds along the spectrum in future issues. Now let s look at the details of these funds as of December 31, Equity Investment Fund S&P 500 Index Fund The Equity Investment Fund achieves long-term growth The S&P 500 Index Fund achieves long-term growth by by investing in a blend of value and growth stocks. investing in a blend of value and growth stocks. Investment objective Long-term growth. Long-term growth that approximates the risk and return of the S&P 500 Index. How are they different? The Equity Investment Fund is a highly diversified fund The S&P 500 Index Fund invests entirely in companies that invests in U.S. and non-u.s. stocks. whose stock is listed on U.S. exchanges. The fund invests in a mixture of large cap, mid cap The fund represents only the large cap segment of the and small cap companies. Overall, the fund is skewed U.S. market. to the large cap segment. The fund is not indexed, rather, if follows managers The fund is passively managed. This means it seeks risks active investment strategies. and returns that are approximately equal to the performance of the Standard & Poor s (S&P) 500 Index. Fund composition 30% 70% U.S. Stocks Non-U.S. Stocks 100% U.S. Stocks Long-term potential risk & return Market Risk Inflation Risk Potential Return Low Medium High Market Risk Inflation Risk Potential Return Low Medium High 6

7 Lifestyles Rebalancing Investments Robin is 25 years old, and her current financial obligations involve paying off her student loans, making car payments and trying to save for a down payment on a house, which keep her focused on her immediate needs. When she signed on with Halliburton two years ago, she chose to contribute 6% of her salary to her 401(k) plan. Her initial allocations placed 90% of her investment in the Bond Index Fund and 10% in the S&P 500 Index. Since her hire date, she has not increased her contributions or changed her allocations. After reading about setting specific goals for her retirement, Robin decided that she should take a closer look at how she was investing her money. With almost 40 years ahead of her before retirement, Robin can focus more on growth than security. She decides to increase her contribution to 10% and move toward more aggressive investments. Robin redistributes her allocations to 15% in Non-U.S. Equity, 45% in the S&P 500 Index and 30% in the Mid Cap Equity Index Fund. The remaining 10% of her investment she keeps in the Bond Index Fund for peace of mind. All of her stock investments meet high growth goals that are consistent with Robin s comfort in taking on risk knowing that she has lots of time to recover from any dips in the stock market. Assuming that Robin makes $40,000 a year, let s look at how her savings would change with her new contribution levels and allocations. Note: The following forecasted returns are for illustrative purposes only. They are not meant to be used as investment advice in particular funds, nor are they meant to predict actual future returns. Bond Index Fund: 5.0%; S&P 500 Index Fund: 8.0%; Non-U.S. Equity Index Fund: 8.5%; Mid Cap Equity Index Fund: 9.0%. Original Allocation 10% Bond Index Fund S&P 500 Index Fund Comparison of Scenarios at Retirement Ages Bond Index Fund S&P 500 Index Fund Mid Cap Equity Index Fund Non-U.S. Equity Fund $1,200,000 $1,000,000 $800,000 90% $600,000 New Allocation 15% 10% 30% 45% Bond Index Fund S&P 500 Index Fund Mid Cap Equity Index Fund Non-U.S. Equity Index Fund A B C 55 A B C 60 A B C 65 Scenario Legend A - Contribute 6% to Original Allocation - Bonds 90%, S&P % B - Contribute 6% to New Allocation - Bonds 10%, S&P %, Mid Cap 30%, Non-U.S. Equity 15% C - Contribute 10% to New Allocation - Bonds 10%, S&P %, Mid Cap 30%, Non-U.S. Equity 15% $400,000 $200,000 $0 7

8 Risk Assessment Investment Strategy Quiz How comfortable are you with the investment risks associated with your plan allocations? Take this simple quiz to see what kind of investor you are. Answer each question, then add up the points associated with each answer to get your total score. When do you expect to make a withdrawal from the plan? [1] in less than five years [2] in five to 10 years [3] in more than 10 years points: How much money have you saved outside of the plan for emergencies? [1] less than three months living expenses [2] three to six months living expenses [3] more than six months living expenses points: How important is it to you that your growth in investment exceeds the rate of inflation? [1] not very important [2] somewhat important [3] very important points: Over what time frame could you tolerate a loss in your investment? [1] never [2] over one to two years [3] as the market fluctuates points: What portion of your total investments (not including your home or vacation home) does the plan represent? [1] between 67% and 100% [2] between 33% and 67% [3] less than 33% points: Have you set up separate savings for major expenses (college, down payment on a home, major home repairs, additional retirement)? [1] no, I don t have separate savings for major expenses [2] yes, I have separate savings to cover major expenses [3] I have no upcoming expenses other than retirement points: 8

9 If in one month the value of your investment were to drop by 10%, you would [1] sell it [2] hold on to it [3] buy more points: If your investment experienced a poor return during a one-year period, you would be [1] extremely uncomfortable [2] okay, as it is expected from time to time [3] not at all concerned points: You inherit $50,000 and decide to invest it in [1] certificates of deposit [2] bonds [3] stocks points: You are more likely to [1] invest $500 knowing you will have $535 at the end of one year [3] invest $500 with a 50/50 chance of losing it or making $1,000 in one year points: If you could invest money in a company s stock, you would [1] not invest in stocks, as it is too risky [2] choose a blue-chip stock of a large, well-established company [3] choose a dynamic, small growing company points: Given the choice between the following three options, you choose [1] $1,000 cash [2] to risk the $1,000 on a 50/50 chance of winning $2,000 [3] to risk the $1,000 on a 1 in 20 chance of winning $20,000 points: Score: Your Risk Tolerance If you scored Your investment strategy may be to invest in Under 24 a conservative investment mix, focusing on funds with lower risk and lower expected returns 24 to 29 a moderate investment mix, focusing on funds with moderate risk and moderate expected returns 30 or higher an aggressive investment mix, focusing on funds with higher risk and higher expected returns 9

10 Investment Know-How Your Investment Objectives The course you have charted for your retirement savings will direct your plan investments. Whether you are at a stage where you need growth from your plan or are approaching the stage where you require more security, understanding these two basic objectives will help you decide which of the plan options best meets your current needs. When choosing fund options that meet these objectives, remember that the advantages of one investment objective may come at the expense of another. For example, an investor seeking growth may have to sacrifice some security, whereas the security-focused investor may have limited growth potential. It s important to remember that no two investors are alike and no single investment strategy is right for everyone. Let s take a look at each of these objectives separately. Growth Growth investments carry higher market risk, but they also provide the greatest opportunity for attractive returns. These investments may fluctuate in price dramatically in the short term and are generally appropriate if you plan to invest for the long term. The objective of growth appeals to most investors who have a longer investment horizon and can withstand market movements. If you have many years (10 years or more) until retirement and you can afford to ride out the ups and downs in the market, you may want to allocate more to investments with high potential for growth. Plan funds focused on high growth include the S&P 500 Index Fund, Large Cap Growth Equity Fund, Large Cap Value Equity Fund, Mid Cap Equity Index Fund, Equity Investment Fund, Non-U.S. Equity Fund, Small Cap Equity Fund and Halliburton Stock Fund. The General Investment Fund and Balanced Fund also focus on long-term growth as part of their objectives. Security When security is your greatest objective as an investor, you are more concerned with return of investment than with return on investment. As you near retirement, you will probably want to make sure your money is moved into more secure investments which are not likely to fall in value just when you need to cash them in. Generally, investments that have the least investment risk also carry the lowest expected return. As markets fluctuate, the interest earned in these types of investments will vary, but the underlying value of the principal will be relatively stable. The greatest risk of holding money in the most conservative securityfocused investments is that they will not perform above the rate of inflation. Plan funds focusing on the security objective include the Fixed Income Fund and the Bond Index Fund. 10

11 Newsstand Market Update Retiree Corner The fourth quarter brought mixed results as U.S. stock markets ended up, bonds were down from the third quarter and a weak U.S. dollar fared better for investors in non-u.s. equities. Surprising double-digit returns in most areas of the U.S. stock market helped end 2004 with a bang. In the fourth quarter, small cap stocks continued to lead the way with large cap stocks performing almost as well. For the full year, small cap stocks dominated with a better than 18% return. Large cap stocks saw an almost 11% return for the year. Overall, value-style stocks outperformed growthstyle stocks for both the final quarter and the year. Among market sectors, technology stocks led the fourth quarter with better than a 13% return, but with only about a 2% gain for the full year. Energy-sector stocks led the year with an almost 30% gain, due largely to rising oil prices. The broad U.S. bond market ended the year only at about 4%, with lower-quality bonds outperforming higher-quality bonds. This was due largely to rising interest rates as bond values tend to drop when interest rates rise. In both the fourth quarter and the year, mortgage-backed securities outperformed U.S. treasuries but trailed corporate bonds by a slight margin. The continuing trade deficit and relatively low interest rates put pressure on the U.S. dollar, spurring its decline. However, U.S. investors with assets overseas benefited from the falling dollar. Non-U.S. equity gains were better than 20% for the full year. Australia and Germany were two of the leading countries for U.S. investors, while the U.K. and Japan lagged. Retirement Rollover? Maybe Not Conventional wisdom has always stated that when you retire, you should roll over your 401(k) into an IRA. However, recent news* suggests there may be some advantages to keeping your 401(k) intact. Before moving your balance, consider these possibilities. Company stock: If Halliburton Company stock is in your account, you may lose significant tax advantages if you roll over to an IRA. Consult a tax advisor for more information. Lower expenses: According to a Department of Labor study, investment management fees are typically lower on average for employer 401(k) plans than for IRAs. Lower fees: You aren t charged fees for low balances in your plan. And you don t have to pay a transaction fee for transferring among plan funds. Competitive returns: The Fixed Income Fund provides stability, safety and a reasonable return 4.8% for It is difficult to find a retail IRA that meets these standards. Unique investment opportunities: There are investment options that you can select within your plan that are not available in the public marketplace. Withdrawal features: Retirees can make periodic withdrawals from specific investments, providing them income over an extended period of time. *CBS MarketWatch, August 18,

12 Fast Facts: Principles of Successful Investing When you re investing for long-term goals like retirement, it s important to have a strategy. Only you can decide which investments are right for you. The following tips can help you make smarter investment choices. Invest early It s never too early to start saving. Put the power of compounding to work for you. The sooner you start investing, the longer your money has to grow. Invest regularly Invest as much as you can afford on a consistent basis. Increase your monthly contributions as you receive raises and are able. Participate in plans Employer-sponsored plans like 401(k) and profit sharing are a convenient and easy way to invest your money. Take advantage of them! Keep focused on your goals Selecting investments that match your goals can help you fulfill those goals. Understand the balance between risk and reward There is an element of risk to all investments. If you choose only low-risk investments, you limit your potential reward in the long run and may not meet your retirement goals. Diversify, diversify, and diversify! Diversifying your portfolio among different asset classes, such as stocks, bonds, and stable value funds, can help you achieve a smoother long-term performance. Invest for the long term It s normal for your investments to show various fluctuations within a short time period, but the statistics are clear the value of a well-balanced portfolio will increase over time. Keep your hands off Don t touch your retirement savings until you actually retire. This will ensure your investments have time to grow and you will avoid tax penalties for using the money early. Monitor performance Review your investment strategy to ensure you are in line with your financial needs as retirement approaches. Remember, markets can change quickly. Monitor your portfolio and adjust your holdings as necessary to keep on track with your goals. 12

13 Fund Performance Update Halliburton Company Employee Benefit Master Trust for the period ended December 31, 2004 General investment policy Balanced Fund EIF GIF U.S. equities 65.0% 70.0% 43.0% Russell 3000 Index Non-U.S. equities 22.5% 14.0% MSCI EAFE Index Emerging markets 7.5% 5.0% MSCI Emerging Market Free Index U.S. broad market bonds 35.0% 33.0% Lehman Aggregate Bond Index U.S. high yield bonds 5.0% Merrill Lynch High Yield Bond Index Performance 10 Years* 5 Years* 3 Years* 1 Year 4th Quarter FUND FIF 6.6% 5.8% 5.1% 4.8% 1.2% Donaghue Money Market Index 3.7% 2.4% 0.9% 0.8% 0.3% Bond Index Fund 7.6% 7.4% 6.1% 4.2% 1.0% Lehman Aggregate Bond Index 7.7% 7.7% 6.2% 4.3% 1.0% Balanced Fund 12.3% 7.5% 7.7% 11.3% 6.7% Balanced Fund Index Composite 10.8% 2.2% 5.6% 9.3% 6.9% GIF 9.5% 3.9% 8.3% 11.6% 8.6% GIF Index Composite 9.5% 2.8% 7.7% 11.2% 7.8% Large Cap Value Equity Fund 13.8% 7.9% 8.5% 15.9% 11.9% Russell 1000 Value Index 13.8% 5.3% 8.6% 16.5% 10.4% S&P 500 Index Fund 12.0% -2.4% 3.5% 10.8% 9.3% S&P 500 Index 12.1% -2.3% 3.6% 10.9% 9.2% Large Cap Growth Equity Fund 9.6% -6.4% -0.2% 7.9% 10.3% Russell 1000 Growth Index 9.6% -9.3% -0.2% 6.3% 9.2% EIF 10.0% 0.7% 7.4% 14.3% 12.2% EIF Index Composite 10.1% -0.6% 7.7% 14.8% 11.8% Non-U.S. Equity Fund 7.4% 0.6% 10.8% 18.5% 13.3% MSCI EAFE Index 5.6% -1.1% 11.9% 20.3% 15.3% Small Cap Equity Fund N/A 6.8% 7.0% 14.2% 14.5% Russell 2000 Index 11.5% 6.6% 11.5% 18.3% 14.1% Halliburton Stock Fund 11.0% 0.9% 45.6% 50.7% 16.3% *Annualized 13

14 Performance Notes The Bond Index, Balanced, Large Cap Value Equity, S&P 500 Index, Large Cap Growth Equity, Non-U.S. Equity, and Small Cap Equity Funds were not in existence until April 1, The Mid Cap Equity Index Fund was not in existence until January 1, In order to provide comparative historical returns, the managers return of their Halliburton Trust account is shown. If the Halliburton Trust had not employed a manager for the periods presented, the firm s composite account return was added. N/A indicates that a management firm does not have a 10-year record. All rates of return are net of expenses. Your rate of return may vary depending on your account activity (e.g., contributions, withdrawals, transfers, loans, etc.) and your plan s administration expenses. To help you better understand how your funds are performing, the funds are compared with composite returns or with appropriate indexes. The composites are created by blending together index returns in proportion to the investment policy of each fund (see chart). Since there are no indexes comparable to the FIF s investments, we compare its return with money market funds tracked by Donaghue. The performance data represent past performance, and no assurance can be made regarding future results. Index Definitions* Donaghue Money Market Index is an index of over 700 money market funds. Lehman Aggregate Bond Index is an index of U.S. bonds, including government, corporate, mortgagebacked, and asset-backed securities. Merrill Lynch High Yield Bond Index is an index of U.S. corporate bonds that are rated less than investment grade but are not in default. MSCI EAFE Index is an index of non-u.s. equity securities listed on the stock exchanges of Europe, Australasia, and the Far East. MSCI Emerging Market Free Index is an index of non- U.S. stocks traded in emerging markets. Russell 1000 Growth Index focuses on the 1,000 largest companies in the Russell 3000 Index that have lower dividend yields and above-average growth rates. Russell 1000 Value Index focuses on the 1,000 largest companies in the Russell 3000 Index that have higher dividend yields and below-average growth rates. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. It is used as a general measure of U.S. stock market performance. Standard & Poor s 500 Index is a popular standard for measuring large-cap U.S. stock market performance. The index includes a representative sample of 500 leading companies in prominent industries. Standard & Poor s MidCap 400 Index is a popular standard for measuring mid-cap U.S. stock market performance. The index includes a representative sample of 400 leading companies in prominent industries with a market capitalization of approximately $1 $4 billion. *You cannot invest in any of these indexes. Fund holdings will differ from index holdings. 14 The information contained in this newsletter is not meant as investment advice. You may want to consult a financial advisor before making any investment decisions.

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16 10200 Bellaire Drive Houston, TX We encourage you to call the Plan Administrative Office with any suggestions or comments regarding Trust Talk. You can expect the next issue in May /05