Ownership of individual life insurance has hit a 50-year low, according to a new study.
The Trends in Life Insurance Ownership study found that only 44% of U.S. households have individual life insurance. The number of U.S. households that have no life insurance whatsoever is growing. Today, 30% of households (35 million) have no life insurance coverage, compared to 22% of households in 2004. Among households with children under age 18, 11 million have no coverage.
A majority of families either have no life insurance or not enough, leaving them one accident or terminal illness away from a financial catastrophe for their loved ones.
According to the study, more than 40% of Americans say a major reason they have not bought more life insurance is because they have other financial priorities right now, such as paying off debt or saving for retirement. However, the drop in life insurance ownership is not because families are not feeling vulnerable. Among households with children under 18, four in 10 say they would have immediate trouble meeting everyday living expenses if the primary breadwinner died today. Another three in 10 would have trouble keeping up with expenses after several months.
Half of households feel they need more life insurance—the highest level ever. Moreover, 24% of households with children under 18 want to speak with a financial professional about their life insurance needs; and a quarter of all households plan to buy life insurance in the next year. According to the study, life insurance beat out all other sources of financial assets or income that Americans expect to use to help pay bills and to maintain their lifestyle in the event of the primary wage-earner’s death.
About one in four middle-market households admit they don’t know how to obtain or reach their financial goals. One of the biggest obstacles is lack of information. Almost eight in 10 U.S. households currently do not have a financial advisor to turn to and most of them say they never did.
Tuesday, August 31, 2010
Monday, August 30, 2010
Living Asset-Light
By Jonathan Hoenig, Smart Money, August 30, 2010
It’s often said that the two happiest days of a boat owner’s life are the day they buy a boat and the day they sell it.
To that end, I am not a boat owner, a pool owner, a horse owner, a collector of wines, artwork, or much of anything else.
For years I have strived to live an asset-light life, focusing on accumulating financial possessions rather than physical ones. Simply put, I have come to abhor stuff. If someone broke into my home, they’d be surprised at how little there was to actually steal.
The "asset light" strategy was popularized by Enron in the last 1999s, when they determined that “heavy” assets like pipelines, which were expensive to build, buy and maintain, were no longer a competitive advantage. What mattered was information, ability…and capital.
That approach has merit for our personal finances despite the company’s demise. When it comes to your bank account, “asset light” means not wasting precious resources on purchases that don’t hold their value or those that aren’t actually assets, but liabilities...like a boat.
An asset light approach doesn’t mean asset free. It’s perfectly acceptable to enjoy weekend cars, stereo equipment, clothing or kitchenware. I’ve written about the past for my passion for used books and vintage computers.
The point is to be selective about the purchases you do make. That means cutting out the junk that loses its value the moment you bring it home. With the exception of precious metals, I can’t think of many physical positions that tend to hold their value. Keep that in mind the next time you step into a Brookstone or Pottery Barn.
Not long after they get their first job most adults develop the realization that it’s possible to appreciate something without having to own it yourself. Any “stuff” you might ever want or need will likely always by available, most likely deliverable, from highly competitive stores like Amazon, Overstock or eBay. The asset-light approach opts to warehouse most items at the store until you really need them rather than loading up on possessions just to have them on hand.
While consumption can be a kick, I’ve written before about how the best thing about having money isn't spending it, but rather knowing that you can spend it should the need or real interest arise. That security trumps any merchandise you might have flagged on your Amazon Wish List.
At the same time, an asset-light approach means learning to taking great pleasure in things that are unbelievably affordable: a steaming hot bath, a great television drama, a first rate hot dog or summer stroll in the park.
Clearly many are going this route: the recession has prompted the nation's savings rate to more than double to 6.4% and average amount of credit card debt falling to an 8-year low.
The idea is to spend money only for a specific purpose and value – not just the impulsive “high” that making a purchase can bring. Can our own government's recent spending binge make the same parsimonious claim?
An asset light strategy should include investing as well as saving your money into a zero-interest bank account. Thanks to a variety of innovative products, you can shift your wealth to bonds or yen or equities, cash or any other asset. That type of flexibility, and profit opportunity, is impossible with a house full of tchotchkes that just take up space.
I own some sentimental items, and like many shoppers benefit from bulk purchases of everyday household items at stores like Costco or Wal-Mart. But an asset light strategy means insuring you get the maximum amount of value out of those purchases you do make and end the habit of accumulating costly items that don’t hold their value over time.
Ancient Roman wisdom had it right: “An object in possession seldom retains the same charm that it had in pursuit.” An asset-light approach emphasizes saving, opportunistic investing and thoughtful but limited spending. The security and flexibility money affords is ultimately more valuable than anything it could ever actually buy.
http://www.smartmoney.com/investing/stocks/my-asset-light-life/#ixzz0y6WhczJL
It’s often said that the two happiest days of a boat owner’s life are the day they buy a boat and the day they sell it.
To that end, I am not a boat owner, a pool owner, a horse owner, a collector of wines, artwork, or much of anything else.
For years I have strived to live an asset-light life, focusing on accumulating financial possessions rather than physical ones. Simply put, I have come to abhor stuff. If someone broke into my home, they’d be surprised at how little there was to actually steal.
The "asset light" strategy was popularized by Enron in the last 1999s, when they determined that “heavy” assets like pipelines, which were expensive to build, buy and maintain, were no longer a competitive advantage. What mattered was information, ability…and capital.
That approach has merit for our personal finances despite the company’s demise. When it comes to your bank account, “asset light” means not wasting precious resources on purchases that don’t hold their value or those that aren’t actually assets, but liabilities...like a boat.
An asset light approach doesn’t mean asset free. It’s perfectly acceptable to enjoy weekend cars, stereo equipment, clothing or kitchenware. I’ve written about the past for my passion for used books and vintage computers.
The point is to be selective about the purchases you do make. That means cutting out the junk that loses its value the moment you bring it home. With the exception of precious metals, I can’t think of many physical positions that tend to hold their value. Keep that in mind the next time you step into a Brookstone or Pottery Barn.
Not long after they get their first job most adults develop the realization that it’s possible to appreciate something without having to own it yourself. Any “stuff” you might ever want or need will likely always by available, most likely deliverable, from highly competitive stores like Amazon, Overstock or eBay. The asset-light approach opts to warehouse most items at the store until you really need them rather than loading up on possessions just to have them on hand.
While consumption can be a kick, I’ve written before about how the best thing about having money isn't spending it, but rather knowing that you can spend it should the need or real interest arise. That security trumps any merchandise you might have flagged on your Amazon Wish List.
At the same time, an asset-light approach means learning to taking great pleasure in things that are unbelievably affordable: a steaming hot bath, a great television drama, a first rate hot dog or summer stroll in the park.
Clearly many are going this route: the recession has prompted the nation's savings rate to more than double to 6.4% and average amount of credit card debt falling to an 8-year low.
The idea is to spend money only for a specific purpose and value – not just the impulsive “high” that making a purchase can bring. Can our own government's recent spending binge make the same parsimonious claim?
An asset light strategy should include investing as well as saving your money into a zero-interest bank account. Thanks to a variety of innovative products, you can shift your wealth to bonds or yen or equities, cash or any other asset. That type of flexibility, and profit opportunity, is impossible with a house full of tchotchkes that just take up space.
I own some sentimental items, and like many shoppers benefit from bulk purchases of everyday household items at stores like Costco or Wal-Mart. But an asset light strategy means insuring you get the maximum amount of value out of those purchases you do make and end the habit of accumulating costly items that don’t hold their value over time.
Ancient Roman wisdom had it right: “An object in possession seldom retains the same charm that it had in pursuit.” An asset-light approach emphasizes saving, opportunistic investing and thoughtful but limited spending. The security and flexibility money affords is ultimately more valuable than anything it could ever actually buy.
http://www.smartmoney.com/investing/stocks/my-asset-light-life/#ixzz0y6WhczJL
Saturday, August 28, 2010
Top Dividend Yield Ideas from Morgan Stanley
Ratings:O = Expected to Exceed Expectations
E = Expected to be In-Line with Expectations
U = Expected to be Below Expectations
N = Neutral
A = Attractive
C = Cautious
I = In-Line
No iPhone Boost for Apple's Chinese Partner
Bruce Einhorn on August 26, 2010
http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2010/08/no_iphone_boost_for_apples_chinese_partner.html
Apple’s in a bind in China. It has teamed up with China Unicom, the perennial also-ran in the country. Unicom has exclusive rights to the iPhone in the world’s biggest cellular market, but it was not Apple's first choice for a Chinese partner. The American company conducted long on-again, off-again talks with the powerhouse player, China Mobile. Those negotiations went nowhere. As the dominant carrier (with 554 million subscribers by the middle of this year) China Mobile is no AT&T and wasn’t about to agree to give Apple the kind of sweet deal that more desperate carriers gave Steve Jobs. So China Mobile went its own way, launching a bunch of Android smartphones, and Apple was left with a new challenge: Could the iPhone magic work at longtime doormat Unicom?
On Thursday, we got our answer. Unicom reported a 54 percent drop in profit for the second quarter, earning $205 million. “Terrible numbers,” HSBC analyst Tucker Grinnan told Bloomberg News. One big problem: Unicom suffered from high marketing costs to attract customers to the iPhone. Apple’s smartphone is popular with Chinese users - but many of them buy their iPhones on the gray market rather than from Unicom. Unicom sold 500,000 iPhones in the first half of 2010, and Chinese bought another 400,000 on the gray market, according to Beijing-based market research firm BDA China.
China Mobile, meanwhile, earlier this month reported a better-than-expected 6.8 percent increase in profit for the quarter, earning $4.7 billion. Who needs Apple? Not China Mobile.http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2010/08/no_iphone_boost_for_apples_chinese_partner.html
Thursday, August 26, 2010
Owning Technology
"...Last night I was using my Hewlett Packard laptop, powered by an Intel Core processor, running Microsoft Windows 7, and connected to my home network via a Cisco wireless router. I was searching with Google to find the best deal on a new Apple iPad..."
Does this sound familiar to you? These technology companies touch our lives on a daily basis. Wouldn't you like to have a piece of that action?
Does this sound familiar to you? These technology companies touch our lives on a daily basis. Wouldn't you like to have a piece of that action?
Wednesday, August 25, 2010
Women Investors Want More From Advisors
A new survey by Boston Consulting Group reports that although women’s cut of global wealth is growing, the service they get from financial advisors is not equal to that offered to men.
Fifty-five percent of the women surveyed said there is need for improvement in their relationships with wealth managers, with 24 percent of that segment reporting a “significant” need for improvement. Few respondents had problems with the products that firms were offering; the service model was the bigger issue.
Advisors might want to pay better attention to their women clients, as their pockets are growing deeper. Women in the United States and Canada controlled 33 percent of wealth in 2009, or about $9 trillion; estimates are that it will grow to $11.7 trillion by 2014. Reasons include a growing presence of women in the workforce, their greater involvement in managing family finances, and the greater incidence of inherited wealth owing to women’s longevity.
Some financial advisors go awry with the assumption that women don’t understand investing or markets. There is empirical data that show women are more risk-averse. Boston Consulting Group reported that more than 70 percent of the women surveyed favored balanced or conservative investment strategies (for women older than 50, the percentage is nearly 95 percent.) On the other hand, women are more willing than men to admit when they don’t understand something about a security or an investment plan, and they’re interested in knowing more about the subject. The more they learn, the more willing they are to take related risks. By comparison, men tend to assume they possess more knowledge about investing than they actually have, and they become more risk-averse as they learn more, she adds.
The financial lives of women investors also are more likely to be rearranged by such changes as divorce, the birth of a child, or the death of a spouse than the financial lives men are. Women live longer, tend to earn less over their lifetimes, and often are caregivers to both children and aging parents, which takes a toll on their ability to generate income. So women are more likely to look at investments from a long-term perspective, more holistically.
As discontent women investors are with the counsel they’re receiving the survey found 85 percent of women surveyed were indifferent to the gender of their advisors. The sentiment in the survey was that personality, experience and qualifications mattered more.
Fifty-five percent of the women surveyed said there is need for improvement in their relationships with wealth managers, with 24 percent of that segment reporting a “significant” need for improvement. Few respondents had problems with the products that firms were offering; the service model was the bigger issue.
Advisors might want to pay better attention to their women clients, as their pockets are growing deeper. Women in the United States and Canada controlled 33 percent of wealth in 2009, or about $9 trillion; estimates are that it will grow to $11.7 trillion by 2014. Reasons include a growing presence of women in the workforce, their greater involvement in managing family finances, and the greater incidence of inherited wealth owing to women’s longevity.
Some financial advisors go awry with the assumption that women don’t understand investing or markets. There is empirical data that show women are more risk-averse. Boston Consulting Group reported that more than 70 percent of the women surveyed favored balanced or conservative investment strategies (for women older than 50, the percentage is nearly 95 percent.) On the other hand, women are more willing than men to admit when they don’t understand something about a security or an investment plan, and they’re interested in knowing more about the subject. The more they learn, the more willing they are to take related risks. By comparison, men tend to assume they possess more knowledge about investing than they actually have, and they become more risk-averse as they learn more, she adds.
The financial lives of women investors also are more likely to be rearranged by such changes as divorce, the birth of a child, or the death of a spouse than the financial lives men are. Women live longer, tend to earn less over their lifetimes, and often are caregivers to both children and aging parents, which takes a toll on their ability to generate income. So women are more likely to look at investments from a long-term perspective, more holistically.
As discontent women investors are with the counsel they’re receiving the survey found 85 percent of women surveyed were indifferent to the gender of their advisors. The sentiment in the survey was that personality, experience and qualifications mattered more.
Life Insurance - A Contrarian View
You might see this as heresy from a guy whose parent company is part of the MetLife enterprise. But here goes...
Life insurance costs have recently climbed after falling for more than a decade.
But remember, life insurance doesn’t benefit the person that dies. It benefits the family left behind and there are prime areas in your life that make it a valuable investment.
The most helpful life insurance policy is for a family income earner that is currently raising a family. If there are young children that are not able to support themselves you should have a life insurance policy. Today, it is more common for both parents to work to earn enough to survive. If you can’t make it on one income you definitely need to have a life insurance policy. If you both are income earners then both should have a life insurance policy.
Many assume that because they have group life insurance coverage at work, they're set. Unfortunately most group policies woefully under insure.
There are dozens of internet-based life insurance calculators available on-line. Find one and plug in the data.
You can stop having a life insurance policy is when your spouse and children are able to take care of themselves and when you have your home paid off. Life insurance should benefit the family to help them stay afloat when the finances dramatically go down.
The ideal amount to spend on life insurance is zero. That’s because the probability math built into underwriting is pretty much the same math casinos use. Some customers win (i.e. die and beneficiaries collect the death benefit), but the average customer loses (i.e. outlives the policy and does not collect the death benefit).
The purpose of insurance is to turn the unknowable (the probability of financial disaster brought on by your death) into the known (the cost of premiums today).
Buy only enough insurance so that your loved ones don’t suffer financially. Buy only cheap term insurance, not expensive whole life or anything else that builds investment value, because you can build investment value in your brokerage account with more control and lower fees.
Pay for insurance only until your family situation no longer requires it. The more you pay, the longer you can lock in prices, up to 30 years.
Now obviously, every person's situation is different and there are times where a Permanent Life Insurance policy is appropriate. Similarly, some people see life insurance as a means of bequeathing a legacy where otherwise they would not have assets to bequeath. But for the vast majority of people the "simpler is better" solution would work just fine.
Life insurance costs have recently climbed after falling for more than a decade.
But remember, life insurance doesn’t benefit the person that dies. It benefits the family left behind and there are prime areas in your life that make it a valuable investment.
The most helpful life insurance policy is for a family income earner that is currently raising a family. If there are young children that are not able to support themselves you should have a life insurance policy. Today, it is more common for both parents to work to earn enough to survive. If you can’t make it on one income you definitely need to have a life insurance policy. If you both are income earners then both should have a life insurance policy.
Many assume that because they have group life insurance coverage at work, they're set. Unfortunately most group policies woefully under insure.
There are dozens of internet-based life insurance calculators available on-line. Find one and plug in the data.
You can stop having a life insurance policy is when your spouse and children are able to take care of themselves and when you have your home paid off. Life insurance should benefit the family to help them stay afloat when the finances dramatically go down.
The ideal amount to spend on life insurance is zero. That’s because the probability math built into underwriting is pretty much the same math casinos use. Some customers win (i.e. die and beneficiaries collect the death benefit), but the average customer loses (i.e. outlives the policy and does not collect the death benefit).
The purpose of insurance is to turn the unknowable (the probability of financial disaster brought on by your death) into the known (the cost of premiums today).
Buy only enough insurance so that your loved ones don’t suffer financially. Buy only cheap term insurance, not expensive whole life or anything else that builds investment value, because you can build investment value in your brokerage account with more control and lower fees.
Pay for insurance only until your family situation no longer requires it. The more you pay, the longer you can lock in prices, up to 30 years.
Now obviously, every person's situation is different and there are times where a Permanent Life Insurance policy is appropriate. Similarly, some people see life insurance as a means of bequeathing a legacy where otherwise they would not have assets to bequeath. But for the vast majority of people the "simpler is better" solution would work just fine.
Tuesday, August 24, 2010
Long-Term Performance Means Little
You don't see much advertising for stock mutual funds lately. Magazines that once burst with boastful performance metrics from stock mutual funds now find that the funds, and stocks as an asset class, have little to promote.
The lesson is that a fund's long-term performance, on which many investors weigh heavily when making allocation decisions, bears no impact on how a market actually performs. What matters is how an asset acts in today's market.
That is why I always look at the stocks underlying those mutual funds. In today's sideways crawling Wall Street environment quality dividend-paying stocks supplemented with investment grade and some high yield bonds will provide superior performance.
But at the same time, those funds with consistent performance, over up-years and down-years, is attributable quality investment company management. Those funds are always worth a look especially if they are suitable for your time horizon and risk tolerance.
The lesson is that a fund's long-term performance, on which many investors weigh heavily when making allocation decisions, bears no impact on how a market actually performs. What matters is how an asset acts in today's market.
That is why I always look at the stocks underlying those mutual funds. In today's sideways crawling Wall Street environment quality dividend-paying stocks supplemented with investment grade and some high yield bonds will provide superior performance.
But at the same time, those funds with consistent performance, over up-years and down-years, is attributable quality investment company management. Those funds are always worth a look especially if they are suitable for your time horizon and risk tolerance.
How to Beat Low Interest Rates
By Dave Kansas, Wall Street Journal
As the stock market has gyrated this summer, one constant has endured. Already low interest rates have gotten even lower.
For investors dependent on interest payments for income, especially those near or in retirement, the current environment is challenging, to say the least.
Ten-year Treasurys are paying yields (2.61%) not seen since the 1950s, except for a brief, panicky moment at the end of 2008. Some Treasury inflation-protected securities, or TIPS, are yielding nothing. And corporate bonds are getting in on the act, with IBM recently selling three-year notes yielding 1%.
These rock-bottom yields reflect pessimism about the economy, worry about deflation and persisting fear of risk. After the chaotic stock market of the past few years, capital preservation and sleeping well at night have trumped most other things. That's why even with yields low, investor appetite seems undiminished.
Low yields mean low income, which has investors concerned about risk as they try to figure out how to augment their investment earnings without taking too big a gamble. Solutions to this yield conundrum aren't easy, but advisers are trying to figure out ways to goose yield without sacrificing too much safety.
First, it's important to keep the low-yield world in perspective. Inflation is at rock-bottom levels and prices, in some cases, are falling. The consumer-price index rose a smidge in July after falling the three previous months. The annual CPI is now 1.2%, which is less than half the yield on the 10-year Treasury, which stands at 2.61%. So, while that yield is half what it was in October 2007, it's still superior to the rate of inflation.
That argument, however, doesn't resonate if someone is trying to live off the investment income of a certain amount of principal. At 2007 rates, for example, you would have needed $1 million in government bonds to generate an income of $50,000 a year. Today, you'd need nearly twice that much.
One strategy some investors are using is investing in blue-chip companies that pay good dividends. A surprising number of high-quality stocks are paying dividend yields superior to Treasurys or municipal bonds, including household names like Home Depot, which pays 3.5%, Merck, 4.3%, and McDonald's, 3.1%.
Look at a company like Johnson & Johnson, with a yield of 3.7%, says Wayne Copelin, founder and president of Copelin Financial Advisors in Sugar Land, Texas. "That's a company that's not going to go away. An investor could put together a few of these stocks and you'd soon have a portfolio throwing off 4.5% in dividend yield without too much risk."
Of course, a lot of companies that seemed eternal only a few years ago have disappeared or gone into bankruptcy. Lehman Brothers, General Motors and AIG didn't strike anyone as about to go away or in need of help as 2007 dawned, but all three soon imploded in spectacular fashion.
Mr. Copelin says he also has been doing a lot more annuity business with investors seeking to lock in stable income. Annuities are insurance products that can be purchased with a lump sum or by investing in the annuity over a period of time ahead of the payout period.
Annuities do have higher fees than mutual funds and other investments, but Mr. Copelin notes that some annuity funds will pay retirees or those near retirement annual returns of 4.5% to as much as 6%.
"In the 1990s, nobody was interested in annuities," he says. "Now they kind of like that guaranteed return."
Another tack is the "total return" approach, which mixes different flavors of fixed-income investments, such as government-agency bonds, mortgage-backed bonds or convertible bonds.
Mutual funds are the best way to diversify risk while increasing yield. In this space, Pimco Total Return Fund yields 3.2% and BlackRock Total Return Fund yields 4.4%.
"This [approach] can possibly increase the risk in fixed-income portfolios a little," says Lynn Mayabb, senior managing adviser at BKD Wealth Advisors in Kansas City, Mo.
http://online.wsj.com/article/SB10001424052748703461504575444060941938340.html?mod=WSJ_PersonalFinance_PF4#printMode
As the stock market has gyrated this summer, one constant has endured. Already low interest rates have gotten even lower.
For investors dependent on interest payments for income, especially those near or in retirement, the current environment is challenging, to say the least.
Ten-year Treasurys are paying yields (2.61%) not seen since the 1950s, except for a brief, panicky moment at the end of 2008. Some Treasury inflation-protected securities, or TIPS, are yielding nothing. And corporate bonds are getting in on the act, with IBM recently selling three-year notes yielding 1%.
These rock-bottom yields reflect pessimism about the economy, worry about deflation and persisting fear of risk. After the chaotic stock market of the past few years, capital preservation and sleeping well at night have trumped most other things. That's why even with yields low, investor appetite seems undiminished.
Low yields mean low income, which has investors concerned about risk as they try to figure out how to augment their investment earnings without taking too big a gamble. Solutions to this yield conundrum aren't easy, but advisers are trying to figure out ways to goose yield without sacrificing too much safety.
First, it's important to keep the low-yield world in perspective. Inflation is at rock-bottom levels and prices, in some cases, are falling. The consumer-price index rose a smidge in July after falling the three previous months. The annual CPI is now 1.2%, which is less than half the yield on the 10-year Treasury, which stands at 2.61%. So, while that yield is half what it was in October 2007, it's still superior to the rate of inflation.
That argument, however, doesn't resonate if someone is trying to live off the investment income of a certain amount of principal. At 2007 rates, for example, you would have needed $1 million in government bonds to generate an income of $50,000 a year. Today, you'd need nearly twice that much.
One strategy some investors are using is investing in blue-chip companies that pay good dividends. A surprising number of high-quality stocks are paying dividend yields superior to Treasurys or municipal bonds, including household names like Home Depot, which pays 3.5%, Merck, 4.3%, and McDonald's, 3.1%.
Look at a company like Johnson & Johnson, with a yield of 3.7%, says Wayne Copelin, founder and president of Copelin Financial Advisors in Sugar Land, Texas. "That's a company that's not going to go away. An investor could put together a few of these stocks and you'd soon have a portfolio throwing off 4.5% in dividend yield without too much risk."
Of course, a lot of companies that seemed eternal only a few years ago have disappeared or gone into bankruptcy. Lehman Brothers, General Motors and AIG didn't strike anyone as about to go away or in need of help as 2007 dawned, but all three soon imploded in spectacular fashion.
Mr. Copelin says he also has been doing a lot more annuity business with investors seeking to lock in stable income. Annuities are insurance products that can be purchased with a lump sum or by investing in the annuity over a period of time ahead of the payout period.
Annuities do have higher fees than mutual funds and other investments, but Mr. Copelin notes that some annuity funds will pay retirees or those near retirement annual returns of 4.5% to as much as 6%.
"In the 1990s, nobody was interested in annuities," he says. "Now they kind of like that guaranteed return."
Another tack is the "total return" approach, which mixes different flavors of fixed-income investments, such as government-agency bonds, mortgage-backed bonds or convertible bonds.
Mutual funds are the best way to diversify risk while increasing yield. In this space, Pimco Total Return Fund yields 3.2% and BlackRock Total Return Fund yields 4.4%.
"This [approach] can possibly increase the risk in fixed-income portfolios a little," says Lynn Mayabb, senior managing adviser at BKD Wealth Advisors in Kansas City, Mo.
http://online.wsj.com/article/SB10001424052748703461504575444060941938340.html?mod=WSJ_PersonalFinance_PF4#printMode
Sunday, August 22, 2010
The Difference Between Investing & Trading
By: Tom Brennan, Web Editor, Mad Money, Friday, 20 Aug 2010
“Not all Wall Street gibberish is deceptively complicated,” Jim Cramer said Friday. “Some of it is deceptively simple.”
Case in point: The idea of investing versus trading.
A lot of people use the terms interchangeably, but they shouldn’t. They carry very different meanings. An investment is based on a long-term thesis, while a trade is any stock purchase made to profit from a short-term catalyst. Mixing up the two can cause some serious damage to your portfolio.
Only buy a stock as a trade when you know there’s some future event that could drive its stock price higher. Maybe, if we’re talking about a pharmaceutical company or a biotech, it’s the release of positive clinical trial data. Whatever the catalyst, though, the strategy is to game that news and, hopefully, take profits after. But even if the plan doesn’t pan out and you lose money, Cramer said, you must take profits once the catalyst has past. The biggest mistake you can make is to turn a trade into an investment.
On the investing side, you might see some short-term declines, but that’s OK. The goal here is to bank profits over the longer term. So those dips are just a chance to buy more of the stock in question, provided you still believe in the thesis that brought you to it in the first place. And if the stock should rise in price, don’t take your money and run. Should your thesis hold true, there will be still more good news ahead for the company.
Cramer made this last mistake himself with Apple [AAPL 249.64] back when it was trading at $26. The share price jumped $5 and he took profits. Yup, at $31 he cashed out. His price target for Apple now, in a world where apparently everyone wants an iPhone and iPad? $300.
http://www.cnbc.com/id/38788780/
“Not all Wall Street gibberish is deceptively complicated,” Jim Cramer said Friday. “Some of it is deceptively simple.”
Case in point: The idea of investing versus trading.
A lot of people use the terms interchangeably, but they shouldn’t. They carry very different meanings. An investment is based on a long-term thesis, while a trade is any stock purchase made to profit from a short-term catalyst. Mixing up the two can cause some serious damage to your portfolio.
Only buy a stock as a trade when you know there’s some future event that could drive its stock price higher. Maybe, if we’re talking about a pharmaceutical company or a biotech, it’s the release of positive clinical trial data. Whatever the catalyst, though, the strategy is to game that news and, hopefully, take profits after. But even if the plan doesn’t pan out and you lose money, Cramer said, you must take profits once the catalyst has past. The biggest mistake you can make is to turn a trade into an investment.
On the investing side, you might see some short-term declines, but that’s OK. The goal here is to bank profits over the longer term. So those dips are just a chance to buy more of the stock in question, provided you still believe in the thesis that brought you to it in the first place. And if the stock should rise in price, don’t take your money and run. Should your thesis hold true, there will be still more good news ahead for the company.
Cramer made this last mistake himself with Apple [AAPL 249.64] back when it was trading at $26. The share price jumped $5 and he took profits. Yup, at $31 he cashed out. His price target for Apple now, in a world where apparently everyone wants an iPhone and iPad? $300.
http://www.cnbc.com/id/38788780/
In 401(k) Planning, Few Acting Their Age
By Elizabeth Trotta
Are investors acting their age?
A recent report from a broker-dealer suggests they might not be, at least when it comes to risk. Among participants in Fidelity’s corporate defined-contribution plans, nearly two thirds maintain asset allocations that are out of sync with the company’s risk standards for their age.
Most financial advisors and broker dealers recommend that investors take riskier bets with their savings while they are younger, and curb that risk as they age to avoid exposure to a potential market decline falling close to their retirement date.
Investors do not appear to be listening. About 64% of Fidelity defined-contribution plan participants do not hold assets that the firm considers age-based and appropriate for their risk tolerance, down slightly from 66.5% at the end of the first half of 2009.
Among the most common culprits were investors between the ages of 36 and 44, 63.7% of whom lacked age-appropriate investments, according to the company’s standard, and about 60% of pre-retirees (45 to 55) missed the company’s mark.
Young people fared better. The study showed that 40% of individuals under 30 were not invested appropriately for their age.
Recent data have shown that young investors may be too reticent to take on enough risk. A recent Merrill Lynch survey of affluent investors found that more investors under 34 described themselves as having a lower tolerance for risk than those in any other age group, except for people over 65, most of whom were retirees.
http://www.smartmoney.com/investing/mutual-funds/in-401k-planning-few-acting-their-age/#
Are investors acting their age?
A recent report from a broker-dealer suggests they might not be, at least when it comes to risk. Among participants in Fidelity’s corporate defined-contribution plans, nearly two thirds maintain asset allocations that are out of sync with the company’s risk standards for their age.
Most financial advisors and broker dealers recommend that investors take riskier bets with their savings while they are younger, and curb that risk as they age to avoid exposure to a potential market decline falling close to their retirement date.
Investors do not appear to be listening. About 64% of Fidelity defined-contribution plan participants do not hold assets that the firm considers age-based and appropriate for their risk tolerance, down slightly from 66.5% at the end of the first half of 2009.
Among the most common culprits were investors between the ages of 36 and 44, 63.7% of whom lacked age-appropriate investments, according to the company’s standard, and about 60% of pre-retirees (45 to 55) missed the company’s mark.
Young people fared better. The study showed that 40% of individuals under 30 were not invested appropriately for their age.
Recent data have shown that young investors may be too reticent to take on enough risk. A recent Merrill Lynch survey of affluent investors found that more investors under 34 described themselves as having a lower tolerance for risk than those in any other age group, except for people over 65, most of whom were retirees.
http://www.smartmoney.com/investing/mutual-funds/in-401k-planning-few-acting-their-age/#
Thursday, August 19, 2010
10 investment traps to avoid
By Cameron Huddleston, Kiplinger.com — 08/03/10
Watch out for these products and practices that can drain – rather than boost – your wealth.
Investors tired of paltry returns and battered portfolios may be tempted to look beyond traditional investments, such as stocks, bonds and mutual funds. But they should be wary of any products and practices that promise a path to riches. Here are the top ten traps.
1. Leveraged ETFs
Exchange-traded funds -- which hold a basket of securities that track the performance of a specific stock index, bond index or other benchmark -- aren't necessarily dangerous. But leveraged ETFs -- which seek to double or triple the returns of an index -- use complex maneuvers that don't benefit long-term investors. These funds can guarantee achieving their goals only on a daily basis. Investors who hold these ETFs longer than a day can lose big.
2. Foreign exchange trading schemes
This is a real money loser for most investors because promoters of foreign currency (forex) trading charge high commissions and some are merely running Ponzi schemes.
3. Gold and precious metals
Watch out for sellers who offer to retain “purchased” gold in a “secure vault” and promise to sell the gold for the investor when it gains in value. In many instances, the gold does not exist. If you're interested in owning gold, you might consider investing in a gold fund.
4. Green schemes
Scammers try to lure people by offering opportunities to invest in new green technologies. They also try to exploit the headlines with claims that investors can profit from environmental disasters, such as the Gulf of Mexico oil spill.
5. Oil & gas schemes
Although investments offering profit participation in oil and gas ventures can be legitimate, revenues can be absorbed by high sales commissions and dubious expenses. Some promoters structure these ventures to avoid regulation and deprive investors of protections. A better option: pipeline master limited partnerships, which own and operate oil- and gas-pipelines.
6. Affinity groups
Scam artists target members of religious, ethnic, professional and other affinity groups by using the group's name to promote an investment and asking potential investors to trust the legitimacy of it. Always seek further information from an independent source.
7. Undisclosed conflicts of interest
Some securities salespeople don't disclose their financial incentives (such as big commissions) for selling certain products that may be risky or inappropriate for an investor. Always ask the salesperson how he or she is compensated.
8. Private or special deals
There are legitimate issuers of private deals -- opportunities for a small number of investors to invest in businesses that are trying to raise capital. But there are plenty of fraudulent ones, too.
9. “Off the books” deals
These are investments brokers offer on the side rather than through their employers. Not only are they risky because they're being sold without oversight from the broker's employer, but also they may be illegal.
10. Unsolicited online pitches
Just because you've seen an investment promoted on Facebook, Twitter or any other social media site doesn't mean it's legitimate. Con artists use these sites to promote fraudulent offshore investments with high-yield, tax-free returns or to spread misinformation about a stock to inflate its value before selling in a "pump and dump" scheme.
Watch out for these products and practices that can drain – rather than boost – your wealth.
Investors tired of paltry returns and battered portfolios may be tempted to look beyond traditional investments, such as stocks, bonds and mutual funds. But they should be wary of any products and practices that promise a path to riches. Here are the top ten traps.
1. Leveraged ETFs
Exchange-traded funds -- which hold a basket of securities that track the performance of a specific stock index, bond index or other benchmark -- aren't necessarily dangerous. But leveraged ETFs -- which seek to double or triple the returns of an index -- use complex maneuvers that don't benefit long-term investors. These funds can guarantee achieving their goals only on a daily basis. Investors who hold these ETFs longer than a day can lose big.
2. Foreign exchange trading schemes
This is a real money loser for most investors because promoters of foreign currency (forex) trading charge high commissions and some are merely running Ponzi schemes.
3. Gold and precious metals
Watch out for sellers who offer to retain “purchased” gold in a “secure vault” and promise to sell the gold for the investor when it gains in value. In many instances, the gold does not exist. If you're interested in owning gold, you might consider investing in a gold fund.
4. Green schemes
Scammers try to lure people by offering opportunities to invest in new green technologies. They also try to exploit the headlines with claims that investors can profit from environmental disasters, such as the Gulf of Mexico oil spill.
5. Oil & gas schemes
Although investments offering profit participation in oil and gas ventures can be legitimate, revenues can be absorbed by high sales commissions and dubious expenses. Some promoters structure these ventures to avoid regulation and deprive investors of protections. A better option: pipeline master limited partnerships, which own and operate oil- and gas-pipelines.
6. Affinity groups
Scam artists target members of religious, ethnic, professional and other affinity groups by using the group's name to promote an investment and asking potential investors to trust the legitimacy of it. Always seek further information from an independent source.
7. Undisclosed conflicts of interest
Some securities salespeople don't disclose their financial incentives (such as big commissions) for selling certain products that may be risky or inappropriate for an investor. Always ask the salesperson how he or she is compensated.
8. Private or special deals
There are legitimate issuers of private deals -- opportunities for a small number of investors to invest in businesses that are trying to raise capital. But there are plenty of fraudulent ones, too.
9. “Off the books” deals
These are investments brokers offer on the side rather than through their employers. Not only are they risky because they're being sold without oversight from the broker's employer, but also they may be illegal.
10. Unsolicited online pitches
Just because you've seen an investment promoted on Facebook, Twitter or any other social media site doesn't mean it's legitimate. Con artists use these sites to promote fraudulent offshore investments with high-yield, tax-free returns or to spread misinformation about a stock to inflate its value before selling in a "pump and dump" scheme.
Self-Employed? Assessing the Retirement-Funding Landscape
By Christine Benz, 18 August, 2010
When you start at a new job at most companies, you're usually presented with a glossy packet that details your options for insurance and retirement savings. But self-employed folks don't have it so easy. Instead, they're forced to fend for themselves on both fronts.
But when it comes to retirement savings, everyone's on their own, and selecting the right type of plan can be a complicated business unto itself. Although the tax code includes several breaks to encourage the self-employed and small-business owners to save for their own retirements, selecting the right plan for yourself and your firm entails assessing an alphabet soup's worth of options.
Which type of plan you choose depends on how much you plan to save, how many employees you have now or may have in the future, and how much flexibility you'd like, among other factors.
Here's an overview of some of the key options, along with those types of individuals and small businesses for whom they're best. Note that I've left off a few options, such as traditional pension plans, whose popularity is ebbing away because of their lack of flexibility.
IRA/Roth IRA
Overview
These plans aren't just for self-employed folks, obviously, but they should be a first stop for any self-employed individuals looking to save for retirement. The key benefit is simplicity. You can put almost anything you like inside an IRA wrapper, and you won't have to contend with any messy paperwork or extra fees to start one up. And if you opt for a Roth IRA, you'll be able to take tax-free withdrawals in retirement and won't have to take mandatory distributions at age 70 1/2.
The key drawback is that contribution limits are pretty paltry: $5,000 for those under 50 in 2010 and $6,000 for the over-50 set in 2010. Income limits also put a lid on who can initially contribute to a Roth, but it's possible to get in through the back door by starting a traditional IRA and immediately converting to a Roth. Roth IRA owners can withdraw their contributions at any time without taxes or penalties, offering an ideal escape hatch for those who'd like to save but fear they might need the money at a later time.
Who It's Right For
Because contribution limits are so low, conventional and Roth IRAs are ideal for those self-employed people who aren't in a position to save much for their retirements. But any self-employed individual should make an IRA the first stop on the road to retirement-funding because he can contribute to a traditional or Roth IRA in conjunction with any of the vehicles outlined below.
Solo 401(k)
Overview
The solo, or individual, 401(k) is a relatively new option in the retirement-planning market, but these plans have really taken off in popularity in recent years. In part that's because they're familiar--they work much like regular 401(k)s do--and also because they allow for higher contributions than is the case with some other retirement-funding vehicles. You can put as much into a solo 401(k) as you can a conventional 401(k)--in 2010, that's $16,500 for those under 50 and $22,000 for the over-50 set.
You can also sink an additional 20% of your net profits in the plan, up to a total contribution amount of $49,000 for those under 50 and $54,500 for 50-somethings on up in 2010. An additional benefit is that you can do a Roth version of the Solo 401(k), just as you can with a regular 401(k), thereby enabling tax-free withdrawals in retirement in exchange for making aftertax contributions. There are no income limits on contributions, and Solo 401(k) participants can also take loans from their accounts.
Who It’s Right For
Just as its name suggests, the solo 401(k) is geared toward individual, self-employed folks and their spouses. It's therefore a good option for those individuals and couples who are in a position to save a fair amount for retirement--not so much for those who have visions of hiring many employees down the line. And even though taking a loan from a 401(k) is never ideal, the ability to do so here is a plus for those who need to tap the money prior to retirement or simply want the flexibility to do so in a pinch. Solo 401(k) participants can contribute more in good years and less money in lean ones, offering another layer of flexibility.
SIMPLE IRA
Overview
Whereas Solo 401(k)s are geared toward self-employed individuals and their spouses, a savings incentive match plan for employees, or SIMPLE IRA, can accommodate businesses with up to 100 employees. The contribution limits are lower than is the case for Solo 401(k)s: $11,500 for those under 50 and $14,000 for those over 50 in 2010. Much like a regular 401(k), employees make contributions on their own behalf, and their employers can make matching contributions of up to 3% of pay. Contributions are tax-deductible, while withdrawals are taxable. Unlike regular IRAs and solo 401(k)s, SIMPLE IRAs do not allow participants to borrow from their accounts. SIMPLE IRA owners can, however, roll over their accounts into a conventional IRA, provided they've had the plan for at least two years.
Who It's Right For
Although the solo 401(k) allows for higher contributions and greater flexibility (such as loans and the Roth option), the SIMPLE IRA is a good choice for businesses with a few more employees. The costs for startup and ongoing administration are also relatively low. And in contrast with a SEP IRA, which I'll discuss in a moment, the onus of retirement savings falls on the employee, not the employer. (The employer can make matching contributions, but the heavy lifting goes to the employees.)
SEP IRA
Overview
In contrast with a SIMPLE IRA, the employer makes the whole contribution to the simplified employee pension IRA; employees don't contribute on their own behalf. That's why most SEPs are set up for self-employed individuals or small businesses that seek to reward the owner or a few key partners with rich retirement benefits. Contribution limits are more generous than is the case with SIMPLE IRAs: In 2010, the contribution limit is up to 25% of compensation, to a maximum level of $49,000. (Note that there is no higher allowable contribution amount for those over 50, in contrast with solo 401(k)s.) Contributions can fluctuate from year to year. SEP IRA owners cannot borrow from their accounts. Contributions are tax-deductible but withdrawals are subject to ordinary income tax. Setup and maintenance costs are low.
Who It's Right For
The key appeal is to individuals who own their own businesses, have employees other than just the proprietor and his or her spouse, and would like to contribute a fair amount for their own retirements as well as for their partners or employees. Bear in mind that even though the contribution ceiling is the same for both solo 401(k)s and SEP IRAs--$49,000--the allowable contributions for a solo 401(k) may be higher for many businesses That's because the solo 401(k) contribution may be composed of two elements--the regular contribution of $16,500 (or $22,000 for those 50 and up) as well was 20% of net profits. SEP IRA contributions, in contrast, consist of 25% of compensation alone; there is no baseline contribution that isn't tied to compensation. Nor does the SEP IRA allow for a higher maximum contribution from those ages 50 and above.
When you start at a new job at most companies, you're usually presented with a glossy packet that details your options for insurance and retirement savings. But self-employed folks don't have it so easy. Instead, they're forced to fend for themselves on both fronts.
But when it comes to retirement savings, everyone's on their own, and selecting the right type of plan can be a complicated business unto itself. Although the tax code includes several breaks to encourage the self-employed and small-business owners to save for their own retirements, selecting the right plan for yourself and your firm entails assessing an alphabet soup's worth of options.
Which type of plan you choose depends on how much you plan to save, how many employees you have now or may have in the future, and how much flexibility you'd like, among other factors.
Here's an overview of some of the key options, along with those types of individuals and small businesses for whom they're best. Note that I've left off a few options, such as traditional pension plans, whose popularity is ebbing away because of their lack of flexibility.
IRA/Roth IRA
Overview
These plans aren't just for self-employed folks, obviously, but they should be a first stop for any self-employed individuals looking to save for retirement. The key benefit is simplicity. You can put almost anything you like inside an IRA wrapper, and you won't have to contend with any messy paperwork or extra fees to start one up. And if you opt for a Roth IRA, you'll be able to take tax-free withdrawals in retirement and won't have to take mandatory distributions at age 70 1/2.
The key drawback is that contribution limits are pretty paltry: $5,000 for those under 50 in 2010 and $6,000 for the over-50 set in 2010. Income limits also put a lid on who can initially contribute to a Roth, but it's possible to get in through the back door by starting a traditional IRA and immediately converting to a Roth. Roth IRA owners can withdraw their contributions at any time without taxes or penalties, offering an ideal escape hatch for those who'd like to save but fear they might need the money at a later time.
Who It's Right For
Because contribution limits are so low, conventional and Roth IRAs are ideal for those self-employed people who aren't in a position to save much for their retirements. But any self-employed individual should make an IRA the first stop on the road to retirement-funding because he can contribute to a traditional or Roth IRA in conjunction with any of the vehicles outlined below.
Solo 401(k)
Overview
The solo, or individual, 401(k) is a relatively new option in the retirement-planning market, but these plans have really taken off in popularity in recent years. In part that's because they're familiar--they work much like regular 401(k)s do--and also because they allow for higher contributions than is the case with some other retirement-funding vehicles. You can put as much into a solo 401(k) as you can a conventional 401(k)--in 2010, that's $16,500 for those under 50 and $22,000 for the over-50 set.
You can also sink an additional 20% of your net profits in the plan, up to a total contribution amount of $49,000 for those under 50 and $54,500 for 50-somethings on up in 2010. An additional benefit is that you can do a Roth version of the Solo 401(k), just as you can with a regular 401(k), thereby enabling tax-free withdrawals in retirement in exchange for making aftertax contributions. There are no income limits on contributions, and Solo 401(k) participants can also take loans from their accounts.
Who It’s Right For
Just as its name suggests, the solo 401(k) is geared toward individual, self-employed folks and their spouses. It's therefore a good option for those individuals and couples who are in a position to save a fair amount for retirement--not so much for those who have visions of hiring many employees down the line. And even though taking a loan from a 401(k) is never ideal, the ability to do so here is a plus for those who need to tap the money prior to retirement or simply want the flexibility to do so in a pinch. Solo 401(k) participants can contribute more in good years and less money in lean ones, offering another layer of flexibility.
SIMPLE IRA
Overview
Whereas Solo 401(k)s are geared toward self-employed individuals and their spouses, a savings incentive match plan for employees, or SIMPLE IRA, can accommodate businesses with up to 100 employees. The contribution limits are lower than is the case for Solo 401(k)s: $11,500 for those under 50 and $14,000 for those over 50 in 2010. Much like a regular 401(k), employees make contributions on their own behalf, and their employers can make matching contributions of up to 3% of pay. Contributions are tax-deductible, while withdrawals are taxable. Unlike regular IRAs and solo 401(k)s, SIMPLE IRAs do not allow participants to borrow from their accounts. SIMPLE IRA owners can, however, roll over their accounts into a conventional IRA, provided they've had the plan for at least two years.
Who It's Right For
Although the solo 401(k) allows for higher contributions and greater flexibility (such as loans and the Roth option), the SIMPLE IRA is a good choice for businesses with a few more employees. The costs for startup and ongoing administration are also relatively low. And in contrast with a SEP IRA, which I'll discuss in a moment, the onus of retirement savings falls on the employee, not the employer. (The employer can make matching contributions, but the heavy lifting goes to the employees.)
SEP IRA
Overview
In contrast with a SIMPLE IRA, the employer makes the whole contribution to the simplified employee pension IRA; employees don't contribute on their own behalf. That's why most SEPs are set up for self-employed individuals or small businesses that seek to reward the owner or a few key partners with rich retirement benefits. Contribution limits are more generous than is the case with SIMPLE IRAs: In 2010, the contribution limit is up to 25% of compensation, to a maximum level of $49,000. (Note that there is no higher allowable contribution amount for those over 50, in contrast with solo 401(k)s.) Contributions can fluctuate from year to year. SEP IRA owners cannot borrow from their accounts. Contributions are tax-deductible but withdrawals are subject to ordinary income tax. Setup and maintenance costs are low.
Who It's Right For
The key appeal is to individuals who own their own businesses, have employees other than just the proprietor and his or her spouse, and would like to contribute a fair amount for their own retirements as well as for their partners or employees. Bear in mind that even though the contribution ceiling is the same for both solo 401(k)s and SEP IRAs--$49,000--the allowable contributions for a solo 401(k) may be higher for many businesses That's because the solo 401(k) contribution may be composed of two elements--the regular contribution of $16,500 (or $22,000 for those 50 and up) as well was 20% of net profits. SEP IRA contributions, in contrast, consist of 25% of compensation alone; there is no baseline contribution that isn't tied to compensation. Nor does the SEP IRA allow for a higher maximum contribution from those ages 50 and above.
Wednesday, August 18, 2010
Dividends & Average Returns
Whether you're a beginning investor or a near-retiree, the importance of purchasing stocks that pay dividends cannot be overstated. Not only do companies that have quarterly or annual payouts provide you with a steady stream of income, they also have the potential for capital appreciation. Simply put, dividend stocks can you give your portfolio what almost no other investment can -- both income and growth.
I am an avid fan of dividends -- and not just because I like that steady stream of cash. Studies have shown that from 1972 to 2006, stocks in the S&P 500 that don't pay dividends have earned an average annual return of 4.1%; dividend stocks, however, have averaged a whopping 10.1% per year. That is an incredible difference -- one that you'd be crazy to not take advantage of.
Insuring Clients In Divorce And Second Marriage
Aug 17, 2010, By Alan Lavine
There’s a reason Joan Rivers has joked that “The second wife gets the biggest diamond.” Financial headaches often come with a divorce and/or a second marriage. The second wife, for example, may need to deal with the hubby sending money to his first wife and kids. There may be a court order for a divorcing spouse to buy life insurance to protect an “ex” and kids in the event of the death of the alimony provider. Plus, estate plans can be messy with second marriages. Litigation over marriage break-ups often lasts for years.
Data on life insurance held by divorcees or spouses in second marriages is scant. Nevertheless, a couple of major surveys indicate that those involved in a divorce or second marriage may need life insurance. Sixty-five percent of those engaged to be married for the second time said they wanted life insurance, based on a 2008 survey of nearly 10,000 baby boomers by Experian Research Services, New York.
Data from the U.S. Census Bureau reveal that those who get divorced and/or those who remarry for a second time are approaching peak earnings years. Yet, they are young enough to qualify for low-cost insurance policies. The average age for persons getting divorced for the first time is 33, while the average age for those divorcing a second time is 39.
Divorce settlements typically require the spouse who pays alimony, child support, children’s medical care, higher education costs and possibly mortgage payments, to carry insurance for as long as those payments are required. If the spouse required to make those payments already has a life insurance policy, benefits can be reassigned to the ex-spouse with children.
Through life insurance, if the spouse making those payments dies, income agreed upon in the divorce settlement may continue. Say the insurance is designed to cover child support. The policy can be set up to terminate when the children reach the age of adulthood, typically 18 or 21. If insurance is required for alimony, it can last as long as those payments must be made.
Divorce settlements typically require the spouse who buys the life insurance policy to notify the other ex-spouse—typically the one with the children—that the coverage is in force and premiums are paid. Typically, there also are restrictions on changing policy beneficiaries.
How the insurance is structured depends upon a client’s situation. The life insurance policy-owning spouse may need to make adjustments if circumstances change. Suppose an ex-spouse who is named as beneficiary on the insurance policy as part of the divorce settlement has remarried? The new couple may have two incomes to raise the children without a need for extra financial support. In that case, the policy owner may change the beneficiary on the policy.
http://registeredrep.com/newsletters/insuranceletter/insuring_clients_in_divorce_and_second_marriage_0817/
There’s a reason Joan Rivers has joked that “The second wife gets the biggest diamond.” Financial headaches often come with a divorce and/or a second marriage. The second wife, for example, may need to deal with the hubby sending money to his first wife and kids. There may be a court order for a divorcing spouse to buy life insurance to protect an “ex” and kids in the event of the death of the alimony provider. Plus, estate plans can be messy with second marriages. Litigation over marriage break-ups often lasts for years.
Data on life insurance held by divorcees or spouses in second marriages is scant. Nevertheless, a couple of major surveys indicate that those involved in a divorce or second marriage may need life insurance. Sixty-five percent of those engaged to be married for the second time said they wanted life insurance, based on a 2008 survey of nearly 10,000 baby boomers by Experian Research Services, New York.
Data from the U.S. Census Bureau reveal that those who get divorced and/or those who remarry for a second time are approaching peak earnings years. Yet, they are young enough to qualify for low-cost insurance policies. The average age for persons getting divorced for the first time is 33, while the average age for those divorcing a second time is 39.
Divorce settlements typically require the spouse who pays alimony, child support, children’s medical care, higher education costs and possibly mortgage payments, to carry insurance for as long as those payments are required. If the spouse required to make those payments already has a life insurance policy, benefits can be reassigned to the ex-spouse with children.
Through life insurance, if the spouse making those payments dies, income agreed upon in the divorce settlement may continue. Say the insurance is designed to cover child support. The policy can be set up to terminate when the children reach the age of adulthood, typically 18 or 21. If insurance is required for alimony, it can last as long as those payments must be made.
Divorce settlements typically require the spouse who buys the life insurance policy to notify the other ex-spouse—typically the one with the children—that the coverage is in force and premiums are paid. Typically, there also are restrictions on changing policy beneficiaries.
How the insurance is structured depends upon a client’s situation. The life insurance policy-owning spouse may need to make adjustments if circumstances change. Suppose an ex-spouse who is named as beneficiary on the insurance policy as part of the divorce settlement has remarried? The new couple may have two incomes to raise the children without a need for extra financial support. In that case, the policy owner may change the beneficiary on the policy.
http://registeredrep.com/newsletters/insuranceletter/insuring_clients_in_divorce_and_second_marriage_0817/
Tuesday, August 17, 2010
How to make money with Mobile Internet
Apple (APPL): iMac + iPod + iPhone + iPad = iMoney
American Tower (AMT): You need cell towers to move that bandwidth around
Baidu (BIDU): 420 million Chinese internet users
China Mobile (CHL): Largest mobile phone company in the world
Cisco (CSCO): Internet routers for home, business, and industry
Google (GOOG): Is it a noun or a verb? Makes no difference. Android cell phones
Intel (INTC): The chips that power your PC, netbook, laptop, and cell phone
Microsoft (MSFT): That ubiquitous software company
Vodaphone (VOD): Euro-Asian telecommunications giant. Owns 45% of Verizon Wireless.
Verizon (VZ): "It's the network" + an almost 7 percent dividend
American Tower (AMT): You need cell towers to move that bandwidth around
Baidu (BIDU): 420 million Chinese internet users
China Mobile (CHL): Largest mobile phone company in the world
Cisco (CSCO): Internet routers for home, business, and industry
Google (GOOG): Is it a noun or a verb? Makes no difference. Android cell phones
Intel (INTC): The chips that power your PC, netbook, laptop, and cell phone
Microsoft (MSFT): That ubiquitous software company
Vodaphone (VOD): Euro-Asian telecommunications giant. Owns 45% of Verizon Wireless.
Verizon (VZ): "It's the network" + an almost 7 percent dividend
Fed-up fund investors at a 'JetBlue' breaking point
By Chuck Jaffe, MarketWatch, Aug. 15, 2010
BOSTON (MarketWatch) -- It's been nearly a week since the man known as the "JetBlue flight attendant" got mad as hell and decided he was not going to take it any more. He cussed out everyone in sight, grabbed two beers, popped open the airplane door and escaped down an emergency slide onto the airport tarmac.
He even got away with it for a little while. And since "Steven Slater" and "fed-up JetBlue flight attendant" have become top Internet search terms, he may even profit from his notoriety.
It is a situation that anyone in a frustrating position can identify with. And few things have investors more frustrated than the stock market and their mutual funds.
Plenty of people are ready to throw up their hands, cuss out management, pull the rip cord and escape for the safety of the sidelines.
For anyone who does that, however, the outcome is not likely to be nearly as good as what the JetBlue flight attendant can expect. There won't be any reality-show deals, but there might be a horror show in your portfolio. And just as Slater's lawyer has suggested that the flight attendant hopes to work again for an airline, most investors who want to bail out on funds need to stick around and work with them in order to meet their long-term savings goals.
That's why it is so important that anyone feeling frustrated with funds dig a little deeper, rather than having the knee-jerk reaction to get out.
Seat belts, please
When a purchase doesn't turn out as expected, frustration comes easily but strategy comes hard. The vast majority of money going into funds lands in issues with high star ratings from investment researcher Morningstar or top scores from fund-tracker Lipper; no one buys funds that they expect will be dogs.
When investors are frustrated with a fund, therefore, one of three things typically has changed from when the investor first bought in.
Funds change, markets change and people change. Understand which of these factors is in play with your fund portfolio and how to respond. Investors who can manage on their own -- building a diversified portfolio either directly in stocks or using exchange-traded funds -- don't need mutual funds, but the average investor will find that they are better equipped to buy a portfolio through a fund than to manage a portfolio of many stocks on their own.
When markets change, it's critical for the investor to gauge what has happened and come up with an appropriate response. Markets go through cycles, and funds fall out of favor during those market turns. Yet the fund, typically, was not purchased just to make money for this cycle, it was bought for diversification and asset-allocation purposes.
"There's a big difference between saying 'I'm giving up on the market' versus 'I'm giving up on this particular fund,'" said Russel Kinnel, director of mutual fund research at Morningstar. "You can listen to the debate over whether we'll head into deflation, inflation, or one after the other, and how the economy is suffering now, but it's hard to reach your goals without stocks and bonds."
People who react when markets change tend to be making the worst decisions. That's how investors locked in losses during the first quarter of 2009, rather than sticking with their plan and seeing a healthy rebound.
Safe travels
Funds not only change managers, but also investment strategies, styles, asset classes and more. But investors typically look at how a fund is doing in the good years, when the real measure of a fund is how it does when times are tough.
If the fund has changed significantly, then it's not the same issue you bought in the first place. At that point, cussing it out, grabbing the beer and heading for the exit in fact makes some sense.
Finally, investors change. Just as the JetBlue attendant's feelings towards his employer and its customers was shaped by years of experience, so are investors shaped over the years. A fund that is volatile and high risk and perfect for a start-up investor with a long time horizon may be a bad idea when that same investor is starting to put the kids through college.
Plenty of people say they can stomach risk; what they can't stomach is losses, or being down from where they started. If you no longer believe in the fund or if it no longer meets your needs, it may indeed be time to act on your frustrations. But by making it a thoughtful act -- rather than an irrational one -- you'll have better control over the situation, so that your new fund will be less likely to put you over the edge.
BOSTON (MarketWatch) -- It's been nearly a week since the man known as the "JetBlue flight attendant" got mad as hell and decided he was not going to take it any more. He cussed out everyone in sight, grabbed two beers, popped open the airplane door and escaped down an emergency slide onto the airport tarmac.
He even got away with it for a little while. And since "Steven Slater" and "fed-up JetBlue flight attendant" have become top Internet search terms, he may even profit from his notoriety.
It is a situation that anyone in a frustrating position can identify with. And few things have investors more frustrated than the stock market and their mutual funds.
Plenty of people are ready to throw up their hands, cuss out management, pull the rip cord and escape for the safety of the sidelines.
For anyone who does that, however, the outcome is not likely to be nearly as good as what the JetBlue flight attendant can expect. There won't be any reality-show deals, but there might be a horror show in your portfolio. And just as Slater's lawyer has suggested that the flight attendant hopes to work again for an airline, most investors who want to bail out on funds need to stick around and work with them in order to meet their long-term savings goals.
That's why it is so important that anyone feeling frustrated with funds dig a little deeper, rather than having the knee-jerk reaction to get out.
Seat belts, please
When a purchase doesn't turn out as expected, frustration comes easily but strategy comes hard. The vast majority of money going into funds lands in issues with high star ratings from investment researcher Morningstar or top scores from fund-tracker Lipper; no one buys funds that they expect will be dogs.
When investors are frustrated with a fund, therefore, one of three things typically has changed from when the investor first bought in.
Funds change, markets change and people change. Understand which of these factors is in play with your fund portfolio and how to respond. Investors who can manage on their own -- building a diversified portfolio either directly in stocks or using exchange-traded funds -- don't need mutual funds, but the average investor will find that they are better equipped to buy a portfolio through a fund than to manage a portfolio of many stocks on their own.
When markets change, it's critical for the investor to gauge what has happened and come up with an appropriate response. Markets go through cycles, and funds fall out of favor during those market turns. Yet the fund, typically, was not purchased just to make money for this cycle, it was bought for diversification and asset-allocation purposes.
"There's a big difference between saying 'I'm giving up on the market' versus 'I'm giving up on this particular fund,'" said Russel Kinnel, director of mutual fund research at Morningstar. "You can listen to the debate over whether we'll head into deflation, inflation, or one after the other, and how the economy is suffering now, but it's hard to reach your goals without stocks and bonds."
People who react when markets change tend to be making the worst decisions. That's how investors locked in losses during the first quarter of 2009, rather than sticking with their plan and seeing a healthy rebound.
Safe travels
Funds not only change managers, but also investment strategies, styles, asset classes and more. But investors typically look at how a fund is doing in the good years, when the real measure of a fund is how it does when times are tough.
If the fund has changed significantly, then it's not the same issue you bought in the first place. At that point, cussing it out, grabbing the beer and heading for the exit in fact makes some sense.
Finally, investors change. Just as the JetBlue attendant's feelings towards his employer and its customers was shaped by years of experience, so are investors shaped over the years. A fund that is volatile and high risk and perfect for a start-up investor with a long time horizon may be a bad idea when that same investor is starting to put the kids through college.
Plenty of people say they can stomach risk; what they can't stomach is losses, or being down from where they started. If you no longer believe in the fund or if it no longer meets your needs, it may indeed be time to act on your frustrations. But by making it a thoughtful act -- rather than an irrational one -- you'll have better control over the situation, so that your new fund will be less likely to put you over the edge.
Monday, August 16, 2010
Right time to consider high yield?
Fidelity Viewpoints — 08/04/10
Current low interest rates and low yields on more conservative fixed-income investments have left many investors searching for higher yields. If you fall into this camp, you may want to consider the relatively higher yields associated with non-investment-grade bonds, also known as high-yield bonds. These securities, however, aren’t for everyone—especially those investors who are risk averse. But, if you are an investor who can tolerate a higher level of risk and volatility, they may offer some advantages.
What are high-yield securities?
High-yield securities are viewed by both analysts and investors as riskier than those issued by companies with stronger balance sheets and higher credit ratings.
Credit-rating agencies—such as Standard and Poor's, Moody's, and Fitch Ratings—evaluate the ability of public companies, governments, and other borrowers to make income and principal payments to their debt holders. The debt of those organizations best prepared to do so is rated "investment-grade" while the debt of those most vulnerable to default is rated "non-investment-grade".
Distressed companies and leveraged companies—due in large part to their relatively high ratio of debt to equity—tend to struggle more than better-capitalized companies during economic downturns. To compensate for taking on increased risk, such as default risk, the debt of these companies typically offers higher yields, hence the term "high yield."
However, although high-yield bonds are fixed-income securities, they often behave more like equities during market declines. Investors should understand that high yield can suffer large losses.
A prudent time to consider high yield?
There are two reasons to consider investing in this sector:
1. High current income
With the 10-year Treasury bond yield hovering in the low 3% range through mid-July, the average yield for taxable high-yield bonds was 8.73%, a difference of nearly six percentage points. As the chart below shows, although this spread has narrowed over the past 12 months, it’s still above historical norms.
2. High coupon can mitigate price declines
In addition to receiving income, high-yield investors have the potential for capital appreciation if the price of their bond or bond fund improves. The combination of the relatively high yields and the potential for capital appreciation can lead to better returns for high-yield bonds as economic conditions improve. If they don’t, high yields can protect against a certain amount of price depreciation.
The one-year high-yield bond return for calendar-year 2009 was nearly 60%. As of June 30, 2010, the one-year return was about 28%.
The default rate, too, has been steadily declining and is not generally expected to negatively impact the asset class in the coming months. It is important, however, to remember that past performance is no guarantee of future results.
Who may want to consider high yield?
An allocation to high-yield securities may be appropriate for an investor who is well diversified, risk tolerant, and has a long-term investment time frame. Typically, these types of securities also appeal to investors looking for additional income and the potential for capital appreciation. Of course, investors need to do their own research.
Next steps
There are many ways to invest in the high-yield bond asset class, including mutual funds, exchange-traded funds (ETFs), or individual high-yield bonds. Given the inherent credit risk associated with these types of bonds, it is important to diversify across many different issuers from different industries. For the average investor, it may be appropriate to seek this type of diversification through a diversified investment vehicle like a mutual fund or ETF.
Current low interest rates and low yields on more conservative fixed-income investments have left many investors searching for higher yields. If you fall into this camp, you may want to consider the relatively higher yields associated with non-investment-grade bonds, also known as high-yield bonds. These securities, however, aren’t for everyone—especially those investors who are risk averse. But, if you are an investor who can tolerate a higher level of risk and volatility, they may offer some advantages.
What are high-yield securities?
High-yield securities are viewed by both analysts and investors as riskier than those issued by companies with stronger balance sheets and higher credit ratings.
Credit-rating agencies—such as Standard and Poor's, Moody's, and Fitch Ratings—evaluate the ability of public companies, governments, and other borrowers to make income and principal payments to their debt holders. The debt of those organizations best prepared to do so is rated "investment-grade" while the debt of those most vulnerable to default is rated "non-investment-grade".
Distressed companies and leveraged companies—due in large part to their relatively high ratio of debt to equity—tend to struggle more than better-capitalized companies during economic downturns. To compensate for taking on increased risk, such as default risk, the debt of these companies typically offers higher yields, hence the term "high yield."
However, although high-yield bonds are fixed-income securities, they often behave more like equities during market declines. Investors should understand that high yield can suffer large losses.
A prudent time to consider high yield?
There are two reasons to consider investing in this sector:
1. High current income
With the 10-year Treasury bond yield hovering in the low 3% range through mid-July, the average yield for taxable high-yield bonds was 8.73%, a difference of nearly six percentage points. As the chart below shows, although this spread has narrowed over the past 12 months, it’s still above historical norms.
2. High coupon can mitigate price declines
In addition to receiving income, high-yield investors have the potential for capital appreciation if the price of their bond or bond fund improves. The combination of the relatively high yields and the potential for capital appreciation can lead to better returns for high-yield bonds as economic conditions improve. If they don’t, high yields can protect against a certain amount of price depreciation.
The one-year high-yield bond return for calendar-year 2009 was nearly 60%. As of June 30, 2010, the one-year return was about 28%.
The default rate, too, has been steadily declining and is not generally expected to negatively impact the asset class in the coming months. It is important, however, to remember that past performance is no guarantee of future results.
Who may want to consider high yield?
An allocation to high-yield securities may be appropriate for an investor who is well diversified, risk tolerant, and has a long-term investment time frame. Typically, these types of securities also appeal to investors looking for additional income and the potential for capital appreciation. Of course, investors need to do their own research.
Next steps
There are many ways to invest in the high-yield bond asset class, including mutual funds, exchange-traded funds (ETFs), or individual high-yield bonds. Given the inherent credit risk associated with these types of bonds, it is important to diversify across many different issuers from different industries. For the average investor, it may be appropriate to seek this type of diversification through a diversified investment vehicle like a mutual fund or ETF.
Another Threat to Economy: Boomers Cutting Back
By Mark Whitehouse, Wall Street Journal, 16 August 2010
America's baby boomers—those born between 1946 and 1964—face a problem that could weigh on the economy for years to come: The longer it takes for the economy to recover, the less money they'll have to spend in retirement.
Policy makers have long worried that Americans aren't saving enough for old age. And lately, current and prospective retirees have been hit on many fronts at once: They have less money, they earn less on what they have, their houses aren't rising in value and the prospect of working longer to make up the shortfall has dimmed significantly in a lousy job market.
Banks, home buyers and bond issuers are all benefiting as the U.S. Federal Reserve holds short-term interest rates near zero to support a recovery. But for many of the 36 million Americans who will turn 65 over the next decade—and even for the 45 million who have another decade to go— the resulting low bond yields, combined with a volatile stock market, are making a dire retirement picture look even worse.
Low yields present retirees with a difficult choice: Accept the lower income offered by safer bonds, or take the risk of staying in the stock market. Either way, their predicament could put a long-term damper on the consumer spending that typically drives U.S. growth.
Despite the market's rebound from the lows of 2009, nest eggs remain severely impaired. As of the first quarter of 2010, net household assets—homes, 401(k) plans, pension assets and other investments minus debts—stood at $54.6 trillion, down 18% from the end of 2007. That's an average of about $171,000 per person, much of which is concentrated in the hands of the wealthiest.
At the same time, the return people can hope to earn on their assets has fallen, particularly for those who switch into bonds or annuities to guarantee a fixed income. The average yield on U.S. government, corporate and mortgage bonds stands at about 2.4%, while stock-market valuations suggest a long-term return of about 6%. At those levels of return, some 59% of people aged 56 to 62 will be at risk of not having enough money to cover basic living and health-care costs in retirement. If market returns are higher—8.9% for stocks and 6.3% for bonds—the picture isn't a lot better: The percentage at risk falls to about 47%.
Before the recession hit, many economists assumed people would solve their retirement problems simply by staying in the work force longer. Now, the recession has blown that idea out of the water.
Older workers, who typically fared better than their younger counterparts in recessions, have been hit just as hard by layoffs this time around. As a result, the fraction of people 65 or older who are working has leveled off after a long period of growth. As of July, it stood at 15.9%, down from 16.3% in mid-2008.
With the overall unemployment rate hovering at 9.5%, many older workers have now found themselves at the back of the line to return to the work force.
The diminishing work prospects will require many older folks to make do with less—a discouraging outlook for firms hoping to sell them everything from restaurant meals to cars.
As of 2008, the latest data available, people aged 65 to 74 were spending 12.3% less than they did ten years earlier, in inflation-adjusted terms. They cut spending on cars and trucks by 46%, household furnishings by 35% and dining out by 27%. At the same time, they spent 75% more on health care and 131% more on health insurance.
Policy makers have more immediate concerns, such as how to create jobs for the nearly 15 million unemployed. The predicament of retirees, though, demonstrates how policy decisions—for example, on whether to stimulate the economy through interest rates or government spending—can have repercussions for many years to come.
http://online.wsj.com/article/SB10001424052748703321004575427881929070948.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
America's baby boomers—those born between 1946 and 1964—face a problem that could weigh on the economy for years to come: The longer it takes for the economy to recover, the less money they'll have to spend in retirement.
Policy makers have long worried that Americans aren't saving enough for old age. And lately, current and prospective retirees have been hit on many fronts at once: They have less money, they earn less on what they have, their houses aren't rising in value and the prospect of working longer to make up the shortfall has dimmed significantly in a lousy job market.
Banks, home buyers and bond issuers are all benefiting as the U.S. Federal Reserve holds short-term interest rates near zero to support a recovery. But for many of the 36 million Americans who will turn 65 over the next decade—and even for the 45 million who have another decade to go— the resulting low bond yields, combined with a volatile stock market, are making a dire retirement picture look even worse.
Low yields present retirees with a difficult choice: Accept the lower income offered by safer bonds, or take the risk of staying in the stock market. Either way, their predicament could put a long-term damper on the consumer spending that typically drives U.S. growth.
Despite the market's rebound from the lows of 2009, nest eggs remain severely impaired. As of the first quarter of 2010, net household assets—homes, 401(k) plans, pension assets and other investments minus debts—stood at $54.6 trillion, down 18% from the end of 2007. That's an average of about $171,000 per person, much of which is concentrated in the hands of the wealthiest.
At the same time, the return people can hope to earn on their assets has fallen, particularly for those who switch into bonds or annuities to guarantee a fixed income. The average yield on U.S. government, corporate and mortgage bonds stands at about 2.4%, while stock-market valuations suggest a long-term return of about 6%. At those levels of return, some 59% of people aged 56 to 62 will be at risk of not having enough money to cover basic living and health-care costs in retirement. If market returns are higher—8.9% for stocks and 6.3% for bonds—the picture isn't a lot better: The percentage at risk falls to about 47%.
Before the recession hit, many economists assumed people would solve their retirement problems simply by staying in the work force longer. Now, the recession has blown that idea out of the water.
Older workers, who typically fared better than their younger counterparts in recessions, have been hit just as hard by layoffs this time around. As a result, the fraction of people 65 or older who are working has leveled off after a long period of growth. As of July, it stood at 15.9%, down from 16.3% in mid-2008.
With the overall unemployment rate hovering at 9.5%, many older workers have now found themselves at the back of the line to return to the work force.
The diminishing work prospects will require many older folks to make do with less—a discouraging outlook for firms hoping to sell them everything from restaurant meals to cars.
As of 2008, the latest data available, people aged 65 to 74 were spending 12.3% less than they did ten years earlier, in inflation-adjusted terms. They cut spending on cars and trucks by 46%, household furnishings by 35% and dining out by 27%. At the same time, they spent 75% more on health care and 131% more on health insurance.
Policy makers have more immediate concerns, such as how to create jobs for the nearly 15 million unemployed. The predicament of retirees, though, demonstrates how policy decisions—for example, on whether to stimulate the economy through interest rates or government spending—can have repercussions for many years to come.
http://online.wsj.com/article/SB10001424052748703321004575427881929070948.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
Friday, August 13, 2010
4 important questions to ask about life insurance
Fidelity Viewpoints — 08/06/10
You're working hard for your money and you'd like your family to enjoy the fruits of your labor throughout the coming years. Preparing for your family's future, however, means more than investing appropriately in order to achieve the right combination of growth and stability for your goals and time horizon. For many people, it also involves purchasing the right amount of life insurance during their working years.
Life insurance can help mitigate the financial impact on your loved ones in the event of your death. With a life insurance policy, your family can use the proceeds to help replace lost income, eliminate debt, pay for college, keep a business afloat, or address other financial needs and goals while they adjust to a new life.
How does life insurance work?
A life insurance policy provides a payment in the event of your death that can help protect your family's lifestyle in the absence of your earning power. Many people have financial goals they are trying to meet with hard-earned income—such as paying off a mortgage, putting a child through college, or supporting an elderly parent. Life insurance can help support your family goals.
Here's how it works: When you purchase a life insurance policy, you're buying a contract with the issuing insurance company. The issuing insurance company guarantees that upon your death, it will pay a preset amount to your beneficiaries. The guarantee is subject to the insurance company's claims-paying ability. The proceeds are typically free from income taxes. The insurance company pays your beneficiaries directly, so they receive the funds without the delays and expenses associated with the probate process that governs assets passed down via wills.
What types of life insurance are available?
Life insurance policies fall into two general categories: term and permanent. A term insurance policy covers a specific period of time, such as 10 or 20 years. At the end of that period, you normally stop paying premiums and your coverage ceases. A permanent insurance policy covers you until your death, regardless of age—as long as premium payments are up to date. Permanent insurance generally includes an investment component along with the insurance policy, and generally carries higher premiums as a result. Permanent insurance is commonly used for wealth transfer and estate planning purposes.
Term insurance is generally more affordable, and in many cases more appropriate, for most purchasers. Term insurance allows you to gain access to life insurance with a lot less money than you'd need if you were trying to buy the same amount of permanent insurance. One helpful comparison is the economics of leasing a car versus buying one: You can often get a more expensive car for the same payment by leasing, rather than buying, the vehicle.
When is the right time to buy life insurance?
Many people could benefit by having life insurance. When someone else is depending on your income, there's generally a need for life insurance.
You may already have life insurance coverage through your employer. Even so, it's usually a good idea to consider purchasing additional coverage independently, because policies you buy outside an employer's plan are portable, meaning your coverage continues even if you lose or leave your job. Also, your employer's coverage may not meet your financial obligations for adequately protecting your family.
It's a good idea to review your need for life insurance whenever a major life event occurs. Consider the following events and the ways in which life insurance might help protect your family in each scenario:
For families with children, if one spouse is staying home, it may be important to have life insurance for that spouse in addition to insuring the primary wage earner. Consider the value of the stay-at-home parent and the services he or she provides. If a premature death were to occur, in addition to being a devastating loss, it would be a tremendous financial strain on your loved ones and might impact the working spouse's ability to continue to make the same living.
Term life insurance can cover future college expenses, funeral and estate expenses, and even business ownership needs.
As you consider purchasing life insurance, bear in mind that you'll generally have to provide “evidence of insurability.” This means that before an insurer issues a policy, the company will typically require you to undergo a basic medical screening, often scheduled at your home or workplace. Generally speaking, the better your overall health, the lower your premium will be. Many factors contribute to the price you will pay for insurance, such as your age and your health. Low blood pressure and low cholesterol, along with a healthy body weight, will typically lead to a lower price. It's usually easier—and less expensive—to buy life insurance in your twenties and thirties than in your forties, fifties, sixties, and so on. Sometimes health issues arise later in life that can make insurance difficult or costly to obtain.
How much life insurance do you need?
There are several ways to go about determining how much coverage you need. One simple method is to buy coverage equal to five to 10 times your annual salary, bonuses, etc. Following this rule of thumb, if you make $50,000 annually, you'd buy a policy between $250,000 and $500,000.
Other methods are more precise and take certain aspects of your financial situation into consideration, such as the capital you've already accumulated, the liabilities you've accrued, and the specific costs you'd like your family to be covered for in the future.
The amount of insurance you need is tied to the annual income you would need to replace in the event of a premature death. If you can afford to retire—meaning you no longer need to work to support yourself and your family—then you may no longer need term insurance. However, most people who are in their working years aren't in a position to afford to retire, and need coverage.
When purchasing term insurance, you'll also have to determine how long you'd like to have the coverage in place. One benchmark to use is the number of years you have until you can comfortably afford to retire. You may, however, want to consider other scenarios, such as the number of years until all your children complete college, or how much it would cost to replace your income for 10 years.
One of the major benefits of term life insurance is its ability to protect your assets at an affordable price. Take care to avoid buying a policy with premiums you may not be able to afford in the future.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-4-questions-about-life-insurance&topic=insurance
You're working hard for your money and you'd like your family to enjoy the fruits of your labor throughout the coming years. Preparing for your family's future, however, means more than investing appropriately in order to achieve the right combination of growth and stability for your goals and time horizon. For many people, it also involves purchasing the right amount of life insurance during their working years.
Life insurance can help mitigate the financial impact on your loved ones in the event of your death. With a life insurance policy, your family can use the proceeds to help replace lost income, eliminate debt, pay for college, keep a business afloat, or address other financial needs and goals while they adjust to a new life.
How does life insurance work?
A life insurance policy provides a payment in the event of your death that can help protect your family's lifestyle in the absence of your earning power. Many people have financial goals they are trying to meet with hard-earned income—such as paying off a mortgage, putting a child through college, or supporting an elderly parent. Life insurance can help support your family goals.
Here's how it works: When you purchase a life insurance policy, you're buying a contract with the issuing insurance company. The issuing insurance company guarantees that upon your death, it will pay a preset amount to your beneficiaries. The guarantee is subject to the insurance company's claims-paying ability. The proceeds are typically free from income taxes. The insurance company pays your beneficiaries directly, so they receive the funds without the delays and expenses associated with the probate process that governs assets passed down via wills.
What types of life insurance are available?
Life insurance policies fall into two general categories: term and permanent. A term insurance policy covers a specific period of time, such as 10 or 20 years. At the end of that period, you normally stop paying premiums and your coverage ceases. A permanent insurance policy covers you until your death, regardless of age—as long as premium payments are up to date. Permanent insurance generally includes an investment component along with the insurance policy, and generally carries higher premiums as a result. Permanent insurance is commonly used for wealth transfer and estate planning purposes.
Term insurance is generally more affordable, and in many cases more appropriate, for most purchasers. Term insurance allows you to gain access to life insurance with a lot less money than you'd need if you were trying to buy the same amount of permanent insurance. One helpful comparison is the economics of leasing a car versus buying one: You can often get a more expensive car for the same payment by leasing, rather than buying, the vehicle.
When is the right time to buy life insurance?
Many people could benefit by having life insurance. When someone else is depending on your income, there's generally a need for life insurance.
You may already have life insurance coverage through your employer. Even so, it's usually a good idea to consider purchasing additional coverage independently, because policies you buy outside an employer's plan are portable, meaning your coverage continues even if you lose or leave your job. Also, your employer's coverage may not meet your financial obligations for adequately protecting your family.
It's a good idea to review your need for life insurance whenever a major life event occurs. Consider the following events and the ways in which life insurance might help protect your family in each scenario:
- New home purchase or major home improvements. Life insurance can cover your mortgage or home equity obligations in the event of your death.
- Marriage. A wedding should prompt you to review your entire financial situation, including your income needs, debt, and other liabilities, and to add a layer of protection for both spouses.
- Birth or adoption of a child. A life insurance policy can provide protection for your family's increased income needs as well as any debt you may have taken on, including college expenses.
- New job. A term insurance policy can replace any group coverage you may have had from a former employer, and allow you to increase your coverage amount in accordance with your new salary.
For families with children, if one spouse is staying home, it may be important to have life insurance for that spouse in addition to insuring the primary wage earner. Consider the value of the stay-at-home parent and the services he or she provides. If a premature death were to occur, in addition to being a devastating loss, it would be a tremendous financial strain on your loved ones and might impact the working spouse's ability to continue to make the same living.
Term life insurance can cover future college expenses, funeral and estate expenses, and even business ownership needs.
As you consider purchasing life insurance, bear in mind that you'll generally have to provide “evidence of insurability.” This means that before an insurer issues a policy, the company will typically require you to undergo a basic medical screening, often scheduled at your home or workplace. Generally speaking, the better your overall health, the lower your premium will be. Many factors contribute to the price you will pay for insurance, such as your age and your health. Low blood pressure and low cholesterol, along with a healthy body weight, will typically lead to a lower price. It's usually easier—and less expensive—to buy life insurance in your twenties and thirties than in your forties, fifties, sixties, and so on. Sometimes health issues arise later in life that can make insurance difficult or costly to obtain.
How much life insurance do you need?
There are several ways to go about determining how much coverage you need. One simple method is to buy coverage equal to five to 10 times your annual salary, bonuses, etc. Following this rule of thumb, if you make $50,000 annually, you'd buy a policy between $250,000 and $500,000.
Other methods are more precise and take certain aspects of your financial situation into consideration, such as the capital you've already accumulated, the liabilities you've accrued, and the specific costs you'd like your family to be covered for in the future.
The amount of insurance you need is tied to the annual income you would need to replace in the event of a premature death. If you can afford to retire—meaning you no longer need to work to support yourself and your family—then you may no longer need term insurance. However, most people who are in their working years aren't in a position to afford to retire, and need coverage.
When purchasing term insurance, you'll also have to determine how long you'd like to have the coverage in place. One benchmark to use is the number of years you have until you can comfortably afford to retire. You may, however, want to consider other scenarios, such as the number of years until all your children complete college, or how much it would cost to replace your income for 10 years.
One of the major benefits of term life insurance is its ability to protect your assets at an affordable price. Take care to avoid buying a policy with premiums you may not be able to afford in the future.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-4-questions-about-life-insurance&topic=insurance
Teaching Your Child To Be Financially Savvy
by James E. McWhinney
When it comes to money, the advice parents usually give their children goes something like this: "Money doesn't grow on trees", or "Close the door when you leave the house - we're not paying to heat the whole neighborhood". Although that parental wisdom has stood the test of time, it takes a bit more effort to teach a child sound financial management principles
The first step in the process is to engage the child's interest. Start with an allowance and have your child dedicate a portion of it to spending and a portion to savings. Be sure to give your child discretion on his/her spending allocation. By giving a child money and the power to make decisions regarding its disposition, you will capture the child's interest and give him/her a sense of responsibility.
Lesson No. 1: Saving
The portion of the child's allowance that is dedicated to savings should be deposited into an interest-bearing savings account. Take your child to the bank when the account is opened and involve him/her in the process. Make sure your child understands the purpose of the account and has a working definition of the term interest.
The child's involvement shouldn't end with that first visit to the bank, however. It's a good idea to set up the account so that statements come in your child's name. When the mail arrives, let your child open the envelope. Review the account balance and help your child understand how and why the balance grows. Give your child a binder or folder and have him/her put each monthly statement in the binder. This teaches your child to be organized and to keep records, and it provides a historical document tracing the growth of the account balance.
Take your child to the bank on the day his/her allowance is paid. Let him/her participate in the process of depositing the money. Remember, the point here isn't to try to turn a $5 deposit into a record-setting investment. The point is to teach your child about money, and lesson one is about saving instead of spending. Your objective is to lay the foundation for a lifetime habit of saving.
Lesson No. 2: Investing
Every child matures at a different rate, but when your child is older, start talking about making money grow more quickly. Most teenagers are able to grasp the basics of stock ownership. Spend some time explaining the concept of risk, highlighting the potential risks and rewards of investing in the stock market. If you can afford it, give your child a few hundred dollars and help him/her research companies that he/she finds interesting, such as toy or gaming companies, skateboard makers, and so on. Walk your child through the process of conducting research using the internet and the resources available at your local library. Most large public libraries in the U.S. subscribe to Value Line, a investment research provider, or offer net access to a variety of finance sites.
When the research is complete, help your child buy shares. Remember, the purpose of this exercise isn't to create a portfolio that will sustain your child through the ages, and it isn't to demonstrate your fine stock-picking skills. The objective is to give your child the opportunity to learn about money and risk and reward by making his/her own choices. If you don't have a lot of disposable money to give your child, or if you are concerned about his/her research and stock selection abilities, limit the investment to one or two companies at $100 each. Online brokerages make this an affordable exercise for almost everyone.
Don't forget that the possibility of losing money is part of the process. Any investor who claims never to have lost money during a lifetime of investing isn't telling the truth. Keep in mind that this should be a learning experience. You are not expected to hand a 13-year-old child the sum of his/her life's savings and suggest that he/she have a go at the markets. The intention is to teach him/her about investing and the consequences of making decisions.
Once again, statements for the brokerage account should be addressed to the child. The statements should go into your child's folder or binder. You can use them to compare the fluctuations in the account balance against the balances from the savings account. Review the returns on the child's portfolio, discuss the results and stick with this process over a period of years.
Look to the Future
As your child matures, he or she can grasp more sophisticated investing concepts, such as the importance of asset allocation and portfolio diversification and the advantages of different types of investment vehicles. You can explain that, as people age or accumulate assets, fixed-income investments may become an appropriate addition to an investor's portfolio. When possible, you can use your personal portfolio as a tool to demonstrate how portfolio construction evolves over time based on an investor's needs.
Conclusion
Knowledge is power. While some adults may blanch at the prospect of giving their child the freedom to pick stocks, it is important to remember that you won't always be around to do the job on the child's behalf. Bear in mind the old saying about teaching a man to fish and feeding him for a lifetime versus giving him a fish to feed him for a day. Ideally, these early exercises in money management will teach your child valuable financial lessons to last him or her well into adulthood.
While affluent adults will invest substantial sums on behalf of their children, including setting up college savings and personal trusts, giving a child the knowledge required to handle his/her own financial affairs is an equally important parental responsibility. In the long run, teaching children about money may be more valuable than giving them cash and no direction on how to handle it. So, start early and make the experience fun. Good saving and investing habits become second nature over time, and your child will be able to draw on these skills for a lifetime.
http://www.investopedia.com/articles/pf/05/teachkidsmoney.asp?partner=basics8
When it comes to money, the advice parents usually give their children goes something like this: "Money doesn't grow on trees", or "Close the door when you leave the house - we're not paying to heat the whole neighborhood". Although that parental wisdom has stood the test of time, it takes a bit more effort to teach a child sound financial management principles
The first step in the process is to engage the child's interest. Start with an allowance and have your child dedicate a portion of it to spending and a portion to savings. Be sure to give your child discretion on his/her spending allocation. By giving a child money and the power to make decisions regarding its disposition, you will capture the child's interest and give him/her a sense of responsibility.
Lesson No. 1: Saving
The portion of the child's allowance that is dedicated to savings should be deposited into an interest-bearing savings account. Take your child to the bank when the account is opened and involve him/her in the process. Make sure your child understands the purpose of the account and has a working definition of the term interest.
The child's involvement shouldn't end with that first visit to the bank, however. It's a good idea to set up the account so that statements come in your child's name. When the mail arrives, let your child open the envelope. Review the account balance and help your child understand how and why the balance grows. Give your child a binder or folder and have him/her put each monthly statement in the binder. This teaches your child to be organized and to keep records, and it provides a historical document tracing the growth of the account balance.
Take your child to the bank on the day his/her allowance is paid. Let him/her participate in the process of depositing the money. Remember, the point here isn't to try to turn a $5 deposit into a record-setting investment. The point is to teach your child about money, and lesson one is about saving instead of spending. Your objective is to lay the foundation for a lifetime habit of saving.
Lesson No. 2: Investing
Every child matures at a different rate, but when your child is older, start talking about making money grow more quickly. Most teenagers are able to grasp the basics of stock ownership. Spend some time explaining the concept of risk, highlighting the potential risks and rewards of investing in the stock market. If you can afford it, give your child a few hundred dollars and help him/her research companies that he/she finds interesting, such as toy or gaming companies, skateboard makers, and so on. Walk your child through the process of conducting research using the internet and the resources available at your local library. Most large public libraries in the U.S. subscribe to Value Line, a investment research provider, or offer net access to a variety of finance sites.
When the research is complete, help your child buy shares. Remember, the purpose of this exercise isn't to create a portfolio that will sustain your child through the ages, and it isn't to demonstrate your fine stock-picking skills. The objective is to give your child the opportunity to learn about money and risk and reward by making his/her own choices. If you don't have a lot of disposable money to give your child, or if you are concerned about his/her research and stock selection abilities, limit the investment to one or two companies at $100 each. Online brokerages make this an affordable exercise for almost everyone.
Don't forget that the possibility of losing money is part of the process. Any investor who claims never to have lost money during a lifetime of investing isn't telling the truth. Keep in mind that this should be a learning experience. You are not expected to hand a 13-year-old child the sum of his/her life's savings and suggest that he/she have a go at the markets. The intention is to teach him/her about investing and the consequences of making decisions.
Once again, statements for the brokerage account should be addressed to the child. The statements should go into your child's folder or binder. You can use them to compare the fluctuations in the account balance against the balances from the savings account. Review the returns on the child's portfolio, discuss the results and stick with this process over a period of years.
Look to the Future
As your child matures, he or she can grasp more sophisticated investing concepts, such as the importance of asset allocation and portfolio diversification and the advantages of different types of investment vehicles. You can explain that, as people age or accumulate assets, fixed-income investments may become an appropriate addition to an investor's portfolio. When possible, you can use your personal portfolio as a tool to demonstrate how portfolio construction evolves over time based on an investor's needs.
Conclusion
Knowledge is power. While some adults may blanch at the prospect of giving their child the freedom to pick stocks, it is important to remember that you won't always be around to do the job on the child's behalf. Bear in mind the old saying about teaching a man to fish and feeding him for a lifetime versus giving him a fish to feed him for a day. Ideally, these early exercises in money management will teach your child valuable financial lessons to last him or her well into adulthood.
While affluent adults will invest substantial sums on behalf of their children, including setting up college savings and personal trusts, giving a child the knowledge required to handle his/her own financial affairs is an equally important parental responsibility. In the long run, teaching children about money may be more valuable than giving them cash and no direction on how to handle it. So, start early and make the experience fun. Good saving and investing habits become second nature over time, and your child will be able to draw on these skills for a lifetime.
http://www.investopedia.com/articles/pf/05/teachkidsmoney.asp?partner=basics8
Thursday, August 12, 2010
Going Green With Mutual Funds
by Mark Veverka, March 2, 2010
Investing in companies that embrace leading-edge environmental practices and technologies can bring healthy returns. The green industry is a new frontier encompassing not only construction, conservation and energy, but nearly every human endeavor, and it could balloon into a $6 trillion market. That's "an order of magnitude of the Internet market," says John Segrich, co-portfolio manager of the Gabelli SRI Green mutual fund.
Unlike the Internet, however, the green economy isn't consumer-driven, or even business-driven. It has been propelled and shaped largely by government policies, standards, subsidies and regulation. "Those polices can change rapidly and have a dramatic effect on the markets," says Segrich, whose $11.6 million fund, launched in mid-2007, was the best-performing green mutual fund in 2009, with a total return of nearly 68%.
It may be most prudent, at this early stage, to invest in green companies through actively managed mutual funds, especially because keeping track of public policy, in the U.S. and elsewhere, requires extensive homework.
Green index and exchange-traded funds offer another alternative to individual stocks and actively managed funds, although these funds are only as good as the components of the underlying indexes. Companies with widely divergent characteristics can be lumped together in such vehicles.
A growing number of ETFs have been created to track small slices of the green market, such as wind, water or biofuels. But Michael Herbst, associate director of fund analysis for Morningstar, warns that "the narrower the swath, the greater the risk [that] an investor will use the ETF ineffectively."
Single-sector funds tend to be volatile, much like the industries they track. "It is fairly common to see investors steer money into hot sectors, such as tech in the late 1990s and energy and commodities heading into 2008 -- after the big gains have been made -- only to take their money out after the inevitable decline, quite possibly missing out on a rebound," Herbst says.
Picking a green mutual fund isn't as easy as it seems. For one thing, fund-research firms have yet to create a "green investing" category.
As a group -- and back then, it was a tiny group -- green funds rallied for several years leading up to 2008, buoyed by investor enthusiasm for solar and wind energy. But the financial crisis and bear market decimated most of these funds, and even after last year's gains, many have yet to retrace all their losses. Only 16 of the funds have three-year returns; those range from an annualized loss of 1.2% for the PFW Water ETF to a much steeper decline of 22.5% for Guinness Atkinson Alternative Energy.
"Waves of enthusiasm and pessimism are likely to affect the group in the future," says Herbst. "Investors may be looking for a direct tie between increased government-stimulus spending in these areas and investment success. We haven't yet seen that direct connection for green funds as a group."
That's why well-managed, diversified funds might hold the greatest appeal, notwithstanding their generally higher costs, especially when it comes to following the bouncing regulatory ball. Gabelli's Segrich is focused on the light-emitting diode (LED) market, which benefits from demand by consumers as much as government policy. Many governments have mandated that incandescent lights be replaced by LEDs, which gives the industry visible growth.
In addition, the consumer-electronics industry continues to roll out LED televisions and other appliances that are more energy-efficient than older gadgets. "The LED industry is sustainable on its own, but governments are behind it, making it all the more attractive," says Segrich.
http://www.smartmoney.com/investing/mutual-funds/going-green-with-mutual-funds/
Investing in companies that embrace leading-edge environmental practices and technologies can bring healthy returns. The green industry is a new frontier encompassing not only construction, conservation and energy, but nearly every human endeavor, and it could balloon into a $6 trillion market. That's "an order of magnitude of the Internet market," says John Segrich, co-portfolio manager of the Gabelli SRI Green mutual fund.
Unlike the Internet, however, the green economy isn't consumer-driven, or even business-driven. It has been propelled and shaped largely by government policies, standards, subsidies and regulation. "Those polices can change rapidly and have a dramatic effect on the markets," says Segrich, whose $11.6 million fund, launched in mid-2007, was the best-performing green mutual fund in 2009, with a total return of nearly 68%.
It may be most prudent, at this early stage, to invest in green companies through actively managed mutual funds, especially because keeping track of public policy, in the U.S. and elsewhere, requires extensive homework.
Green index and exchange-traded funds offer another alternative to individual stocks and actively managed funds, although these funds are only as good as the components of the underlying indexes. Companies with widely divergent characteristics can be lumped together in such vehicles.
A growing number of ETFs have been created to track small slices of the green market, such as wind, water or biofuels. But Michael Herbst, associate director of fund analysis for Morningstar, warns that "the narrower the swath, the greater the risk [that] an investor will use the ETF ineffectively."
Single-sector funds tend to be volatile, much like the industries they track. "It is fairly common to see investors steer money into hot sectors, such as tech in the late 1990s and energy and commodities heading into 2008 -- after the big gains have been made -- only to take their money out after the inevitable decline, quite possibly missing out on a rebound," Herbst says.
Picking a green mutual fund isn't as easy as it seems. For one thing, fund-research firms have yet to create a "green investing" category.
As a group -- and back then, it was a tiny group -- green funds rallied for several years leading up to 2008, buoyed by investor enthusiasm for solar and wind energy. But the financial crisis and bear market decimated most of these funds, and even after last year's gains, many have yet to retrace all their losses. Only 16 of the funds have three-year returns; those range from an annualized loss of 1.2% for the PFW Water ETF to a much steeper decline of 22.5% for Guinness Atkinson Alternative Energy.
"Waves of enthusiasm and pessimism are likely to affect the group in the future," says Herbst. "Investors may be looking for a direct tie between increased government-stimulus spending in these areas and investment success. We haven't yet seen that direct connection for green funds as a group."
That's why well-managed, diversified funds might hold the greatest appeal, notwithstanding their generally higher costs, especially when it comes to following the bouncing regulatory ball. Gabelli's Segrich is focused on the light-emitting diode (LED) market, which benefits from demand by consumers as much as government policy. Many governments have mandated that incandescent lights be replaced by LEDs, which gives the industry visible growth.
In addition, the consumer-electronics industry continues to roll out LED televisions and other appliances that are more energy-efficient than older gadgets. "The LED industry is sustainable on its own, but governments are behind it, making it all the more attractive," says Segrich.
http://www.smartmoney.com/investing/mutual-funds/going-green-with-mutual-funds/
Right time to consider high yield?
Fidelity Viewpoints — 08/04/10
Higher current income from these bonds can help buffer price volatility.
Current low interest rates and low yields on more conservative fixed-income investments have left many investors searching for higher yields. If you fall into this camp, you may want to consider the relatively higher yields associated with non-investment-grade bonds, also known as high-yield bonds. These securities, however, aren’t for everyone—especially those investors who are risk averse. But, if you are an investor who can tolerate a higher level of risk and volatility, they may offer some advantages.
What are high-yield securities?
High-yield securities are viewed by both analysts and investors as riskier than those issued by companies with stronger balance sheets and higher credit ratings.
Credit-rating agencies—such as Standard and Poor's, Moody's, and Fitch Ratings—evaluate the ability of public companies, governments, and other borrowers to make income and principal payments to their debt holders. The debt of those organizations best prepared to do so is rated "investment-grade" (BBB and higher), while the debt of those most vulnerable to default is rated "non-investment-grade" (BB and lower).
Distressed companies and leveraged companies—due in large part to their relatively high ratio of debt to equity—tend to struggle more than better-capitalized companies during economic downturns. To compensate for taking on increased risk, such as default risk, the debt of these companies typically offers higher yields, hence the term "high yield."
A prudent time to consider high yield?
There are two reasons to consider investing in this sector:
1. High current income
With the 10-year Treasury bond yield hovering in the low 3% range through mid-July, the average yield for taxable high-yield bonds was 8.73%, a difference of nearly six percentage points.
2. High coupon can mitigate price declines
In addition to receiving income, high-yield investors have the potential for capital appreciation if the price of their bond or bond fund improves. The combination of the relatively high yields and the potential for capital appreciation can lead to better returns for high-yield bonds as economic conditions improve. If they don’t, high yields can protect against a certain amount of price depreciation.
The default rate, too, has been steadily declining and is not generally expected to negatively impact the asset class in the coming months. It is important, however, to remember that past performance is no guarantee of future results.
Who may want to consider high yield?
An allocation to high-yield securities may be appropriate for an investor who is well diversified, risk tolerant, and has a long-term investment time frame. Typically, these types of securities also appeal to investors looking for additional income and the potential for capital appreciation.
Next steps
There are many ways to invest in the high-yield bond asset class, including mutual funds, exchange-traded funds (ETFs), or individual high-yield bonds. Given the inherent credit risk associated with these types of bonds, it is important to diversify across many different issuers from different industries. For the average investor, it may be appropriate to seek this type of diversification through a diversified investment vehicle like a mutual fund or ETF.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-time-to-consider-high-yields&topic=investing-bonds-cds
Disclosure: I hold a High Yield Mutual Fund and a High Yield ETF.
Higher current income from these bonds can help buffer price volatility.
Current low interest rates and low yields on more conservative fixed-income investments have left many investors searching for higher yields. If you fall into this camp, you may want to consider the relatively higher yields associated with non-investment-grade bonds, also known as high-yield bonds. These securities, however, aren’t for everyone—especially those investors who are risk averse. But, if you are an investor who can tolerate a higher level of risk and volatility, they may offer some advantages.
What are high-yield securities?
High-yield securities are viewed by both analysts and investors as riskier than those issued by companies with stronger balance sheets and higher credit ratings.
Credit-rating agencies—such as Standard and Poor's, Moody's, and Fitch Ratings—evaluate the ability of public companies, governments, and other borrowers to make income and principal payments to their debt holders. The debt of those organizations best prepared to do so is rated "investment-grade" (BBB and higher), while the debt of those most vulnerable to default is rated "non-investment-grade" (BB and lower).
Distressed companies and leveraged companies—due in large part to their relatively high ratio of debt to equity—tend to struggle more than better-capitalized companies during economic downturns. To compensate for taking on increased risk, such as default risk, the debt of these companies typically offers higher yields, hence the term "high yield."
A prudent time to consider high yield?
There are two reasons to consider investing in this sector:
1. High current income
With the 10-year Treasury bond yield hovering in the low 3% range through mid-July, the average yield for taxable high-yield bonds was 8.73%, a difference of nearly six percentage points.
2. High coupon can mitigate price declines
In addition to receiving income, high-yield investors have the potential for capital appreciation if the price of their bond or bond fund improves. The combination of the relatively high yields and the potential for capital appreciation can lead to better returns for high-yield bonds as economic conditions improve. If they don’t, high yields can protect against a certain amount of price depreciation.
The default rate, too, has been steadily declining and is not generally expected to negatively impact the asset class in the coming months. It is important, however, to remember that past performance is no guarantee of future results.
Who may want to consider high yield?
An allocation to high-yield securities may be appropriate for an investor who is well diversified, risk tolerant, and has a long-term investment time frame. Typically, these types of securities also appeal to investors looking for additional income and the potential for capital appreciation.
Next steps
There are many ways to invest in the high-yield bond asset class, including mutual funds, exchange-traded funds (ETFs), or individual high-yield bonds. Given the inherent credit risk associated with these types of bonds, it is important to diversify across many different issuers from different industries. For the average investor, it may be appropriate to seek this type of diversification through a diversified investment vehicle like a mutual fund or ETF.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-time-to-consider-high-yields&topic=investing-bonds-cds
Disclosure: I hold a High Yield Mutual Fund and a High Yield ETF.
Monday, August 9, 2010
Boomers say Internet, travel, pet care are basic needs
By Catherine Carlock, MarketWatch, 6 August 2010
SAN FRANCISCO (MarketWatch) -- Do you need or just want your Internet connection and an annual family vacation? What about your pet? For many baby boomers, those are all basic needs, not luxuries, according to a new survey.
Eighty-four percent of those surveyed said having an Internet connection is a basic need, and 66% said shopping for birthdays and special occasions is. Fifty-one percent said pet care is a basic need, and 50% said taking a family vacation once a year is a need, not a luxury, according to a recent survey by MainStay Investments of 1,049 consumers aged 45 to 65.
As baby boomers reach retirement age, they are redefining what constitutes a luxury item and what defines a basic need, but being able to afford those basic needs may affect the way some boomers prepare for retirement.
Traditionally, basic needs extended to three categories: food, clothing and shelter. But that's changing. Here's more information on the portion of boomers surveyed who find the following items to be basic needs
About three in four respondents said they would rather spend less now so they can invest in a more comfortable retirement. And 47% said they would downsize their home in retirement to be able to afford their lifestyle expenses.
But what survey participants say on a survey may differ from what they end up doing, said Dr. David Stewart, a financial psychologist who focuses on consumer behavior, and dean of the school of business administration at the University of California at Riverside.
"The socially desirable response, the seemingly responsible response, is 'Yes, I do need to save for retirement more,' but the reality is the baby boomer generation as a whole... has not adequately saved for retirement," Stewart said.
In order to afford the lifestyle of their choosing, many baby boomers said they'll push back retirement, according to the survey. Some boomers may work until past their 70th birthday, Stewart said.
Others may save more, adjust portfolio allocations and seek help from a financial adviser to help ensure they can maintain their previous lifestyle after they retire.
Traditionally, people approaching retirement have been net savers, as compared with younger generations, who are net consumers, Stewart said.
But as baby boomers reached middle age, there was not much of a shift in spending behavior. Rather, boomers stayed in the net consumer phase rather than moving to the saver phase, he said.
Now, as more boomers approach retirement in the midst of an economic downturn, that shift toward becoming a saver may be near, Stewart said.
Boomers nearing retirement may realize, "Maybe I can't live in as much excess as I have been," Leung said. "If boomers really want to live the retirement they've envisioned, then they need to do something about it."
http://www.marketwatch.com/story/boomers-say-travel-pet-care-are-needs-not-wants-2010-08-06?siteid=nwhpf
SAN FRANCISCO (MarketWatch) -- Do you need or just want your Internet connection and an annual family vacation? What about your pet? For many baby boomers, those are all basic needs, not luxuries, according to a new survey.
Eighty-four percent of those surveyed said having an Internet connection is a basic need, and 66% said shopping for birthdays and special occasions is. Fifty-one percent said pet care is a basic need, and 50% said taking a family vacation once a year is a need, not a luxury, according to a recent survey by MainStay Investments of 1,049 consumers aged 45 to 65.
As baby boomers reach retirement age, they are redefining what constitutes a luxury item and what defines a basic need, but being able to afford those basic needs may affect the way some boomers prepare for retirement.
Traditionally, basic needs extended to three categories: food, clothing and shelter. But that's changing. Here's more information on the portion of boomers surveyed who find the following items to be basic needs
- Weekend getaways, 46%
- Professional hair color/cut, 43%
- Children, grandchildren's education, 42%
- Dining out, 38%
- Domestic travel, 35%
- Ordering takeout, 34%
- Movies, 30%
About three in four respondents said they would rather spend less now so they can invest in a more comfortable retirement. And 47% said they would downsize their home in retirement to be able to afford their lifestyle expenses.
But what survey participants say on a survey may differ from what they end up doing, said Dr. David Stewart, a financial psychologist who focuses on consumer behavior, and dean of the school of business administration at the University of California at Riverside.
"The socially desirable response, the seemingly responsible response, is 'Yes, I do need to save for retirement more,' but the reality is the baby boomer generation as a whole... has not adequately saved for retirement," Stewart said.
In order to afford the lifestyle of their choosing, many baby boomers said they'll push back retirement, according to the survey. Some boomers may work until past their 70th birthday, Stewart said.
Others may save more, adjust portfolio allocations and seek help from a financial adviser to help ensure they can maintain their previous lifestyle after they retire.
Traditionally, people approaching retirement have been net savers, as compared with younger generations, who are net consumers, Stewart said.
But as baby boomers reached middle age, there was not much of a shift in spending behavior. Rather, boomers stayed in the net consumer phase rather than moving to the saver phase, he said.
Now, as more boomers approach retirement in the midst of an economic downturn, that shift toward becoming a saver may be near, Stewart said.
Boomers nearing retirement may realize, "Maybe I can't live in as much excess as I have been," Leung said. "If boomers really want to live the retirement they've envisioned, then they need to do something about it."
http://www.marketwatch.com/story/boomers-say-travel-pet-care-are-needs-not-wants-2010-08-06?siteid=nwhpf
The one missing investing ingredient: Luck
By Sam Mamudi, MarketWatch, Aug. 2, 2010
NEW YORK (MarketWatch) -- Investors saving for retirement can find mutual funds that invest in almost any kind of asset, but they can't buy the one thing that will have the biggest impact on their nest egg: luck.
Forget about who's the hottest fund manager, which is the best-performing fund or which sector appears to be the best bet. The biggest factor in long-term returns is how the financial markets happen to perform during the 30 or so years an investor puts money away for retirement.
Recent history has provided a fresh lesson in the power of chance, as many on the cusp of retirement were battered by a stock market that dropped almost 40% in a single year amid the crisis in the financial industry. But the crippling effect of a market swoon just before you leave the work force is only part of the story.
The bigger issue is that if your career coincides with a relatively flat period for the markets, there's going to be a natural limit on how much you can hope to reap from your investments.
It's a sobering thought. If so much of your fate as an investor is out of your hands, what can do you do?
Focus on the things you can influence, said Fran Kinniry, head of Vanguard Group's investment strategy group. That means going back to some of the traditional advice about investing for retirement: Start saving as early as possible, save as much as possible, diversify and pick low-cost investment options. It also means you shouldn't rely on projected returns based on historical averages to make up for inadequate savings. And you shouldn't think that your skill or your fund managers' skill in choosing investments is going to save the day.
Still, mutual funds are the best way for most investors to build their savings--many fund firms offer relatively inexpensive investment options that can help investors compile substantial nest eggs.
The goal, then, is to invest with the understanding that while the growth potential of your nest egg may be out of your control, there are steps you can take to come as close as possible to realizing whatever that potential is.
"You need to work really hard on the controllable factors," said Vanguard's Kinniry, starting with an aggressive savings plan. "Ask yourself what the risks are of oversaving, and compare that to the risks of and consequences of undersaving, which are huge," he said.
The rule of thumb in the retirement industry is that individuals should try to save at least 12% to 15% of their gross salary. And the sooner you start saving, the sooner compounding interest starts building up your portfolio.
You can also temper any bad luck that comes your way by diversifying your investments. Stocks and bonds sometimes perform well at different times, while a general rule of thumb is that commodities perform inversely to stocks. Other options include Treasury inflation-protected securities, which may shine in periods when rising consumer prices weigh heavily on stocks and conventional bonds. If you're properly diversified, bad luck in one area of the market may be offset by better luck somewhere else.
http://www.marketwatch.com/story/the-one-missing-investing-ingredient-luck-2010-08-02?siteid=nwhpf
NEW YORK (MarketWatch) -- Investors saving for retirement can find mutual funds that invest in almost any kind of asset, but they can't buy the one thing that will have the biggest impact on their nest egg: luck.
Forget about who's the hottest fund manager, which is the best-performing fund or which sector appears to be the best bet. The biggest factor in long-term returns is how the financial markets happen to perform during the 30 or so years an investor puts money away for retirement.
Recent history has provided a fresh lesson in the power of chance, as many on the cusp of retirement were battered by a stock market that dropped almost 40% in a single year amid the crisis in the financial industry. But the crippling effect of a market swoon just before you leave the work force is only part of the story.
The bigger issue is that if your career coincides with a relatively flat period for the markets, there's going to be a natural limit on how much you can hope to reap from your investments.
It's a sobering thought. If so much of your fate as an investor is out of your hands, what can do you do?
Focus on the things you can influence, said Fran Kinniry, head of Vanguard Group's investment strategy group. That means going back to some of the traditional advice about investing for retirement: Start saving as early as possible, save as much as possible, diversify and pick low-cost investment options. It also means you shouldn't rely on projected returns based on historical averages to make up for inadequate savings. And you shouldn't think that your skill or your fund managers' skill in choosing investments is going to save the day.
Still, mutual funds are the best way for most investors to build their savings--many fund firms offer relatively inexpensive investment options that can help investors compile substantial nest eggs.
The goal, then, is to invest with the understanding that while the growth potential of your nest egg may be out of your control, there are steps you can take to come as close as possible to realizing whatever that potential is.
"You need to work really hard on the controllable factors," said Vanguard's Kinniry, starting with an aggressive savings plan. "Ask yourself what the risks are of oversaving, and compare that to the risks of and consequences of undersaving, which are huge," he said.
The rule of thumb in the retirement industry is that individuals should try to save at least 12% to 15% of their gross salary. And the sooner you start saving, the sooner compounding interest starts building up your portfolio.
You can also temper any bad luck that comes your way by diversifying your investments. Stocks and bonds sometimes perform well at different times, while a general rule of thumb is that commodities perform inversely to stocks. Other options include Treasury inflation-protected securities, which may shine in periods when rising consumer prices weigh heavily on stocks and conventional bonds. If you're properly diversified, bad luck in one area of the market may be offset by better luck somewhere else.
http://www.marketwatch.com/story/the-one-missing-investing-ingredient-luck-2010-08-02?siteid=nwhpf
Sunday, August 8, 2010
The app revolution: the biggest market in the history of the planet
By Cody Willard, Aug 8, 2010, Android App News
When you find the single largest target market in the history of the planet, it’s time to get excited — perhaps even consumed by apps. I’ve certainly been obsessed with all things apps since I started looking at the growth ahead and the ultimate size of a market that will entail billions of people using trillions of apps.
Seriously, those are real numbers.
And as for those publicly-traded plays on the app revolution, you really do have to do is look at Google and Apple as the purest ways to get involved.
Nokia and its Symbian OS are also going to be huge, but unlike Google’s Android and Apple’s iPhone, Symbian’s got to be defending its current outsized global marketshare. RIMM and Softee and Palm, are going to see big growth too, but I think we’ll looking at three primary platforms in five or ten years from now.
Billions of people, trillions of apps, and un-count-able app transacactions, interactions, and entertainments and games played…there are going to be a lot of winners and a lot of money to be made by those winners.
Disclosure: I hold positions in Google, Apple, and Research in Motion.
http://www.appconsumer.com/the-app-revolution-the-biggest-market-in-the-history-of-the-planet/
When you find the single largest target market in the history of the planet, it’s time to get excited — perhaps even consumed by apps. I’ve certainly been obsessed with all things apps since I started looking at the growth ahead and the ultimate size of a market that will entail billions of people using trillions of apps.
Seriously, those are real numbers.
And as for those publicly-traded plays on the app revolution, you really do have to do is look at Google and Apple as the purest ways to get involved.
Nokia and its Symbian OS are also going to be huge, but unlike Google’s Android and Apple’s iPhone, Symbian’s got to be defending its current outsized global marketshare. RIMM and Softee and Palm, are going to see big growth too, but I think we’ll looking at three primary platforms in five or ten years from now.
Billions of people, trillions of apps, and un-count-able app transacactions, interactions, and entertainments and games played…there are going to be a lot of winners and a lot of money to be made by those winners.
Disclosure: I hold positions in Google, Apple, and Research in Motion.
http://www.appconsumer.com/the-app-revolution-the-biggest-market-in-the-history-of-the-planet/
Friday, August 6, 2010
Investors Are Still Behaving Badly
By Carl Richards, August 5, 2010, New York Times
Every year the research firm Dalbar does a study that tries to quantify the impact of investor behavior on real-life returns by comparing investors’ earnings to the average investment (using the S&P 500 as a proxy).
The latest study looks at the 20-year period that ended Dec. 31, 2009:
But real people don’t invest that way. We trade. We watch CNBC and listen to Jim Cramer yell. Despite knowing better, we give into the genetic tendency to get more of those things that give us pleasure — buy high — and get rid of things that cause us pain — sell low. We’re just wired that way.
What is really interesting is how little this seems to change over the years. When it comes to investing, the tendency to behave badly is not going away.
So what do we do about it?
1. Admit it. Like any destructive behavior that first step to fixing it is to admit that there is a problem in the first place. Being honest with yourself and reviewing past decisions will help:
2. Develop a checklist. Then go through that checklist before you make major investment decisions. It works for pilots and doctors. It will help you avoid mistakes in investment behavior, too.
Try writing down the proposed change and then let it sit for 24 hours, or call a trusted friend or adviser and walk them through your thinking before you make the change. Often just hearing yourself explain why you want to make the change will convince you to forget the whole thing.
3. Don’t play. Sometimes the answer might be to take our money and go home. There is nothing that says you have to invest in the stock market to be considered an intelligent human being. It is fine to recognize that it might work better to follow Will Rogers’s advice and focus on the return of your money instead of the return on your money.
The reality is investing successfully is hard. But hopefully by focusing on our behavior, we can close this gap in the next 20 years.
http://bucks.blogs.nytimes.com/2010/08/05/investors-are-still-behaving-badly/?ref=your-money
Every year the research firm Dalbar does a study that tries to quantify the impact of investor behavior on real-life returns by comparing investors’ earnings to the average investment (using the S&P 500 as a proxy).
The latest study looks at the 20-year period that ended Dec. 31, 2009:
- Average investment return = 8.20 percent
- Average equity investor return = 3.17 percent
But real people don’t invest that way. We trade. We watch CNBC and listen to Jim Cramer yell. Despite knowing better, we give into the genetic tendency to get more of those things that give us pleasure — buy high — and get rid of things that cause us pain — sell low. We’re just wired that way.
What is really interesting is how little this seems to change over the years. When it comes to investing, the tendency to behave badly is not going away.
So what do we do about it?
1. Admit it. Like any destructive behavior that first step to fixing it is to admit that there is a problem in the first place. Being honest with yourself and reviewing past decisions will help:
- Did you get caught up in the tech bubble in 1999?
- Real estate in 2006?
- Did you sell in 2002, late 2007, or early 2008?
2. Develop a checklist. Then go through that checklist before you make major investment decisions. It works for pilots and doctors. It will help you avoid mistakes in investment behavior, too.
Try writing down the proposed change and then let it sit for 24 hours, or call a trusted friend or adviser and walk them through your thinking before you make the change. Often just hearing yourself explain why you want to make the change will convince you to forget the whole thing.
3. Don’t play. Sometimes the answer might be to take our money and go home. There is nothing that says you have to invest in the stock market to be considered an intelligent human being. It is fine to recognize that it might work better to follow Will Rogers’s advice and focus on the return of your money instead of the return on your money.
The reality is investing successfully is hard. But hopefully by focusing on our behavior, we can close this gap in the next 20 years.
http://bucks.blogs.nytimes.com/2010/08/05/investors-are-still-behaving-badly/?ref=your-money
Thursday, August 5, 2010
A Single Mom's Guide to Financial Security
A single parent multitasks all the time. Sometimes she’s the chef, other times the taxi driver or housekeeper, and she’s always the breadwinner, family psychologist and teacher. Managing a family, a household and holding down a job keep her plenty challenged.
If you’re winging parenthood on your own, you know it’s difficult to carve out time to pay the bills, let alone do financial planning.
Here are some suggestions for streamlining your financial life and building up your net worth:
Establish a cash reserve. Everyone should have an emergency cash fund, but it’s especially crucial for a single parent. A good rule of thumb is an emergency fund equal to three months of expenses, but your savings needs to ultimately reflect your financial situation. The key to establishing a cash reserve is to be consistent.
Take Control of Your Finances. Healthy finances require that you pay attention to how you spend your money. Managing cash flow is difficult. It can seem time consuming and overwhelming, but it’s time well spent. If you ignore your expenditures, money simply disappears.
Set up a spending plan. Write down your short-term and long-term goals. Ask yourself how you can accomplish them. The first step is to evaluate your spending habits. Track your spending for three to four months, or look back over your checkbook and your income for the same period. Do you have any discretionary funds? Do you need to cut back your spending? Take the time to develop a spending plan.
At this juncture in life, the top financial goals should be to accumulate assets that will increase your net worth and your retirement savings. Pay yourself first through payroll savings plans and your 401(k).
Protect Your Family’s Future. Across the board, financial planners agree that single parents, in particular, need disability insurance and life insurance as a contingency plan to protect themselves and their children. Long-term disability insurance overs your most valuable asset — the ability to earn an income. Yet, it’s the most overlooked insurance. Check with your employer to see if you can pick up this coverage at work. Life insurance is particularly important for single parents, especially if you are the sole supporter of your children.
Estate and Contingency Plans Are Vital. Single parents should have a will to protect and provide for their children in case something happens. Your will names your childrens' guardians and controls your estate — that is, everything you own from your house, bank accounts, investments, insurance and personal property to your retirement plans. If you die without a will, the state becomes the executor. Single parents should also have a living will and a durable power of attorney. A living will expresses your wishes if you become terminally ill or incapacitated, and a durable power of attorney empowers someone you trust to carry them out.
Invest for College Early. The earlier you save for college, the more your money grows. State-sponsored Section 529 college savings plans grow tax-free. Most incomes can’t heavily contribute to both retirement planning and college savings, so invest small amounts to both — just get started. A common investing mistake is to invest too much money under the child’s name. Parents who open investment accounts for their child may find these earnings produce a larger tax bill than expected, due to the kiddie tax. Plus, parents who opt for custodial accounts need to remember that their child can access this money when they turn 18 years old. They may or may not choose to spend it on its intended purpose. Lastly, a large sum of money in the child’s name can hurt their chances for financial aid. This is one more reason to consider Section 529 plans because they’re assets of the owners, typically the parents, not the child.
Don’t invest too conservatively. Concentrate your investments in growth-oriented investments.
Take advantage of your company’s retirement program. The biggest mistake people make is they don’t participate in their company’s pension plan, and then lose out on the company’s matching contribution.
Contribute to an IRA. Pay yourself first! The most reliable investment strategy is an automatic debit from your paychecks into your investment accounts. A good rule of thumb is saving 10 percent of your income, which includes your employer’s contribution.
http://www.accidentaljedi.com/a-single-parents-guide-to-financial-security.html
If you’re winging parenthood on your own, you know it’s difficult to carve out time to pay the bills, let alone do financial planning.
Here are some suggestions for streamlining your financial life and building up your net worth:
Establish a cash reserve. Everyone should have an emergency cash fund, but it’s especially crucial for a single parent. A good rule of thumb is an emergency fund equal to three months of expenses, but your savings needs to ultimately reflect your financial situation. The key to establishing a cash reserve is to be consistent.
Take Control of Your Finances. Healthy finances require that you pay attention to how you spend your money. Managing cash flow is difficult. It can seem time consuming and overwhelming, but it’s time well spent. If you ignore your expenditures, money simply disappears.
Set up a spending plan. Write down your short-term and long-term goals. Ask yourself how you can accomplish them. The first step is to evaluate your spending habits. Track your spending for three to four months, or look back over your checkbook and your income for the same period. Do you have any discretionary funds? Do you need to cut back your spending? Take the time to develop a spending plan.
At this juncture in life, the top financial goals should be to accumulate assets that will increase your net worth and your retirement savings. Pay yourself first through payroll savings plans and your 401(k).
Protect Your Family’s Future. Across the board, financial planners agree that single parents, in particular, need disability insurance and life insurance as a contingency plan to protect themselves and their children. Long-term disability insurance overs your most valuable asset — the ability to earn an income. Yet, it’s the most overlooked insurance. Check with your employer to see if you can pick up this coverage at work. Life insurance is particularly important for single parents, especially if you are the sole supporter of your children.
Estate and Contingency Plans Are Vital. Single parents should have a will to protect and provide for their children in case something happens. Your will names your childrens' guardians and controls your estate — that is, everything you own from your house, bank accounts, investments, insurance and personal property to your retirement plans. If you die without a will, the state becomes the executor. Single parents should also have a living will and a durable power of attorney. A living will expresses your wishes if you become terminally ill or incapacitated, and a durable power of attorney empowers someone you trust to carry them out.
Invest for College Early. The earlier you save for college, the more your money grows. State-sponsored Section 529 college savings plans grow tax-free. Most incomes can’t heavily contribute to both retirement planning and college savings, so invest small amounts to both — just get started. A common investing mistake is to invest too much money under the child’s name. Parents who open investment accounts for their child may find these earnings produce a larger tax bill than expected, due to the kiddie tax. Plus, parents who opt for custodial accounts need to remember that their child can access this money when they turn 18 years old. They may or may not choose to spend it on its intended purpose. Lastly, a large sum of money in the child’s name can hurt their chances for financial aid. This is one more reason to consider Section 529 plans because they’re assets of the owners, typically the parents, not the child.
Don’t invest too conservatively. Concentrate your investments in growth-oriented investments.
Take advantage of your company’s retirement program. The biggest mistake people make is they don’t participate in their company’s pension plan, and then lose out on the company’s matching contribution.
Contribute to an IRA. Pay yourself first! The most reliable investment strategy is an automatic debit from your paychecks into your investment accounts. A good rule of thumb is saving 10 percent of your income, which includes your employer’s contribution.
http://www.accidentaljedi.com/a-single-parents-guide-to-financial-security.html
Wednesday, August 4, 2010
7 Reasons Why Stocks Still Matter
By Jeffrey R. Kosnett, Kiplinger's Personal Finance — 07/27/10
After suffering through a wild ride the past several years, many ordinary investors have thrown up their hands in disgust. But stocks belong in many portfolios, and you shouldn’t banish them entirely and forever.
Investing in stocks can be maddening. Major market indexes regularly swing 2% to 3% in one day, sometimes in a few hours. All it takes is for a few traders or talking heads to react to a government economic report or to some development in a distant land whose leader's name you couldn't remember for a million bucks. For example, the U.S. stock market plunged 2.7% on June 29 on reports of weak home prices and consumer confidence. On July 22, the market jumped 2.5% following upbeat earnings reports.
If you have enough money to last through a long retirement, by all means, cut way back on your allocation to stocks. As for the rest of you, don't act too hastily. Stocks belong in many portfolios, and you shouldn't banish them entirely and forever. Below are seven reasons why you should continue to hold some stocks (as long as you accept that share prices won't be calm and predictable):
1. They pay dividends
Dividends are back in favor with investors, advisers and, fortunately, many chief executives and corporate directors. Cash dividends represent money in your pocket now and don't depend on the ups and downs of a stock. Plus, a company can boost its payout every year, while the overwhelming majority of bonds and CDs pay the same amount of interest year in and year out.
The U.S. stock market, as measured by Standard & Poor's 500-stock index yields about 2%. That may not seem like a lot, but it's more than what you get today from a five-year Treasury note. Moreover, the index, which includes companies that don't share their wealth, understates the dividend advantage. The average dividend-paying stock in the S&P 500 yields 2.4%, and you can find plenty of good companies that yield far more. Examples: McDonald's, a whopping 6.6%.
2. You can use them to play the economy
Naysayers of the prognosticating abilities of stocks like to quote the old quip by economist Paul Samuelson about the market having forecast nine of the past five recessions. Yes, the market is not a perfect predictor of the economy, but it does often offer clues. Typically, stocks tend to fall before a seemingly healthy economy begins to backslide and rise before the economy emerges from recession. We saw that in 2007, when stocks peaked a couple of months before the onset of recession and in 2009, when the market bottomed several months before the economy . The main point is that in most cases you'll want to lighten your exposure to stocks when the economy is firing on all cylinders and add to your holdings when the economy looks flat-out awful.
3. They give you exposure to growth all over the world
The U.S. is no longer the only game in town. U.S. stocks now account for only one-third of global market capitalization. The real growth is in emerging markets, including such countries as India, Brazil, Mexico, Turkey, South Africa and Indonesia. If you invest (preferably through a good, well-diversified mutual fund) in local industries in these developing markets, such as homebuilding, retailing and finance, you can insulate yourself, to some degree, from the wacky doings in the U.S. market.
4. IPOs offer fresh hope
Talk that Facebook or a revived General Motors will go public creates a buzz and can give the market a jolt of optimism. In this economy, poorly managed or poorly financed companies have no shot at issuing stock and fooling the public, as happened during the tech bubble of the late 1990s. As long as serious companies still see a future in getting their shares listed and traded, you have to believe the stock market can still be a place where the price of an investment will eventually reflect the value of the underlying enterprise. You'll just have to endure spells during which traders treat "good" stocks and "bad" ones alike.
5. They're just too hard to ignore
On Kiplinger.com, you can find what we call a "Tofurky portfolio" because it's supposed to act like a stock portfolio but doesn't hold any stocks. It's done well with its recipe of bonds, bank loans, commodities and energy partnerships; but there aren't enough alternative investments to go around, whereas there are trillions of dollars worth of stocks. If everyone ditches stocks and piles into other securities, you can bet a bubble will form and eventually burst, as all bubbles do. So as much as I like pipeline partnerships, for example, it's impossible to make a case for a growth portfolio that's 100% free of traditional common stocks.
6. Financial reform may help
Scoff if you wish, but if the recently enacted financial-reform law stiffens the backbones of regulators and promotes a saner approach to risk-taking at banks, the result may be fewer panics and mini crashes. Remember this: Whenever there are failures or insolvencies (or rumors of impending trouble) that involve financial firms--as opposed to oil companies, home builders or automakers--the traders' culture is to sell now and ask questions later. Anything that cuts down on the propensity of overaggressive or misguided financial firms to cause such confusion reduces the chance of a 2008-style meltdown.
7. Thank heavens for earnings season
Companies issue important fundamental news so infrequently that the arrival of earnings season comes as a relief to regular investors. That's when they learn whether a company has met expectations and, more important, they get some indication of what the future holds for a firm -- and, by extension, for a sector and sometimes for the entire market. A rally of the sort that occurred on July 22 confirms that plain old commonsense investment news can still translate into winning days for you and me. If only there could be more days like it.
Disclosure: I own a position in MCD
https://news.fidelity.com/news/article.jhtml?guid=/FidelityFeeds/pages/why-stocks-still-matter&topic=investing
After suffering through a wild ride the past several years, many ordinary investors have thrown up their hands in disgust. But stocks belong in many portfolios, and you shouldn’t banish them entirely and forever.
Investing in stocks can be maddening. Major market indexes regularly swing 2% to 3% in one day, sometimes in a few hours. All it takes is for a few traders or talking heads to react to a government economic report or to some development in a distant land whose leader's name you couldn't remember for a million bucks. For example, the U.S. stock market plunged 2.7% on June 29 on reports of weak home prices and consumer confidence. On July 22, the market jumped 2.5% following upbeat earnings reports.
If you have enough money to last through a long retirement, by all means, cut way back on your allocation to stocks. As for the rest of you, don't act too hastily. Stocks belong in many portfolios, and you shouldn't banish them entirely and forever. Below are seven reasons why you should continue to hold some stocks (as long as you accept that share prices won't be calm and predictable):
1. They pay dividends
Dividends are back in favor with investors, advisers and, fortunately, many chief executives and corporate directors. Cash dividends represent money in your pocket now and don't depend on the ups and downs of a stock. Plus, a company can boost its payout every year, while the overwhelming majority of bonds and CDs pay the same amount of interest year in and year out.
The U.S. stock market, as measured by Standard & Poor's 500-stock index yields about 2%. That may not seem like a lot, but it's more than what you get today from a five-year Treasury note. Moreover, the index, which includes companies that don't share their wealth, understates the dividend advantage. The average dividend-paying stock in the S&P 500 yields 2.4%, and you can find plenty of good companies that yield far more. Examples: McDonald's, a whopping 6.6%.
2. You can use them to play the economy
Naysayers of the prognosticating abilities of stocks like to quote the old quip by economist Paul Samuelson about the market having forecast nine of the past five recessions. Yes, the market is not a perfect predictor of the economy, but it does often offer clues. Typically, stocks tend to fall before a seemingly healthy economy begins to backslide and rise before the economy emerges from recession. We saw that in 2007, when stocks peaked a couple of months before the onset of recession and in 2009, when the market bottomed several months before the economy . The main point is that in most cases you'll want to lighten your exposure to stocks when the economy is firing on all cylinders and add to your holdings when the economy looks flat-out awful.
3. They give you exposure to growth all over the world
The U.S. is no longer the only game in town. U.S. stocks now account for only one-third of global market capitalization. The real growth is in emerging markets, including such countries as India, Brazil, Mexico, Turkey, South Africa and Indonesia. If you invest (preferably through a good, well-diversified mutual fund) in local industries in these developing markets, such as homebuilding, retailing and finance, you can insulate yourself, to some degree, from the wacky doings in the U.S. market.
4. IPOs offer fresh hope
Talk that Facebook or a revived General Motors will go public creates a buzz and can give the market a jolt of optimism. In this economy, poorly managed or poorly financed companies have no shot at issuing stock and fooling the public, as happened during the tech bubble of the late 1990s. As long as serious companies still see a future in getting their shares listed and traded, you have to believe the stock market can still be a place where the price of an investment will eventually reflect the value of the underlying enterprise. You'll just have to endure spells during which traders treat "good" stocks and "bad" ones alike.
5. They're just too hard to ignore
On Kiplinger.com, you can find what we call a "Tofurky portfolio" because it's supposed to act like a stock portfolio but doesn't hold any stocks. It's done well with its recipe of bonds, bank loans, commodities and energy partnerships; but there aren't enough alternative investments to go around, whereas there are trillions of dollars worth of stocks. If everyone ditches stocks and piles into other securities, you can bet a bubble will form and eventually burst, as all bubbles do. So as much as I like pipeline partnerships, for example, it's impossible to make a case for a growth portfolio that's 100% free of traditional common stocks.
6. Financial reform may help
Scoff if you wish, but if the recently enacted financial-reform law stiffens the backbones of regulators and promotes a saner approach to risk-taking at banks, the result may be fewer panics and mini crashes. Remember this: Whenever there are failures or insolvencies (or rumors of impending trouble) that involve financial firms--as opposed to oil companies, home builders or automakers--the traders' culture is to sell now and ask questions later. Anything that cuts down on the propensity of overaggressive or misguided financial firms to cause such confusion reduces the chance of a 2008-style meltdown.
7. Thank heavens for earnings season
Companies issue important fundamental news so infrequently that the arrival of earnings season comes as a relief to regular investors. That's when they learn whether a company has met expectations and, more important, they get some indication of what the future holds for a firm -- and, by extension, for a sector and sometimes for the entire market. A rally of the sort that occurred on July 22 confirms that plain old commonsense investment news can still translate into winning days for you and me. If only there could be more days like it.
Disclosure: I own a position in MCD
https://news.fidelity.com/news/article.jhtml?guid=/FidelityFeeds/pages/why-stocks-still-matter&topic=investing
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