ALBERT HERTER

Archive for June, 2009|Monthly archive page

‘PREPARING FOR AN UNCERTAIN FINANCIAL FUTURE,’ short piece by me reprinted in Terry Dean Schmidt’s monthly newsletter, “Management Pro”. We shared a house in Georgetown 30 years ago. Author, lecturer, consultant, great public speaker.

In Uncategorized on June 16, 2009 at 02:02

During the 1970s when I worked for the government in Washington DC, I shared a group house with Al Herter.  Al is a self-made millionaire and successful investor, and is called “the hippie philanthropist”.

Al mastered the art of living comfortably on a small budget. By living simply and following the Quaker philosophy, he became financially independent by doing both well and good. In these topsy-turvy financial times, his twelve steps offer practical and simple advice we can all benefit from.

Notice: These smart steps can alter your life and your future outcomes. Following them again and again will put some traction in your action.

  1. Think simple living. The Quakers are the standard. Want what you have. Do what you can. Be who you are. Count your blessings.
  2. For a month, keep track of every penny you spend in a small notebook (but don’t go out and buy one). Review each bill you pay or have paid. Need all those cable channels? The lattes? The smokes? The cleaners? The maid twice a week?
  3. Mend clothes, darn socks, turn off lights, and re-heat leftovers. Think small, cheap, and affordable.
  4. Sell anything you don’t use, want, need, or are just storing for posterity, for the children, or for a rainy day. Get onto craigslist.com and sell all that extra stuff you have and don’t use. It declutters and puts money in your pocket.
  5. Look for other revenue centers that you can profit from, such as rent out a small room as an office; or rent out the garage or even the basement for storage. Explore how you can rent or exchange apartments rather than use hotels.
  6. Health is number one on my list. Eat better. Eat less. Practice yoga, take walks, ride your bike.
  7. Plant a veggie garden. It saves money and is better for you-and may even be something you can sell to others and/or barter with them. You do tomatoes, and the neighbors do corn/beans/squash. You share the tools, knowledge and harvest. Not only will your garden grow, but so will your neighborly community.
  8. Starting to get the drift that the landscape has changed dramatically?
  9. Cook and entertain at home. Invite others over for potlucks. They’re cheaper, easier nicer and more fun!
  10. Walk, use public transit, use your bike, car pool, or any combination thereof (but not all at once, of course).
  11. Be preventative with your health through diet, exercise and relax. When necessary, use generic drugs.
  12. Breathe, relax and enjoy life! You’ve only got this very moment to live it to the fullest-and that’s one thing that is for certain!

Check out Al’s blogwww.TheSmartMoney.wordpress.com.

”CHOOSING BONDS IN TODAY’S MARKET,” from fidelity.com. My call four months ago, Feb. 10th~~~check archives ‘ Feb. 2009’, when I was buying SPHIX / FAGIX. And again on Feb. 14th when I bought more! $6.02 then, NAV of $7.38 on Friday.

In Uncategorized on June 14, 2009 at 14:01

Last year many investors turned to U.S. Treasury and other government-backed, more conservative securities. If you were one of them, now may be a good time to reevaluate your investment strategy to make sure you have proper exposure to fixed-income securities beyond Treasuries and cash. Here’s why.

What happened

The key theme in last year’s fixed-income markets: the credit crisis, which drove increased demand for lower-risk investments.

If you fled to U.S. government bonds, you weren’t alone. As the crisis unfolded last fall, many investors sold securities that were, or were feared to be, losing value. Instead, they bought bonds with explicit government backing, including U.S. Treasuries and Ginnie Maes and other bonds from government-sponsored agencies like Fannie Mae 

 or Freddie Mac 
.  This heavy demand in late 2008 caused their prices to rise dramatically. These types of bonds delivered strong total returns (the gains and losses in value from changes in the price of the bond combined with interest earned). Rapid selling of riskier bonds, such as high-yield, caused their prices to drop dramatically, leading to negative total returns during this same period. (See table below.)

What’s happening now

Things have changed in 2009. Through May, an unprecedented amount of U.S. government and monetary policy actions has led to improving credit market conditions. Leading economic indicators have signaled a slowdown in the rate of economic decline, and in some cases show signs of improvement. Last fall’s performance trend has reversed, with positive year-to-date returns reflecting greater demand for fixed-income securities that are not backed by the U.S. government. Year-to-date total returns for high yield bonds (24.3%), leveraged loans (15.8%), and emerging-market debt (11.1%) demonstrated their rebound from major losses in 2008. At the same time, Treasury returns (-4.9%) and other government-backed securities (e.g., mortgage-backed securities) have underperformed, despite massive purchases of some of these bonds by the Federal Reserve. (See table below.)

At the end of May, the yields on Treasury bonds remain near historic lows, seeming to offer little room for growth when the market climate improves or interest rates rise. (One exception is Treasury Inflation-Protected Securities, or TIPs.) At the same time, the yields paid by non-government bonds—while lower than in February—are still much higher than normal, relative to risk-free Treasuries. This means that investors who can tolerate some volatility in returns may earn relatively higher yields while they wait for the economic climate and credit markets to improve. While the Fed’s recent purchases of Treasuries may continue to provide support for government-backed securities in the near term, if the economy improves and interest rates climb, the historically low current yields on these bonds offer little protection.

What it means for you

The past year has made it obvious that shifts in credit and interest rate expectations can influence the performance of the different types of bonds. Since the prices of certain bonds may move in different directions from other bonds as market conditions shift, Fidelity suggests that investors who own fixed-income investments consider diversifying. To help stabilize a fixed-income portfolio over the long term, consider bonds with different risk and return characteristics. While yields on many nongovernment bonds have come down from their recent peaks, in many cases they are still well above historical norms. If you can tolerate additional volatility in your portfolio, you can find some relatively high yields for a portion of your fixed-income investments while waiting for economic recovery. Given the ongoing uncertainty about current credit market conditions, now may be a good time for you to reevaluate and potentially rebalance your bond holdings.

‘WHERE ARE WE NOW? A FIVE-POINT SUMMARY,’ by Simon Johnson, former chief economist of the I.M.F., now professor at M.I.T. Short read, worth it !!!!!! INFLATION? ‘MY advice: pay close attention to oil prices.’

In Uncategorized on June 14, 2009 at 04:46
1. Financial markets have stabilized – largely because people believe that the government will not allow Citigroup to fail.  We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside.  How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation (my versionJoe Nocera’s view).  For more on how we got here, see the Frontline documentary that airs on Tuesday and Paul Solman’s explainer wrap up.

2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years.  Longer term growth prospects remain uncertain – has consumer behavior really changed; if finance doesn’t drive growth, what will; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)?

3.  More broadly, there is sophisticated window dressing in the pipeline but no real reform on any issuecentral to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis.  The financial sector lobbies appear stronger than ever.  The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything – with the possible exception of healthcare.

4. The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before late 2010.  The financial markets beg to differ – presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide.  In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed.  My advice: pay close attention to oil prices. 

5. Emerging markets are increasingly viewed as having “decoupled” from the US/European malaise.  This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new bubble – based on a “carry trade” that now runs out of the US.  The ”appetite for risk” among investors is up sharply.  The G7/G8/G20 is back to being irrelevant or merely cheerleaders for the financial sector.

Comments welcome.

By Simon Johnson

‘BUILDING A PORTFOLIO THAT WILL STAY AFLOAT ONCE INFLATION RETURNS,’ in today’s Times. And return it will, so time to prepare for that is TODAY!

In Uncategorized on June 13, 2009 at 02:33

Most economists don’t expect inflation to arrive anytime soon. But nobody really knows when it will appear or how corrosive its effects will be. In the meantime, financial planners are suggesting that investors make sure that their portfolios are well positioned to withstand any impact on their hard-earned money — before it’s too late.

“There are a lot of people who are worried about rising deficits and the prospect of a falling dollar, and all of these things will put upward pressure on inflation,” said Alan Gayle, senior investment strategist at RidgeWorth Investments. “We don’t see inflation as a problem this year and even perhaps for 2010, but it is a factor that investors should try and incorporate in their portfolios as they go forward.”

That doesn’t mean making a radical overhaul to your investment portfolio, unless, of course, it wasn’t well diversified to begin with — or if all of your money is sitting in cash or low-yielding Treasuries with no long-term plan. (If that’s the case, you may want to seek professional advice.) What many financial planners are recommending, however, is incorporating some classic inflation hedges — some inflation-protected securities, maybe, or some commodities, while making sure your fixed-income investments have relatively short maturities.

For the short term, investment experts agree, deflation is more probable, with unemployment still climbing and the economy still mired in a recession. There’s talk of green shoots, but most everyone agrees that an earnest recovery is a long way off.

Still, inflation can quietly sneak up on you, and at that point it will be more expensive — or less effective — to get the inflation protection you need. It’s especially rough on people who live on fixed incomes, notably retirees, many of whom have already suffered painful losses in their portfolios.

“The problem is if you wait until we are actually in it,” said Chuck Roberson, a financial planner with Modera Wealth Management in Old Tappan, N.J., “it will be too late or the strategies won’t work as well.”

What follows are some of the most common strategies to inflation-proof your portfolio:

REVIEW YOUR MIX The inherent characteristics of a well-diversified portfolio — including a healthy dose of stocks — will help withstand inflation. If, for instance, your investments are split between domestic and foreign markets, which they should be, you already have a built-in hedge against the dollar and the American economy. Some financial professionals have added a diversified basket of foreign bonds to their fixed-income allocations. Others are hopeful about a recovery in Asia, so they are adding more money to Asian-based funds (minus Japan), while some planners have slightly increased their ratio of international to domestic stock funds.

SHORTEN UP Several financial planners recommend shorter-term fixed-income investments, or at the least making sure your bond investments aren’t heavily tilted toward long maturities, because they are most affected by rising interest rates. (Newer bonds issued at the higher, prevailing rates make existing issues less valuable. So when interest rates rise, bond prices tend to fall. Bond funds and investors who hold securities with shorter maturities have the opportunity to reinvest at higher rates more quickly.)

“Fixed income is a disaster in inflationary times,” said Steve Podnos, a financial planner in Merritt Island, Fla., who has been keeping his clients’ fixed-income money in short-term, high-quality bonds funds like theVanguard Short-Term Bond Index Fund. “You are giving up a couple of percentage points of income per year but inflation can do harm in terms of declining asset values.”

For clients with at least $250,000 to invest in bonds, Gordon Bernhardt, a financial planner in McLean, Va., builds a bond ladder, spreading money evenly across a portfolio of bonds that mature at regular, but staggered, intervals. This enables you to replace maturing bonds with bonds that offer higher yields.

TIPS Treasury Inflation-Protected Securities, or TIPS, guard against inflation because the principal increases with inflation (but decreases with deflation), in tandem with the Consumer Price Index. Investors can either buy the securities directly, or purchase a TIPS mutual fund or exchange-traded fund. If you hold TIPS directly, you will receive the adjusted principal, or your original investment, whichever is greater, when the TIPS mature. Interest payments also rise or fall with the movement of prices.

While the allocation to TIPS will vary on a person’s circumstances and goals, Scott Dauenhauer of Meridian Wealth Management has about 20 percent of his clients’ fixed-income allocation in TIPS.

It is best to keep TIPS and TIPS funds in tax-deferred accounts like anI.R.A. because you’ll be taxed on the amount your principal increases — even though you don’t receive it until the TIPS matures. With mutual funds, those adjustments are distributed (and taxable) to investors each year as well.

COMMODITIES Commodity investments tend to perform well when there’s inflation because rising prices usually mean a stronger economy at home (or elsewhere in the world). That, in turn, leads to increasing demand for raw materials to meet rising production and consumer needs. Don’t be tempted to make individual bets on oil or gold, planners say. Instead, buy a diversified basket of commodities that tracks a major index like the Dow Jones-UBS Commodity Index from a low-cost fund or exchange-traded fund provider.

Investors have to determine what allocations are best for them, but planners said they would invest anywhere from 3 to 10 percent of a portfolio in commodities. Given commodities’ volatility, investors need to rebalance their portfolio periodically to make sure their position doesn’t balloon. These investments are also best kept in a tax-deferred account.

REAL ESTATE Real estate can also be a good way to hedge against inflation. Real estate investment trusts, which invest and own commercial and residential properties, are an easy way to gain access. Not surprisingly, REITs, which are required to distribute most of their income (generally from rent rolls) to shareholders, have been battered in the downturn. But they have shown signs of hitting bottom, and Mr. Gayle said it might be a good time to start building a position.

“But while it is an inflation hedge, it is a leveraged inflation hedge,” Mr. Gayle said. “Debt and access to debt influence the real estate market very significantly,” he added, “so that should be further down the list” of inflation protectors.

Investors with a higher net worth may consider foreclosures, as long as they have done their homework. “If inflation does come back, hard assets like real estate will start to move,” said Marc Schindler of Pivot Point Advisors. But you need to have a five- to 10-year time horizon and you don’t want to invest more than 25 percent of your net worth in real estate, he added. Still, he said, “if you are able to buy at a huge discount to market through foreclosure or other means, it will be a wise investment.”

‘THE SMART WAY TO SAVE AMID LOW INTEREST RATES, ‘ from Fidelity.com

In Uncategorized on June 12, 2009 at 18:33

For all the recent fretting about rising interest rates, you’d think at least one group would be celebrating: risk-averse investors in short-term bank certificates of deposit and money-market funds. Interest rates are indeed rising, topping 3.7% last week for 10-year Treasurys, and hitting 4.6% for the 30-year. Yet CD yields remain stubbornly low. This is great news for the nation’s beleaguered banks, for whom a steep yield curve is a proven formula for higher profits. No wonder bank stocks have done so well this year, with plenty of room for further gains, in my view. But it’s not great news for peoFor all the recent fretting about rising interest rates, you’d think at least one group would be celebrating: risk-averse investors in short-term bank certificates of deposit and money-market funds. Interest rates are indeed rising, topping 3.7% last week for 10-year Treasurys, and hitting 4.6% for the 30-year. Yet CD yields remain stubbornly low. This is great news for the nation’s beleaguered banks, for whom a steep yield curve is a proven formula for higher profits. No wonder bank stocks have done so well this year, with plenty of room for further gains, in my view. But it’s not great news for people like my mother, who depends on the interest from CDs for much of her income, and has watched the yields plunge from over 4% on two-year CDs to just over 2% now. In discussions with her and her broker, we gave considerable thought to adding a little more risk to her portfolio in order to boost the yield. But ultimately we concluded the additional risk in her case just wasn’t worth the loss of peace of mind. Yes, she wanted more income — and she wanted safety. Her ladder of two-year CDs provided welcome stability last year as the market plunged. After every dizzying dive, I was able to reassure her that everything she needed was tucked safely in federally-insured certificates of deposit. That reassurance was worth a lot. Yet that fails to solve the immediate need to generate more income, a problem many fixed-income investors are now facing. The conventional approach is to move further out on the maturity scale, extending a CD’s term in order to lock in higher yields. But the recent sharp rise in Treasury yields hasn’t been mirrored in CD yields. When I checked this week, the national averages were 2.1% for one-year CDs, 2.3% for two-year, and 3.1% for five-year. Moreover, the longer the maturity, the higher the risk to erosion of principal if interest rates rise. Investors in longer term U.S. Treasurys have already suffered an 18% drop this year in the value of their bonds. This doesn’t matter so much if all you need is the income, but it’s still dispiriting to see the value of your bonds decline. In this environment, I have a suggestion that bucks the conventional wisdom: Instead of lengthening maturities, shorten them. You don’t have to give up all that much income; you don’t have to worry about rising interest rates eroding your principal; and the short maturities guarantee that, in the event CD rates do rise, you’ll be in a position to take advantage of them when your CDs mature. When I checked this week on rates for six-month CDs, I found numerous banks offering just under 2%, negligibly less than the rate for one- and two-year CDs. I don’t see any need to go shorter than six months, which will nearly take us to the end of the year, and provide enough time for CD rates to catch up to rising Treasury yields. There’s little or no downside risk. If yields don’t rise, your principal will still be safe, and you can simply continue the short-term strategy until they do. If they do rise, you can again extend the maturities and take advantage of higher yields. The trade-off is slightly less current income, but only very slightly. If you are indeed risk averse — and in my view, everyone over 50 should have at least some assets that are virtually risk free — you simply have to accept that in this environment, you can’t have higher yields without sacrificing safety. In my mother’s case, she may have to spend some principal in order to maintain her standard of living. But it’s only for the next six months, at which time we can re-evaluate the risk-reward equation. Many investors are putting the trauma of last year behind them and re-embracing risk, which to some extent is healthy. But the danger of further volatility has hardly vanished. I don’t like to forecast interest rates any more than I do stock prices, but the case for higher interest rates in the not-too-distant future strikes me as pretty compelling. Short-term CDs are an almost risk-free strategy for being prepared. © 2009 SmartMoney. SmartMoney is a joint publishing venture of Dow Jones & ple like my mother, who depends on the interest from CDs for much of her income, and has watched the yields plunge from over 4% on two-year CDs to just over 2% now. In discussions with her and her broker, we gave considerable thought to adding a little more risk to her portfolio in order to boost the yield. But ultimately we concluded the additional risk in her case just wasn’t worth the loss of peace of mind. Yes, she wanted more income — and she wanted safety. Her ladder of two-year CDs provided welcome stability last year as the market plunged. After every dizzying dive, I was able to reassure her that everything she needed was tucked safely in federally-insured certificates of deposit. That reassurance was worth a lot. Yet that fails to solve the immediate need to generate more income, a problem many fixed-income investors are now facing. The conventional approach is to move further out on the maturity scale, extending a CD’s term in order to lock in higher yields. But the recent sharp rise in Treasury yields hasn’t been mirrored in CD yields. When I checked this week, the national averages were 2.1% for one-year CDs, 2.3% for two-year, and 3.1% for five-year. Moreover, the longer the maturity, the higher the risk to erosion of principal if interest rates rise. Investors in longer term U.S. Treasurys have already suffered an 18% drop this year in the value of their bonds. This doesn’t matter so much if all you need is the income, but it’s still dispiriting to see the value of your bonds decline. In this environment, I have a suggestion that bucks the conventional wisdom: Instead of lengthening maturities, shorten them. You don’t have to give up all that much income; you don’t have to worry about rising interest rates eroding your principal; and the short maturities guarantee that, in the event CD rates do rise, you’ll be in a position to take advantage of them when your CDs mature. When I checked this week on rates for six-month CDs, I found numerous banks offering just under 2%, negligibly less than the rate for one- and two-year CDs. I don’t see any need to go shorter than six months, which will nearly take us to the end of the year, and provide enough time for CD rates to catch up to rising Treasury yields. There’s little or no downside risk. If yields don’t rise, your principal will still be safe, and you can simply continue the short-term strategy until they do. If they do rise, you can again extend the maturities and take advantage of higher yields. The trade-off is slightly less current income, but only very slightly. If you are indeed risk averse — and in my view, everyone over 50 should have at least some assets that are virtually risk free — you simply have to accept that in this environment, you can’t have higher yields without sacrificing safety. In my mother’s case, she may have to spend some principal in order to maintain her standard of living. But it’s only for the next six months, at which time we can re-evaluate the risk-reward equation. Many investors are putting the trauma of last year behind them and re-embracing risk, which to some extent is healthy. But the danger of further volatility has hardly vanished. I don’t like to forecast interest rates any more than I do stock prices, but the case for higher interest rates in the not-too-distant future strikes me as pretty compelling. Short-term CDs are an almost risk-free strategy for being prepared. © 2009 SmartMoney. SmartMoney is a joint publishing venture of Dow Jones

‘SIX WAYS TO PROFIT FROM THE FALLING DOLLAR, ‘ from Fidelity Interactive Services. Available at fidelity.com. AND MY GUESS IS THE DOLLAR WILL CONTINUE TO COLLAPSE.

In Uncategorized on June 11, 2009 at 17:45

The dollar is falling – but that doesn’t mean the sky is falling for U.S. investors.

After three years of steady declines, the dollar soared late last year as the deepening global financial crisis sent investors looking for the shelter of U.S. assets in the storm.

Now investors are leaving their safe haven, putting their money back into the stock market and other riskier investments. The result? The dollar has now given back nearly half of its 2008 gains. And there could be more declines coming.

But no need to be a chicken little about it. Indeed, investors can profit from the dollar’s misfortune, should it continue, as many investing professionals suggest it will.

An added plus: You’ll be protecting yourself against the inflation typically caused by a falling dollar, which makes it more expensive to buy imported goods and services.

“We’ve been telling people for about a year that our biggest concern is a loss of purchasing power from a weaker dollar and higher inflation,” says Ned Sundermann, president of Sundermann Capital Management, a fee-only investment advisory firm outside Denver.

But this doesn’t mean making a major overhaul in your investment portfolio.

“Currency predictions are difficult to make,” says Joanna Bewick, portfolio manager at Fidelity Investments, who stresses the importance of holding a well-diversified portfolio with dollar- and non-dollar-denominated investments. That way you can benefit if the dollar rises or falls.

Here are six ways you could benefit from a falling dollar and protect against inflation:

Buy overseas stock and bond mutual funds

“If you’ve got an inclination the dollar is going to drop over the long term, you should invest in foreign assets,” says Clint Edgington, president of Beacon Hill Investment Advisory, a fee-only investment advisory firm in Columbus, Ohio.

Foreign stock and bond funds are two such options. With a falling dollar, you’d capitalize on any appreciation in those investments and also get a currency gain from a falling dollar. Experts note you should check whether or not a fund is hedged against currency swings. One that isn’t hedged would give you the extra lift from the dollar drop plus gains in the stock or bond funds themselves. The risk is that you would lose from any dollar gain in an unhedged fund. It depends on your overall mix and tolerance for risk.

Buy shares or funds of big U.S. companies with significant overseas sales

Many American businesses traded on U.S. stock exchanges get a large percentage of their revenue selling recession-resistant products outside the United States. With the dollar weak or falling, their foreign-denominated overseas sales would be worth more once those sales are converted into dollars.

“Think of companies such as Coca-Cola 

  and 3M ,” says Fred Taylor, principal at North Star Investment Advisors, a fee-only investment advisory firm in Denver.

Buy commodities or commodity funds

“Move money into hard assets, particularly any that would hurt if you dropped it on your foot,” says Sundermann, the Colorado investment adviser.

Oil, gold, metals and other dollar-denominated commodities have rallied while the dollar has fallen.

“As the dollar falls, foreign buyers bid up the prices of those commodities because they’ve become cheaper,” Fidelity’s Bewick says. An easy way to invest: buy a mutual fund or an exchange-traded fund, an investment vehicle that trades on a stock exchange. The fund or ETF would track a commodity price index, or stocks of companies that produce commodities.

Buy overseas currencies

While perhaps too risky for most average investors, buying foreign currencies can let you profit directly from a falling dollar. You can buy them outright, but a simpler way is to invest in a currency mutual fund or an ETF linked to either a basket of overseas currencies or a single one, such as the euro or the Australian dollar.

The risks are substantial, though, because currency swings can be sudden and terribly sharp. Think Thai baht or Mexican peso and you’ll get the idea.

Buy ‘TIPS’ or funds that bet against U.S. Treasury bonds

“If the dollar is going to fall, interest rates are going to go up,” says Vitaliy Katsenelson, director of research at Investment Management Associates Inc., a fee-only money-management firm in Denver.

Treasury prices fall when inflation and interest rates rise as investors seek to free up money from long-term investments.

What to do? You can buy Treasury Inflation Protected Securities, or “TIPS,” which are designed to protect against inflation. Or buy a mutual fund that bets against the price of U.S. Treasury bonds. If Treasury prices fall, the value of your investment would go up.

A word of caution: “You’d want to be careful about investing in such funds over the long term because those products are really created for short-term trading,” says Edgington at Beacon Hill.

Buy shares in a real estate investment trust

A REIT is a real estate company that sells shares of stock to the public. You can invest either directly or through a REIT mutual fund. REITs typically manage income-producing properties, such as apartment buildings or office buildings. A residential REIT is considered less complex.

“You’d expect the rental rate on the apartments to rise because of the general expectations about inflation,” says Clifford Smith, professor at the University of Rochester’s Simon Graduate School of Business.

Whether it’s REITs, TIPS, the euro, gold, IBM or an overseas stock mutual fund, you’ve got plenty of options — so to speak — to make a buck from a falling dollar.

‘LONG-TERM INVESTING DOESN’T WORK,’ by Tom Gardner, founder of Motley Fool.

In Uncategorized on June 11, 2009 at 12:51

Recs

124

Today, everywhere I turn in the investment world, someone is asking about the merits of long-term investing. Does it work? Did it ever? Looking over the wreckage of one-time blue chips AIG (NYSE: AIG)Fannie Mae (NYSE:FNM)General Motors, et al, these are natural questions.

For every Danaher (NYSE: DHR), up around 3,000% over the past 20 years, there are plenty of disappointments — such as Eastman Kodak (NYSE: EK), down nearly 90% over that same time frame.

So which is it? If you buy and hold for 25 years, are you a champ or a chump? If you stick with a stock for five years, are you a star or a sucker?

What do you think? (Drop a comment below!)

Here’s what I think. 
It makes sense that this debate would rage during the most explosive year in the history of stocks, with the S&P 500 racing to 1,400, buckling to 670, and now settled ‘twixt the two. In 2008, on 18 separate days, the index moved more than five percentage points. Damnation!

It took nearly 60 years to rack up the same number of highly volatile days. When decades of tiny waves give way to a single tsunami, you can no longer blindly accept the merits of body surfing. The same goes with long-term investing; we can’t help but debate it after a year of calamity.

Now, if you think I’m chalking this up to mere shortsightedness — a one-year phenomenon — hold on there. The Motley Fool has been associated with long-term, buy-and-hold investing since our founding in 1993.

And as co-founder and CEO, I’m writing to say that, for many people, long-term investingsimply doesn’t work. You read that right. Many investors today are wrong to anchor their stocks to an average holding period of three to five years or more.

But now, are you ready to be confused? 
All that said, the evidence still shows that multiyear or multidecade holding periods will generate the highest real rates of return, after taxes and the frictional costs of trading.

Lifelong stock investing is the most broadly available way, across the world, to become a millionaire. It’s just that most people don’t have the time frame, the temperament, or the training to invest this way. Nor do they tack on new capital to their portfolio at lower prices.

Master investor Shelby Davis did. By repeatedly buying and holding stocks forever — Chubb(NYSE: CB)Aon (NYSE: AOC), and Torchmark (NYSE: TMK) among them — he turned $50,000 into $900 million over a half-century of investing. Against that record, you have reams of statistical data showing that when investors trade their accounts actively, the odds of their losing to the market rise dramatically. Worse still, the likely outcome of their hyperactive trading is that they lose money outright (see Terrance Odean and Brad Barber, “Trading Is Hazardous to Your Wealth”).

So what’s the average investor to do — caught between the rock (of not having the time or training to invest prudently for the long haul) and a hard place (of facing insurmountable odds against successful active trading)?

For me, it starts with knowing thyself. You must know the following (the four Ts):

1. Temperament. Can you stomach a 50% loss in the value of your investment portfolio over a two- to three-year period?

2. Time frame. Can you handle 10 years of zero returns from your investments?

3. Training. Are you capable of investing in public companies, diversifying internationally, and understanding what you own?

4. Tacking on. Are you inclined to add new money along the way, particularly as prices fall?

If you can’t chant a resounding yes to all four of these, you shouldn’t embrace buy-and-hold investing for the long term.

The facts bear out that most people don’t demonstrate all four in their investment approach. They can’t endure volatility leading to flat returns over any decade. They don’t truly understand the businesses in which they’ve invested or the money managers with whom they’ve invested. And they are disinclined to add money during bear markets.

They should not buy and hold for the long haul — period.

It is for these reasons that we launched our Motley Fool Pro service, smack in the middle of the mayhem last fall. Pro has almost never been in the red; it is up 10% today; and it is beating the market by 5.8 percentage points. But how?

The service features buying stocks long, selling stocks short, using exchange-traded funds (ETFs), and deploying options as a conservative hedge. The aim is to:

1. Dramatically reduce volatility.

2. Avoid down years.

3. Protect investors against ignorance, via an open community.

4. Eliminate the need to add new capital each year.

It aims to neutralize the need for a steely temperament, a multidecade time frame, thetraining to understand each investment, and the necessity of tacking on new capital each month, quarter, or year. This is precisely what must be done by the many investors for whom long-term, buy-and-hold investing simply is not suitable.

The debate
And so as I see it, the debate about long-term investing is actually a poorly framed one. Long-term investing simply doesn’t work for many, many investors today. But that doesn’t mean it’s dead.

For those for whom it does, I expect they’ll be enjoying financial freedom measured in quarter-centuries. For those for whom it is not suitable, they must learn diversification and hedging strategies.

We’re having a big debate around this question here — with Fools voicing strong opinions at both ends of the spectrum. Over the coming weeks, we’ll be interviewing experts and voicing our own motley opinions. But we also want to know what you think.

‘EIGHT TIPS ON HOW MONEY CAN BUY YOU HAPPINESS,’ from Shine & Yahoo. Upbeat suggestions about enriching your life in tough economic times.

In Uncategorized on June 10, 2009 at 13:16

The relationship between money and happiness is one of the most interesting, most complicated, and most sensitive questions in the study of happiness.

Studies show, unsurprisingly, that money’s impact on happiness is greatest when you have the least amount of money.

But if you’re one of the lucky people who has enough money to cover the basics – food, shelter, even a car — does that mean that money can’t make a difference to your happiness? Some happiness experts argue yes, but I think that’s…ridiculous.

The secret to using money to buy happiness is to spend money in ways that support your happiness goals.

Imagine that you have a certain amount of extra cash. How should you spend it?

One option: a fancy new TV set. Enticing. The fact is, however, that the new TV won’t give you much happiness bang for your buck. The hedonic treadmill describes our tendency to adapt quickly to changed circumstances — which means you’ll get a big kick out of the TV for a short while, but you’ll soon take it for granted.

The hedonic treadmill means that buying STUFF isn’t very satisfying, but there are ways to spend money that are likely to help give you enduring happiness. Spend money to…

1. Strengthen bonds with family and friends. Studies show that having close relationships is one of the most important elements of a happy life. Pay for a plane ticket to visit your brother’s new baby, go to your college reunion, throw a Superbowl party.

2. End marital conflict. If you’re constantly arguing about the unkempt lawn, or the moldering laundry, see if you can throw some money at the problem. Can you hire the teenager down the street to clean out the garage?

3. Upgrade your exercise. Studies show that one of the quickest and surest ways to boost your mood is to exercise. If spending money on a new iPod, a more convenient gym, or a new pair of yoga pants will make it easier to get yourself off the couch, that’s a good happiness investment.

4. Think about fun. Ask yourself – and be honest – what’s fun for you? Fishing, bird-watching, travel, hunting through flea markets, experimenting in the kitchen, skiing, scrapbooking? Make sure that your calendar reflects some activities that you are doing just for FUN. For happiness, you’re better off using your money to have a great experience than to gain a possession.

5. Serenity and security. Peace of mind is critical to happiness, so use the money to pay down your debts or to add to your savings.

6. Pay more for healthy food. It’s a sad fact that fruits, vegetables, and healthy food are more expensive than fast food, but eating healthfully will pay off in the long run, in terms of your good health and energy.

7. Spend the money on someone else. One of the best ways to make yourself happy is to make someone else happy. Think about ways you could spend the money that would make a big difference to someone else — whether someone you know, or a cause you support. How many new books could the library’s children’s room add to the shelves?

8. Think about YOUR priorities. Two years ago, some friends decided to skip an anniversary trip so they could use the money to buy a super-expensive Dux bed. I thought this was a bad idea, because the “hedonic treadmill” would mean that they’d quickly get used to the new bed. Oh, no. They still rave about their Dux bed. So maybe that fancy new TV set would mean a lot to you, although I, for one, would hardly notice the difference. As always, the key to any happiness question is to know yourself, and what makes YOU happy.

‘THE JOY OF LESS, ‘ from Happy Days, The magazine of living a simpler life. Tender story of chosing a much different life. ‘WANT LESS!’~~~WENDELL BERRY, POET & FARMER.

In Uncategorized on June 8, 2009 at 23:43

“The beat of my heart has grown deeper, more active, and yet more peaceful, and it is as if I were all the time storing up inner riches…My [life] is one long sequence of inner miracles.” The young Dutchwoman Etty Hillesum wrote that in a Nazi transit camp in 1943, on her way to her death at Auschwitz two months later. Towards the end of his life, Ralph Waldo Emerson wrote, “All I have seen teaches me to trust the creator for all I have not seen,” though by then he had already lost his father when he was 7, his first wife when she was 20 and his first son, aged 5. In Japan, the late 18th-century poet Issa is celebrated for his delighted, almost child-like celebrations of the natural world. Issa saw four children die in infancy, his wife die in childbirth, and his own body partially paralyzed.
 
I’m not sure I knew the details of all these lives when I was 29, but I did begin to guess that happiness lies less in our circumstances than in what we make of them, in every sense. “There is nothing either good or bad,” I had heard in high school, from Hamlet, “but thinking makes it so.” I had been lucky enough at that point to stumble into the life I might have dreamed of as a boy: a great job writing on world affairs for Time magazine, an apartment (officially at least) on Park

In the corporate world, I always knew there was some higher position I could attain, which meant that, like Zeno’s arrow, I was guaranteed never to arrive and always to remain dissatisfied.

 

Avenue, enough time and money to take vacations in Burma, Morocco, El Salvador. But every time I went to one of those places, I noticed that the people I met there, mired in difficulty and often warfare, seemed to have more energy and even optimism than the friends I’d grown up with in privileged, peaceful Santa Barbara, Calif., many of whom were on their fourth marriages and seeing a therapist every day. Though I knew that poverty certainly didn’t buy happiness, I wasn’t convinced that money did either.

So — as post-1960s cliché decreed — I left my comfortable job and life to live for a year in a temple on the backstreets of Kyoto. My high-minded year lasted all of a week, by which time I’d noticed that the depthless contemplation of the moon and composition of haiku I’d imagined from afar was really more a matter of cleaning, sweeping and then cleaning some more. But today, more than 21 years later, I still live in the vicinity of Kyoto, in a two-room apartment that makes my old monastic cell look almost luxurious by comparison. I have no bicycle, no car, no television I can understand, no media — and the days seem to stretch into eternities, and I can’t think of a single thing I lack.

I’m no Buddhist monk, and I can’t say I’m in love with renunciation in itself, or traveling an hour or more to print out an article I’ve written, or missing out on the N.B.A. Finals. But at some point, I decided that, for me at least, happiness arose out of all I didn’t want or need, not all I did. And it seemed quite useful to take a clear, hard look at what really led to peace of mind or absorption (the closest I’ve come to understanding happiness). Not having a car gives me volumes not to think or worry about, and makes walks around the neighborhood a daily adventure. Lacking a cell phone and high-speed Internet, I have time to play ping-pong every evening, to write long letters to old friends and to go shopping for my sweetheart (or to track down old baubles for two kids who are now out in the world).

When the phone does ring — once a week — I’m thrilled, as I never was when the phone rang in my overcrowded office in Rockefeller Center. And when I return to the United States every three months or so and pick up a newspaper, I find I haven’t missed much at all. While I’ve been rereading P.G. Wodehouse, or “Walden,” the crazily accelerating roller-coaster of the 24/7 news cycle has propelled people up and down and down and up and then left them pretty much where they started. “I call that man rich,” Henry James’s Ralph Touchett observes in “Portrait of a Lady,” “who can satisfy the requirements of his imagination.” Living in the future tense never did that for me.

I certainly wouldn’t recommend my life to most people — and my heart goes out to those who

Perhaps happiness, like peace or passion, comes most when it isn’t pursued.

 

have recently been condemned to a simplicity they never needed or wanted. But I’m not sure how much outward details or accomplishments ever really make us happy deep down. The millionaires I know seem desperate to become multimillionaires, and spend more time with their lawyers and their bankers than with their friends (whose motivations they are no longer sure of). And I remember how, in the corporate world, I always knew there was some higher position I could attain, which meant that, like Zeno’s arrow, I was guaranteed never to arrive and always to remain dissatisfied.

Being self-employed will always make for a precarious life; these days, it is more uncertain than ever, especially since my tools of choice, written words, are coming to seem like accessories to images. Like almost everyone I know, I’ve lost much of my savings in the past few months. I even went through a dress-rehearsal for our enforced austerity when my family home in Santa Barbara burned to the ground some years ago, leaving me with nothing but the toothbrush I bought from an all-night supermarket that night. And yet my two-room apartment in nowhere Japan seems more abundant than the big house that burned down. I have time to read the new John le Carre, while nibbling at sweet tangerines in the sun. When a Sigur Ros album comes out, it fills my days and nights, resplendent. And then it seems that happiness, like peace or passion, comes most freely when it isn’t pursued.

If you’re the kind of person who prefers freedom to security, who feels more comfortable in a small room than a large one and who finds that happiness comes from matching your wants to your needs, then running to stand still isn’t where your joy lies. In New York, a part of me was always somewhere else, thinking of what a simple life in Japan might be like. Now I’m there, I find that I almost never think of Rockefeller Center or Park Avenue at all.

‘HOW TO PASS ON ALL YOU’VE EARNED,’ from Fortune magazine. Gifts, estate taxes, trusts, a good overview of current tax regulations & some suggested strategies.

In Uncategorized on June 8, 2009 at 13:38

— If 84-year-old Bob Sievers of Pacific Palisades, Calif., had his way, Congress would scrap the estate tax altogether when it considers an Obama administration proposal on the future of the controversial tax. As co-owner of a lumber business for 40 years, Sievers built his wealth from scratch and paid taxes on his earnings every step of the way.

“What we have, we earned, and we paid tax on everything we earned, and we don’t want to be taxed again when we die,” says Sievers emphatically. Sievers, along with his wife, Carol, first set up an estate plan in 1982, and they have updated it numerous times over the years to reflect changes in the value of their nest egg and the expansion of their family, which now includes five children, 11 grandchildren, and four great-grandchildren. They quickly discovered they would need to establish an intricate network of trusts and other tools if they hoped to pass along the bulk of their hard-earned assets to their children without Uncle Sam taking a sizable chunk in taxes.

The estate tax – known as the “death tax” among its detractors – will be a hot topic in coming months. The tax-cut package enacted in 2001 called for it to be phased out over 10 years. This year, for example, only the portion of estates that exceeds $3.5 million for an individual and $7 million for a couple is subject to tax; the rate is 45%. This exemption is far bigger than in 2008, when the tax applied to estates valued above $2 million. But the 2001 tax cuts expire after next year. If Congress doesn’t act, the estate tax will disappear in 2010 but will return in 2011 at the pre-2001 level of $1 million with a tax rate of 55%.

President Obama has said that he wants to keep the estate tax where it is today: at 45% on amounts above $7 million (for couples). Estate-planning experts speculate Congress will pass a new law before year’s end to prevent 2010 from being a tax-free year. “They can’t suffer the revenue loss” from removing the tax for a year, says Jay Adkisson, an attorney and founding partner at Riser Adkisson LLP. (One thing that’s not expected to change: A spouse can inherit an unlimited amount tax-free through the marital deduction.)

Regardless of what happens in Washington, creating an estate plan and keeping it updated is critical. A smart plan uses tools, ranging from life insurance to trusts, to lower or even eliminate the estate tax and to prevent strife and bitter feuds among beneficiaries after a death. “Poor planning can destroy a family,” says Les Kotzer, an attorney who is the author of “Where There’s an Inheritance – Stories From Inside the World of Two Wills Lawyers.” If no plan is in place or if terms are not explicitly spelled out, chaos can ensue, he says. Kotzer recalls a man who made a handwritten will leaving “all his personal stuff” to a son. A bitter court battle erupted as a daughter claimed “stuff” meant his power tools and personal possessions, not gold and diamond rings that their mother had owned. The son vowed to fight her to the gritty end, claiming he hoped his sister’s legal fees would cost more than the jewelry was worth. Here are some tools you and your lawyer or estate planner can use to avoid such disasters.

The joy of giving

Let’s start with a couple of simple techniques. For example, giving away money during your lifetime can reduce the value of your taxable estate. Here are the basics: You can give any number of individuals up to $13,000 each year without any tax consequences. Amounts above $13,000 are subject to the gift tax, but you also have a tax credit that allows you to give up to $1 million during your lifetime without incurring taxes. And there is no limit on how much you can give tax-free when you pay someone’s higher-education or medical expenses directly.

As far as how you make those gifts, you can simply hand the money over to the recipient, but you have other choices. One popular method is a so-called Crummey trust, often used for a child, which allows you to impose conditions on how and when the beneficiary can get access to the money.

Life insurance

If you’re planning to leave property, a business, or other noncash assets to your heirs, life insurance can be a lifesaver. If you purchase a policy that will cover the taxes on your estate, your heirs won’t be faced with having to sell assets to pay the taxes. “Mom and Dad give money to the kids to take insurance out on their lives,” says attorney Jeffrey Condon, author of “The Living Trust Advisor.” “When they die, the insurance company will write a check tax-free to the kids.” You can also set up a life-insurance trust to be the beneficiary of the policy: That way, the death benefits won’t be taxed as part of the estate.

Geoffrey VanderPal, of Elite Financial Planning Group of America in Las Vegas, recalls one client who had a $40 million financial services business that he wanted to pass on to his son. The client ignored suggestions that he set up an estate plan with a life insurance trust to cover the taxes on the estate. When the client died, the son couldn’t afford the $18 million in taxes and had to liquidate the business.

Put faith in trusts

Trusts are one of the most popular tools for reducing estate taxes. But they are expensive – setting one up can cost anywhere from $500 to $20,000, with most falling between $2,000 and $5,000 – and complicated. We’re not talking about living trusts, by the way. Living trusts can keep your estate out of probate court but generally do not help avoid estate taxes. To do that, you need to set up an irrevocable trust. One popular form is the grantor-retained annuity trust, or GRAT. With a GRAT, you transfer assets into a trust that has a set life, typically five years. You receive annual payments from the trust, based on an interest rate set by the IRS. The payments are calculated so that the trust “zeroes out” by the end of the term, which means you will have gotten back your original assets plus the IRS rate of interest on them. Any appreciation above that interest rate goes tax-free to the beneficiaries of the trust, such as children and grandchildren.

Since the current IRS-designated rate is low – only 2.4% – this trust is an attractive place right now to put battered stocks, property, or other assets that are expected to see big gains in the next few years. “We’ve seen an explosion since last December in the number of individuals who are making and thinking about doing GRATs,” says Gail Cohen, head of global wealth management at Fiduciary Trust Co. “People are thinking they’re going to see jumps of 25%, 30%, or 50% in securities in the next two years because the values had gone down so low.”

You can also use trusts to give money to your favorite causes. For example, with a charitable lead trust, or CLT, the charity gets annual distributions, with the balance passing to your heirs at the end of the term. In a charitable remainder trust, or CRT, the donor gets annual distributions from the trust, with the balance passing to the charity when the term ends.

In addition to trusts, limited partnerships and limited liability companies can play a role in your estate plan. Under IRS rules, you are allowed to transfer real estate or other assets into a partnership at a discount to market value, typically 20% to 30%. Then you can give shares in the limited partnership to your children. This maneuver effectively lowers the value of the asset for tax purposes.

Stay-up-to-date

Once you have an estate plan, update it regularly to reflect changes in the value of the assets, revised tax laws, a new marriage, or the birth of children. “People really need to revisit their estate plans today in light of the shrinking values of their homes and their businesses,” says Cohen.

And don’t procrastinate. When actor Heath Ledger died in January 2008, his outdated will did not include his infant daughter, Matilda Rose, and a family battle ensued over his assets. “Nobody wants to talk about death, and nobody wants to talk about money,” says Holly Isdale, managing director of Bessemer Trust. “It’s like planning a huge party that you’re never going to attend.” But you have to make sure you’ve set up your plan properly, she says: “You’re not going to be around to fix it if it goes wrong.”