7 keys to mistake-free investing

Here are the seven strategies and their application to financial decisions:

1. Limit the options. Purchase illiquid investments to avoid the urge to sell investments when the market is falling.

2. Avoidance. Avoid information about how the market or portfolio is performing in order to stick to a long-term investment strategy.

3. Rules. Establish and use rules to help make better financial decisions, such as spend only out of income and never out of capital.

4. Deadlines. Set financial deadlines. For example, aim to save a certain amount of money by the end of the year.

5. Cool off. Wait a few days after making a big financial decision before executing it.

6. Delegation. Delegate financial decisions to others, such as allowing an investment adviser to manage your portfolio.

7. Other people. Use other people to help reach financial goals. An example would be meeting with a financial adviser to make and execute a financial plan.

http://money.msn.com/investment-advice/7-ways-to-limit-investment-mistakes-usnews.aspx

Investing Decisions Based on Emotions

According to a recent global survey by Barclays Wealth, a large percentage of investors not only realize their tendency to make decisions based on emotions but would welcome help in dealing with the problem. Some key observations:

1. Failing to see the big picture. Considering investing decisions in isolation and not including their impact on an entire portfolio was cited as a problem.

Consequence: Investing too much in a single asset class, industry or geographic market because you know a lot about it and are comfortable with such decisions.

2. Using a short-term decision horizon. Ignoring the appropriate goal of long-term wealth accumulation in favor of short-term returns hindered investors.

Consequence: Statistically, losses are more likely in the short run. Because people are twice as sensitive to losses as to gains -- a behavioral phenomenon known as "myopic loss aversion" -- their willingness to take short-term risks is too low and they often make the wrong investment decisions.

3. Buying high and selling low. Investors tend to do what's comfortable amid bullish or bearish market conditions.

Consequence: Buying when markets are high or selling when markets are low is a risky strategy that fails to take advantage of market opportunities. A buy-and-hold strategy is superior.

4. Trading too frequently. Multiple emotional and personality traits produce an irrational bias toward action.

Consequence: Investment costs are higher, and the frequency of other poor decisions is increased.

"This lack of control over our emotions is not an abstract problem," the Barclays study said, and "it can have tangible, detrimental effects on both investor satisfaction and performance."

The report also found substantial improvement in investment decisions as people aged. Older investors were much less likely to trade too often, try to time the market or base investments on short-term considerations.

They were also more satisfied with their financial situation.

Barclays Wealth also found that women are better long-term investors than men, who tend to take more risks and are more likely to favor frequent trading and efforts to time the market.

"Women tend to have lower composure and a greater desire for financial self-control, which is associated with a desire to use self-control strategies," the report said.

"Women are also more likely to believe that these strategies are effective." As a consequence, women tended to trade less and earn higher returns over time.

Barclays Wealth sponsored surveys of more than 2,000 people from 20 countries . These investors may not have known the details of their emotional flaws as documented by behavioral economists. But they were aware that they were prone to bad decisions and were open to getting help.

The report identified seven self-control strategies to help people counter their tendencies to make bad decisions. The use of these strategies was not limited to investments and often included other behaviors, such as big-ticket purchases or dieting and exercise.

http://money.msn.com/investment-advice/7-ways-to-limit-investment-mistakes-usnews.aspx

Buy Young

By Emily Lambert

In the wake of the recession only 44% of American households have individual life insurance, a half-century low. Fewer still have disability insurance. If you're uninsured or haven't reviewed your coverage recently, here's a reason to get moving: You're the youngest now you'll ever be, and as you age the cost of coverage will only rise. "A 35-year-old male is going to pay less than a 36-year-old male," says Mark Maurer, president of brokerage Low Load Insurance Services.

Here's how to get started.

Find your family's number

Insurance agents are fond of citing multiples of annual income that people should try to replace with life insurance. But what matters is your own family's needs. "The key question is ‘Who suffers if this person's income is gone?'" says William Wixon, a certified financial planner in Maple Grove, Minn. In fact, Wixon occasionally advises his older clients to let their life insurance policies lapse.

Young parents, by contrast, generally do need life insurance. But situations differ. Two highly paid professionals might be able to raise their kids just fine on one of their salaries, while a stay-at-home spouse needs extra protection should something happen to the sole breadwinner. Estimate what your survivors would need to cover future bills, including a mortgage and the rapidly rising cost of college. Then subtract your spouse's expected earnings, plus death benefits your family would receive from group life insurance policies, Social Security and other sources.

Pick a product

Life insurance comes in two main flavors, with many variations. The simplest and cheapest--and the best for most young families--is term insurance. With term you pay premiums for a number of years set at the outset. In exchange the underwriter agrees to pay a death benefit to your beneficiaries if you die during that term. Outlive it and your heirs get nothing.

Term carriers compete fiercely on premiums, and you pay only for what you need for as long as you need it (say, until your kids are grown). If this strategy appeals to you, look for "level" premiums for which the annual cost is fixed for the life of the policy--say, for 10 or 20 years. A 40-year-old woman could get a $1 million, 20-year level term policy for as little as $540 a year.

The other flavor, permanent insurance, is far more expensive and can be mind-bogglingly complex. The advantage is that it stays in force and pays off when you die. Permanent (whole or universal) policies can also work as a sort of forced savings plan. That's because, over time, they build up a cash value that you may be able to tap into or use to reduce premiums when you're older.

Still, view with skepticism broker pitches of permanent policies as great tax-deferred investments. Often they aren't, due to high fees, mandatory contributions and withdrawal restrictions. Moreover, a significant portion of permanent policyholders stop paying premiums, forfeiting some or all of the cash value they've amassed over the years and even the death benefit.

Permanent policies tend to make the most sense for those whose assets will be subject to federal and/or state estate taxes when they die or who want to generate cash at their deaths--for example, so a family business can go to one child and cash to another. But if estate planning is a concern, first consult an attorney or fee-only financial planner who doesn't earn life insurance commissions.

Unsure of whether you want permanent coverage? You can keep your options open by buying a term policy that can be converted into more expensive permanent insurance based on your health status at the time your policy was originally issued.

http://www.forbes.com/forbes/2011/0627/money-guide-11-insurance-life-disability-policies-buy-young.html

Hedge against disability

By Emily Lambert

Working adults have a 3% chance of becoming disabled before retirement age, compared with a 1% to 2% chance of dying. Yet only 27% of adults have private disability coverage, even though the disabled must still cover their own living expenses, as well as their families'. Don't count on Social Security disability to pay your bills. It can take years to start receiving benefits that average only $1,064 a month.

Many employers offer basic, low-cost group disability as a benefit or for an extra out-of-pocket premium. It's better than no coverage. But group policies often have offset provisions, meaning they pay you less once Social Security disability kicks in. Plus, group coverage might render you ineligible for an individual policy, which (unlike a group policy) will continue if you change jobs. Another advantage to buying an individual policy early is that you can renew coverage at your original rate even if your health deteriorates, notes Michael Horrow, an insurance and policyholder attorney at Donahue & Horrow in Los Angeles.

Disability policy literature can go on forever, but a few details are crucial. How is a "disability" defined? The best option pays if you're unable to perform your own occupation, or "own oc" in insurance lingo. A surgeon would be covered if she could no longer operate. The alternative, "any occupation" coverage, would only start paying if she became unable to act even as a Wal-Mart ( WMT) greeter. For obvious reasons, an "own oc" policy will cost more.

"It is absolutely worth the investment," says Horrow. Some group policies, he cautions, offer "own oc" coverage initially but after two or three years convert to "any oc."

The benefit period is crucial, too. Some older policies last for life, but those are harder to buy now. Others cover you for only two or five years, or until age 65. Consider, also, paying extra for a cost-of-living rider. A $6,000 monthly payment might sound good now but not in a decade or two if unadjusted for inflation. Lastly, be aware of the tax implications. If you pay your premiums at work with pretax dollars, Uncle Sam may demand a cut of your benefits.

http://www.forbes.com/forbes/2011/0627/money-guide-11-insurance-life-disability-policies-buy-young_3.html

New Strategies for Dividends

By Ben Levisohn, Wall Street Journal

With investors increasingly worried about sluggish economic growth, the end of the Federal Reserve's bond-buying program and debt woes in Greece, dividend stocks are suddenly looking a lot sexier.

Such stocks—long the preserve of investors attracted by their steady stream of income and low volatility—are luring new followers.

The rally in dividend stocks is part of a broader move by investors out of growth stocks and into more-conservative sectors such as utilities and consumer staples. Earnings growth is beginning to slow as the bull market enters its third year, leading to a natural shift to stocks with more predictable returns—including ones that pay dividends.

Recent U.S. economic data has been subpar at best, with payrolls expanding by just 54,000 in May, well below economists' estimates, and the Federal Reserve is reporting disappointing regional manufacturing activity.

"Dividend strategies do well when growth rates are slowing and equity returns are tapering off," says Savita Subramanian, head of quantitative strategy at Bank of America Merrill Lynch. "We could see the market continue to reward dividend stocks."

Overall, dividend-paying companies in the S&P 500 increased their payouts during the past four quarters by 9% from a year earlier, to $213 billion. Some have announced steeper increases.

With companies booking handsome profits and sitting on record amounts of cash, there is plenty of room for further increases.

Strategists and managers were recommending dividend-paying stocks in 2010 during the market's midyear slump, amid similar worries about the strength of the U.S. economy.

After outperforming the broader market for the five months beginning in April that year, dividend payers trailed by 5.1 percentage points the following six months—after the Fed first hinted at a second round of massive bond buying.

An added bonus for dividend investors: With Treasury yields so paltry—the 10-year yield is back at 3%, near a multidecade low—income investors can build a portfolio that rivals government bonds.

Top 7 Most Common Financial Mistakes

It is indeed a material world. When it comes to spending, the U.S. is a culture of consumption. The result: rising levels of consumer debt and declining household savings rates. But in 2008, this culture was hit hard by economic reality. As a result of the credit crisis and ensuing economic recession, savings rates also rebounded. For those who had been living beyond their means for years, it suddenly got a lot harder to make ends meet. And, although the government tends to encourage spending during economic downturn and statistics may lead us to think that overspending is normal, it is often a risky choice. Here we'll take a look at seven of the most common financial mistakes that often lead people to major economic hardship. Even if you're already facing financial difficulties, steering clear of these mistakes could be the key to survival.

Mistake No. 1: Excessive/Frivolous Spending
Great fortunes are often lost one dollar at time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you're enduring financial hardship, avoiding this mistake really matters - after all, if you're only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever.

Mistake No. 2: Never-Ending Payments
Ask yourself if you really need items that keep you paying for every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning your from financial hardship.

Mistake No. 3: Living on Borrowed Money
Using credit cards to buy essentials has become somewhat normal. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn.

Mistake No. 4: Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade.

Sometimes a person has no choice but to take out a loan to buy a car, but how much does any consumer really need a large SUV? Such vehicles are expensive to buy, insure and fuel. Unless you tow a boat or trailer, or need an SUV to earn a living, is an eight-cylinder engine worth the extra cost of taking out a large loan? If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive. You might need one, but if you're buying more car than you need, you're burning through money that could have been saved or used to pay off debt.

Mistake No. 5: Buying Too Much House
When it comes to buying a house, bigger is also not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance and utilities. Do you really want to put such a significant, long-term dent in your monthly budget?

Mistake No. 6: Treating Your Home Equity Like a Piggy Bank
Your home is your castle. Refinancing and taking cash out on it means giving away ownership to someone else. It also costs you thousands of dollars in interest and fees. Smart homeowners want to build equity, not make payments in perpetuity. In addition, you'll end up paying way more for your home than it's worth, which virtually ensures that you won't come out on top when you decide to sell.

Mistake No. 7: Living Paycheck to Paycheck
In 2007, the U.S. household savings rate fell below 1%, but other countries had considerably higher rates of personal savings. For example, the Netherlands, Italy, Norway, Germany and France personal savings rates average 10% or more according, to the OECD Factbook 2005. Clearly it is possible to enjoy a high standard of living without financing it with debt. Countries in Asia boast savings rates of as much as 30%!

The cumulative result of overspending puts people into a precarious position - one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you'll have very few options. Everyone has a choice in how they live, so it's just a matter of making savings a priority.

Making a Payment Vs. Affording A Purchase
To steer yourself away from the dangers of overspending, start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn't the same as being able to afford the purchase. Finally, make saving some of what you earn a monthly priority.

Read more: http://www.investopedia.com/articles/pf/05/041405.asp#ixzz1Onmvz1nu

Do Small Investors Move The Market?

Well-funded institutional investing firms - each with big budgets for research, technology and investments - have notoriously been in the driver's seat when it comes to moving the market. A small percentage change in large institutional buying or selling, for example, can immediately affect prices, driving a market higher or leaving it in a free fall. The increase in the number of small investors, coupled with changes in technology, however, could change market dynamics and allow small investors to actually move the market. (These vehicles have gotten a bad rap in the press. Find out whether they deserve it.

Build It and They Will Come
Not that many years ago before the rapid advancements helped by the internet, individual investors were at the mercy of stock brokers to gain important and timely information regarding investment choices, or to place trades in the stock market. Investors had to compete for the broker's time and expertise, often losing out on profits while waiting for advice or to place a buy or sell order.

The advent of the internet, technical charting platforms and discount online brokerage firms have turned the once-tedious, pricey and inefficient task of placing orders into a precise, affordable and efficient method by which individuals can participate in the financial markets. The ease of online investing and a growing interest in self-directed investment decisions have led to a significant rise in the number of small investors.

Big Enough to Move the Market?
With this growing participation from online investors, then, is it reasonable to assume this group has the buying power to move the markets? Not necessarily. In most cases, the institutional players - including investment banks, insurance companies, pension funds, hedge funds and mutual funds - significantly outweigh the small investors in terms of both volume and dollars. They are able to trade in large enough sizes to have an influence on prices. Despite the growing popularity of the individual investor, the institutional investors tend to be the ones with the most power to move the market.

The Bottom Line
Market participants of all types - whether large hedge funds or individual traders - contribute to market liquidity and collectively give each market its shape. While many of today's popular markets cannot be pushed around by individual investors, as technology improves and small traders have access to a growing number of field-leveling advantages (including advanced market analysis tools and direct access trading) the ability for small investors to move the market could eventually increase.http://financialedge.investopedia.com/financial-edge/0611/Do-Small-Investors-Move-The-Market.aspx

Why housing is in a depression

By Brett Arends

BOSTON (MarketWatch) — It’s official. The house price collapse is now worse than it was during the Great Depression.

That astonishing piece of information comes from the researchers at the think tank Capital Economics.

It follows Tuesday’s news from Case-Shiller that house prices fell again in March, as the double dip gets worse.

Writes Capital Economics’ senior economist Paul Dales, “On the Case-Shiller measure, prices are now 33% below the 2006 peak and are back at a level last seen in the third quarter of 2002. This means that prices have now fallen by more than the 31% decline endured during the Great Depression.”

It’s yet more proof that the nationwide financial bust is far worse, and it may be getting worse instead of better.

Capital Economics says the latest double-dip in housing should come as no surprise. It’s very much following a pattern seen in the early 30s, when a brief recovery also petered out. The same has also happened in other big housing busts around the world, the think-tank says. It believes prices are going to fall even further before we hit rock bottom, maybe sometime next year.
The double-dip in housing, which has left nearly 30% of homeowners in negative equity, increases the chances that the Fed may resort to Quantitative Easing III — although they will probably call it something else.

In some ways, the collapse in house prices is even deeper than Case-Shiller is telling you.
After all, the official data take no account of inflation. During the Depression we had deflation — so while your home was worth fewer dollars, each dollar was more valuable.

Today we have (modest) inflation. If Fed chairman Ben Bernanke gets his way, we’ll get a lot more. We probably need it. Compared to wages, housing is now back to levels last seen in the late 1990s.

And the Case-Shiller data masks huge variations in housing markets. Prices have collapsed many suburbs, exurbs, rural areas, and in well-known disaster sites like Miami, Las Vegas and Phoenix. Meanwhile the declines have been much milder in places like Manhattan or Boston. Some high-end real estate is actually selling well. The buyers have money.
Is there a silver lining to this? Well, maybe.

If you can get the financing, housing is now cheap. Really cheap. Capital Economics reckons housing is now 24% undervalued, and is the cheapest it’s been in thirty-five years.

With mortgages rates on the floor, and inflation surely brewing down the road, housing in many parts of the country looks like a good deal. But you’ll have to be patient to see the biggest rewards. Capital Economics says, back in the Depression, it took 19 years for house prices to recover to their previous peaks.

http://www.marketwatch.com/story/why-housing-is-in-a-depression-2011-06-01?siteid=nwhpm

Summer Outlook – Continued Inclement Weather

The summer storms rolled in early this year wrecking devastating tornadoes across the Midwest and Southeast. And now for us in northeast Florida we have hurricane season to look forward to. NOAA predicts as many as ten hurricanes this season.

Besides the actual weather, we continue to deal with unsettling weather in our investments. Every day a different headline broadcasts bad news. Sovereign debt in Europe (most notably with Greece), Rising oil prices as a result of turmoil in the Middle East and exacerbated by the falling U.S. dollar and commodity speculators, Rising food costs, Supply chain disruptions as a result of the Japanese disaster, and the overall slowdown in the global economy.

Closer to home, unemployment continues to be high and private sector hiring remains limited. The housing situation is plagued by an enormous glut of homes on the market which is a real drag on economic growth. And just last month U.S. manufacturing slowed, putting further pressure on U.S. economic expansion. Continued debate over the U.S. debt ceiling and the deficit also creates uncertainly. Consumers - the life of our economy - remain on the sidelines stashing money away rather than spending it.

Up until recently, the stock market has basically shrugged off the bad news. While there was always some sort of dip in reaction to the headlines, the markets rebounded once the dust settled.

Most market and economic analysts predict we will continue to experience these ups and downs this Summer. Or at least until the time we can put all this bad news behind us.

Now would be a good time to consider adding to your investment holdings. Quality companies remain quality companies. As the markets get knocked down by world events, it presents a buying opportunity. Remember the goal is to buy low and sell high. Those who invested during the dark days of 2008 reaped tremendous profits once the markets recovered.

As we move into the latter part of 2011, I anticipate a flurry of activity to be generated by Washington to improve the U.S. economy. Despite the rhetoric, 2012 re-election at the local, state and federal levels will be driven by economy. Without economic improvement, and the resultant gain in the stock markets, politicians will pull rabbits out of their hats to kick start U.S. economic growth. Otherwise their re-election prospects will be considerably dimmer and we all know that their self-preservation is their first priority.

Solving Social Security with cheap money

By Linda Stern, Reuters

The budget challenge posed by the retirement of the baby boom behemoth has been acknowledged and expected for decades: With fewer workers supporting each retiree, the Social Security program would become insolvent, or become so expensive as to be unaffordable.

The program's trustees recently furthered that argument, projecting that the retirement security trust fund will run out of cash in 2036 -- unless something changes about the way the program collects and spends revenues.

For almost as long as actuaries have been warning about the impending crunch, some observers (including, ahem, me) have expected the problem to be solved by paying off oldsters with cheap money. That is, a hefty round of inflation that would reduce the real growth of Social Security benefit, so retirees could feel like they were getting a lot of dollars, but the real budgetary hit would be reduced.

Indeed, many economists have cited the Federal Reserve's easy-money policies and recent increases in food and energy prices as proof that we are well on our way to another inflationary period.

The counter-argument has been made: Social Security already includes an automatic cost-of-living adjustment (COLA) based on the consumer price index. So, any increase in inflation would automatically get fed back into the program, right?

That is true, but not the whole story.

In the first place, inflation already erodes a bit of that Social Security benefit in two ways. The cost-of-living adjustment already lags the CPI data by at least three months, allowing some benefit depreciation to creep into the payments.

And the index used to adjust benefits -- the so-called CPI-W -- probably understates the kind of price increases elderly people face.

An experimental CPI that aims to measure the cost of living for consumers over the age of 62, called the CPI-E, has been rising faster than the CPI-W since its inception in the early 1980s. For the last 10 years, the CPI-W has grown at an average annual rate of 2.5 percent; the CPI-E has grown at 2.65 percent, probably because of rapidly rising healthcare costs that make up a larger percentage of retirees' expenses than those of younger workers.

Politically speaking, there are ways to tinker with the inflation adjustment that would help close program shortfalls while mostly flying below the radar. That could seduce politicians of both parties who want to address Social Security without openly riling retirees.

Policymakers could switch the index upon which the COLA is based to another experimental measure called the "Chained CPI." That measure, which adjusts for how spending patterns change when prices rise, shaves some of the inflation out of its price measurements. During the last 10 years, it has been rising at an annual rate of 2.2 percent.

Alternatively, policymakers could build a longer lag into the Social Security COLA by delaying the adjustment for three months every year, as they did in 1983 when they shifted the adjustment from October to January. Or, they could simply decide to subtract a percentage point from the annual COLA for all but the lowest earning recipients.

Put all of that together, and current and future retirees would do well to prepare for some cheaper dollars in their benefit checks in the future. Here's how:

• Earn money on inflation. When prices rise over long periods, interest rates usually do too. Retirees who have significant savings can capitalize on that by buying money market mutual funds and short-term certificates of deposit that will capture rate hikes. They can also tuck some inflation-protected bonds into their tax-deferred accounts.
• Hedge inflation. The housing market may or may not recover anytime soon, depending on where you live. But if you own your house outright, or are paying for it with a fixed-rate low-interest rate loan, you are somewhat protected from the cost of housing going up in the future. Other ways to protect the retirement kitty from U.S. inflation would include investing some of it in foreign-denominated stocks and bonds, keeping a small portion of your money invested in commodities, and making sure some of your retirement assets are invested for long-term growth (stocks) instead of short-term income (bonds.)
• Solve the health-care dilemma separately. The real inflation problem for retirees is the interplay of these two factors: (1) As they age, people spend a higher percentage of their income on health care, and (2) healthcare costs have been rising more rapidly than consumer inflation. So come up with a plan for covering healthcare down the road. It can include a solid long-term care insurance policy with an inflation adjuster, a good Medigap policy and/or a bucket of savings. (Retiree health-care costs have been put at $230,000 per person by Fidelity Investments.)
• Remember that your spending will adjust, too. Except for healthcare, retiree spending does trend down over the years. People in their 80s just don't have the same life styles as they did when they were in their 60s, so they may not need a dollar-for-dollar COLA. They don't travel as much, drive as much, buy as many clothes or even eat as much. So, if the COLA gets shaved a little bit, the monthly Social Security check could account for a higher percentage of everyday expenses in the future.