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Thursday, 31 January 2008

Truth or dare for your financial adviser

Put your prospective planner's frankness to the test with these four tough questions.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Conventional wisdom says you should pick a financial adviser you connect with, and one who has good references and no problems with regulators. Sure, that's a good way to start, but it won't tell you if he or she is likely to chase market trends or put a desire for fees ahead of your best interests. The questions below will give you insight into any planner's style and candor.

1. What was your largest mistake over the past 10 years?

Be wary of self-serving or trivial examples, such as "I'm too dedicated to my clients." I'd rather hear my adviser say that she used to underweight international stocks or even tried to time the market and failed. The key is that she's willing to admit to real errors and can tell you what she learned from them. After all, nobody's perfect. If Warren Buffett can own up to past mistakes, so can your adviser.

2. Do your financial incentives always line up with my best interests?

Knowing what you'll pay for a planner's services isn't enough. All payment models - yes, even hourly fees - create inherent conflicts between advisers and clients, and your adviser should be up front about that too. For example, a planner who charges based on a percentage of assets should let you know that he has an economic incentive to capture all of the money you have to invest.

3. How have your clients' portfolios performed over the past 10 years?

Your adviser will likely tell you she outperformed the market, and she may even be willing to provide performance data as proof. But that only tells you she's trying to time the markets, which will add to your fees and lower returns over the long haul. A much better answer: Your adviser's explanation of how she provided focus and discipline to allow clients to earn market returns.

4. If I wanted to buy a couple of broad index funds or ETFs, which would you recommend?

This is a particularly important question, as it will give you a glimpse into the adviser's priorities and show where your interests fit in. An expensive index fund has no chance of outperforming the lower-cost equivalent index fund. So if he suggests an S&P 500 or total index fund that has an expense ratio of 0.5% or more, you know your interests aren't coming first.

Bear market: Don't get spooked

Human beings tend to get emotional in a down market. But those that can endure the pain, will reap the benefits.

By The Mole, Money Magazine's undercover financial planner

NEW YORK (Money) -- Question: I'm seeing my account values take a daily dive and I've lost all of my gains from the past year, and then some. I'm hearing recession predictions and I'm wondering if I should cut my losses and get out of the market now. Do you think this is the beginning of a bear market?

The Mole's Answer: Don't panic! The bad news is I have absolutely no idea what the market will do in the short-term, nor does anyone else. The good news is that I'm 100 percent confident that:

  • The market is a great long-term investment.
  • The ups and downs of the market impact our financial futures a whole lot less than our reactions to it.

Unfortunately, we seem unalterably programmed to buy high and sell low. And even though history shows us time and again the error of this, we keep doing the same thing and expecting a different result.

The market is now down about 10 percent for the year and more than 15 percent from its high in October of last year. Sensationalistic headlines read something like "worst start ever for the stock market," and "as January goes, so goes the year." Such anxiety-inducing hype makes it virtually impossible for us to ignore the doom and gloom and just stay the course, but that's exactly what you should do.

Behaving badly

The current crisis du jour in the market, like almost all of them, has its roots in how we invest. It was incredibly easy three months ago to say that we have a high tolerance for risk. We had just seen our U.S. stock portfolio nearly double and our international stock portfolio nearly triple. With such a whopping gain, one would think we would surely be able to handle a small 15 percent pullback, right?

The truth is that most of us are fair weather investors. Our tendency to be risk tolerant in good times, and risk averse in bad times, causes us to feel a bit bullet-proof. The result is getting into stocks when the market is up, and doing the traditional "panic and sell" when it turns downward.

It may be hard for many of us to remember back to October of 2002 when stocks bottomed out, having fallen by nearly half since 2000. To jog your memory, go back to an article written by Jason Zweig, at the bottom of the bear market: Are you wired for wealth? Jason gave us a glimpse into our minds and explained why most of us were panicking and selling at the exact wrong time.

How to be an investor

It's easy to consider yourself an investor in good times, but it's the down markets that separate the real investors from the speculators. An investor understands that, after five straight up years in the market, a pullback is just part of the game. It's okay to feel the pain as long as you don't let it drive you to panic. As much as I hate to admit it, I look at my own portfolio daily for some reason I'll never be able to explain. I feel your pain, but I know my instinct to sell is dead wrong.

An investor needs to understand and have faith in the fact that capitalism works. Not to mention the fact that in the history of the U.S. stock market, it has only lost value a couple of times over a ten year period. Because rebalancing is a critical part of one's investing, now is the time to reallocate more toward equities, as long as one had a proper asset allocation strategy in the first place. After all, it's better to buy things on sale, isn't it?

My Advice: If you can't sleep at night wondering how much more stocks will fall, then the stock market was never right for you in the first place. Moving in and out of the market is likely to give you a low return.

On the other hand, if you can accept that bear markets are a necessary part of stock market investing, then look at this as a buying opportunity. If the market goes down further, it's an even better buying opportunity.

In the words of Warren Buffett, "Be fearful when others are greedy and greedy when others are fearful." That may be easier said than done, but it's good advice.

Rocky market, smart strategies

Indexing and dollar-cost averaging are always sound approaches to long-term investing, but right now they're especially timely.

By Michael Sivy, Money Magazine editor at large

NEW YORK (Money) -- Volatility. That's the one thing that seems predictable in today's stock market. Share prices are swinging up and down more violently than they have anytime in the past five years. And that seems likely to continue.

Most bear markets are the result of economic recessions. As investors begin to anticipate weaker corporate profits, they pay less for stocks. Once it looks as though the downturn is almost over, however, investors become more enthusiastic and stock prices typically rebound. This whole process can take up to a year.

The current bear market, however, is the product of an unexpected economic shock - gigantic losses at banks because of irresponsible subprime loans. That's an important distinction because it makes market moves more sudden and unpredictable.

We still don't know how big all the loan losses will be or how long they will go on. We don't know what the Federal Reserve will do at its meeting this week or later this year. We don't know what the next round of economic growth figures will bring, or the trend in unemployment.

So you should be prepared for high volatility for an indefinite period of time.

What does this mean for your investing strategy? Professionals who have to try to beat the market on a quarterly basis face daunting challenges. But investors with a time horizon of a decade or longer just need to make sure that they are not diverted from a sensible investing plan.

Dollar-cost averaging should be the cornerstone of any such plan, especially now. It is the practice of investing money at regular intervals and it has two advantages.

First, you limit the risk of putting all your money in when the market is at a high. And the more volatile the market is, the more important it is to spread out your contributions, so that some go in when stocks are cheap.

The second advantage is that contributions of a fixed size will buy more shares when prices are down and fewer when prices are up. The greater the price swings, the lower your average buy price.

Investors normally use dollar-cost averaging with index funds, because that's an easy way to contribute small amounts of money at frequent intervals - every month, for instance - and get broad diversification.

The other advantage of index funds is that they typically have very low annual management fees, especially if you pick an index fund at a large company such as Fidelity or Vanguard.

Writing in a financial journal in December, Princeton economics professor Burton Malkiel cited two mistakes that investors often make. One is to overestimate their ability to predict the future. The other is to overestimate how much they can control outcomes.

In fact, it's wiser to stick with a plan that pays off whatever the future holds. Moreover, there is one thing you really can control, which is the level of your annual expenses. So choosing a very low-cost index fund is one of the few things you can do that will surely improve your long-term results.

The most common index funds, which are also likely to have the lowest fees, are those that try to track the S&P 500. These funds hold primarily blue chips and are very broadly diversified among different industries.

S&P 500 index funds are also particularly timely now because the index tilts toward growth investments. And blue-chip growth stocks are undervalued by up to 20 percent, while value stocks are fairly priced. That means that the most convenient index is also focused on the most attractive part of the market.

So don't allow current economic turmoil to throw you off balance. If you have an orderly plan for building your retirement savings, stay on track.

And if you're younger and you haven't begun investing yet, this is a great time to get started. Open an account for an S&P 500 index fund and start contributing regularly every month or every quarter. You'll be helping to develop an important savings habit.

One thing you do know is that the market is depressed right now. And whether it turns up soon or goes a little lower, if you begin dollar-cost averaging now, you'll be getting in on the ground floor.

Saturday, 26 January 2008

Get Rich Quick or Lose Money Quick?

by Henry Hebeler

Recently I got one of those invitations to attend a get-rich-quick seminar. Included were two free tickets valued at over $100 each. The seminar promised to provide life-altering financial strategies. It had been a while since I attended one of these seminars, so I decided to go.

The meeting was held in a lavish setting: an expensive hotel ballroom lit with fancy chandeliers. The room was equipped with a PowerPoint display on a huge screen. Attendees began to fill the room, directed by lots of assistants who gave out colorful brochures. Precisely on time, the speaker walked up to the podium and took command. I'll call him Slick (not his real name, of course, but it fits).

Slick described himself as a self-made, very wealthy man who made a lot of money in a company buyout, real estate and then the stock market. He had retired very young, got tired of living the easy life and then decided to help others learn how to be successful investors. He was an excellent pitch man who sought audience participation, some of which I suspect came straight from shills planted in the audience.

Get rich now

The prospect of getting rich effortlessly has great allure, but the promoters are the ones making the easy money.

Resist the temptation to be a sucker

1. Make a killing in real estate
2. Make a mint in the stock market
3. Make for the exit -- fast

Make a killing in real estate
Slick devoted about an hour to the topic of how to make money from properties on the brink of foreclosure. He described situations where widows and less fortunate people got behind in their mortgage or tax payments and were therefore ready to settle for pennies on the dollar days before the scheduled date of a foreclosure auction.

Although all of these "opportunities" are a matter of public record, the government is slow to produce the data. Slick said that by working with his firm, you could get more timely information plus professional help when the time came to go to the door of the desperate seller. A legitimate real estate agent would accompany you and do all the talking. You would stand at the agent's side as the prospective buyer.

As Slick pointed out, this is a benefit to all parties: The seller gets a clear record without a bankruptcy, the mortgage holder gets a good fraction of the debt back, the real estate agent gets a commission and you get a valuable piece of property that you can turn over for a nice profit.

So far, Slick divulged nothing new. He admitted that others promoted the same techniques as proffered in many books and seminars, but his firm offered expert advice, training, a Web site with materials that made rapid response possible and use of professional real estate firms that would help close the deals.
Getting money for investments would be no problem. Slick said we could borrow money from our 401(k) plans and later pay it back with interest that would increase the savings value. He didn't mention that many plans don't allow you to make additional contributions until your loan is repaid, which would cause you to miss out on your employer's matching contributions. Nor did he detail the very stringent rules on 401(k) loans or the fact that the money you borrowed would be taxed twice: once on the after-tax money to repay the loan and then again when you withdraw it at retirement.

Slick then suggested an alternative financing method -- that investors could get adjustable-rate mortgages, or ARMs, and enjoy low rates with little risk since these properties would only be held for the short term. But you'd have to have lived in a cave for the past year to be oblivious to the pitfalls of ARMs. They are partly to blame for the meltdown in real estate and involve a high level of risk, as many homeowners can attest, especially in a real estate market that has virtually ground to a halt.

Undaunted by current market conditions, Slick promised that the real estate payoffs would be huge. Some offered a guaranteed 25 percent return, he exclaimed. Some even averaged a 50 percent return. He showed that a few thousand dollars would compound to millions over 15 years.

I don't doubt his math and I'm sure opportunities exist like those he described. There are a few people who have amassed fortunes in real estate. But is this easy, are the opportunities for great gains plentiful and can this be done with little or no risk? No.

Make a mint in the stock market
Then Slick turned to the subject of the stock market. That 50 percent return on real estate paled in comparison to what you could make in the stock market if you could take advantage of technical analysis, puts, calls and options.

"Volatility is simply opportunity," Slick told the audience. "It's not risk."

He went on to say that we had a great advantage over professional traders because we can trade faster. (This was news to me.) The best strategy, Slick said, was to buy and sell, not hold. He gave an example of a series of buy and sell tactics, combined with charting, that he had used with a stock. He made well over 50 percent in just six months, he said.

Near the end Slick repeated that he was doing this only to help other people learn how to get rich. This free lecture would be followed by an opportunity to attend any of a number of follow-up courses -- each of which cost thousands of dollars. These courses cover a number of aspects of real estate investments and such things as foreign trade and options trading.

To Slick's credit, he did not apply a lot of pressure on everyone to sign up for the courses. He knew he had planted seeds of 25 percent-plus returns, and that these would germinate in the minds of many of the attendees in the audience.

Make for the exit -- fast
Some time ago, in spite of my admonitions, some of my friends attended expensive courses put on by a promoter of similar concepts. They too heard the same pitches about real estate and stock trading. They were taken by the opportunity to make lots of money with little work. They paid thousands of dollars for courses, CDs, Web site use and books. The promoter made millions from his courses and publications, but lost money on his firm's own investments. He is now facing jail time for tax evasion, and his clients and employees are now sadder but very much wiser.

The shame of this is that these get-rich-quick seminars likely attract more clients than seminars given by legitimate, hard-working financial planners who charge low fees and recommend low-cost portfolios consistent with their clients' goals and risk tolerance levels. Sure, some advisers hawk insurance products and investments that help them profit more than their clients. But their greed pales in comparison to that of firms promoting schemes that offer guaranteed extraordinary returns at little or no risk.

The get-rich-quick hucksters can probably find actual investors who can testify about their huge gains at these seminars. But the odds of the average person consistently achieving extraordinary results are low. It's true that lots of money can be made in real estate deals, but lots of money can be lost, too. I have friends on both sides of that fence, and my own real estate results have been very mixed.

As far as stock market trading goes, if such accomplishments were common and consistent among the average investor, then certainly mutual fund managers would be able to easily beat their benchmarks and hedge funds would never get in trouble. But this is not the case. Far more mutual funds lag the indexes than beat them. Hedge funds have their problems, too. Consider the collapse of Long-Term Capital Management, spearheaded by some of the brightest people in the finance business. And plenty of hedge funds recently found themselves on the wrong side of the housing bubble bet.

Unlike much of the audience, I walked out without signing up for the next level of instruction. An old joke popped into my head that asks, "How do you make a million dollars?" The answer: "You start with 2 million."

Copyrighted, All rights reserved.

Friday, 25 January 2008

Avoiding Panic Helps Long-Term Investors

by Tim Paradis

Investor Urgency Builds As Market Swoons but Answer Is the Same: Don't Panic

Don't panic.

That advice could probably serve as a stand-in for "hello" at many brokerages these days. With Wall Street stumbling -- particularly since the beginning of the year -- uneasy investors are calling on financial advisers with an urgency not seen since the start of the decade.

Like last time, when the economy was reeling from the flameout of technology stocks and the Sept. 11 terrorist attacks, long-term investors who can resist giving in and selling out will likely emerge the strongest.

But as before, the latest stock market pullback has unnerved individual investors, many of whom are ferrying money from equities into bonds and cash. In the week ended Jan. 15, when many analysts were predicting an imminent cut in interest rates, assets in money market funds ballooned by $15.96 billion to a high of $3.17 trillion, according to iMoneyNet.

And investors pulled an estimated $18.2 billion from mutual funds last week, according to TrimTabs Investment Research. So far this year, investors have shifted about $41.4 billion out of these investments.

While those who removed money out of the market after the dismal numbers seen in recent weeks might be happy, they could be left smarting if they try to time the market but miss a rebound.

"If you have a three- to five-year time horizon and longer I would say there is very little you should really do," said Dave Stepherson, senior portfolio managers at Hardesty Capital Management in Baltimore. "These knee-jerk sell decisions are extremely unhealthy at these points. In fact, you should be doing the opposite," he said.

He said he tells nervous clients to pay attention to the markets, but so that they can detect opportunities in solid investments that have sold off, not to simply react to daily ups and downs.

The Dow Jones industrial average is down nearly 10 percent just this year, and well off its October highs. The same is true for the broader Standard & Poor's 500 index -- the benchmark that many mutual funds track and are measured against. The S&P has lost more than 10 percent for the year and the technology-heavy Nasdaq composite index has fallen more than 13 percent since 2008 began.

Investors -- faced with wrenching pullbacks in the value of investments like 401(k) plans -- have watched with alarm.

Ken Jackson, 68, of Hillside, N.J., rolled his eyes at the thought of receiving his next financial statement, which is due any day now. As a mortgage consultant, he watches the stock market closely, but said he doesn't let its peaks and valleys dictate his personal spending or handling of his investments.

"I'm pretty much a steady spender. I don't worry too much about what's going on in the market," referring to his day-to-day spending.

Jackson said he remains confident enough in a market correction that he'd reprise a bet he made with a friend about 5 years ago, when the Dow sank below 9,000 points. He wagered a helping of chocolate ice cream that the index would bounce back above 10,000 points within months.

"I won," he said.

Plenty of others remained nervous. By midday Tuesday, E-Trade Financial Corp. said it saw a 25 percent spike in volume at its U.S. call centers over what the online brokerage would have normally expected. More investors were logged into its U.S. Web site examining their accounts Tuesday than at any point in the five years it has kept tabs.

Even market titans famous for their investing acumen find it difficult to correctly time the market, observers note. Billionaire investor Warren Buffett owes his success not to predicting Wall Street's tides but to sticking with long-term investment prospects.

"We buy things are cheap and we sell things that are dear," Stepherson said. "We are advising our clients that this is what they should be doing -- not necessarily jumping into the deep end of the swimming pool but wading in."

"How much opportunity cost is there if you try to time it and you're wrong? The opportunity cost far outweighs the possibility of getting it right," he said.

Michael Barron, chief executive of Knott Capital in Exton, Pa., said he sidestepped the worst of the stock market's recent convulsions by avoiding investments in hard-hit sectors like finance. But he said even investors who find themselves holding unpopular investments can re-examine the risks to their investments and then methodically shift into a more balanced long-term strategy.

He still looks askew at some of the stocks that have been beaten down and that some on Wall Street are saying could be ripe for bargain-seekers.

"It's not time to bottom fish in financials," Barron said. "I would look at my overall portfolio: Is my portfolio positioned correctly? Which sectors have the best risk-reward relationships? Given the large amounts of uncertainty and volatility in the marketplace they are usually more defensive sectors like consumer staples and health care."

Some investors have concerns but aren't blinking yet.

Connie Rink, 64, said she put her faith in her stockbroker when she received her last financial statement, a dreary account of her investments in stocks and real estate.

"If it gets scary, she'll call me," Rink said. "I'm expecting a call anytime."

Rink, a widow, put her house in Jacksonville, Fla., on the market more than a year ago and has yet to find a buyer. She's also trying to figure out how she'll live on one-third less income when she retires in a few years from her job as an activities director at a middle school for the arts.

For now, though, Rink said previous financial planning and a willingness to ride out the tough times has afforded her extravagances such as a trip to New York City with her family.

"I've gone through recessions before," she said, watching her grandchildren glide past at the ice skating rink at Rockefeller Center. "This just doesn't feel like a real, full-blown recession to me."

AP Business Writer Jackie Farwell contributed to this report.

Copyrighted, The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten, or redistributed without the prior written authority of The Associated Press.

Thursday, 24 January 2008

The Market Braces for the Boomers

by Alan Murray

Will the baby boomers' retirement cause the stock market to go bust?

That question, studied and debated for more than a decade, is no longer hypothetical. Kathleen Casey-Kirschling, the former New Jersey teacher who was born one second after midnight on January 1, 1946, became eligible for Social Security benefits this New Year's day, making her the first splash of a demographic tsunami. Over the next three decades, nearly 80 million boomers will join her.

To some prognosticators, the prospect of this swollen generation stepping down is a fright -- many times worse than the stock market's tumble last week. If the baby boomers stop working, they ask, who will produce the goods and services to keep the economy growing? If they stop earning, who will pay taxes to fund their Social Security and Medicare checks? And if they sell off stocks and bonds to finance their golden years, who will buy?

The answers to those questions remain covered in fog. Only this is absolutely clear: The generation that was first raised by Dr. Spock, first mesmerized by television and first serenaded by the Beatles is about to redefine retirement, just as it has every other stage of American life.

Threat to Stocks

At the core of concerns about the baby boomers' retirement is something economists call the "life-cycle hypothesis" of economic behavior: Most people tend to save little when young, build up savings during middle age, and then spend those savings in retirement.

That leads some savvy analysts to fret that the boomers' retirement will be marked by widespread selling of stocks and bonds. Jeremy Siegel, a professor at the University of Pennsylvania's Wharton School, has said his computer model shows that, absent help from overseas investors -- buying he does expect to cushion the blow -- the boomers' retirement could cause stock prices to fall 40% to 50%.

"We have never witnessed anything like this," Dr. Siegel says of the huge exodus from the work force and its potential market effects.

But don't short the stock market just yet. There are reasons to think the future won't be so dire.

To begin with, a boomer-driven sell-off is unlikely to begin in the next decade or so. Many boomers are just reaching their peak earning years, and, for a while at least, their increased savings will offset any securities sales by others like Ms. Casey-Kirschling who opt for early retirement.

Moreover, while the baby boomers' rapid ramping up of savings helped fuel the soaring stock market of the '80s and '90s, the data suggests the "dissaving" after retirement happens much more slowly -- less a hill than a gently sloping plateau.

Assist From Abroad

Then there's the fact that the U.S. is, increasingly, an integrated part of a global economy. Even if boomers want to sell, Dr. Siegel argues, there will be plenty of younger and newly wealthy people in China, India and other emergent countries who will be ready to buy all the securities that the boomers want to dump.

"We can sell our assets to the rest of the world," Dr. Siegel says, "and they can ship us their goods." To some extent, of course, that's already happening.

Complicating the picture is the problem of how to pay for the government benefits that boomers are entitled to in retirement. The Congressional Budget Office projects that Social Security spending, absent changes, will grow from about 4% to 6% of the U.S. economy in the next 25 years, while Medicare and Medicaid will grow from 4% to 8%. By 2050, programs for the elderly are likely to eat up as big a share of the economy as the entire government does today -- forcing working Americans to face a possible 50% increase in their taxes.

David Walker, the U.S. comptroller general, thinks failure to come to grips with that fundamental fiscal problem could hold the seeds of the U.S.'s demise. "The Roman Republic fell for many reasons," he has said, "but three reasons are worth remembering: declining moral and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government."

Still, while demography may be destiny, that destiny is not unalterable. There are several economic developments that could lessen the burden of the boomers' sunset years.

One is more rapid growth in productivity. Once the boomers retire, the U.S. will have only two workers for every one person in retirement -- compared with four today. But if those workers are more productive than their predecessors -- perhaps because of better technology -- they can earn enough to finance the boomers' retirement and maintain the nation's wealth. The prospects for technology and productivity rescuing the day, however, have dimmed in the past year, as the government's measures of productivity growth have slowed.

Importing Workers

Another possibility is immigration. The U.S. can allow in more, younger workers from overseas. While that may be economically attractive, however, it's politically deadly -- as candidates are learning in this year's presidential campaign.

Finally, there is the possibility that baby boomers learn that work doesn't end at 62 or 65 or 66, but rather at 70, 75 or even 80. When Social Security was created, the average American had no reason to expect to live to the age of 65. Today, thanks to improvements in health care, he or she has every reason to expect to live to 75 or 80 or beyond. If so, shouldn't we remain productive members of the work force for longer?

If the answer to that question is yes, it would go a long way toward ensuring that grim economic and market forecasts for the baby boomers' final years never come to pass.

Five Rules For Investing In Equities

A lot of investors go about their investments in an illogical way. They are given a tip from their broker on basis of some rumor or news. They impulsively buy the scrip and afterwards wonder why they bought the stock.

Such Behavior is foolish and must be avoided. The moment you receive a tip on a stock, confirm the news on Reuters or other business websites. The news, if any, will be on these sites; be it dividend payoffs, announcements, earnings, corporate move to buy another company, fight of top management or any other news.

Broadly one should abide by following guidelines:-

1. Business of Company

Buy stocks of only those businesses that you understand. Once you have bought a stock, keep watch on quarterly results of that company and also keep watch on the general trend in the sector of that stock.

2. Study the past performance

All companies present particulars of their fiscal operation in their yearly reports. Study their past performance and then invest.

3. Know the promoters

The Management team and promoters of a company are key people who bring growth to a business. Invest in companies that have good promoters, experienced management, and where promoters hold more than 40% of the shares.

4. Future outlook of the company

Although a company could have done well in the past, it is not necessary that it will carry on performing well in the time to come. Keep a close watch on sector trend and market trend. You can know this by reading views of financial experts.

5. Stock price

The share price of each company fluctuates continuously on the stock markets with investors buying and selling the shares. The cost at which a person is conformable to buy or sell a share of a company is the perceived value of the share of the company taking into consideration the company's present business and future business growth. Besides this, investor sentiment plays a large role in pricing of stocks. It is important that prior to buying a stock, you evaluate whether the price of that share at which it is available for purchase, is adequately valued i.e. it is not over-priced. Similarly, when you sell, you need to be sure that you are not selling dirt cheap. To help you evaluate this, you may apply a popular ratio called the Price/Earning ratio (P/E ratio). The P/E ratio is based on the following formula:

P/E ratio = Market price of the share/Earning per share (EPS)*

*EPS = Profit After Tax (PAT)/ Total number of shares issued by the company

{"/" means divided by}

You can find information on the EPS, PAT and total number of shares issued by the company from its annual report. Once you have bought a stock after doing sufficient research, then you must not sell the stock in hurry if it falls by 5-10%.

Wednesday, 23 January 2008

Top tips: Spotting opportunity in a down market

By Gerri Willis, CNN

We've been hearing how bad the economy is and how a recession is looming. But before you start hiding your money in your mattress, remember there are opportunities in a down market.

1. Silver Lining for Homebuyers

While it's true housing values have come down - dramatically in many places. And likely home prices are heading lower. So, if you're in the market to buy, now is the time to start the process. Start to look at markets you're interested and gauge your local real estate market.

The other good news is for first time home buyers looking for a traditional mortgage. Both the 30- and 15-year fixed-rate mortgages are at their lowest levels since July 2005, according to Freddie Mac.

Even if you're not buying a home, there's good news. Rent prices aren't really moving up much at all. According to data from and, the median rent check barely moved at all. In some cities like Washington, Phoenix and Miami, rents actually fell dramatically.

2. Know your history

We know how scary it can be if you have a 401(k) or you're holding mutual funds and you've been watching the market tank. But don't try to time the market. It's a losing bet. History shows that stocks pick up during a recession. Bottom line: The stock market is a forward-looking indicator. If you're a long-term investor, you will be able to ride out the bumps.

3. Get the most for your money

Generally when the Fed is in a rate cutting mode - as it seems to be recently - interest rates on CDs go down. But that's not happening. The subprime issue is getting in the way of typical pricing.

But you could benefit. Short term CD interest rates, and we're talking 3- or 6-month CDs, are yielding the same or even higher interest rates than 1-year or even 5-year CDs. That's because banks are trying to raise some money through the CD market.

If you don't want to keep you money tied up for a few months, you can also consider high-yield money market accounts. Some Internet banks are offering rates close to 5 percent. If you want to check out some of the highest CDs and money market rates, go to

4. Stock sale

Stocks are cheap right now. And the easiest way to get into the market is through index funds or exchange traded funds - or ETFs. Check out Vanguard or Fidelity for low-cost options.

Some people are very excited about the Magellan Fund reopening to investors. This was a members-only mutual fund for a decade. This fund is up almost 19 percent in 2007 and that beats out the S&P 500 by 13 percent.

But that said, you should really do your homework before investing in any fund. Talk to your financial advisor and also check out

Recession or Not, Investors Have Choices

By Tim Paradis, AP Business Writer

While Wall Street Debates Likelihood of Recession, Investors Shouldn't Wait to Place Bets NEW YORK (AP) -- While Wall Street debates whether the U.S. is headed for recession, investors don't have to wait for an answer -- they can take steps to limit their risks beyond simply defensive moves like rushing into bonds or converting investments to cash.

A slowing economy requires investors to become more selective and take a long-term view while also looking for stocks and other investments that might fare better in a sputtering economy.

Companies involved in agriculture, fertilizer and commodities are poised to do well because of increasing demand from fast-growing economies including China and India, said Todd Salamone, vice president of research at Schaeffer's Investment Research in Cincinnati.

"Despite all the talk about recession, despite all the slow growth -- these are the sectors that have bucked the trend," he said.

Salamone noted that while these stocks already have had a good run, they're still worth betting on because they're less likely to suffer under the vagaries of the U.S. economy than, say, the retail, housing and airline sectors.

Although Salamone sees the wisdom in buying when a sector has been beaten down and making contrarian moves to scoop up bargains, he believes that investors should remain cautious about the financial sector. Financial services companies from investment banks to mortgage writers have been hard hit by souring mortgage loans and have seen their stock prices fall sharply.

"Over the next three to 12 months, anyway, we'd say it might be too early," he said of financial stocks. "Five to 10 years out they might be great plays but over the next year or so we just think it's too early. There's too much uncertainty, there's too much bottom-fishing in that area."

Hard as it might be, setting aside emotion and looking toward long-term goals can help investors focus on sectors that show solid growth prospects.

Gordon Ceresino, vice chairman of Federated Investors' MDT Advisers, contends that employing an investment strategy that extends over at least seven years can help investors look past the day-to-day swells and swoons of the stock market and help them resist the temptation to sell their holdings when Wall Street gets rocky.

"They get too caught in the emotion and they will tend to zig when they should have zagged," said Ceresino, referring to professionals and everyday investors alike.

"I'm not going to make a move because someone scared me this morning and said 'The world is coming to an end,'" said Ceresino. "You need to stay with your fundamentals and not get emotional."

Investors who just can't get past their nervousness about the market can still move into areas of safety like government-backed bonds. Market-watchers urge investors to be mindful, however, of the hazards of reacting too quickly -- someone who pulls too much money out of stocks may miss out on the start of a Wall Street rally. Indeed, investors are still debating whether the economy is already in a recession or only a mild slowdown.

Ceresino said that trying to pick when to exit and re-enter the market is a daunting challenge for any investor, even a professional.

"The person that thinks they can lock in their current portfolio returns by going to cash and then time themselves back in -- what you end up doing is you end up destroying your ability to meet your long-term goal."

Tuesday, 22 January 2008

Rethinking the Recession

by Ben Stein

Are we in a recession? No one knows. Indeed, it's literally impossible to know.

A recession is six consecutive months of negative economic growth. At most, December 2007 would be our first month, so we wouldn't know until sometime in June 2008 if, by the end of May 2008, we'd been in a decline for six straight months. So no matter what anyone tells you, we can't know if we're in a recession yet.

Mea Culpa

The December retail sales figures were poor. Obviously, housing is weak. Autos look to be softening (good time to buy a Cadillac). Even most commodities are off their peak.

More important than any of these to us economists, however, are two factors. First, because of repeatedly being stung by losses in real estate lending, lenders are reluctant to lend, which is causing a slowdown in economic activity. Second, money supply growth has been sluggish for the last several months. This is often a signal of a weakening economy.

I want to be honest here (and everywhere): This slowdown is happening faster and harder than I thought it would. I was too optimistic. My optimism was based on a belief that the Federal Reserve would act more aggressively than it has in fighting the slowdown. It didn't, and we're paying the price.

Let's hope that Ben Bernanke, the chair of the Federal Reserve Board, has learned his lesson. Hopefully, he'll now plunge in with both feet to get a lot of liquidity into the system, and reassure lenders that he'll backstop them and not let them fail. He's now perceived as weak, and he'll have to act aggressively to get the ball rolling again. But he can do it.

Retro Recessions

For now, however, assume that he's doing too little too late, and that we'll have a recession. Here, then, are a few salient facts about postwar recessions, which I've discussed before.

There have been 10 recessions in the last 63 years. The average length of these downturns has been about 10 months. The average decline in economic activity from peak to trough was about 2.5 percent. No decline has been worse than about 3.7 percent.

In the past 25 years, there have only been 2 recessions, which is an extremely good record. The two recessions -- in the early 1990s and the 2000-2001 correction -- have been extremely brief. The really severe recessions of the postwar era have been engineered by the Fed to fight inflation -- in the early 1970s and early '80s.

When the Fed is fighting to promote expansion and not to rein it in, recessions tend to be brief. Real consumption doesn't fall for more than a few months in such cycles. It would be almost unheard of for there to be a year-on-year fall in retail sales from 2007-2008 if the Fed is actively liquefying the economy.

Unemployment always rises in recessions. The degree of the rise is usually modest, generally only about 2 percentage points, although some -- like the one engineered by the Fed in the early Reagan years -- have gone as high as 4 points. The average length of involuntary unemployment during recessions is about six weeks.

Slacker Overboard

There is some good news in here.

Even in a recession, more than 90 percent of workers who want to work will be employed. Even in a recession, most businesses will make a profit. Even in a recession in this era, more than 10 million men and women will need cars and trucks. Many millions will need new homes. Tens of millions will need retirement investment products and life insurance. In the United States, even in a recession, there are plenty of people with money to spend.

Those who tend to their work, who get to the office or showroom or shop early, stay late, work hard, stay on the phones dialing for deals (as my pal, Barron Thomas, puts it), will make money. Those who stay sharp and make a point of befriending their clients will make money. Yes, some extra effort will be needed, but it'll pay off. There's still money to be made, even when the economy itself has slowed down.

It's the guy or gal who puts in extra effort who stays ahead and even prospers when the economy is in a slowdown. The easygoing, laid-back time-servers get tossed overboard.

Stay Hungry (Not Literally)

There's another key truth about recessions: They always end, and the economy always goes on to a new plateau. It may take a while, but the stock market always moves on to a new high.

So stay hungry. Work harder. Dig deeper. Keep investing in broad indexes. You'll come out all right on the other side.

Sunday, 20 January 2008

Why White Men Prefer Asian Women

Hi guys, something to take your mind off the volatile market.... :)

Fred Reed

There is near me an Asian sushi-beer-and-dinner establishment that I´ll call the Asia Spot. The region is urban, so the clientele is a mix of some of just about everything, but the waitresses are all Asian, principally Japanese, Indonesian, Vietnamese, and Thai. The Spot is a neighborhood bar. A large after-work crowd, many of them regulars, gather at happy hour. The social dynamics are curious. It would be an exaggeration to say, as someone did, that the black guys come to pick up white women, and the white men come to get away from them – but it would be an exaggeration of an underlying truth. The waitresses are a large part of the Spot´s appeal.

A common subject of conversation among male customers is how very attractive these women are when compared to American women. It is not a thought safe to utter in mixed company. It is a very common thought. American women know it.

Why are the Asians attractive? What, to huge numbers of men, makes almost any Asian more appealing than almost any American? The question is much discussed by men at the Spot. (I should say here that when I say “women,” I mean the majority of women, the mainstream, the center of gravity. Yes, there are exceptions and degrees.)

American women of my acquaintance offer several explanations, all of them wrong. For example, they say that Asian women are sexually easy. No. American women are sexually easy. The waitresses at the Spot are not available. They date, but they cannot be picked up.

Another explanation popular among American women is that men want submissive women, which Asians are believed to be. Again, no. For one thing, submissive people are bland and boring. In any event the waitresses aren´t submissive. Many compete successfully in tough professions. Among Asian waitresses I know I count an electrical engineer who does wide-area networks, and a woman with a masters in biochemistry who, upon finding that research required a Ph.D and didn´t pay, went back to school and became a dentist. Both of these wait tables to help out in the family restaurant.

At the Spot I know a woman waitressing her way through a degree in computer security, a bright Japanese college graduate making a career in the restaurant business, and the manager of the Spot – not a light-weight job. Submissiveness has nothing to do with their attractiveness.

Why, then, are they so very appealing?

To begin with, look at the American women in the Spot. Perhaps a third of them are stylishly dressed. The rest of the gringas run from undistinguished to dumpster-casual: baggy jeans, oversize shirts -- often male shirts -- with the tails out. They seem to affect a sort of homeless chic, actually to want to look bad, and do it with more than a touch of androgyny. A high proportion are at least somewhat overweight. (So are the men, but that´s another subject.) The Asians, without exception, are sleek, well-groomed, and dressed with an understated sexiness that never pushes trashy.

Further, the Asians are what were once called “ladies,” a thought repellant to feminists but very so refreshing to men. Listen to the American women at neighboring tables, and you will frequently hear phrases like, “He´s a f---ing piece of poo.” In what appears to be a determined attempt to be men, they have adopted the mode of discourse of a male locker room and made it their normal language. The Asians, classier, better students of men, do not have foul mouths. They presumably know about body parts and bathroom functions, but do not believe that a woman raises her stature by referring to them constantly in mixed company.

Men at the Spot, I have noticed, instantly understand that colloquial commentary is not wanted, and don´t engage in it: In the presence of the civilized, men adopt the standards of civilization. Men also tend to think of women as women think of themselves. The Asians, without displaying vanity, clearly think well of themselves. And ought to.

All in all, they give the impression that they do not want to be one of the guys. They want to be one of the girls. Here we come to the core of their appeal. Let me elaborate.

The default position of American women is what men refer to as “the chip,” a veiled truculence, mixed with a not-very-veiled hostility toward men and a shaky sense of sexual identity. The result is a touchiness reminiscent of hungover ferrets. There is a bandsaw edge to them, a watching for any slight so that they can show that they aren´t going to take it. They are poised to lash out in aggressive defense of their manhood.

As best as I can tell, they don´t like being women. Here is the entire problem in five words.

The Asians at the Spot show every indication that they do like being women. They do not seem to have anything to prove. Being happy with what they are allows them to be comfortable with what they are not – men. They are not competing to be what they can´t be with people who can´t be anything else. They don´t have to establish their masculinity because they don´t want it. They do not assume, as American women tend to, that femaleness is a diseased condition to be treated by male clothes, gutter language, and bad temper.

I´ve spent many dozens of hours chatting with the gals at the Spot, and never seen a sign of the chip. For a man, the experience is wonderful beyond description – smart, pretty, classy women, who are women, and are not the enemy. As long as American women carry the chip, the Asian gals will eat them alive in the dating market.

Note that the espousal of hostile obnoxiousness as a guiding philosophy appears to be an almost uniquely American horror. It certainly isn´t requisite to independence or self-respect. I recently met a quite attractive blonde who, among other things, was smart, a long-haul motorcyclist, a student of the martial arts out of sheer athletic enjoyment of it, and an excellent marksman. She was also heterosexual, feminine, delightful company, and had no trace of “the chip.” I was astonished. How was this possible, I wondered?

She was Canadian.

Six Ways Stores Trick You Into Spending More

by Jeffrey Strain

It's one of life's ironies that retailers try to lure you into their stores with low prices, only to do everything in their power to make sure you spend more than you intended once you're inside.

It's important to understand these methods so you don't fall for them.

Double Discounts: Retailers know that most people aren't good at math, and they take advantage of this. More and more are using double discounts to earn more money while making customers think they are getting a better deal than they actually are.

For example, if you are given a choice of buying a $100 item at 45% off, or buying the same item at 20% off with 30% additional taken off at the register, which would you choose? Most people simply add the 20% and 30% and assume that they are getting 50% off the item.

When you do the math, however, it doesn't work out that way. Taking 45% off of $100 means the item sells for $55. But if 20% off $100 is $80; taking 30% off that $80 leaves you with an additional $24 discount, for a price of $56, or a dollar more.

A 2007 study published in the Journal of Consumer Research indicates that shoppers are likely to feel the double discount is a better value.

Fight Back: Do the math before buying. If you can't do the calculations in your head, purchase an inexpensive calculator and carry it around when you go shopping. If you see an item that comes with a double discount, the store may be attempting to make you believe you are getting a better price than you are.

Pricing items at $9.99 vs. $10: Studies have found that when prices end in 9, consumers end up spending more money. While this might seem strange, there are various theories as to why this happens. Most note that when people process information, the first number they read has a stronger impression than the following numbers. So $9.99 seems much lower than $10.

Another theory is that pricing items this way makes it more difficult to calculate and compare unit prices. For example, if a 200-ounce package of an item is $3 and a 400-ounce package of the same item is $5, it's fairly easy to calculate that the 400-ounce package is a better value.

But when the same items are priced $2.99 and $4.99, respectively, they may appear to be the approximately same price, since the first numbers are what register and two is half of four.

Fight Back: Instead of looking at the first number, make a conscious effort to round everything up when doing your calculations. This is another reason to take a calculator when you shop: it can help you work out the true price if you have trouble doing calculations in your head.

Three for $9.99: Stores will often offer multiple items for a single price, such as three for $9.99. Most people assume that they need to purchase three of the items to get this "special" price so they buy more than they really need.

The truth is that unless the items are marked at higher individual prices or the label says something like "must purchase quantity stated to get discount," you can buy a single item for $3.33.

Fight Back: Get in the habit of purchasing only the amount you really need.

Buy One, Get One Free: This is another promotion that can mislead you into thinking you're getting a good deal. It's often difficult to tell whether you would pay half as much for purchasing a single unit or, for that matter, whether the price of a single unit has been inflated to take into account the extra item being "given away."

Many times the "buy one, get one free" offers are not better than the regular price of purchasing two items.

Fight Back: Before purchasing a buy-one-get-one-free item, find out what the regular price of that item is. Then do the math to see if you're really getting a bargain.

"Sale" doesn't mean a discount price: Retailers play on the assumptions you make. Consumers are trained that "sale" means a good price and these items are usually advertised in big, bright lettering at the end of store aisles. The problem is that what the stores call a "sale" may not give you a very good price. (Check out The Grocery Store Game (Janine Bolan), page 28, for other tips of this ilk.) So the casual passerby will see the item is "on sale" and buy the product assuming it's a good price, when it isn't necessarily so.

Fight Back: Don't assume things on the end of an aisle or that are marked as "on sale" are actually a good price. Make a grocery price book so you know a good price and always compare the prices with other similar items.

Putting things at eye level: When you walk down the aisles of the store, notice what items are at eye level. They will be the ones that are the most profitable for the store, which usually means the most expensive ones. This is because stores know you are much more likely to see and choose something at eye level than something on the top or bottom shelf.

Fight Back: When shopping, be sure to look high and low before deciding which product to purchase. You'll often find what you're looking for at a lower price on another shelf.

Stores are quite sophisticated when it comes to getting you to part with your money. If you understand how they are trying to manipulate you, you are less likely to fall into these traps and hold onto more of your hard-earned money.

Copyrighted, TheStreet.Com. All rights reserved.

Saturday, 19 January 2008

The Millionaire's Real Secrets

by John Rosevear

Have you read (or seen) The Secret? Yes, that Secret, the one that promises unlimited gains from the application of something called the "Law of Attraction." The book quotes assorted luminaries, including a "channeled" spirit being and a few people with mysterious degrees in "metaphysics" from heretofore unheralded institutions of higher learning.

The Secret is available in book and DVD versions. I recently watched the video at the behest of a friend, and my impression was that despite the very slick presentation, dubious "experts," and New-Agey-magical-thinking context, there's actually some useful perspective in there.

As you might have heard, the gist of The Secret is that much of what goes on in the universe is governed by that "Law of Attraction." This "law" states that, on an emotional level, like attracts like. In other words, if you really feel successful on a deep-down level, you will be successful, because the universe will respond to your successful feelings with success-enabling opportunities. (The corollary to this is that if you feel like a failure, you'll fail, says the "law," because the universe will give you what you seem to be wanting.)

Whether you credit the metaphysical explanation or not, there's some truth in the message. Believing in success is certainly a precondition for actually succeeding in any endeavor. But that's hardly the whole formula.

Finding the magic
It's easier said than done, of course, but if you want to retool yourself for massive financial success, the keys include:

Believe it's possible. Half of doing anything out of the ordinary -- whether it's becoming a millionaire, learning to be an expert skier, or just getting promoted to vice president -- is believing that it's possible. That may sound like motivational-guru claptrap, but it's true -- if you think that something is impossible, then for you, it probably will be. Becoming an expert skier is just a matter of learning to turn smoothly and getting lots of experience with different conditions. Becoming a millionaire is just a matter of increasing your savings rate. Both of these things are easier said than done, but they're both possible. People less smart and capable than you and I do both every year -- we can, too.

Burn your boats. Various ancient Greek commanders and the conquistador Hernando Cortes supposedly made a practice of burning their own armies' boats after landing on the coast of a hostile land. With no way to retreat, their armies had to succeed -- or die trying. Whether these stories are true or not, raising the cost of failure is a time-honored way of motivating oneself for success.

Associate with those who are already successful. Find people who have already done what you want to do. Get to know them, and spend time with them if you can. This reinforces that your goal is possible (which helps with the belief point), gives you models for success and sources of advice and insight, and helps with the boat-burning -- you don't want to embarrass yourself by failing in front of your successful new acquaintances, right? Again, this is often easier said than done -- if you're currently broke and your goal is to become a billionaire, you may find the club a bit inaccessible -- but let your creativity lead you. And if your goal is related to investment or financial success, you need look no further than the Fool's message boards for a friendly group of peers and role models.

The above are all parts of the formula laid out in Napoleon Hill's excellent classic, Think and Grow Rich, a book that should be on your must-read list if you haven't encountered it already (and a book, I suspect, from which The Secret drew a lot of its inspiration).

But there's one more point that is often missed by people propounding wealth formulas, even though it should be the most basic formula of all: If you want to accumulate wealth, spend less than you earn. Sure, picking through beaten-down stocks like homebuilders Builders FirstSource and Toll Brothers might help you find a gem that will drive your portfolio to spectacular new heights. Or you might end up buying in at the perfect bottom on financials like First Marblehead and Washington Mutual. Yet to accumulate wealth, first and foremost, your income has to exceed your outflow.

After all, you need money to buy that gem in the first place, right? Yet one look at consumer debt levels in America shows how few people have really taken this one to heart. No amount of visualizing or new friends will help you accumulate wealth if you spend it all as it comes in.

Thursday, 17 January 2008

Your stocks: Riding out a recession

The outlook isn't as bad as many investors fear, and there are ways to keep your investing plan on track. Money Magazine's Michael Sivy has a plan for defensive investing.

By Michael Sivy, Money Magazine editor at large

Tuesday, 15 January 2008

A key reason why we think a recession is unlikely

Source: Deutsche Bank, Bloomberg

December 27 for Friday December 28, 2007

Monetary policy was not particularly tight at any point in this economic cycle.

Generally, recessions begin when the Fed over-tightens monetary policy in an attempt to dampen inflation pressures. While the Fed ultimately lifted interest rates by a substantial 425 bps in the current cycle, this was from record low levels. Real interest rates arguably never went into restrictive territory, and since the Fed was so quick to cut interest rates (-100 bps in the last three months) the probability of recession decreases substantially.

In the current cycle, the real fed funds rate, defined as the level of the nominal fed funds rate minus the year-over-year change in the core CPI, peaked at 3.0% in June 2007. In the 2001 recession, the real fed funds rate peaked at 4.0%; and in the recession before that, 1990-1991, it peaked at 5.3%. The average real fed funds rate at the start of a recession is 5.0%, which is 200 bps above where the fed funds rate peaked in the current cycle. A lower peak in real fed funds combined with aggressive easing since then should eventually help steady the financial markets and economy.

We expect another 50 bps in rate cuts as an insurance move to assure a second half 2008 acceleration. We project the unemployment rate to edge up slightly in the next few months and
headline inflation to decelerate as energy prices stabilize/decline in response to slower growth--accordingly, inflation expectations should drift lower.

If economic growth was accelerating significantly, we would be more worried about inflation. However, the reacceleration should be modest at best, since most of the pick-up in domestic demand will likely be back-loaded into H2 2008.

After all, the traditional channel through which lower interest rates lift growth, namely housing, is a channel that is likely to be of limited use in the near term since the housing sector continues to work through a massive supply imbalance which may be relatively immune to lower interest rates.

Consequently, the possibility of a longer and more extended period of declining home prices
cannot be ruled out and with that increased downside growth risks.

Monday, 14 January 2008

What you can do about... Inflation

By Larry Haverkamp (Doc Money)

OH no! Inflation is coming. And lots of it. Check out the trend: Inflation in 2005 was 0.5 per cent. It doubled to 1 per cent in 2006. This year, it will be about 2 per cent. Last month, the Government forecast 2008 inflation to be 2 to 3 per cent. Now, the official forecast is 3.5 to 4.5 per cent. What is going on? We haven't seen inflation this high since 1980 and 1981 when it hit 8.5 and 8.2 per cent. The all-time record was back in 1973 and 1974 when prices rose 20 and 22 per cent. For hyper-inflation, check out Zimbabwe, Africa. Its annual inflation rate is 9,000 per cent. An expat there complained that the price he paid for his home 10 years ago will buy only one bunch of bananas today.


There are two reasons why inflation could come roaring back: demand and supply. Demand: Li Xinru lives with his wife and son on a small farm in China. Last month, the family bought their first car. Of course, the car uses petrol which adds to the world's demand for oil. While it doesn't add much, there are millions of Li Xinrus out there. We only see the final effects: A surge of oil exports going to China, India and other developing countries. Supply: The problem is the earth. It is too small. It is unable to support all of us and no one wants to leave. Our planet's natural resources will eventually decline to zero. And it may happen sooner than you think. Take oil. Matthew Simmons' book, Twilight In The Desert, details why Saudi oil reserves are probably less than what they report. The extraction rate may also be too aggressive. It can cause wells to be permanently capped with as much as 60 per cent of the oil still in the ground. How long until the last well runs dry is anyone's guess. No Opec nation has ever permitted an independent audit of its oil fields. It isn't just oil. All natural resources are being used up. It results in sky-high prices for oil, tin, zinc, palladium, nickel, iron ore, gold and natural gas. Can anything save us? Ethanol - made from corn - is the leading substitute for oil. But now, scientists at Cornell University in the US have shown that ethanol production actually uses more energy than it creates. It leaves us with no good long-run solutions. About all we can do is to ration what remains, with resources going to the highest bidder.


The short-run offers more hope. Our strong dollar helps a lot to lower the price of imports, which holds down inflation. But you can do more: Set your own inflation rate in seven easy steps.

Step 1: Inflation is the increase in the consumer price index (CPI). It is a weighted average of 5,170 goods sold at 3,000 outlets in Singapore. But watch out. It is only an average and Mark Twain has shown how averages can be misleading. Each of us is unique so we can create our own personal inflation rate. To keep it low, buy only the cheap stuff. For example, inflation ticks up when luxury watch prices rise. That inflation is easy to avoid: Simply leave the $10,000 watches for the rich tourists. A $100 Casio keeps time as accurately as a Rolex costing 100 times more. The same goes for holiday travel. Make day trips to Sentosa and save big.

Step 2: A home is a big part of our monthly budget. In fact, housing makes up 20 per cent of the CPI. But if you already own a home, as do 90 per cent of Singaporeans, then inflation doesn't hurt. In fact, it helps by increasing the value of your home, which is likely to be your biggest asset.

Step 3: Inflation boosts interest rates and that raises mortgage costs. You can solve it by borrowing long-term now, while rates are low. The best deal is a 30-year HDB mortgage at 2.6 per cent interest.

Step 4: For lending, do the opposite. Don't get locked into investments that pay only 1 to 2 per cent. Inflation is going to push those rates much higher. Especially avoid whole-life and endowment policies, including education policies. They lock you into guaranteed returns of only 1 or 2 per cent for up to 25 years.

Step 5: Go easy on unit trusts and stock investments. Studies show they do not perform well in periods of high inflation.

Step 6: In contrast, commodities and property do well in inflationary times.

Step 7: Money market funds are a safe investment. Best of all, they have no lock-in period. So the return will increase instantly when inflation pushes interest rates higher.

Sunday, 13 January 2008

Market upside without the risk

Beware of annuities promising high returns at low risk. Most clients would do better investing on their own.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Question: In "The truth about can't-lose funds," you did a good job of making fixed-indexed annuities (FIAs) look totally worthless.

I provide FIAs to my clients, and I think several of your comments are not based in fact. FIAs are not appropriate for everyone but they do have their place. An FIA will not make you rich, but it is not intended to do so.

What is your recommendation for the client that wants market participation without risk?

The Mole's answer: You are referring to my November 8 column about an insurance product called an equity-indexed annuity, a type of fixed income annuity that promises upside stock market participation without any downside risk.

I am not against all fixed-income annuities, but I am against equity-indexed annuities because the premise of these products is essentially to try to cheat capitalism.

I agree with you that equity-indexed annuities are not appropriate for everyone. In fact, I've never found them to be appropriate for any of my clients.

When you look under the covers of this type of annuity, you usually find two things:

  • Complex terms and formulas that make it hard for the consumer to understand how payments are calculated.
  • A clause that unilaterally lets the insurance company change the payment terms of the agreement.

Further, since the insurance company is invested mostly in bond-type instruments, the returns will be similar to those of bonds, which are generally much lower than stock returns. Returns are further reduced by commissions, marketing and operating costs, and insurance company profits.

Bottom-lining it, these types of annuities are good for those who sell them, but not so good for the consumers who buy them.

What do I tell the client who wants market participation without risk? Well, plain and simple, you can't have it both ways. But capitalism says that if you take a smart risk with your money, you should expect a long-term real profit.

So I try to assess my clients' willingness and need for risk, and help them to take smarter ones. One way of taking a smart risk is by keeping costs low. That's why the type of annuity that pays handsome commissions to the planner that sells it doesn't fit in with my clients' goals.

I do, however, have a solution for someone wanting to maximize their participation and minimize their risk. Let's use a $10,000 investment as an example and spread it out over two low-cost investments.

  • The client puts $5,744 into a 10-year CD paying 5.70 percent annually. In ten years, this CD will mature with a $10,000 balance.
  • The client puts the other $4,256 in a total stock market index fund with fees as low as .07 percent annually.

The first part of the investment ensures that the consumer is guaranteed their money back and that guarantee happens to be backed by an agency of the U.S. Government (FDIC) rather than a private insurance company. The second part reaps the benefits of the stock market.

Even if the stock market stays flat, which is statistically very unlikely over a 10-year period, you still get back $10,000 from the CD, plus the $4,256 investment, which averages out to a 3.6 percent annual return. A much more realistic 9 percent average annual stock market return yields a combined 7.2 percent average annual return for the entire build-it-yourself product.

The higher returns are attributed to rock bottom costs. You also get the lower tax rates from long-term capital gains, and you can even defer the CD interest payments by putting your CD in your IRA account.

Now you may be asking, if this strategy is superior to buying an equity-indexed annuity, why isn't it more popular? The fact that no one has the economic incentive to sell it is exactly why it's so rare. The book "Freakonomics" explains the consequences of economic incentives, not the least of which is that the-do-it-yourself strategy doesn't pay people to sell it or bear the high costs of marketing glitz.

In my view, it's critical to know the client before designing an appropriate portfolio, so it's hard to confirm that a single investment is good for a client. It is far easier, however, to recognize a product is not good for a client since there are usually low cost alternatives that better meet client risk and return goals.

I suspect you and I will have to agree to disagree on this one and you will continue selling these annuities and I will continue to recommend against them. I sure appreciate your letter. I have received many letters from those that sell annuities, and allow me to say that yours was one of the few that could be printed.

Odds Are Growing for Economic Recession

By Jeannine Aversa, AP Economics Writer

Subprime Mortgage Meltdown, Unemployment, Wall Street Losses Threaten to Trigger Recession WASHINGTON (AP) -- The unemployment rate leaps to a two-year high, record numbers of people are forced from their homes and Wall Street nose-dives again. Such is the fallout from a housing meltdown that threatens to slingshot the country into a recession.

The big economic question these days is whether the weakening economy will survive the strains or collapse under them.

The odds have grown that the economy will slip into a recession. At the beginning of last year, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable this year.

Hopeful it can be avoided, President Bush and the Democrat-controlled Congress are exploring economic rescue measures, including possible tax rebates. Federal Reserve Chairman Ben Bernanke pledged to lower interest rates as needed.

The idea is to induce people to boost spending, especially on big-ticket items such as homes and cars, and revitalize economic activity.

"The recession gorilla is there. The question is can the Federal Reserve do enough to avert a recession?" asked Brian Bethune, economist at Global Insight. "We think the odds are close to 50 percent that there will be a recession. It is high -- no question about it."

Much hope rides on the Fed. By dropping rates, it can act quickly -- faster than Congress or the White House could agree on and deliver an economic boost.

"The Federal Reserve is not currently forecasting a recession," Bernanke said last week. "We are forecasting slow growth."

Bernanke signaled that a rate cut would come this month. Many economists believe a key rate, now at 4.25 percent, could fall by as much as one-half of a percentage point. Such a cut would lower the rates that are charged to millions of consumers and businesses for many different types of loans.

Analysts predict the Fed will keep doing that in the months ahead as part of a campaign that started in September, when the central bank cut rates for the first time in four years.

Trying to put the fragile economy back on firm footing is the biggest challenge for Bernanke since taking over the Fed nearly two years ago. His job requires a deft reading of the economy's vital signs and keen insights into what makes people and businesses tick. It is their behavior that shapes the economy. And it is in turbulent times that the Fed chief needs to bolster public and investor confidence.

Still, Wall Street is on edge. The Dow Jones industrials plunged nearly 250 points on Friday. Also, consumer confidence tumbled in early January.

Bill Cheney, chief economist at John Hancock Financial Services, puts the odds of a recession as high as 40 percent. "There are a lot of headwinds and the economy probably has enough momentum to get through, but when things get rough, there are a lot of ways things could go wrong," Cheney said.

The fear is that people will clamp down on the spending and businesses will put a lid on hiring and capital investment, sending the economy into a tailspin.

By one rough rule of thumb, a recession occurs when there are two consecutive quarters -- six straight months -- when the economy shrinks.

The National Bureau of Economic Research, the recognized arbiters for dating recessions, uses a more complicated formula. It takes into account such things as employment and income growth. By that measure, the last recession was in 2001, starting in March and ending in November.

Tax rebates aimed at stimulating the economy were part of Bush's $1.35 trillion in tax cuts in 2001. They were credited with helping to make the recession short and mild.

The current housing slump, made worse by a credit crunch, is weighing heavily on economic activity.

Upcoming reports are expected to show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first part of 2008. Consumers, whose spending is indispensable to a healthy economy, are expected to have tightened their belts.

High energy prices, weaker home values that make people feel less wealthy, and a deteriorating jobs market all figure into more caution on the part of consumers.

The unemployment rate jumped to 5 percent in December from 4.7 percent, fanning recession fears. It was the biggest one-month gain since October 2001, during a time of massive layoffs in the travel industry after the Sept. 11 attacks.

Lawrence Summers, one of President Clinton's treasury secretaries, said the odds of a recession this year went up after the dismal employment report. He advocates temporary tax cuts and emergency spending. "It is now conventional opinion and many fear that there will be a serious recession," Summers wrote recently in the Financial Times.

Martin Feldstein, who was President Reagan's top economic adviser, and former Federal Reserve Chairman Alan Greenspan have urged greater government intervention. Greenspan recently said the economy is "getting close to stall speed," and Feldstein has said his best guess is that the economy "has not turned down and it is still expanding, but very weakly."

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