DailyFinance.com http://www.dailyfinance.com DailyFinance.com http://o.aolcdn.com/os/df/2013/img/2-dailyfinance_logo_m.png DailyFinance.com http://www.dailyfinance.com en-us Copyright 2013 Weblogs, Inc. The contents of this feed are available for non-commercial use only. Blogsmith http://www.blogsmith.com/How Much Does Your Money Manager Cost You?http://www.dailyfinance.com/2013/05/08/money-manager-fees-underperformance-Charley-Ellis/http://www.dailyfinance.com/2013/05/08/money-manager-fees-underperformance-Charley-Ellis/http://www.dailyfinance.com/2013/05/08/money-manager-fees-underperformance-Charley-Ellis/#commentsFiled under: , ,

UNITED STATES - OCTOBER 06: Charles Ellis, consultant and author, talks with reporter Christine Harper prior to an event in New York, U.S., on Monday, Oct. 6, 2008. (Photo by Daniel Acker/Bloomberg via Getty Images)
Daniel Acker/Bloomberg via Getty ImagesCharles Ellis, consultant and author, talks with reporters.
By PENELOPE WANG

Charles Ellis may not be a household name, but he commands the respect of many savvy investors.

He shook up Wall Street in 1975 with a landmark article in a financial trade journal that attacked the notion that professional money managers consistently beat the market.

Nonprofessionals stand even less chance of outperforming the benchmarks, argued Ellis, so individuals need to rethink their approach to building wealth. That influential piece was the basis for Ellis's classic investing book, "Winning the Loser's Game," the sixth edition of which is due out in July.

Founder of the financial consulting firm Greenwich Associates, Ellis has also served as a director of Vanguard. Today he still worries about investing costs, as well as the challenges that aging boomers face from low bond yields, uncertain stock returns, and dubious financial come-ons.

Ellis, 75, spoke recently with MONEY magazine editor-at-large Penelope Wang. Their conversation has been edited.

Despite recent highs, bear markets and crises have made our readers nervous about stocks. What's your advice for them?

Ben Graham said that people pay too much attention to what the market is doing currently. And he wrote his wonderful book "Security Analysis" in 1934. If people look backward, they will have one set of views. As they look forward, they'll have another.

What kind of returns should people expect?

Seven percent annual average returns for stocks over the next decade is the consensus among the investing pros I talk to. Minus inflation and expenses. So you're looking at a real return of 5 percent or less, which is not a lot. But over time you can still do pretty well.

So they should be buying stocks?

They should absolutely invest in a low-cost index fund. But nonprofessionals should forget about stock picking. For an individual investor, it's like my saying, "I'd like to play football with the NFL." You've got to be kidding.

You don't recommend giving money to pros to manage either.

Most active managers underperform because of fees. Some 80% of them would slightly beat the market, but after fees, their returns end up being below the market.

You've said that people should think differently about fund costs.

We've been describing fees in a way that really is nonsense. We ought to look at fees not in terms of assets, but as a percentage of the incremental returns of a fund -- how much extra return you can expect over a comparable index fund.

Think of the 7% expected long-term returns of stocks. A 1.5% fund expense ratio is a big fraction of that 7%.

Now compare that with an index's expected returns. How much more can you expect from an actively managed fund? Your fee wipes out any advantage -- assuming you get those extra returns. Fees as a percentage of incremental returns are unbelievable.
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Let's turn to bonds. What's your take on them, given ultra low rates?

The best piece of advice I could give long-term investors today is don't own bonds. And if you do own them, you probably ought to move out of them.

Right now the Federal Reserve is set on keeping rates down. The yield on a 10-year Treasury bond is under 2 percent. When yields go back to their historical average of 5.5 percent, an intermediate bond fund could go down 25 percent in value. People who are putting their retirement money into safe -- quote, unquote safe -- bonds can get hurt badly.

So someone with half of his or her money in bonds should move it into cash?

Moving entirely out of bonds into money funds or bank CDs may be too extreme for some people. But you can diversify more. You could look at foreign bonds or dividend-paying stocks, though you will be taking on more market risk than you would with CDs. Or you could perhaps stick with a short-term bond fund, which would fall less if rates were to rise. There's no simple answer.

How and when might bond investors get hurt?

The Fed has enormous information about the economy, and two smart people heading it: vice chair Janet Yellen and chairman Ben Bernanke. They will just likely judge that the time has come to stop pushing rates down. They'll look for signals like lower unemployment and higher inflation. I would expect to see rising rates in the next three, five, 10 years.

So what should pre-retirees do if they don't know how to be invested for retirement?

One thing they should beware of: Bad guys are tracking who's getting close to retirement. And they're targeting people with pitches -- mail, email, phone calls.

You get a lot of very sexy propositions: "Now is the time for you to break free" and "You're entitled to control of your investments." "This is, after all, your money. You should get it done your way."

All this "you, you, you" stuff. The truth is, in all too many cases, people will get stuck with something that costs way too much and won't deliver on promises.

How can you avoid getting stuck?

Anyone rolling over an IRA needs to be super-careful. If you hear from someone that you don't know or someone from a firm you've never heard of, check them out. There are a lot of tough players out there who are selling all types of products and who don't really worry about what happens to you.

So if you're being offered something, ask the salesperson to put the numbers in writing and ask him, "Would it be a good idea if I run this by my accountant or my lawyer?" If he doesn't like that idea, that tells you something.

It's not just about a particular product, but also about how you buy it. Low-cost annuities are a good idea, but sales commissions often make them not that good a deal when you purchase them.

You should check fees rigorously. There are usually several ways to buy anything.

You also think that people should adjust their timetable for investing.

For someone around the age of 60, a 30-year time horizon for investments is perfectly sensible. If you have a younger spouse, it could be even longer than that.

You can change your behavior by thinking really long term. You can stop being flustered so much about daily market moves or even what the market does this year.

The longer your time horizon, the more you will surely invest in equities, which will help you build financial security. With a long time horizon, you will also focus more on protecting your family -- your spouse and your kids -- even after you're gone. I'd like to help my grandchildren get to college.


See More from CNNMoney:
Fortune 500: 20 biggest stock gainers
20 biggest stock losers
Best big companies to work for

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]]>Ben BernankebondsBuy and Holdcharles ellisFederal Reserve SystemFinancegreenwich associatesindex fundsinvesting advicemoney managementretirement planningSecurity AnalysisstocksTreasury NotesWall StreetCNNMoneyWed, 08 May 2013 10:50:00 ESTApple Raises $17 Billion in Largest Corporate Bond Sale Everhttp://www.dailyfinance.com/2013/05/01/apple-raises-17-billion-in-largest-corporate-bond-sale-ever/http://www.dailyfinance.com/2013/05/01/apple-raises-17-billion-in-largest-corporate-bond-sale-ever/http://www.dailyfinance.com/2013/05/01/apple-raises-17-billion-in-largest-corporate-bond-sale-ever/#commentsFiled under: , , ,

Apple bond sale
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By

Apple sold $17 billion worth of bonds late Tuesday in the largest sale of corporate bonds ever. The company offered both fixed and floating rate bonds, with maturities of of 3, 7, 10 and 30 years. At $17 billion, the offering trumps Roche Holdings' $16.5 billion bond sale in 2009, according to data from Dealogic.

Apple saw strong demand for its bonds, which were rated Aa1 by Moody's and AA+ by Standard & Poor's.

"Whenever a company that's so highly rated comes to market, it's a big deal," said Jody Lurie, a fixed-income analyst at Janney Montgomery Scott.

Apple (AAPL) did not immediately respond to a request for comment. The deal's underwriters, Goldman Sachs (GS) and Deutsche Bank (DB), declined to comment.

Standard & Poor's and Moody's have already given Apple high credit scores, though Fitch has said the company's business model is not consistent with a AAA rating.

Related: Which is worth more, coffee w/Tim Cook or a Lamborghini?

There are only a handful of companies that have AAA ratings, so Apple's AA rating will make it popular with insurance companies and other institutions that need to hold high-quality assets, said Lurie. "Everyone wants a bite of the Apple," she said, adding that the order book for Apple's offering is rumored to have already reached $40 billion.


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Apple said earlier this month that it would tap the bond market as part of a plan to increase its share buyback program to $60 billion and boost its third-quarter dividend. The move is unusual for Apple, which has not sold debt to the public since 1996.

Apple has amassed a cash hoard worth $144 billion as of the first quarter. However, much of that cash is stashed in overseas accounts, which means Apple would face a hefty tax bill if it were to bring the money home.

Apple joins a growing number of major technology companies that are taking advantage of record low interest rates. Microsoft (MSFT), for example, sold $2 billion worth of bonds last week.

More from CNNMoney

World's 5 hottest stock markets
Why Japan's stock market is red hot
7 big winners in Nikkei surge

Gallery: Companies Paying The Most and Least Taxes

Companies Paying the Most in TaxesCompanies Paying the Most in TaxesCompanies Paying the Most in TaxesCompanies Paying the Most in TaxesCompanies Paying the Most in Taxes

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]]>ApplebondsCorporate BondsCorporateBondsdebtdividendGoldman SachsGoldmanSachsGoogleinterest ratesinvestorsMicrosoftoffshoreshare buybackstock buybackCNNMoneyWed, 01 May 2013 10:19:00 ESTDon't Ignore the Dangerous Side of Dividend Stockshttp://www.dailyfinance.com/2013/05/01/dividend-stocks-dangers-income-investing/http://www.dailyfinance.com/2013/05/01/dividend-stocks-dangers-income-investing/http://www.dailyfinance.com/2013/05/01/dividend-stocks-dangers-income-investing/#commentsFiled under: , ,

Pitney Bowes
Pitney Bowes / Facebook
With low interest rates having eliminated any chance of earning a decent income from bank CDs and other safe investments, millions of conservative investors have turned to dividend stocks. That would seem like a logical move.

Yet in moving more of their money into the stock market, investors often forget that dividend stocks are a lot more dangerous than fixed-income investments -- and owning the wrong dividend stocks can end up burning you twice.

Just When You Thought You Were Safe

Pitney Bowes (PBI) gives us a textbook example to illustrate the dangers.

When it comes to solid dividend stocks, Pitney Bowes looked incredibly attractive to many investors. The stock sported a sky-high dividend yield of nearly 10 percent, and even more importantly, Pitney Bowes had demonstrated its commitment to increasing its dividend payouts over time, with a 30-year track record of boosting its dividends on an annual basis.

Yet that track record didn't stop the company from slashing its dividend in half after it announced its most recent quarterly earnings. Citing the need for "add financial flexibility to invest in its business and enhance its capital structure," the company will now pay $0.1875 per share on a quarterly basis, beginning with its June payment.

As if the news that half of their income would disappear weren't bad enough for investors, Pitney Bowes' shares immediately plunged after the market opened following the announcement. Within hours, shareholders had lost more than 16 percent on their investment.

Warning Signs

Attentive investors saw signs of potential trouble long before Pitney Bowes' announcement.

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The stock was removed from the prestigious Dividend Aristocrats list because of the drop in its market capitalization, which took away one of the company's biggest incentives to keep raising its dividend. Moreover, the company had started diverting cash toward paying down debt, reducing the amount available for dividend payments.

Perhaps most importantly, Pitney Bowes had skipped its usual token dividend increase earlier in the year, signaling a change in its payout policy.

Despite those signs, the stock's rapid plunge shows how surprised most investors were by the move. Dividend cuts usually create strong downward pressure on a stock's price, and that leaves the conservative investors who gravitate to dividend stocks facing an unpalatable combination of big principal losses and reduced income going forward.

Know What You're Getting Into

Bank CDs are largely buy-and-forget investments, which you can let sit until they mature. Dividend stocks, on the other hand, require regular attention, and even then, unexpected pitfalls will occasionally wreak havoc on your portfolio.

Remember that before you move too much of your money into dividend stocks in search of better returns.

Motley Fool contributor and The Motley Fool have no position in any of the stocks mentioned. For long-term investing ideas, check out our free special report, "The 3 Dow Stocks Dividend Investors Need."

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]]>bondsbonds vs stockscdsconservative investingdividend stocksFinanceIncome investinginterest ratesPitney Bowes IncThe Motley FoolDan CaplingerWed, 01 May 2013 05:00:00 ESTWhat Is Asset Allocation?http://www.dailyfinance.com/2013/04/12/asset-allocation-definition/http://www.dailyfinance.com/2013/04/12/asset-allocation-definition/http://www.dailyfinance.com/2013/04/12/asset-allocation-definition/#commentsFiled under: , , ,

Alamy
April is Financial Literacy Month, and our goal is to help you raise your money IQ. In this series, we'll tackle key economic concepts -- ones that affect your everyday finances and investments -- to help you make smarter choices with every dollar decision you face.

Today's term: asset allocation.

In the most basic sense, asset allocation is simply how one's assets are divided among different asset classes, such as cash, stocks, bonds, real estate, and so on -- even insurance investments, commodities, collectibles, and other categories count.

But the term also refers to an investment strategy -- one that can reduce risk through diversification.

Clearly, having all your money in any one asset class can be risky. In 2008, the S&P 500 plunged 37 percent. If you'd held all your assets in an S&P 500 index fund, your net worth would have taken a big hit that year. (It's worth noting, though, that long-term investors who held on regained those losses.) That was also a time of falling real estate values, and had you been a big property owner, especially in some particularly hard-hit regions, you'd have suffered a big blow, with our national housing market only recently starting to pick up again.

Given the harrowing ride we've been on in recent years, you might think that holding cash is the best way to protect your assets from outside forces. Think again.

Cash's buying power tends to shrink every year, due to inflation. Given the inflation we've experienced between just 2000 and 2012, something that cost you $100 in 2000 would cost you about $132 today. Dollars stashed in a mattress are shrinking dollars.

Even dollars kept in savings accounts these days are problematic, given our low interest rates. If you're earning even 1 percent in interest, but the inflation rate is around the long-term average rate of roughly 3 percent, then you're losing ground by 2 percent annually. Bonds can offer a guaranteed return, but they too sport low interest rates today, and bond prices can fall over time, too.

Allocation in Action

There is no one-size-fits-all perfect asset allocation model. What's good for you might be less so for someone else, due to the current size of your nest egg, your risk tolerance, your years until retirement, and other considerations.

One thing that everyone should do, though, is rebalance their portfolio, to maintain the desired allocation. That's because over time, an allocation will likely change.

Imagine this simple example: If your assets are split equally between stocks and bonds, and over three years your bonds hold steady, but your stocks double in value, your allocation will no longer be 50-50. It will be 33-67, with stocks making up much more of the overall portfolio.

Some advisers may suggest rebalancing frequently, after minor changes. You needn't be that fastidious about it, as frequent selling and buying can generate unwelcome commission fees. But do keep an eye on your holdings and when any category has become meaningfully larger or smaller than you want, rebalance.

One Way to Allocate Your Assets

Tending to rebalancing is easier said than done, which is why target-date funds have grown more popular. These mutual funds are built and managed around a particular retirement date, and therefore rebalance their holdings over time, investing more conservatively as the "target" date approaches.

Keep in mind, though, that there's a lot of variation among these funds. Even with similar names, funds from different companies can give you dramatically different performance. Remember, too, to keep any target-date fund holdings in perspective by factoring in your assets that are held outside of the fund. You might think that you're all set, with half of your nest egg in a target-date fund. But if the other half of it is all in stocks -- or real estate or cash -- then your overall portfolio allocation is far from what the target-date fund is targeting.

However you do it, be sure to pay attention to your asset allocation. The stocks, funds, bonds, and investment properties you pick do determine your ultimate results, but so does your allocation.

Want to learn more? Take our course on investment strategies in the DailyFinance Learning Center.

Gallery: Test Your Financial Fluency

Pop Quiz:You've saved $25,000 for a down payment on a house. You plan to buy within a year. Which of the following is the safest place toD. Bank savings account is correct.What's the fastest and easiest way to boost your paycheck?C. Adjust your tax withholding is correct.



More money terms:
Net worth
Sunk cost
Opportunity cost

See all money terms to know

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]]>asset allocationbalanced portfoliobondsfinancial literacyfinancial termsInvestinginvestment strategyreal estatestocksSelena MaranjianFri, 12 Apr 2013 05:00:00 ESTThe Money Scorecard: How Do You Rate?http://www.dailyfinance.com/2013/03/30/next-avenue-money-scorecard-how-do-you-rate/http://www.dailyfinance.com/2013/03/30/next-avenue-money-scorecard-how-do-you-rate/http://www.dailyfinance.com/2013/03/30/next-avenue-money-scorecard-how-do-you-rate/#commentsFiled under: ,

Ed Koch in New York 1980'sBy RICHARD EISENBERG

When Ed Koch was mayor of New York City, he loved to ask passers-by: "How'm I doing?!" We all want to know the answer to that question in our lives, too.

That's why Next Avenue is launching the series: "Next Avenue Scorecard: How Do You Rate?" We're starting with my area: Money.

Below you'll find the latest statistics for how Americans in their 40s, 50s and 60s are faring, on average, based on: net worth, income, savings and investments, and debt -- along with my two cents after each.

The good news I can report: According to a spanking new Fidelity Investments survey on retirement savings, individuals in their 40s, 50s and 60s are saving more for retirement these days than other age groups.

"We're seeing many midcareer investors taking advantage of catch-up contributions [extra money people 50 and older are allowed to put into retirement plans], which is encouraging because this can have a significant impact on reaching savings goals," says Ken Hevert, vice president of retirement products for Fidelity Investments.

On to the Next Avenue Money Scorecard:

NET WORTH

Median family net worth
Age 45 to 54: $117,900
Age 55 to 64: $179,400
Age 65 to 74: $206,700

(Source: Federal Reserve Survey of Consumer Finances, 2012)

My two cents I think net worth -- what you get when you subtract your household's debt from its assets -- is a somewhat meaningless number, since yours could look puny if you have a sizable mortgage, despite your savings. You can compare your net worth versus others with your income using the CNNMoney.com Net Worth: How Do You Stack Up? calculator.


INCOME

Median household income
Age 45 to 54: $63,861
Age 55 to 64: $55,937
Age 65 and older: $33,118

(Source: U.S. Census Bureau Current Population Survey, 2011)

My two cents As you can see, household income generally shrinks once you hit your mid 50s and plummets after 65 (many in that age group are retired). A clever calculator on the Payscale.com site lets you see how your salary compares with others in your field with your experience; you can also get a free customized salary report with career path predictions for your job and names of companies who hire people like you.

SAVINGS AND INVESTMENTS

Total savings/investments, workers age 45 to 54
Less than $10,000: 46%
$10,000 to $99,999: 26%
$100,000 to $249,999: 12%
$250,00 or more: 17%

Total savings/investments, workers age 55 +
Less than $10,000: 31%
$10,000 to $99,999: 29%
$100,000 to $249,999: 18%
$250,000 or more: 22%

Percentage of workers currently saving for retirement
Age 45 to 54: 57%
Age 55+: 66%

(Source: 2012 Retirement Confidence Survey, Employee Benefit Research Institute and Mathew Greenwald & Associates)

Percentage of families owning retirement accounts
Age 45 to 54: 60%
Age 55 to 64: 60%
Age 65 to 74: 49%

(Source: Federal Reserve Survey of Consumer Finances, 2012)

Average total contribution of workplace savings plan and IRA in 2012
Age 45 to 49: $11,077
Age 50 to 54: $12,880
Age 55 to 59: $13,360
Age 60 to 64: $12,867
Age 65 to 69: $12,505

(Source: Fidelity Investments 2013 survey of 999,000 individuals with IRA and 401(k) or 403(b) balances at Fidelity)

Percentage of households owning mutual funds
Age 45 to 54: 24%
Age 55 to 64: 21%
Age 65 or older: 18%

(Source: Investment Company Institute Characteristics of Mutual Fund Investors, 2012)

Percentage of families owning stocks (directly or in mutual funds/retirement accounts)
Age 45 to 54: 58%
Age 55 to 64: 60%
Age 65 to 74: 46%

Percentage of families owning bonds
Age 45 to 54: 1%
Age 55 to 64: 2%
Age 65 to 74: 3%

(Source: Federal Reserve Survey of Consumer Finances, 2012)

My two cents I'd be a cautious about taking too literally the dollar figures in the savings tables, because they're based on survey data rather than the entire U.S. population. Still, they'll give you a sense of whether you should pat yourself on the back, go into manic saving mode or something in between.
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For retirement saving guidance, Chris Farrell's Next Avenue article, "Money Rules of Thumb You Need to Follow (and Ignore!)" is recommended reading.

If you're in your 40s, 50s or mid-60s and don't have a retirement account, you're not only in the minority, you're endangering your financial future. Once you have an emergency savings fund, please either contribute to your employer's retirement fund or open an IRA.

There's still time to fund a 2012 IRA if you had earned income last year. The Next Avenue article, "Last Call to Get Your 2012 IRA," has the details.

DEBT

Percentage of families with mortgages on primary residences
Age 45 to 54: 60%
Age 55 to 64: 54%
Age 65 to 74: 41%

Median value of mortgages on primary residences
Age 45 to 54: $114,000
Age 55 to 64: $97,000
Age 65 to 74: $70,000

Percentage of families with installment loans
Age 45 to 54: 50%
Age 55 to 64: 41%
Age 65 to 74: 30%

Median value of installment loans
Age 45 to 54: $12,000
Age 55 to 64: $11,300
Age 65 to 74: $10,000

Percentage of families with credit card balances
Age 45 to 54: 46%
Age 55 to 64: 41%
Age 65 to 74: 32%

Median value of credit card balances
Age 45 to 54: $3,500
Age 55 to 64: $2,800
Age 65 to 74: $2,200

Percentage of families with debt payments past due 60 days or more
Age 45 to 54: 13%
Age 55 to 64: 8%
Age 65 to 74: 6%

(Source: Federal Reserve Survey of Consumer Finances, 2012)

My two cents I'm encouraged to see that Americans' debt loads drop as retirement nears. Making loan and credit card payments when you don't have a full-time income can be a bear.

That said, a full 41 percent of people 65 to 74 are still carrying a mortgage and those with installment loans (car loans, student loans and the like) owe $10,000, on average, which is pretty steep.

If you can pay off your home before retirement begins, do it. (As Forbes recently noted, Bankrate.com has a handy amortization calculator that can help you time your mortgage payoff to your retirement date.)

I bet that getting out of debt will make you a whole lot cheerier the next time you ask yourself, "How'm I doing?"

Photo Credit: Pat Carroll/NY Daily News Archive via Getty Images


Gallery: How A Family Of Four Manages To Live Well On Just $14,000 Per Year

Wagasky finds inspiration everywhere from the library to tips from readers on her blog.She stopped eating out and learned how to cook.Everything in the home is either hand-sewn and or made from scratch.The family swapped cable for Netflix and Hulu.She goes to the grocery store once per month, pays cash, and never goes over budget.

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]]>BankratebondsdebtEmployee Benefit Research InstituteFidelityFinanceHousehold IncomeInvestmentMutual fundsPayScaleretirement planningretirement savingssavingsavingsstocksNext AvenueSat, 30 Mar 2013 05:00:00 ESTDespite Stock Surge, Money Still Flowing Into Bondshttp://www.dailyfinance.com/2013/03/25/bond-mutual-funds-stocks-great-rotation/http://www.dailyfinance.com/2013/03/25/bond-mutual-funds-stocks-great-rotation/http://www.dailyfinance.com/2013/03/25/bond-mutual-funds-stocks-great-rotation/#commentsFiled under: , , ,


Market pros call it the Great Rotation. That's the long-awaited scenario when investors take their money out of bonds and sink it into stocks.

It was the buzzword this month when the Dow Jones industrial average reached a record high. The idea was that investors were confident enough in the economy to shed their financial crisis fears and leave the safety of bonds.

But it's not happening.

Money keeps flowing into bonds. Industry consultant Strategic Insight says U.S. bond mutual funds have attracted $64 billion in cash in the first two months of the year, just below last year's pace of $68 billion over the same period.

Stock mutual funds had net deposits of $76 billion through February, according to the consultancy. While that is up sharply from $14 billion a year earlier, the cash for stocks is not coming at the expense of bonds, according to more recent snapshots of investment flows.

Instead, investors are withdrawing from money-market funds, which are often used as a parking spot for cash, according to EPFR Global.

"The expectations of a big exodus from bonds are way overblown," says David Santschi, CEO of TrimTabs Investment Research, a fund-tracking firm.

A stock market crash and recession have made bonds especially appealing since 2008, when the nation was in the throes of the financial crisis. The abundance of buyers has pushed bond prices up and sent yields lower, reducing interest payments to investors.

Even with low yields, bonds will continue to attract retiring baby boomers and others who want reliable income for daily expenses. The yield on the 10-year Treasury note - a benchmark - is hovering under 2 percent. Other types offer higher yields. Investment-grade corporate bonds yield 3 percent and riskier "junk" bonds yield just under 6 percent.

Money-market funds, meanwhile, yield 0.02 percent.

Still, the Dow's record surge is drawing more attention to stocks.

The blue-chip index broke through its all-time high March 5 and kept climbing. It's up nearly 11 percent this year and 122 percent from its bottom in March 2009. The broader Standard & Poor's 500 index is up 9 percent and is close to breaking its own record.

Investors added $8 billion to U.S. stock funds and exchange-traded funds in February. And they're putting in more cash this month, as $12 billion flowed into stock funds and ETFs through Tuesday, according to EPFR Global.

Bond funds, including ETFs, have pulled in nearly $8 billion this month.

Much of the money flowing into stocks and bonds has come out of money-market funds. About $32 billion has been pulled out of money funds this month, according to EPFR Global.

Withdrawals that didn't go directly into stock or bond mutual funds could have gone into bank accounts, covered daily expenses or been used for other needs. Investors also could have used the money to buys stocks or bonds directly rather than through funds.

If the money keeps flowing, this would be the first year since 2006 that more cash was invested in U.S. stock funds than withdrawn from them, according to Strategic Insight

Pension funds, 401(k) plans and other institutional investors are typically the largest contributors to daily stock fund flows. But individuals also have been moving in recently, according to EPFR Global.

The market's gains over the past four years could have been larger, had individuals been investing more in stock mutual funds. In the run-up, much of the buying has come from companies repurchasing their own stock. Companies in the S&P 500 have bought $1.5 trillion since the Great Recession began in December 2007. Hedge funds, foreign investors and others who don't own mutual funds bought as well. ETFs have also attracted cash, helping to support the rising market.

There is more fuel for stocks to continue soaring. Dividend payments are headed for a record year and companies keep buying back stock. Boards approved $118 billion in buybacks last month, the largest single-month total ever, according to research firm Birinyi Associates.

Richard Peterson, a psychiatrist and founder of MarketPsych, which advises banks and big money managers, says news coverage of the Dow's run is likely luring people who had remained wary of stocks since the financial crisis in 2008. One fear gets replaced with another.

"It's the fear of missing out on a good thing," he says. "People are watching it go up without them."

David Savage, a 52-year-old manager of a demolition equipment company, is being cautious about stocks.

Savage, who lives in Naugatuck, Connecticut, makes regular contributions to an investment portfolio that includes stocks and bonds as well as real estate.

He believes the Dow could pass 15,000 by the end of the year - that's about 3.4 percent above its Friday level of 14,512. But he plans to see where the market is in June or July before significantly changing his stock holdings.

"If I still have that warm fuzzy feeling then, my investments will stay put," he says. "If not, I'll move to less volatile stock positions."

Matthew Lemieux, an analyst with fund tracker Lipper Inc., warns that the increased investment in stock mutual funds doesn't mean the Great Rotation is coming.

At the beginning of 2011, stock funds attracted cash four months in a row, the strongest start to a year since 2006. But the cash began to dry up in the spring and summer. Investors worried about the debt crisis in Europe and a fight between Congress and the White House over raising the government's borrowing limit.

Stocks have pulled back slightly over the past week amid renewed concerns about Europe and the possibility of bankruptcy in the Mediterranean island nation of Cyprus.

At home, Congress and the White House continue to clash, unable to reach broad agreement to head off automatic spending cuts.

That's a key reason why Richard Shortt of Somerville, Mass., is sitting tight with the stocks he owns rather than buying more.

"Rather than jumping in, I'm prepared to start jumping out," says Shortt, a 68-year-old retired small business consultant. "I've learned through the last two major downturns that you don't buy at highs and you don't sell at lows."

Justin Beal, a 39-year-old municipal fire inspector from Clovis, Calif., believes the stock market will continue to remain at or near record levels in the coming months. But that's partly due to the Federal Reserve's policy of maintaining historically low interest rates through its bond-buying program, he thinks. The program will have to be pulled back or ended at some point, potentially ending the stock market's surge.

"The records don't really mean a lot," Beal says. "The average guy needs to understand that you can't be jumping on the bandwagon at the end of the rally, when it's greed that's driving the market."

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]]>bondsdow jones industrial averagegreat rotationmarket rallystock market rallyThe Associated PressMon, 25 Mar 2013 05:00:00 EST3 Simple Ways to Increase Your Retirement Incomehttp://www.dailyfinance.com/2013/03/09/increase-retirement-income-tips-social-security-/http://www.dailyfinance.com/2013/03/09/increase-retirement-income-tips-social-security-/http://www.dailyfinance.com/2013/03/09/increase-retirement-income-tips-social-security-/#commentsFiled under: , , , ,

Retirement IncomeA soon-to-be-released report from the Deloitte Center for Financial Services reveals the nation's dire state of retirement readiness -- and, on top of that, how deflated so many people feel about the prospects of their future getting better:
  • Although saving for retirement is a top priority, 58 percent of those surveyed said they don't actually have a retirement plan.
  • One in five say they will rely entirely on Social Security to provide their retirement income.
  • Nearly 40 percent believe that no matter what they do with their money, they won't be able to generate the income they want when they retire.
Yet despite people's grim outlook for their retirement prospects, few trust financial professionals to help them, instead preferring to handle their money on their own.

Don't give up just yet: You can take charge of your finances in ways that can make a big difference in retirement. Here are the three key areas where you can squeeze out more money to cover your retirement living expenses.

1. Make The Most of Social Security. Social Security seems simple on its face, but choosing the best strategy for taking advantage of the entitlement is complicated, especially if you have other family members depending on your benefits. In general, the longer you wait, the bigger your monthly checks will be. Moreover, waiting can boost not only your income but also the benefits your spouse can receive, both in spousal benefits during your lifetime and after your death in survivors' benefits.

To do: Visit the My Social Security website where you'll get good information about what your benefits will look like, along with information to help you choose the best time to start taking your benefits. (Here are other strategies to follow to get maximum value from Social Security.)

2. Get Better Investing Returns. In the current environment of rock-bottom interest rates, you can't expect no-risk bank products like CDs to give you the income you need in retirement. These days, you have to understand how different investments provide income, including bonds, stocks, and specialty investments like real-estate investment trusts and master limited partnerships.

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To do: Understanding portfolio income doesn't mean you have to invest in all of these different things. Often, a simple combination of stock and bond index mutual funds or exchange-traded funds is all you need to produce both the income you need and the growth to meet rising costs.

3. Take Advantage of Other Financial Resources. Beyond Social Security and your investments, many retirees have few or no financial resources to tap into after they quit their jobs. Having to go back to work during retirement is not only unpalatable to most retirees but also difficult to do in this economy, in which millions of underemployed and unemployed individuals are fighting for job opening.

To do: You may not even have thought about some of the resources that may be available to you. For instance:
  • If you had a retirement plan at a former employer, check to find out how to draw benefits from it, either directly from the plan or by rolling over the proceeds into a retirement account of your own.
  • For low-income retirees, government assistance can help you make ends meet. Medicare and Medicaid coordinate to provide health benefits, while other programs can provide assistance with food and utility bills. Contact the agency in your state or local government that handles financial assistance for more details, as they can vary dramatically from place to place.
  • If you own your home, you may be able to draw income from your home equity. A reverse mortgage is one option, although it can often involve considerable fees.
  • Private assistance can also cut your costs. Drug companies often offer medications at lower cost to those in need, while even simple senior discounts can produce big savings.
Living on a fixed income is challenging, but it's not impossible. Rather than giving in to despair, focusing on these keys will help you come up with the income you need for a better retirement.

Photo Credit: Alamy

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]]>bondsCenters for Medicare and Medicaid ServicesFinanceHealthIncome investingmaster limited partnershipsreal-estate investment trustsretirement planningretirement tipsSocial SecuritySocial Security benefitsstockswhen should I retireDan CaplingerSat, 09 Mar 2013 05:00:00 ESTSuddenly, Bonds are Riskier than Stockshttp://www.dailyfinance.com/2013/02/22/bonds-riskier-than-stocks-interest-rates-yields-bubble/http://www.dailyfinance.com/2013/02/22/bonds-riskier-than-stocks-interest-rates-yields-bubble/http://www.dailyfinance.com/2013/02/22/bonds-riskier-than-stocks-interest-rates-yields-bubble/#commentsFiled under: , ,

Bonds vs. StocksBy HIBAH YOUSUF

Bonds have outperformed stocks over the last 30-year period, but that's about to change, experts warn.

"Bonds are not the safe haven that they used to be," said Michael Sheldon, chief market strategist at RDM Financial Group. "Interest rates have been declining since the early 1980s but now we're heading into a period of rising rates, which means that investing in the bond market will be a lot more challenging over the next few years."

Investors with stakes in long-term Treasuries are already feeling the pain.

As the 10-year Treasury yield recently crept up to 2% from its record low of 1.4% last July, the iShares Barclays 7-10 Year Treasury ETF (IEF) and the iShares Barclays 10-20 Year Treasury ETF (TLH) declined 3%, while the iShares Barclays 20+ Year Treasury Bond ETF (TLT) dropped 10%.

If the 10-year yield rises back to the level it was before the financial crisis (around 5%), bond funds could plunge 25%, said Fred Dickson, chief market strategist at KDV Wealth Management.

The threat of rising yields is especially worrisome for individual investors, who have poured more than $1 trillion into bond funds in the aftermath of the financial crisis, according to the Investment Company Institute.

That trillion-dollar inflow has led to an overcrowded market.

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"Investors have way too much exposure to the bond market," said Christian Magoon, CEO of Magoon Capital. "They're invested in bonds for their perceived safety, so they'll likely be extra sensitive to the price moves. Losing 10% or 20% in the bond market feels like losing double that amount in the stock market."

The risk is even more alarming when you consider valuations, added Dickson. The bond market "looks eerily similar" to the overvaluation of the stock market at the height of the Dotcom bubble, he said.

By comparison, the S&P 500, which is near a new record high, is trading at less than 14 times 2013 earnings estimates. Even at its all-time high in October 2007, the S&P 500's valuation was just above 17.

"There are certainly also risks in the stock market, and there's always a possibility of a correction," said Magoon. "But relative to bonds, stocks look much safer over the long term. And without more exposure to stocks, most investors won't be able to get the kinds of investment growth and the ability to fight inflation that they need to meet their retirement goals."

That's because stocks usually offer better returns than bonds. On a historical basis, stocks deliver an average annual return between 6% and 7% after inflation, according to Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School. At best, bonds have historically returned up to 1%, after inflation.

Of course not all bonds are created equal. Experts like Magoon are investing in debt issued by emerging markets like Mexico, where the fiscal and debt outlooks are brighter than those of developed countries, including the United States.

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]]>bond bubblebond fundsbond yieldsbondsbonds vs stocksCNNMoney.comFinanceInterest Ratesinterest rates riseInvestment Company InstituteJeremy SiegelMichael SheldonSafe InvestmentsstockstreasuriesTreasuryTreasury bond yieldstreasury bondsUnited States Treasury securityWharton School of the University of PennsylvaniaCNNMoneyFri, 22 Feb 2013 05:00:00 ESTBond Market Crash: Is Disaster Ahead for the 'Safe' Part of Your Portfolio?http://www.dailyfinance.com/2013/02/06/bond-market-crash-fears-interest-rates/http://www.dailyfinance.com/2013/02/06/bond-market-crash-fears-interest-rates/http://www.dailyfinance.com/2013/02/06/bond-market-crash-fears-interest-rates/#commentsFiled under: , ,

Bond market crashJust when you've finally gotten over the stock market crash from four years ago, there's a new threat that could potentially hit your portfolio. Even worse, it's in an area that many people think of as being safer than stocks: the bond market.

Goldman Sachs (GS) is the latest big Wall Street institution to sound the alarm about a potential bond market crash. Although bond-market dynamics are sophisticated and complex, the argument against bonds boils down to these simple points:
  • Interest rates are near all-time lows, which means that the prices of bonds and bond funds, which go the opposite direction of rates, are extremely high right now.
  • Nevertheless, investors have piled into bond investments over the past several years, accepting lousy guaranteed returns in exchange for the near-certainty that they won't lose any principal.
  • Corporations and other borrowers have been issuing huge amounts of bonds into the market, raising cash and refinancing their debt to take advantage of low rates before the opportunity to get cheap financing disappears.
  • In the past month, rates have started ticking upward, and further rate rises -- which many see as inevitable -- would send bond fund prices down.
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Even worse, many investors who've been trying to boost the income from their portfolios have unknowingly increased their risk in a potential bond market crash. Just as a five-year CD pays more than a one-year CD, longer-dated bonds have better rates. But their prices are also more vulnerable to interest-rate increases, magnifying their future losses if rates rise sharply. Brokerage firm UBS (UBS) even plans to take the extraordinary step of classifying bond investors as "aggressive" because of the firm's negative outlook for the bond market.

Where Can You Take Cover

Goldman and other Wall Street firms can use expert strategies and complex financial products like derivatives to give them protection against rising rates and falling bond prices. For regular investors, though, the options are more limited.

Here are some ways you can take cover if you agree that a bond-market crash is coming:
  • Think short-term. Investing in short-dated bonds reduces the interest rate you get now, but if rates rise, you don't have to wait as long before you get to reinvest in a new bond paying a higher rate. Bond funds that own short-term bonds also don't lose value in rising-rate environments as much as longer-term bond funds.
  • Look at CDs instead of bonds and funds. Bonds and bond funds can rise and fall in price, but with CDs, you always have the option of withdrawing your money simply by paying an early-withdrawal penalty. With some banks letting you take money out by paying as little as three months of interest, if rates rise dramatically, you can grab your CD money early and reinvest it in a higher-paying CD.
  • Consider inflation-protected savings bonds. One of the best deals in the market right now is the Series I savings bond, which pays returns based on the current rate of inflation. The rate changes automatically every six months, but you don't have to pay taxes on the interest until you cash them in. One caveat: you can't cash them in for a year, and if you hold them less than five years, you'll pay a three-month penalty. (By the way, don't confuse these with TIPS -- Treasury Inflation-Protected Securities. Series I bonds are similar, but not the same.)
  • Beware of high-risk bonds. The safest bonds tend to pay the lowest rates, with Treasuries at the highest level of safety and corporate bonds offering successively higher interest rates as credit quality weakens. Many investors have gravitated to speculative high-yielding "junk" bonds because they pay 6 percent or more compared to less than 2 percent for comparable Treasuries. But if those somewhat riskier companies default on their debt, you could lose much or all of your investment.
Experts have been calling for a bond-market crash for many years, and so far, their cries have fallen on deaf ears. With more signs pointing to a healthier economy, though, rising rates look like they're getting closer. Take these simple steps and you'll reduce your losses if a bond-market crash happens.

For more on smart investing:

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. Motley Fool newsletter services have recommended Goldman Sachs.


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]]>bond market bubblebond market crashbond risksbondsFinanceGoldman SachsGSInterest RatesSafe Investmentsseries I savings bondsThe Motley FoolTIPStreasury inflation protected securitiesUBSUnited States Treasury securityWall StreetDan CaplingerWed, 06 Feb 2013 06:00:00 ESTShould You Invest Your Emergency Fund?http://www.dailyfinance.com/2013/02/04/emergency-fund-investing-saving/http://www.dailyfinance.com/2013/02/04/emergency-fund-investing-saving/http://www.dailyfinance.com/2013/02/04/emergency-fund-investing-saving/#commentsFiled under: , ,

New York Stock Market saftey net cashFinancial emergencies always seem to strike at the worst possible time. Keeping a stash of ready cash to help you weather financial storms can make it a lot easier to get out of a money bind without having to resort to payday loans and other costly lenders of last resort.

It can take quite a while to get there if you follow the advice of many financial experts and aim to set aside an emergency fund that's big enough to pay three to six months' worth of living expenses. With most bank savings accounts paying just fractions of a percent in interest, the question many people ask is whether it makes more sense to invest your rainy-day fund in something that will provide a higher return.

The Cash Stash Dilemma

The major problem that most households have in setting up an emergency fund is in finding spare money to save in the first place. But even once you get past that hurdle, another issue comes from the fact that most people have don't have nearly enough money in their long-term investment portfolios.

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With so many competing demands on your money -- from everyday expenses to long-range goals like buying a house or paying for your kids' college education -- keeping thousands of dollars in an insured bank account that doesn't pay any significant return on your money represents a major waste of financial potential.

You need your money to do double duty. But can you achieve the goals of having a secure emergency cash stash while scoring better returns from more promising investments?

Beating Low Returns

To answer that question, you have to take a close look at the reason you have your rainy-day fund in the first place.

In general, there are two different types of financial emergencies that come up, and the choices you have about what to do with the money you set aside for each type of emergency are different.

o. Unexpected expenses: On one hand, truly unexpected expenses demand quick attention. When your furnace or air conditioner breaks, putting off the repair for months usually isn't an option. When the auto mechanic tells you it's going to be hundreds or thousands of dollars to get your car going again, postponing for long is rarely an option: Most people can't afford the disruption to their daily lives of not having a vehicle, especially when it comes to getting to work.

Having enough spare cash to handle those types of emergency is extremely valuable. Although having a credit card whose balance you pay off every month can buy you a few weeks of extra time to gather funds, in general, you want that portion of your rainy-day money instantly available to get things taken care of immediately.

o. "What ifs" with warning: If you're fortunate enough to have a larger contingency fund set aside in case of something like a job loss, temporary layoff, or an unexpected injury that takes away your ability to work, then keeping a cash cushion equivalent to three to six months' worth of your expenses in a savings account isn't as necessary. Typically, you'll have at least some warning that trouble at work may be coming, giving you time to move money around before you need your entire emergency fund.

For whatever portion of your cash stash you won't need immediate access to, consider investments that provide higher returns. Bonds and bank CDs can offer higher interest rates than savings accounts, although their rates, too, are fairly depressed. Many dividend-paying stocks provide higher amounts of income than you can get from most income-paying alternatives. Of course, with stocks, a market downturn can cause substantial losses, and even with bonds and bank CDs, you can lose money or have to pay penalties if you end up needing to sell them in an emergency situation.

Make Your Money Work Harder

In order to keep your emergency cash stash truly available for emergencies, you'll want to make sure you keep at least some of your money in a savings account, despite their low interest rates. But the closer you get to your emergency fund goal, the more sense it makes to let some of that cash do double duty.

Gallery: Countdown: Fortune's Top 20 Fastest-Growing Companies

20. 51job19. Epoch Holding18. American Equity Investment Life17. Alexion Pharmaceuticals16. Bridgepoint Education


You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.

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]]>bondsCDsdividend stocksemergency fundemergency savingsFinancelow interest ratesLow risk investingsaving for an emergencysavings account intereststart savingThe Motley FoolDan CaplingerMon, 04 Feb 2013 11:30:00 ESTHow the Fiscal Cliff Deal Saved Dividend Stockshttp://www.dailyfinance.com/2013/01/15/dividend-stocks-fiscal-cliff-deal/http://www.dailyfinance.com/2013/01/15/dividend-stocks-fiscal-cliff-deal/http://www.dailyfinance.com/2013/01/15/dividend-stocks-fiscal-cliff-deal/#commentsFiled under: , , , , ,

dividend stocks Fiscal Cliff stock marketThe months-long wrangling in Washington over whether to extend expiring tax breaks went down to the wire, but eventually, lawmakers got the job done. In doing so, they also removed what could have become a huge threat to millions of investors who rely on dividend-paying stocks.

Increasingly in recent years, income-hungry investors have come to depend on dividend stocks as a key component in their overall investment strategies. With banks offering next to nothing for savings accounts and interest rates near historic lows on other income-producing alternatives like bonds, even conservative investors have had little choice but to embrace stocks for their lucrative dividend payouts.

Yet without a deal, that final refuge for income investors could have disappeared.

The 'What If' Scenario

Throughout the debate, most of the focus was on the prospective increases in the overall tax rates that would have taken effect in 2013, with particular attention to the changes affecting high-income taxpayers. With rate increases that would have boosted taxes by three to five percentage points, the impact on the economy and on individual budgets would have been significant.

But the biggest potential tax hike in the fiscal cliff would have been applied to dividend stocks. Since the early 2000s, dividend taxes have been capped at 15 percent. That top rate would have increased to 39.6 percent, and the additional 3.8 percent Medicare surcharge tax would have resulted in taxes on dividends nearly tripling for high-income earners -- and nearly doubling for a wide swath of ordinary investors.

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In particular, one intricacy of the tax laws could have led companies to make a big change in their dividend policies. For years, the tax rate on dividends has been the same as what investors pay on long-term capital gains. That equal treatment gives no tax incentive one way or the other for companies to decide whether to return extra capital to shareholders through dividends or by other means, such as share buybacks.

But without a fiscal cliff resolution, capital gains rates would have stayed relatively low at 20 percent -- just half the rate that would have prevailed for dividends.

Such a wide disparity could well have led companies to replace dividends with stock repurchases. That in turn would have put dividend investors in a bind, as the steady gains in dividends over the past several years could have reversed themselves in one fell swoop and eliminated a key source of investor income.

Even Now Not All Dividends Are Created Equal

In the end, the deal set both capital gains and dividend rates at 20 percent for taxpayers with incomes above $400,000 for singles and $450,000 for joint filers. That kept the old law's equal treatment of dividends and capital gains in effect and should therefore prevent companies from having to pull back on dividends just to maximize their tax efficiency.

Even though the new tax laws have taken effect, you still need to understand that those low dividend tax rates don't always apply. The 15 percent and 20 percent maximum rates only apply to qualified dividends, which exclude payouts from certain companies.

For instance, many of the most popular real estate investment trusts, particularly those like Annaly Capital (NLY) and American Capital Agency (AGNC) that focus on mortgage-backed securities, are subject to tax at your higher ordinary income rate. For more information on whether your stocks pay qualified dividends, contact your company's investor relations department.

In addition, if you're a frequent stock trader rather than someone who buys and holds stocks, you could lose the favorable dividend tax rate. To get the lower rate, you have to own a stock for more than 60 days during the roughly four-month time frame surrounding the dividend payout.

Don't Count Out Dividends

Despite the worries of December, dividend stocks have emerged from the fiscal cliff debate stronger than ever. Given how hard it is to get income anywhere else, having dividend stocks in your portfolio is likely to remain an essential part of making ends meet for those who live off their investments.

If you're interested in some of these dividends on your quest for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks."

Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital.

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]]>bondscapital gains taxconservative investingdividend investingdividend stocksdividend tax rateFinancefiscal cliff dealIncome investinglow interest ratesqualified dividendssavings account interestThe Motley FoolDan CaplingerTue, 15 Jan 2013 06:00:00 ESTThe Dangerous Problem Behind ETFs' Big Asset Surgehttp://www.dailyfinance.com/2013/01/09/etf-mutual-funds-bonds-vs-stocks/http://www.dailyfinance.com/2013/01/09/etf-mutual-funds-bonds-vs-stocks/http://www.dailyfinance.com/2013/01/09/etf-mutual-funds-bonds-vs-stocks/#commentsFiled under: , , ,

Traders work on the floor of the New York Stock Exchange The rivalry between exchange-traded funds and mutual funds got even more heated in 2012, with ETFs winning the fight for investor assets by a landslide.

According to Morningstar research, investors put a total of $154 billion into ETFs in 2012, the biggest inflows since 2008. At the same time, investors yanked more than $119 billion out of actively managed stock mutual funds last year.

At first glance, that may seem like really good news. After all, most ETFs come with much lower fees than active mutual funds, and often, those lower costs end up improving overall returns. (In fact, Morningstar found that ETFs that invested in well-known large growth stocks outperformed their active fund counterparts by more than a percentage point in 2012 -- which may seem like a minor boost, but in fact can make a huge difference in returns over the long haul.)

The problem, though, is that investors aren't just moving their money from stock mutual funds to stock ETFs. Instead, they're making big changes to their asset allocations, and the moves they're making are a lot riskier than they think.

Selling Stocks High, Buying Bonds Higher

A closer look at the Morningstar figures reveals that only about a fifth of the money going into ETFs last year went to stock ETFs. A much higher proportion of assets went into bond ETFs, yet another sign of the continuing gravitation of investors away from "high-risk" investments like stocks and into "safe-haven" investments like bonds.

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For those who've managed to ride out the stock market waves since equities hit their 2009 lows, selling as the market hits new five-year highs has intuitive appeal. After all, the most common advice investors get is to buy low and sell high. With the market at levels it hasn't seen since before the financial crisis, current conditions appear to fit that description pretty well.

Yet even if stocks are richly valued, bonds certainly aren't the bargains that some investors make them out to be.

How Low Can You Go?

Bonds have seen 30 years of declining rates and rising prices since the high-inflation period of the late 1970s and early 1980s gave way to huge declines in inflation. Despite a recent rise over the past month, bond yields are still very close to record lows. Combined with a slow economy, upward pressure on rates has been virtually nonexistent.

The attraction to bonds comes from the fact that bond ETFs have performed extremely well in recent years. Yet even that trend appears to be slowing, as bond ETFs oriented toward the Treasury market posted more modest gains in 2012 than they did in 2011.

If the high-flying corporate and municipal bond sectors start to see their gains moderate in the coming months -- which is definitely possible given the uncertainty over the outcome of upcoming government debates on the U.S. debt ceiling and the automatic budget cuts that could take place if sequestration kicks in -- then bond ETF returns will fall dramatically and could even turn into losses for a time.

The Right ETF Move

When you're considering how to invest your money, remember that you have two separate decisions to make: Deciding whether you want to buy ETFs or active mutual funds is a completely independent issue from which ETFs or funds you'll end up choosing for your particular investing needs.

In most cases, an ETF will be less costly, more tax efficient, more transparent, and easier to understand than a similar active fund. In that sense, many ETFs are better than mutual funds.

But in order to stay on track with a long-term financial plan that takes your specific needs into account and will help you meet your money goals, you'll want an asset allocation plan that puts you in appropriate investments given your financial situation. Whether you pick ETFs, active mutual funds, or a mixture of the two, be sure to pick those with the best chance of boosting your long-term returns.

For more on smart investing:


To learn more about a few ETFs that have great promise for delivering profits to shareholders in a recovering global economy, check out The Motley Fool's special free report, 3 ETFs Set to Soar During the Recovery.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.

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]]>actively managed fundsbond etfbond fundsbondsETFETFsexchange traded fundsFinanceMorningstar Incmuni bondsmutual fund feesMutual fundsretirement planningrisky investmentsSafe HavenSafe InvestmentsThe Motley FoolDan CaplingerWed, 09 Jan 2013 12:25:00 EST7 Alternatives to the Stock Market for Older Investorshttp://www.dailyfinance.com/2013/01/03/7-alternatives-to-the-stock-market-for-older-investors/http://www.dailyfinance.com/2013/01/03/7-alternatives-to-the-stock-market-for-older-investors/http://www.dailyfinance.com/2013/01/03/7-alternatives-to-the-stock-market-for-older-investors/#commentsFiled under: , , ,

Gold barsBy Joe Udo

The stock market is a great investment if you have a long time horizon. But should you continue to invest in stocks once you retire? When you start withdrawing from your retirement portfolio, you will be a lot more sensitive to stock market fluctuations. Most financial advisers recommend reducing stock market investments as you get older, but you don't want to just stick the money under the mattress either. Inflation will erode cash savings over the years, and we need to continue to invest. Here are seven investment alternatives to the stock market:

Annuities. There are many types of annuities, but the basic idea is that we pay an insurance company a lump sum in exchange for a guaranteed monthly payment for life. Annuity payouts are primarily tied to interest rates, so it's probably a good idea to wait until rates improve. You probably don't want to put all of your savings into an annuity because you really don't know how long you will live. If your pension and Social Security payments aren't enough to pay your minimal monthly expenses, then it's a good idea to buy an annuity to fill that gap.

Bonds. The classic alternative to the stock market is bonds. You can lend money to the government or a corporation and receive some interest. When the stock market goes south, investors turn to bonds as a good diversification from the stock market.

CDs. CDs are not very attractive at the moment because the yields are very low. However, the return is guaranteed and the risk is also very low. Building a CD ladder is a good way to guarantee stable returns. Once interest rates improve, it will be a good idea to invest in a long-term CD.

Real estate. Rental properties are a great way to generate some income, but they can be a lot of work. If you don't want to deal with tenants, then a property management company can be a huge help. If you really don't want to be a landlord, consider a real estate investment trust (REIT) instead. Investing in a REIT is much easier than owning rental properties, and the dividend payout is usually very good compared to other dividend stocks.

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Gold. Gold is another diversification from the stock market. When economic turmoil hits, the price of gold goes up. Gold represents stability, and a small portion of your portfolio might benefit from that. Investing in gold is easier than ever. You can invest in gold ETFs without having to worry about stashing gold jewelry in the freezer.

Peer-to-peer lending. Peer-to-peer lending is a great way to generate extra income. You lend money to individual borrowers and you'll be paid an interest rate. The good thing about peer-to-peer lending is that you can lend in $25 increments and diversify your lending portfolio. Some percentage of borrowers will default, but your lending portfolio should be able to handle some losses because the interest rate is so high. One big caveat is if we have a big recession and many people lose their jobs, then the default rate will skyrocket.

Long-term care insurance. The cost of long-term care can put a big dent into any retirement portfolio. A good nursing home can cost over $10,000 a month depending on where you live. Long-term care insurance can offset that cost. If your family has any history of Alzheimer's, dementia, or Parkinson's disease, long-term care insurance might be right for you. However, the cost of long-term care insurance is quite high, so if your family doesn't have any history of needing long-term care, it might be better to invest the money elsewhere.

Retirees shouldn't pull out of the stock market completely because it is still a great investment over the long term. Retirement can last over 30 years, and we need some growth in our retirement portfolio. However, retirees need to take a close look at their portfolio and ask themselves if they can handle the volatility. Most people think they can handle a big drop in the stock market, but when it happens, they often sell at the wrong time and lose out on the recovery. Choosing some alternative investments outside the stock market may bolster your finances during such an event.

See more on U.S News:


What History Predicts for Stocks in 2013
The Dark Secret to Beating the Markets
How to Tell if You Should Downsize in Retirement

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]]>AnnuitiesBondsCDGoldinvestmentLong-term care insurance.Peer-to-peer lendingpensionReal estateREITretirementretirement portfolioSocial Securitystock marketstock market investmentsU.S. NewsThu, 03 Jan 2013 12:10:00 EST11 Easy and Great Ways to Save Money in 2013http://www.dailyfinance.com/2012/12/27/11-easy-and-great-ways-to-save-money-in-2013/http://www.dailyfinance.com/2012/12/27/11-easy-and-great-ways-to-save-money-in-2013/http://www.dailyfinance.com/2012/12/27/11-easy-and-great-ways-to-save-money-in-2013/#commentsFiled under: , , , ,

Gallery: 11 Easy and Great Ways to Save Money in 2013

1. Pay down high-interest credit cards first2. Correct your tax status3. Buy the stocks of dividend-paying companies4. Buy bonds


Fool contributor Sean Williams has no material interest in any companies mentioned in this article. The Motley Fool owns shares of Johnson & Johnson, ExxonMobil, and Starbucks, as well as puts on Starbucks. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Johnson & Johnson, and Starbucks, as well as buying calls on Johnson & Johnson and writing covered calls on Starbucks.

The article 11 Easy and Great Ways to Save Money in 2013 originally appeared on Fool.com.

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]]>401kbank feesbondsCapscharitable givingcredit card debtdividend stocksDIYdo it yourselfFinancegeneric drugsgeneric foodshealth insurance costsmuni bondsnewyear2013Orbitz Worldwide IncPatient Protection and Affordable Care ActRoth IRAtax deductionstax withholdingThe Motley Foolyearend 2012Sean WilliamsThu, 27 Dec 2012 06:00:00 ESTHow to Stop Low Interest Rates From Ruining Your Retirementhttp://www.dailyfinance.com/2012/06/11/how-to-stop-low-interest-rates-from-ruining-your-retirement/http://www.dailyfinance.com/2012/06/11/how-to-stop-low-interest-rates-from-ruining-your-retirement/http://www.dailyfinance.com/2012/06/11/how-to-stop-low-interest-rates-from-ruining-your-retirement/#commentsFiled under: , , ,

Wells Fargo low interest rates and retirementLow interest rates have made life a lot easier for many borrowers struggling to make monthly payments. But for retirees, who have to live off their portfolios, low rates have caused huge problems.

A May survey from Gallup and Wells Fargo (WFC) confirmed what many people already know all too well: Low interest rates are destroying people's confidence about ever being able to retire. Fully one-third of those surveyed said that they expect low rates will compel them to work longer and delay their retirement, while 45% of current workers say they think low rates will make it a lot more likely that they'll outlive their money after they retire.

In particular, the survey points to deteriorating confidence among retirees. Last year, retirees were much more optimistic about their futures. Yet with core inflation outpacing rates on bank certificates of deposit by more than a factor of three in many cases, those living on fixed incomes are feeling the pinch -- and will continue to do so as higher prices reduce the purchasing power of their nest eggs.

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To fight low rates, some retirees have taken drastic measures to fill their income gaps. Almost 20% of retirees have moved their money into riskier investments they probably wouldn't have bought if rates weren't so low. For instance, some retirees have turned to dividend-paying stocks, many of which pay out more income than bank CDs and other income-generating investments.

No single investment, however, is a perfect solution for income shortfalls. The best answer for most retirees involves using a combination of investments to generate income. Dividend-paying stocks may play a role in your portfolio, but putting all your money into stocks involves far more risk than the vast majority of retirees can afford to take.

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Instead, consider other types of income-producing investments. Municipal bonds earn interest that isn't subject to federal income tax, but they also have higher yields than Treasury bonds of the same maturity -- even though you have to pay federal tax on Treasury income. Meanwhile, managed payout funds make fixed payments to their shareholders over time, and even if the income the fund portfolio generates isn't enough to cover a payment, the fund can go in and essentially return a portion of your investment back to you to cover your cash flow needs.

These low interest rates won't last forever. But while they do, make sure to do what you have to in order to ensure you have the income you need.

For more on making the most of your retirement:

Motley Fool contributor Dan Caplinger is trying to put low rates on his side. You can follow him on Twitter here. He doesn't own shares of the companies mentioned. The Motley Fool owns shares of Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo.


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]]>bondsbonds vs stocksBondsVsStockscdscertificates of depositCertificatesOfDepositdividend stocksDividendStocksFinanceGalluplow interest ratesLowInterestRatesmanaged payout fundsManagedPayoutFundsmuni bondsMuniBondsPostponingRetirementretirement planningRetirementPlanningThe Motley Fooltreasury bondsTreasury NotesTreasuryBondsTwitterWells Fargo & CoDan CaplingerMon, 11 Jun 2012 16:45:00 ESTAn Investment Puzzle: How to Put Your Assets in the Right Placeshttp://www.dailyfinance.com/2012/04/02/an-investment-puzzle-how-to-put-your-assets-in-the-right-places/http://www.dailyfinance.com/2012/04/02/an-investment-puzzle-how-to-put-your-assets-in-the-right-places/http://www.dailyfinance.com/2012/04/02/an-investment-puzzle-how-to-put-your-assets-in-the-right-places/#commentsFiled under: , ,

Investment choicesObviously, what you invest in can mean the difference between getting rich and losing your shirt. But where you invest can be even more important -- especially if you end up picking winners.

Most people have several different ways to put their money to work. If you have a 401(k) or other retirement plan at work, you can have deductions pulled directly out of your paycheck and put toward your long-term savings. Opening an IRA can give you many of the same benefits with even more flexibility. For goals other than retirement, regular brokerage or mutual fund accounts let you have complete control over your money, and you can take it out or move it without any penalties.

But if you have a diversified investment portfolio with a variety of assets -- such as stocks, mutual funds, bank CDs or other fixed-income investments, and alternative investments -- you may not spend much time figuring out where each investment fits best across all the accounts you have. As a result, you could be missing out on big tax savings.

What should go where?

The right answer depends on your individual situation, but some general rules of thumb apply to many people.

1. Interest-bearing assets belong in IRAs. If you have bank CDs, bonds, or other investments that produce interest income, the best place for them is in a Traditional IRA. The reason is that these assets benefit the most from the tax savings that IRAs provide. Unlike income from stock dividends and capital gains, interest income gets taxed at your higher ordinary rate. Given how low the rates on these investments are right now anyway, the last thing you can afford is to lose a big share of that meager income to the tax man.

2. Save your best ideas for a Roth IRA. A Roth IRA is a special type of retirement account that let's you withdraw all the income it generates tax-free. Therefore, you should put the investments that have the best chance of soaring in value inside a Roth.

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High-growth stocks fit that bill. Think about some of the blockbuster gainers over the years -- stocks like priceline.com (PCLN) and Green Mountain Coffee Roasters (GMCR) that have made a bundle for their longtime shareholders. If you'd put those investments in a Roth IRA, you could've enjoyed all those profits without paying a penny in tax. That's why Roth IRAs are so valuable -- but since you can only contribute limited amounts to a Roth, you have to use your Roth money wisely.

3. Invest long-term in taxable accounts. Even though stocks give you the best chance to make significant money over the long haul, that doesn't mean that they aren't suitable for taxable accounts. Until you actually sell a stock you own, you don't pay tax on any gains. So plenty of people are still sitting on big gains from stocks like Amazon.com (AMZN) and Apple (AAPL) that they've held for years, letting their profits ride -- and they haven't had to pay a dime in tax along the way.

Moreover, as long as you hold onto investments for more than a year, any gains qualify for a tax break. Currently, the maximum tax rate for long-term capital gains is 15%, compared to up to 35% for regular income. So putting stocks and stock mutual funds or ETFs in taxable accounts can be a smart idea -- especially when you can't afford to lock up that money until you retire.

Think Smart

Figuring out what investments to buy may seem hard enough without worrying about which account to use to buy them. But in your constant fight with the IRS, it can make a huge difference -- and it's worth the effort.

For more on smart tax moves:

Motley Fool contributor Dan Caplinger learned a lot of tax lessons the hard way. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, priceline.com, Green Mountain, and Apple, as well as creating a lurking gator position in Green Mountain and a bull call spread position in Apple.


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]]>401kassets under managementAssetsUnderManagementbondscdsFinanceinvesting tipsInvestingTipsRoth IRATax-freeSavingsAccountsTraditional IRATwitterDan CaplingerMon, 02 Apr 2012 15:45:00 ESTInvesting Error: Don't Use Stocks as an Inflation Hedgehttp://www.dailyfinance.com/2012/03/09/investing-error-stocks-not-inflation-hedge/http://www.dailyfinance.com/2012/03/09/investing-error-stocks-not-inflation-hedge/http://www.dailyfinance.com/2012/03/09/investing-error-stocks-not-inflation-hedge/#commentsFiled under: ,

Hedge fund errorYou've heard it so often you can probably repeat it in your sleep: Equities are the best protection against inflation.

Financial planners say it. Money managers say it. Pundits and gurus say it. Without a nice chunk of equities in our portfolio, we are told, inflation will ravage our net worth, and we may not have anything left for our very old age.

That's why some experts have even recommended that retirees or near-retirees hold 60% or more of their assets in stocks -- terrible advice, and it destroyed many people's finances and peace of mind during the crash a couple of years ago.

The market has come back since then -- without the participation of those who sold at the bottom in despair -- so maybe some advisors believe it was sound thinking after all.

But academic research, old and new, completely flies in the face of this conventional "wisdom." It establishes clearly that stocks are not a very good hedge at all against inflation, particularly high inflation. Even Stocks for the Long Run himself, Jeremy Siegel, acknowledges that.

"Historically, that's been the case," said John Tatom, a finance professor at Indiana State University." I claim that's one of the most well-established tenets in financial economics."


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In a 2011 paper, Tatom wrote: "There is a strong negative correlation between inflation and real and nominal stock prices. Contrary to opinion, equities are not a good hedge against inflation."

Some new research by three noted experts on asset prices confirms this. Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School have one of the world's deepest databases on the performance of stocks, bonds, bills, and currencies, as well as inflation. It covers 19 different markets and goes all the way back to 1900.

In an article in the 2012 Credit Suisse Global Investment Returns Yearbook, they found that during periods of "marked" inflation, equities easily outperform bonds, probably the worst investment to own during inflationary episodes. Yet equities gave a real return of -12% during those periods, while bonds lost 23.2%. Double ouch.

"When inflation has been moderate and stable,...equities have performed relatively well," the three professors concluded. "When there has been a leap in inflation, equities have performed less well in real terms. These sharp jumps in inflation are dangerous for investors."

"High inflation reduces equity values," they summed up.


Confusing ROI with Inflation Protection

So why have so many experts embraced equities as an inflation hedge? Because they're confusing the large total returns investors may have earned from equities over long periods of time with an actual "hedge" against inflation.

Because of their greater risk, equities tend to produce bigger rewards over the long run -- say, 20 years or more.

But that's not quite in the bag, either.

Exhibit A: the lost decade. The average annual total return for the S&P 500 index from 1999 to 2011 was -0.4%. So, we're going to need a hell of a good next eight years to reach the S&P's long-term averages of just under 10% a year in this 20-year period. Dow 36,000 anyone?

Of course, if you invested in certain types of stocks -- small-cap value, real estate investment trusts, and emerging markets -- you would have done well. But who knew that in 1999?

And when it comes to inflation, even the esteemed Jeremy Siegel of The Wharton School of the University of Pennsylvania hedges his bets, so to speak.

"Over 30-year periods, the return on stocks after inflation is virtually unaffected by the inflation rate," he wrote in Kiplinger's last year. "Although stocks do well when annual inflation is in the range of 2% to 5%, their performance begins to falter when inflation exceeds 5%."

Why? Because "companies can't always pass along increased costs, especially in the case of an important raw material, such as oil. As a result, many companies will see their profits squeezed," he wrote.

Siegel's conclusion: "Stocks are not good short-term hedges against rapidly increasing inflation, but bonds are worse."

What You Should Actually Buy

So, what does that mean? If you own a lot of stock because you want to protect your portfolio against inflation, you probably should sell some.

For instance, if you're five to ten years from retirement and you have 50% to 60% of your assets in stocks, you should reduce those holdings to 40 to 50% of your portfolio.

And if you're worried about inflation, you should take some of that money -- and sell some of your bond holdings, too-- to buy some asset classes that have better track records as inflation hedges.


Such as? "In periods of high and increasing inflation, gold and commodities are definitely something you want in your portfolio," said Mark Johannessen, managing director of Harris SBSB in McLean, Va., and former president of the Financial Planning Association.

Dimson, Marsh, and Staunton's research backs him up. "Gold is the only asset that does not have its real value reduced by inflation," they write. "Gold has on average been resistant to the impact of inflation. However, investment in gold has generated volatile price fluctuations...There have been long periods when the gold investor was 'underwater' in real terms."

Not for the last decade, of course, when gold rose more than sevenfold before stalling below $1,900 per ounce. But the researchers are talking about the very long run.

Another good hedge: housing. Don't everyone all groan at once. According to Dimson, Marsh, and Staunton, "real house-price changes ... seem relatively insensitive to inflation ... Housing has provided a long-term capital appreciation that is similar in magnitude to gold."

Unfortunately, U.S. housing has produced the weakest returns of major markets over the last century, so if you'd like to hedge against inflation with your home, pack up and move to Australia.

Real estate investment trusts (REITs) may be a decent substitute, but there aren't as much data on their performance over many, many years -- and they've had a big run.

Finally, there are TIPs (Treasury inflation-protected securities), inflation-linked bonds issued by the US and other governments. Smart people like David Swensen, Yale's chief investment officer, recommend them for individual investors as good protection against inflation. But they're very expensive now.

So, what should you do? I'd take some profits in your stock and bond holdings and buy small positions (maybe 5% of your portfolio each) in gold, commodities, REITs, and TIPs ETFs, preferably when they've sold off a bit, too.

Then, I'd keep 40% to 50% in stock, 20% to 30% in bonds, and another 10% in cash. That way, you'll have some protection against inflation, deflation, and just normal life.

And if your financial advisor tells you to buy more stock to keep from outliving your money, tell him or her that in the long run, we're all dead.



Howard R. Gold is editor at large for MoneyShow.com and columnist for MarketWatch. You can follow him on Twitter @howardrgold and read why Republicans need to stop pining for a white knight at The Independent.

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]]>bondscommoditiesDavid SwensenequitiesgoldIndiana State Universityinflation hedgesInflationHedgesinvesting mistakesInvestingMistakesJeremy SiegelReal Estatereal estate investingRealEstateInvestingREITSreturn on investmentReturnOnInvestmentstocksTIPSTreasury inflation-protected securitiesTreasuryInflation-protectedSecuritiesTwitterMoneyShow.comFri, 09 Mar 2012 12:45:00 ESTA Few Basic Tax Terms That 'The Man' Doesn't Want You to Understandhttp://www.dailyfinance.com/2012/02/16/a-few-basic-tax-terms-that-the-man-doesnt-want-you-to-underst/http://www.dailyfinance.com/2012/02/16/a-few-basic-tax-terms-that-the-man-doesnt-want-you-to-underst/http://www.dailyfinance.com/2012/02/16/a-few-basic-tax-terms-that-the-man-doesnt-want-you-to-underst/#commentsFiled under: , , ,

Tax termsIs the American tax code designed to be confusing?

Looking at the thing, it's hard to escape that conclusion. To begin with, there's its size: The full code is over 70,000 pages long -- 22 times as long as Remembrance of Things Past, 62 times as long as the King James Bible, and 54 times as long as the complete works of William Shakespeare. Or, to put it another way, it's about 175 times as long as its first edition, which was published in 1913.

Contained within its 3.7 million words are thousands of exemptions, definitions, deductions and loopholes, and teasing them out requires an estimated 7.6 billion hours of tax preparation per year. That's more than 24 hours for every man, woman and child in the country. Even the head of the IRS hires an accountant to do his taxes.

Given all that, it's hard to dismiss the notion that the tax code is deliberately designed to confuse the average taxpayer: Its byzantine structure supports an army of accountants and attorneys, computer programmers and bean counters who rake in an estimated $27.7 billion per year helping us prepare our taxes.

But the tax prep industry isn't the only group that benefits. Arguments about cuts and deductions, minimums and premiums have fueled many a political campaign. And whether you're inclined to raise tax rates or lower them, increase incentives or decrease exemptions, chances are that you've been tripped up at least once or twice by a confusing term -- or a slick politician wielding it. With that in mind, we decided to unpack a few of the most weaselly of the IRS's weasel words -- and look at how they may affect your yearly taxpaying ritual.


Income vs. Taxable Income

James RossOne of the most slippery tax phrases is income. Taken at face value, its definition seems obvious -- clearly, "income" is supposed to refer to the amount of money that a worker brings home in a year. But in the hands of the tax industry, even this clearest of words becomes cloudy. Recently, The New York Times highlighted this with its tale of the ridiculous tax rate paid by James Ross (right). The founder of an investment firm, Ross paid 102% of his 2010 income to the taxman.

The tale was tailor-made for tax critics: Ross -- a job-creator, a graduate of Yale and Columbia, and a one-man economic powerhouse -- was clearly being charged a cruel and unusual tax rate. How could the government possibly rob such an upstanding citizen like that? Where do we live, Sweden? By God, Ross had to withdraw money from his savings account to cover his taxes!

Of course, there was more to the story. Ross didn't actually pay 102% of his income, but rather 102% of his taxable income -- the money left over after he subtracted out his mortgage interest, state taxes, and all the other clever deductions and exemptions he was allowed to take from his total income. In fact, Ross actually paid only 20% of his real earnings in 2011 -- about 4 percentage points less than the average tax paid by someone at his level. Thanks to his impressive list of deductions and business-related expenses, he actually scored a nice tax cut, rather than the brutal burn that the Times story would at first seem to suggest.

Income should be an straightforward, clear term, but it's often muddied for political purposes. Total income -- the amount of money that one makes in a year -- can be hard to quantify, so pundits and politicians tend to focus on more easily-defined terms. For example, depending on a politician's leanings, he or she may consistently discuss earned income (all the taxable wages and tips that one gets from a job), adjusted gross income (earned income, minus personal exemptions), or taxable income (earned income, minus all exemptions and all deductions). Because wealthy people often have more deductions and exemptions than lower-level earners, changing which term you use can radically alter how you frame any tax debate -- not to mention the degree to which the rich seem to be unfairly targeted by the tax code.


Dividends: Qualified to Cause Trouble

By all rights, a dividend should be easy to understand: It's money that a company pays out to its stockholders, and for most of the modern era, it was generally taxed at the same rate as any other income. Beginning in 2003, however, special tax breaks for stockholders muddied the waters, turning a relatively simple idea into a complicated -- and controversial -- tax nightmare.

Tax terms

Nowadays, there are two basic classes of dividends -- "ordinary" and "qualified." Ordinary dividends, which come from stocks that have been held for a short period of time, are taxed at the same rate as ordinary income. "Qualified" dividends, on the other hand, come from stocks that have been held for longer periods, and are taxed at a much lower rate.

The differences between the rates are major. People who earn up to $33,950 per year pay a basic tax rate of 10% to 15%. But people who make that money from qualified tax dividends don't pay any tax on it at all. Meanwhile, those who earn more than $33,951 per year pay between 25% and 35% on their taxes, but those who get that money from qualified dividends pay only 15%. This, by the way, explains how tycoons like Mitt Romney and Warren Buffett reach overall tax rates of 15% or lower, while people who make $34,000 per year pay a base rate of 25%.

While the qualified dividend tax rate is attractive, it is also confusing: The IRS' rulebook states that qualified dividends must come from stocks that the owner has held "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date." But there's also qualified preferred stock, which must have been held "more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days."


Interest Gets Too Interesting

As if dividends weren't confusing enough, some things classed as "dividends" are actually misnamed -- and are taxed as regular income. For example, the "dividends" that you get from your credit union or savings and loan bank are actually classed as interest. This money counts as regular income, and is taxed as such.

(Of course, interest income isn't a huge problem these days. As long as the Federal Reserve keeps its interest rate at or near zero, most financial institutions aren't going pay much interest to their customers. This, incidentally, is part of why banks have been piling on fees and charges over the last few years. But that's another story.)

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Interest itself is another tax oddity. For example, in the current election cycle, something called "carried interest" has come under scrutiny. Essentially, it's a payment method used by many hedge funds and investment firms that pays fund managers and execs out of the proceeds of the funds they manage. By linking paychecks directly to investment income instead of salary, carried interest enables these high-earners to pay a 15% tax rate instead of the 35% that wage earners pay. President Obama's 2013 tax proposal suggests that Congress close the carried interest loophole.

But even regular interest can be confusing. The interest that one gets from a standard bank account, CD or money market account is taxed at the same rate as regular income, but interest from a savings bond doesn't count until the bond matures or until you redeem it. And, if you use your savings bond interest to pay for some of your college expenses, you may be able to avoid paying taxes on it.

If you own U.S. Treasury bills, notes or bonds, the interest that you get from them is subject to federal tax, but not to state tax. On the other hand, interest on bonds that are issued by states may be exempt from federal tax! For that matter, some of the interest you pay -- specifically the interest on your mortgage and your student loans -- may be deductible.


Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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]]>bondscarried interestCarriedInterestdeductionsDividendsFederal Reserve SystemincomeInterestinternal revenue serviceInternalRevenueServiceIRSJames RossJamesRossqualified dividendsQualifiedDividendsstockstax codetax the richtax tipstaxable incomeTaxableIncomeTaxCodeTaxTheRichTaxTipsThe New York TimesTwitterWarren BuffettBruce WatsonThu, 16 Feb 2012 11:50:00 ESTThe Economy Ahead: What to Expect in 2012http://www.dailyfinance.com/2011/12/28/the-economy-ahead-what-to-expect-in-2012/http://www.dailyfinance.com/2011/12/28/the-economy-ahead-what-to-expect-in-2012/http://www.dailyfinance.com/2011/12/28/the-economy-ahead-what-to-expect-in-2012/#commentsFiled under: , , , ,

What to expect in 2012With 2011 fast coming to a close, it's time to think about what's next -- if you dare.

The good news is, there's less talk among the experts of a double-dip recession. But there's also little sign that it's time to pop the champagne cork. The general expectation is for the economy to grow between 2% and 2.5% in 2012 -- not great, but better than no growth.

Some are even more pessimistic. In the recently released annual Bank of America Merrill Lynch 2012 CFO Outlook, 38% of financial executives at U.S. companies said they expected the U.S. economy to expand in 2012, down from 56% in last year's survey and 66% the year before. But only 7% predicted layoffs, and some 46% plan to hire -- the same percentage as planned to in 2011. And 36% said credit had gotten easier to access, compared to 28% last year.

So, there are positive signs, but uncertainly looms large. In the recent Country Financial Security Index, 30% of respondents said they believed 2012 would be better than 2011, 28% said it would be worse and 32% said about the same.

"Next year will be more about the middle and less about the extremes that we've suffered in 2011," says Mark Lamkin, CEO of Lamkin Wealth Management. Over the last four years, the markets had 2% declines about 100 times more than any other time in S&P history. It also recorded 2% daily gains more times that ever before. "Unprecedented was the norm in 2011. Next year will be a year of meeting in the middle."

Expect a modest, but sustained, recovery. The economy won't fire on all cylinders though, predicted Alan Levenson, chief economist for T. Rowe Price: There are too many "what ifs?"

Here's a look at some of the factors that will help determine the fate of 2012.

The Job Market

With unemployment still stuck near 9%, inquiring minds want to know whether 2012 will bring any real relief for job seekers? It may be too close to call. "Job growth picks up in the second half of 2012, but the unemployment rate is expected to be little changed in the fourth quarter of 2012 versus the fourth quarter of this year," said Levenson.

Eurozone Crisis

The European sovereign debt crisis won't be solved over night. Some experts are forecasting a mild recession on the Continent, but others go a step further. "Europe will enter a deeper recession with some of the PIIGS [Portugal, Ireland, Italy, Greece and Spain] defaulting and credit downgrades of some major European banks and governments," says Bill Garrett of Garrett Financial.

The European Central Bank is likely to do either a quantitative easing program, a TARP-style program, or a Eurobond deal if Germany approves, or perhaps a combination of these. "This will put Europe in recession, but avoid a run on banks and a Lehman style event," says Lamkin.

China Taps the Brakes

Slowing demand from China, combined with Beijing's ongoing money-tightening measures, is prompting concern that this vital engine of economic activity may lose momentum at an inopportune time for the rest of the world, said Scott Berg, portfolio manager of T. Rowe Price's Global Large-Cap Stock Fund.

Stock Market Oscillations

For the equities markets, there's just one word -- volatility. The elections, congressional gridlock, and the European debt crisis will be the chief stirrers of the uncertainty pot. "Look for more of the same," says Mickey Cargile, founder and managing partner of Cargile Investment Management. "Investors will need to be patient and have the courage not to bail out of the stock market. I've never seen a stock market that wants to go up as much as this."

Lamkin is optimistic: "With record earnings in the S&P 500 this year, earnings get even better and as confidence returns the P/E's expand for the market," he says. "This leads to a total return in stocks of 8% to 12% for 2012."

Bond Market Inversions

"Risky bonds [will] become 'safe' and 'safe' [will] become risky," predicts Lamkin. "Fixed income bonds face headwinds of higher rates before year's end, six months ahead of the Fed's schedule."

Municipal bonds won't have as good a year in 2012 as they did in 2011, but because of a favorable supply and demand outlook, they should post mid-single-digit gains, says Lamkin.

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The government and corporate bond yield gap will narrow, says Frank Fantozzi, CEO of Planned Financial Services. The performance gap between government and corporate bonds will reverse in 2012, with corporate bonds outperforming as they post modest single-digit gains as interest rates rise and credit spreads narrow. He says bond yields may be volatile within a 1.7% to 3% range, but he expects them to rise over the course of the year, with the yield on the 10-year Treasury ending the year around 3%.

Ongoing economic growth will help normalize interest rates, as will a continuation of Fed policy, stable inflation and tightening fiscal policy. The wide gaps between yield on government bonds and other bonds are likely to converge some in 2012, says Fantozzi.

Gold Keeps Going

2011 was a bull year for gold, with record prices topping $1,900. Will they keep rising in 2012? David Morgan, publisher of The Morgan Report, which focuses on money, metals and mining, believes precious metals will continue to rise because of the inability of the global financial system to do anything other than take the "easiest" way out of the Eurozone debt crisis: debasing the euro, rather than letting massive debt defaults occur.

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"I do expect a soft first quarter of 2012," says Morgan. "More consolidation through the summer and higher prices by year end. $60 silver by year end 2012 and gold over $2400. But it may take a year to get to those prices."

"If the euro problem does not get resolved in some meaningful way, gold could begin its move much earlier and faster," says Morgan.

Cargile, on the other hand, says there is no reason to buy gold. "Gold produces no income; it depends on someone buying it for more than you paid. It's a manipulated market, and volatile."

Politics As Usual

The U.S. credit rating downgrade was largely caused by political intransigence, and as we roll toward the November elections, it will get harder and harder for the opposing parties in Washington to find common ground. "Political gridlock will continue," says Cargile. "It's working for them, but it isn't for us."

But there's the possibility that as the election nears, Obama and the GOP nominee will leave behind the extremes and meet in the middle, which business likes, says Lamkin. "If voters vote accordingly, the most important budget decisions since World War II will be made with the right candidates with a bipartisan banner. After the election, I believe the market will have a strong fourth quarter based on this meeting in the middle and optimistic outlook."

Housing Begins Its Rebound

The first half of 2012 may be the last great opportunity to purchase a home at the lowest market prices we have seen in many years, and at the lowest interest rates we can remember, says Scott Cramer, endowment strategist and president of Cramer & Rauchegger.

From October 2010 to October 2011, the inventory of existing homes for sale dropped from 3.8 million homes to 3.3 million. That's still an excess of inventory, but we could see a major jump in home sales next year as banks realize that the homes they are holding on to will sell, giving them an incentive to release their inventory more quickly, he says. This could lead to the beginning of a slight increase in home prices by late 2012. The Fed also stated recently that it could ease off its commitment to leave interest rates unchanged until 2013, and could slightly increase rates before the end of 2012.

The Smart Moves for You in 2012

So what does all this mean to you? The experts weighed in on smart moves to make in light of the conventional wisdom about what to expect next year.

o. Seek dividends: One problem companies share with individuals is that their bank deposits aren't making them any money. So some of those earnings are getting paid out in dividends to shareholders. There are many solid, well-run companies with great balance sheets paying more than 4% on an annual basis.

o. Consider small and mid-cap U.S. stocks: These should provide attractive returns for investors in 2012, in part due to mergers and acquisitions activity powered by large corporate cash reserves.

o. Skip emerging markets ... or not: The jury's still out on emerging markets. Some experts say to avoid them, "Buy domestic, not emerging markets or Europe. Buy what you understand. U.S. corporations are strong," says Cargile. But other experts think they're returns will exceed those of developed markets. Long term, emerging markets offer intriguing growth prospects.

o. Get creative: You may have dismissed bonds because with a fixed income vehicle, the interest rate is locked in and principal will be negatively impacted by inflation. However, a step-up bond starts with one rate, then increases after a period of time. This gives the fixed income investor a degree of inflation protection, says Cary Guffey, a financial adviser with NBC Securities.

o. Keep up good habits: The recession tamed consumer spending, sparked saving and inspired us to pay down debt. Don't stop in 2012. Start or continue building your emergency fund until you have at least six months of living expenses stashed. Diversify. Stay cool when it comes to the stock market. The wild ride is far from over. Rethink any rash moves motivated by emotions.

Mostly, be ready for anything.



Gallery: 6 Big Financial Lessons of 2011

1. The Roller Coaster Ride Isn't Over.2. Don't Obsess Over Today's News.3. It's Not Just About the U.S.4. Politics Govern Your Pocketbook.5. Take Control of Your Finances.







Correction: A previous version of this story referred to Mickey Cargile's firm as WNB Private Client Service. In 2011, that company changed its name to Cargile Investment Management.

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]]>2012bondschinaDividendseconomyemerging marketsEmergingMarketsEuropeEurozone debt crisisEurozoneDebtCrisisFinanceinvestingpresidential electionPresidentialElectionreal estateRealEstatestock marketStockMarketT Rowe Price Group IncunemploymentSheryl Nance-NashWed, 28 Dec 2011 12:00:00 ESTHow to Profit From the Biggest Potential Crises of 2012http://www.dailyfinance.com/2011/12/12/how-to-profit-from-the-biggest-potential-crises-of-2012/http://www.dailyfinance.com/2011/12/12/how-to-profit-from-the-biggest-potential-crises-of-2012/http://www.dailyfinance.com/2011/12/12/how-to-profit-from-the-biggest-potential-crises-of-2012/#commentsFiled under: , ,

How to Profit From the Biggest Potential Crises of 2012By Lawrence Meyers, InvestorPlace Contributor

Depending on how you view things, we either are in heaps of trouble economically or about to emerge from a terrible recession. Personally, I think it's the former. I always like to have a few trades on my watch list to take advantage of possible crises, as uncertainty creates opportunity. So in looking ahead for 2012, I'm looking to exploit other people's woes like the good capitalist I am.

Here are three bets I'd be pretty comfortable researching in greater detail and possibly pull the trigger on:

Bill Gross, of the famed PIMCO funds, has been a bond guy all his life, and he went bearish on bonds earlier this year. Hell froze over. You can see this either as capitulation or an ominous warning. I am very wary of municipal bonds. Our own country's debt crisis has reached all the way down to municipalities.

When it was revealed that the bond insurers did not have nearly the capital necessary to make payouts on defaulted collateralized debt obligations during the mortgage crisis, I lost all faith in bond insurers. To me, there is an equivalent risk and higher reward with preferred stocks. By purchasing a basket in an ETF such as iShares S&P Preferred Stock Index Fund (NYSE:PFF), you give yourself a 7% yield with minimal volatility. Get out if interest rates rise significantly, though.

Underfollowed and under-read fund manager Robert Rodriguez is a genius. He thinks we're headed for more recession next year, and Congress has been inept in its handling of fiscal policy. I agree. He hates bonds right now, except for very short-duration bonds, and so do I. Prices are near a double-top. I think bond prices will get hit next year, so I might short the iShares Barclays 20+ Treasury Bond Fund (NYSE:TLT).

Going hand-in-hand with our economic crisis has been the decline of the dollar. That trend will continue. That means you can short the dollar via PowerShares DB US Dollar Index Bearish (NYSE:UDN).

The real question at hand is this: Why the heck is the market doing so well in the face of really bad economic times? If you read my recent series on the Dow Jones Industrial Average, you know about several Dow stocks that would make for good long-term additions to a portfolio. That is the key to understanding investment in the market going forward - careful individual stock picking. Go with large-caps in general, and only go with small-caps that are directly benefiting from the situation. As for other systemic shocks that might or might not happen, have your trigger finger ready for these possibilities.

I expect some trigger event to knock the market down 20%. Perhaps it will come from Europe. Or, if Obamacare is upheld by the Supreme Court, expect the market to correct significantly. It will be a sign that overreaching regulation and legislation is acceptable to the High Court, and that's bad for business. However, if it is overturned, then go long Health Care SPDR (NYSE:XLV). Likewise, should Obama be re-elected, the market will react badly. So look at ProShares Short S&P 500 (NYSE:SH). If Obama is kicked out and the GOP takes over Congress, I expect a market surge, so you could go long the market with SPDR S&P 500 ETF (NYSE:SPY).

Stay far away from financials. There might be another big shock coming to the system. I am wary of Bank of America's (NYSE:BAC) stability, and certain sources tell me that the bad behavior of bond insurers, reinsurers and investment banks hasn't changed a bit. If you want to make an aggressive bet on this arena, double-short financials via ProShares UltraShort Financials (NYSE:SKF).

Finally, if you really want to bet against improvement in the global economic situation, believe Obama will be re-elected, that Europe will crater, that commodity prices will once again skyrocket, and that the dollar will crash, then you can short the market big-time via ProShares UltraPro Short S&P 500 Index Fund (NASDAQ:SPXU) and ProShares UltraPro Short Nasdaq 100 ETF (NASDAQ:SQQQ). These babies give you 3x leverage on your short bet.

Of course, all of these are highly speculative plays based on highly speculative crises of 2012. As always, do your own research and, for Heaven's sake, use stop-losses.

Lawrence Meyers does not hold a position in any securities mentioned but may have a position in several stocks the ETFs own. Check out InvestorPlace.com's other looks back at 2011 and ahead to 2012 here.

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]]>Bank of America CorpBill GrossbondsDow Jones Industrial AverageFinancefunds to buyFundsToBuyindex fundsIndexFundsPimcoProShares Short S&P 500stocks to buyStocksToBuySupreme CourtUnited States Dollar (b) vs Euro SpotInvestorPlaceMon, 12 Dec 2011 15:35:00 EST