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Wednesday, 30 December 2009

Watch Out for Scams Targeting Seniors

by Kathryn A. Walson, Staff Writer, Kiplinger's Retirement Report

Seniors are prey for smooth-talking scammers who promise big prizes and great investment returns.

In 2000, Liz Mulligan took a job as a caregiver for an elderly man. She had recently retired from a position that involved auditing. So it didn't take her long to figure out that her client's bookkeeper had stolen $219,000 from him. The bookkeeper eventually went to prison.

"That got me interested in helping seniors who've been financially exploited," says Mulligan, 64, who lives in Seattle. "I saw the disastrous effects."

Mulligan started a business that helps victims organize their financial records and negotiate with creditors and banks. She also volunteers as a "fraud fighter" for a program created by the AARP Foundation and the Washington attorney general's office.

As a fraud fighter, Mulligan calls seniors around the U.S. to advise them how to dodge scam artists. And when she calls, many offer horror stories about how they have fallen for a con.

The number of horror stories is rising. Across the U.S., law-enforcement officials are noting an uptick in senior-directed scams. Anxious to replenish their recession-embattled retirement savings, many retirees are falling for the tantalizing promises of smooth-talking predators.

"Seniors are scared that they don't have enough money for medical costs, or that their home isn't worth as much as it was," says Jean Mathisen, director of AARP's Fraud Fighter Call Center in Seattle, one of nine such centers. "People are feeling such desperation that they sometimes suspend common sense."

The scams directed toward seniors run the gamut. Many con artists promise outsize returns on IRA investment products. Telemarketers hawk anti-aging products that are never delivered or are worthless.

Con artists are nothing if not creative. Take what's known as the Grandparent Scam. State attorneys general warn that a caller may say, "It's your favorite grandson." The senior may respond with something like, "Is this Joe?" Then "Joe" claims he's been in an accident or stranded and persuades the senior to wire money.

As much as you want to bolster your sagging retirement savings, remember the adage: If it's too good to be true, it probably is. Here are some of the con artists' favorite senior-directed scams.

Fabulous offers. A con artist will call or send a letter or e-mail alerting you that you've won a big prize or that you can buy a product, perhaps prescription drugs, at a great price.

With sweepstakes schemes, for instance, a scammer will tell a senior that to claim the prize he or she must first pay a fee. However, it's illegal for a company to require someone to pay to claim a prize. You won't get your money back, and you certainly won't see any sweepstakes winnings. "Whatever money you've sent by wire transfer is impossible to recover," says Kristin Alexander, spokesperson for the Washington state attorney general's office.

A 66-year-old Illinois man learned that the hard way. In late 2008, a man called to say that the retiree won $3.5 million. The caller told the retiree to wire $200 to cover a delivery fee, and called later to say there was a mix-up with the wire transfer and that he must send $150 more. "He convinced me that I had won it," says the victim, who asked that his name not be used. "I was gullible."

Also, watch out for postcards, e-mails or certificates promising bargain or free cruises or vacations. You'll know it's a scam if the promoter tells you that the deal is a time-limited offer and pressures you to provide a credit-card number, certified check or money order right away. The entire trip could be bogus. Or you'll be hit with lots of extra fees after you've sent your deposit.

Phony-bank fraud. Watch out for callers who claim to be from your bank or credit-card company. They'll tell you that they've noticed suspicious activity on your credit card and want to check it with you. You'll know the call is not legitimate if the caller asks for your credit-card or Social Security number to confirm he's talking to the right person.

Be aware of e-mails from what purports to be a trusted institution that asks for your Social Security number or account numbers. Phony Bank of America and Citibank messages are common. One prevalent scheme is an e-mail promising you a tax refund from the IRS -- except the IRS never e-mails taxpayers.

Scammers usually adapt their cons to the changing economic environment. Law enforcers warn of a hoax based on the rise in bank failures. An e-mail will claim to be a financial institution that has recently taken over the consumer's bank or mortgage and ask for an update on account information.

If a large home renovation socked you with a bigger mortgage than you can afford comfortably, watch out for companies that offer to negotiate a payment plan or loan modification. The fraudster may claim to be affiliated with your lender. You may be told to pay upfront fees. If you're having trouble making your payments, call your lender or find a housing counselor approved by the U.S. Department of Housing and Urban Development at

Investment schemes. If you think you can tell a con artist from a legitimate adviser, consider this finding from a major study: Investment-fraud victims are more financially literate than non-victims. The hook: a promise of high returns with little risk. "When people set up a scam to target seniors, there's always going to be an emphasis on safety," says Michael Byrne, chief counsel with the Pennsylvania Securities Commission.

Typical is a case involving the FBI, Securities and Exchange Commission, and securities regulators in several states. Four ringleaders and their 95 sales agents reached nearly 3,000 victims by phone, on the Internet and at sales seminars, according to the U.S. Attorney's Office in the southern district of California.

The salespeople told investors, many of them seniors, that the investment was a "secret" and "invitation only" bank program that was risk-free and would generate monthly returns of as much as 50%. In late 2008 and early 2009, the four men were sentenced to prison for running a Ponzi scheme.

Even knowing the adviser is no guarantee you won't be taken. In 1994, Ruth and Len Mitchell handed over $100,000 to an accountant who lived on the same street in Beaver Falls, Pa. The neighbor told the couple that he could invest the money in real estate bonds through a company that he ran. He promised the couple 8% returns. Ruth says she received what the accountant called interest payments. But he never actually invested the money.

Ruth, 68, and Len, 85, both retirees, learned of the theft in 2005 after the IRS uncovered that the accountant was running a Ponzi scheme. Many other victims, including business owners and doctors, were the accountant's neighbors or friends, she says. He's now in prison. "You trust people, and that's what you should not do," says Ruth, who now lives near Phoenix.

Seniors are commonly targeted during free luncheon seminars. The goal of seminar leaders is to recruit new investors and earn commissions. "We've heard about people being talked into putting their savings into products that are fraudulent or into products that are simply wrong for them," says Andres Castillo, who oversees AARP's Free Lunch Monitor program.

The AARP program sends volunteers to seminars. Monitors who hear anything questionable -- perhaps promises of low risks -- notify AARP, which alerts the North American Securities Administrators Association. To become a monitor, visit

Don't Become a Victim of Fraud

The first step, says Alabama Securities Commission Director Joseph Borg, is to remember, "You can't have high returns and no risk." The easiest way to protect against fraud is to ignore the pitches. Hang up on telemarketers, reject invitations to free-lunch seminars, and toss out mail with promises of surefire investments and cheap travel. Politely shut the door on solicitors.

Do not give any cold caller or visitor money, whether it's wiring money or sending money orders or personal checks. If you suspect telemarketing fraud, call your state attorney general's office or the National Consumer League's Fraud Information Center at 202-835-3323 or go to Register with the Federal Trade Commission's National Do Not Call registry at, or call 888-382-1222.

Never let someone push you to make an immediate decision. A salesperson may warn you that the deal will disappear if you don't buy immediately. It is not rude to decline such high-pressure offers.

Don't give credit-card or bank-account information or a Social Security number to an unsolicited caller. You should only give out such information if you call your bank or Social Security office yourself.

Don't invest your money with friends unless you've checked them out with securities regulators. And watch out for strangers who develop a friendship and then try to persuade you to invest.

If you're considering an offer, do research first. Get all the information in writing, and have documents reviewed by your lawyer.

Check the record of any telemarketer with the Better Business Bureau, local consumer groups or state attorney general. Obtain a salesperson's name, telephone number, address and business license number. Ask which regulator issued the license and check it out.

Brokers and brokerage firms must be registered with the Financial Industry Regulatory Authority or a state securities regulator. You can find links to all state regulators at The site's "Senior Investor Resource Center" also provides tips on preventing fraud.

For an insurance agent, check with your state insurance department. For a broker, you can review the license and registration, as well as a history of complaints, at, or call 800-289-9999. For registered investment advisers and firms, use the SEC's Investment Adviser Public Disclosure site (

Editor's Note: This article was originally published in the October 2009 issue of Kiplinger's Retirement Report.
Copyrighted, Kiplinger Washington Editors, Inc.

Sunday, 20 December 2009

The Only Way to Earn 50% Annual Returns

By Tim Hanson

Think back to the fall of 2007. Happy times, indeed. The market was rising, Lehman Brothers and Bear Stearns still existed, and we were blissfully unaware that Tiger Woods was an adulterer.

At that time -- perhaps overcome with confidence -- my colleague Joe Magyer and I penned an article asking why you weren't earning 50% annual returns. This, in fact, was a challenge posed to us by Motley Fool CEO and co-founder Tom Gardner, and one we spent some time thinking about because, well, we thought we might be able to pull it off.

The results of our brain strain
Our strategy to achieve this glorious return had three steps:

1. Get out of index funds.
2. Protect our principal.
3. Invest in small, underfollowed stocks that are likely to be mispriced.

Fast-forward to today. While I stand by those three steps, if you had followed them for the past few years, you would have subjected yourself to extraordinary volatility and (at least temporary) losses.

And that's the catch-22: The only way to give yourself a chance at massive returns is to expose your portfolio to massive potential losses.

So are we idiots?
Since few individual investors are willing or able to take that degree of risk, that 2-year-old article looks in hindsight like nothing more than a useless thought experiment. Sorry for wasting your time.

But I've revised my thinking to make it more actionable and relevant to you. Rather than chasing 50% annual returns across your entire portfolio, why not aim for them in a small portion of your portfolio? That's called diversification, and it reduces your risk of massive losses. As the same time, as you'll see below, it also gives your portfolio the potential to achieve very meaningful outperformance.

Here's what I mean by that
This past summer, I traveled to China on our annual Global Gains research trip, looking for stocks that might double or more over the next three years. (Anything less is generally not worth the hassle of investing in China.) One of the companies we discovered in Inner Mongolia was a small fertilizer company called Yongye International.

The stock was cheap, the management team savvy, and the market opportunity enormous. In other words, it looked like a promising investment. (To read more about the investment opportunities in rural China, click here.)

And it turned out to be just that
I made Yongye my top pick from that trip. But it wasn't my only pick. Instead, I placed it within the context of a broader basket of plays on the booming development taking place in rural China. In fact, I told folks to buy four stocks in addition to Yongye, with Yongye representing less than half of a full 5% position. Here's what that basket looked like in the end:


Recommended Position Size

Yongye International


China Green Agriculture


China Marine Food




China Mobile


And here's what the returns have been from that basket since we recommended it in July:





China Green


China Marine




China Mobile


*Through market close Dec. 17, 2009.

As you might guess, the basket has been an incredible performer thus far. In fact, if you weighted the stocks as we recommended, your basket of China stocks is up more than 60%. Even better, it's crushed its China benchmarks, such as the Xinhua 25. That passive index, composed of giants such as Huaneng Power (NYSE: HNP) and China Telecom (NYSE: CHA), is actually down 1% over the same period of time.

Still, keep it small
Now it's easy to look at those returns and say that we should have told folks to invest more money in Yongye or China Green. But doing so would have subjected you to all of the risks associated with investing in a small, unproven Chinese company -- the consequences of which can be disastrous, given China's "developing" standards for corporate governance and accounting.

Yet you didn't need to invest a ton of money in Yongye to realize significant tangible benefits. In fact, if you were 95% invested in a market index fund composed of stalwarts such as JPMorgan Chase (NYSE: JPM), Wal-Mart (NYSE: WMT), and Verizon (NYSE: VZ), and just 5% invested in our basket (as we recommended), then you would have beaten the market's return since July by 250 basis points -- 15.3% to 12.8%.

Nothing to shake a stick at
That's a significant improvement that could have been achieved without subjecting your portfolio to enormous potential losses or the volatility associated with emerging-market stocks. Furthermore, thanks to the benefits of compounding, if we can keep that edge up over time through smart emerging-market investments, the difference in dollar terms on a sum as small as $5,000 becomes incredible.





$5,000 at 12.8% becomes ...




$5,000 at 15.3% becomes ...




That extra edge is what we seek to deliver to you at Motley Fool Global Gains, through our research trips to emerging markets and careful selection of emerging-market stocks.

The reason I mention this is because we just returned from a research trip to India with our top picks in that emerging market and we're hopeful that they will replicate the success we had in China this summer.

3 ways to outsmart the market

At times the market acts like the fool. Protecting yourself from its folly is simpler than you might think.

By Pat Regnier

(Fortune Magazine) -- As you try to figure out how to put your money to work in a market that veers from depression to mania, you're confronted with two opposing facts that lead to opposing investing strategies.

Fact No. 1: Outwitting the market is tough.

There's a good chance you've learned this the hard way. Remember when you were a tech-stock genius, circa 1999? Or how you didn't really gain confidence in the bull market that started in 2002 until about 2005, only to be really confident just in time for the market's top in 2007?

If experience hasn't schooled you, the numbers can: Over the past 15 years, about 60% of the mutual funds that invest in blue-chip stocks failed to beat the S&P 500 index, the frequently cited proxy for "the market." Managers of bond and foreign-stock funds also struggle to beat benchmarks.

Even during the recent bear market, the sort of moment when pros are supposed to prove their worth by sidestepping the weakest investments, the indexes trumped most managers, data from Standard & Poor's show. And consider what happened to Bill Miller, the famed investor who beat the S&P 500 for 15 straight years: He walked his Legg Mason Value Trust fund right into the propellers of the financial crisis by betting on AIG (AIG, Fortune 500) and Freddie Mac (FRE, Fortune 500).

The obvious conclusion: Stock picking, whether you do it yourself or pay a pro to do it for you, is a mug's game. You're better off buying and holding a cheap, diversified, and consistent index fund, which passively invests in the stocks listed on a broad market benchmark.

Fact No. 2: At times the market can act incredibly stupid.

If you own, say, the Vanguard S&P 500 (VFINX) index fund, you can take comfort in knowing that it performed relatively well in a disastrous 2008. But surely the more salient fact is that it lost 37% of your money that year and has so far earned back just 40% of that loss.
0:00 /3:25Target date funds 101

Twice in less than a decade, in fact, investors who did the smart thing and "owned the market" have seen huge chunks of their wealth destroyed by bursting asset bubbles, and it's not as if there were no warnings. Dotcom excesses were a punch line long before tech flamed out. And the media were churning out headlines about a real estate bubble in 2005.

The obvious conclusion: Passive investing -- whether through indexing or a buy-and-hold strategy with other kinds of funds -- is for suckers. You need a strategy that shields you from the consequences of irrational exuberance.

There's just one problem: fact No. 1. Let's revisit the case for passive investing. It's still very strong. But two increasingly popular ideas that suggest a more active/passive approach deserve a closer look: The first is that traditional index funds have a design flaw that leaves you vulnerable to bubbles, so maybe it's time to employ a better mousetrap.

The second is that there are simple, objective measures that can tell you when stocks as a class of assets are simply too risky. After considering those claims, we'll spell out three strategies for navigating a market that sometimes loses its mind -- without your losing your own trying to second-guess it.
Why markets are efficient - except when they're not

The case for index funds and the case for buy and hold aren't necessarily identical, but they share a common intellectual root: the idea that markets are what economists call "efficient."

The stock market is made up of lots of buyers and sellers who have access to the same information. If you think Microsoft (MSFT, Fortune 500) is cheap at $29 a share, you're betting that you know something the trader selling it to you from Fidelity or Goldman Sachs (GS, Fortune 500) or some hedge fund hasn't yet figured out. That's a tough bet to win more than half the time.

The efficient-markets hypothesis also says that if some pattern or formula emerges that leads to higher returns with no extra risk, it will disappear quickly as investors swoop in to exploit it. Result: Stock prices move around randomly. And if you want to get a higher return than the market, you have to take on more risk.

Also tilting the scale toward indexing is what Vanguard founder John Bogle once called the "cost matters" hypothesis. Since actively managed funds slice an average of 1.4% a year from returns in fees (plus high unseen trading costs), it's hard for them to beat an index fund charging less than 0.2%.

But what if markets aren't so smart after all? As Time columnist Justin Fox explains in his book "The Myth of the Rational Market," the idea of an efficient market has come in for plenty of refinements, exceptions, and lately outright attack.

Economists Eugene Fama (the pioneer of efficiency theory) and Kenneth French have shown that there are a few patterns in stock returns: Small stocks beat big ones, and stocks with low valuations, known as value stocks, beat growth stocks.

Meanwhile, behavioral economics has identified persistent psychological biases that cause investors to make substantial errors in pricing assets. For example, Yale's Robert Shiller and Wellesley's Karl Case surveyed homebuyers in cities experiencing a real estate bubble and found that many expected houses to appreciate a wildly unrealistic 10% per year for 10 years.

Equity investors are prone to a similar backward-looking optimism: How often did you hear in the '90s that stocks would earn a consistent double-digit return and would always beat bonds?

Then there are those bubbles. By some accounts, they aren't bolts from the blue but are recurring features of markets, particularly lightly regulated ones.

The late - and newly fashionable - economist Hyman Minsky described a cycle in which stable markets create their own instability. As investors get used to steady returns, they start borrowing to amp up gains (think Lehman Brothers and its 30-to-1 leverage) and buying increasingly dubious stuff (think subprime mortgages and CDOs).
Can you sidestep the bubbles?

It seems you ought to be able to insulate against such bursts of insanity, even if you concede that trying to find the next Bill Miller, and then knowing when to dump him, isn't the answer. These two ideas are gaining currency:

The "better" index.
Traditional indexes are weighted by market capitalization, which means that the more the price of a stock rises relative to other equities, the bigger the slice of the index it becomes.

In the tech bubble, owning a broad index fund would have had you betting bigtime on the bubbliest stocks. In 1997 tech shares were just 15% of the assets in the Vanguard 500 index fund. By 1999 they were about one-third.

"Traditional cap-weighted indexes overweight the overvalued and underweight the undervalued," says money manager Rob Arnott. He's developed an alternative "fundamental" index, which owns a cross section of the market and divides up its holdings by measures of economic values, such as dividends and sales, rather than the market's weighting. And Arnott has licensed mutual and exchange-traded funds -- index funds that you buy and sell like stocks -- to track his creations.

Wharton's Jeremy Siegel, author of "Stocks for the Long Run," is an adviser to an investment firm implementing a similar strategy. The claim is that the funds naturally avoid bubbles. Arnott's FTSE RAFI 1000 (PRF) index would have beaten the S&P 500 by five percentage points a year since 1999 if it had actually existed back then.

The caveat.
The new indexes lean toward value stocks, which do seem to have a performance edge. The not-so-academic debate is whether that's because the market initially underprices them or because they're riskier. In other words, is the extra return a free lunch, a reward for sticking your neck out, or something in between?

It's certainly the case that tilting toward value isn't a guarantee you'll miss every crash. Arnott's index had as much as the S&P 500 in financial stocks just before the banking crisis hit, and it lost a bit more than the established index did in 2008.

Yes, the neo-indexers have a smart investment case and a lot of historical data to back them up. But if growth turns out to beat value over the next 30 years, they may not deliver what an ordinary index fund can all but promise: the market's return, and better performance than most other funds.

The valuation test.
Even if you invest only via broad index funds, you still must decide how much of your assets you want to hold in equities overall. In general, that should be determined by how much risk you want to take.

But if you check some basic market statistics, you can easily see that stocks are more expensive at some times than they are at others. It seems like common sense to trim back when an asset class is dear and hold a little extra when it's cheap.

Andrew Smithers, head of the London investment research firm Smithers & Co., argues that the 10-year price/earnings ratio -- sometimes known as the Shiller P/E, after the Yale economist -- is one way to reliably gauge how expensive stocks are.

It looks at what the market is willing to pay for stocks based on earnings over the past decade in order to smooth out short-term bumps. When the long-term P/E is high, as you can see in the graphic to the right, future returns have tended to be low. (You can find this P/E at

The question is, Why should this keep happening? After all, Shiller laid out his P/E argument in a bestselling book a decade ago. Savvy investors ought to have tried to take advantage, and the effect should have gone away.

But Smithers says that isn't likely. Rallies don't change course on a reliable schedule, and even professional investors find it hard to wait out an overpriced market. In the years leading up to the 2000 crash, refusing to buy booming tech stocks cost more than one fund manager his job.

"It's a wild and woolly market, in which career risk dominates," says Jeremy Grantham of the Boston investment firm GMO.

The caveat.
Princeton economist Burton Malkiel, author of "A Random Walk Down Wall Street," the book that popularized efficient-market theory, concedes that market P/Es do seem to have had some predictive power.

"But it's loose," he adds. And he doesn't see any evidence that individual investors will do better than the pros in choosing when to buy and sell. Most people who time the market are terrible at it: Cash flows into stock funds hit peaks in early 2000 and ebbed as the market hit bottom.

This kind of activity is incredibly costly. From 1989 through 2008, the S&P 500 gained a bit more than 8% a year, but the average equity fund investor earned less than 2% thanks to lousy timing, according to the research firm Dalbar.

Okay, you're saying, but now I know that following the herd is a mistake, so I'll change my ways. Unfortunately, that's difficult to do in real time, even if in hindsight the correct course is clear.

"This is a problem behavioral finance helps us understand," says economist French. "We're all overconfident, and one of the sources of that is the simplicity we see when we look backwards." Holding out even in an "obvious" bubble can be excruciating.

The Shiller P/E went above 20 for the first time in decades in 1992. Alan Greenspan coined the term "irrational exuberance" in 1996. By 1999, when P/Es topped 40, your neighbor who had half his portfolio in Cisco (CSCO, Fortune 500) didn't look like a lemming; he looked like a guy who drove a nicer car than yours and whose kids went to private school.

Late in a rally, bears decide that they can't fight the tape and buy back in at the worst moment. "When you time, you have to be right twice: on the sale and on the purchase," says Malkiel.
Three rational ways to cope with a crazy market

So the stupid market is devilishly hard to outsmart. What do you do about that?

Learn the right lesson from a burst bubble.
Many market timers argue that the crashes of 2000 and 2008 show that stock prices flash signals warning of steep losses ahead.

But here's a simpler and easy-to-follow lesson: The market can deliver a steep loss at any time. And those losses can mean poor results even over a fairly long run.

Right now, U.S. stock returns are still negative over the past 10 years. Japan's market (not counting dividends) is about where it was in 1984.

So even if you remain a believer in buy and hold, one moral of the past decade is that you may want to buy and hold less in U.S. equities than conventional wisdom once dictated. Stay diversified in cash, bonds, and overseas stocks. And above all, save enough so that you don't have to depend on high returns for equities.

Malkiel recommends rebalancing your portfolio once a year. That keeps your risk where you want it, but it also means you're making small bets against market sentiment.

Say you decide that the best mix for you is 50% in stocks and 50% in bonds. If stocks have a huge rally and go up 40% while bonds rise by 5%, your portfolio will now be 57% in stocks and just 43% in bonds. To get back to even, you'll have to sell the stocks the market loves at the moment.

Conversely, if the equity market falls, you'll buy stocks as the herd is shunning them. This automated, unemotional contrarianism works against pure efficient-market theory. But it also seems to work, period.

Not that it's foolproof. As the financial adviser and writer William Bernstein says, an investor who rebalanced into Japanese stocks starting in 1990 would have been sorry.

If you time, keep it limited, rare, and cheap.
We're not all built psychologically for the laissez-faire approach to investing. Some like to test their predictive acumen; others can't stand the idea that they should do absolutely nothing to prevent a large loss. But the more you trade, the more likely you are to make a wealth-destroying mistake.

So set parameters. First, because there's a good chance you are wrong, never go all the way into or out of stocks.

Baylor finance professor William Reichenstein says you might vary your stock allocation by no more than 10 percentage points in either direction. If you generally have 50% in stocks, you'd go to 60% when they looked cheap, or 40% when they seemed expensive. Don't do so based on hot news; change your allocation only in response to significant shifts in value.

Smithers thinks that investors far from retirement can usually ignore even these, with a few exceptions like 1999. And, he advises, you need to make this decision yourself. Money managers can't be relied on to buck the trend. They're part of the reason markets get overpriced.

Saturday, 19 December 2009

How the falling U.S. dollar affects your stock portfolio

By Paul J. Lim, senior editor

The dollar has fallen for much of this decade, and lately the decline is picking up speed. Already down more than 15% against the euro since March, the buck is expected to sink another 10% by the first quarter. Usually, when a once-strong asset falls this far out of favor, the correct long-term strategy is clear: Be a contrarian and buy.

But the dollar isn't an asset -- it's a vehicle through which investments are made. And the fact that investors around the world are buying more and more non-U.S. assets suggests that the dollar will keep falling.

There are, of course, plenty of reasons here at home that the dollar is faltering. Among them: rising deficits; low interest rates paid out by our bonds; and rising inflation fears.

But the dollar is also weaker because "investors think there are better places to put their money to work than in the U.S.," says Jack Ablin, chief investment officer for Harris Private Bank.

Indeed, the 37% drop in the dollar's value against a basket of other currencies since 2001 coincides with an unprecedented demand for the assets of other economies, especially shares of companies in fast-growing places such as China and Latin America.

A decade ago, U.S. stocks comprised 54% of the world's stock market value; today they represent only a third. As investors shift out of the U.S. market, they exchange dollars for the currencies of countries where they're doing their buying, reducing demand for the buck.

Safety isn't enough

To be sure, the dollar is still the world's "safe haven" currency, says Jeffrey Kleintop, chief market strategist for LPL Financial. The dollar's value spiked after the 9/11 terrorist attacks and again last year during the global credit freeze.

In both instances investors rushed into Treasury bonds, which required the purchase of dollars. So there will be occasions when the buck bucks its long-term trend. But that's not the same as holding back the tide.

Expand your horizons

This doesn't mean that the U.S. economy is crumbling. The strength of a nation's currency is never a pure reflection of economic might. The yen gained on the dollar this year even though Japan's economy shrank twice as fast as this country's did.

Nor does it mean you should be dumping U.S. stocks. Keep in mind that nearly half of all revenue for companies in the S&P 500 index comes from outside the U.S., up from 32% at the start of this decade. And the falling buck makes dollar-based goods look attractive to foreign buyers. A jump in U.S. exports is already starting to help, as third-quarter S&P 500 earnings are coming in ahead of analyst estimates.

But the dollar's long-term decline does argue for keeping a sizable portion of your stock portfolio -- at least 25% and up to 50% -- in foreign shares. Their value will rise simply based on the currency exchange. Meanwhile, you'll be taking advantage of the opportunities that await you overseas.

Could the Government Prevent Another Major Collapse?

By Simon Maierhofer

Growing up and going to school in a little village in Germany, I had a big advantage - a big brother. Not only was my brother twice as old and tall as me, he was also twice as tall as all the other boys at school. If needed, he could be my 'Get out of jail free card' - or at least so I thought.

No matter how old you are, having the backing of a big brother is always advantageous. Even huge multi-billion, multi-national banks (NYSEArca: KBE - News) and financial organizations (NYSEArca: XLF - News) needed the help of a 'big brother' earlier this year.

In this case, the government stepped up and took the place of a big brother. There were, however, no family ties involved in this relationship. It was strictly business. On numerous occasions, the government had to bail out banks (NYSEArca: IAT - News) that had gotten into trouble.

Unpleasant history

On October 2, 2008, the House granted final approval of the first $700 billion bailout package.

On October 9, 2008, $37.8 billion were given to AIG (NYSEArca: AIG - News) in addition to the previously granted $85 billion. This package was increased to about $170 billion in November. On November 24, 2008, the FDIC and U.S. Treasury announced to back more than $300 billion worth of Citigroup's (NYSEArca: C - News) non-performing assets.

On February 17, 2009, the $787 billion bailout was approved followed by the Fed's announcement to buy up to $1.2 trillion worth of government and government agency (i.e. Fannie Mae, Freddie Mac) bonds on March 18th.

On March 23, Secretary Treasury Geithner announced a plan to create the Public Private Investment Program (PPIP). On May 8, the long-awaited bank stress test results were released and quickly modified.

The above, complicated as it may seem, is just a small synapses of what happened. But it beautifully illustrates the point that the government was ready to come to the rescue whenever needed.

Willing, but ineffective?

A picture says more than a thousand words and the chart below shows the effect, of the bailouts. Every bailout was received by major market declines. Following the initial bailout, the Dow Jones (DJI: ^DJI), S&P (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) dropped some 30% in 45 days.

Within 20 days of the second major bailout, the Dow Jones (NYSEArca: DIA - News), S&P 500 (NYSEArca: SPY - News) and Nasdaq (Nasdaq: QQQQ - News) tumbled 15% or so. Dozens of other initiatives in between had no noticeable positive effect either.

On March 23rd, the Dow soared 496 points, allegedly because of the PPIP. The government stimulus plans probably infused some confidence into the market, but they certainly were not the only catalyst to send stocks soaring. The PPIP and the Fed's bond buy-back program weren't launched until the middle/end of March.

In early March, amidst this doomsday atmosphere, the ETF Profit Strategy was one of the only bullish advisory outfits. Via a special Trend Change Alert sent out on March 2nd, the ETF Profit Strategy Newsletter recommended to start buying long and leveraged long ETFs, expecting the onset of a massive rally.

While the buy alert worked, the same thing can't be said for the various bailouts. Nevertheless, most investors' believed that big brother would step in once again, if needed, to prevent a major collapse. This may be true, but the issue is not one of willingness, it's one of effectivity.

Shooting blanks

The primary goal of the composite of stimulus packages was to shore up banks and re-inflate the economy. For money to be inflationary, however, it has to reach the consumer. We know that banks (NYSEArca: KRE - News) received plenty of money. But where did this money go?

Injecting $2+ trillion into the economy sounds good in theory. Unfortunately, it appears as if the bailout funds handed to banks never really reached the economy, or the consumer. As the chart below shows, cash assets of all commercial banks have grown four-fold over the past 18 months.

In other words, banks pocketed the money, but didn't share the wealth. Banks are hoarding rather then lending. The purpose of the bailouts' were to inflate the credit markets. As long as money remains on banks' balance sheets as cash, it simply cannot do its job of inflating the economy.

Too big even for big brother

In a special bailout report, issued on September 2008, the ETF Profit Strategy plainly revealed the flaws of the initial, and all subsequent, bailout initiatives.

Aside from those inherent flaws, the U.S. government faces a problem that is simply too big. Yes, too big, even for the U.S. money-printing machine.

According to an Asian Development Bank research report, the value of global financial assets including stocks, bonds, and currencies (not including real estate) fell by more than $50 trillion in 2008. IHS Global Insight estimates that $14 trillion worth of wealth was destroyed in the U.S. alone.

This is more than five times the amount of the Fed's current balance sheet. Additionally, and more importantly, the total world derivatives market (the kind of leveraged financial instrument that has caused this massive deflation) is estimated to be worth about $800 trillion.

In the face of record government deficits, President Obama has a hard time getting a $1 trillion +/- health care bill approved. Would it be reasonable to assume that permission would be granted for another trillion dollar bailout? More importantly, could the U.S. government afford another trillion dollars plus bailout? It doesn't seem so.

This time it's different

A quick comparison of the post 2007 downturn with all previous recessions shows that the only parallels to retain any value are those to the Great Depression.

Concerns about a similar outcome - an 80%+ drop in the U.S. stock markets (NYSEArca: VIT - News) - are quickly dismissed. 'This time it's different, the government can print its way out of trouble.'

That's true, unlike the 1929 - 1932 period, the US dollar is not backed by gold (NYSEArca: GLD - News) anymore which opens the door for more fiat money to be printed and debt to be monetized. At first glance, being off the gold standard may seem like a blessing.

In reality though, it's a curse. Due to the endless amount of fiat dollars, there is an endless mountain of debt out there, toxic debt. The $800 trillion in derivatives floating around would never have happened with a gold-backed U.S. dollar.

In summery, yes, the government can now print money seemingly at will. Nevertheless, the problem at hand is simply too big to be monetized. Eventually, the piper will get paid. This will have far reaching financial consequences.

Every issue of the ETF Profit Strategy Newsletter includes a detailed short, mid and long-term analysis of the stock market and other asset classes, along with common sense strategies to survive and thrive in the current financial environment.

Unlike the banks, many of us don't have a big brother to erase our financial mistakes. It's up to you and me to get it right the first time.

Thursday, 17 December 2009

How to ruin your chances of prosperity

Sheyna Steiner

Prosperity and financial freedom are burdens. Where's the excitement in knowing you'll always have enough money to cover any contingency and pay all your bills? All that free time and security would be enough to bore anyone to tears.

To avoid that fate, most people can ruin their chances of prosperity simply by doing as little as possible: Show up at work, do just enough to stay employed and strive for mediocrity.

But for those who just can't seem to beat prosperity off with a stick, there are overt ways to foil long-term financial success.
4 ways to thwart prosperity

* Don't set goals.
* Dillydally.
* Think inside the cubicle.
* Invest in the hottest sectors.

Don't set goals

As they say, you can't reach your destination if you don't know where you're going.

The mantra preached by self-help gurus in every field, from weight loss to dog training, is to set clearly defined goals. The same is true for finance.

Whether your money goal is to pay down debts or become a billionaire, write it down and then figure out how to reach that milestone.

"First we need to define what prosperity means to each of us, meaning are we financially free? Or do we have no mortgage? Do we have money in the bank?" says Justin Krane, Certified Financial Planner and president of Krane Financial Solutions in Los Angeles.

"If someone says they want to retire, that is not as clear and vivid as, 'I want to be able to travel and gift money to my kids,'" he says.

Before you make wealth-building a priority in your life, set your goals.


Saving and investing is a mandatory part of building wealth. It may not make you a Maserati-driving, champagne-swilling magnate, but it plays a vital role in fostering good financial habits.

Think of it like establishing good grooming habits. Heidi Klum probably has a great skin care routine, and though you won't become a supermodel by following her example, you may end up with nice skin.

Saving and investing work best in the long run if you start early. To gum up your prosperity plans, take a few years off between 18 and 40.

Blame it on math and compounding interest.

"One of the lessons we try to teach young people is that the savings curve is not linear; it's geometric," says Jack Reutemann, Certified Financial Planner and president of Research Financial Strategies in Rockville, Md.

"To save for retirement, if you wait until 35, you have to double the money you would have had to save if you started at 25," he says.For instance, a 25-year-old would need to save $167 a month for 45 years to amass about $881,000, assuming an annualized 8 percent return.

Sadly, saving the same amount with an identical return for 35 years will get you just about $383,000.

Think inside the cubicle

Keeping your head down and your nose clean is a good way to stay employed, but it's not the best way to get rich.

While company executives rake in the dough, the rank and file often get the short end of the stick -- they're subject to layoffs and pay freezes while CEOs make millions. Even for star employees, there are no guarantees of ongoing employment, hence, very little control and security.

The big money is in entrepreneurship. The big losses are also there. Some people who may be inclined to start their own business may never actually do it because of the perceived risk.

"When you talk to the average person about starting a business, they find the idea very risky. When you talk to people who have started a business, they didn't find it very risky because they had special gifts or talents or skills and never thought that it would fail," says Dan Danford, chief executive officer of the Family Investment Center in St. Joseph, Mo.

"Most people perceive a higher level of risk than is actually there," he says.

Invest in the hottest sectors

Everyone has heard of someone who's made a mint in the market -- the guy who bought Apple when it went public or Caterpillar in the 1990s.

But for just a little more luck and investing savvy, any of us could have a pot of gold in our brokerage account. More likely than not, the average investor is not doubling or tripling her money in a year. Instead, he or she is likely earning less than the market return.

"The average investor return is two-thirds of the S&P," says Reutemann.

Kelly Campbell, a Certified Financial Planner at Campbell Wealth Management in Washington, D.C., has also found that to be true.

"When the S&P lost 38 percent in 2008, most investors lost 30 (percent) to 60 percent of their portfolio. Why someone would lose more than the market did is a mystery to me," he says.

Once a sector or a stock is hot, it's a fool's bet to jump on the bandwagon. But it can be hard to resist the siren song of massive returns in a short period of time.

Investing is difficult -- people devote their lives and careers to studying markets and finance. There's no shame in admitting that despite skimming a book and some online articles about investing, you still don't know everything there is to know.

"People have to educate themselves and find their way to a competent adviser who will help them buy low-cost index funds," Reutemann says.

If you're not up to doing it yourself, an ethical adviser can shape your investing strategy and also help you see the big picture and attain your financial goals.

Thursday, 10 December 2009

cnnmoney Poll: 84% of Americans think economy still in recession

By Chris Isidore, senior writer

Economists are in broad agreement that the Great Recession is over. The American public strongly disagrees.

In a poll of more than 1,000 Americans conducted late last week by CNN/Opinion Research Corporation, 84% of those surveyed believe that the economy is still in recession.

That's a slight improvement from the 87% who believed there was still a recession in the September survey, but it is almost the opposite view of the nation's economists.

An official declaration of an end to the recession that started in December 2007 won't be made until next year at the earliest by the National Bureau of Economic Research. But recent economic readings and surveys of economists all point to a U.S. economy that is growing again.

The economy grew at a 2.8% annual rate in the three months ending in September, according to the latest reading on gross domestic product, the broadest measure of the nation's economic activity.

While the economy continues to lose jobs, the number of jobs lost in November fell to 11,000, the smallest amount of any month since the start of 2008, while the unemployment rate improved to 10% from 10.2%. And a survey of 43 top economists by the National Association of Business Economists in October found 81% agreed that the recession was over.

The survey was taken ahead of that latest jobs reading. It comes as President Obama announced Tuesday that he wants Congress to redirect a certain portion of leftover Wall Street bailout funds toward new job creation measures, including building roads and bridges, "weatherizing" homes to reduce energy bills and lending to small businesses.

Recovery 'only an economist can love'

But even economists understand why the general public doesn't share economists' view of current conditions. Mark Vitner, senior economist with Wells Fargo Securities, said this has so far been a recovery that only an economist can love, given continued job losses and tight credit conditions.

"I think the end of the recession and beginning of the recovery is very difficult for Main Street America to see," he said. "The bad news isn't coming out as frequently, but there really hasn't been much good news. We're stuck in some sort of economic purgatory."

Vitner said part of the disagreement between economists and the public view of the economy is a difference in how recession and recovery are defined. Economists believe a recession is over and a recovery begins when the economy has hit bottom.

"If you fall into a hole, the time that you're falling is the recession. Once you hit the bottom, the recession is over. But you're still in the hole," said Vitner. "Most non-economists think the recovery doesn't begin until you're out of the hole."

In fact the survey backs up that disconnect between economists' and the public's views.

It found 46% of those surveyed believe that conditions have stabilized and are not getting any worse. But that plurality also believes that means the economy is still in recession.

Economic conditions of those answering the poll also affect the results.

"The recession has hit blue-collar families the hardest," said CNN Polling Director Keating Holland. "More than half of whites who never attended college say economic conditions are still in a downturn. Most whites who attended college say things have stabilized or are starting to get better."

Few gains seen, more worries ahead

Vitner said that any improvement in the economy so far has produced very modest gains for the average household, as well as the broader economic measures. So people are likely to feel like there's a recession for quite some time.

"The hole is a very big hole this time and the recovery is very modest so it might take us a number of years to get out of the hole," he said.

While economists are typically getting more optimistic, the poll found evidence the public is getting more pessimistic.

The poll found only 15% believe the economy is starting to recover from the problems it faced in the past year or so, down from 17% who saw improvement in the previous poll in September. And it found 39% believe the economy is still in a downturn and conditions are continuing to worsen, up from 36% who believed things were getting worse in September.

And many Americans are still worried things could get a lot worse.

Asked about a risk of another depression, the poll found 43% believing that was somewhat or very likely, a bit worse than the 41% who thought that in a survey in the middle of summer, although well below the 59% who feared another depression when asked in early October of 2008.

The survey described a depression as a period when roughly one out of four workers were unemployed, banks fail across the country and millions of ordinary Americans were temporarily homeless or unable to feed their families.

Asked in general terms how well things are going in the country today, the outlook is more negative than the previous reading for the first time since President Obama took office in January, with 66% saying things are pretty or very bad, up from 63% among those asked that question on Oct. 30 and Nov. 1. Still, that is better than the 79% who believed things were pretty or very bad a year ago.

-- CNN Wires and CNN Deputy Political Director Paul Steinhauser contributed to this report

Wednesday, 9 December 2009

7 Retirement Investing Mistakes

Provided by

Everyone knows the secret to investment success is to buy low and sell high. The problem is most of us lack clairvoyance.

We weigh in on some of the most common mistakes investors make, and while it's easy to see that chasing hot stocks -- the most frequently cited mistake -- would be an exercise in futility, there are other pitfalls to watch out for on the road to retirement.

There are never any guarantees when investing, but avoiding these seven missteps will better your chances of success.

Mismatching Investment With Goal

Need that money for retirement in the next couple years? Don't put it in a hot emerging-markets fund.

Consider when you'll need access to your money. This will help you avoid unnecessary transaction fees, penalties and risk.

For some goals, such as paying for college, it may make sense to use a mix of investments, says Gail MarksJarvis, author of "Saving for Retirement (Without Living Like a Pauper or Winning the Lottery)."

"If you are saving for college and your child is within three years of going to college, you've still got seven years until that last year of college," she says.

So while the bulk of short-term college savings should probably be very safe in CDs or short-term bonds or a high-yielding savings account, maybe some of that money could be invested in stocks. "Just remember the rule of thumb," she says, "that money you'll need within five years shouldn't be in stocks."

Discounting Fees

Fees may sound minuscule at 1 percent or 2 percent, but they can gouge your returns by thousands of dollars.

While all mutual funds have expense ratios, which cover investment advisory, administrative services and other operating costs, some are much higher than others.

To complicate matters, some funds impose sales charges or loads. Load funds are only available through an investment adviser or broker who is compensated by sales commissions.

Picking no-load funds is one way to save money on fees. Instead of going through a broker, call a mutual fund company directly to purchase a fund.

While it might be worth paying a load if you don't have the time or inclination to make your own investment choices, just remember, it's hard, even for a skilled money manager, to make up for those extra fees.

Failing to Strategize

It's time to pick funds from your 401(k) lineup. All you do is pick the ones that performed the best, right?

Wrong. Before you research the investment, there are a couple of things to think about. First, plan your investment strategy by determining what asset classes work best for you, and then pick the investments that are best in these categories.

Next, make sure you're comparing apples to apples. Some funds don't make as much money as others -- by design. A bond fund cannot compete with a stock fund because of the nature of their respective holdings. However, different types of funds serve different purposes. The bond fund can have a stabilizing effect on one's portfolio.

Misreading the Label

You bought a bunch of different funds -- so that means you're diversified, right? Not necessarily. You don't want to find out that you're overexposed to a particular market sector after it hits a rough patch. Luckily, staying out of this trap is a matter of learning to read the label.

Understanding the different types of asset classes will help you strategize. Different asset classes do better at different times. Bonds may do well while the stock market is suffering and large-cap firms may weather tough times better than spunkier small caps. Boring bonds will never match stocks in a hot market and small caps may be better poised to take off like a shot than their larger, lumbering counterparts.

Neglecting Research

Psssst. Wanna hear a good stock tip?

No, we're not going to tell you about the next Google. We're going to tell you to do your homework. Here's what to look for when researching funds:

* Type of fund (large-cap growth, small-cap value, etc.).
* How long the manager has been there.
* How much the fund costs (expense ratio).
* Minimum investment required.
* Portfolio holdings (list of securities).
* Performance information -- remember, past performance does not guarantee future return.

Ignoring Your Portfolio

Buy and hold can be a smart strategy, but buy and ignore won't serve you in the long run.

Without reviewing your holdings, you won't know if your portfolio remains balanced, and you won't shift your holdings to achieve retirement goals or help you cope with changing life events.

The experts differ on how often you need to do a portfolio review. Some recommend doing so on a quarterly or semiannual basis. Others meet three times a year with clients. But all agree that it's important to review your holdings at least once a year, whether they're within a company-sponsored retirement plan or outside of one.

Getting Emotional

The market is ricocheting all over the place, and when the boss isn't paying attention, you're online buying and selling in a frenzied attempt to dodge the bullets.

Richard Salmen, a Certified Financial Planner and national president of the Financial Planning Association, describes the all-too-common trap emotionally driven investors fall into: "Most people don't earn what the market earns. They invest too heavily in too risky investments that are doing well, then drop out when they go back down. They take all their money out of tech stocks, for example, put the money into bonds, then put money back in stocks after prices have gone back up."

His prescription is to invest a little bit of money from every paycheck, diversify, then leave it alone.

Copyrighted, All rights reserved.

Wednesday, 2 December 2009

Inequality is bad news for everyone

S'pore could be a test bed to temper rat-race impulse to keep up with others
By Tan Hui Yee, Correspondent

WE MIGHT know it as the rat race; academia call it the 'expenditure cascade', but it amounts to the same treadmill.

In short: When the rich get richer, but the poor stay poor, life becomes tougher for everyone else.

Not that the rich intend that outcome but the bigger homes, flashier cars and nicer clothes they buy make everyone else raise his expectations. Soon, the less well off spend more too, but it's a struggle to keep up because their income hasn't grown as much.

Professor Robert Frank applied the term expenditure cascade to this unfortunate product of rising inequality, a phenomenon that could just as well apply here as it does in his native United States.

And while public policies to temper expenditure cascade seem a political impossibility in the US, Prof Frank believes Singapore could make an ideal test bed.

The Cornell University economist, who was in town two weeks ago to lecture at the Civil Service College, told The Straits Times: 'Even if envy and jealousy were non-existent, there would still be perceptions of quality that depend on context. And so everybody would have a tendency to spend more when others spend more.

'When everybody spends more on high quality things, the things that used to seem high quality don't seem so any more.'

The award-winning 64-year-old academic says the effects of the expenditure cascade wouldn't be that bad if it merely centred on items that were not crucial to survival.

'The main problem is if you don't match the spending of others like you, then sometimes that makes you less able to achieve basic goals.'

Take the case of the suit you wear to a job interview. If everyone spends more money on a suit to make a good impression, bucking the trend could mean losing your stab at the job, he says.

Or a home near a good school. Since the number of homes near popular schools is generally limited, parents bid up the prices of such homes to give their kids the head start in life.

'If you don't spend as much as people like you on housing, then your kids will go to below-average schools,' says Prof Frank.

'Most parents spend more even though they don't have more, which means they would have to borrow more, save less and work harder.'

When everybody spends more, they all pay a higher price only to end up in the same positions in the social hierarchy as they were before. End result: Society 'wastes' a lot of money.

After all, some things in life are what economists call 'positional goods' - their value lies more in how they are ranked in relation to their peers.

Military hardware is one example - a country's security is not guaranteed by the number of bombs it has, but by having a greater number of bombs than its neighbours.

Ironically, the educator also thinks that education itself can be a positional good.

'A good education just means a better education than what others have,' says Prof Frank.

The question, he says, is whether the skills learnt are essential to one's job.

'If the answer is yes, then the money is not wasted. But if the best jobs go to the people with the most education, but the education isn't necessary to do the job, when you double the amount of money spent on education, the same jobs will go to the same people at the same salaries.'

Since it is human nature to want to get ahead, Prof Frank is under no illusion about curbing that instinct. Rather, he advocates a progressive consumption tax to reduce wasteful spending.

Instead of taxing people's incomes, governments should tax incomes left over after subtracting savings. Since the biggest spenders are taxed more, the rich have the greatest incentive to cut expenditure, which in turn reduces pressure on those less well off.

The resulting tax extracted could then be put to more productive uses - 'hiring teachers, or doctors, or fix the roads or build a new subway line' - all items that increase the welfare of all citizens.

He thinks the idea has dim prospects in his home country, given how it is 'politically paralysed' by Republicans blocking attempts at social reform.

Singapore is a different story.

'Singapore has been a leader in innovative policy change. It was among the first place to tax congestion... if there is any new idea with merit, it would have a better chance to be implemented here than anywhere else.'

He feels rising inequality should be a concern not just because of the spending pressure it puts on us all, but because of the way it affects our sense of well being.

Officials here are quick to point out that absolute incomes have risen for the majority over the years even though the incomes of top-tier earners are pulling away from the rest of the population.

Prof Frank sees absolute and relative incomes as being relevant in this area: 'Both frames of reference are important. When people ask 'how am I doing?', they have two frames of reference - 'how am I doing compared with before', and 'how am I doing compared to other people like me.''

Whether one's progress in one area can be used to justify a deficiency in the other depends on the extent of either.

Studies elsewhere have drawn the link between people's relative income levels and levels of happiness. Generally, richer people are happier than poor ones. Yet, when everybody's incomes rise at the same rate, average levels of happiness stay fairly constant.

It does suggest that average levels of happiness can never be raised.

'I think it's possible,' he says without hesitation. 'Making the income distribution a little tighter takes some of the net pain out of inequality. You can't change the fact that half of the population is in the bottom half, but the pain they suffer can be lessened if they are below average by a smaller amount.'

In other words, people will generally be happier if the disparity between the rich and poor was not so glaring. What about the argument that a more equal society would reduce the motivation for people to work hard?

'There doesn't have to be great inequality for people to want to work hard... In countries that have low inequality, gross domestic product (GDP) grows faster on the average,' he says.

'In the United States, GDP grew faster in the three decades after World War II than in the three decades that followed those, even though inequality was lower in the first three decades.'

In any case, free markets don't always give the best results.

Before 1991, elite American universities agreed among themselves not to compete for the best students through merit-based scholarships in order to channel their money to truly needy students. But the US Justice Department charged them with violating anti-trust legislation, prompting them to end such cooperation.

What ensued was a free for all as universities tried to match each other's scholarship offers to attract the highest-scoring students, which drained funds available for financial aid.

Prof Frank himself has seen this competition first hand. One of his four sons, Chris, was offered a generous scholarship of more than US$50,000 a year to study at New York University in 2005.

Chris, knowing his father's position on this issue, didn't know what to do. He asked his father for advice.

'He's a very good student. And I could afford to pay for his college. He was going to get to go whether he got a scholarship or not,' says Prof Frank.

'I said, 'What do you think is going to happen if you tell them you don't want the scholarship?'

'He paused and said, 'Well, they're just going to give it to the next kid on the list.'

'I said, 'Yeah, that's about right. So what should you do?'

'He said, 'I should accept the scholarship, and then if I am successful, I should make a big donation to NYU someday.''

There's a tinge of pride in his voice as Prof Frank relates how his son struggled with the unfairness of the whole situation but just as quickly, he adds: 'But it's still a problem... It's grossly unfair that some poor family wouldn't get that.'

The moral of the story, he says, 'is more competition isn't always better'.

It's like being spectators in a ball game. 'If everybody stands to see better, then nobody sees better than if they were to remain seated.'

The Biggest Scam Ever

by Robert Kiyosaki

On the cover of the October 19, 2009 issue of "Time" magazine ran this headline: "Why It's Time to Retire the 401(k)." The cover picture was ominous, showing a 401(k) sinking like the Titanic.

I recommend reading this entire article, especially if you do have a 401(k). My concern is that the flaws of this retirement plan will grow into personal tragedies as the first of approximately 75 million baby boomers retire, leading to the biggest stock market crash in history.

But in spite of the apparent problems with the 401(k) plan, the darlings of financial media continue to tout its benefits. The same month "Time" ran its article, "More" magazine's financial guru, Jean Chatzky, wrote an article about using low-interest savings to pay off high-interest credit cards. In the article she states, "There's no better guaranteed return on your money (except, perhaps, a 401(k) match)."

Countering Jean's wisdom of "no better guaranteed return," the "Time" article stated, "At the end of 1998, the average 401(k) balance was $47,004. By the end of 2008, the average balance was down to $45,519." If that is a great guaranteed return, I'm glad I don't have a 401(k). The "Time" article pointed out that $100 in 1998, after inflation, was worth about $73 in 2008, a loss of $27 after ten years. So whom do you believe..."Time" or "More" magazine?

If you are unsure as to whom (and what) to believe, the "Time" article made two more statements worth considering. They are:

1. "The older you are the riskier a 401(k) gets."

2. "Forty-four percent of all Americans are in danger of going broke in their post-work years."

Now, I can hear some of you saying, "But the stock market is going back up. Green shoots are appearing. Everything is fine. The crash was just a correction." For those optimists among you: I wish that all of your dreams come true and you live happily ever after.

I do not criticize the 401(k) plans just to criticize. I write because I am concerned. Let's say "Time" magazine's estimates are correct. Let's say 44 percent of all Americans will go bankrupt after retirement. For approximately 75 million baby-boomers preparing to retire, that means 33.8 million of them will go bust once they stop working. To me, this is disturbing.

While many think the financial crisis is over, I believe the worst is yet to come. In spite of the green shoots in the stock market, the fundamentals of the U.S. government are worsening. I doubt Social Security can afford the avalanche of retiring baby boomers. The Social Security fund is empty, underfunded by approximately $10 trillion. For the first time in 35 years, Social Security will not pay a cost of living increase. And Medicare is projected to face a shortfall as well, of between $65 and $85 trillion.

In 2009, interest payments on our national debt are about $380 billion, which is $1 billion a day in interest. At the same time, the national debt is projected to climb to $20 trillion by 2012, which means the U.S. will have to borrow money just to make the interest payments.

I know the Federal Reserve Bank can continue to print more and more money...but city and state governments cannot. This means your city and state taxes will have to go up. If you think your property taxes are high now, just wait five years. I predict that, even if your home's value does not go up, property tax rates will, and higher taxes will do wonders for property values. This means people counting on their home as their biggest asset may be disappointed.

In 1913, when the Fed was created, and in 1971, when President Richard Nixon took the U.S. off the gold standard, the ultra rich were allowed to siphon off our wealth -- via our own money, the very thing we work hard for and do our best to save. In other words, with every dollar the Fed prints, our wealth is being drained via increased taxes, debt, inflation, and savings.

A Cash Heist

There are four expenses that keep the poor and middle class struggling financially. They are:

1. Taxes -- both apparent and hidden

2. Debt -- mortgages, credit cards, and student loans.

3. Inflation -- rising food and fuel costs

4. Retirement plans -- 401(k) and savings

It is via these four expenses that the rich get richer. In other words, all four of these expenses are a cash heists, the ways the rich use the government to get into our pockets, draining us of our wealth.

The Silver Lining

The silver lining of all this: With a more sophisticated financial education, rather than have taxes, debt, inflation, and retirement accounts as drains on a person's wealth, a person can convert those government-sponsored expenses into elements that work in one's favor. By using the same rules of money the rich use, those four expenses will make you richer. In other words, taxes, debt, inflation, and not needing a retirement plan can make you richer if you use different rules of money. As stated earlier, in 1971 Nixon changed the rules -- and so should you.

In closing, the 401(k) has a few good points...but not good enough, in my opinion, given the financial challenges that lie ahead.

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