Forget Pundit Predictions. Your Portfolio: Practical and Personal.

Burt Shulman

Among its many painful lessons, the current financial crisis provides a stark reminder that public investment pundits tend to have at best a theoretical, rather than a predictive understanding of the markets. So many of us poured so much money, not to mention faith, into the markets on the advice of these public pundits, and both money and faith took a serious beating. Some pundits do present information and perspectives we can all use to make better decisions, but recent events have once again made it clear that as a group they have little real predictive abilities. Soothsayers they ain’t — ask almost any investment “expert” point blank and they’ll admit that timing the market is generally a fool’s game, unless you’re willing to spend most of your waking hours studying and tweaking mathematical models that focus mainly on daily, even hourly time horizons — and unless you’re fully prepared to lose your shirt when things still don’t work out as planned.

For most of us — with the bulk of our investment money in 401k’s, 403b’s, IRA’s and similar pre-tax vehicles — the safest path is to start with a hard look at our bottom-line needs and goals, and our investment time horizons. Time horizon is defined as the number of years that remain before you plan to (or must) achieve a specific goal — for example, the Big One, retirement. Time horizon helps determine how much investment risk you can reasonably take because the longer you can hang in, the more risk you can handle. That’s because, in the event of serious downturns such as the one we’re living through, your investments will have more years in which to recover.

The main point: if you’ve been searching the web for the latest round of pundit-provided answers to the Big Questions — “How long will this recession last?” or “Could this be the prelude to another Great Depression?” or “Is it time to jump with both feet into the market?” — you’d be better off sparing yourself the trouble. The simple fact is that almost every pundit got this one wrong, and those who got it right arguably did so the way a persistent player will occasionally win at roulette. Regardless of their training, what public experts do remains as much an art as a science — and all too frequently that art proves to take the form of fantasy.

On the other hand — when they analyze the relative likelihood of a range of potential future outcomes; or when they engage in rear-window, “what the heck just happened” analyses, the experts can help you avoid potentially serious future mistakes.

If you have investments now, but no financial advisor, the suggestion here is to stop searching the headlines, and start searching for an advisor you can trust. Referrals from friends are helpful, but there’s no substitute for interviewing advisors yourself, checking their backgrounds, and studying their long-term — not short-term — track records (long-term meaning at least 5 years). Ask a ton of questions about their business model, which will be either discretionary (where you’ll sign over to them the discretion to invest on your behalf without first obtaining your approval) or non-discretionary (where your advisor can’t do a thing without getting your signature first). There are arguments to support both approaches, and your choice may be as much a matter of your temperament as anything else. But as Bernie Madoff has taught us all, regardless of who you work with, in the end you’re responsible for your own financial health. Painful as it may be, we owe it to ourselves to keep opening those monthly statements, especially in tough times, and to keep asking our advisors — and ourselves — every question that comes up. At all costs, avoid advisors who a) don’t like to answer questions and / or b) insist on providing their own investment statements rather than statements from the institutions that actually process and hold your investments.

If you don’t have any significant investments yet, this is a fine time to get started; the market is low and though it may go lower it’s certainly cheaper to get started today than it was, say, last August. Still, always remember the old maxim: if a deal looks too good to be true, it is. For every big gain there’s an equivalent (and possibly greater) big loss that could strike at any time.

Still, on balance investing in the stock market has proven to be a very good move for most who have been able to keep their money in the market for long periods. So — contribute as much as you can to your company’s 401k or 403b plan, and / or open your own IRA; it’s all pre-tax money, which reduces your current taxes because it reduces your current taxable income. And despite the mixed messages coming from our government right now (“Americans don’t save enough” followed immediately by “Americans don’t spend enough”), over the long haul saving toward specific goals is the best way to go.

No matter how much they may shout at us on television, or how many statistics they confidently recite to prove their points, public experts are only 100% accurate in the rear-view mirror: reviewing what happened yesterday. And while that kind of insight has its benefits, the suggestion here is to think long-term, find a trustworthy financial advisor, and save, save, save.

Burt Shulman is a contributor to the Fund.com Expert’s Desk and Managing Partner of ESE Advisory Group LLC. For more on Burt and ESE Advisory Group LLC click here.

ETF Pick of the Week – Australian Dollar (FXA) 1/24/2009

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

Please read this Disclaimer

Overview and Rationale:
A contrarian play, FXA should benefit from any rebound in commodity and energy prices, intervention to weaken the Japanese yen, perception that the currency is oversold and the attraction of a 7% yield.
In 2007 Australia had about 13% of world reserves of iron ore and was ranked fourth after Ukraine (19%), Russia (16%) and China (14%). In terms of contained iron, Australia has about 15% of the world’s EDR and is ranked second behind Russia (19%). Australia produces around 16% of the world’s iron ore and is ranked third behind China (32%) and Brazil (19%).
While South Africa still has the world’s largest reserve of gold at 6000 tons (14.3%), Australia has the second largest reserve with approximately 12% of the world’s holdings.
Japanese investors seeking higher yields in foreign bond markets, such as in Australia and New Zealand, have been brutalized in recent months, with the Aussie dollar and NZ kiwi losing roughly 45% of their value against the yen to their lowest levels this decade.
FXA also offers a nice yield of 7.3% and also provides a nice hedge on the U.S. Dollar. Though recently weak, the Aussie dollar, it may reverse course as global markets concern over the Fed printing press and inflationary pressures returns.

Catalyst:
From a technical perspective, the timing to begin building a position in FXA looks attractive. The AUDUSD chart shows that the AUD has fallen from near parity with the USD at .95 to .67. During the past decade the AUD has traded above .65 for nearly 7 out of the last 10 years. The fall of the AUD has been brutal and is an outlier compared with the performance of other major currencies.

Risk Factor: Moderate given the depressed state of energy & commodity prices.

Risk Management: Suggest an 8% trailing stop loss.

Tip: You may wish to scale into a position at a price of $65 or lower.

A Guide for Everyone on Practical Financial Literacy-401k’s (Part 4)

Braun Mincher

Braun Mincher is the author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy”. This blog entry is from Chapter 8 of his book and the fourth in a series of ten entries on this subject. For more on Braun click here.

When someone starts to drone on about what you shouldn’t do, it can be difficult to stay awake sometimes. Human beings were meant to be proactive. Don’t just tell me what not to do; tell me what to do.

Here’s one of the first things to do: Get yourself a 401(k).

Here’s what it is: First established in 1981 with final regulations in 1991, a 401(k) is an employer sponsored retirement plan named after a section of the US Internal Revenue Code (Section 401, Paragraph “k”—duh). Would you believe that Japan also has 401(k) programs modeled after the U.S. system and they, too, call it a “401(k)”—even though that number and letter correspond to absolutely nothing in that country? Some trivia with which to impress your friends.

A 401(k) is usually set up by a private corporation—not a government entity. For certain selected occupations, there are similar plans that work much the same way, but are given different names. For example, 403(b) Plans cover workers in educational institutions, churches, public hospitals, and non-profit organizations, and 457 Plans cover employees of state and local governments and certain tax-exempt entities. The self-employed are also eligible to setup their own 401(k) programs. Individuals or employees themselves are not eligible to sponsor their own 401(k) plan.

A 401(k) allows a worker to save for retirement while generally deferring income taxes on the saved money, growth and earnings until withdrawal, with the theory being that most people’s post-retirement income tax bracket will be less than it is today. This makes sense for the individual when one considers that it is logical to earn more money when working than when retired, right? So the idea here is that no income tax is withheld on the money contributed in the year that money is put into the 401(k). Furthermore, some people retire to states that do not have income taxes, since income is taxed on both a state as well as a federal level (with the exception of the no-income-tax states that were explained in a previous Chapter).

However, there is a new “Roth-401(k)” (named after a U.S. Senator by the name of … Roth). With this program, taxes are paid now, but not on the growth or withdrawal in the future. Wrap your mind around this twist: You put $1,000 in today. It produces earnings and grows in value. Eventually, due to appreciation, you get to withdraw, say, $10,000 from that original $1,000 investment. Forget tax brackets—the tax on $10,000 is larger than the tax on $1,000, right? That’s how the Roth program works. Using the aforementioned example, with a Roth IRA, when you draw out that $10,000, you pay no taxes, because you already paid taxes on the $1,000 you started with way back when you put that $1,000 in.

Because of this new wrinkle, Roth 401(k)s are becoming immensely popular. What you might be wondering is how does one designate which of the two programs one participates in. The way that works is this: Your employer (not you, unless you are self-employed) sets up the 401(k) or Roth 401(k) program. Setting up either such program requires the filing of certain forms with the IRS—an employer can’t simply say, “If you want, you can give me some of your money, I’ll add some of mine to it, and we’ll invest it together and call it a 401(k).” It doesn’t work that way.

It is possible that your employer will give you a choice between a traditional 401(k) and a Roth. You can see the advantages of both, though, and even if you favor one more than the other, they’re both good retirement vehicles.

If you are self-employed, or if you are the employer, then you must mull over the differences and decide which way to go. A good professional financial advisor and/or accountant can then help you set it up and make sure all the proper forms have been filled out and filed.

Usually, the employee can select from a number of investment options, such as a variety of mutual funds that emphasize stocks, bonds, and money market investments. Some plans also offer the option to purchase company stock. The key here is, the employee—you—gets some choice as to how the money is invested, and if you leave, you can take it with you. This, again, is in contrast to a company pension plan where you have no control over how the money is invested.

This is also where that word “diversify” comes up again. Again, it is best not to have more than 20% of your money in any one stock, fund, or investment apparatus. Think about the people who tied up all their benefits in Enron or WorldCom stock.

Assets held by the plans are generally protected from creditors of the account holder (i.e., if you get sued or go bankrupt). In other words, if you declare bankruptcy, your 401(k) cannot be touched. In the case of EMPLOYER bankruptcy, assets in a 401(k) are protected, while pension plans usually are NOT (another advantage of 401(k)s over traditional employer pension plans).

Here is the biggest benefit to a 401(k): Many companies “match” an employee’s contributions, up to 1, 2, 3% or more of their salaries. This is like “free money” for the employees, and you are crazy if you do not max out these contributions! The “match” is also tax deductible to the company. Like health plans, this is an important employee perk, and many employers are offering it in order to get quality employees.

Despite this, unlike health care benefits, some employees don’t bother getting involved in their employer’s 401(k) program. This is insanity. I am urging you to be a saver anyway; why not invest in a program where some of your savings may, in fact, be matched by someone else? Picture putting $50 a week into a savings account, and then handing your employer some deposit slips so that he or she could also put $50 per week, every week, into YOUR savings account. Mind-blowing, isn’t it?

Other employees still leave money on the table by only “dipping their toe in the water” with 401(k) investment. At a minimum, I strongly urge you to put in as much money as your employer will match. Using the previous example, what if I told you that if you put in up to $100 per week, I would also put $100 per week into your account. If you only put in $50, then that is all I would put in as well. Why, then, would you stop at $50? Put in whatever I am willing to put in. Take my money, please. It’s like the reverse of the street person standing on the corner asking for spare change. A 401(k) is like a rich guy standing on the corner handing out spare change. Take it!

Furthermore, money placed into your interest-bearing checking or your regular savings account is not tax-deductible or tax-deferred. A 401(k) is. Earn $50,000 a year and put $5,000 a year into a savings account, you still pay income tax on $50,000. Earn $50,000 and put $5,000 into a traditional 401(k), you pay income tax on only $45,000. Which is better?

You can contribute up to $15,500 to a 401(k) in 2007. This will be indexed for inflation in future years, increasing in $500 increments. For 2007, the maximum total contribution (what both you and your employer can contribute) is the lesser of your total annual earnings or $45,000. Employees are generally able to contribute up to 15% of their earnings to a 401(k).

With a traditional 401(k), you must start to draw out assets after reaching the age of 70½, but can do so as early as 59½ in most cases. Only a Roth IRA is not subject to minimum distribution rules. There is a specific calculation that the government has devised that dictates how much money must be withdrawn from your 401(k) upon reaching this age of (assumed) retirement. The penalty for not doing this—50% of the amount that should have been withdrawn —is one of the most severe that the IRS levies. So, remember that this program does have certain rules and regulations that must be followed. Following them is not onerous, so don’t be scared off. But bear in mind that they are there.

If you really need to get at your 401(k) money early, there is a 10% penalty for early withdrawal, in addition to ordinary income taxes on that money, which is considered regular income upon withdrawal. There do exist, though, some exceptions for borrowing for home purchases, secondary education expenses, medical care and the like. Check with your accountant or your employer’s human resources (HR) person before contemplating early withdrawal.

If you change jobs, you can take your 401k with you. This is important, as some people are under the misconception that they must either stay at a job they dislike so that they do not lose that money, or that they MUST cash out that money and pay a 10% penalty if they leave that employment. Not to worry, the government has already addressed that issue and you are covered. If your new employer has a 401(k) Plan, you can convert yours into theirs in what is called a “Direct Rollover.” Even if your new employer does not offer a 401(k) program, you can still do this via something called an individual IRA Rollover (more on this later). You even have the third (and least desirable option) of keeping your 401(k) with your old employer. For obvious reasons, this is not a great idea since you would most likely lose daily controls over that money’s management.

Too many people ignore all of these options and simply cash out and pay the 10% penalty. Dumb, dumb, dumb, dumb. Worse yet, some then take that money and say, “Wow, what a windfall! I think I’ll go out and buy a boat.” You’ve now just thrown away a whole lot of savings, defeating the whole concept.

This is a major hurdle in savings and investment mentality in general. When we are children, parents often tell us, “If you want that expensive toy, you’re going to have to save for it and buy it yourself.” On the surface, this is good parenting in its attempt to mold young people’s minds about hard work, saving, and reward. The problem is, the reward is too easily obtained and has negligible value. So the kid saves for that hot new toy. He buys it. Six weeks later, he’s bored with the toy and it’s thrown into the back of the closet. The kid hasn’t learned to save for anything of important lasting value, such as LIVING. And this is hard because the younger we are, the less we think about tomorrow. Oh, we might think about tomorrow, as in actual tomorrow. On Monday, we think about Tuesday. What we don’t grow up thinking enough about is Tuesday, sixty years from now; when we’re old and can no longer work.

Another catch to the whole “leaving my old job and taking with me the 401(k) I had there” is simple housekeeping. Make sure the check for your cash-out (it is still a type of cash-out, unless you decide to leave it at your old employer) is written out to the new plan and not to you personally. If it is made out to you, you will have to pay the 10% penalty and the income tax. Or, better yet, go the “Direct Rollover” route and never even touch the check.

401(k)s are great and you should avail yourself of them. The tax advantages, whether you are using a traditional or a Roth type, are substantial. Again, this is an example of the government creating incentives and disincentives to direct the populace to do certain things and not do certain other things. As Social Security continues to have its problems, the federal government is hoping to have as many people saving on their own—and they consider a 401(k) something that you do on your own, even though it usually involves an employer. In this way, if Social Security benefits need to be cut more in the future, less people are likely to be adversely affected. In fact, as you may know, Social Security benefits are now taxed if one’s total income from all sources exceeds a certain level. It’s a give away/take away. Social Security is fine for people who are truly indigent—it keeps them alive. I hope it stays in existence for their benefit. But for the rest of us, all signs are pointed toward us forgetting about it and taking care of ourselves —with the occasional governmental incentive.

What you should do before signing an agreement with your broker or financial advisor?

Ken Ennis

Use the F.A.C.T. method.

F = Fees. Where have we heard that before? It’s always important, but especially if you’re going into what’s called a “Managed Account” program. In that event, your money will be invested across a number of investment types and classes, and you’ll likely pay your advisor a percentage of the assets they manage for you (typically expressed as “basis points,” where 100 basis points = 1% of the total). Study your advisor’s fee and determine if there are (or could be) any hidden fees beyond it. Managed accounts typically involve many hands in the pot — so before signing up, find out who will be involved and what percentages each will earn. Remember the folks we listed before: sub-advisors, investment managers, custodians, operational partners, etc.? In a typical managed account, each will take a piece of your money, on top of what your financial advisor takes. Don’t get us wrong: with the right advisor, a managed account can be an excellent choice, since it will typically offer great diversification and potentially higher gains, making the overall cost reasonable. Plus, to a large extent, such accounts align the otherwise divergent interests of everyone we’ve mentioned toward the single happy purpose of making you more money — because if you do, they do. But it’s particularly important with Managed Accounts to understand exactly who’s earning what from your money.

• Remember: YOU MUST ask your advisor for an “All-in Fee,” which includes everything and everyone you’ll be paying: all the players and all the services, including your advisor’s. As a rule of thumb, the All-In Fee for a Managed Account made up of all mutual funds shouldn’t exceed 2.75%-3.00%, of which your advisor should take no more than 1.25% or so; .90% is actually average for a financial advisor, so if they do want more ask them why — and if you don’t understand their explanation (their additional services, etc.) resist the temptation to shrug, check the box, and say “Oh. I guess it’s ok”. You don’t want to work with an advisor who intimidates you, so keep on asking until you really understand; and if the process gets tense, find another advisor. Explaining and justifying their fees is part of their job, and most will actually be willing to negotiate, within parameters that include the amount of assets you’re giving them to manage.

A = Account Type. Understanding the two main account types is important because it determines how much control you’re willing to give your advisor. The overall choice is between “non-discretionary” and “discretionary” accounts. “Non-discretionary” means that your financial advisor can’t do anything without your explicit “ok”. The opposite is true with “discretionary” accounts. Think “power of attorney”: you’re giving your advisor authority (discretion) to make changes to your account without your pre-approval. This can actually be a good thing, since it allows your advisor to make fast changes in response to dramatic events. But it also means that you have to be truly comfortable with your advisor. Even discretionary accounts have boundaries, so be sure you understand and agree about what those boundaries are.

• Remember: YOU MUST understand the extent of the discretion you’re granting your advisor. Ask a lot of questions – especially the “stupid” ones that embarrass you, because we can bet they aren’t stupid at all. Can your advisor buy and sell securities on your behalf — or just rebalance existing securities to match an asset allocation target (in other words, match the percentage diversification across investment classes that your risk tolerance and time horizon call for)? If you’re giving your advisor discretion to buy and sell, what types of securities are and aren’t eligible? And never forget the core rule: if you don’t understand something, keep asking until you do. If your advisor gets frustrated, find another advisor who won’t.

C = Choice. How much choice do you have in determining your asset allocation at the outset? Can you select from a list of securities or are you signing up for a closed program that puts all investors into the same sets of securities – which can actually be fine for people who don’t have large sums to invest and want to pay lower fees, or just want some limited market exposure.

• Remember: YOU MUST understand what choices you’ll have in your program, both when the account is set up and even more importantly once your money is invested. If you want the ability to tell your advisor to replace a particular investment that isn’t doing well, make sure your account type offers that flexibility. Most firms offer several varieties of managed accounts which satisfy different investor preferences.

T = Termination. Finally, before you sign on, get all the details about what’s involved in terminating the account. Will there be any fees? If so, will these be tied to how much time will have elapsed? And once you indicate your desire to terminate, can your advisor move your assets into another type of account without your sign-off? Finally, how long will it take to get your assets back?

• Remember: YOU MUST study your termination agreement before signing on. Ask your advisor whether you’ll get hit with penalties or transaction charges if you decide you want your money back, or if you choose to move it to an account at a different institution. In some managed accounts at large firms you’ll get hit with a 1.00% “exit/transaction/see you later/thanks for coming/don’t let the door hit your wallet on the way out” fee. Needless to say, that is not what you want.

Ken Ennis is a contributor to the Fund.com Expert’s Desk and Managing Partner of ESE Advisory Group LLC. For more on Ken and ESE Advisory Group LLC click here.

ETF Pick of the Week – iShares MSCI Canada (EWC) 1/16/09

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

Please read this Disclaimer

Overview and Rationale
As an affluent, high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production, and affluent living standards.

Canada is largely a resource-based economy but its service side provides good balance. It offers investors fiscal strength, low political risk, and a resilient economy.

Industrial Materials (15.6%) and Energy (26.3%) sectors account for 42% of EWC, with such main players in industry such as Canadian Natural Resources (CNQ), Encana Corp. (ECA) and Suncor Energy Inc. (SU). But the financial sector is the largest group in EWC, at 35%. These banks are in relatively good shape compared to US large banks.
Canada and EWC are also a limited play on gold mining companies with two of North America’s largest, Barrick Gold (ABX) and Goldcorp Inc (GG). Canada and EWC thus offer a low-risk way to add energy and commodity diversification to your global portfolio.

EWC offers a nice yield just under 3% and also provides a nice hedge on the U.S. Dollar. Though recently strong, the greenback may reverse course as global markets concern over the Fed printing press and inflationary pressures returns.
Canada, on the other hand, is in a strong fiscal position and actually has a current budget surplus.
Catalyst: The Canadian market and EWC will likely do very well if and when energy and commodity prices rebound from their sharp selloff.

Valuation
EWC is trading at a five-year low and lost about 10% of its value just this week. I can’t tell you where the bottom is but believe the risk/reward relationship is favorable for investors. The Canadian market is trading at about a 10% discount to the S&P 500 on a price to earnings basis.

Risk Factor
Moderate – Low given the depressed state of energy & commodity prices.

Risk Management
Suggest an 8% trailing stop loss.

Tip: You may wish to scale into a position in EWC rather than jump in with both feet.

ETF Pick of the Week – iShares MSCI Austria (EWO) 1/12/09

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

Please read this Disclaimer

Overview and Rationale:
The eight million people of Austria are at the heart of the continent and the country’s resurgence brings back memories of its historical role as an imperial dealmaker. Vienna still has the regal feel of an imperial capital, much grander than its current size and stature but the country benefits economically and politically by not being France or Germany, countries that tend to throw their weight around the councils of Europe.

For several reasons, Austria and its exchange-traded fund have benefited more from Europe’s opening to the east more than any of the other older EU members.

First, the Economist points out that its trade with Central and Eastern Europe (CEE) has jumped over the past decade and a half, helping to reduce its trade deficit. Second, and more important, Austria’s stock of direct investment in central and eastern Europe zoomed from almost zero in the early 1990s to nearly 10% of Austria’s GDP.

Furthermore, while a decade ago much of its investment was concentrated on manufacturing, now the biggest chunk goes on financial intermediation, property and services. This reflects its growing role as the nexus of support services for Eastern European countries. The eastern opening, together with those of Austria’s EU entry in 1995, EU economic and monetary union in 1999 have boosted economic growth as well as the ETF (EWO) that tracks it.

That is, until last fall when EWO began a sharp decline as the economies of Eastern Europe slowed exposing fiscal weakness and fragile currencies.

Catalyst:
The chief catalyst that I believe will propel EWO is its relative valuation and the likelihood that markets and economies of Eastern Europe are at a point of maximum pessimism.

Valuation:
We are likely close to a point of extreme pessimism for EWO with minimal downside risk and potential for prospects improve. The Austrian market is trading at just 5.5 times projected 2009 earnings compared with 11.2 times for Germany and 12.8 times for Switzerland. It is down about 20% over the last three months but showing some near-term strength.

Risk Factor:
Moderate though keep in mind that the top three companies in EWO (Erste Bank, OMV and Telekom Austria) account for 39% of its assets.

Risk Management:
Suggest an 8% trailing stop loss

When buying mutual funds, use the F.I.T.T method.

Ken Ennis

F = FEES. Most mutual funds have fees, and most add them up so you can see what you’re paying as an overall percentage of your investment. 1.25% for stocks funds and .50% for fixed income funds are fairly reasonable expense ratios. If the fund you’re interested in has higher ratios than those, ask your advisor why. Then ask whether he/she can recommend cheaper alternatives — and regardless of their answer, keep looking yourself.

• Remember to multiply the % in the expense ratio by the amount of money you’re investing. 1.25% may not sound like a lot — until you attach it to your hard-earned $100,000 investment. At that point, 1.25% becomes an annual fee of $1,250 per year for a single fund. That may make you uncomfortable.

I = Investment Strategy. Explanations of a fund manager’s strategy will be found in the fund’s prospectus, and in fund reports provided by reputable fund data suppliers like Morningstar or Lipper. Basically, you’re looking for two things:

1) does the fund “walk its talk”? I.e., does it in fact invest the vast majority of its assets in the asset class that’s in its title. For example, if you invest in the “ABC Small Cap Growth Fund”, you’d like to see 90-95% of that fund invested in small cap growth stocks. If you see less, buyer beware.
2) In the case of the above, what is the fund investing in besides small cap growth stocks? Small cap value stocks or cash would be fine. Mid cap stocks, large cap stocks, fixed income, real estate – not fine. We suggest you look for another fund. If the words “illiquid” or “high yield” show up in the investment descriptions of a fund that doesn’t claim to be a high yield fund, the manager may be trying to enhance returns by tossing in investments that don’t belong. Look for another fund.

• Remember: YOU MUST understand what a fund invests in before you invest in the fund. Not doing this would be like buying a house without going upstairs or checking out the basement. If you find the process too confusing, ask your advisor to explain it to you. If you still don’t understand, trust your instincts and move on to another fund anyway – and possibly another advisor. Warren Buffett only invests in businesses he can understand; it seems to work pretty well for him.

T = Turnover. “Turnover” means the percentage of a fund’s instruments that are bought and sold within a given year. 100% is a good base turnover for an equity fund, but if it goes significantly higher than that, you risk paying higher fees (even if the fund, gulp, loses money) because there are so many trades that must be paid for. Plus, with so much turnover your capital gains taxes may be higher – even if, once again, the fund loses money overall. A high turnover fund – 200%+ — is making quick bucks on its trades. That can be fine if it’s the investment style you really want — but again, your tax bill may give you serious sticker shock.

• Remember: YOU MUST try to find a fund’s turnover numbers over the past few years to get a sense of a pattern. If last year’s number was 125% and the two years prior were 250%, buyer beware. You’re looking for consistency, and that isn’t it.

T = Tenure. As in: Fund Manager Tenure. In most cases, you’re better off with a fund that’s managed by a team, because it ensures that your hard-earned money doesn’t rely solely on one person. Five years or more of reliable tenure gives a fund’s results a degree of consistency. Of course, if a fund changes managers, don’t rule it out — the new manager maybe eminently qualified to do a fine job. Just be aware that the new team won’t have any track record in managing that particular fund.

• Remember: YOU MUST look in the prospectus for the tenure of the manager or management team. If it’s less than 5 years, move on to another fund, unless your advisor can give you good reasons to believe that the new manager is qualified and ready to go. Most people do more research before they buy a washing machine than they do before investing their life savings in a mutual fund. Shop around; this decision is too important to rush.

Ken Ennis is a contributor to the Fund.com Expert’s Desk and Managing Partner of ESE Advisory Group LLC. For more on Ken and ESE Advisory Group LLC click here.

WHY ETFS

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

Why you should use Exchange Traded Funds (ETFs) as your Core Investement Tool
Exchange-Traded Funds (ETFs) are exciting new investment tools that have grown rapidly to over $400 billion of assets. ETFs offer exposure to dozens of asset classes due to ETFs broad diversification, great flexibility, low expense ratios, high tax efficiency, superior ETF trading flexibility, and competitive long-term performance versus active managers.

ETFs are passively managed portfolios designed to track specific indexes and represent baskets of stocks, currencies or commodities.
Some ETFs offer relatively low-risk, broadly diversified portfolios, which investors may find attractive as the core equity components of their portfolios. Others offer diversified investments in particular styles, sectors, industries, regions, countries, or commodities.

There are currently almost 300 ETFs that provide exposure to US equity markets.
The largest ETF managers include Barclays Global Investors (iShares), State Street Global Advisors (streetTRACKs and SPDRs), Bank of New York (QQQQ), MDY, BLDRs), Vanguard, Merrill Lynch (HOLDRs), World Gold Trust, PowerShares, Rydex, ProShares, WisdomTree, DB Commodity Services, Victoria Bay, Van Eck, Claymore, First Trust, and Fidelity. Several ETFs offer exposure to duplicate or similar indexes; however, there are significant differences in the products and indexes especially as to how they weight companies in the ETF basket. We believe investors should favor ETFs that best meet their investment objectives with the lowest operating expenses and reasonable liquidity.

There are 80 ETFs that provide international equity exposure.
Many international ETFs are iShares based on MSCI Indexes, but others are based on S&P, Bank of New York ADR, Dow Jones STOXX, and WisdomTree indexes.
ETFs are an excellent tool to build a low cost and simple global portfolio. ETFs offer investors have many choices of global and international sector ETFs to allow them to take advantage of global growth and value opportunities around the world.

Six ETFs offer US fixed-income exposure.
They are all iShares based on Lehman Treasury and Aggregate Indexes and a Goldman Sachs Corporate Bond Index. There are also ETFs that target dividend rich companies and preferred stock.

There are 14 ETFs that provide exposure to alternative asset classes including gold, silver, oil, broad based commodities and currencies.
Three commodity ETFs hold the physical commodity in which they invest, while three other ETFs utilize commodity futures. The currency ETFs invest in foreign time deposits or currency futures.

ETFs trade on major exchanges.
This allows investors to buy and sell them at stated market prices. In contrast to open-end funds that price once a day at the close, ETFs are available to all investors at market prices throughout the day. This helps to reduce the uncertainty of buying shares intraday at prices to be determined at the close. Many index-linked ETFs can also be shorted without an uptick, providing extra flexibility for hedging or market-timing.

ETFs are very flexible investment tools relative to mutual funds.
They can be bought on margin, purchased using limit and stop loss orders, and many have listed options. This open trading prevents opportunities for market timing in which some investors buy open-end funds investing in foreign markets that closed before US trading started. For example, on a day when the US market is higher, ETFs based on a Japan index usually trade up in anticipation of higher prices in Japan overnight. In this case, open-end funds investing in Japan may be priced based on the previous day’s close.

Index-linked ETFs have some of the lowest expenses of any investment tool.
Their expense ratios are significantly lower than those of open-end mutual funds, but the range has widened as some providers cut fees while certain newer products have higher fees. For example, the Vanguard Total Stock Market Index Fund (VTI) has an expense ratio of seven basis points (bps), while the average actively managed domestic equity open-end fund has 150 bps in expenses.

ETFs are also tax efficient since the securities in the ETF basket only change as the index it tracks change.
Mutual funds often distribute large amounts of capital gains to shareholders each year. ETFs capital gains distributions are rare and so ETF investors enjoy a lower tax burden which of course drags down returns.

For a complete list of ETFs, ETF sponsor information, articles about ETFs and performance data, please click here.

We teach teens trigonometry, why not Money 101?Today’s financial crisis is a prime example of why the next generation needs financial literacy.

Braun Mincher

Why does the school system require classes such as math, English, and science, but not basic personal finance?

We force students to learn trigonometry, yet how many of us ever use it again after graduation? In contrast, how many transactions involving money will we each conduct on a daily basis for the rest of our lives?

Think about each time you purchase something with a credit card, make a car payment, reconcile your bank account, or pay taxes. Even though these transactions are a daily occurrence for most consumers, we receive very little financial education on them from our school system, or even our parents.

Now think about how huge a decision it is to rent or purchase a home, apply for a loan or mortgage, make a contribution to your IRA or 401(k), shop for insurance, or get married. How do we expect to make wise financial decisions when we have little education on even the basics?

According to a 2007 survey commissioned by the National Council on Economic Education, only seven states currently require high school students to receive financial education in the school system. What about the other 43 states?

We need look no further than the daily news headlines about the mortgage meltdown, the stock market crisis, the housing slump, or the rising cost of oil to see how relevant financial literacy is.

Rather than waiting for the system to correct itself, we need to educate our future generations to make smarter financial decisions.

Just 20 years ago, personal finance was significantly less complex than it is today, and in many cases, parents supplemented what the schools did not teach.

Fast forward to present day, and we now have hundreds of different home mortgage options and the burden of retirement planning is shifting from the government and traditional company pension plans to consumers through investment vehicles such as IRAs and 401(k)s.

Because of their own financial woes, in many cases, parents are no longer comfortable with talking to their children about the touchy subject of money and personal finance.

Sadly, research shows that financial illiteracy has reached epidemic levels with no end in sight.

Much has been done to bring awareness to other growing crises such as childhood obesity, the need to wear sunscreen, and the dangers of drug and alcohol abuse, but why has something as important as financial literacy been largely ignored?

Results from my recent online consumer survey, FinancialLiteracyQuiz.com, show that:

•Only 50 percent of those who took the survey know that property taxes and mortgage interest are tax deductible

•Only 40 percent know that their liability for credit-card fraud is limited to $50.

•Only 33 percent know what “annual percentage rate” (APR) means.

•Only 32 percent know what required deductions are taken from their paycheck.

So, why should Americans care? These are basic pieces of information that are critical to financial decisions. And the better job we do of financially educating the next generation, the more financially independent they will be. This will not only mean breaking free from ongoing support from parents or destructive financial habits, but it could potentially save a lot of money.

Our school system has an obligation to prepare students for success in a fast paced global economy. Personal finance is a subject that will affect all consumers for the rest of their lives, regardless of age, education level, or income.

Financial literacy is a fundamental life skill that needs to be properly taught in the school system, alongside traditional math, English, and science.

The public needs to put pressure on lawmakers to mandate this. Parents and students need to be vocal locally.

In the meantime, consumers need to accept personal responsibility and invest in themselves to get financially educated. They can start by reading a book, attending a seminar, or getting coaching from a trusted adviser. But they have to start now. The future of our financial lives depends on it.

Braun Mincher is the author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy. For more on Braun click here.

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Why the Economic Crisis is a Good Thing

Braun Mincher

In case you’ve been living under a rock or in a cave, we are currently in the midst of a widespread financial crisis and looming recession. But before lapsing into a coma induced by a glimpse at your most recent 401(k) statement, realize that there may be a silver lining in this ever-darkening cloud, at least for those who choose to notice it.

The roiling financial markets might prove to be the “slap in the face” that consumers and educators need to realize the importance of teaching financial literacy in the school system. Shockingly, only three states currently require a semester-long course devoted to personal finance as a high school graduation requirement. The results from a 2008 survey conducted by the Jump$tart Coalition – a financial literacy advocacy group for students ¬– prove that more is needed. More than 6,500 high school seniors took the group’s 31-question survey and, in general, could only correctly answer 48.3 percent of the questions. That’s down from the 2006 survey when the mean score was 52.4 percent.

It’s human nature to be reactionary. We’re not clairvoyants – well, most of us aren’t – and cannot be expected to predict when disaster will strike. But in many cases, such as in the current financial crisis, the fissures that lead to mass failure aren’t impossible to read and are a long time in forming.

Now, fingers are flying, quick to place the blame for worldwide economic ruin as far from themselves as possible – Washington, Wall Street, real estate brokers, mortgage lenders, and the regulators who were charged with supervising them all. The argument over whether mortgage lenders or the home buyers are responsible for using the poor financial instruments that have played a major role in tens of thousands of foreclosures as well as the fall of some of the nation’s largest companies may never be settled.

The truth is, we are all responsible. Consumers must accept personal responsibility and cannot count on anyone else to take care of their financial health as well as themselves. Whether devious or not, real estate agents, mortgage lenders, car dealers, credit card companies and the like have a financial interest in making the deal, regardless of whether the deal is the right for the individual. There is certainly no direct financial alignment of interest between the two parties.

The mindset that we can live beyond our means is an underlying theme to the current crisis. Consumer acceptance of fiscal limits has become nearly non-existent. Why would you limit your spending power when it’s so easy to extend your credit? During the past decade, financial instruments have become exceedingly complex, but at the same time easier to access.

While most high school or college students are receiving their first credit card solicitations, a majority of them don’t even understand how finance charges will accrue. Only 48 percent of the Jump$tart survey participants were able to point out that a credit card holder who only pays the minimum amount on monthly card balances will pay more in annual finance charges than a card holder who pays the balance in full. Financially uninformed students soon become financially unaware adults.

According to recent survey results from www.FinancialLiteracyQuiz.com, only 40 percent of participants knew that their liability for credit card fraud is limited to $50. The Web site’s 50-question multiple-choice quiz covers such topics as credit and banking; real estate and mortgages; car buying; taxes and insurance; and saving for the future. Sadly, the average adult quiz taker scores just 53%, similar to the Jump$tart survey administered to students.

If we can’t teach students about the mechanisms that dictate credit financing, how can we expect them to decipher the terms of an adjustable rate mortgage or the understand the consequences of a financing plan that begins with the borrower owing 110 percent the value of the home?

While legislators and regulators are discussing how the financial markets can avoid further stress, parents, educators, business leaders and the general public should be addressing how the future generations can avoid the mistakes of their predecessors. Every state should have dedicated financial education classes as a required part of its K-12 curriculum. There is no excuse for lack of knowledge of this practical life skill in a subject that impacts our lives everyday. We require students to study trigonometry and physics, which a vast majority of them will never use outside of the classroom. So why not arm them with at least the basics of leading a financially secure life?

We do not need to waste time fretting over the current state of the financial markets. No amount of worry will soothe the system. Instead, we need to wake up and smell the opportunity that this crisis presents — an opportunity to demand that the future will be one of financial enlightenment rather than fiscal ignorance Regardless of the economic climate in the future, the best defense is a financially educated consumer.

Braun Mincher is the author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy”. For more on Braun click here.

Is Financial Illiteracy Tantamount to Child Abuse?

Braun Mincher

We teach our children to walk and speak, to brush their teeth and hair, and to not talk to strangers, so why aren’t we teaching them about money management and financial wellness?

We deal with money in our everyday lives. Starting at a young age, more so now than ever before, we are exposed to the various aspects of money management and fiscal tools. But, while the nation places an importance on teaching the youth of America about mathematics, science and even sexual health, we neglect to prepare our children for the inevitable matter of personal finance.

Child abuse comes in many forms. Neglect is a failure to provide for a child’s physical needs. Emotional abuse is any behavior that interferes with a child’s mental health or social development. How is not teaching your child about at least the basics necessary to lead a financially healthy adult life not abuse, too?

Financial illiteracy among all Americans is truly reaching epidemic proportions, but it is most prevalent among the young – the generation of tomorrow. The results from a 2008 survey conducted by the Jump$tart Coalition – a financial literacy advocacy group for students ¬– show how dire the situation has become. More than 6,500 high school seniors took the group’s 31-question survey and, in general, could only correctly answer 48.3 percent of the questions. That’s down from the 2006 survey when the mean score was 52.4 percent.

Likewise, the average score at http://www.financialliteracyquiz.com/ for participants less than 18 years of age is 29.8 percent. The scores tend to increase with age, perhaps due to experience, but the overall score average score on the quiz is only 53 percent.

Perhaps likening financial illiteracy to child abuse feels like a stretch, but let’s think about the consequences. A child who is neglected is denied adequate supervision, shelter, food, clothing, medical care and/or hygiene. Each of these elements is essential to leading a decent life and also provides the child with a roadmap for adulthood. Will a neglected child grow to be a neglectful parent? Where would he or she learn otherwise?

I’m sure that there are many neglected children that have grown to be responsible adults and loving parents – after all, things like food and shelter are really common sense. But children who do not learn about things like savings and credit are not likely to magically stumble upon the information as they grow up. Instead, they will learn the hard way, through trial and error, sullying their credit and overall financial well being along the way.

Consider the millions of Americans who have lost or are loosing their homes. Or the increasing number of individuals who turn to payday loans — carrying interest rates of up to 400 percent — because they cannot budget for their living expenses. If as children these individuals were given basic guidance in money matters perhaps some of these hardships could be avoided.

Financial illiteracy can be debilitating. Money might not be everything, but fiscal responsibility is key to the American dream – a house, a happy family, a stable job. Beyond that, knowing the basics of personal finance is paramount to survival in an ever-more-complex environment. As a nation, we need to provide the next generation with the financial basics just as we provide them with other necessities of life. To not do so is misguided and even cruel.

Braun Mincher is the author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy”. For more on Braun click here.

Retirement Planning for 30-year-olds: “Seize the 401k! Then Max It Out!

Burt Shulman

Long, long ago, in a galaxy far, far away — back when I turned 30, that is — I didn’t understand the concept of retirement planning. 65 was a number I couldn’t relate to. If I thought about retirement at all, I fantasized that I’d win some kind of nebulous career jackpot and never actually have to worry about it. If that didn’t happen, I’d just sleepwalk through my financial life until I had no choice, at which point I’d magically work it all out.

Well, that was then, this is now, and as the stock market pulls us deeper into the muck of the worst financial crisis in 80 years, I’ve decided it’s my duty to start waving my arms, jumping up and down and shouting in the faces of today’s 30 year olds (you know who you are): “Max out those 401ks – NOW!!” Forget about Social Security. Its long-term survival is no longer an even bet, and if it somehow does make it, don’t expect it to provide more than token support by the time 2043 rolls around.

So even with the Dow dropping like a rock (and maybe especially), if you’re a 25 or 30 or 35 year old there is simply no counter argument: you have to start maxing out your 401k today. If it makes you crazy to watch large cap stocks turn tiny, put your money in the lowest-risk cash vehicles your plan offers — money market funds, low-risk bonds, whatever makes you comfortable — until a bit of sanity returns to the market. But please do put your money somewhere. Max’ing out your 401k has to be Task Number One on the to-do list, if you haven’t already done it.

To make the point even more emphatically, allow me to don my blogger’s top hat and tails and perform a simple magic trick, for your fiscal pleasure.

Imagine you’re 30 and earning $50,000 a year. Times are tough, so let’s assume that over the next 35 years your average annual income will rise by only 3% a year, while your investments will grow by only 5% a year. With the latest round of Wall Street carnage still smoldering in the background those numbers may not seem so bad, but historically they’re way down there, especially given your 35-year time horizon. By 2043 the market will have gone bull and bear so many times that the darkness of 2008 (and 2009?) will be a distant memory. But let’s be modest in our estimates anyway.

Being both a new hire and a savvy 30 year old, let’s say you decide to immediately start pumping 10% of your annual pre-tax income into your 401k. Because your company is one of those well-managed firms that still ponies up what’s called a matching contribution — in this case a robust 6% — as long as you contribute at least 6% of your salary, the company will match it. That extra 6% is actually “found” money, because just by signing up to save, you’ve effectively increased your salary by 6% per annum. And since all of it’s pre-tax (yes, you’ll have to pay tax in 35 years — but that is then, this is now), 10% adds up to a lot more in actual dollars than it would if you were putting away 10% of your take-home. Plus, it’s carved right off the top of your paycheck, which cuts down the amount of tax you have to pay every two weeks.

Now move the calendar ahead 18 years. It’s a few months before your 48th birthday and you’re having a mid-life crisis. You’ve been getting increasingly ornery about that 401k contribution – “certifiable” might be a better word – and you now decide you’ve had it with deferred income. You’re going to stop contributing and never start again. To calm your traumatized wife, you grudgingly agree to leave your money in the 401k until you’re 65, allowing it to continue its unexciting but reliable 5% annual growth.

Over the years you’ve become friends with a colleague who works in the same department at the same salary at the same company as you. Oddly enough, he even has the same birthday. When it comes to 401k’s, though, he’s your exact inverse: where you started out savvy, he started out ornery, refusing to invest anything in his 401k despite the company’s (and your own) pleas. To shut you up when you pressed him, he once memorably intoned “Live for today, tomorrow will take care of itself!” — dangerously mangling a dated 1960’s tune, while at the same time making no sense.

By now, though, he’s married, has two kids, owns a house, and is becoming increasingly nervous about where all this “Live for Today” stuff has left him.

A few months before his 48th birthday – coincidentally the same night you’ve turned ornery – he awakens at 3am in a cold sweat. The Ghost of Contributions Past has just been shouting at him in a dream that Tomorrow never had any intention of Taking Care of Itself – in fact Tomorrow is now cannonballing straight at him like a runaway train. Half-asleep and in a panic, he races to his laptop and arranges to start contributing 10% per annum — just like you. Contritely, he realizes that you should have been his role model all along — unaware that when he sees you tomorrow you’ll completely confound him by announcing that you’ve decided he was right after all: tomorrow will take care of itself (it won’t, but this is a parable, so bear with me).

Now, at age 48 your friend’s salary, like yours, is a little north of $85,000. During lunch the following day, while you try to ignore him he insists on explaining his revelation. “I was truly freaked until I realized that I’ve got 18 years left to save — and frankly, now that I know you’re stopping, my total contribution will be a lot bigger than yours because I’m starting with a much higher salary than you did. My 10% plus the company’s 6% will add up to a lot more real dollars. So to make you reconsider this “Live for Today” idiocy, I’ll offer you a bet: I’ll wager that on retirement day I’ll have more money than you do.”

To your annoyance, his reasoning seems sound: you did start at a much lower salary and contribute much less than he eventually will — and now that you’ve shut down your contributions you’ll never be able to catch up. In fact, you calculate that his contribution will end up more than 65% higher than yours. Sadly, it’s pretty clear: in the end he’ll do much better than you. Unless you change your mind.

Being stubborn and deeply committed to your midlife crisis you decide you won’t change your mind. But here’s where the magic comes in. When you get back to your desk you run the numbers – and decide to take the bet.

According to your calculations, on the day you both retire you’ll walk onto the golf course with $678,000. And despite his 18-year race against time (and you), your friend will walk off in the other direction with just $466,000 — 31% less than you! To even reach that number he’ll have had to contribute $76,000 more of his hard-earned money than you did, and the company will have had to award him $46,000 more than they awarded you. Yet precisely the same investments will have earned you $561,000, while earning your friend less than half that.

But that doesn’t make sense. You started at 30 and stopped at 47; he’s starting at 47 with a lot more cash, and will stop at 65; yet you’ll wind up over $200,000 richer. How will this wonderful trick be performed? Through a lovely bit of financial legerdemain called “compounding”. The 5% earned by your investments may have seemed anemic at the time, but with 18 more years to work its will on your behalf you’ll come out way ahead. Despite your bizarre decision to stop contributing at the age of 48, and despite your friend’s considerably larger overall contribution, 5% of a smaller initial pie spread out over 36 years will earn you more than twice as much as 5% of a larger initial pie spread out over 18 years (that’s earnings, not total cash).

Now this is the moment at which you’re supposed to leap to your feet and shout “Where’s my 401k site?” But if you’re still not convinced, let’s run another quick hypothetical. Let’s say you didn’t turn ornery at 48, but instead kept contributing 10% per year till you turned 65. We know your late-blooming friend will wind up with $466,000. Guess how much you’ll wind up with?

$1,157,000. All because you started contributing 10% a year at age 30.

At this point in our story, if you happen to be age 30 and there’s still no 401k fire in your belly I’d like to ask you a favor: please post a message on this blog and tell me why. At age 30 (or 25 or 35) the path to retirement is spread out before you like the yellow brick road. It’s never too early to start – but sometimes it’s too late. Wall Street will rise again, but that doesn’t even matter right now. The original Roman phrase was “Carpe Diem!” and it doesn’t mean “Live for Today” but “Seize the Day!” So what are you waiting for? Seize it!

Or to coin a new Roman phrase: “Seize the 401k! Then Max It Out!”

Burt Shulman and Ken Ennis are contributors to the Fund.com Expert’s Desk and Managing Partners of ESE Advisory Group LLC. For more on Burt, Ken and ESE Advisory Group LLC click here.

“This is not an offer to sell or a solicitation to buy”

Ken Ennis

A practical guide to the arcane world of financial mumbo jumbo.

This is a tale about fine print. Beloved by us all as a good cure for insomnia. For me, listening to it works just as well as reading it myself. I particularly enjoy municipal bond radio ads: 60-90 seconds of intense detail — “These bonds are from a particular municipality, this is the interest rate, these are the ratings etc., etc.” — followed by my favorite part: “In no manner may this be construed as an offer to sell, or a solicitation to buy, these bonds.” Oh. Right. So, uh, what the heck is it?

Well, legally, it’s an announcement – a selfless act of “public service” to let us know that these bonds will be available. And in that spirit we appreciate it, because along with a couple of bucks, it will get us on a N.Y.C. subway (but act now because the fare could go up at any time — though in no manner may this be construed as an offer or solicitation to buy a Metrocard).

More fun phrases:

”These are rankings, not ratings” (or is it “These are ratings, not rankings”?)
”This investment may from time to time lose value”
”So-and-So #1 is a research provider to this investment; So-and-So # 2 is sub-advisor; So-and-So # 3 is investment manager; So-and-So # 4 is advisor.”
And So-and-So # 5? I guess that would be me.
And finally the grand daddy of them all (say it with me, fellow sufferers): ”Past performance does not guarantee future results.” Like coming home.
Of course, there’s the other side of the coin. The financial services industry is regulated – and likely to be more regulated soon – so there are also a number of phrases that can never be said in an advertisement, prospectus, agreement or announcement. In the spirit of the late great George Carlin, here are:

The 7 things you can never say in the financial services business:
7. “Put ALL of your money in this blockbuster – you can’t go wrong!”
6. “These returns are guaranteed. Trust me.”
5. “This little beauty will outperform like nobody’s business.”
4. “Do the words ‘risk-free’ mean anything to you?”
3. “Don’t worry, there are no hidden fees – heck, there are no fees at all!”
2. “This investment is suitable for ALL investors, with ANY investment goal — from your 9 year old’s college fund to your great grandma’s retirement savings.”
1. “We are confident that the historical returns of this fund will continue well into the future. I mean — why wouldn’t they?”

Needless to say, if at any time you read or hear one or more of the above, run – do not walk – to the nearest exit, squeezing your wallet tightly in both hands.
There are, however, some very practical things for which there’s just no substitute for reading the fine print. And that is the subject of our next piece.

Ken Ennis is a contributor to the Fund.com Expert’s Desk and Managing Partner of ESE Advisory Group LLC. For more on Ken and ESE Advisory Group LLC click here.

Quantitative Strategies

Richard Tortoriello

The Dow Jones Industrial Average has suffered well over 20 bear markets since the beginning of the last century, but is still going strong. The DJIA has risen from about 60 at the beginning of 1900 to about 10,500, as of early October 2008. This works out to a compound annual growth rate of about 5%, and when dividends are added in, to an annualized return of 8% to 9%.

The point? Investors should keep in mind that, historically at least, bear markets have always been followed by bull markets. The trend in the stock market reflects the energy and entrepreneurial spirit of the citizens of the United States—it mirrors the long-term growth trend of the U.S. economy.

Although the current bear market has been accompanied by a near-meltdown of the U.S. financial industry, soaring commodity prices, and a debt-laden consumer, I don’t expect this time to be different. For investors who have put some cash aside, bear markets offer the chance to buy high-quality companies—those that consistently deliver strong profitability and earnings and cash flow growth and are soundly capitalized—at bargain prices.

One way to identify so-called “value” stocks is to begin with a well-constructed stock screen. In my upcoming book, Quantitative Strategies for Achieving Alpha (McGraw-Hill, November 2008), I provide investors with backtest results on over 100 investment strategies that they can use to construct stock screens that work under a variety of market and economic conditions.

In the book, I use a building block approach to constructing complex investment screens and models. I define a building block as a factor that has investment value, meaning it consistently outperforms or underperforms the market, and that is based on sound investment theory (we know why it works, not just that it works). By combining the building blocks into various two-factor models, we also learn which factors work well with each other, increasing excess returns and consistency over time.

For the current investment environment, I chose a stock screen that emphasizes cash profitability, valuation, and financial strength—an approach that has worked well historically during bear markets. It employs two of our strongest building blocks, enterprise value to EBITDA and cash return on invested capital, as well as a risk-based factor, total debt to EBITDA. These investment factors incorporate data from a company’s income statement, statement of cash flows, and balance sheet, as well as market price, into an integrated investment model. I also chose factors that should result in a low Beta (a measure of volatility) and a low maximum loss.

Our first factor, cash return on invested capital, is a measure of cash-based profitability. It tells us that a company possesses high-quality resources—that its able to use a talented workforce, a sophisticated manufacturing process, a strong brand name, etc., to generate a lot of cash. It also suggests that a company has financial flexibility: it can use excess cash to pay dividends, reduce shares or debt, purchase competitors, etc.
Cash ROIC is calculated as past 12-month free cash flow (cash from operating activities minus capital expenditures) divided by total invested capital. Invested capital equals the book value of common stock plus long-term debt, preferred stock, and minority interest.

Our second factor, enterprise value to EBITDA, measures a company’s relative valuation. That is, it looks at the price an investor must pay for a company’s EBITDA—earnings before interest, taxes, depreciation, and amortization—relative to that of all other companies in our screening universe (about 2,200 companies). EV/EBITDA is a widely used valuation measure among professional investors, and one that our testing shows works very well. (The investor should note that past results do not guarantee future performance.)

We calculate enterprise value as the market value of common stock, plus the book value of long-term debt, minus cash and short-term investments. EV represents the theoretical price an acquirer would pay to purchase the entire company (excluding an acquisition premium). For EBITDA we use a company’s past 12-month operating income plus depreciation expense. A true EBITDA calculation would also include non-operating income, but for quantitative purposes the difference is academic.

Our third factor, total debt to EBITDA, measures a company’s financial strength. Specifically, it looks at a company’s ability to pay back its debt out of its current income stream. Companies with low total debt to EBITDA ratios should have little trouble meeting debt service needs, and are less likely to be directly affected by the current credit crisis. Total debt includes both long-term debt and debt reported under current liabilities.

The complete screen is written as follows:
Enterprise Value / EBITDA 10%
Total Debt / EBITDA < 50%

The values for this screen were taken from the appendix to my book, which provides the average portfolio values over time for each of the single-factor backtests presented in the book.

To give readers an idea of the screen’s historical performance, I backtested it using data from 1989 through 2006. The backtest resulted in 18 portfolios with an average of 54 companies in each portfolio. These portfolios generated a compound annual return (price appreciation plus dividends) of 18.9% versus 10.3% for the universe, and outperformed the universe for 78% of the 1-year periods tested. For the same period, the Standard & Poor’s 500 showed a compound annual return of 12%. Beta versus the universe was a low 0.62 (0.75 versus the S&P 500) and the maximum loss sustained in any one year was 4.4%.

This list of stocks presented below was selected from a screen run using data as of August 2008. The original list contained 70 stocks, which I narrowed down to 10, primarily relying on technical analysis, as well as a brief qualitative evaluation.

Richard Tortoriello, is the Aerospace & Defense Analyst in the Equity Research Division of S&P and author of “Quantitative Strategies for Achieving Alpha”. Richard will periodically contribute articles on investing based upon his recent book. To order his book click here.

Quantitative Strategies for Achieving Alpha

The Secrets of Money: A Guide for Everyone on Practical Financial Literacy-Social (In)Security (Part 2)

Braun Mincher

Braun Mincher is the author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy”. This blog entry is from Chapter 8 of his book and the second in a series of ten entries on this subject. For more on Braun click here.

Why bother saving? There’s always Social Security, right?

Social Security is a social insurance program funded through dedicated payroll taxes (via FICA—the Federal Insurance Contributions Act). Tax deposits are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund. The program was initially signed into law by President Franklin D. Roosevelt in 1935 as a measure to implement “social insurance” during the Great Depression of the 1930s, when poverty rates among senior citizens exceeded 50%. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers’ wages, half directly as a payroll tax and half paid by the employer.

Payroll taxes were first collected in 1937, also the year in which the first benefits were paid. The original 1935 statute paid retirement benefits only to the primary worker. Many types of people were excluded—mainly farm workers, the self-employed, and anyone employed by an employer of fewer than ten people. These limitations, intended to exclude those from whom it would be difficult to monitor compliance, covered approximately half of the civilian labor force in the United States. Critics have even called Social Security a compulsory wealth transfer mechanism.

In 1939, the Act was amended in three important ways:
• The widowed, nonworking spouse of someone entitled to an old-age benefit also became entitled to an old-age benefit.
• Survivors (widows and orphans) became eligible for a benefit.
• Retirees who had never paid any FICA taxes became eligible for old-age benefits. This feature was very popular among the millions of elderly Americans hardest hit by the Great Depression.

The earliest age at which (reduced) benefits are payable is sixty-two. Full retirement benefits depend upon a retiree’s year of birth. Those born before 1938 have a normal retirement age of sixty-five. Normal retirement age increases by two months for each ensuing year of birth until the 1943 year of birth, when it stays at age sixty-six years until the year of birth 1955. Thereafter the normal retirement age increases again by two months for each year ending in the 1960 year of birth, when normal retirement age stops at age sixty-seven for all born thereafter.

The normal retirement age for spousal retirement benefits shifts the year-of-birth schedule upward by two years, so that those spouses born before 1940 have age sixty-five as their normal retirement age.
A worker under age seventy and eligible for retirement can delay receiving benefits past full retirement age, and thereby increase the worker’s eventual retirement benefit and the surviving spouse’s benefit (delayed retirement credit).

Although Social Security is sometimes compared to private pensions, this is not a correct comparison, since Social Security is social insurance and not a retirement plan. Throughout a worker’s career, the Social Security Administration keeps track of his or her earnings. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. For the entire history of Social Security, benefits have been paid almost entirely by using revenue from payroll taxes. This is why Social Security is referred to as a pay-as-you-go system.

In 2004, the U.S. Social Security system paid out almost $500 billion in benefits. In approximately a decade (2019), payroll tax revenue is projected to be insufficient to cover Social Security benefits. Don’t count on Social Security when you retire… the system may be bankrupt by then. In fact, according to the Social Security Administration website, unless changes to the system are made, benefits will be reduced by 26% in 2040 and could continue to be reduced every year thereafter. Check your calendar and check your birth date. Are you planning to retire after that time?

The worker-to-beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within forty years it will be 2-to-1. With this ratio, there will not be enough workers to pay scheduled benefits at current tax rates. In short, the system is currently broken, and it soon may be bankrupt. I am not telling you this to send you into a panic; I am telling you because you must put this benefit out of your mind. Forget about it. If it’s there when you retire, use it for groceries and be glad for it. But it is not a retirement strategy.

Why am I down on Social Security? I’m actually not. It came from a very nice and warmhearted gesture. The problem is, the numbers no longer hold up today. People are living longer, and the Baby Boomers are now retiring and they didn’t produce enough offspring to join the workforce and help support their retirement. For that, dear readers, is the crux of the system. Today’s workers pay for today’s retirees. I once read where someone suggested that people receiving Social Security benefits should be shown on each check they receive exactly how much of “their own” money they are getting back from the system, and how much is from the rest of us who are still working. For after a certain number of years, people do, indeed, begin drawing out far more—even calculating interest—than they themselves paid in.

Longevity (thank you, modern medicine and science) has caused a big shift in the actuarial table, and is probably the biggest single reason the system is in disarray. Retirement age may now be shifting to sixty-seven, but in truth, were we to use the calculations FDR put in place in 1935, we would be raising it to around seventy-eight. Should our government drastically raise the age at which one may receive benefits in order to save the system? I can’t really answer that question. The problem is, it is hard and, frankly, unfair to change a system midstream. If citizens are paying into this program with the expectation of retiring at age sixty-five or sixty-seven, is it right that they should find out at age fifty-nine that the game has been changed and now they must plan to work until seventy-five or seventy-eight? I don’t think so.

I don’t mean to use this book for my personal political pontification, but my suggestion is simple and was stated succinctly a few paragraphs ago: Don’t depend on the Social Security system. You simply must be in charge of your own retirement. Anything you get from the government should be considered gravy, not the entire meal.

As stated before, the amount you may draw out per month is dependent upon your wages during your working years. But that said, the truth is that the amounts being paid out today are barely enough to keep elderly people from living out in the streets. It is a social safety net, but nothing more. Imagine that spend-a-holic non-saver who earned $10,000 a week and spent it all suddenly retiring and being forced to make due with around $1,500 per month. That’s one heck of a shock to the system.

As a small anecdote, if you’re a Libertarian/anti-Big Brother-type, you might be enlightened to know that Social Security numbers were never intended to be used for identification. Their primary purpose was to track individuals for taxation purposes. In recent years, though, your Social Security number has become a de facto national identification number. Apply to go to school, even a public school (I’m not even talking college here), and you have to present that number. Apply for loan? Show the man your number. Buy a car? Get it insured? Gotta have that number. An American simply cannot be an American today without that little nine-digit number.

Silver Buggin’

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . For more analysis from Delfeld, or to subscribe to Chartwell Advisor, Click here.

William Jennings Bryan’s “Cross of Gold” speech on July 9, 1896, electrified the Democratic National Convention, giving the 36-year-old the inside track on capturing the presidential nomination.

The speech addressed the issue of monetary policy and the debate over backing the dollar with gold and silver rather than just gold, which was deemed overly restrictive and unfair to working people and farmers. It ended with this memorable sentence: “You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.”

More than a century after Bryan’s speech, gold still has its sparkle, and silver still has an inferiority complex. Gold exchange-traded funds have attracted huge inflows by investors seeking a hedge against inflation, protection against global fiscal imbalances and a weak dollar, and positions that hopefully will not be closely correlated to global equities.

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It’s time, however, to take a closer look at silver and the silver ETF–iShares Silver Trust (amex: SLV – news – people )–which has gained nearly 25% since its June low but still trades at a price below where it launched in late April of this year.

Silver has long been the neglected orphan of the precious metals markets. Investor sentiment toward silver has been depressed by the perception that demand for silver in film and paper for photo imaging is falling sharply due to the rise of digital photography. But photography only accounts for about 8% of total demand for silver. Actually, silver has some of the best-looking supply and demand fundamentals in the metals markets.

The demand for silver is rising fast, due to increasing demand for the raw material for the manufacturing of jewelry and silverware, and because it has so many industrial applications.

It is, for example, one of the best electrical conductors of all the metals.

The real case for investing in silver, however, lies on the supply side, because silver really is quite rare. There are only 23 pure silver mines operating around the world, and most of the silver supply comes as a byproduct from mines mainly engaged in digging for lead, zinc and copper. Furthermore, silver production was flat this year and is expected to be flat again next year.

The amount of mined silver has been less than its demand every single year for the last 15 years, but this hasn’t been a huge problem, because the world has been able to fill the gap from inventories and official stockpiles.

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However, today the U.S. government’s stockpile is all but gone, and sales from other official sources, such as China, Russia and India, appear to be declining, too. According to research consultancy CPM, in 1990, there were around 2.2 billion ounces of silver held in above-ground stocks. Today, there are probably only about 300 million. That’s a 50-year low.

SilverStockReport.com notes that while about 95% of the gold ever mined still exists in above-ground refined form, 95% of the silver ever mined has been consumed by electronics and jewelry. Aside from industrial demand/supply imbalances, silver is once again being viewed by many as a pure metals investing play.

When the silver ETF closed its first day of trading on April 28 at a price of $138.12, I recommended to clients that they sit on the sidelines because of the rapid run up in the price of silver during the SEC registration process. Since then, the ETF’s price has fallen from a high of $152 in early May to below $100 while it accumulated $1.2 billion of silver.

It is also interesting to look at the point and figure chart for (SLV) complements of Chartwell Advisor’s partner Don Smith, president of go2mypv.com.

Figure 2

Don’s view is that SLV broke through a triple bottom in May, but by the end of June, it took a nice turn. If it reaches a level of $128, it will break a second consecutive double top, which is a buy signal.

With an annual fee of only 0.50%, the silver ETF is the cleanest and easiest way to gain some exposure to silver. Another option is to invest in one or more of the largest silver miners, but they are, for the most part, located in somewhat unstable countries, such as Bolivia and Peru. The top six silver miners have a combined market cap of just $8 billion and do not seem particularly cheap to me. The largest silver miner in the world is BHP Billiton (nyse: BBL – news – people ), which I have liked for some time; it now has a market cap larger than that of Coca-Cola (nyse: KO – news – people ). BHP is also the largest position in the iShares MSCI Australia Index (amex: EWA – news – people ).

William Jennings Bryan’s “Cross of Gold” speech is a classic, and investors can benefit from his captivating message 110 year later. Put the silver ETF in your core portfolio with a 10% trailing stop loss.

Carl Delfeld, is also the and author of “The New Global ETF Investor”. Carl will periodically contribute articles on ETF investing based upon his book. To order his book click here.

The New Global ETF Investor

Rich by 65, Poor by 65: what a good financial advisor teaches his clients about money, that they don’t know themselves

Todd Colbeck

Todd Colbeck, CEO of Colbeck Coaching Group Inc., has spent more than 10 years helping over 1000 financial advisors increase client loyalty through strengths based business development, having an engaged and productive staff and using more competitive investment strategies. Todd created a system of strengths based coaching using a combination of over a decade of financial service experience and graduate work he did with The Gallup Organization while studying for his MBA in Strengths Based Executive Leadership.

There is nothing wrong in running out of money by the age of 65. You just have to find a job, depend on your relatives or kill yourself like that French investor did. Thierry Magon de la Villehuchet trusted all his and his client’s life savings to Bernard Madoff, the disgraced hedge fund manager. Some said Madoff’s investors were victims of their own greed. Todd Colbeck, MBA believes that people who find themselves broke after 60 did poor in their life-cycle financial planning.

Life-cycle financial planning is a hand-drawn map of your goals, risks, expenses and sources of income. This map helps to make sure you never run out of money. For most people “never run out of money” means investing and growing it. How much money do you need not to run out? Million dollar lottery winners homeless after a couple of years and not qualifying even for welfare, show biz stars with holes in their pockets after a couple of divorces– they prove that there is always a risk to run out of big money. Madoff’s Ponzi scheme is a quick way to get rid of billions of dollars too.

You can design the life-cycle financial plan yourself or you can use the help of a financial advisor. If you want to map out your financial future yourself, try to remember where you learned about earning and spending money. Who taught you about money? What are the worst money investments you ever made? What were the best ones? Why? Then you might realize it is a good idea to align with a professional in such a serious matter.

Who needs a good financial advisor?
-Everyone needs a financial advisor, but not everyone has one. People in their 20’s, 30’s or 40’s may not understand the risk of running out of money by the end of their life. They risk living poorly and continuing to work. Driving a taxi every night and working part-time in Walgreens when you’d rather play with your grandkid or travel around the world – this is the risk, – says Todd Colbeck, CEO of Colbeck Coaching Group Inc., who got his MBA in Strengths-based Leadership from the joined program of Gallup, Oxford, University of Nebraska and Toyota University.

College graduates who just got their first job and anyone who did not hit their 60’s yet, please, listen. You have something called human capital – it is the amount of money you will earn in the future. Human capital is greatly influenced by age and education. By the age of 60 it translates into financial capital – money and property, which are supposed to provide you with peace of mind. Money means more than something you pull out of an ATM. It can be an asset like life insuarance, for example.

The first thing which is frequently overlooked by young people and regretted later in life is getting life insurance. I myself did not get it when I turned 18 just because all my friends did not, – complains Todd Colbeck. -I listened to their “expert” advice about the uselessness of life insurance when you are still young and unmarried. How silly was I?! Now I understand that the best time to buy life insurance is when you are young, because it is cheap and easy to get. Because the cash value of it accumulates over time. Because people die inevitably and sometimes unexpectedly. Because people you care about should not go through tough financial times after your death.

One of the signs of a good financial advisor is his concern about your security. There are five more vital areas of your life that a good financial advisor has to cover designing your life-cycle financial map. They are: income and expense management; retirement planning; tax planning; estate planning and investment planning.

Too much? This is the only way to stay secure in this mad (offs’) world. By the way, Madoff was a wealth manager – responsible for investing and growing people’s money. Wealth management is also one of the branches of the financial planning profession. His main responsibility is picking investment vehicles and maintaining their growth and balance. He is an executor of your wishes.

A life-cycle financial advisor’s job incorporates investing and financial planning. He is not only the executor; he is the one who shapes your wishes. A good life-cycle financial advisor not only determines your goals, risks, and a time horizon in order to make a right investment, he also helps to figure out if you need this investment at all, if there is something more important to invest in. He provides solutions of how to manage your risks in order to reach your goal (risk management).
You basically pay for your sweet dreams at night and refreshing morning, because your life-cycle financial advisor has determined how much you can spend each year without worrying. A good financial advisor makes sure that you have other sources of income to stay financially secure in case you lose some money in Ponzi scheme. He will never advise you to invest all your life savings into only one hedge fund. He will diversify.
A good financial advisor maps the rest of your life out and then adjusts this financial map annually according to the changes in your life.

How much does a good financial advisor charge?
A wealth manager charges commission on the product he sells to you or a fee (percentage of the assets you have invested in). A financial advisor charges per each financial plan (map) he designs for you, and then the annual fee for adjusting it. It can be anything between $500 to $30 000 and higher, depending on the time spent and complexity of the plan. For instance, if you own a private company then your financial advisor needs much more time to analyze its value comparing to if you own just a car. If you’d like to invest, then your financial advisor charges an additional fee for the investment advice (like the regular wealth manager does).

How to recognize a bad life-cycle financial advisor?
He does not cover all essential six areas of life-cycle financial planning described above, skipping two or more.
He does not give you at least three references to call upon request.
He won’t meet regularly and he does not come at your request.
He does not stay in touch. He is not responsive when you call him.
He does not make adjustments each year.
He puts all your eggs in one basket and they all break. He shoots himself after all which still does not get your eggs back to their initial condition.

Todd will periodically contribute articles to the Fund.com blog. For more information on Todd, click here.

Colbeck Coaching Group

Chartwell ETF Rules

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

To begin the new investment year, it may be helpful to review our ten investment rules. Here they are.

1) Think Global
The days of just allocating 10% of your portfolio to an international mutual fund without thinking are over. The world is filling in fast and you need a global perspective in seeking growth and value opportunities. In particular, emerging markets with 85% of the world’s population, 25% of world GDP and generating more than 50% of world economic growth, still only represent 11% of the world’s total market value. This is a great opportunity since many of these countries have higher foreign exchange reserves, lower foreign debt, lower inflation, higher credit ratings, and have enjoyed average annual economic growth of 7.7% during the last four years. The current sharp pullback in growth and valuations is an opportunity as emerging market countries, particularly in Asia show a glimmer of growth hard to find elsewhere. Look for value throughout the world.

2) Get Organized
Most portfolios I review are a hodgepodge and rarely reflect a well thought out strategy. Investors would be better served by separating their portfolios by goals and risk. Why not a core & explore strategy with a core portfolio for the capital you primarily want to protect and a few growth portfolios with capital appreciation as the overriding objective. This keeps India, Treasury bonds, gold, foreign currencies, China and biotech all in their proper places.

3) Use ETFs as Core Investment Tool
Although ETFs are popular because of their low cost, transparency and tax efficiency, they can also help you get organized and go global. ETFs are an effective tool for a smart core/satellite strategy and can be easily paired with intensive active asset management. ETFs offer investors risk management techniques such as using trailing stop losses and there is no better way to diversify your portfolio into areas such as precious metals like silver and gold, foreign currencies like the Swiss franc or euro, countries like Singapore or Brazil, timber, and technologies like clean energy.

4) Look Under the Hood
Before investing in an ETF, make sure you take the time to look to see what companies are in its basket and how they are weighted. Traditional market cap weighted ETFs in particular can have a high concentration in its top names. Samsung Electronics (South Korea – EWY) and Ericsson (Sweden- EWD) account for 23% of their respective country ETFs, Google is not even in HLDRS Internet ETF, the iShares S&P Latin America 40 (ILF) has 88% in Brazil and Mexico, and the difference in the companies in the iShares S&P Global Financials (IXG) and WisdomTrees International Financial Sector (DRF) ETF is striking.

5) A Rifle is More Deadly than a Shotgun
Keep in mind that broad-based ETFs are a very different animal than narrow ETFs that focus on a particular sector or sub-sector. Vanguard’s FTSE All World ex-US (VEU) ETF has 2,200 stocks from 48 countries where as the iShares FTSE/Xinhua China 25 (FXI) is a basket of 25 Chinese companies listed on the Hong Kong market with 40% of your exposure in just four companies. On the other hand, after disappointing earnings, Ericsson recently lost 25% of its value in one day while the Swedish ETF was off only 5%. Cap allocations to your portfolios accordingly.

6) To Beat Benchmarks, Look Forward
The traditional market cap weighted indexes such as the MSCI World index that most institutional money managers use as their benchmarks look backward. For example, in the MSCI world index, America accounts for 48%, Japan 11%, Australia 2.3%, Germany 3.1%, Singapore 0.37% and Brazil is 0.7% and Canada is 0.1%. Japan is still 40% of the Asian MSCI index. To beat these benchmarks, use common sense and weight countries based on prospects going forward rather than the value of their market due to past performance.

7) Politics Matter
Take off your green eyeshades, get your head out of the numbers and start paying attention to politics. Great bull markets start with significant political reforms and end in their reversals. Just look at the Reagan revolution of the early 1980s, the Irish renaissance, the fiscal reforms in Brazil, India and China opening up to foreign investment, Sweden’s turn to the center. What are the prospects and likely impact regarding upcoming elections in India? You need to know.

Valuation Led, Momentum Check
It is difficult to fight the momentum of surging markets but over the long haul, valuation is king.. Chartwell ETF watches 30, 50 and 200-day moving averages closely in making its ETF selections but also checks them against relative valuations. When you see an emerging market like India or Indonesia trading at 25 times earnings, it is time to apply the breaks and take some money off the table. Look beyond p/e ratios and at price to book and price to cash flow. A 8% trailing stop loss strategy is also wise and takes emotion out of the equation. Only a fool holds out for top dollar.

9) Follow the Big Boys
Chartwell ETF also looks carefully at where the big global money managers are placing their bets. EPFR Global tracks both traditional and alternative funds domiciled globally with $10 trillion in total assets and delivers a complete picture of institutional and individual investor flows and fund manager allocations driving global markets. Being a bit ahead of these massive investment flows is the goal. You don’t want to be left behind holding the bag as behemoths like Templeton sharply reduce weightings to countries like Mexico or Malaysia.

It is also good idea to hedge markets that may be ahead of themselves with limited allocations to ETFs that move opposite markets. On days when your global portfolio is a sea of red, it is nice to see ETFs like the ProShares Short Emerging Markets (EUM) in the black. I refer to these inverse ETFs as portfolio shock absorbers. having a slug of them during 2008 made a big difference in staying in the black.

10) Date Before You Marry
It is surprising how many investors change advisors or money managers without getting to know how they think. Take your time and have a few dates before tying the knot. Spend some time getting to know how they approach building a global portfolio and make sure your expectations and goals are clear. This is one reason Chartwell offers its Portfolio Architect consulting services and why Chartwell ETF offers a trial period to new members.

Carl Delfeld, is also the and author of “The New Global ETF Investor”. Carl will periodically contribute articles on ETF investing based upon his book. To order his book click here.

The New Global ETF Investor

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The Secrets of Money: A Guide for Everyone on Practical Financial Literacy-Company Pension Plans (Part 3)

Braun Mincher

Braun Mincher is the author of “The Secrets of Money: A Guide for Everyone on Practical Financial Literacy”. This blog entry is from Chapter 8 of his book and the third in a series of ten entries on this subject. For more on Braun click here.

Okay, so while I’m in the midst of debunking the retirement myths of the last few generations, allow me to now eviscerate “the company pension plan.” Yes, between Social Security and the company pension, we would be set for good. That’s what Americans were told and many believed it. Frankly, for a short window of history, it was true. But unfortunately, those days are now over.

A pension is a steady income given to a person by virtue of their previous employment, usually after retirement. These are generally funded through labor unions, the government, or through the former employer themselves—sometimes as a pure benefit or sometimes via an employee contribution matched by the employer. The concept of the company pension went along with the classic “gold watch” for fifty loyal years of service. That was what America was once built upon—the lifelong employee. For a time, most American parents taught their children that this was why they should “get a good job,” and this was what defined a good job. A “good job” involved working for a big “stable” company that not only provided wages, but also a retirement plan. All you had to do was get hired, then show up for work each and every day for the rest of your productive life and everything would be set for you. No cares, no worries.

This is no longer the case today. True pension plans have been almost entirely replaced by 401K plans and IRAs (definitions and entire dedicated subchapters to follow). Most younger workers are NOT covered by an old-fashioned company pension that pays benefits upon retirement. Some of the biggest traditional pension plans still in existence are through major unions such as those for teachers or government employees. Also, non-unionized government employees still do rather well with these programs in most cases.

Furthermore, we are very much in the age of “Future Shock,” that is, too much change in too short a period of time. Few companies are truly stable. It has been said that fifteen years from now most Americans will be working in industries that do not even exist today. Starbucks only began in 1971 and didn’t expand to multiple cities until 1987, but look at them today. Microsoft was only founded in 1975. Google just began in 1998. Fifteen years from now, even these big names may seem quaint and antiquated.

The point I am trying to make is that “The Big Boss Man”—your employer as some surrogate parent figure—is a thing of the past. You work for him (or her) and the employer gets from you what they need and you get from them what you need. In each case, the needs are immediate and immediately gratified. But there isn’t much of a tomorrow. Tomorrow is no longer guaranteed. Only you can guarantee your own tomorrow.

Pension funds usually invest in large real estate projects, like shopping malls and high rise buildings and use the return from that investment to fund payments. But if you read the newspapers, you will recall that some pension funds have been horribly mismanaged over the years, and workers’ contributions or contributions made on their behalf have been squandered in highly speculative ventures—or stolen outright.

The point here is that, if you do happen to work in an industry that provides a pension plan, you have no control over the management of that money. Repeat: You are not in control. Your opinion does not count. In upcoming subchapters, we will talk a little about things like mutual funds, where you are investing in some expert’s opinion of which stocks and investments should provide the best possible return. But even then, you can pull your money out and “ride another horse” if you don’t like the results of that expert’s investment picks. You can’t do that with a company pension. You’re along for the ride, good or bad. Personally, I like a bit more control over my own future than that.

In addition, pension benefits, combined with health benefits and other perks, have crippled some of America’s greatest companies. Large and powerful unions forced large employers, such as those in the automobile industry, to provide incredibly lucrative compensation packages for their rank and file employees. These benefits far exceed what might be considered free market-driven wages and benefits for unskilled or semi-skilled workers. This may have been good for the workers (while the party lasted), but it eventually ruined the companies themselves. Consider companies such as General Motors. Instead of being a manufacturer of cars, GM is more like a healthcare/pension company that just happens to also make cars. Tons of retirees drawing large pensions has contributed greatly to large layoffs of current employees, outsourcing of manufacturing, and the inability of domestic manufacturers to compete with savvy foreign companies. It is said that approximately $1,000 of the cost to build each GM car goes directly into retiree benefits.

The bottom line: Do not depend on Social Security OR a company pension plan (if you are one of the few who still qualify for one) for your retirement. Take responsibility for your own retirement by saving … starting NOW!