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Money Coach

December 2006 - Posts

  • What's Making America Wealthy?

    For the richest Americans, stocks, real estate and businesses make up a large portion of net worth. For the middle class, a home is what drives wealth. The charts below show typical asset breakdowns according to economic class.

    TOP 1%


    Principal residence 7.8%
    Stock, financial securities, mutual funds and personal trusts 31.6%
    Liquid assets (bank deposits, money-market funds and cash surrender value of life insurance) 5.0%
    Unincorporated business equity and other real estate 46.9%
    Pension accounts 6.9%
    Miscellaneous assets 1.8%


    NEXT 19%


    Principal residence] 28.8%
    Stock, financial securities, mutual funds and personal trusts] 20.0%
    Liquid assets (bank deposits, money-market funds and cash surrender value of life insurance)] 11.3%
    Unincorporated business equity and other real estate] 23.2%
    Pension accounts] 14.9%
    Miscellaneous assets] 1.8%


    MIDDLE THREE QUINTILES


    Principal residence] 59.8%
    Stock, financial securities, mutual funds and personal trusts] 5.5%
    Liquid assets (bank deposits, money-market funds and cash surrender value of life insurance)] 11.8%
    Unincorporated business equity and other real estate] 8.8%
    Pension accounts] 12.3%
    Miscellaneous assets] 1.8%


    Notes: Top 1%: net worth of $3,352,100 or more. Next 19%: net worth of $257,700 to $3,352,100. Middle quintiles: net worth of $263 to $257,700. Source: Federal Reserve's 1998 Survey of Consumer Finances.



    Posted Dec 29 2006, 09:40 AM by moneycoach with no comments
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  • Can Your House Make You Rich?

    Putting money in your home is no substitute for investing. However the money or cash flow you use to support your home in most cases is not money spent but money used to support an asset that ultimately will increase your net worth and eventually your long term security.

    As the stock market slumped, you probably felt relieved--perhaps elated--to see the value of your home soar. Indeed, since 1995, housing values in the U.S. have grown from $8.4 trillion to $13.4 trillion. From 1998 to 2005, single-family home prices rose an average of 8.2% a year nationally, with houses in some markets doing even better (see the map below for gains by metropolitan area and forecasts for this year and next). Little wonder, then, that many Americans have come to view real estate as a more secure path to wealth than the stock market, taking out ever-bigger mortgages and trading up as quickly as possible.

    To be sure, owning a house provides substantial financial benefits. For many Americans, it's the source of the bulk of their wealth. The typical middle-class family has, on average, some 60% of its net worth tied up in a home. But you shouldn't count on home ownership to make you rich. In fact, figuring out how your home fits into wealth building can be a complicated analysis. Here's why.

    Putting money in your home is no substitute for saving and investing. The key reason is that a house represents a much different type of wealth than a stock and bond portfolio does. For one thing, it's not liquid--it can't be converted to cash with a phone call. It takes time to sell a house--and you can't be sure of its actual value until you find a buyer.

    More important, you have to live somewhere. So even if you sell your home, it won't help support you unless you buy a cheaper place and stash the profits elsewhere. But that seldom happens--almost invariably home owners trade up to bigger, more expensive places. What about tapping home equity for retirement? A lot of people do downsize when their children move out and they are ready to retire, or retirees will sell high-priced homes in the Northeast and buy cheaper places down South.

    But for the most part, retirees don't cash out--unless forced to. Most retirees prefer to stay where they are; others may move to retirement communities or condos that cost as much as their former homes. If you're decades away from retirement, it's important to discuss plan whether you will cash out at a profit--or if you will even want to sell or if you will move relocate etc..

    Home ownership does provide both financial and psychological advantages, not to mention substantial tax breaks. Home equity can be an important form of diversification; although real estate unless leveraged is unlikely to outperform stocks over the long term, it can do well in years when stocks falter. Owning a home also gives you the flexibility to tap a home-equity line of credit for emergency expenses or college tuition or to take out a reverse mortgage in your later years. (however, one must give interest to the bank to use their money the major downfall to paying off your home) And home ownership often prompts investors to get serious about building wealth and developing a financial plan.

    Still, to realize the full benefits of your home equity, you must avoid two hazards of home ownership--too much spending and not enough saving. In recent years, growing numbers of Americans have tapped their equity by refinancing and taking out home-equity lines of credit. As a result, economists say, the average amount of home equity as a share of value has plunged from 78% in 1950 to only 55% in 2000. And all too often, people spend that extra cash rather than invest it. A recent study showed that an increase in housing wealth leads to a greater increase in consumption than does an identical increase in stock market wealth. People have almost a metaphysical belief in the value of their homes - they feel the values are somehow more permanent than gains in the stock market, so they feel even more wealthy and more willing to spend.

    But that wealth could prove illusory. After all, you can't expect continued double-digit gains. Real estate has seen eras of slow growth and even periodic price declines. U.S. home prices climbed 4.7% on average in 2002 and 3.7% in 2003 and even higher in 2004 before slowing down in 2005, according to real estate forecasting firm Case Shiller & Weiss; but, as most anyone listening to the news in recent months can tell you, some formerly hot housing markets have seen prices flatten or even drop. Most real estate economists are not looking for a crash, but there's bound to be a softening of prices. And over the long run, you can't expect prices to rise much faster than people's incomes, or historically greater than inflation, since that would make homes unaffordable The best reason to buy a home is because it is something you enjoy--over the long term, it will probably be a good investment, but it won't make you rich.



    Posted Dec 29 2006, 01:01 AM by moneycoach with no comments
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  • Stocks Are Still the Way to Go

    When you examine the typical asset breakdown of the wealthiest Americans, one fact stands out: Overwhelmingly, categories such as stocks and business equity make up the greater part of net worth, some 40% to almost 80%. By contrast, for the less affluent middle class, the home is the largest single asset, amounting to nearly two-thirds of net worth. Throughout most of the '80s and '90s, the wealthy have become even wealthier in large part because they own the biggest percentage of equities. Indeed, recent studies have found that the wealthiest 10% of households own nearly 90% of the nation's financial assets.

    Granted, stocks seem a lot more risky these days. At the end of 2006, the market has erased some $4.5 trillion in value since early 2000. And many forecasters have predicted that after the double-digit gains of the '90s, returns from stocks will be lower over the next few years--possibly less than their 10% historical annual average. Not surprisingly, fewer investors have been eager to pile into equities. In 2000, investors poured a record $300 billion into stock mutual funds; a year later, that flow dropped to just $32 billion.


    Still, economic history convincingly demonstrates that stocks have been the best way to build wealth over the long run. For example, a study using economic data from 1962 to 1995--an era that spans both a punishing bear market and a period of high inflation—shows that if you increased the middle class' likelihood of owning stock and the amount of stock they held by 15%, the group would have enjoyed aggregate wealth gains of 25% to 40%. Over the long term, keeping more of your portfolio in stocks has been the best way to enhance net worth. And there's no reason to think that trend won't continue. Even in the boom and bust of the dotcom era of 1998 to 2001, some $280 billion in wealth was created by mutual funds.

    Posted Dec 28 2006, 01:43 PM by moneycoach with no comments
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  • How Much Are You Saving?

    By and large, we're doing a lousy job of socking money away for big things in life, like retirement and college for our kids.

    I know it's the holiday season and the last thing you want to hear about is frugality, but the best way to start off the new year is with a mindset that says "I will be vigilant about saving money".

    But maybe you're already doing that. To see how your retirement plan contributions and your children's college fund compare with the norm, check out the results of these two surveys.


    HOW MUCH DO YOU PUT IN YOUR 401(K)?


    Median contribution

    Household income (% of wages)
    $50,000 to $75,000 6 .0 %
    $75,000 to $100,000 8.5 %
    More than $100,000 10.00 %


    HOW MUCH HAVE YOU SAVED FOR COLLEGE?

    Nothing 38%
    $1,000 or less 4%
    $1,000-$10,000 25%
    $10,000-$40,000 20%
    More than $40,000 13%

    Note: Among parents with college-bound children and household income over $50,000. Source: Investment Company Institute.

    Posted Dec 26 2006, 01:54 PM by moneycoach with no comments
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  • Are You Saving Enough?

    Now that we have established where we are financially, the next question is: "are we saving enough?"

    If we look at our parents and grand parents today people complain and say that our past generations had security. They had government or company pensions and with the introduction of the 401-k the American companies our abandoning us and our future. If we however look at history the difference is that when someone was hired in the old days by governments or often corporations and were blessed to have a old fashioned defined benefit plan. They were mandated to contribute on average 7.5% of their salary to the plan from the day they were hired. The only difference between the good old days and today is mostly freedom and the discipline that one needs to take to plan and save on a voluntary basis rather than as a condition of employment. Think about social security -- the biggest threat to its long term future is not the fear of employee savings accounts but rather the control that people will have that will upset their long term security.

    So are you saving enough? For a quick ball-park estimate, look at the table below to see how much you need to save regularly to accumulate $1 million. Keep in mind, few families have enough cash to save for all their goals at the same time. So make retirement your first priority and max out on your 401(k) and IRAs--over the long term, these tax-deferred plans are great savings accounts but not the place to accumulate wealth. As your income grows, you can target other goals such as buying a house or saving for your kids' college bills.
    -----------------------------------------------------------------------------------------------------

    HOW LONG BEFORE YOU REACH $1 MILLION? If you want to accumulate $1 million by the time you retire, here are how many years it will take, assuming different monthly savings levels and rates of return, including the 10% historical average annual return for stocks. (See Chapter 8 to understand the problem with averages)


    MONTHLY RATE OF RETURN


    SAVINGS 4% 6% 8% 10%

    $100 90 67 54 46
    $500 52 41 34 30
    $750 43 35 29 26
    $1,000 37 30 26 23
    $1,500 30 25 22 19
    $2,000 25 21 19 17

    ------------------------------------------------------------------------------------------------------

    Are your debt and spending levels under control? If you decide that you need to clamp down on your spending, don't become obsessed with making a budget--few people can stick to one. Instead, first make sure you put money toward your long-term savings goals each month. Then, each time you contemplate an expenditure, ask yourself, “Is this purchase going to enhance my net worth?” Once you're in that wealth-building mindset, you'll find that you spend less automatically.

    Remember, in the end how well you're doing comes down to what you're doing. If you need more encouragement, consider this: Overall, the baby-boom generation has accumulated larger net worth--including their homes and financial assets--than their parents had at similar ages. That's largely because baby boomers have been more active investors in the stock market than their parents were; boomers have also enjoyed unprecedented economic prosperity. Assuming real wage growth, boomers will likely have more wealth than their parents in retirement. Many may even continue to accumulate wealth into retirement. The past few years have delivered a clear lesson on the way to build wealth: If you come up with a financial plan and stick with it, you'll end up ahead.

    Posted Dec 21 2006, 03:55 PM by moneycoach with no comments
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  • High Income Doesn't Mean High Wealth

    During the late '90s, most families saw inflation-beating wage gains. Median household income grew at an annual rate of 2.5% between 1995 and 1999, according to the Census Bureau. As a group, higher-income Americans captured a disproportionate share of those gains--for example, the top 5% of wage earners saw their income grow at an annual rate of 3.5%. More Americans climbed into the six-figure-and-up salary range--the percentage of households earning $100,000 or more grew to 13.4% in 2000, up from 5.5% in 1980, after adjusting for inflation.

    You might think that a six-figure salary is closely linked to serious wealth accumulation. Not necessarily. A lofty salary certainly helps you build wealth, but there's a surprisingly low correlation between a high income and a high net worth. At all income levels, some families have accumulated wealth while others have meager portfolios.



    ----------------------------------------------------------------------------------------------------------

    INCOME -- HOW MUCH DO YOU MAKE?

    Throughout the late 1990s, most Americans enjoyed inflation-beating wage growth. To see how your income compares with that of others your age and where it places you among all households, check out the figures below.


    BREAKDOWN OF HOUSEHOLDS BY INCOME


    Under $25,000 27%
    $25,000-$49,000 27.8%
    $50,000-$74,999 20%
    $75,000-$99,000 11.2%
    $100,000 and over 14%

    MEDIAN INCOME BY AGE

    Under 25 $23,077
    25-34 $40,897
    35-44 $54,661
    45-54 $62,105
    55-64 $52,678
    65 and over $26,667

    Source: Claritas Demographic Projections, 2001.

    --------------------------------------------------------------------------------------------------------

    One key reason for the disparity between income and net worth, according to economists, is saving and spending patterns. Many of us simply increase our spending in line with our pay raises. Or we sabotage ourselves with debt. Indeed, total household debt levels are at historic highs, according to Federal Reserve data. Even though the families that are shouldering the largest debt burdens are low-income and middle-class families, high earners are also letting debt take over more of their budgets. In 1989 debt payments averaged 8% of income for households earning more than $100,000; by 1998 that figure was 10%. In 2004, that figure jumped to 13%.


    Posted Dec 19 2006, 03:17 PM by moneycoach with no comments
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  • Giving Yourself a Financial Report Card

    You’ve heard the expression, “Everybody’s a comedian?” Well, times have changed, and I guess the life of a comic isn’t as fulfilling as it once was – maybe the pay isn’t any good. Today, everyone is a financial
    planner. From your local banker, insurance agent, stockbroker - even accountants and lawyers call themselves financial planners.

    Thirty years ago stockbrokers and insurance agents looking to achieve a dramatic change in their image created a profession known today as “The Financial Planning Industry.” The founding fathers of this industry decided that if they could create a “profession” through which they could conduct sales, they would be perceived with the same level of respect that the public holds for doctors and lawyers. The ultimate goal of this industry is still to sell products - which is the source of the lion’s share of the revenue that supports most financial planners.

    Thirty years ago people were not willing to pay financial professionals an hourly wage for their expertise. Most consumers are happy to pay a doctor a lawyer a plumber an auto mechanic in order to benefit from their training or talents, but the media continues to espouse the mantra that it’s not necessary to pay fees to manage the most important aspect of your life - your family’s personal financial wealth and security. Nick Murray’s famous conversation about the "no load" cardiologist is a good example of the general thinking on paying a professional to manage your personal wealth (after all, would you want a doctor operating on you because he needed the practice?). If you have a heart problem or a brain tumor, you wouldn’t shop for the cheapest doctor let alone operate on yourself. So, why is it that we believe we can manage our money better and with more expertise then someone who spends 50 hours a week in the financial services industry?

    Although the logic behind this thinking is questionable, the reasoning behind this cultural belief is explainable. Financial planning is not a product as most people understand products. Financial planning is nothing more than research.

    In order to begin to maximize your wealth, you need to take a long, hard look at where you stand today financially and then evaluate your current position against your personal and professional goals as explained in these blogs. The analysis and strategies to meet those goals are the educational component your will gain from reading up on personal finance issues. The tool we will use in the process of achieving those goals is called the blueprint to financial freedom.



    Posted Dec 18 2006, 07:21 PM by moneycoach with no comments
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  • Seven Keys: Part II

    Let’s face it. Wealth is created in our personnel and professional lives by the decisions we make, the risks we take, and how hard we work.

    That’s why it’s a myth that wealth is created in the financial markets, although that’s what we hear from the media and from the financial industry. The truly wealthy made their wealth in the creation of a new idea or working hard at their professions. Look at Tiger Woods. To what does the golfing great owe his wealth? Certainly not from the financial markets or from a bevy of stockbrokers who manage his money.

    Nope, Tiger owes his wealth to working on his game. Granted, the financial markets play a role in growing his money. It’s the financial services industry’s role to preserve and protect the wealth that people make in their personnel and professional carrier.

    Yet this is where the primary conflict in wealth creation exists. Think about it -- the financial industry teaches us that in order to create wealth one has to save more, spend less and don’t take all those trips you want. If you can’t make enough financial wealth through that kind of sacrifice then the financial industry has to invest your money more aggressively in order to have the markets create the mountains of wealth that you could not make by sacrifice.

    But the real reason people don’t retire when they want or don’t take the trips they want or don’t live the life they want is due to a lack of confidence. Specifically, a lack of confidence that they will have enough money to take care of the seven critical areas of their life.

    The primary reason they have no confidence is that there is so much uncertainty attached to the financial markets. Again, think about it. You will have enough money to retire IF the market averages 10%. Or IF you take enough risk, or IF you diversify enough.

    You get the picture.

    My view is that if people approach wealth with the same dedication they do with their families and career, the sooner they’ll create real wealth.

    It’s your personal decision that wills you on the road to financial comfort.

    But in order for us to be motivated to make those decisions we must first be able to quantify our values, dreams and desires, and then establish a goal on how to go about achieving it.



    Posted Dec 15 2006, 04:14 PM by moneycoach with no comments
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  • Seven Keys for Financial Growth



    When it comes to goals personal values will determine the amount of money needed to reach your goals.

    A financial advisor I recently penned a book for determined the SEVEN Primary Categories that are important in everyone life. They all have different values associated with how the feel about these areas of their life however it all can be grouped into how we see our past and future relative to our family , health, community we live and work in were we wish to retire the schools we want our children to attend. The charities that are important to us, our travel and leisure plans, the tangible assets we wish to accumulate, and are professional careers; what we want to do for work how hard or how long we want to work, and what we may want to do when we no longer have to work.



    ♣ Family (spouse, children, parents, grandchildren, extended family)

    ♣ Health (Maintenance, special needs, constant care.)

    ♣ Community we live in, work in, wish to retire to, schools.

    ♣ Charities that are important to us

    ♣ Travel – the travel plans we want to have

    ♣ Tangible assets we wish to accumulate

    ♣ Professional- business, what we want to do after we retire.

    Posted Dec 14 2006, 02:28 AM by moneycoach with no comments
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  • Money Goals: Emphasize the Start, Not the Finish

    Greatness always comes from people working hard to fulfill their dreams. Whether it was in school, athletics, weight loss, or in work, goals and dreams of personnel achievement are the catalyst for all success.

    However, in their financial lives, my experience is that people are lost at how to discuss or establish the same dreams. They may say they want a lot of money, or they need a $1,000,000 to retire, or they want to pay-off their home, and they also want their portfolio to out perform the market. These are objectives not goals and often they are what we have been told we should want.

    What is the purpose? It’s really no-wonder that the most important aspect of a secure financial future is usually where people fail.

    It is how they start.

    How can we blame them? As I indicated earlier in this blog series, average investors are getting the wrong message from Wall Street and the media. Their objectives often are to sell their solutions to the problem that we need to convince you that you have.

    Think of how the industry communicates to us:

    ♣ No load funds out perform load funds
    ♣ Buy term invest the difference
    ♣ Always invest pre tax the maximum
    ♣ Insurance is a great investment
    ♣ Compound interest is your friend
    ♣ The Stock Market averages 10 %
    ♣ Stocks out perform bonds
    ♣ Paying Cash is the secret to wealth
    ♣ Fee’s and expenses are the most important factor in determining return
    ♣ Payoff your home
    ♣ Interest only loans will ruin the economy
    ♣ Technology stocks is the New Era
    ♣ Trade deficits will ruin the economy
    ♣ Social Security will not be their when we retire
    ♣ Your Asset Allocation should be based on 100 – your age will determine the percentage of bonds verses stocks
    ♣ Index investing is better than active management
    ♣ The economy is bad

    Perception vs. Reality

    No-wonder why we are confused. The reality is that all of these issues, despite banner headlines and sense of absolute certainty surrounding them, have no real bearing on you and your families’ personal financial wealth and well being.

    Just think for a second about our perception versus reality. Do you think today the economy is good or the economy is bad? To most people the answer to this question will enable them to feel confident or fearful of their future. That is our perception. Did you ever think in reality the economy really does not exist? What is the economy? What is the phone number to the economy? How do we measure a good economy versus a bad economy or society?

    It is all about people’s perception of how things are, the media speeds up the perception, which in turn affects people’s attitudes, which then creates corporate individual reactions. This is then followed by politics and governments actions to manipulate the outcome.

    The reality is that wealth is not about the economy; in society there is no measurement gauge to determine what someone’s true wealth. The reality is wealth is personal; it is your attitude about your own personal and professional goals, dreams, and desires, your personal perceptive, coordinated or integrated back to your personal and professional goals.

    Posted Dec 12 2006, 02:43 PM by moneycoach with no comments
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  • What the Professionals Know -- and You Probably Don't



    So with all the emphasis on money these days why aren’t more Americans getting rich in the financial markets?

    It’s a good question.

    While individual investors have made great strides in recent years but, for many nonprofessionals, the stock market remains an impenetrable maze of confusing numbers. Lawmakers, the Federal Reserve, market analysts, and professional economists seem to talk in a foreign language. Just what is a "J-curve"? What are "monetary aggregates," and why are fixed-income (bond) managers constantly stumbling over "yield curves"?

    Some Wall Street veterans would rather keep all the good financial information to themselves. Access to analysts’ reports, fund managers’ commentary, road shows, and long lunch meetings are traditional birthrights to Wall Street pros. Their inside access to what’s really happening in the business world gives them a huge advantage over average investors. Key information allows them to pop out of dicey positions or pop into lucrative ones long before individual investors see any changes in the market.

    Wall Street insiders also keep getting better access to lucrative deals. According to some investor advocates, Wall Street’s secret lists, known as "pot lists," confirm that the largest institutional investors are reaping the profits from hot initial public offerings (IPOs), leaving few opportunities for individual investors to participate. Companies like Fidelity Investments, the nation’s largest mutual fund management firm, routinely receive double the allocation given to the next largest institutional investor, and more than the average mom-and-pop investment account.

    This may sound unfair; the truth often does. In the hurly-burly financial markets, volume is king and timely information is its handmaiden. Holding the winning cards is what Wall Street is all about.

    Posted Dec 10 2006, 04:43 PM by moneycoach with no comments
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  • Looking at Money in New Ways

    In the next few blogs, I'd like to take a look at money -- what it is, how we use it, and how we view it.

    There’s little question that we are more sensitive to change today because of the speed with which we receive information. In 1805, word of British Admiral Horatio Nelson’s victory at Trafalgar did not reach North America until six weeks later. Now, any news, in any remote area, can be transmitted around the world in seconds.

    The media and the speed with which investors are gathering investment information today are changing as well. Many people still subscribe to newsletters, brokerage reports, and The Wall Street Journal. But many more are replacing paper-based investment information sources with electronic ones-most notably, television and the World Wide Web. Circulation of The Wall Street Journal and The New York Times has fallen over the past ten years; CNBC’s viewers have tripled in that timeframe. And millions of investors are also flocking to investment industry Web sites like The Motley Fool or CNNMoney.com.

    To keep up with a stock market that seems to move with the speed of a supernova, many investors are turning to the real-time, software-based information tools that are available on the Internet. Just a few years ago, most investors had to go to a library and leaf through yellowed copies of The Wall Street Journal or The Economist to figure out whether it was a good time to buy or sell their stocks. Today, an astounding number of sources on the Internet give much better information and deliver it ten times faster.

    The immediacy of electronic delivery channels meets the needs of today’s time-strapped investment consumers. Television and the Internet have helped fuel that trend by removing some of the mystery that had surrounded the stock market. Anyone with a remote control or a Web browser now has access to the kind of information that used to be available only to big firms. Not everyone may want to check basis-point disparities in Portuguese debentures at 1:00 A.M. in their pajamas, but you can if you want to.

    Posted Dec 10 2006, 12:59 AM by moneycoach with no comments
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  • Emotional Investing

    I have a theory about bubbles, behaviors and breaking away from the herd

    As much as we’d like to make our investment decisions with the cold calculation of a computer chip, our emotions and our behaviors often won’t let us. As the technology bubble of the late 1990’s demonstrated, it’s easier and less complicated to follow the herd than to do our homework and get a reliable barometer on a stock’s potential direction. But when the bubble burst, investors learned a lesson in financial behavior they’ll never forget.

    In the prehistoric days of the 1990’s, when dot.com millionaires walked the earth and some shares of Internet stocks sold for about the same price as a new microwave oven or a round of golf at Pebble Beach, few investors wanted to hear about bubbles.

    Perhaps that’s why when the technology bubble finally burst in 2000, so many investors were carried away by the herd, unable to sell their dot.com stocks and technology funds before it was too late.

    Why the trouble with bubbles and what does financial behavior and dealing with change have to do with it?

    First a short lesson on bubbles. Financial market bubbles happen when stocks rise in price, regardless of fundamental factors such as earnings or revenues. As a result, valuations ballooned to vastly over-inflated levels. That’s exactly what we saw in the dot.com gold rush of the late 1990’s, when many highly-regarded Wall Street analysts were hard pressed to properly valuate technology companies but proceeded to predict they would rise to $200, $300, and even $400 per share, anyway. Chasing the dream and ignoring the bubble, investors stampeded toward technology stocks with a vengeance, pushing stock prices up to historic levels and setting the stage for the technology bubble burst of 2000, in the process.

    The technology bubble of the late 1990’s – like most market bubbles – had three stages.

    • First, there was a shift in market psychology, driven by the Internet craze.

    • Next, the share prices of technology companies rose until their valuations reached speculative heights.

    • Then IPOs were floated to soak up capital. Before long, we saw IPOs that represented little more than a set of ideas and people in a prospectus. The notion of making products that people actually use, a la Proctor & Gamble or Ford Motor Company, was viewed as quaint by many investors. Once that rational set in, the bubble burst.

    It hasn’t fully recovered yet. Even as the Dow Jones Industrial Average flirts with the 11,500 level in late 2006, few market observers know when the market will enjoy sustained upward momentum again.

    Posted Dec 06 2006, 10:15 PM by moneycoach with no comments
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  • Signs of a Good Mutual Fund

    Here are factors experts say are signs of good-quality equity funds. Their presence doesn't mean a company is honest any more than their absence means it is crooked. But odds are better when funds stick to these fundamentals.

    -- Low fees: Since fund fees are charged to the investment pool, they directly reduce the fund's performance and return to investors. Experts recommend funds with low fees.

    --Low turnover: Funds with high rates of redemptions relative to their size are likely to be seeing lots of investors buying and selling. This churning is expensive for investors who want to buy and hold. Best to avoid.

    --Fund performance: The classic measure of fund performance tells you how much the fund earned, usually in increments of one, three, five and 10 years. Instead of picking the top-earning fund, look for those that have been consistent performers over the long haul. Also, look for how well a fund does in a downturn. Funds that lost less during the post-2000 stock market decline probably have good managers.

    --Transparency: What information does the fund company make available? If it publishes fund inflows and other details, your level of understanding is much higher.

    --Funds under suspicion: While funds may be innocent until proven guilty, investors aren't waiting to render a verdict. They've yanked more than $15 billion from Putnam Investments since it was charged last month, and millions more from other fund companies under investigation. While such withdrawals don't immediately harm investors, they show a lack of confidence and will force remaining investors to shoulder the cost of those redemptions.

    --Stable, reliable management: Hard to determine, but look for managers who have been around for many years and for companies with reputable names.

    --Index funds: Unlike actively managed funds that try to pick winning stocks, index funds simply try to match major stock-market indexes, such as the Standard and Poor's 500. Since they don't require active management, fees are low. Studies have shown that, over time, very few actively managed funds beat these index funds, so paying fees for active management can be a waste of money.

    Posted Dec 05 2006, 02:04 PM by moneycoach with no comments
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  • Fund "Red Flags"

    Critics contend that mutual funds lack both the proper external and internal oversight -- meaning fund managers can potentially bend the rules without fear of consequence.

    That's especially true of mutual fund boards of directors.

    The fund industry's 2004 Fact Book described independent directors as "watchdogs" who have helped the industry avoid systemic problems and safeguarded the public. The sad fact is that, instead of being watchdogs, most fund directors behave more like lap dogs, too often wielding rubber stamps in exchange for nice paychecks.

    It's up to your fund's directors to keep fees down and performance in line with benchmarks, and to make sure that your fund doesn't get too big to manage effectively. And it's up to them to keep the rapid traders out of your fund, if the prospectus says they don't belong there.

    Unfortunately, this is not a shining moment for fund directors. Not, for example, when directors of a Janus overseas fund were apparently oblivious to the possibility of questionable trading that was implied by redemptions exceeding assets by nearly four times in one year. Nor when Joseph DiMartino collected $815,938 in 2002 for watching over some 200 Dreyfus portfolios. And not when Heartland directors let the pricing of muni-bonds in its two funds get so out of kilter.

    It’s bad enough that funds charge too much. To make matters worse, many companies are on an endless quest to boost assets. A buildup in assets is good for fund companies because it increases management fees, but it can be harmful to you, the investor.

    The asset-gathering prowess of fund companies is on display in a variety of ways. They rush to open new funds when a sector is hot, often launching funds at the worst time. Counting multiple share classes, 136 technology and telecommunications funds were started in 2000--just as those sectors topped off Case in point: Before the market's 2000 peak, Merrill Lynch brokers peddled $2.1-billion worth of Merrill's Internet Strategies fund and tech-heavy Focus 20 fund. The funds subsequently plunged 90% and 86% respectively.

    When a fund performs well, it attracts loads of customers--no surprise at all. But funds, especially those that invest in smaller companies, can grow too large, and the bigger they are, the harder it is to deliver standout returns. Many companies are unwilling to turn off the cash spigot. Fidelity, for instance, is tempting the performance gods by letting its fine Low-Priced Stock fund, which specializes in small and midsize companies, swell to $25 billion. No-Load Fund Analyst newsletter has expressed concern that Artisan let its $9-billion International fund grow too big.

    Then there's the slice-and-dice game. Fund groups start multiple variations of a particular style of investing. Firsthand, for example, runs four different technology funds. In the late 1990s, Janus launched several similar funds that invested in large, fast-growing companies. Royce, which does nothing but invest in undervalued stocks of small companies, runs 17 different funds in the small-value category. Royce now manages nearly $11 billion in a sector of the market filled with hard-to-trade stocks.

    To boost assets, many companies that sell no-load funds join no-transaction-fee programs run by big discount brokerages, such as Fidelity and Schwab. The fund companies pay the brokers a fee (usually 0.35% to 0.4% of assets annually) to participate in their NTF programs. The funds then attempt to boost expenses for all investors--not just those buying through discount brokers--and usually succeed.

    All in all, just more reason to watch your fund closely.



    Posted Dec 05 2006, 01:15 AM by moneycoach with no comments
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