Mid-Term Elections: A Catalyst for Stocks?

Some timely analysis from Fidelity Investments Market Analysis, Research & Education group:

For whatever reason, U.S. midterm elections (1950-2009) typically have kicked off a period of strong gains for U.S. stock investors.

During the year after a November midterm election, average returns for large- and small-cap U.S. stocks have been significantly better than the long-term average annual returns for these categories since 1950.

Historically, there has been little differentiation among stock market performance whether a U.S. midterm election has resulted in political party gridlock or harmony, nor which party seized control:

• Large-cap stock returns have been about the same, whether or not the outcome resulted in gridlock or harmony. Small-cap stocks, meanwhile, outperformed in years of political harmony compared to gridlock.
• Conventional wisdom also generally supports the notion that Republicans are the more investment-friendly party, typically supporting less business regulation and lower taxes.

However, average large-cap returns haven’t varied much according to which party seized control.

The historical post-midterm-election stock results underscore two key points:

• Many factors influence near-term stock movements besides election results, such as the current trend of the economy and profit cycle.
• Even if legislative actions eventually lead to important policy changes, the midterm election outcomes themselves historically have not appeared to be major drivers of the stock market’s direction.

As a result, investors may consider sticking to their investment strategies instead of trying to move in and out of the market based on short-term political events.

The Dominant Ecosystem in Technology

Analysis from Fidelity Investments Market Analysis, Research & Education group:

Roughly once every decade, there is a dominant ecosystem that emerges in technology.

Fidelity's technology, media and telecom equity sector research teams are bullish on mobile Internet due to its potential to emerge as the next ecosystem, which has significant investment implications across multiple industries.

The research team looked at individual product cycles and penetration rates across multiple geographies, to analyze historical patterns of adoption across a variety of consumer technology products over several decades (examples: VCR to DVD players, and CDs to iPods).

This analysis led to the conclusion that adoption rates for second-generation consumer technology products typically ramp faster than the initial device that defined the market, leading to conviction in accelerating smartphone adoption at a rate faster than took place for cell phones (and more generally, that mobile Internet penetration is occurring faster than desktop Internet).

Reduce the tax hit on investments

Fidelity Viewpoints — 10/27/10

Strategies to potentially boost your after-tax returns.

There’s been an incessant buzz this year when it comes to taxes. Are they going up? Will they stay the same? Unless Congress acts soon, a multitude of taxes are likely to increase in 2011 for all investors–including those in high tax brackets–making the last few months of 2010 a potentially critical time to manage your investment income more efficiently. And with so much uncertainty in the air, it’s an important reminder to take time now to properly position your Taxes can significantly reduce returns portfolio for the future, no matter what happens.

One of the most common mistakes an investor can make is to overlook the potential impact taxes can have on investment returns. In fact, Morningstar cites on average, over the 74-year period ending in 2009, investors who did not manage investments in a tax-sensitive manner gave up between one and two percentage points of their annual returns to taxes. So, a hypothetical stock return of 9.8% that shrank to 7.7% after taxes would, in effect, have left the investor with 2.1% less investment income in his or her pocket.

Taxes, however, aren’t as inevitable as you might think. With careful and consistent planning, you can potentially reduce their impact on your returns through tax-efficient investing. We highly recommend that you consult with an experienced tax advisor, financial planner, or estate planning attorney to help you make the right tax moves for your particular situation—or to confirm that your current approach is still sound. But here are some possible tax-smart strategies to consider to help you prepare for a productive discussion with your advisor.

First, consider the accounts you invest in

Tax-free municipal bonds and money market funds. If generating income is one of your investment goals, you may want to consider tax-free municipal bond and money market funds, especially if you’re in a high tax bracket. These funds typically invest in bonds issued by municipalities and their earnings are generally not subject to federal tax. You may also be able to avoid or reduce state income tax on your earnings if you invest in a municipal bond or money market fund that holds bonds issued by entities within your state. Interest income generated by most state and local municipal bonds is generally exempt from federal income and/or alternative minimum taxes. But if these bonds were used to pay for such "private activities" as housing projects, hospitals, or certain industrial parks, the interest is fully taxable for taxpayers subject to the AMT.

Tax-advantaged retirement savings accounts. Choosing the types of accounts in which to invest can be as important to tax efficiency as the types of assets you put in those accounts. When saving for retirement, a qualified workplace savings plan, such as a 401(k) or 403(b) plan, allows you to contribute pretax dollars that can potentially grow on a tax-deferred basis until they’re withdrawn after age 59½. If your employer offers a Roth 401(k), you can avoid taxes entirely on your earnings, provided certain conditions are met, although your contributions would not be pretax or tax deductible in the year you make them. Similarly, a Roth IRA allows your investments to grow tax-free, but there are income limits for contributions. (For 2010, the phase-out ranges are $167,000 to $177,000 for joint filers and $105,000 to $120,000 for individual filers.) If your income exceeds the limit and you or your spouse is not covered by a retirement plan at work, you may contribute to a traditional IRA for tax-deferred savings. Roth IRAs are now available to many investors and a new law allows workplace plan participants to directly convert certain plan assets in a 401(k) or 403(b) plan from a former employer to a designated Roth account, provided it is available in the plan. This may be good news for participants who are eligible for a distribution and want to keep their money in an employer plan rather than rolling it over to a Roth IRA.

If your employer offers you access to a health savings account (HSA) with a high-deductible health insurance plan, it’s a useful tool to potentially save on taxes while paying for qualified medical expenses. And don’t forget about tax-deferred annuities. Taxes aren’t due on any earnings until they’re withdrawn in retirement, and there are no annual contribution limits,3 unlike an IRA or 401(k) plan.

Second, understand your asset allocation

Employing an asset location strategy: A well-thought-out asset allocation strategy can play a key part in helping to reduce a portfolio’s overall risk and boost reward potential. But there’s another important companion strategy that many investors often overlook. Known as “asset location,” it involves deciding which investments within your asset allocation are held in taxable, tax deferred, or tax free accounts. This strategy can potentially help reduce the tax impact.

For example, you may want to consider whether it may be advantageous to give priority in your taxable accounts to relatively tax efficient investments, such as stocks or mutual funds that pay qualified dividends (as long as these rates remain in effect), equity index funds, and tax-managed stock funds. Similarly, it may make sense to use tax-deferred accounts such as defined contribution plans (401k, 403b, 457, etc.), traditional IRAs, and tax-deferred annuities for investments that generate high levels of ordinary income, such as taxable bond funds and real estate investment trusts, as well as for any equity funds that tend to make large and frequent distributions of capital gains - particularly short-term capital gains.

Third, know when to hold or sell

Avoiding unnecessary short-term taxable gains. If you sell an investment within one year of purchasing it, you’ll likely owe more tax on your capital gain than if you held it for more than a year. So-called “short-term” capital gains are taxed at the same rate as your ordinary income, as much as 35% in 2010. The top tax rate on “long-term” capital gains is 15%. You should check to see if any of the investments you own may be worth holding for longer periods of time to avoid short-term capital gains. Of course, you should keep in mind the risk of holding these investments, and understand how they fit in your overall portfolio. If the risk outweighs the potential tax hit, it may make sense to sell.

Offsetting capital gains with capital losses. Suppose you want to sell stock that has substantially increased in value in order to use the proceeds for a one-time expense, such as purchasing a vacation home or paying your grandchild’s college tuition. To offset a large tax liability on your capital gain, you could sell an investment that has lost value. But, if the losing investment was important to maintaining your portfolio’s asset allocation, you may want to purchase a different investment in the same asset category. Just be aware of wash sale rules that may prevent you from claiming a capital loss.

Ongoing tax-loss harvesting. Tax-loss harvesting is the practice of selling investments that have lost value to offset current and future-year capital gains. Unlike one-time or occasional loss sales, however, a systematic tax-loss harvesting strategy requires diligent investment tracking and detailed tax accounting.

An effective tax-loss harvesting strategy involves continuous analysis of every tax lot (shares purchased at a given price and time) to determine when the tax loss benefit warrants selling appreciated positions. Trading a specific tax lot with a specific cost basis is different than selling all of your shares in a particular fund or stock, which may have been purchased at different times over many years and could have significantly different tax implications as a whole than they would individually.

If and when you decided to harvest your losses, you may want to consider replacing the lots you sold by investing in securities that have similar diversification and risk exposure characteristics, by being mindful of the wash sale rule, as previously noted.

Fourth, monitor deductions and distributions

Capital loss carry-forwards. If your capital losses exceed your capital gains in a given year, you can generally deduct up to $3,000 of the excess from your ordinary income in that year. If you have more than $3,000 in excess losses, you’re able to carry forward those losses into future years.

Loss carry forward

These capital loss carry-forwards have considerable power to reduce future tax liabilities, especially during periods of extreme market volatility. Case in point: the market crash of 2008. If you were disciplined in harvesting your tax losses when asset values declined virtually across the board, you probably wound up with significant capital loss carry-forwards. You could have used those losses to offset gains you might have realized as the market rebounded from its lows in 2009—or possible gains in years ahead. But make sure you don’t forget about your carry-forwards, or you could lose them forever. Losses in your name alone are not passed along to your heirs.

Monitor anticipated mutual fund distributions. Each year, mutual funds must distribute to their shareholders any earnings they might have realized from interest, dividends, and capital gains. So immediately after the distribution, the share price drops, and you’re likely to owe tax on the distribution if you own the fund in a taxable account.

There are a couple of options to consider when facing the potential tax liability on distributions. The primary distribution management strategy would be to avoid purchasing securities just prior to the distribution. Another would be to sell your shares just before the distribution date. The downside is that depending how much you paid for your shares originally, you could generate a significant capital gain—and a tax liability to go with it. Also, worthy replacement funds might be making distributions, too, and if your original fund is highly rated with good prospects, you might want to keep it.

Despite the complexity, taking all these factors into consideration and paying close attention to your funds’ anticipated distribution schedule can be an important tax-efficient strategy.

Comments from a Chief Equity Strategist

At the recent Broker-Dealer Conference in Washington DC, I had the opportunity to meet Bob Doll. For those who do not know him as a talking head on television, Bob Doll is Vice President and Chief Equity Strategist for BlackRock. BlackRock is one of the world’s preeminent asset management firms and a premier provider of global investment management, risk management and advisory services to institutional, intermediary and individual investors around the world. His comments:

He is cautiously optimistic right now despite the fast sentiment shifts being seen in the markets.

Double Dip Recession. Unlikely. Since last June we have had five consecutive quarters of positive GDP growth. But we remain in a “muddle through” environment.

Earnings. 40% of S&P 500 revenue is derived from overseas. That figure is expected to rise to 70%. Multinational Large Caps are performing well. Corporate balance sheets have never been better so expect more merger & acquisition activity.

Growth. BlackRock is overweight in U.S. equities right now as they are underperforming multinational and foreign equities and as such have higher potential for future growth. He sees challenges for Japan and Europe and the Emerging Markets.

Fixed Income. Equities are paying more than bonds right now.

Long Term Growth. Conservatively 8%. Expect 4-6% earnings growth in the U.S. and 6-8% in foreign markets.

Portfolio. During this slow recovery, overweight on Dividend paying equities. In sectors he likes (in order) Industrials, Technology, Energy, Consumer Products, Healthcare, Utilities, and Telecom.

The view from Europe

I had the opportunity to meet with two of Capital Group Investors' European analysts. Capital World Investors is the research arm of American Funds - the largest mutual fund company in the country. Some soundbites from the discussions:

Despite the volatile markets and recessionary economies, the lack of major corporate bankruptcies suggests the strength of the companies is pretty good.

Pharmaceuticals and energy valuations are low - there is plenty of room for growth here. Despite the hype associated with alternative energies, in Europe they have found that solar and wind energy is neither cheap nor efficient.

Consumer demand in emerging markets is increasing. Multinational consumer product companies stand to profit the most.

Headlines about the woes of Greece and Ireland notwithstanding, in the grand scheme of the total European economic order, those two countries are small and not particularly influential.

When looking at overseas investments look at the companies not the countries. Most multi-national companies have footprints well beyond their hometown.

The Obama Administration is slowly allowing more international capital for U.S. investment. That additional capital investment will bode well for the companies involved and the overall market.

Focus on long term value. May have to tolerate some short term pain for long term gain. There is "money to be made".

Add luster to your portfolio

By Brendan Coffey, Fidelity Interactive Content Services — 10/22/10

You know gold is on a tear when you see ads from companies offering “cut-rate government gold” or opportunites to buy your gold jewelry.

But investors should look beyond the bizarre pitches and focus on the fundamentals. Gold shines brightest in uncertain times, and the metal hit an all-time high this month when it passed $1,350 an ounce. Consider the opportunity this trend may provide.

Some experts say gold’s rise is neither a bubble nor a harbinger of financial apocalypse, but rather a return to its rightful place as a store of wealth and a hedge against sluggish stock and bond performance.

How to invest in gold, and how much, are a matter of debate. A small allocation can go a long way: Most experts advise having no more than 5% of your portfolio, if that much, in gold. And while coins and Exchange Traded Funds (ETFs) are popular, some investment professionals say mutual funds that focus on gold miners could be most profitable for most investors.

Gold is unique in that it has acted as the sole store of wealth for centuries. The metal also has its own demand in industrial and commercial uses as well – jewelry, dentistry and in catalytic converters, for example.

Gold hit a low of about $250 an ounce in September 1999 (not adjusted for inflation), and while current prices seem high, they are well below the inflation-adjusted peak of $2,251 hit in 1980. Mindful of gold’s lows of a decade ago, the current generation of investors may be the first to largely ignore gold as a standard part of their investments.

Despite its lack of popularity with individual investors, gold has been rallying for two main reasons. One is that emerging-market economies, led by India and to a lesser extent China, have seen increasing demand as growing middle classes buy more jewelry.

Roughly half of annual demand for gold comes from jewelry, with 10% coming from industrial and dental uses and the rest from investments, such as gold coins. Of all the gold that has ever been mined, about 177,000 tons, 52% exists in the form of jewelry, 12% in industrial and dentistry form, 16% in retail investments and 2% unaccounted for.

This will be the tenth year consecutively where gold has had positive returns thanks largely to emerging market demand.

Central banks are the second main source of demand, holding 18% of the world’s mined supply. Central banks are turning to gold to diversify their holdings because the dollar, the world’s reserve currency, has been falling. Considering that central banks hold just 10% of their assets in gold, down from 80% in 1980, it’s not unreasonable that gold is flowing back into central bank holdings.

Individual investors can buy coins but that can be inefficient since you have to pay to safely store and insure your gold. You can buy bullion through the dominant gold ETF, the SPDR Gold Trust which will hold the gold for you in London.

But mutual funds that focus on owning stocks of gold mining companies rather than the metal itself may offer the best opportunity for investors, even if gold fails to rally from its record highs. That’s because miners have a cost of production of $650 an ounce, on average, meaning they will still be solidly profitable even if gold’s price falls.

But as beautiful as a bar of gold is, it doesn’t have the capacity to find more of itself, pay dividends or increase its earnings. Gold-related stocks also benefit from long-term capital gains, as low as 15% in the U.S., whereas gains from owning physical gold or a bullion-holding ETF will get taxed at the rate for collectibles, currently 28%.

Equities for the long term and more

Jim Moffett, lead manager of the large-cap Scout International Fund and a three-time nominee for Morningstar’s International Stock Fund Manager of the Year. More thoughts:

At this point, it blows my mind to see people piling into a low-return investment, whereas if you look at stocks in this country and around the world, companies in general are in a lot better financial shape than they were. You look back at longer-term values, and equities are relatively undervalued at this point. I believe you can get a better yield on the average Standard & Poor's stock than you can on 10-year Treasuries. Unless the world's going to fall apart—which we don't think it is—that argues for equities, not this week or next, but for the long term.

And this country doesn’t have a monopoly on good ideas. There are a lot of smart people around the world running good businesses. In general, they’re available at very attractive prices. Interestingly, their yields are, in general, a little bit better than ours.

Contrarian ideas from Old Europe and Japan
There's a little of a contrarian in us. Looking at Old Europe, there are some great companies that are available at what I believe are reasonable values, including health care companies. Even in Japan, there are some interesting situations. Japan doesn’t change very fast, but 20 years ago, the typical Japanese company had lots of debt. Now, their balance sheets are in good shape. We think there may be some interesting opportunities there.

High on global tech and resources
We like technology. As we grow out of this, companies are going to be spending to improve their production processes. Consumers are still going to buy their little electronic gizmos. We think that’s one of the places where the action is going to be.

https://guidance.fidelity.com/viewpoints/5-experts-september-2010

Boring is back. Stick to quality

Jim Moffett, lead manager of the large-cap Scout International Fund and a three-time nominee for Morningstar’s International Stock Fund Manager of the Year. His comments:

I think in terms of the experience of the last two years, the key takeaway is to stick to quality. In the midst of all the crosscurrents or the macro themes, picking good stocks still pays.

The analogy I use is the early 1990s, which was the last time we had a real estate and financial bubble that burst. It took us four years before we started really growing. Our position is that it's going to take a similar amount of time—or even longer—to work our way out of this mess. It takes time for individuals to rebuild their balance sheets. While it's a civic virtue one by one, it's a public curse when we all save at the same time.

Back in the early 1990s, the stable quality companies outperformed. It was the quality growth era, and I think it may hold lessons for today. Boring is back. Stick to quality!

https://guidance.fidelity.com/viewpoints/5-experts-september-2010

Emerging Markets & Gold

Will Danoff just celebrated his 20th year managing Fidelity’s go-anywhere Contrafund^®—Fidelity’s largest equity fund, with $62 billion in assets. More thoughts:

Companies positioned in Asia, India, Latin America, and Brazil may have the ability to grow at a much faster rate in the next five years than a company that's trying to sell more cups of coffee to the U.S. consumer. What I've tried to do is expose my funds to those companies with growing positions in the emerging markets, and those companies with true competitive advantages that may be able to grow by gaining market share in the more developed economies.

The U.S. government is spending more money than it is generating. I believe that's unsustainable, and probably bad for our currency, and therefore relatively good for gold. I still think that gold will probably appreciate if governments around the world don’t control their budgets. But there are some other reasons to consider owning gold: supply is declining, demand from consumers in the emerging markets is growing, central bank demand is up, and it's harder and harder to find gold.

If the dollar does weaken further, exporting companies will have an advantage, and global blue chips that make money in foreign currencies could also benefit, as those profits will convert into more dollars.

https://guidance.fidelity.com/viewpoints/5-experts-september-2010

Riding the global tech wave

Will Danoff just celebrated his 20th year managing Fidelity’s go-anywhere Contrafund^®—Fidelity’s largest equity fund, with $62 billion in assets. His thoughts:

I think technology is one way to benefit from businesses spending more, and I think that's where you may see more growth over time. Businesses have a lot of cash on their balance sheets. They may buy other companies, but I think they're definitely going to buy more technology. It’s been 10 years since we’ve had a technology cycle, so the potential for upside is there.

Smartphones represent an exciting trend. Just three years after being invented, more than 300 million smartphones are expected to sell this year: that's about the same number as personal computers. And the mobile Internet is experiencing faster adoption rates than conventional desktop Internet. The implications of that are potentially extremely powerful.

From social networking to location-based services, cell phones are helping to power all kinds of innovative businesses in communications and commerce. And on the back end, that’s creating demand for semiconductors and telecommunications networking gear. The bottom line: smart phones are big.

Another powerful theme within tech is cloud computing. The growth of cloud computing has resulted in the consolidation of data centers and the delivery of software applications over the Internet. It makes sense for certain services that consumers and businesses use every day to be centralized. A perfect example is e-mail—companies are eschewing in-house applications such as Outlook for Web-based services such as Gmail, which reduces a company’s need for data storage. Companies are realizing that it no longer makes economic sense to build and maintain their own gigantic data centers, and so they’re migrating their noncritical data into the “cloud”—and they are willing to pay for that service.

Technology is also interesting because, for the most part, technology companies are able to sell their wares all over the world and thus are benefiting from the fast growth in most of Asia and Latin America. Additionally, many of these tech companies have outsourced manufacturing overseas, and now they're generating lots of free cash flow.

https://guidance.fidelity.com/viewpoints/5-experts-september-2010

Changing View of Retirement

By Jennifer Saranow Schultz

Is the traditional concept of retirement likely to become a casualty of the latest recession?

The people at Sun Life Financial, a financial services company, seem to think so. The traditional view of retirement, stopping work when government benefits become available, is changing. More and more, Americans are choosing to be ‘unretired,’ that is, continue to work full- or part-time after the age when they are eligible to receive full Social Security benefits.”

To learn more about whether, and why, people may be choosing to continue to work after reaching the traditional retirement age, Sun Life began conducting a survey two years ago that it calls the Unretirement Index. According to Sun Life, “unretirement” is defined as “working at least 20 hours per week after the age when one is eligible to receive Social Security benefits.”

Sun Life recently released its latest Unretirement Index, which captures this retirement lifestyle change and hints that people may not be so happy about it.

The survey found that more than half of working respondents — 52 percent — expect to work at least three years longer than originally planned and just as many respondents expect to retire at age 70 as age 65. These delays, according to Sun Life, “are driven by economic conditions, a lack of confidence in government benefits in the future and dwindling retirement savings.”

http://bucks.blogs.nytimes.com/2010/10/20/changing-view-of-retirement-as-we-know-it/?ref=your-money

As September goes, so goes the rest of the year

If history remains a foretelling of future events, a strong investment September is usually a prelude to a strong year end finish. This September the S&P 500 posted an 8.92% return, the biggest September gain since 1939.

Keep in mind past performance is no guarantee of future results. But...

Since 1930, after a positive September, the stock market averaged 10.5% in the months September to January.

Since 1929, the fourth quarter of the mid-term election year has historically generated the market's best quarterly return, averaging nearly 8%.

Since 1942, the market has gained on average 18.3%, six months after mid-term elections.

Since 1900, the third year of the presidential election cycle generates positive returns 81% of the time in the Dow Jones Industrial Average, with an average gain of 12.6%.

Source: Richard Golod, Director Global Investment Strategies for Invesco
Washington DC, 14 October 2010

iPad comes to Wal-Mart

Wal-Mart will start selling theApple iPad this Friday, a coup for the discount store which will now have the popular tablet in its stores ahead of the holiday shopping season. Rival Best Buy has been selling the device since its launch in April, but Wal-Mart insists its sales heft will compensate for being late to the game and it plans to have 2,300 stores selling the iPad by mid-November.

Do midterm elections impact stocks?

U.S. midterm elections typically have kicked off a period of strong gains for U.S. stock investors. Consider the period from 1950 to 2009. During the year after a November midterm election, average annual returns for large-cap stocks were 23.4%, more than twice the 11% average from 1950 to 2009. Likewise, small-cap U.S. stocks returned 31.2% versus the long-term average annual returns of 13.5%.

Gridlock is good: perception or reality?

The theory that inaction caused by political gridlock—where the U.S. Senate, U.S. House of Representatives, and White House are not all controlled by the same party—is often considered “good for the market” does not appear to have much historical support from stock-return data following midterm elections. Large-cap stock returns during post-midterm election years have been about the same, whether or not the outcome resulted in gridlock or harmony (i.e. one party controls both houses of Congress and the White House). Small-cap stocks, meanwhile, outperformed in years of political harmony compared to gridlock.

The party effect—hard to find it

Conventional wisdom also generally supports the notion that Republicans are the more investment-friendly party, typically supporting less business regulation and lower taxes. However, average large-cap stock returns in post midterm-election years haven’t varied much according to which party seized control. Historically, the year after a U.S. midterm election has been a favorable one for stocks. Meanwhile, election outcomes have had no discernible impact on the stock market’s performance during these periods.

Investment implications

With a host of economic, budget, and tax issues facing the next Congress, government policy is arguably the center of attention now more than at any time in decades. Legislation over the next few years may have an impact on the future trajectory of the U.S. stock market. But history underscores two key points:

• Many things influence stock movements besides election results, particularly trends in the economy and corporate profit cycle.
• Even if legislative actions eventually lead to important policy changes, the midterm election outcomes themselves historically have not appeared to be major drivers of the stock market’s direction.

What does this mean to investors? Stick to a sound investing strategy, based on your time horizon and risk tolerance, instead of attempting to move in and out of the market based on short-term political events.

https://guidance.fidelity.com/viewpoints/midterm-elections

When free 401(k) advice is offered, take it

By Michelle Singletary, Washington Post Staff Writer, Saturday, October 9, 2010

Many employers have realized that their workers, who have largely become responsible for self-servicing their own retirement portfolios, need guidance so they can best allocate contributions to their 401(k) or other retirement plans. And many companies now offer professional advice - for free.

The problem is, some employees don't take advantage of the guidance, according to a study by the investment company Charles Schwab.

It's safe to say it's very difficult for people to have a well-diversified portfolio if they are doing it on their own.

Schwab looked at the behavior of employees participating in retirement plans it services and conducted a survey of more than 1,000 401(k) plan participants nationwide.

Seventy percent of respondents said their 401(k) was their only or primary source of retirement savings. But less than half felt confident they were making the right investment choices.

Most respondents said they would use free, personalized advice if their employer made it available. But when Schwab looked at the actual participant behavior in plans it services, fewer than 10 percent of people who have access to free advice took advantage of it.

A little more than a quarter of the respondents said they got their advice elsewhere. That's fair enough. But 26 percent said they were too busy dealing with day-to-day financial issues. Many people didn't think they had enough saved to warrant getting help. What was surprising was the 49 percent who said they wanted to have more than $100,000 saved before taking the time to ask for advice.

In analyzing the 401(k) plans it services, Schwab found that when employees took advantage of the free advice, it had a significant impact on how they handled their retirement plans. People realized they could save more. Seventy percent of workers who receive 401(k) advice make changes to their deferral rates, and their savings rates nearly double as a result, jumping on average from 5 to 10 percent of pay.

Listening to the advice meant greater diversification. The average participant who has not received professional advice is invested in fewer than four asset classes, where those who receive advice invest in a minimum of eight.

Employees who sought advice also didn't panic during the ups and downs of the stock market. Most plan participants who received advice saw their 401(k) portfolios rebound when the market rebounded last year.

It used to be that the company that managed your 401(k) plan couldn't give you anything more than the most generic advice about how to invest in the offerings of the plan. This is not the case anymore.

Employers can make arrangements for a financial services or investment company to provide advice, from how much workers could be saving to helping them figure out where to put their money based on their investment goals. Taking into account their own comfort with risk, workers can get advice on which funds to invest in, and how much to invest to meet their retirement needs.

The Schwab survey found that most respondents said they would seek help with retirement planning the closer they got to retirement. For many, that's just too late to correct any mistakes.

With something as important as your retirement savings, don't procrastinate. Whatever free advice is made available by your employer, use it.

http://www.washingtonpost.com/wp-dyn/content/article/2010/10/09/AR2010100903469.html?sub=AR

The power of combining assets under one roof

Few investors would argue the benefits of diversifying a portfolio, but there is a time when putting your eggs into just one "basket" may actually work for the better—when you consolidate your accounts with one service provider.

Besides the obvious perks—simplicity and convenience—there are other benefits attached to combining your assets under one roof. These include more effective asset allocation and diversification, potentially lower fees, higher service levels, and better planning, among others.

So, with all the advantages made possible by consolidating, why do so many investors still have their money spread among several investment firms? Some people think they're diversifying more broadly, although, in fact, they may be duplicating investments at different firms.

Now more than ever people need a single relationship they can trust.

Then there are those who have simply ended up with accounts in different places due to job changes and 401(k) plan balances left behind at former employers. Those 401(k) plan assets are often better off rolled into one IRA with one provider to expand the range of investment choices and to manage the assets more effectively.

Taking control of your portfolio and making your investments work effectively for your goals are among the most compelling reasons to consolidate multiple accounts. If you have investments in several locations, it's difficult to stay in control of your overall portfolio. It's also complicated to make your investments work together. In fact, you could be duplicating exposure to certain asset classes.

Financial services providers might categorize assets differently, so it's hard to get an accurate view of your overall allocation. Worse you might not realize how far off track your asset allocation has become, unless you're constantly monitoring every account in every place. For most individuals, that's tough to do.

When you consolidate, it's much easier to take charge of your strategy and keep your intended asset allocation on track. After market events like our most recent downturn, you can assess the damage to your overall portfolio and react prudently. Moreover, rebalancing is a far simpler proposition. If the money is in one place, rebalancing takes one set of transactions, rather than several through multiple providers.

Consolidating also makes it easier to catch overlap in your holdings and improve your portfolio's diversification. These days, many firms offer similar investments or funds that invest in the same securities. So you're not necessarily diversifying more broadly by investing through multiple providers.

If you're investing through multiple providers, you might be paying more fees than necessary. This is because financial providers typically need assets and trading to reach certain thresholds before offering price breaks. Typically, the more assets you move to one financial services provider, the more opportunities you may have to avoid unnecessary account fees, as well as to pay lower fund expenses and qualify for lower commissions on brokerage trades.

Consolidating may also improve the quality of certain planning activities, such as retirement income planning. Typically, you need to determine a sustainable withdrawal rate, meet minimum required distributions, and monitor your assets to make sure you're not depleting your resources too quickly.

The financial details of your day-to-day life are complicated enough. Why make it harder by trying to track your money in multiple places? Doing so takes time and effort that many people just can't sacrifice.

Think about how much easier it would be for your accountant to get one set of 1099 forms at tax time, rather than several.

Clearly, consolidating is a decision that warrants some time and consideration. But the potential benefits are far too compelling to ignore. You could improve and find it easier to maintain your asset allocation, as well as diversify your portfolio more effectively. You might find opportunities to save money, both through improved tax efficiency and the lower fees often associated with having higher asset levels at one provider. Most of all, you'll have a chance to plan more effectively and to take control of your finances. And that's a move that, in the end, could improve your overall financial picture.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/consolidate-accounts-and-conquer&topic=financial-planning

To be a winning investor, know the risks

Most people who want to “avoid risk” actually mean they want to “avoid loss.” Removing everything from the market and put it in their mattress, a piggy bank or a money-market fund — all providing roughly the same return these days — protects against market risk, the chance that a “double-dip,” “flash crash” or any other incident will drive down the market price of their holdings to where they have a loss.

But that strategy leads to purchasing-power risk, which is the opposite end of the risk spectrum, the chance that their money doesn’t grow fast enough to keep pace with inflation.

There’s also interest-rate risk, a key factor in the current rate environment. Investors face potential income declines when a bond or certificate of deposit matures and they need to reinvest the money. Juicing returns using higher-yielding, longer-term securities creates the potential to get stuck losing ground to inflation if the rate trend changes.

Another concern is “shortfall risk,” which has more to do with the individual investor than the markets. This is the possibility that someone won’t have enough money to reach their goals. Many investors take this risk when they are too conservative during troublesome market times or too aggressive when things are good. Investors who were whole-hog into tech stocks during the Internet bubble got hammered when it popped; today’s sideline sitter, conversely, might be missing out on low-priced stocks as they wait until they’re more comfortable.

Finally, there’s timing risk, which is not so much about when you are buying or selling as it is about your personal time horizon. To put it simply, the chance of stocks making money over the next 20 years is high; the prospects for the next 18 months are murky. If you need money at a certain time, this risk must be factored into your asset allocation.

If the studies show anything, it’s that investors definitely don’t understand opportunity risk. Consider this the greed factor, the chance of missing out. Opportunity risk runs against innate human psychology, as people perceive opportunities at just the wrong times. They’ll jump to buy when the market is at the end of a good run and hesitate when the market has fallen to lows that have put quality companies on sale.

Even after all of those risks, there’s currency risk, credit risk and more.

Each and every type of risk deserves some consideration in portfolio construction.

So if you are an investor , the question should not be whether you are avoiding risk given current market conditions, but whether you have accepted enough different forms of it.

http://www.marketwatch.com/story/to-be-a-winning-investor-know-the-risks-2010-10-06?siteid=nwhpf

Apple's iPad sold three million units

Apple's iPad sold three million units in the first 80 days after its April release and its current sales rate is about 4.5 million units per quarter.

At this current rate, the iPad will pass gaming hardware and the cellular phone to become the 4th biggest consumer electronics category with estimated sales of more than $9 billion in the U.S. next year. TVs, smart phones and notebook PCs are the current three largest categories.

CNBC. 6 October 2010

Disclosure: I own Apple.

Threats to Retiree Investors

The sluggish economic recovery is a threat to everyone’s financial security. But for retirees, that threat is multiplied.

Retirees don't have the luxury of the long time horizon that younger counterparts have, and because retirees are making account withdrawals, they're more susceptible to market volatility.

And going back to work to replenish lost savings becomes less and less viable the older you get.

Here are the six threats to retiree investors — and tips for how to beat them.

1. Time

A lack of time prohibits the usual means of ringing out risk — from holding an investment over a long time to dollar-cost averaging. It also means you won’t have as much time to recover from a catastrophic market event like the recent financial crisis.

So retirees need to, plain and simple, take less risk.

Some people tend to think that a person has risk tolerance based on the amount of money they have, but it should be based on the person’s ability to make up a loss.

Aside from choosing less-risky investment options, retirees can also be smart about locking in profits.

Individuals nearing retirement and those with the need to depend on investment income to cover daily expenses may wish to select investments that lock in gains and provide a guaranteed income stream.

2. Trust

The older you get, the more you have to rely on others. And especially if you don’t really understand the financial stuff — you have to be very careful who you place your trust in.

Retirees should ask the hard questions and do their homework before turning over their money to a financial-services firm — even if you get a referral from a friend. (Remember: Bernie Madoff relied on friends telling friends about his great returns!)

But don’t let your guard down after you hire a financial adviser: be cautious that if anything seems out of the statistical norm — super high returns or super low prices, it could be scam, so do a little extra research of your own.

And if anyone rushes you to invest in something — raise an eyebrow. Your financial adviser should always be willing to answer as many questions as you need — and always make sure you’re comfortable before investing your money.

Remember: They work for you — not the other way around.

3. Technology

When you hear about the “next big thing,” a hot sector like technology that’s going to bring investors mega returns, it’s easy to get sucked in.

But when you’re a retiree, you have to act your age! Not every new company in that sector is a sure thing and if you pick the NOT sure thing — you don’t have time to make up that money.

As a rule, be wary of anything priced below $5 a share.

And, if you absolutely, positively insist that you MUST invest in a hot, young company — make sure it’s no more than 1 percent of your total portfolio, he adds.

That way, you’ll never wonder “what if” — and if it doesn’t work out, you won’t lose the whole farm!

4. Taxation

Pay attention to the taxes your retirement account is subject to — and find ways to keep them from putting a hole in the bottom of the boat and sucking out your life savings.

Estate taxes will be on the rise again next year and capital-gains taxes are always lurking when you have stocks that do well. So, consider gifting those stocks that have done well to your kids and grandkids — you can give up to $13,000 per person.

Also consider converting some of your retirement account to a Roth IRA, which is tax free, but beware of tax traps you could be subjected to during the transfer. Check out a site like RothIRA.com for the latest laws, information — and potential tax traps.

Another line of defense is to get more life insurance. Life insurance is tax free, and your kids and grandkids will get the check without with being held up in probate, the legal process of divvying up an estate.

5. Television

We tend to trust the people we see.

But you have to be very careful when you’re watching a program where someone on TV is advising you to buy or sell a stock or other investment. Take it as a tip but then do your homework on the soundness of your investment and whatever motive the person telling you to buy or sell may have. Is he a short-seller? Do you even know what a short-seller is?

This is why you need to do your own homework.

(FYI — a short seller is a person who’s betting against the stock, so they have every interest in the stock falling because they’ll profit when the stock goes down.)

6. Terrorism

Unfortunately, we’ve seen it too many times in the past few years — from fake anthrax scares to terror attacks — one-time events like this can send a ripple of fear through the market.

Younger investors can afford the time to watch their investments dip, for however long, and they have time to recover. Retirees — who are drawing an income from their account — don’t have that luxury.

Here are a few simple formulas:

First, subtract your age from 90. The resulting number is the percent of your retirement account you should have in riskier investments, like equities.

So, if you’re 50, that’s 40 percent you can have in equities. If you’re 75, that number drops to 15 percent.

If there’s a sudden drop in the market — you’re shielded.

When it comes to individual stocks, if it goes down more than 5 percent — get out. A younger investor has more time to make up the difference — retirees don’t. Better to lose 5 percent — than your shirt.

And finally, if something in the market has you rattled, don’t be afraid to take some money out and sit on the sidelines.

Don’t try to be a hero and stick it out. When it comes to your life savings, the most heroic thing you can do is hold on to it, and pass some of it on to your kids and grandkids.

URL: http://www.cnbc.com/id/39504953/

Life Insurance: What You Need to Know

Life insurance comes in a variety of forms meant to accomplish a range of objectives, from providing for survivors to moving assets out of your estate. The prices for it depend not only upon how much coverage you want but also upon what type of policy you get, either for a finite period of time or indefinitely.

The first question you need to ask, though, is how much insurance do you need? There is not a clear answer on this because it depends on your expectations. The better question is this: What am I trying to provide for with life insurance? If your concern is your spouse, a common calculation is to take out a policy that would cover all living, personal and household expenses for at least one year. This allows the surviving spouse to grieve without worrying about bills, and it also gives the spouse a period to begin making decisions for life without you.

If there are dependent children, however, the amount of insurance you need increases. Again, the dollar value depends on several factors, including the age of your children and what you want to provide for them. The person who wants to send his three children to private school and private college is going to need a lot more than the person looking to provide for the basic needs of one child in public school.

In insurance, desire is something that does not always align with reality. How much life insurance you are going to get also depends on what you can afford in terms of premiums as well as how much insurance a company will sell you. Just because you want a $5 million policy and can pay the premiums on it does not mean a company will underwrite that amount. Like a loan to a person flush with cash, insurance companies would rather sell large policies to healthy people who are going to live for decades. This gives them time to turn your premiums into more than the face value of your policy. The person who is already sick but wants to provide for his family will, in all likelihood, struggle to get an adequate amount.

Now onto types of insurance.

TERM - Term life insurance is a popular and relatively inexpensive form of insurance. It covers a person for a period of time, usually 20 years. During the term, if the insured dies, his heirs receive the full value of the policy. After the term expires, they get nothing. Furthermore, the policy never has an intrinsic value — unless the person dies during the term.

Term life, then, is a contract, not an investment, to buy peace of mind. It is a good for a particular period — say the time it takes for a child to mature and leave home — and will pay the insured’s heirs the full value of the policy if he dies, regardless of how long he has been making the payments.

One variant on this, offered by a few insurers still structured as mutual companies — where their policy holders actually own the company — is convertible term life. This starts out as basic term, with its comparatively low premiums for the amount of coverage. But within a set period of time, often the first 10 years, it can be converted to whole life. The premiums will increase but the person does not have to be screened again for insurance.

WHOLE - Whole life insurance plays a dual role for many people. It is both insurance in the case of an untimely death as well as an estate planning tool for when that final day comes. It is also considerably more expensive than term life. The reason is that it has an intrinsic value, from which you can draw if you need the money. And whereas term life is for a period of time, whole life lasts in perpetuity, unless you stop paying the premiums or cash in the policy.

Since whole life is also an investment for some people, some companies offer the policy holders the option of selecting the underlying securities that back the death benefit. This adds a small element of risk to the eventual payout. While the value of the portfolio can, obviously, increase or decrease, the insurer sets a floor for how low its value can fall. While investment losses are capped there are other downsides. First, there are fees associated with the trading portfolios, which can also chip away at the policy’s value. And then there are those who believe that you can get better returns by investing on your own.

This is where you have to evaluate why you want a whole life policy. If it is to move assets out of your estate tax-free, then any additional upside is good. If it is to increase the amount you leave to your heirs through the underlying portfolio, then you may not see the increase that you expect during your lifetime. Buying term life for a greater amount is an option, though those prices increase as you get older (and closer to the point where the insurer is going to have to pay out). Regardless of the type of policy you select, the payment to your beneficiaries is tax-free.

http://www.nytimes.com/2009/04/28/your-money/life-and-disability-insurance/lifeinsureprimer.html?_r=1&ref=your-money

Disability Insurance: What You Need to Know

The screening a person goes through for disability insurance is far more onerous than life insurance. This may seem odd since everyone is going to die, but not everyone is going to become disabled. But this is not how insurance companies think about it. Death is something an actuary can calculate fairly easily and accurately. Someone who is overweight, smokes and drinks too much, for example, could be expected to die before someone who is fit and free of harmful vices.

Predicting who will become disabled is not so easy. It is a calculation based on chance. While someone building skyscrapers would seem to be at more risk for disability than a secretary, this is not always the case. One constant, though, is that women will be charged more for disability insurance than men. Reasons for this vary, but any candid insurance agent will explain that women are more in tune with their bodies and more apt to go on disability during their working lives. This does not mean men are tougher; it means men are generally less aware, continue to go to work when they are sick, and die younger. (No one said an actuary’s calculations were cheery.)

The two things that will hurt someone the most trying to buy private disability insurance (as opposed to a group policy offered by a company) are back problems and psychiatric care. These are the categories that generate the largest number of claims: lower back injuries and depression. If one of these conditions is pre-existing, the underwriter may deny coverage. Or the underwriter may attach a rider exempting those areas from coverage or, worse, limit the payout period for any disability claim. Again, this may seem deeply unfair, but insurance companies are for-profit entities.

SHORT-TERM VS. LONG-TERM DISABILITY Disability insurance is divided into two broad categories, based on the length of the claims — short and long. They are exactly as they sound. Short-term disability kicks in soon after a claim is made but generally stops within two years. Long-term takes longer to start, from 31 days to a time set by the insured, but can last until the insured’s death. Among insurance products, long-term disability is among the most expensive and the one insurance companies are least eager to underwrite. The reason is simple: It is a hard product for them to make money on. Unlike life insurance, where the actuarial tables are on their side, long-term disability could cost an insurance company dearly. A man in his early 30s, for instance, could pay $5,000 annually for insurance that would replace a yearly income of $400,000. If, however, he is disabled a couple years into the policy, the insurer could be paying that claim for 40 years.

http://www.nytimes.com/2009/04/28/your-money/life-and-disability-insurance/lifeinsureprimer.html?pagewanted=2&_r=1&ref=your-money

The second largest amount of proven oil reserves

The Energy Report for Monday, October 4, 2010

Who has the second largest amount of proven conventional oil reserves or easy to get to oil?

Iraq has announced that they will increase the amount of their proven oil reserves from mere 115 million barrels of oil to a whopping 143.1 billion barrels of oil putting them in second place in the world of cheap, easy to get to oil. Dow Jones reports that the figure, the first update since 2001, would mean Iraq has the world's second largest reserves according to statistics on the OPEC website. Iraq would take second place from Iran, which has 137.01 billion barrels of proven reserves, but would still be far behind Saudi Arabia, which has 264.59 billion barrels of proven oil reserves, according to OPEC figures.

These aren't random figures, rather they were the results of deep surveys carried out by the ministry's oil reservoir company and international companies which signed contracts with Iraq.

Dow Jones say that Iraq has signed 12 deals with international oil companies to ramp up output capacity to about 12 million barrels a day from around 2.4 million barrels a day now. BP PLC (BP), Exxon Mobil Corp. (XOM), Royal Dutch Shell PLC (RDSA), Lukoil Holdings (LKOH.RS), Eni SpA (E), Total SA (TOT), Japan Petroleum Exploration Co. Ltd. (1662.TO) and China National Petroleum Corp., or CNPC, have signed on to develop Iraq's vast oil fields. The largest Iraqi oil field was West Qurna. With total proven oil reserves of 43 billion barrels, it could be the world's second largest.

West Qurna is divided in two--Phase 1 and Phase 2. Exxon Mobil led a consortium and won a deal to develop Phase 1, while Lukoil led a consortium to develop Phase 2. Rumaila, which is being developed by BP and CNPC, is the second-largest Iraqi oil field, with total proven reserves of 17 billion barrels. Majnoon, which Shell won the right to develop, comes third with proven reserves of 11 billion barrels of oil.

The new reserve figure doesn't include the semi-autonomous region of Kurdistan in northern Iraq. The region's authorities have estimated reserves in their Kurdistan region to be around 40 billion barrels.

This is an amazing development. It has been said that one of the reasons that Saddam Hussein invaded Kuwait was because it had coveted its oil, If he only would have taken the time to look around.

Disclosure: I own British Petroleum

20 Ways to Celebrate Financial Planning Week

Suggestions to celebrate Financial Planning Week:

• Balance your checkbook
• Make a monetary contribution to your favorite charity
• Start a savings account for a child, vacation or a gift for yourself
• Help teach your children how to save and spend wisely
• Get your estate in order: Create or revise your will and other estate-planning documents
• Meet with your financial planner and share your appreciation for their service
• Pay off a credit card
• Get a head start on college — investigate college planning options
• Establish an emergency fund
• Evaluate your employee benefits and begin planning for open enrollment
• Develop your holiday spending budget
• Plan for year-end tax strategies
• Arrange a meeting with a financial planner for a relative, friend or colleague
• Give yourself a subscription to a personal finance magazine
• Invite your financial planner to speak at your workplace
• Review your insurance coverage
• Write down your financial goals and revisit them periodically
• Start using personal finance software to help you better understand your money
• Look up three financial terms that have baffled you and resolve to understand them
• Talk to a relative about their plans for long-term care

High Dividends Sparking Telecom Stocks

By Reinhart Krause, INVESTOR'S BUSINESS DAILY

Investors hit the pause button on cable TV stocks over the summer as they flocked to high-dividend-paying phone companies.

Indeed, dividends are among the few things that set the two big providers of telecom services to homes apart.

Phone and cable companies compete in delivering to consumers phone, pay TV and broadband services. Though they're losing droves of video subscribers amid the weak economy, cable TV companies are still the top provider of pay TV. And cable companies are No. 1 in selling broadband.

But when it comes to the key financial metric of shareholder dividends, cable TV companies are playing catch-up with the likes of AT&T (T) and Verizon Communications (VZ).

The telecom leaders offer dividend yields above 6%. AT&T is expected to dole out about $1.68 per share in 2010. Verizon shareholders will get about $1.91 a share.

The nation's two biggest cable TV firms, Comcast (CMCSA) and Time Warner Cable (TWC), only recently began offering dividends. Time Warner Cable's yield is about 3%, or about $1.60 per share in 2010. Comcast's is near 2%, at 38 cents a share.

Disclosure: I own Verizon

New Tax Deduction for the Self-Employed Medical Costs

On Monday, 9/27/10, a new law was signed into effect. The Small Business Jobs and Credit Act of 2010 offers a vital tax break for more than 23 million Americans who are self-employed, which represents 78% of all small businesses in America.

Up until now, the self-employed haven't been privileged to the equivalent tax benefit relating to medical insurance costs that all other types of business entities have had. Many types of business entities, with the exception of the self employed, have been able to deduct the expense of their medical coverage as a business expense, which has saved them a decent amount of money in payroll taxes.

Now, the self-employed can take a 1-year tax deduction for medical costs in determining the self-employment tax. To qualify, you must:

• File a Schedule C (IRS's Form 1040) or a Schedule E showing income that's earned - this comprises single member Limited Liability Corporations that have a single member, S-Corporations that are solely owned, and sole proprietors.
• File a Schedule SE (IRS's Form 1040) and pay the self-employment tax.
• Pay for family or individual medical coverage this year (2010).

This deduction can be taken by the self-employed when filing their 2010 taxes next year.

On average, the self-employed can expect to save anywhere between $456.71 and $968.14 in taxes. However, if your 2010 income is higher than $106,800, the tax benefit will be lower since your income falls higher than the maximum set wage limit that is applicable to FICA, or payroll taxes. Your personal tax savings can be accurately assessed by your tax professional.

http://www.parasolfinancial.com/insurance-agent-news/bid/52611/New-Tax-Deduction-for-the-Self-Employed-Medical-Costs&urlhash=KN48&goback=.gde_45215_member_31135425