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Tuesday, 30 October 2012

6 Ways to Screw Up Your Retirement Plan

Contributing to an employer-sponsored retirement plan is an important step toward a secure future, but experts warn that, like any other financial asset, it takes oversight as well as common sense to reap its benefits.

Avoid these six critical mistakes to improve your chances of having a successful retirement.

Mistake No. 1: opting out

One of the biggest mistakes is to decide not to participate, says Robert Gordon, senior financial adviser at Miami-based Investor Solutions.
"As the saying goes, 'you've got to be in it to win it,'" he says. "Be it a 401(k), 403(b), 457 or other similarly numbered options, the responsibility is on the employee to take the initiative and complete the paperwork."
In an attempt to encourage more people to take advantage of employer-sponsored retirement plans, the 2006 Pension Protection Act provides safe harbor to companies who offer automatic enrollment that requires employees to opt out rather than opt in, says CFP Artie Green, a professional investment adviser at PWJohnson Wealth Management in Sunnyvale, Calif.
"That has not taken hold to the degree the government was hoping," says Glenn A. Hottin, a CFP at M&H Advisors in New Haven, Conn. "The majority who don't elect to join generally are confused by their choices, and the confused mind does nothing."
Definitely don't opt out if your company offers automatic enrollment. It will also automatically select an investment option for you -- often a target-date fund. Once you're in the plan, take time to acquaint yourself with all its investment options so you can determine if the preselected fund is the best choice or if there's one that better meets your goals, time horizon and risk tolerance.

Mistake No. 2: borrowing from your plan

Your company retirement plan is not a piggy bank. Treating it like one has very expensive consequences.
"Borrowing from a retirement account has become more prevalent," Hottin says. "For someone out of work, it may be the only way to address some large expenses.
"My suggestion is always to exhaust other options prior to going into your 401(k), because it's so expensive to do so. It could cost you as much as 40 cents on the dollar -- and that is money you never recover." That could occur if you borrow the money and then default on the loan, which results in a deemed distribution on which you would owe taxes and a penalty if you're under a certain age.
"Some things are legal but just not wise," Investor Solutions' Gordon says. "This is one of those things."

Mistake No. 3: cashing out in a job change

"I am always amazed by the number of people who cash out their plan when they leave their previous employer," Gordon says. "I hear excuses like, 'It was easier than rolling it over,' 'I needed the money for moving expenses,' or, the best, 'I used the money to fund my vacation before I started the new job.'"
Cashing out at 59 ½ years of age or younger, he says, carries a 10 percent penalty. "It doesn't make sense to take the funds on which you have been earning less than 2 percent and pay a guaranteed penalty of 10 percent," says Gordon.
Of course, this would be in addition to the taxes you would owe.
This also doesn't take into account the returns you forfeit by not staying invested. Even small amounts cashed out when you're young can prevent you from amassing a large nest egg. For example, if you had kept $5,000 in your retirement account 20 years ago instead of cashing it out, that amount could have grown to nearly $14,590 today, assuming a 5.5 percent annualized return.
While the last 10 years or so have been a challenge for investors, the stock market's historical returns have rewarded them.

Mistake No. 4: leaving the account in limbo
Just leaving your retirement account with a former employer is also a bad option, Hottin says.
"If your former company downsizes or is acquired by another firm," he says, "finding some contact who can help you retrieve it at a later time could be a hassle.
"It's better to take your 401(k) with you and mix it in with your new employer's plan -- or roll it into an individual retirement account of some type so you can manage it a bit better." If you do an IRA rollover, make sure it's a trustee-to-trustee transfer.
Rolling it into your new employer's account will give you continued creditor protection, says Green. "Even if you default on loans or you're a defendant in a lawsuit and lose, nobody can touch the money in your 401(k) or 403(b)." Depending on the state you live in, he says, your money might also be protected in an IRA.

Mistake No. 5: too much company stock

Financial advisers caution you should have no more than 10 percent of your retirement account in your employer's company stock. If you're concentrated in a single security, you get hit with a double whammy if your company hits hard times and you lose your job.
"Having company stock in a 401(k) plan is good for the company in a few ways, but it's a bad idea for the nonowner employees in many ways," Gordon says. "If you're thinking, 'What about the Facebook or Google employees who are now millionaires because of their stock?' don't confuse luck with skill. On the streets of this nation, there are many former employees of Enron, PanAm, WorldCom and others who also believed in their company's stock."
Sometimes, companies make their stock available to employees at a discount through stock options or other direct purchase programs, he says. If you're tempted, "you are probably best served by taking advantage of the discount and realizing the gain on the 'discount' as soon as (feasible)."

Mistake No. 6: ignoring the big picture
Your employer-sponsored retirement plan is just one leg of the proverbial three-legged stool of a retirement plan.
"One of the largest mistakes is lack of planning in a holistic sense," Hottin says. "People fail to consider their retirement plans as part of the bigger picture. Your employee retirement account should be part of an overall strategy of financial well-being."
In other words, Green says, the term "retirement plan" should refer not just to tax-qualified plans such as IRAs and 401(k)s, but also other sources of income such as Social Security, company pensions, part-time work and other money saved up -- "your overall plan for how you're going to get through the remainder of your life."
Of course, many variables are beyond your control: You don't know how long you will live, how your investments will perform or whether you'll encounter an unforeseen expense that can derail your plans. So the best way to plan for the unexpected is to spend less, invest as much as you can and choose investments wisely.


Wednesday, 24 October 2012

‘Era of Uncertainty’ May Be Drawing to a Close

If economists, business executives and investors have been sure of one thing this year, it is that uncertainty — over economic policies, political leadership and central-bank actions — is largely to blame for the shambling global economic pace, spotty job growth and serial bouts of anxiety in financial markets.

But the bull market in "uncertainty" has likely peaked -- not that many have noticed amid the political noise and unsettled stock market, which is falling sharply Tuesday amid disappointing earnings and worries over Spain.

Like most overplayed market themes, there's a set of plausible facts and resonant conditions at the core of the uncertainty obsession:
  • A close and contentious presidential race, with economic philosophies at its core, is about to culminate.
  • The "fiscal cliff," in which spending cuts and tax increases of up to $600 billion could be triggered, is just ahead in January.
  • China is undertaking a once-a-decade leadership succession as it strains to re-energize economic growth.
  • Europe's debt crisis has eased under European Central Bank promises and prescriptions but meets no one's definition of being solved.
For sure, some business investment spending seems truly to have been postponed as executives wait to see how the fiscal situation shakes up. Lend an ear to a few company earnings conference calls and it begins to seem the same "uncertain" investor-relations staff is writing all the scripts.
But the run of ugly corporate earnings outlooks is almost entirely explainable as a mature profit cycle in a slow-growth, post-crisis world. And it appears the markets themselves have, in general, made a halting peace with the hard-to-predict impending economic-cum-political events that, after all, have been universally anticipated for months.
  • Yields on Treasury bonds, which typically drop in tough-to-figure-out periods, have risen substantially since late summer, surrendering some of the "safe harbor" premium built up in the past several months.
  • The Bloomberg Euro-Area Financial Conditions Index is near a post-crisis high, as is the domestic Chicago Fed's National Financial Conditions Index.
  • U.S. stock-market volatility has been remarkably low in recent months, even including the past week's turbulence and Tuesday's swoon, which has the VIX (VIX) up near 20.
  • The S&P 500 Index is riding its longest stretch without at least a 5% weekly dip since 2002 (this could change depending on how the rest of this week plays out).
The Uncertainty Index

Economists at Stanford have designed the Economic Policy Uncertainty Index, which draws from media mentions of economic uncertainty, the number of tax provisions set to expire in coming years and the variation in economic-growth forecasts among professional economists.

The index has been elevated all year -- no surprise given the abundance of tax statutes scheduled to sunset in January. Yet the spike in the uncertainty index to 2012 highs in July was mostly driven by its news-coverage component, a circular effect of uncertainty chatter feeding into measured uncertainty. The index has since receded a bit, in sync with the stock market's steady if not quite convincing grind to recent five-year highs.
Ajay Kapur, Asia-markets strategist at Deutsche Bank, ventures we've likely seen the worst of the uncertainty theme, in part because the measured political polarization of the main U.S. governing parties has hit a 130-year peak, based on how infrequently Democrats and Republicans in Congress break with their party in voting. In other words, it's hard to see how it can get worse than a 130-year extreme, and is more likely to give way to at least slightly less polarization in coming Congresses.

Assuming a clear presidential winner Nov. 6, one can at least take a stab at analyzing which fiscal cliff elements will go away and which might be extended. In nearly every scenario, the incentives to forestall an outright gallop over the cliff should be pretty strong. Unlike the 2011 debt-ceiling standoff, which blindsided the markets, the cliff is not so much an either/or choice between cataclysm invited or averted. It likely will involve not a market-seizing shock but a mix of negative yet measurable outcomes that would act as a bigger or smaller economic drag over time.

Europe's Lehman Moment May Have Already Happened

Similarly, investors await the return of palpable financial danger from Europe. Henry McVey, head of the global macro and asset allocation team at Kohlberg Kravis Roberts & Co., remarks he is "constantly struck by the fact that investors keep waiting for a Lehman-type moment in Europe." He ventures the notion that "maybe it has already occurred" in the less-dramatic form of the wealthy EU members forcing investors to take a "haircut" on Greek government debt holdings. The tentative truce in European debt markets among debtors, creditors and investors is only as good as European Central Bank Chairman Mario Draghi's professed resolve to do "whatever it takes" to support stability — but it's at least that good, which is an improvement over a year ago.

One final thought on the policy equation: For most of the past three years, there was a constant debate raging about whether the Fed would follow one asset-purchase, money-conjuring program with another. And if so, when and how big?

Since September, with the Fed's announcement of an indefinite asset-buying campaign totaling $40 billion a month until unemployment is notably lower, this policy argument officially is over. The plan may not work job-creation magic, but it frees investors from having to handicap the Fed's next move for the foreseeable future. Even Tuesday's chatter about Chairman Ben Bernanke not standing for a third term beginning January 2014 underscores the emerging stability in Fed policy: When in recent history has a potential shift in central-banking philosophy 14 months away constituted a daunting level of uncertainty?

Even if it's true the uncertainty bubble is starting to deflate, it doesn't mean stocks are necessarily poised to quickly shake off their earnings-driven woes, or that companies are about to binge on new equipment and staff.

It does mean investors could soon return to the old-fashioned task of determining how this business cycle will play out from here for corporate profits and risk appetites on a company-by-company basis, without the all-consuming focus on a lack of certainty which, like the weather, everyone discusses but no one can do anything about.

7 ways to save money in your 20s

There is a paradox that exists when you're in your 20s; you have the energy and freedom to do whatever you want, but not necessarily the funds to do so. Often the two sides are at odds with one another, but they don't inevitably have to be. There are a number of ways to exercise your youthful exuberance, whether it be venturing out into the world on your own or pursuing your passions, without hemorrhaging money.

 Here are a few tips to survive and thrive in your 20s without breaking the bank.

Live with Roommates

If you attended college and shared a place with peers, why not continue to do so after you enter the workforce? It's a good way to begin the onset of personal budgeting and household running without having to incur the higher prices that come with a single-bedroom residence. Living with roommates will also allow you to build up some experience dealing with financial responsibility and living under the same roof as other people before you dive headfirst into purchasing property with a spouse. Splitting rent with three other people for a place with a single bathroom, or sharing a fridge, may not be the most glamorous of accommodations to have in your 20s, but a few years down the line it will save you money while allowing you to maintain some financial independence.

Rent appliances

Instead of purchasing appliances try to rent appliances so if you have to suddenly move out you have to bear no re-location charges or risk damaged goods in transition. 

Invest in a bicycle instead of motorcycle or car

You’ve just landed a job and the motor cycle looks really tempting, but you could save up that money and buy a bicycle instead and work up those muscles. You can always cycle to work if you live close enough or leave it at the metro/train station. This would also save you your gym subscription. The car can wait till you manage to save enough for a decent down payment. 

Learn to Cook

Learning how to cook can boost your finances and cut out unnecessary fat, both literally and figuratively. Suppose you spend at least Rs 200 on meals each day of a full week - you're looking at a food budget of 1400 a week, excluding snacks and beverages. For the same amount, you can visit your local grocery store and purchase produce, meats, spices and grains which will yield a wide variety of healthy meals that can last you for more than a week. 

Cancel Your Cable TV Subscription

As the generation that heralded in the advent of the Internet, you have to honestly ask yourself: do you truly need to pay Rs 400 a month on cable television? With a basic broadband Internet connection, you can be connected to hours of free media from sites such as YouTube. Why then, coupled with the cost of your Internet connection, would you pay for a cable package that provide dozens of networks that you likely do not watch? There are multiple subscriptions that the average frugal 20-year-old can cut from his or her monthly budget, but given the amount of media available for a fraction of the cost of a basic package, the choice to let go of cable television seems to be the first obvious choice.

Steer clear of credit cards

You’ve only just started earning; do you really want to be in debt just yet? Living without a credit card is a good way to learn to live within your means. You can always create a fund and save up for a few months for the 42 inch plasma TV that you’ve been eyes since college. You’ve waited so far, wait just a little bit longer. 

Volunteer With an Organization

Do you like looking at fine art? Attending concerts? Playing with dogs? Look for a business or organization in your area looking for volunteers. You might be surprised at how many of the places you enjoy frequenting will let you volunteer. What these opportunities lack in compensation, they make up for volunteer perks. For instance, some music venues look for ushers and bartenders to work at shows and in return allow volunteers to watch performances for free.

While letting you enjoy your passions at no cost besides your time, volunteering has the added opportunity for you to mingle and meet new people.

Sunday, 14 October 2012

What to Do When You're Denied a Promotion

If you were expecting to get promoted, but got passed over, you're understandably confused and probably frustrated. But how you react and what you choose to do next can greatly affect your career path, so carefully consider your actions.

Withhold the negative emotions. If you feel like you deserved the promotion, you probably are angry, confused, and have a short fuse. But keep it under wraps until you know the entire situation. After all, you may not know the whole story; maybe someone was better qualified than you, or maybe your boss envisions you in a different role down the road.

No matter what you're feeling, try to be diplomatic and neutral in your reaction. Flying off the handle won't better your position. Instead, take time to regroup and consider your next steps.

Find out truth. If you're comfortable talking to your boss about why you were passed over, you might find out some key areas you can improve. Perhaps you were deficient in one area that the promotion required; in that case, focus on beefing up your skills so that the next time around, your boss has no reason to turn you down. Rather than sulking because you weren't promoted, focus on using this as a learning experience to better yourself professionally.

Set milestones for yourself. Armed with information about the professional areas you need to develop, create a game plan for how you will develop the skills you need to move up the corporate ladder. While you can set internal milestones you personally want to achieve, you can also speak to your boss to set a plan where you reach certain milestones to be reconsidered for the promotion.

Make sure the milestones are clearly defined. Sometimes employers are vague about what they're looking for, which can just send confusing signals to you. Make a list and agree upon it together.

Tips for Increasing Your Chance of Getting That Promotion The Second Time Around
--If you know the skills you need for the position you want, you can make the effort to get the skills you're lacking. Take it upon yourself to improve your promotability by taking classes, training, or getting involved in extra projects.
--Don't burn bridges; just because your boss didn't promote you doesn't mean he doesn't think you're a skilled worker. Keep the lines of communication open.
--Agree upon milestones you can work to achieve to qualify for the promotion the next time.
--Talk to others who have moved into similar roles to get advice about how you can better fit the job requirements.
--Keep networking; the more people you meet, the more advice you can get to help you.

When to walk away. Sometimes people aren't promoted not out of lack of merit, but simply because employers are biased or have no intention of offering a qualified employee a deserved promotion. In this situation, you may need to consider switching jobs. As an employee, you want to be recognized for your hard work, and if you're not after several years and conversations, you may need to move on.

If you can't work out any hope of being promoted if you improve your job skills, begin looking for another position elsewhere, or even in another department. Be honest with yourself, too: Perhaps being overlooked for a promotion means you're not cut out for the job you thought you were, which means you should consider other roles.

Lindsay Olson is a founding partner and public relations recruiter with Paradigm Staffing and, a niche job board for public relations, communications, and social media jobs. She blogs at, where she discusses recruiting and job search issues.

Worried About Global Economy? Here's One Possible Refuge

As slowing global growth bites into multinationals' earnings, investors may be more willing to give small-cap US stocks a look.

The New York Stock Exchange.The Russell 2000 (^RUT) is up 12 percent for the year, trailing the 14 percent gain in the S&P 500. But micro caps are up 17 percent, in line with the Nasdaq's gains.
"I think you've got a lot of nervousness coming up to earnings. With small caps, you don't have to worry so much because they're more domestic and you don't have a lot of international exposure," said Lori Calvasina, small-cap and mid-cap equity strategist at Credit Suisse.

She said the Russell 2000 stocks generate just 19 percent of their revenues internationally. As for the S&P 500, 46 percent of revenues are from overseas sources.

Through Thursday, the S&P 500 lost 2 percent over a five day period, while small caps were down just 1.8 percent. The small-cap energy sector was actually up 0.3 percent in that same period, while mega cap energy stocks were down 1.5 percent. Small-cap consumer discretionary stocks were down 1.5 percent, while the larger cap discretionary sector was down 2.6 percent in the same period.

The comments from big U.S. companies with foreign earnings exposure just in the past week shows a worrying trend. The latest was Advanced Micro Devices (AMD) which said late Thursday that its third quarter revenue will probably be 10 percent lower than last quarter due to the weak global economy and also as more consumers choose tablets, over PCs. Engine maker Cummins (CMI) also warned about slowing growth, as did Alcoa (AA) and Avnet (AVT).

Goldman Sachs analysts Thursday issued a note on small-cap opportunities, in stocks with market capitalizations of less than $3.5 billion. The analysts noted that only a quarter of the small cap managers are beating their benchmarks for the year. They pointed out that investors are most overweight industrials and materials, but underweight health care and financials, two of the three best performing sectors so far this year.

"The stock-picking environment for small caps has improved on both an absolute and relative basis to large caps," the Goldman analysts wrote. "Indeed, the three-month correlation for the Russell 2000 are at three-year lows. When looking at dispersion of returns...we note that they remain most acute in energy and health care."

The Goldman analysts recommend "under-earners," companies with room for margin expansion, like Owens Illinois (OI), Global Payments (GPN), and Manitowoc (MTW). They also like companies with attractive yields and dividend growth like Great Plains Energy (GXP) and Cinemark (CNK). Other names on their "Conviction Buy" list include Domino's Pizza (DPZ), PerkinElmer (PKI), Tenneco (TEN), Volcano Corp. (VOLC), SunCoke Energy (SXC), and NeuStar (NSR).

Calvasina said she is maintaining her 850 target on the Russell. "We're not changing our target but we can't get bearish right now ... and I'm kind of a bearish person by nature," said Calvasina.

She said her quarterly survey of small cap investors showed that 56 percent said in September that they were bullish over the next six months, compared to 40 percent in her second quarter survey. Unlike other surveys, she said her survey of about 100 clients is not contrarian when it comes to bullishness.

Small caps are out of favor among many investors who were interested in the high quality big cap names and dividend payers this year. "People can talk about large caps all they want, but that's not really happened this year. The smaller you go down in terms of market cap, the more domestic you are and you really saw microcaps doing well when the domestic theme picked up. And the only place you saw inflows was into small cap ETFs. The active managers haven't gotten the inflows."

Calvasina said the names that were most widely held by small-cap funds underperformed in the second quarter, but made a comeback in the third quarter.

Some of those most widely held include Hexcel (HXL), Genessee and Wyoming (GWR), Netgear (NTGR), Dana Holding (DAN), and Portfolio Recovery (PRAA).

"The market's going up but people are pretty much risk averse ... I think we're still in the middle of something that hasn't played out yet," she said. She said some investors expect a big sell-off and are looking for a buying opportunity in small cap names later this year. But she said she's not sure that sell-off is going to be all that big.

"I don't think they're going to blow up. I don't think they're going to see a lot of fast money in there right now," she said. "I don't get a lot of calls from the multi-cap investors or the hedge fund crowd...I feel the only people interested in small caps right now are the small cap guys."

She said the multiple of small caps, like the rest of the market, is down from where it was in the spring of 2011, when it was at 17.7. It's now at a price-to-earnings ratio of 14.7. Among the sectors that could see upside is energy, she said. In the small cap universe, the energy sector represents a lot of the U.S. natural gas industry, as opposed to the multinational oil companies of the S&P 500.

"Energy was at a historical low relative to the Russell on a valuation basis. It's at a historical low on earnings momentum. I just think it got way too out of favor," she said. Year-to-date, Russell 2000 energy stocks are down 3.4 percent, compared to the 5 percent gain in the S&P energy sector.

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