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Wednesday, 31 August 2011

The economics of happiness

The mad pursuit of corporate profits is threatening us all

by Jeffrey D Sachs

We live in a time of high anxiety. Despite the world's unprecedented total wealth, there is vast insecurity, unrest and dissatisfaction.

In the United States, a large majority of Americans believe that the country is "on the wrong track". Pessimism has soared. The same is true in many other places.

Against this backdrop, the time has come to reconsider the basic sources of happiness in our economic life. The relentless pursuit of higher income is leading to unprecedented inequality and anxiety, rather than to greater happiness and life satisfaction. Economic progress is important and can greatly improve the quality of life, but only if it is pursued in line with other goals.

In this respect, the Himalayan Kingdom of Bhutan has been leading the way. Forty years ago, Bhutan's fourth King, young and newly installed, made a remarkable choice: Bhutan should pursue "gross national happiness" (GNH) rather than gross national product (GNP). Since then, the country has been experimenting with an alternative, holistic approach to development that emphasizes not only economic growth, but also culture, mental health, compassion and community.

Dozens of experts recently gathered in Bhutan's capital, Thimphu, to take stock of the country's record. I was co-host with Bhutan's Prime Minister, Mr Jigme Thinley, a leader in sustainable development and a great champion of the concept of "GNH".

We assembled in the wake of a declaration in July by the United Nations General Assembly calling on countries to examine how national policies can promote happiness in their societies.

All who gathered in Thimphu agreed on the importance of pursuing happiness rather than pursuing national income. The question we examined is how to achieve happiness in a world that is characterised by rapid urbanisation, mass media, global capitalism and environmental degradation.

How can our economic life be re-ordered to recreate a sense of community, trust and environmental sustainability?

Here are some of the initial conclusions.

First, we should not denigrate the value of economic progress. When people are hungry, deprived of basic needs such as clean water, health care, and education, and without meaningful employment, they suffer. Economic development that alleviates poverty is a vital step in boosting happiness.

Second, relentless pursuit of GNP to the exclusion of other goals is also no path to happiness.

In the US, GNP has risen sharply in the past 40 years but happiness has not. Instead, single-minded pursuit of GNP has led to great inequalities of wealth and power, fuelled the growth of a vast underclass, trapped millions of children in poverty and caused serious environmental degradation.

Third, happiness is achieved through a balanced approach to life by both individuals and societies.

As individuals, we are unhappy if we are denied our basic material needs, but we are also unhappy if the pursuit of higher incomes replaces our focus on family, friends, community, compassion and maintaining internal balance. As a society, it is one thing to organise economic policies to keep living standards on the rise, but quite another to subordinate all of society's values to the pursuit of profit.

Yet politics in the US has increasingly allowed corporate profits to dominate all other aspirations: Fairness, justice, trust, physical and mental health, and environmental sustainability. Corporate campaign contributions increasingly undermine the democratic process, with the blessing of the US Supreme Court.


Fourth, global capitalism presents many direct threats to happiness.

It is destroying the natural environment through climate change and other kinds of pollution, while a relentless stream of oil-industry propaganda keeps many people ignorant of this. It is weakening social trust and mental stability, with the prevalence of clinical depression apparently on the rise. The mass media have become outlets for corporate "messaging", much of it overtly anti-scientific, and Americans suffer from an increasing range of consumer addictions.

Consider how the fast-food industry uses oils, fats, sugar and other addictive ingredients to create unhealthy dependency on foods that contribute to obesity. One-third of all Americans are now obese. The rest of the world will eventually follow unless countries restrict dangerous corporate practices, including advertising unhealthy and addictive foods to young children.

The problem is not just foods. Mass advertising is contributing to many other consumer addictions that imply large public-health costs, including excessive television watching, gambling, drug use, cigarette smoking and alcoholism.

Fifth, to promote happiness, we must identify the many factors other than GNP that can raise or lower society's well-being.

Most countries invest to measure GNP but spend little to identify the sources of poor health (like fast foods and excessive television watching), declining social trust and environmental degradation. Once we understand these factors, we can act.

The mad pursuit of corporate profits is threatening us all. To be sure, we should support economic growth and development but only in a broader context: One that promotes environmental sustainability and the values of compassion and honesty that are required for social trust.

The search for happiness should not be confined to the beautiful mountain Kingdom of Bhutan. PROJECT SYNDICATE

Jeffrey D Sachs is Professor of Economics and Director of the Earth Institute at Columbia University. He is also Special Adviser to United Nations Secretary-General on the Millennium Development Goals.

Sunday, 28 August 2011

3 Ways the Next Recession Will Be Different

If the second half of 2009 and 2010 were a time of economic recovery, then 2011 has by and large felt like a relapse. Skyrocketing oil prices from instability in the Middle East cut into consumer spending, the prolonged debt ceiling debate chipped away at business confidence and the European debt crisis continues to enrage the stock market.

All of this has only renewed concerns among analysts and average Americans that the U.S. would suffer a dreaded double-dip recession, but according to several economists MainStreet spoke with, even if we do enter into another recession later this year or in early 2012, it won't be nearly as damaging as the Great Recession of 2008.

"If there is another recession, I think it wouldn't be as severe and it would also be shorter," says Gus Faucher, senior economist at Moody's Analytics. "And the reason for that is a lot of the imbalances that drove the previous recession have been corrected."

As Faucher and others point out, banks are better capitalized now, the housing market has shed (however painfully) many delinquent homeowners who signed up for subprime mortgages before the recession and U.S. corporations have trimmed their payrolls and are sitting on ample cash reserves to help weather another storm. At the same time, consumers have gradually improved their own balance sheets by spending less and paying off more of their debt.

That said, another recession wouldn't be a walk in the park for U.S. businesses or consumers since the country would experience a worsening of an economy that is still trying to recover from the first downturn. Any new job cuts, mortgage delinquencies and revenue loss — however mild — would effectively be piled on top of previous losses, making it feel that much more severe.

Fewer Job Losses, but Higher Unemployment Rate

This severity will likely be most evident in the labor market. The country lost more than 8 million jobs across all sectors of the economy during the first recession, causing the national unemployment rate to roughly double from 5% to 10.1% at its worst point. Few if any economists expect job losses this time around to be as significant or widespread, but the major difference is that many of those lost jobs have yet to come back, and the unemployment rate has been hovering around a comparatively high 9% for months.

"Unemployment is not going to double from 9% to 18% now, but it could get up to 10% and maybe more, hitting those highs we experienced last time around," says Paul Dales, senior U.S. economist at Capital Economics in Toronto.

Others like Faucher predict that the unemployment rate could go as high as 11% in a second recession. That may only be a 2% increase from the current situation, but it would represent the highest unemployment rate at any point since the end of World War 2, surpassing the 10.8% rate at the tail end of the 1982 recession.

Initially, many of the same industries that suffered job losses in 2008 and 2009 would experience layoffs again in the next recession, with manufacturing and construction businesses leading the way, according to Mark Price, a labor economist with the Keystone Research Center. But unlike last time, some sectors might escape largely unscathed. In particular, Faucher points to the education and health services industries, which grew in the aftermath of the recession and have a better long-term outlook than most professions.

Different Cities Could Be Impacted

The parts of the country that had it worst during the first recession — housing bubble states like Florida, California and Nevada — won't be helped any by a second recession, but neither will they be the hardest hit. Instead, Dales speculates that it may be cities like Washington, D.C., that are in for an unpleasant surprise.

"One of the differences in this next recession is that there would be less fiscal stimulus," Dales said, predicting that legislators would be less likely to expand government payrolls or pump billions into the economy given the anti-spending climate right now. "So more jobs might be lost in Washington, D.C., which escaped quite lightly during the first recession."

Faucher speculates other cities like New York and Boston may endure tougher times if the stock market were hit hard by the next recession, since these cities are very much exposed to the financial markets. What's more, he argues that the technology industry might experience some turbulence as well, more so than during the previous recession, as investors would have to think twice about funding projects. If so, San Francisco and Seattle could have a gloomy outlook.

A Better Housing Market

While no one can say for sure which factor might cast the final blow the economy, one thing seems clear: it won't be the housing market.

"This will not be a housing-led recession like the last one," Faucher said, and as a result, consumers shouldn't expect to see a drastic fallout in the housing market this time around. "The housing market may bounce along the bottom a little longer and see small price declines, but we are pretty close to an equilibrium."

Housing starts are at record low levels and prices have dropped significantly, meaning the market doesn't have much farther to fall. Once again though, that's not to say the housing market would be unaffected by another recession. According to Dales, the big concern is that a new economic downturn could prompt another round of first-time mortgage defaulters, which in turn would lead to another round of foreclosures.

"It might even be the case that people who are struggling to pay their mortgages now would see another recession as reason enough to stop paying, that they might say they have had enough," Dales said.

Sadly, since foreclosures could take years to process, it could serve as a long reminder of the devastating impact of a recession, even one that is short-lived.

How Long Will My Retirement Savings Last?

I'm 64 and plan to retire next April. I have $160,000 saved. How much lifetime income can I expect to draw from my savings? -- Mike W.

Have you ever heard the joke about the accountant who is asked how much two plus two is? His response: "How much do you want it to be?"

Well, there are many possible answers to your question, too.

The amount of income you can expect to receive from your $160,000 stash can vary significantly depending on a number of factors, many of which you can control and many of which you can't. Indeed, how long you'll live and what sort of gains you'll earn on your savings are beyond your control.

Even if you knew the average return you would earn on your savings throughout retirement, you still couldn't know exactly how much lifetime income you could get. When you're drawing money from a portfolio, the pattern of returns, not the average, determines how long your savings will last.

So if you draw the same amount of money each month from two portfolios that earn an identical annualized return of, say 6%, over the next 30 years, but one suffers big losses early in retirement and recovers down the road while the other zooms to big gains at first and stumbles later on, the portfolio with the early losses will run out of money sooner.

The reason is that the combination of lousy initial returns plus withdrawals can deplete your nest egg so badly that there's not enough capital remaining for the portfolio to adequately recover — even when the markets turn around.

Given this sort of inherent uncertainty, how can a retiree arrive at a balance between pulling enough dough out of savings to live on without taking too much risk too soon?

You've got a number of choices. One is to manage the process yourself.

The key to this strategy is to start with a withdrawal rate that gives you a high level of confidence that you'll be able to increase your withdrawal amount annually based on inflation for at least 30 or so years — in your case, into your mid-90s.

Toward that end, many advisers recommend that you follow the "4% rule." For you, that would mean withdrawing 4% of your $160,000, or $6,400, the first year of retirement and then boosting it each year.

If inflation runs at say, 3% a year, your second withdrawal would be roughly $6,600, the third about $6,800 and so on. The advantage to this approach is that research shows you have roughly 80% to 90% odds of your money lasting 30 or more years.

But the 4% rule also has its downsides. One is that you can still run out of money, especially if you get hit with losses early in retirement. Another is that you might find it difficult to live on just 4% of your savings (although, of course, you'll also have Social Security and possibly a pension if you're expecting one from an old employer).

A less obvious risk is that if the financial markets perform decently, limiting yourself to an inflation-adjusted 4% could leave you with a big pile of savings late in life, which means you could have lived larger earlier in retirement.

The way to avoid these issues is to adjust the amount you withdraw along the way, taking less if your portfolio has taken a hit and more if it's ballooning in value.

Of course, you could also consider other withdrawal rates. For example, Maryland financial planner Michael Kitces has done research showing that you may be able to safely go to a higher initial withdrawal rate, say, 5% or more, if you're starting out when the stock market is undervalued and thus more likely to earn above-average returns going ahead.

Similarly, Minneapolis financial planner Jonathan Guyton and retirement-planning software developer William Klinger have done computerized simulations showing that a retirement portfolio has a high probability of lasting 40 years even with an inflation-adjusted initial withdrawal rate of just over 5%, provided you strictly follow a series of "decision rules" that call for you to adjust your withdrawals throughout retirement based on your investment performance.

If you want to take some of the guesswork out of the process, a good way to generate guaranteed income in retirement is to buy an immediate annuity.

To set up an immediate annuity, you hand over a portion of your savings to an insurer (or, far more common, to an investment firm selling annuities for the insurer) that then issues you a monthly check for life, the size of which depends on your age and the prevailing level of interest rates. Today, for example, a 65-year-old man might receive roughly $580 a month.

If you want income that will rise with inflation, you can get an immediate annuity that is linked with the consumer price index, or CPI. But you'll start with a payment closer to $400. (To see how much you might receive at different ages and for different sums, click here.)

A couple words of caution about annuities, however. When you buy an annuity you are betting that the insurer will be able to make payments for many years into the future. There is no 100% guarantee that insurer will be able to meet those obligations, but there are ways to protect yourself.

Also, I strongly recommend that you don't put your entire retirement stash into an annuity, as you are typically giving up access to the money you invest. That means the cash won't be available for emergencies or other expenses, which is why I think it's a good idea to consider a hybrid strategy that combines the assured income of an annuity with draws from a portfolio of stocks and bond funds that can provide liquidity and some long-term growth.

Whichever way you decide to go, it's important that you monitor your progress and be prepared to make adjustments to stay on track.

Online tools can help. With Vanguard's Retirement Nest Egg Calculator, for example, you can estimate how long your savings might last with different withdrawal rates and investing strategies.

And both T. Rowe Price's Retirement Income Calculator and Fidelity's Retirement Income Planner tool allow you to probe even deeper, testing a variety of strategies.

(One caveat: Depending on how you answer risk-tolerance questions in Fidelity's tool, it may end up recommending a plan with one or more annuities. But you can always click on a link for a non-annuity plan, and compare the two.)

If you feel as if all of this is a bit much for you, consult an adviser. Just try to find one with an open mind — not someone whose main mission is to sell annuities nor someone so ideologically opposed to annuities that he wouldn't even consider including one in a retirement income plan.

The bottom line, though, is that if you start making withdrawals at a sensible level and remain willing to make occasional adjustments, you'll be doing everything you need to do to make that $160,000 go as far as it can.

Wednesday, 24 August 2011

'Very Muted Growth' Coming for Next 10 Years: Faber

Both the U.S. and Europe are facing a decade of slow growth brought on primarily by the blunders of central banks, noted doomsayer Marc Faber said.

Investors should protect themselves by buying plenty of physical gold and putting it in a secure location, preferably outside the U.S., the author of the Gloom, Boom and Doom newsletter told CNBC.

"If I look at the politicians both in Europe and the U.S., I don't think that prospect (for growth) is very good," he said. "If I also look at the entitlement system and the government expenditures and the fiscal deficits and the debt overhang, I think for the next 10 years we'll have very muted growth in the Western world and standards of living for the average household will continue to decline."

In other words, he said, the next 10 years are likely to be much like the previous decade.

"I think we never really came out of the recession in many different sectors of the economy," Faber said. "If you look back to say 1999 to today, the U.S. as an economy, macroeconomically speaking, is of course much worse off than in 1999-courtesy of the Federal Reserve I may add."

Many prominent economists have joined Faber's dour outlook for the U.S. economy, at least in the short term.

Goldman Sachs has cut its forecast for growth to 1.5 percent for the year, and other parts of the world are experiencing slowdowns, as well.

In such a slow-growth environment, Faber prescribed a diversified mix for portfolios-25 percent to 30 percent in stocks, 20 percent to 30 percent in physical gold-"in a safe deposit box ideally outside the U.S. in various locations" because "I don't trust anyone"-some cash, and up to 30 percent in real estate, particularly in Asia.

"I think it's important in today's very uncertain world to diversify not only in various asset classes...but also the custody of your assets should be in different jurisdictions," he said.

Amid the turmoil surrounding markets, including the Standard & Poor's downgrade of U.S. debt , gridlock in Washington and burgeoning European debt problems, Faber predicted more investors would pull back positions in the capital markets.

"Investors, kind of worldwide, trusted the regulators, they trusted the system and they were enthusiastic about owning equities," he said. "Over the last 10 years, the mood has changed a lot. Investors and individual investors in particular, they don't trust management anymore. They are upset about executive compensation, they're upset about regulators. They think the markets are rigged and they're upset about the ratings agencies.

"A lot of individuals will not came back to the (stock) market and on rebound they will have reduced their positions."

Saturday, 20 August 2011

5 Money Moves 'Dr. Doom' Is Making Now

Marc Faber readies for hyperinflation, dollar's demise and civil unrest

SAN FRANCISCO (MarketWatch) — Mr. Market, the doctor will sell you now.

"Dr. Doom," that is — also known as Marc Faber, the Hong Kong-based investment manager, author, and publisher of "The Gloom Boom & Doom Report," his monthly musing about the state of global economics and geopolitics.

Faber is to financial-market optimists what the Grinch is to Christmas. He doesn't often like what he sees, and nowadays he finds even less to like about the world's economic situation than he did in 2008 — as if that wasn't bad enough.

"Financial conditions are today worse than they were prior to the crisis in 2008," he said in a telephone interview earlier this week from Thailand. "The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional."

Certainly, the unprecedented global stock market volatility in this hot August, including Thursday's rout, suggests that investors and traders alike are looking for someone, somewhere, to take the wheel.

Pin that against a backdrop of fragile economies, inflationary government policies, high unemployment, social and income disparity, military actions and geopolitical tensions in the Middle East and Asia, and you get a good picture of how Faber sees the investment map.

Faber (pictured left) doesn't take a contrarian stance in the strict sense; it's more of a constant vigilance — capital preservation over capital appreciation — so that one can live now to fight for investment gains another day.

"The way I look at it," Faber said, "I am ultra-bearish about everything geopolitically. In an environment of money printing, we have to ask ourselves, how do we protect our wealth? ... Where do we allocate the money?

Good question, but in fact a fairly straightforward one if, like Faber, you believe that Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, hyperinflation is a real possibility, the stock market's recovery since 2009 has favored the rich and powerful, cash is trash, and gold and land in the countryside are the only true safe havens.

"The Federal Reserve is a very evil institution," Faber said with characteristic bluntness, "in the sense that they punish decent people who have saved all their lives.

"These are people who don't understand about stocks and investments," he added, "and suddenly they are forced to speculate."

Speculation is the opposite of investing — of which there is little of nowadays from the corporate sector, let alone government and retail stock buyers. Corporations are instead hoarding cash out of concern that slow global economic growth will slam profits.

Such a miserly attitude can become a self-fulfilling prophecy. Faber noted that corporate earnings will likely disappoint stockholders across the board, including commodity shares, with the exception of traditional defensive sectors such as health care, consumer staples and utilities.

Moreover, one of the main ways corporations are spending money — on mergers and acquisitions rather than on hiring and equipment — is ultimately inflationary, Faber said.

"The corporate sector is not spending much money on capital investments and new investments — that's why they have this huge hoard of cash," Faber said. "There will be many more takeovers and industry consolidation in the years ahead. It destroys jobs, but this is what will happen. As industries consolidate, they get more pricing power, and the cost of living increases."

Of course, Faber points out, while such dealings might not be ideal for Main Street, it can sustain Wall Street, which leads Faber to a prognosis for stocks that may surprise the doctor's patients.

"I'm not that negative about equities," Faber said. "If you're bearish about the world, you'll probably be better off in equities than in government bonds and cash."

So batten down the hatches, double-check the locks and keep Faber's to-do list handy:

1. Avoid Treasurys

"It's a suicidal investment to own 10-year or 30-year U.S. Treasurys," Faber said.

What about the Treasury rally in the wake of economic weakness, stormy stock markets and investors' flight to safe havens?

"What does a weak economy mean?" Faber said. "It means collapsing tax revenues. The deficits go up. You have to issue more government bonds." The abundance of new debt would dilute credit quality, he added, only further sapping investors' confidence in Treasury debt.

"U.S. government bonds are junk bonds," Faber said. "As long as they can print, they can pay the interest. But another way to default is to pay the interest and principal in depreciating currency.

"For that reason I would advocate a wide basket of diversification out of dollar-based assets," Faber added. "The dollar may rally somewhat, but clearly in the long run the dollar and other paper currencies — the euro is not much better — will have a depreciating tendency vis-a-vis honest money: gold and silver."

2. Cash is trash

Given his bleak assessment of the U.S. dollar, it's no surprise that Faber doesn't recommend holding cash as a long-term cushion against portfolio shocks.

"It would be very dangerous to say 'I don't trust stocks, gold, real estate, I want to keep my money in cash.' That's a way to end up losing a lot of money," Faber said.

Specifically, the problem in Faber's view is the loss of purchasing power as inflation whittles away the value of money.

"We're in a paradoxical situation where under a traditional monetary system the safest places are cash, Treasury deposits, government bonds," Faber said. Nowadays, he noted, "they have been made by monetization into the most unsafe assets from a longer term perspective.

"Weak economies usually have higher inflation rates than stronger economies," Faber added. "In weak economies you have loose fiscal policies and money printing. And the U.S. is the world champion in loose monetary policies. I don't believe a single word of what the Bureau of Labor Statistics is printing about inflation figures.

"Paper money has lost its value," Faber said. "Hyperinflation is the pattern to come."

3. Stocks offer some safety

"I am not completely bearish about stocks," Faber said. "If I have cash, government bonds and stocks, for the long term, I'd take stocks."

Just not necessarily U.S. stocks.

While Faber said the U.S. market is "oversold" and the Standard & Poor's 500-stock index (SPX - News) could rebound to the 1250 to 1270 range, he expects U.S. equity values to decline — though not in a full-blown capitulation.

"My assumption is that March 2009 was a major low, and that we will not go back below that low," Faber said. "Can we go to 900 on the S&P? Yes."

But as the S&P 500 slides closer to 1000, the Federal Reserve could step in with a third round of stimulus for investors to cheer, Faber said.

Fed action, he noted, "may not lift stock prices to new highs, but it may stabilize them. If you print money, stocks will not collapse."

4. Emerging markets will expand

In contrast to his dim view of U.S. and other developed markets, Faber is downright sunny about investing in emerging nations.

"I do not think that investors fully appreciate the enormous shift that has and is occurring in the balance of economic power from the Western world to emerging economies," he told subscribers In a market commentary published in early August.

This week, Faber reiterated his opinion that emerging markets will reward buyers over the long-term.

"I happen to feel that somewhere in the world we can make 7% on equities for the next 10 years," he said. "I can buy you a portfolio of high-dividend stocks in Asia that would have a yield of 5% to 7%." Dividend predictability is one reason that Faber also recommends holding corporate bonds.

Faber's own stock portfolio is centered on dividend-paying Asian shares, particularly in Malaysia, Singapore, Thailand and Hong Kong. These include a variety of real estate investment trusts and utilities.

Lately he's also turned positive on Japanese banks, brokerages and insurance companies. "They have a better loan portfolio than the European banks," Faber said of Japanese banks. "The banks in Asia are in a very solid position. All these are a play on the recovery in the stock market in Japan."

5. Gold is worth its weight

Gold blew through $1,800 an ounce on Tuesday, continuing its forward march as investors seek higher ground. Given his world view, Faber is convinced that the price of gold will continue rising and that any pullback is a buying opportunity.

To understand why, you have to see gold like Faber does — as a currency, an alternative to the U.S. dollar, that will be increasingly in demand as the U.S. and other governments print more and more money.

"The function of paper money is to facilitate the exchange of goods and services, to be a store of value and a unit of account — the U.S. dollar fails on all three," Faber said. "Intelligent people, instead of holding cash in U.S. dollars with zero interest rates, why not hold money in gold and silver?"

And as a currency, Faber said gold should be held in its physical form and not in shares of gold miners or even exchange-traded funds. That would rule out popular vehicles such as SPDR Gold Trust or iShares Gold Trust (GLD - News)

Be sure to store your gold in banks in Switzerland, London, Singapore, Hong Kong, Australia — just not in the U.S., Faber said.

"Physical gold in a safe deposit box is the safest," Faber added. "Forget about huge capital gains. I would look at capital preservation. I want to preserve my capital."

Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.

Last Straw or Time to Buy?

by Kelly Greene

aurence Montello, a certified financial planner in Palm Beach Gardens, Fla., stayed the course through the stock market's swings earlier this month. Now that stocks are slumping again, led by Thursday's 3.7% decline in the Dow Jones Industrial Average, he is urging clients to bail out.

"Three weeks ago, I would have said: 'We're in it for the long haul,'" Mr. Montello says. "But we don't want to see these $200,000 to $300,000 swings in performance in a $5 million account."

Mr. Montello now is advising clients, many of them retired, to move 20% of their stock portfolios into cash and 10% into Treasurys.

Greg Zandlo, a certified financial planner in Coon Rapids, Minn., went further: He advised clients Thursday to move their investments completely out of equities. "Stocks that have a 5% dividend are great, but what kind of consolation is that going to be if they're down 10%?'' he asks.

[More from Bond ETFs That Soar When Stocks Sink ]

After the 419.63-point selloff by the Dow, many individual investors are finally throwing in the towel. They were already nervous. Investors withdrew $23.5 billion from domestic equity funds during the week ended Aug. 10, more than in any single entire month since October 2008.

On Thursday, trading volume at discount broker Scottrade Inc. was 77% higher than the day before and 50% higher than average of the four previous days, while TD Ameritrade also said volume surged.

Relyea Zuckerberg Hanson LLC, a wealth-advisory firm in Stamford, Conn., that manages about $500 million, has been working hard to keep its clients calm. Carl Zuckerberg, its chief investment strategist, has sent out three client emails in the past week.

"We're fighting the perception that something unusual is going on,'' he says, "when what's really unusual is a prevailing end-of-the-world mindset.''

[More from No Easy Answer on Tax Issue ]

Janet Moffett says that her stomach dropped on Thursday as her anxieties about the economy worsened. The 73-year-old Beverly, Mass., resident, who retired in April, planned to call her financial adviser after she "settles down'' to ask that he move more of her $200,000 investment portfolio into cash. Otherwise, she says, "I think I am going to be wiped out.''

To guard against the kind of volatility that led the market's "fear index"—the VIX, short for the Chicago Board Options Exchange Volatility Index—to spike 38% on Thursday,Mark Singer, president of Safe Harbor Retirement Planning in Lynn, Mass., is reducing his clients' equity exposure by up to 25%. Mr. Singer, who manages $70 million, has sent out six emails to clients with what he calls "group hugs'' to assuage their fears.

Ted Sarenski, chief executive of financial adviser Blue Ocean Strategic Capital, is telling his clients to keep at least 20% of their total investments in cash. "While it might not be earning anything,'' says Mr. Sarenski, whose Syracuse, N.Y., firm manages $150 million, "that cash at least isn't losing value.''

For investors who are panicking, T. Rowe Price Group Inc. (NYSE: TROW - News) suggests putting a process in place for liquidating portions of your portfolio gradually—such as liquidating 10% today, and then later, maybe in a week or a month, liquidating another 10%, until you "regain your emotional equilibrium,'' says Christine Fahlund, a senior financial planner at the Baltimore firm.

[More from Global Selloff Spreads to Asia ]

The slide has other advisers reassessing their assumptions. Devin Pope, a certified financial planner in Salt Lake City, has ratcheted back his performance assumptions for future rates of return on equity portfolios to the 5%-to-6% range, from 7% to 8%.

For a "balanced account'' with at least 30% bonds along with equities, he has reduced the projected rate of return to 3.5% to 4%, down from 5% to 6%.

His reasoning: With governments grappling with deficits around the world, "we're going to have to have a decrease in government spending and an increase in taxes to combat those deficits,'' Mr. Pope says. "That's going to put stress on GDP and consumption-and limits the earnings we're going to see for the next five to 10 years.''

Not everyone is pulling the plug. Christopher Cordaro, a wealth manager at RegentAtlantic Capital LLC in Morristown, N.J., says that he and his clients are holding tight. "We're in a slow-growth recovery that will have a lot of volatility associated with it,'' Mr. Cordaro says. "But there's not enough bad economic news to get out of the market.''

—Thomas Coyle contributed to this article.

Even Financial Gurus Make Money Mistakes

by Chris Taylor

I bought Lehman Brothers.

There, I said it. My dark secret, finally out in the open. Watching financial stocks drop like stones in the fall of 2008, I figured it was a classic case of investor panic. After Lehman went from over $90 to under $10, I almost felt bad at getting such a bargain. After all, it couldn't go to zero, right?

And then it did. My modest investment was wiped out, and I couldn't even stand to look at the Wall Street Journal for a long time afterwards. My point is that even personal-finance journalists, doling out our sage advice, can make bone-headed financial decisions. Really big ones.

That in mind, I asked a few of the nation's top personal-finance commentators about their own missteps that they'd love to forget. You might enjoy the schadenfreude, of reveling in others' misery. But hopefully you can also leverage these lessons to avoid similar screw-ups in your own life.

Think of it as a financial group therapy session. Because hey, we're all human.

Beth Kobliner, author, Get a Financial Life: Personal Finance in Your Twenties and Thirties.

When I was first offered a job as a writer at Time Inc., I was just 22. I remember having an interview with then-managing editor of Money magazine, Landon Jones. That afternoon, he called me up at my office and offered me the job with a starting salary of $30,000. I was thrilled! 'Yes!' I shouted into the phone. 'Sounds great!' I could finally afford to move out of my parents' place in Queens and move into Manhattan, into a one-bedroom on the upper, upper East Side.

As I was rapturously imagining my first microwave meal, the phone rang again. It was Landon calling back to say that he felt bad; he thought he had offered me too little money. This was my giant bay-window of opportunity, to seize the day and launch into some negotiations. But, inexplicably, I verbally jumped out the window and plunged to my financial doom. I heard myself say, 'No. That's really OK. It's more than generous! I can't wait to start.'

And there it was. A pregnant pause ensued, and both he and I knew that I couldn't take it back. My opportunity was dead on arrival. To be clear, I wasn't cavalier about money; I was poor. I had massive amounts of student loans. I had no trust fund. I barely had a bank account. And yet I found it impossible to say, 'Yes! I deserve more money.' Not only did that mess me up for my first year on the job, but it took me many, many years to catch up. Lesson: Don't undersell yourself."

Carmen Wong Ulrich, Author, The Real Cost of Living, former host of CNBC's On the Money

I used to be able to 'do it all'. But the year I had my show on CNBC, I also had a one-and-a-half-year-old at home. My hours were just insane, and juggling everything, we ended up being late filing our taxes. Because guess who's in charge of all things money? Me.

I was very, very disappointed in myself. I was embarrassed. Thankfully, once I finally got to pulling together paperwork for our accountant, we proactively called the IRS and got late filing fees waived. But I learned my lesson. Ask for help...!

Dave Ramsey, Host, The Dave Ramsey Show

After college, I found a niche in bargain real estate. By age 26, I had a rental real-estate portfolio worth more than $4 million. I had arrived at financial independence, and thought I had made it! But I had an unusual ability to finance everything. If one of my business lines of credit ran low, I would put on my custom-tailored suit and head for the bank. Bankers loved to lend me money. We had every type of credit — business lines of credit, equity lines of credit and let's not forget all those platinum and gold cards.

The problem came when our largest lender was sold to a larger bank. Most of our borrowing was in short-term notes, and because of this, the banks had the right to call most of our debt within 90 days. And that's just what they did. I had 90 days to find $1.2 million. I paid virtually all of it, but doing so destroyed my business and caused a chain reaction. I lost everything but my home and the clothes on my back, and eventually filed bankruptcy.

Hitting bottom and losing everything was the worst thing that ever happened to me — and the best thing. After this I went on a quest to learn how money really worked and how I could get control of it. I read everything I could get my hands on, and talked to rich people who made money and kept it. This quest led me on a journey over the last 20 years of helping others learn to control their money — so they don't have to go through what we went through."

BofA layoffs are the latest as an industry shrinks

Christina Rexrode, AP Business Writer, On Friday August 19, 2011, 5:50 pm EDT

NEW YORK (AP) -- Bank of America Corp. is cutting 3,500 jobs, the latest sign that the banking industry is becoming smaller, simpler and less profitable.

It's quite a transformation from the go-go days of five or six years ago. Then, big banks were reaping outsized profits from large bets on risky trading and complicated investments that eventually backfired, fueling the financial crisis that scorched them and the global economy in 2008.

The cuts confirmed Friday by Bank of America follow layoffs announced this summer at Goldman Sachs Group Inc., Bank of New York Mellon Corp., State Street Corp. and other financial institutions.

And though banks also laid off thousands of workers in 2008 and 2009, analysts say it's different this time: Many of the banks are posting profits right now, so their layoffs indicate permanent structural changes rather than temporary cuts in response to a weak economy.

Steven Mann, chairman of the finance department at the University of South Carolina's Moore School of Business, said he's hearing from MBA grads who have been job-searching for months and haven't found anything.

"From 2002 to 2007, pretty much everybody who could walk and talk could get a job," Mann said. "But those days are gone."

Banks are hiring in some areas. For example, some are adding workers to wade through troubled mortgages and offer new loan terms to struggling borrowers. Some are adding financial advisers to prepare for the wave of retiring baby boomers.

And some bankers are finding jobs outside the big-name banks and taking advantage of the market's trends. They're working for government regulators or opening firms to evaluate troubled real estate assets.

But overall, analysts say, the industry is shrinking after years of growing too big, too fast.

U.S. banks employ about 2.09 million people, down from 2.21 million in early 2008, according to data compiled by the Federal Deposit Insurance Corp. The average salary in the finance and insurance industry was $84,516 last year, according to the Bureau of Labor Statistics. Though that's far higher than the overall private-sector average of $46,451, the finance salaries are shrinking while other salaries are growing.

The average salary in finance and insurance fell $436 from 2007 to 2010, not adjusted for inflation. The average salary in all private-sector jobs rose $2,089.

Nancy Bush, contributing editor at SNL Financial, said she expects more bank layoffs will come as the industry transforms under strict new regulations, including limits on practices that had previously been big sources of revenue, such as charging merchants when customers paid via debit card. Low interest rates that keep them from charging borrowers higher rates are also weighing on banks' profits.

"There are big employment issues in the financial industry that are going to hit us in the next few years," Bush said. "It's like the build-out of the defense industry."

With its high wages, the banking industry is an important economic engine. Finance and insurance accounted for about 5.2 percent of private-sector jobs last year, according to the BLS. But it made up 9.4 percent of private-sector wages.

Banks grease the skids of their local economies, hiring workers and contributing to charities. Their business support restaurants, law firms, and office suppliers.

Banks and securities firms shed about 100,000 jobs during the recession. But since 2010, as the stock market recovered, they became a steady, if modest, source of employment after the economy began generating net job gains in February of that year. Banking and securities firms have added 33,600 jobs in the 17 months through July. Private employers overall have added 2.4 million jobs over the same period.

"They can be more nimble than you think and decide to cut hundreds or thousands of people relatively easily," said Ed Turner, a recruiter for finance jobs in Bank of America's hometown of Charlotte, N.C.

He works independently after the firm where he was a principal folded last year because the banking jobs dried up.

Banks' muddled outlook has also spooked many investors. The KBW Bank Index has fallen 23 percent this month, compared to a 13 percent fall in the S&P 500. Bank of America shares have fallen 28 percent.

The banks emphasize that they have bigger capital cushions and lower default rates than they did several years ago. What investors worry about is the banks' exposure to continued problems over soured mortgages and mortgage-backed securities.

As the country's biggest mortgage servicer, Bank of America is especially vulnerable. It's still cleaning up the exotic mortgages of Countrywide Financial Corp., a California-based lender it bought in the summer of 2008. The purchase has brought lawsuits, regulatory probes and quarterly losses.

Brian Moynihan, Bank of America's CEO for a year and a half, has been telling shareholders and employees that the bank is in the middle of a transformation that might be painful now but will stabilize it long-term. The bank has lost money in three of the six quarters since Moynihan became CEO, including an $8.8 billion loss in the second quarter as it set aside money for potential claims from mortgage securities investors.

Moynihan is slimming down the bank after his predecessors' years of empire building, cutting expenses, closing branches and selling off assets to build capital.

The bank's announcement Monday that it would sell international credit-card units sent its shares soaring 8 percent. They ended Friday down 4 cents at $6.97.

The 3,500 cuts confirmed Friday amount to a little more than 1 percent of Bank of America's workforce of roughly 288,000. But they follow a string of other layoffs, including 2,500 already announced this year.

A bank spokesman declined to say if the cuts would be concentrated in a particular part of the country, but said they would be spread across most of the business units.

The bank has previously cut jobs in mortgage lending and investment banking, for example, after demand for those services slowed. The spokesman, Scott Silvestri, said the layoffs were not part of "New BAC," a cost-cutting program started in May.

After this round of layoffs, the bank should have about 284,000 employees. Its roster peaked in early 2009, right after it absorbed Countrywide Financial and investment bank Merrill Lynch, at about 302,000.

AP Business Writer Chris Rugaber in Washington contributed to this report.

Wednesday, 17 August 2011

Lessons on Investing From America's Richest Family

by Karen Blumenthal

After the stock market lost 20% of its value in October 1987, Sam Walton, then one of America's richest men, was unfazed.

In less than a week, the value of his Wal-Mart Stores stock had dropped almost $3 billion, reducing his wealth to a mere $4.8 billion. "It's paper anyway," he told the Associated Press. "It was paper when we started and it's paper afterward."

Given the wrenching swings of the past two weeks, many of us may wish we could be so sanguine about our own losses. But even without a few extra billion dollars in the bank, there are useful lessons to be gleaned from the way the Waltons and other ultrarich families cope with investments and market volatility.

Just like us, the rich want to maintain their lifestyle, preserve wealth and have money for their heirs or philanthropy. And when it comes to investing, there are several ways the rest of us should take a cue from them:

• The very wealthy have a plan. Sam Walton's plan started in the early 1950s, when, on the advice of his father-in-law, he set up a family partnership, made up of him, his wife, Helen, and their four children, to own his two variety stores. By doing that, he began planning his estate and building family wealth years before he opened the first Wal-Mart in 1962.

Nowadays, most very wealthy people have a team of advisers and an investing strategy in place that should work even when the worst imaginary case becomes real. Small investors, too, should have a comfortable investment process that works in good times and bad.

A financial adviser can be invaluable in helping you with this, but so can a trusted family member or friend who will help you stick to your plan when you start to doubt it.

• The very wealthy live below their means. Walton, who died in 1992, was famously frugal, driving an old pickup truck and flying coach. Many very wealthy people spend much more extravagantly, but even so, "most of our ultrawealthy clients have a lifestyle that is well below their means," says Craig Rawlins, president of Harris myCFO Investment Advisory Services, which serves wealthy families.

When you don't spend everything, he says, "you have a better opportunity to weather this volatility because you know there's a cushion there."

• The very wealthy value cash flow. One of the most painful lessons of 2008 was the recognition that we need to keep enough in cash or liquid investments to weather a stretch when the value of everything else is in flux. Martin Halbfinger, managing director, wealth management, at UBS, says every investor should have a "SWAN" account—for "sleep well at night."

"That's a different number for every investor," he says, but you should have enough in bank accounts, bonds or other liquid investments that you can leave your stocks alone when market volatility defies logic.

Sturdy, dividend-paying stocks also can help. Annual dividends on the Walton family's 1.68 billion shares of Wal-Mart stock add up to $2.45 billion a year, enough to buy plenty of groceries and just about anything else.

• The very wealthy focus on risk, not return. Larry Palmer, managing director, private wealth management, at Morgan Stanley Smith Barney, said he has never had a client say, "My objective is to have my family wealth beat the S&P 500." Rather, he says, clients focus on what kinds of risks they are taking with their portfolio.

The Walton family wealth long has been tied to its Wal-Mart stock, now valued at $83.6 billion. But Sam also bought the tiny Bank of Bentonville in 1961, and it is now part of the family-owned Arvest Bank, an $11.5 billion banking company. Walton Enterprises also owns a chain of small newspapers that, along with other interests, offer diversification and push the family's estimated combined wealth close to $100 billion.

Small investors need to similarly manage their portfolios, making sure that their holdings of stock and other volatile investments aren't so great that they are putting more at risk than they intended to.

• The very wealthy hang on. The super-rich don't sell because they are fearful—though some may be selling right now for investment reasons, such as cutting the tax bite on holdings with big gains. The Walton family ownership of Wal-Mart stock hasn't changed since late 2002, when some shares were transferred to charitable funds.

In that sense, Sam was spot on. Though the Walton family's Wal-Mart shares have dropped by more than $10 billion since mid-May, until the stock is actually sold, the losses really are nothing more than paper.

Karen Blumenthal is the author of "Mr. Sam: How Sam Walton Built Wal-Mart and Became America's Richest Man" (Viking).

Tuesday, 16 August 2011

How Do You Know It's Time to Retire?

The first wave of Baby Boomers turned 65 earlier this year. Once, that was the official retirement age, the birthday after which you could spend entire Tuesdays on the golf course with no judgment. It was also the age at which people would start to look askance at the office.

Indeed, a broad swath of older workers once faced mandatory retirement age policies, and until this spring, Great Britain had a "Default Retirement Age" (DRA) of 65. Past that, an employer could dismiss an employee simply because she was getting on in years.

But Britain's DRA has now been largely phased out, and social norms are changing. According to the Bureau of Labor Statistics, in the U.S., the labor force participation rate among people aged 65 to 74 rose from 16.1% in 1988 to 25.1% in 2008. To be sure, the increased participation among older workers is at least partly due to financial necessity — though the increase began during good times, rather than simply spiking during the recent recession. But even if you are financially comfortable, or if you can be flexible with living expenses, this increase in working seniors raises different questions: in the absence of social norms or laws, when is the right time to retire? What are the signs that you should stay, and what are the signs it's time to move on?

The biggest variable, experts say, is how you feel about your current job. "A lot of times, that can be something negative," says Betsy Werley, executive director of the Transitions Network, an organization for women over age 50 who are exploring what's next in their personal and professional lives. "You wake up in the morning and can't stand the thought of going to work."

Then it's definitely time to pick a quit date. If you don't loathe your work, however, then here are three more questions experts recommend asking before penning your resignation letter:

1. Do I have a life outside of my job? "Your work life is a big part of your social ecology," says Mark Miller, who runs the website Retirement Revised.

Even if you don't necessarily like your colleagues, humans are social creatures and need people to talk with on a regular basis. If you don't have a social network outside of your workplace, then you need to build one before you give notice, or else you'll wind up missing the water cooler fast.

2. How will this affect my family? Is your spouse ready to retire, or is he or she already retired? Or perhaps your spouse has no intention of retiring, which can cause tension if you assumed you'd spend all your time together. You may prefer work dinners with clients to eating in a romantic Caribbean restaurant, all alone.

Of course, if your children and grandchildren need time and attention, that can affect the decision as well; few jobs let you take off for eight weeks to care for your grandchildren while your adult child is going through a divorce.

And finally...

3. What else can I see myself doing? "If you have a big list of things you're dying to get to, you're in good shape," says Sydney Lagier, who retired from a venture capital firm in her early 40s, and now pens a blog called Retired Syd. "If you are just going to watch TV you're not going to like it."

People get a big chunk of their identity from work, and in its absence, you need to redefine yourself. How would you identify yourself at a party? If you don't have an answer to that question right now, spend some time coming up with one.

Howard Stone, co-author of "Too Young To Retire" and a retirement coach, recommends writing a letter to yourself (or a friend or mentor) from the perspective of you, five years from now. In this future scenario, you've created your ideal life. "Write about it as if it's already happened," says Stone.

What would you do with the extra time? Many people have visions of travel and volunteering with causes they care about, but a surprising number these days are also envisioning some form of paid work — either a part-time job in a new field they've always fantasized about (wine production, working in an independent book store), consulting occasionally in their previous fields, or starting their own businesses.

Whatever it is, try to be as specific as possible, because then, you can "start to work on what needs to be done to get to that ideal life five years from now," says Stone. The more alluring the image is, the stronger the pull will be.

"The ideal time to retire is when the unfinished business in your life begins to feel more important than the work you're doing," he says.

Sunday, 14 August 2011

5 Fixed-Income Bear-Market Strategies

by Katherine Reynolds Lewis

One of the biggest risks to your retirement is facing a bear market during the early years after you stop working. If you must sell stocks in a falling market, you risk depleting your nest egg at exactly the moment you need it — leaving you with too little savings to cover your needs for your retirement.

If you withdraw regular amounts from your portfolio to cover your living expenses during a market downdraft, you must sell more shares at a lower price. It's essentially the reverse of dollar-cost averaging, which is what you did during the accumulation phase when you invested money at regular intervals. Dollar-cost averaging involves buying more shares when the market is down or fewer shares when it's up.

"You're liquidating a portion of the portfolio and locking in those negative returns and creating some very bad outcomes," says Stephen Horan, head of private wealth management for the CFA Institute and co-author of "The New Wealth Management."

"We call that sequence-of-return risk," he says.

In such a scenario, it's best to leave stocks alone to recover from the loss and to draw instead on the fixed-income portion of your portfolio. Retirement experts recommend employing one of the top five fixed-income strategies to ensure enough income in a bear market. Following are the pros and cons of each method.

CD ladder

A solid fixed-income strategy begins with calculating your bare-bones expenses and looking at what you will receive from Social Security and any defined-benefit pension. Next, choose a vehicle to ensure enough income each year to make up the difference.

One simple option is to design a CD ladder, such as a combination of one-, three- and five-year CDs, the principal amounts of which will cover your income needs in case stocks fall, says Rick Rodgers, a Certified Financial Planner in Lancaster, Pa. If the stock market is up, you can reinvest funds from the maturing CDs in higher-rate CDs rather than spending the principal.

"You're never going to make money in fixed income; that's not the purpose of it. After taxes and inflation, it's break-even at best," Rodgers says. This is particularly true in these times of low yields.

"When the market is going up, I am going to be overweighted in stocks so I will be selling some stocks and putting it into fixed income," says Rodgers. "It smooths out the ups and downs."

The downside of a CD ladder: low yields, no upside as the market fluctuates and continual effort to reinvest maturing CDs, says Lynn Mayabb, CFP, a senior managing adviser at BKD Wealth Advisors in the Kansas City, Mo., office.

Don't let CD penalties prevent you from withdrawing your cash early, though. Weigh the penalty against the potential gain or need, Mayabb says.

Bond ladder

If you're looking for a little higher yield, consider creating a ladder of bonds with sequential maturities. "Having that money come due on a regular basis eliminates the need to have a lot of money sitting in cash," Rodgers says.

The two key risks to investing in bonds are interest rates rising and credit quality declining. "We address both of those issues by laddering it. Each one of those bonds that makes up the bond ladder is different," he says.

It's a good idea to stick with highly rated bonds and stable companies, and be sure to monitor your picks for any decline in quality.

One danger of a bond ladder is that you can inadvertently shift the asset allocation of your portfolio if you don't manage carefully, Horan says. As the front of the ladder matures, the makeup of your investments shifts. On the plus side, you've guaranteed enough income for the critical first years of retirement, which "set the initial path" for your retirement portfolio, he says.

For an individual investor, a properly diversified bond ladder is likely to be too much work, says Carlo Panaccione, CFP and founder of the Navigation Group in Redwood City, Calif. A good financial planner can set this up for you, but you generally need a minimum of $100,000 to construct a properly diversified bond ladder.

Variants on bond ladders

"Sometimes a bond ladder doesn't always make sense, depending on what the yield curve looks like," Mayabb says. Often, the middle-term maturities tie up your cash longer but fail to reward you with higher rates.

Instead, she favors a barbell approach, in which you divide your money equally between short-term bonds and those with 10- to 15-year maturities, skipping intermediate-term bonds altogether. "Those are the sweeter spots for getting the rates."

Or consider laddering the coupon payments on a bond, rather than the bonds themselves, Horan says. For instance, if you need $50,000 each year, you could buy a five-year bond with a 5 percent coupon and $1 million face value. At the end of the five years, you'd get $1 million back.

It may be more efficient to find a single bond with the desired payment structure, rather than piecing together five different bonds in a laddered structure, he says.

As with a traditional bond ladder, these variants may also suffer from a lack of diversification and need to be monitored for credit quality, says Panaccione.

Floating-rate fund

If all this seems like too much work, consider investing in a floating-rate fund -- also called a bank-loan fund -- which holds a variety of bonds or bank loans with adjustable rates, giving you exposure to a range of credits. "In fixed income, you have to be realistic about how closely you're willing to watch" credit quality, Panaccione says. "If you're not willing to review things on a regular basis, don't buy individual bonds."

Unlike individual bonds, floating-rate funds have no maturity date, so you can lose principal if market fluctuations cause fixed-income investments to drop in value. "I don't like bond funds because they don't guarantee my principal," Rodgers says, while conceding that they can be a good choice in some cases. "For the individual investor who's not using an adviser, they should be using a bond fund."

Focus on the total return of your portfolio, rather than the rise or fall in a particular fund, says Anthony Valeri, CFA, a senior vice president and market strategist at LPL Financial in San Diego. Liquidity is an issue, since these bonds don't trade on an exchange. "If we have a recession you'll see price declines" in floating-rate funds, Valeri says.


The classic strategy for ensuring a stream of income in retirement, of course, is purchasing an immediate annuity. This insurance product guarantees that you will receive a stream of payments for as long as you live.

The downside: You pay a premium for that guarantee and lose control of your assets forever.

"I've done annuities this year only because of clients demanding them," Panaccione says. The insurance companies are "probably investing in what you would've invested in and charging you a premium. Is that what you need to sleep at night? Then it's probably worth paying the premium."

If you're married, the question of an annuity becomes more complicated. You can buy a joint life and survivor annuity for a smaller payout, or opt for provisions that guarantee some portion of your payment goes to your spouse if you die. But it will cost you, Mayabb says.

By choosing an annuity, you lose the flexibility of changing your mind. "Once you annuitize, those assets are no longer yours," she says. "With a bond ladder, CD ladder or investment account, if something happens and you need $20,000, you go sell something."

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Aftershock to Economy Has a Precedent That Holds Lessons

JAMES B. STEWART, On Friday August 12, 2011, 7:54 am EDT

Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week. They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.

The events of the last few weeks — gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor’s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market — bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then. The Dow Jones industrial average dropped 49 percent from its peak in 1937. Manufacturing output fell by 37 percent, a steeper decline than in 1929-33. Unemployment, which had been slowly declining, to 14 percent from 25 percent, surged to 19 percent. Price declines led to deflation.

“The parallels to what is happening now are very strong,” Robert McElvaine, author of “The Great Depression: America, 1929-1941” and a professor of history at Millsaps College, said this week. Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis.

Are we at similar risk today? David Bianco, chief investment strategist for Merrill Lynch Bank of America, told me this week that “the market is collapsing faster than any fundamentals would warrant.” The possibility that the United States faces a recession as bad as 1937’s seems far-fetched. Nonetheless, Mr. Bianco notes that the market is now pricing in an 80 percent chance of recession, one likely to be more severe than in 1991. (He said Merrill Lynch places the odds at 35 percent.) He noted that there had been only three instances when such a steep market decline was not followed by recession: 1966, 1987 (after the October stock market crash) and 1998 (after the implosion of Long Term Capital Management.) “Confidence is shaken and rapidly falling,” he said, a problem worsened by falling stock prices.

By 1937 an economic recovery seemed to be in full swing, giving policy makers every reason to believe the economy was strong enough to withdraw government stimulus. Growth from 1933 to 1936 averaged a booming 9 percent a year (rivaling modern-day China’s), albeit from a very low base. The federal debt had swelled to 40 percent of gross domestic product in 1936 (from 16 percent in 1929.). Faced with strident calls from both Republicans and members of his own party to balance the federal budget, President Franklin D. Roosevelt and Congress raised income taxes, levied a Social Security tax (which preceded by several years any payments of benefits) and slashed federal spending in an effort to balance the federal budget. Income-tax revenue grew by 66 percent between 1936 and 1937 and the marginal tax rate on incomes over $4,000 nearly doubled, to 11.6 percent from an average marginal rate of 6.4 percent. (The marginal tax rate on the rich — those making over $1 million — went to 75 percent, from 59 percent.)

The Federal Reserve did its part to throw the economy back into recession by tightening credit. Wholesale prices were rising in 1936, setting off inflation fears. There was concern that the Fed’s accommodative monetary policies of the 1920s had led to asset speculation that precipitated the 1929 crash and ensuing Depression. The Fed responded by increasing banks’ reserve requirements in several stages, leading to a drop in the money supply.

The possible causes of the ensuing stock market plunge and steep contraction in the economy provide fodder for just about everyone in the current political debate. Republicans can point to the Roosevelt tax increases. Democrats have the spending reductions, which coincides with Mr. McElvaine’s view. “It appears clear to me that the cause was policies put into effect in 1936-37, mainly cutting spending when F.D.R. believed his re-election was secured,” he said.

The Nobel-prize winning economist Milton Friedman blamed the Fed and the contraction in the money supply in his epic “Monetary History of the U.S.” And the stock market itself may have been a culprit, falling so steeply that it wiped out the wealth effect of rising prices, undermined confidence and brought back painful memories of the crash. But taken together, they suggest that policy makers moved too quickly to withdraw government support for the economy.

In the current context, it’s hard to blame the Fed for being too restrictive in its monetary policy, as the Fed was in 1937. If anything, critics fault it for being too accommodating, raising many of the same issues that led the Fed to tighten in 1937. Ben S. Bernanke, the Fed chairman, is a student of Depression history and is well aware of Mr. Friedman’s monetary analysis. “He won’t make the same mistake,” Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania, said.

The Fed’s pledge this week to keep interest rates near zero not just for a vague “extended period” but for a full two years rendered two-year Treasuries virtually risk-free and depressed their yields to a record low of 0.19 percent. This should lead investors to seek income from riskier assets, leading to lower interest rates across the spectrum, including mortgage rates.

Despite a brief stock market rally after the Fed’s announcement, Mr. Bianco said he believed investors might be underestimating the significance of the Fed’s move. “You will see household funding costs go down. That will be a benefit and should boost confidence.” At the least, “The Fed has not abandoned us. They’re doing what they can,” he said.

But monetary policy can only do so much, especially if fiscal policy is moving in the opposite direction.

Christina Romer, a professor at the University of California, Berkeley, who has written extensively about the Great Depression, declared two years ago while chairman of President Obama’s Council of Economic Advisors: “The urge to declare victory and get back to normal after an economic crisis is strong. That urge needs to be resisted.”

Yet both political parties have strapped themselves to the mast of deficit reduction, one through spending cuts, the other tax increases. The recent market plunge may reflect not the largely symbolic S.& P. downgrade of United States Treasuries or worries about political gridlock, but widespread investor fears that both approaches risk a renewed recession by withdrawing stimulus from a fragile economy too soon. No one seriously disagrees that the budget deficit has to be addressed, either through spending cuts or tax increases or in some combination of the two. The question is when.

The good news about the 1937-38 recession, severe though it was, is that it lasted just a year, from May 1937 to June 1938 by most calculations. The precipitous 1937 stock market decline and surging unemployment jolted Washington into action. The Fed reversed its higher bank reserves policy and cut the discount rate to 1 percent. In April, President Roosevelt announced a $2 billion “spend-lend” program and embraced deficit spending. But the tax increases remained in effect. Economic growth resumed in June 1938 and was stronger than it had been in the 1933-37 period. Stock prices surged.

Of course, history never repeats itself exactly, and unfortunately for today’s policy makers, the causes of the 1938 economic rebound seem less clear than the causes of the recession. While Keynesians have embraced the Roosevelt stimulus package to support their arguments for government intervention, others argue it came too late and was too small to account for the recovery. A Federal Reserve Bank of Chicago senior economist, Fran├žois Velde, concluded that while traditional monetary and fiscal analyses tended to account for the severity of the 1937 downturn, other still-unidentified factors are needed to explain why the economy “rebounded so strongly.”

Still, the sense that Washington was doing something to address the problems may have played a key role by bolstering confidence, which was reinforced by rising stock prices.

Historians can’t know if the 1938 recovery, strong as it was, would have been enough to finally end the Great Depression. World War II intervened. But nothing today seems nearly as dire as the problems facing the world in 1938. The 1937 aftershocks had the effect of galvanizing policy makers who had grown complacent about the recovery. The result was renewed economic growth, higher employment, higher wages and productivity — and higher stock prices. Investors who had the courage to buy stocks at their 1937 lows were looking at a 60 percent gain less than a year later.

4 Fast Ways to Save Money Now

A free-falling stock market can make everyone more frugal. How to find the extra cash in your budget

The falling market and the economic uncertainty that comes with it has even the most frugal looking for new ways to save. Many of the easiest ways to do so may not even require that much sacrifice.

Right now, there are plenty of reasons to build savings. For the intrepid, extra cash may mean the ability to snatch up stocks at bargain prices. Far more people are still shoring up their personal balance sheets from the last downturn, and another market tumble reinforces the need for an emergency fund, or to pay down debt. Even for spenders, there's an incentive to sock away a little more: The down market is expected lead to sales on many big-ticket items like cars, airfare and electronics. "It's smart to save wherever you can," says certified financial planner Sheryl Garrett, founder of the Garrett Planning Network, a national group of fee-only advisors.

In general, Americans are already better savers than they used to be. In June 2011, Americans saved 5.4% of their disposable income, up slightly from 2010 but more than double the 2.4% savings rate circa 2007. Still, most financial planners recommend aiming higher, to 10% or so. And while cutting out morning lattes and MP3 purchases can add up, keeping on track requires serious discipline. Better to aim for the bigger expenses by reviewing regular monthly bills. A little research and a phone call or two to can save hundreds of dollars on cellphone and cable service, insurance payments and credit card bills, says Schwark Satyavolu, co-founder of

Of course, financial experts rarely advocate against saving. But market swoons to tend to bring out consumers' thrifty sides. For some help with boosting your monthly savings, here are four options that won't take more than an hour or two:

Switch Cellphone Plans
Save: $400 a year

Cellphone users are paying more -- $92 per month on average for a two-year contract, up from $78 last year, according to J.D. Power & Associates. And picking the right plan has also become more complex as carriers add new data plans and require different packages for different phones. In early July, Verizon joined AT&T in eliminating unlimited data plans for new subscribers. Moving into a plan that better fits your calling texting and data patterns could save up to $400, Satyavolu says. Sites like BillShrink and Validas will analyze your current bill and make savings suggestions, or you can call your provider and competing services. (Some apps can also help you save on texting or talk time.) But if the best bet seems to be switching carriers, be warned: early termination fees can go as high as $350, which could eat up any savings in a hurry. Switching can also change call quality, so ask friends who use that carrier if they've had problems -- or better yet, borrow their phone and test for yourself.

Shop Insurance Policies
Save: $200 a year

More severe natural disasters and higher rebuilding costs have led insurers to raise homeowners insurance premiums by more than 7% in many areas over the past year. (Some are hurricane-prone areas, but not all. Some Pennsylvania homeowners saw premiums jump 33% last year.) That's reason enough to shop around on sites like and, checking rates and available discounts. Be sure to call your current insurer, too, and see if they have any new programs you might be eligible for, Garrett says. It wouldn't be hard to save at least $200 per year or more. Last month, Garrett bought new homeowners and auto insurance policies, cutting her yearly bill by $800.

Change (or Ditch) Cable
Save: $800 a year

Consumers can save substantially by finding a new cable provider, or depending on their viewing habits, cutting the cord altogether. Switching is easier to compare with sites like BillShrink or And most viewers have more options than they think, especially for those who are interested in satellite -- and the annual savings for switching averages $800 a year, Satyavolu says. Providers often make their best deals available via cable-phone-Internet bundles, though, and switching to a lower price can entail an unbearably slow Internet or a crackly phone connection, says Dan Rayburn, an analyst for investment bank Frost & Sullivan who covers digital media companies. Also, the growing options for free or cheap TV online mean some people may be able to get by with fewer channels, says Rayburn. A viewer might, for example, switch to a basic cable package with 13 or so channels and use an $8 monthly streaming subscription from Netflix or Hulu to catch more missed movies and TV shows.

Get a Better Credit Card
Save: $600 a year

Thanks to Standard & Poor's downgrade of U.S. debt, many experts expect credit card rates will rise soon. But right now, offers are better than they have been in years, says Curtis Arnold, founder of card comparison site Consumers who haven't re-assessed in the past year can compare on sites like CardRatings or to get a better ongoing rate, 0% balance transfers of up to 24 months, or generous reward bonuses. Delta and Continental, for example, have offered some customers sign-up bonuses worth two free round-trip domestic tickets, while an 18-month balance transfer offer would save someone paying off a $5,000 debt in $300 increments more than $650 in interest. estimates average savings of $600, from lower interest rates and more lucrative rewards. But if you're transferring a balance, be sure to compare fees, Arnold warns. Most cards charge 3% of the balance, but a few are starting to charge as much as 5%, which eats into savings.

Wednesday, 10 August 2011

'Scared to Death': Should I Move Into Cash?

by Walter Updegrave

Over the years, I've lost huge amounts of my retirement fund. I've been through the savings & loan fiasco, the tech stock bubble, the crash of 2008 and now this market. I can't afford to lose my money again, so I'm considering moving it all to cash. Do you think that's a good move? I'm scared to death. -- Cheryl P., Houston, Tex.

I hear you. Looking back over the past twenty-five years you can easily get the impression that all we've done is lurch from one crisis to the next.

Add to that backdrop new worrisome twists like Standard & Poor's debt downgrade of the U.S. government and Fannie and Freddie Mac, the specter of a double-dip recession, the economic woes in Europe and Monday's more than 5% plunge in the Dow, and it's understandable why you'd want to ditch stock and bond funds and huddle in cash.

But that would be a mistake.

Now is not the time to give in to emotions and make rash moves. It's the time to take a few deep breaths and dispassionately set a sensible course for the future.

Let's start with a little perspective. Yes, the fact that U.S. debt no longer carries a top triple-A rating is troubling. But it's not as if S&P told investors something they didn't know before (i.e; that our country's long-term finances are a mess).

As for the economic effect the downgrade might have, that's far from clear. Ultimately, though, bond investors' expectations will determine the yields on Treasury bonds, not the opinion of a bunch of guys in ties over at S&P.

And, so far, investors seem to be rushing into Treasuries not away from them. So I think people may be overreacting to the whole downgrade thing.

That said, whether the sell-off was an overreaction to the downgrade, the growing sense that the economy may be weaker than previously thought or something else, investors have clearly shown they're skittish about stocks.

But this isn't exactly news either. Although we lose sight of it from time to time, the fact is that the stock market is and always has been a very volatile place.

The flip side of that volatility, though, is that stocks have also generated some pretty impressive long-term returns. If you look at the 56 rolling 30-year periods from 1926 through 2010 (1926-1955, 1927-1956, etc. through 1981-2010) the lowest annualized return stocks have delivered over a 30-year span is 8.5%, and the average 30-year annualized return for all those periods is 11.3%. For bonds, the numbers are 1.5% and 5.1%, respectively.

This doesn't mean stocks will generate the same gains over the next 30 years. I wouldn't be surprised to see them come in considerably lower.

But I don't see any reason why, over the long term, one would expect stocks to underperform bonds or cash, especially considering the current low yields on bonds and cash equivalents.

So it seems to me that the challenge for someone investing his nest egg today is still pretty much what it was before all the debt-ceiling-downgrade hoopla: to participate in stocks' long-term growth without getting hammered too badly when stocks suffer their inevitable periodic declines.

There are two ways you can try to do that. One is to attempt to outguess the market — that is, capitalize on stocks when they're doing well and then move out of them into bonds or cash or gold or whatever to avoid downturns.

The other is to invest in a reasonable mix of stocks and bonds and basically stick to it, allowing the bond portion of your portfolio to dampen stocks' swings. The first approach — moving in, out and around various parts of the market — is difficult-to-impossible to pull off consistently.

If you doubt that, just consider recent events. In the weeks leading up to August 2, investors' biggest fear was that Congress and the Obama administration might fail to raise the debt ceiling on time and thus spark a stock-market meltdown.

People were so convinced that this would threaten their portfolios that many considered moving their money into cash to protect against that possibility. When Congress and the White House reached a deal before the Tuesday deadline, the big market swoon everyone feared was averted.

However, two days later, while investors were still feeling good about dodging the debt-limit bullet, the Dow plummeted 510 points on concerns about the European debt crisis and the possibility of the U.S. sliding back into recession.

And then came Monday's wild 635-point Dow free fall in the wake of S&P's downgrades.

My point is that you can never really tell what might initiate a market decline — let alone know when it might occur.

The more sensible way to participate in stocks' long-term growth is to create a mix of stocks and bonds that gives you a shot at solid returns and offers at least some protection.

The longer away you are from retirement and the more your stomach can handle the value of your retirement savings taking the occasional hit, the more you can devote to stocks.

The closer you are to retirement and the more upset you get when your nest egg gets whacked, the more you should tilt toward bonds and cash. If you're on the verge of retirement, that mix might be somewhere around half in stocks and half in bonds.

Taking the asset allocation approach and sticking with it (except for periodic rebalancing) won't immunize you against losses. But it can help you manage the downside risk of stocks without giving up all the upside.

And, more importantly, it gives you a rational way of dealing with the stock market's volatility and keeping downturns to a magnitude you can handle, rather than engaging in a never-ending guessing game.

By trying out different blends and seeing what sort of losses they incurred, you can get a better feel for what stocks-bonds allocation might be right for you.

Remember, though, if you go with too conservative a strategy to guard against market downturns, you limit your upside. So to get a sense of whether the asset allocation you choose will give you a large enough nest egg to support you in retirement, I suggest you also run it through a calculator like Fidelity's Retirement Quick Check or T. Rowe Price's Retirement Income Calculator.

I don't want to downplay the seriousness of the situation facing investors today. We could very well see lots more turmoil in the financial markets and further declines in stock prices.

But the fact is that there will always be something going on that investors will feel compelled to react to, whether it's the threat of a recession triggering a market meltdown or, in better times, rosy reports of economic growth and corporate profits suggesting the markets will soar.

But if you invest on the basis of hunches and speculation rather than setting a coherent long-term strategy and sticking to it, you'll put yourself at risk of selling after prices have already fallen and buying back in when prices are already inflated.

In the end, that will make it tougher for you to earn the returns you'll need to build a decent nest egg and harder for you to maintain your emotional equilibrium in tumultuous times like these.

Tuesday, 9 August 2011

Second Recession in U.S. Could Be Worse Than First


If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around.

Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health — including jobs, incomes, output and industrial production — worse today than they were back then. And growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009.

“It would be disastrous if we entered into a recession at this stage, given that we haven’t yet made up for the last recession,” said Conrad DeQuadros, senior economist at RDQ Economics.

When the last downturn hit, the credit bubble left Americans with lots of fat to cut, but a new one would force families to cut from the bone. Making things worse, policy makers used most of the economic tools at their disposal to combat the last recession, and have few options available.

Anxiety and uncertainty have increased in the last few days after the decision by Standard & Poor’s to downgrade the country’s credit rating and as Europe continues its desperate attempt to stem its debt crisis.

President Obama acknowledged the challenge in his Saturday radio and Internet address, saying the country’s “urgent mission” now was to expand the economy and create jobs. And Treasury Secretary Timothy F. Geithner said in an interview on CNBC on Sunday that the United States had “a lot of work to do” because of its “long-term and unsustainable fiscal position.”

But he added, “I have enormous confidence in the basic regenerative capacity of the American economy and the American people.”

Still, the numbers are daunting. In the four years since the recession began, the civilian working-age population has grown by about 3 percent. If the economy were healthy, the number of jobs would have grown at least the same amount.

Instead, the number of jobs has shrunk. Today the economy has 5 percent fewer jobs — or 6.8 million — than it had before the last recession began. The unemployment rate was 5 percent then, compared with 9.1 percent today.

Even those Americans who are working are generally working less; the typical private sector worker has a shorter workweek today than four years ago.

Employers shed all the extra work shifts and weak or extraneous employees that they could during the last recession. As shown by unusually strong productivity gains, companies are now squeezing as much work as they can from their newly “lean and mean” work forces. Should a recession return, it is not clear how many additional workers businesses could lay off and still manage to function.

With fewer jobs and fewer hours logged, there is less income for households to spend, creating a huge obstacle for a consumer-driven economy.

Adjusted for inflation, personal income is down 4 percent, not counting payments from the government for things like unemployment benefits. Income levels are low, and moving in the wrong direction: private wage and salary income actually fell in June, the last month for which data was available.

Consumer spending, along with housing, usually drives a recovery. But with incomes so weak, spending is only barely where it was when the recession began. If the economy were healthy, total consumer spending would be higher because of population growth.

And with construction nearly nonexistent and home prices down 24 percent since December 2007, the country does not have a buffer in housing to fall back on.

Of all the major economic indicators, industrial production — as tracked by the Federal Reserve — is by far the worst off. The Fed’s index of this activity is nearly 8 percent below its level in December 2007.

Likewise, and perhaps most worrisome, is the track record for the country’s overall output. According to newly revised data from the Commerce Department, the economy is smaller today than it was when the recession began, despite (or rather, because of) the feeble growth in the last couple of years.

If the economy were healthy, it would be much bigger than it was four years ago. Economists refer to the difference between where the economy is and where it could be if it met its full potential as the “output gap.” Menzie Chinn, an economics professor at the University of Wisconsin, has estimated that the economy was about 7 percent smaller than its potential at the beginning of this year.

Unlike during the first downturn, there would be few policy remedies available if the economy were to revert back into recession.

Interest rates cannot be pushed down further — they are already at zero. The Fed has already flooded the financial markets with money by buying billions in mortgage securities and Treasury bonds, and economists do not even agree on whether those purchases substantially helped the economy. So the Fed may not see much upside to going through another politically controversial round of buying.

“There are only so many times the Fed can pull this same rabbit out of its hat,” said Torsten Slok, the chief international economist at Deutsche Bank.

Congress had some room — financially and politically — to engage in fiscal stimulus during the last recession.

But at the end of 2007, the federal debt was 64.4 percent of the economy. Today, it is estimated at around 100 percent of gross domestic product, a share not seen since the aftermath of World War II, and there is little chance of lawmakers reaching consensus on additional stimulus that would increase the debt.

“There is no approachable precedent, at least in the postwar era, for what happens when an economy with 9 percent unemployment falls back into recession,” said Nigel Gault, chief United States economist at IHS Global Insight. “The one precedent you might consider is 1937, when there was also a premature withdrawal of fiscal stimulus, and the economy fell into another recession more painful than the first.”

There is at least one factor, though, that could make a second downturn feel milder than the first: corporate profits. Corporate profits are at record highs and, adjusted for inflation, were 22 percent greater in the first quarter of this year than they were in the last quarter of 2007.

Nervous about the future of the economy, corporations are reluctant to make big investments like hiring. As a result, they are sitting on a lot of cash.

While this may not be much comfort to the nation’s 13.9 million unemployed workers, it may be to their employed counterparts.

“In the financial crisis, when markets were freezing up, the first response was, ‘I’ve got to get some cash,’ ” said Neal Soss, the chief economist at Credit Suisse. “The fastest way to get cash is to not have a weekly payroll, so that’s why we saw such big layoffs.”

Corporate cash reserves today, he said, could act as a buffer to layoffs if demand drops.

“There are arguments that another recession would be worse, and there are arguments in the other direction,” Mr. Soss said. “We just don’t know at this juncture. But ultimately it’s a question you don’t want to know the answer to.”

Where to Park Your Cash

by AnnaMaria Andriotis

Throwing in the towel? For nervous investors looking for a place to park their cash until this market maelstrom blows over, some options are better than others.

Yields on cash haven't been good for a long time, but in recent months, some banks have souped up their offers. Some checking accounts now tout interest rates up to around 3% and money market accounts as high as 1.15%. Meanwhile, roughly a dozen banks recently revamped their certificates of deposit by eliminating penalties on early withdrawals and allowing interest rates to rise for those consumers who stay locked in.

For the banks, it's been a campaign to win back savers. Now, with the stock market in free-fall and bonds also risky, near-cash investments look like one of the few remaining safe havens for consumers. At this point, says Jeff Sica, president and chief investment officer at Sica Wealth Management, "You're really playing the game not to lose." In that environment, a small, guaranteed return and the protection of the Federal Deposit Insurance Corporation (up to $250,000 per person, per institution) can look pretty attractive. Also, consumers can get additional coverage by having a separate joint account as well as a retirement account, which are insured separately.

The rates are certainly higher than simply letting cash sit in a brokerage account -- which is what happens automatically after you sell a position, until you give further direction. Typically, those so-called sweep accounts -- where brokerages park investors' cash and money derived from sales or stock dividends that aren't reinvested, for example -- pay far less than a bank account. At Vanguard, for example, where the cash is placed in money market funds, investors earn just 0.02%. The accounts are convenient -- no money transfer required, and deployable at will -- but for large amounts or long periods of time, investors can find higher rates elsewhere.

Of course, even now, most advisers don't recommend a knee-jerk flight to cash. Usually that's the kind of behavior that loses money for investors over the long term: Selling into a falling market and buying only when prices come back up is the very opposite of "buy low, sell high." And over the longer term, rates on most bank checking and savings accounts are too low to keep up with inflation, which is running at about 3.6% over the past 12 months. Investors who park their cash in these low-yielding accounts won't lose it but that money is unlikely to grow at a pace that keeps up with inflation. Historically, only market gains over the long term have done that.

For those still looking for a temporary holding tank, here are the options:


In recent months, dozens of banks have rolled out a fresh take on the CD by eliminating their least popular features: steep early withdrawal penalties and locked-in interest rates. For example, Bank of America and PNC Bank now offer CDs where consumers can withdraw their cash when they'd like without a fee. And investors don't have to feel anxious about missing out if rates rise: In June, Ally Bank introduced a four-year CD that lets customers raise the interest rate to match the bank's current offer twice during the term. In May, Sovereign Bank rolled out a CD on which the rates rise about 0.4 percentage point every year.

Of course, to get the best rates on CDs, investors still have to commit to the old headaches: longer maturities and early-withdrawal penalties. Though there are better offers, the average yield on a one-year CD is just 0.44% compared to 1.61% on a five-year CD. And even with the newer options, banks' rules vary. Even some of the most liquid CDs limit the timing and frequency of withdrawals.

Rewards Checking Accounts

While many large banks are winding down their checking account rewards programs, many local institutions, including community banks and credit unions, are offering appealing yields to the tune of 3%. That's the case at Union Center National Bank, Atlantic Coast Bank and Raritan Bay Federal Credit Union. That's by far the highest yield offered for a principal-guaranteed product now, says Greg McBride, senior financial analyst at

But this deal is really intended for consumers who use their checking accounts often. To get this yield, checking account holders typically have to make a mixture of around a dozen debit card transactions per month, a certain number of direct deposits or withdrawals. Also rewards generally don't apply to more than $25,000 of deposits, says McBride. This is probably the best option for people who want to keep some cash at the ready.

Money Market Accounts

The yields aren't the best, but for flexibility and ease, this is the best way to go, says McBride. Money market accounts rarely require a minimum balance or impose monthly fees. Some of the highest yields can be found at online banks, including Sallie Mae, Ally Bank and Discover Bank where they range from 1% to 1.15%. But banks are also increasingly offering sweet deals, especially for consumers with large balances.

The catch: Unlike the yields on CDs, which are guaranteed, rates on money market accounts can drop whenever the bank chooses to adjust them -- sometimes as often as each month -- so today's appealing yield may not be so attractive tomorrow.

Goldman Sachs Information, Comments, Opinions and Facts