Q. Mike, I am a new plan safety member, will I receive another cost of living adjustment at the end of October?

A. No! You did receive a 2% non-compounded adjustment to your pension effective July 1, 2008. But no supplemental cost of living will be paid. The Retirement System's investment portfolio, for FY 2007-08, did not produce excess earnings. For the supplemental to be paid the System must earn in excess of 8%; for FY 2007-08 it was down by about 3%.

Q. Mike, my teen-age children are asking about a plan to build lifetime wealth. I am delighted by their sudden interest in things financial. Can you offer some easy to follow yet proven strategy for them?

A. Yes, (1) own stocks - you can't beat the long term returns; I would suggest a well diversified fund like Vanguard's Total Market Index Fund (ticker VTSMX) which also comes in an ETF format (ticker VTI). This will keep fees and expenses low and provide the needed diversification. (2) urge them to start now - a surer bet than counting on high returns. (3) buy a house; well not right now; but when they have saved a down payment and have a job. This is a seed to plant in their minds. Lastly (4) if they are to marry, stay married. Research shows that divorce reduces a person's wealth by more than half, proving that when it comes to money, you're better off staying on a team. An easy read for them would be Investing for Dummies by Eric Tyson; this book covers investing fundamentals, stocks/bonds/and Wall Street, real estate, small business, and investor resources.

Q. Mike, How does the performance of our Retirement System's portfolio stack up?

A. Quite well, I am happy to report. While down by about 3% in FY 2007-08, public pension funds on average lost 4.3% during that same period and corporate pension funds were off by 5.1%. Large institutional funds, as measured by the Wilshire Trust Universe Comparison Service, had a medial negative 4.4% return. My favorite, but admittedly unfair, comparison is with the Harvard Endowment - a $37 billion fund that has averaged an incredible annual rate of return of 15% over the last decade and was up 8.6% in FY 2007-08. These returns take into account annual distributions to the university as well as new gifts. How did it achieve this 8.6% return? By taking a large position in real assets such as commodities, timber, agricultural land and real estate; it was also helped by over-exposure to foreign bonds and inflation-indexed bonds. The Retirement System's FY 2007-08 performance, while negative, did outperform its institutional peers largely through its exposure to alternative investments and real estate. Retiree's are counting on the System to both prudently invest and also to achieve excess reserves so as to be able to pay a supplemental cola. In the current market this is a tall order.

Q. Mike, Are we now in a recession?

A. It certainly feels like one. The official answer comes from the National Bureau of Economic Research (NBER) - a private organization of economists. It decides whether there has been a significant and extended decline in economic activity spread across the economy, lasting more than a few months. A more precise, but strictly unofficial, definition of recession is two consecutive quarters of decline in gross domestic product. As of yet, the NBER has not declared a recession. The NBER has recorded 32 recessions since 1854, and their average duration was 17 months. But the 10 recessions since 1945 have lasted, on average, just 10 months. The most important thing to know about recessions is that they eventually end. And after they do, stocks rise to higher levels than before the recession. As the NBER reminds us: "Expansion is the normal state of the U.S. economy."

Mike Hebel has been the POA's Welfare Officer since January 1974. He is an attorney and certified financial planner. He represents POA members at the City's Retirement Board and at the Workers' Compensation Appeals Board. He also advises on investment matters pertaining to the City's deferred compensation plan. Mike retired from the SFPD in 1994. If you have a question for Mike, send an e-mail to mike@sfpoa.org or call him at 861-0211.