Saturday, May 3

Can the economy survive the Fed?

Can the economy survive the Fed?
Business Week | By Anthony Mirhaydari, MSN Money

Cheap money from the Federal Reserve has been the primary force keeping the market high and the economy on a recovery path. But can they keep it up when the stimulus ends?

After the market turmoil of the last few days, the inevitable question is: Now what?

Months of calm and upward momentum have suddenly been replaced by uncertainty, volatility and fear. The Dow Jones Industrial Average ($INDU) has tipped into its worst sell-off since October. Japanese and Chinese stock indexes have entered bear-market territory, with the Shanghai Composite earlier this week testing levels not seen since January 2009.

This follows months of selling in commodities, precious metals and corporate bonds. It looks like the start of the pullback-or-worse trend I've been warning of, in columns such as "Beware: Market insiders are selling."

The central issue is pretty clear: The Federal Reserve is moving to phase out cheap-money stimulus by trimming its $85 billion-a-month "QE3" bond-buying program. The timing is unclear, but no longer can we assume that government borrowing costs, and thus interest rates throughout the economy, will remain low and docile for years to come.

The Fed's cheap money has been the key to keeping the economic recovery going and to the market's big rally and recent all-time highs. So can the economy keep going without it? Let's take a look at the road ahead.

At this point, the near-term concern is how bad the market damage will be as major uptrend support is broken. Investors have been reminded that stocks can, indeed, go down persistently.

On a technical basis, things aren't looking good:

Anthony Mirhaydari

? Cyclical, economically sensitive stocks like materials and energy are starting to weaken once more compared with defensive sectors such as health care.

? The percentage of Standard & Poor's 500 Index ($INX) stocks going up has fallen at a rate not seen since the May 2012 sell-off, and before that, the August 2011 meltdown.

? The number of stocks hitting new 52-week lows on the New York Stock Exchange each day has moved to levels not seen since August 2011 levels.

? Traders are rushing into put options, which profit when stocks go down, at such a pace that they're pushing the CBOE Volatility Index (VIX) or "fear gauge" -- which is calculated based on the price of options contracts -- above its 200-day moving average for the first time since, you guessed it, August 2011.

As a rough estimate of how bad it could get before we see a relief rally, a test of the S&P 500's February low near its 200-day moving average around 1,500 should be expected at the very least -- which would represent a decline of an additional 4% or so. A test of support at the October high near 1,450 would be worth a loss of 8%.

Whether the losses move deeper than that, in the near term, depends mainly on whether the Fed pushes ahead with its tapering plans at its July and September policy meetings, or moves more slowly. And that depends on the flow of economic data. A deeper drop in inflation measures or any slowdown in monthly job gains would likely change the tone coming out of the Fed. It would show that the Fed shares Wall Street's lack of faith in the economy's strength, which the pros might find comforting.

Other factors will also shape what the Fed and the economy do next.

The next step in Japanese Prime Minister Shinzo Abe's plan to revitalize his nation's economy -- via reforms of Japan's crusty economic institutions -- hangs on parliamentary elections July 21. A recent electoral victory in the 127-seat Tokyo Metropolitan Assembly bodes well for Abe, but certainty that reforms will keep moving ahead will help the global economic picture.

Also critical: whether the Chinese continue to clamp down on credit growth in the days ahead by allowing interbank lending rates to stay high. The overnight borrowing rate jumped from less than 2.5% earlier this year to as high as 13.2% last week before settling just below 6%. If the situation doesn't calm down, volatility in Chinese equities could destabilize the region and keep pressure on U.S. issues as well.

Finally, we have the upcoming second-quarter earnings season to worry about. Alcoa (AA) kicks things off July 8. Executives have been cutting earnings guidance at a pace not seen since the dot-com bubble was bursting, amid weaker profitability and tepid global demand. Analysts are looking for S&P 500 earnings growth of 3.2% and sales growth of 1.7%; that's down from expectations of 6.1% and 3.7%, respectively, back in April.

If earnings fall and the Fed starts to gut stimulus efforts, the market and the economy would get a nasty one-two punch to the gut.

Over the longer term, whether the economy can move forward without the Fed is far from certain.

What we don't know just yet is whether the U.S. economy is continuing to slow -- as some recent data suggest -- or re-accelerating, as the Fed is forecasting.

And while the latter sounds good, it would also mean that inflation-adjusted interest rates, which have already shot up (as shown in the graph below) are headed even higher.

That will test whether the housing market -- and all the activity by investors that has helped push it higher -- is strong enough to absorb a rise in mortgage rates.

Higher rates will also increase the government's borrowing cost and the cost of capital for businesses, and put further pressure on bond-heavy investor portfolios (the subject of my column last week, "The next big 401k wipeout").

Oh, and let's not forget that we are in a global economy. After Japan and China, focus will turn to again to Europe. As the eurozone recession spreads to Germany and a relatively lofty valuation for the euro damages export competitiveness, the European Central Bank will be tempted to deal out more cheap-money stimulus, building on its 0.25% interest rate cut on May 2.

While this would be a good thing, it most likely won't come until after German elections in September to avoid making it a political issue for Chancellor Angela Merkel. There is also a risk that German courts could throw a wrench in the works by declaring existing eurozone rescue efforts unconstitutional.

All this is a lot for the Fed to take into account in the months ahead. The complex picture is part of the reason the Fed has been committed to stimulus for roughly four years now -- and it explains why so many investors are nervous at the prospect of that one constant positive coming to an end.

Friday, May 2

5 Buffett picks with big upside

5 Buffett picks with big upside
Business Week | By Meena Krishnamsetty and Matt Doiron, MarketWatch

Here are the largest holdings by Berkshire Hathaway as of March 30 that had value-investor appeal due to their low P/E-to-growth ratios.

Warren Buffett's holding company, Berkshire Hathaway (BRK.A), filed its first-quarter 13F with the Securities and Exchange Commission last month. We've found that 13Fs can be used to develop profitable investment strategies -- for example, the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year).

And it's always useful to examine moves by Buffet, given his track record in unearthing value in the market.

We also like to screen filings from investors like Buffett to find stocks that satisfy various investment criteria, such as those with low P/E-to-growth (PEG) ratios. The PEG ratio combines the price-to-earnings multiple with analyst expectations for future growth rates, and while analyst forecasts are frequently inaccurate, the ratio offers a way to estimate a stock's upside potential.

Here's a quick take on the five largest holdings in the Oracle of Omaha's investment vehicle at the end of the first quarter that had five-year PEG ratios of 0.9 or lower.

The holding company increased its stake in DirecTV (DTV) by 10% during the first quarter of 2013, to a total of over 37 million shares. With a trailing earnings multiple of 13 and with the sell-side predicting high earnings growth at the satellite TV company, the PEG ratio comes in well below 1.

However, we'd note that revenue grew only 8% last quarter compared with the first quarter of 2012 with earnings actually declining. DirecTV was one of the top picks in Southeastern Asset Management's portfolio; that mutual fund is managed by billionaire Mason Hawkins.

Oil and gas refining and marketing company Phillips 66 (PSX) was another of Buffett's high upside potential picks with the filing disclosing ownership of more than 27 million shares. Downstream oil and gas companies are generally seeing low earnings multiples in the current market environment, and the fairly recent ConocoPhillips (COP) spinout is no exception with both trailing and forward P/Es of 8.

With analysts expecting earnings per share to improve over the long term, we get a five-year PEG ratio of 0.7. Phillips 66 has risen about 80% in the last year. Gilchrist Berg, Steve Cohen, Colin Hall, and Manish Chopra are among hedge fund managers with bullish PSX positions.

Berkshire reported a position of 25 million shares in General Motors (GM), unchanged from the beginning of the year. GM trades at 11 times trailing earnings. Many market players, including a large share of analysts, billionaire David Einhorn, and apparently Berkshire's team as well, believe that auto makers are set for high growth as U.S. consumers replace an aging auto fleet and economic conditions in other markets improve.

However, recent reports show lower revenue and earnings at GM than a year ago. General Motors made our list of the most popular stocks among hedge funds in Q1 2013 (check out the full top 10 list).

Buffett was buying shares of $29 billion market cap oil field equipment and services company National Oilwell Varco (NOV) between January and March. At that valuation the stock carries trailing and forward P/Es of 12 and 10, respectively, and analysts are looking for enough growth to give it a Peg ratio of 0.9.

While revenue was up strongly in the first quarter of 2013, however, net income fell by over 20% and so we'd have to investigate it more closely before buying. Viking Global, managed by billionaire and Tiger Cub Andreas Halvorsen, initiated a position of 2.7 million shares during Q1.

A new position in Berkshire Hathaway's portfolio for 2013 was its 6.5 million shares of Chicago Bridge & Iron (CBI), a $6.3 billion market cap company which provides infrastructure engineering services primarily to energy customers.

The business stands to benefit from increased production of natural gas, and so while its trailing earnings multiple is fairly high at 21 analysts believe that it is actually undervalued -- that same valuation is only 12 times forward earnings estimates. Julian Robertson, Siddharth Thacker, and Ricky Sandler are betting on the stock.

Thursday, May 1

6 high-priced loans and how they work

6 high-priced loans and how they work
Business Week | By Mitchell D. Weiss,

There are plenty of loan options available, even for low-income borrowers with iffy credit. Proceed with extreme caution, though.

There are lots of cash-strapped consumers out there who, for all practical purposes, are closed out of many traditional credit product offerings because of the high default risk they’re presumed to represent. But that doesn’t mean the financial services industry hasn’t figured out ways to profit from their plight. After all, the “unbanked” and “under-banked” demographic, as it’s known, is huge -- estimated to comprise more than a quarter of all U.S. households -- and its need for financing is acute, especially during tough times.

So the industry has created a slew of pricey specialty loan products that were designed for lower-income borrowers with poor credit. I’m talking about payday, bill-pay and refund anticipation loans, insurance-premium financing, structured settlement and private student loans.

But are the risks associated with these credit products truly so great that they justify the outsized rewards the lending institutions earn for marketing them? Let’s take a behind-the-scenes look at how these financings are structured and you can decide for yourself.

Many companies pay their employees in arrears -- this week’s paycheck is based on the previous week’s hours. They’re also likely to pay every other week or twice-monthly. So it’s not unusual for a low-income earner to feel the pinch in between payrolls, hence the creation of the payday or account advance loan.

As long as the borrower’s employer is a bona fide company that can confirm its employee’s continuing earning status, and as long as the payday lender is able to gain control over its borrower’s next payroll deposit, the lender will have effectively ensured the repayment of its loan. The borrower, however, might not fare so well. That’s because the cash-flow “hole” he’s created for himself by trading next week’s paycheck for this week’s cash is likely to provoke a recurring need; at least until he’s able to generate enough extra cash-flow to bridge the gap on his own. In fact, according to a report by the Center for Responsible Lending, the typical payday borrower remains indebted for two or more years for a loan that was intended to span one or two weeks.

And the reward for what turns out to be a very tightly-managed risk? The typical account advance lender loan charges more than 600% APR (annual percentage rate) for the service.

Consumers who live from paycheck to paycheck often run short. However, as long as the borrower’s checking account activity is consistent -- predictable payroll deposits every other week, comparable-dollar utility, cable and cellphone payments every month -- and as long as the borrower agrees to a preauthorized Automated Clearing House from that checking account, the bill-pay lender will then have virtually managed away its risk when it covers one of the borrower’s monthly cellphone payments.

The bill-pay lender’s reward? When you combine the processing fees and interest, the APRs can approach 200%.

Payroll tax over-withholding is not uncommon for low-income earners (and others) who may lack the financial literacy education that would help them to understand the math behind the process. Consequently, those who live with unforgiving budgets may be strongly tempted to take advantage of the quick cash-hit a tax refund advance represents.

From the lender’s perspective, as long as the tax return was properly prepared and filed, and provided that it can secure the refund once it’s been issued, it’ll have effectively offset the risk of nonpayment by swapping the credit of the low-income borrower for that of the U.S. Treasury -- the issuer of the tax-refund check.

The refund lender’s reward? According to the National Consumer Law Center, the APRs for these loans range from 100% to 200%.

Auto insurance premiums can be expensive, especially for those living in major urban areas. And while many insurance carriers offer payment plans for their policy premiums, some don’t. Enter the insurance-premium finance companies. The loans are typically structured with a down payment that’s at least equal to the non-refundable portion of the total annual premium: the up-front money the insurer gets to keep even if the policy is canceled right away.

The balance is then spread out over fewer months than the policy is designed to cover. That way, in the event of a payment default, the lender is able to cancel the policy before the remainder of the premium has been “earned” by the insurance carrier and pay itself back with the refund. As a result, the risk is once again very tightly managed, if not completely eliminated.

In return, the borrower pays an interest rate that’s usually much lower than for payday, bill-pay or refund anticipation loans, which seems like a pretty good deal -- that is, as long as the payments are made on time with checks or ACH drafts that are backed up with sufficient funds on deposit. Otherwise, the high fees the finance companies charge for late payments and bounced checks can easily escalate the overall cost for these nine or 10-month loans to the mid-double digits or more.

Hardly a day goes by without a structured settlement loan commercial that features a campy mini-opera or a little dog planting a money tree. The pitch is, you’re entitled to a future stream of payments -- whether from a court settlement, annuity or some other source -- but you need the money now. High risk? Not so much. That’s because the lending decision has less to do with the borrower’s creditworthiness than it does with the entity that has agreed to remit the payments in the first place.

The reward? According to a transaction sampling published by the Bankruptcy Law Network, APRs can approach the mid-double digits.

Generally speaking, students who borrow for their education don’t have payroll checks, tax refunds, prepaid insurance premiums or structured settlements to pledge as collateral in exchange for the money they need. As such, you’d probably conclude that student loans are actually the riskiest of this group of loans, right? Well, yes, unless you consider that except in extreme circumstances (as measured by the Brunner test), these loans are virtually impossible to discharge in bankruptcy. So the question becomes, what’s a fair price to charge for a loan that sticks to your personal credit like gum to the bottom of a sneaker?

According to the government, it’s 3.4% if you can demonstrate financial hardship and 6.8% otherwise. The private lenders, however, feel differently. I do a fair amount of pro bono counseling work at the university where I teach, and the students and alums I help are struggling with private student loan debts that carry interest rates as high as 15%. To give you a sense of the impact this kind of rate differential can have, borrowing $10,000 at 15% for 10 years is the same as borrowing $16,400 at 3.4% for same duration. Is it any wonder why more and more students are moving into their parents’ basements after graduating college?

Face it, the financial services industry isn’t likely to reform or discontinue these high-priced lending products on its own -- there’s just too much money at stake. Therefore, it’s up to those who need these specialty loan products to learn how to avoid the worst of the deals and limit the damage from the ones they end up selecting. A few suggestions:

Payday loans and bill-pay loans are not only very expensive but they also have the very real potential of becoming the kind of debt traps I described before. You’re actually better off taking a credit card cash-advance, even if it comes with a 25% interest rate plus a 5% fee (which is what my own credit card company charges). The APR calculates to a little less than 35%, if the loan were to be paid off in 12 months -- far less than for either of the alternatives. This simple APR calculator, courtesy of, can help with the math.Insurance-premium financing can make sense if you’re careful about not missing a payment or bouncing a check. Otherwise, the fees will eat you up alive. If you’re obtaining your insurance coverage through an intermediary (insurance agent or broker), double check that the carrier doesn’t offer a less costly service of its own.

Structured settlement loans can also make sense provided that the interest rate is low enough, you’re prepared to live without the monthly payments you would have otherwise received and you’re disciplined enough not to fritter away the cash once you get your hands on it. Online calculators such as this one, courtesy of Zenweaan, help you decide.When it comes to financing higher education, try to limit your borrowing to the programs the government has made available to students and parents. In addition to lower rates of interest, the feds also offer the most repayment flexibility -- which is particularly important in times of economic difficulty.

Tuesday, April 22

You can have 6 resources for $500 or less

You can have 6 resources for $500 or less
Business Week | By Stacy Rapacon, Kiplinger

Even with just a little seed money, you can find an attractive mutual fund to fit your needs.

The entry fee for many mutual funds is often upward of $2,500 -- an amount a lot of folks might consider too steep a price to commit to a single investment.

Young investors eager to get in the game might not have enough cash to afford those minimums yet. More-seasoned players might prefer to diversify their portfolios in smaller increments.

Whatever your reason, if you seek a good investment for $500 or less, consider buying into one or more of these no-load mutual funds. Collectively, the six funds, organized by the amount required for a minimum initial investment, don't necessarily constitute a balanced portfolio. However, these diverse offerings can help fill holes in existing portfolios or serve as building blocks for new portfolios. (All returns and related data are as of March 21.)

A low-cost index mutual fund, which is designed to mirror the performance of a broad market segment, can give you a solid investing foundation that's diversified and simple to understand. With just $100, you can reap the benefits of index-fund investing and make an initial investment in Schwab Total Stock Market Index (SWTSX). It tracks the Dow Jones U.S. Total Stock Market index, which is made up of about 3,600 stocks. While the fund's current portfolio is primarily invested in large-company stocks, it also dips into medium- and small-caps, giving you a good sampling of the entire domestic market.

Schwab Total Stock Market Index has done well over the past year, gaining 24.2 percent and outpacing the 23.3 percent return of the widely followed Standard and Poor's 500 ($INX). Over the past decade, it has returned an average of 8.2 percent a year, ahead of the S&P 500's 7.5 percent annualized return and better than 85 percent of the funds in the "large blend" category. (Large blend funds invest in stocks with both growth and value attributes, and are fairly representative of the overall stock market.) The fund's annual expenses are a very low 0.09 percent.

Schwab also offers a set of target-date funds with low minimum investment requirements. Another easy core option for your portfolio, a target-date fund asks you to simply pick the year you want to reach your investing goal (typically, retirement), and the corresponding fund's managers take care of the rest. They select the appropriate mix of investments based on your time horizon and adjust the portfolio as your selected year nears.

For example, a 24-year-old aiming to retire at age 65 would opt for Schwab Target 2055 (SWORX), which opened in January 2013. The fund requires an initial investment of just $100; annual expenses are 0.73 percent.

Being so young, the fund has little past performance to recommend (or disparage) it, but its older siblings -- guided by the same manager, Zifan Tang -- indicate a promising future. Over the past three years, Schwab Target 2025 (SWHRX) has gained 10.2 percent annualized, beating its category by an average of 1.8 percentage points a year and ranking it in the top 8 percent of all 2021-25 target-date funds. Since Tang took the reins in 2012, the fund has gained a total of 26.5 percent, topping its category by 4.9 percentage points.

One note on fund performance figures: Stocks have been on a tear since the last bear market ended in March 2009, resulting in outsized gains during the past five years. Over the long term, the average annual return of the stock market is closer to 10 percent.

If you want to raise your portfolio's moral standard, consider this pair of so-called socially responsible funds, which invest according to clearly established principles. Amana Growth Investor (AMAGX) and Amana Income Investor (AMANX) are run in adherence to Islamic law, meaning they do not invest in businesses involving alcohol, gambling, tobacco or pornography. They also avoid businesses that charge interest, such as banks, and investments that pay interest, such as bonds. Both funds invest primarily in large companies, but the Growth fund focuses on fast-growing firms, while the Income fund seeks undervalued stocks that pay dividends.

The strategies, including the ethical code, have hindered the funds recently. "This bull market of the past five years hasn't been very favorable," says Morningstar analyst David Kathman. "With interest rates so low and money so cheap, it's given a boost to companies that aren't necessarily pristine, and those are not the types of companies that these funds own."

Restricted from holding firms that carry too much debt (which Amana defines as more than one-third of their market capitalizations), Growth has gained a relatively tame 20.9 percent over the past year, lagging the S&P 500 by about 2.4 percentage points and anchoring it to the bottom 9 percent of its large-growth category. Similarly, Income has returned 19.4 percent, or 3.9 points less than the index, and ranks below 80 percent of its large-blend peers. The Income fund yields 1.4 percent, a full percentage point better than the Growth fund.

Over the longer term, however, performance was significantly better because their lack of financial companies and highly leveraged firms served them well during the last bear market. In the past decade, both funds score top rankings, with Growth gaining 10.9 percent annualized, or an average 3.3 percentage points more per year than the S&P 500, and Income earning 11.2 percent annualized, or an average 3.6 points a year better than the index. Each fund requires $250 to buy in; Growth and Income have expense ratios of 1.11 percent and 1.18 percent, respectively.

The Amana funds are poised to perform well in the future as well, says Kathman. "Eventually the economy will start to get a little better, interest rates will have to rise, and when that happens, I think these funds will look better."

Investors can't live by large-caps alone. Well-balanced portfolios also call for the stocks of small- to medium-sized companies. There's no hard-and-fast rule, but small-cap stocks typically have market capitalizations up to $1 billion; mid-caps, $1 billion to $10 billion. (Market cap is calculated by multiplying share price by the number of shares outstanding.)

Homestead Small Company Stock (HSCSX) may focus on the small, but it can be a big winner for your portfolio. Requiring a buy-in of just $500, it's the only member of the Kiplinger 25, our favorite no-load mutual funds, with a minimum initial investment below $1,000, and it keeps expenses low, charging 0.91 percent a year.

The affordability doesn't discount results. It has lagged the Russell 2000 index of small-company stocks over the past year by 2.4 percentage points, but it still gained a respectable 25.8 percent. And it has beaten its benchmark over three-, five- and ten-year periods. Over the past 15 years, the fund earned 12.1 percent annualized, topping the Russell 2000 by an average of 3.0 percentage points a year.

To get more yield out of your portfolio, try Nicholas Equity Income (NSEIX), which requires an initial $500 investment and charges 0.75 percent in annual expenses. The fund invests in dividend-paying companies of all sizes and aims to pay a higher yield than the S&P 500. Achieving that goal, it currently has a 30-day SEC yield of 2.7 percent, beating the index's 1.9 percent dividend yield.

Over the past year, the fund has posted a return of 18.0 percent, lagging the S&P 500 by 5.3 percentage points. Long-term results are better: Over the past ten years, it has gained 10.6 percent annualized, topping the S&P 500 by an average 3.1 points a year and putting it in the top 7 percent of funds in its mid-cap value category.

Monday, April 21

10 tips on how to see lead energy stocks

10 tips on how to see lead energy stocks
StockScouter the current list of 10 recommended stocks is loaded with oil - and gas-related businesses.

Compiled from StockScouter ratings of Verus Analytics

High-flying biotech stocks with momentum names such as (AMZN), down 22 percent on the year attracts the tech-heavy- NASDAQ ($COMPX) from the clouds this week investors should a more down-to-earth approach.

Literally, they may want to drill down into the Earth: no less than five are oil and gas companies to observe the ten shares the latest list on StockScouters.

Leading the Pack is based on the Denver Kodiak oil & gas (KOG), whose oil and gas reserves and are concentrated in North Dakota Williston basin. Kodiak is a relatively small player in the energy sector - compare his modest $3.5 billion market capitalization to, that of Exxon-Mobil (XOM) for $417 billion-but investors and analysts this Bakken shale play to take note. Bank of America Merrill Lynch initiated coverage on Kodiak last week with a buy rating and a price target of $16; Shares were traded Friday to just over $ 13.

Weatherford International (WFT) energy equipment manufacturers and oil and gas producer Devon Energy (DVN), ConocoPhillips (COP) and Chevron (CVX) also marks under this week claimed top 10 Favorites.

Kodiak oil gas-/ & get a "10" from the StockScouter rating system on MSN Money, the highest score possible. Due to StockScouters analysis shares the KOG want to outperform the market in the next six months with average risk significantly.

Read the full Scouting report on Kodiak oil gas-/ & here.

Weatherford International(WFT)

Oil and gas equipment and services
American Realty capital properties(ARCP)

Real estate investment trust (REIT)

We think the StockScouter rating system, developed by Verus Analytics for MSN Money is one of the best tools you can use when you try to decide where to invest.

StockScouter seeks based predictions for stocks, whose company fundamentals, price development, estimating and stock ownership appear characteristics to a rising price in the future as these factors of stock prices in the past have influenced.

The system assigns each bearing a much-anticipated six month return and balance this return against expected volatility of the stock.

Scout rates stocks on a scale of 1 to 10, and reviews can change daily. Booth at publishing this article reviews and data in the table were listed.

In addition to the daily top 10 list above, of research firm of Verus Analytics StockScouter used described, (previously known as gradient Analytics quantitative business unit), to generate a monthly benchmark portfolio of stocks that the market has monthly updated since its inception in August 2001 surpassed.

An investor who started in 2001 by investing in each of the benchmark portfolio top 10 stocks to earlier in the month, at the end of the month and then start fresh with a new group of ten shares sale would be is, before trading costs and taxes of 1.069% until 31 March 2014 generated have been.

At the time, a columnist for MSN Money, with companies worked writer Jon Markman, researchers on the tool.

Markman suggested the top 10 stocks roll over every six months to keep the trade costs, a strategy that may be a better fit for most investors. This would be slightly different results, which would vary based on your starting point.

Sunday, April 20

The least expensive 2014 cars to insure

The least expensive 2014 cars to insure
Business Week | By Jeffrey Steele,

Most of the cheapest cars to insure aren't actually cars, they're SUVs and minivans.

If you want to save money on auto insurance, spring for an SUV or minivan.'s annual ranking of the vehicles with the best car insurance rates is dominated by non-sedans.

A few years ago, minivans held a good grip on our "least expensive to insure" rankings. But small and mid-size SUVs have been increasingly grabbing ranking spots. This year, minivans account for just five of the top 20 places. (See the 2014 rankings for the most expensive cars to insure and car insurance rates by state.)

And Jeep grabs a remarkable seven of the 20 "least expensive to insure" spots.

The advantages that propelled the minivans to the best spots are now being seen with SUVs: Family-friendly vehicles used mainly for safely ferrying kids around to Scout meetings and soccer matches. The parent driving the kids is among the least likely to speed, crash or have a claim.

And good rates always boil down to claims: When drivers of a certain vehicle submit fewer claims and/or less expensive claims, all owners that vehicle benefit with better car insurance rates.

That brings us to the Jeep Wrangler, Patriot, Compass and Grand Cherokee. Their good insurance rates hinge on Jeep owners.

While Jeeps exude an "adventurous spirit," they're usually not used for reckless abandon.

Least expensive 2014 cars to insure

6. Chrysler Town & Country Touring

According to Karl Brauer, senior analyst for Irvine, Calif.-based Kelley Blue Book, owners of Jeeps tend to be single or married women under age 45, who display prudent driving behavior.

"While there is an 'adventuresome' image to the Jeep brand, for every Wrangler that does serious off-roading, there are dozens of Wranglers and Grand Cherokees and Compasses -- and CR-Vs, Siennas and Traverses -- that are used to carefully haul kids around suburbia at sub-50-mph speeds most of the time," he says. "This demographic and these driving conditions don't cause a lot of accidents, thankfully."

While advertising may show Jeeps on craggy rocks, it's not unusual for Jeeps to never go off-roading.

Mark Takahashi, auto editor for in Santa Monica, Calif., agrees that most Jeeps are regarded as family vehicles. "If you're driving your family around, you will drive more carefully, and not take chances, because you have a vested interest in being a careful driver," he says.

Jeep Wranglers in particular are very economical to repair, which helps keep insurance rates down. If you get a dent in your door, the body shop can easily remove the door.

"It's usually bolted rather than welded together. Look at the doors of a Jeep Wrangler to this day, and they're removable, just like the old Army Jeeps," says Takahashi.

Joe Wiesenfelder, executive editor of Chicago-based, agrees Jeep's victory on the "least expensive to insure" rankings is a reflection of both how safely Jeep owners drive their vehicles and the cost of repair and replacement of Jeeps.

"You'd certainly be able to theorize that the owners of any one on this list are less likely to have collisions, and that the vehicles are less likely to be stolen. If they're low-volume cars, that suggests less of a replacement part market" for stolen parts.

Jeeps and SUVs also likely have an advantage because of their height. "They are higher-riding than the average car," Wiesenfelder says. "So if they are in a collision with an average car, that car will have greater damage than the Jeep." commissioned Quadrant Information Services to provide average auto insurance rates for 2014 models. Averages were calculated using data from six large carriers (Allstate, Farmers, GEICO, Nationwide, Progressive and State Farm) in 10 ZIP codes per state. Not all models were available, especially exotic cars. More than 850 models are included in the 2014 study.

Averages are based on full coverage for a single 40-year-old male who commutes 12 miles to work each day, with policy limits of 100/300/50 ($100,000 for injury liability for one person, $300,000 for all injuries and $50,000 for property damage in an accident) and a $500 deductible on collision and comprehensive coverage. This hypothetical driver has a clean record and good credit. The rate includes uninsured motorist coverage. Average rates are for comparative purposes. Your own rate will depend on personal factors.

Saturday, April 19

Buy, hold and prosper: The power of patient investing

Buy, hold and prosper: The power of patient investing
Business Week | By James K. Glassman, Kiplinger

It's behavior that determines your success or failure as an investor -- not knowledge, skill or luck.

If you ever needed a lesson in the power of patience, let me remind you of a date in recent history: March 9, 2009.

On that day, the Dow Jones Industrial Average ($INDU) closed at a gut-wrenching low of 6,547. Stock prices had been cut in half in just 15 months. General Electric (GE) had plunged from $38 to $7, Cisco Systems (CSCO) from $29 to $14, and Bank of America (BAC) from $43 to $4.

Making money in the stock market is hard not because finding great companies is difficult but because the best and easiest-to-understand strategy for winning is so difficult to adhere to. That strategy can be described in three words: buy and hold.

Five years from that 2009 bottom, the Dow was up roughly 10,000 points to a new record. No, the stock market doesn't always bounce back so dramatically, but it always bounces back.

No matter what the chart followers say, the market does not rise and fall in repeating patterns. If it's down sharply in a three-year stretch, for example, it won't necessarily rise just as sharply over the next three years. The market works on its own time­table, but there are some eternal verities:

Stocks of large U.S. companies have reliably returned about 10 percent annualized over the past two centuries. They should do just as well for the next two.In the short term, the market can be risky -- if we define risk as volatility, or the severity of the ups and downs. In the long term, the market is much, much less risky.Individual companies can vaporize (Enron and Lehman Brothers, to name a couple), but a diversified portfolio protects you from the risk that an individual company will implode and provides a smoother ride. Compounding is enormously powerful. Over long periods, small price gains and dividend payouts mount up (but note that the expenses charged by mutual funds, brokers and other advisers add up, too).

And that's it! That is all you need to know about succeeding in the stock market. Buy a solid, low-cost, diversified mutual fund (or assemble your own diversified port­folio), forget about it for a long time, and you should do well.

As an example, consider Dodge & Cox Stock (DODGX), with an expense ratio of 0.52 percent. Over the past 15 years, a $10,000 investment in Dodge & Cox, a member of the Kiplinger 25, grew to about $40,000. At that rate, in another 15 years it will become $160,000, and in another 15 years it will be $640,000. And that spectacular growth comes from an annualized return of 9.5 percent, roughly the historical norm. Any 30-year-old who can put away $30,000 -- not every year but just once -- has an excellent chance of becoming a millionaire by age 70.

It is behavior that determines investment success or failure -- not knowledge or skill or luck. Benjamin Graham, the Columbia University professor and financier who was Warren Buffett's mentor, wrote: "The investor's chief problem -- and even his worst enemy -- is likely to be himself." What he meant was that people let their emotions get in the way of smart investment moves. They tend to buy when stocks soar and sell when stocks sink.

The selling part is especially dangerous because people want to avoid losing. Richard Thaler and Cass Sunstein write in their book "Nudge" that academic research has found that "losing something makes you twice as miserable as gaining the same thing makes you happy."

They point out that in 1992, participants in retirement plans administered by Vanguard were allocating 58 percent of their assets to stocks. But by 2000, as stocks had quadrupled in value, the proportion rose to 74 percent. Then, as stocks fell sharply over the next two years, the allocation fell to 54 percent. "Their market timing," they write, "was backward." We saw the same phenomenon during the recent cycle, with investors bailing out of stock funds as prices sank and returning only recently, as indexes hit new highs.

The values that help you succeed in the market are the values that Aristotle extolled: moderation, persistence and humility. The question is how to adopt behaviors that fit those values when the minute-by-minute noise of the market is so dramatic. Here's some advice:

Avoid the noise. One way to make yourself get out of bed in the morning without hitting the snooze button is simply to move the alarm clock away from your bed. The investment equivalent is moving stock-price information as far away as you can. Twenty years ago, I told the editor of the Washington Post's business section to quit running pages and pages of stock prices. Stop encouraging readers to check how their shares were doing each morning. The Post did drop the tables, but mainly because readers can now get prices by the second on their computers and smart phones. Don't fall into that habit. Check your holdings once a month or once a quarter.

Think of your holdings not in dollar terms but as investments in great businesses. When GE drops in price, think of the event not in terms of money that you have lost but in terms of someone else's transitory valuation of your little piece of GE. Do you really want to give up a stake in a wonderful company just because others fleetingly believe it is worth less?

For many investors, sitting still is not an option. They have to do something. If you're in that category, I suggest you set up a "fun and games" account, a separate portfolio that represents, say, 5 to 10 percent of your assets and in which you can trade to your heart's content. Compare its results with that of your buy-and-hold portfolio over five or ten years. Chances are high that your emotions and the costs of trading have taken a toll.

Make purchases in the same amount every month or quarter. This technique, known as dollar-cost averaging, forces you to buy more shares when prices drop. Instead of feeling bad about market declines, you may actually feel good because you are picking up more assets at better prices.

Think buy, not sell. Hunt for bargains. The recovery, by the way, is not over. For example, GE trades today at $26, still about one-third below its 2007 high. Cisco sells for under $23, also about one-third off its high. Bank of America is at $16, still down about 70 percent. I recommend them all.

In urging a buy-and-hold strategy, I am not suggesting that you mindlessly keep companies that have gone sour. The reason to sell, however, is not that the price of a stock has declined but that the business has deteriorated and is unlikely to recover -- a key new product has failed, a rival has started a price war, or the new CEO is clueless. If you have chosen stocks well, these events will be rare. And if you are wise, you will err on the side of keeping what you have. If you had done that five years ago, your portfolio would be up, oh, some 200 percent.

James K. Glassman is a visiting fellow at the American Enterprise Institute. His most recent book is "Safety Net." He owns none of the stocks mentioned.

Friday, April 18

The upside of down stock markets

The upside of down stock markets
Business Week | By Kathy Kristof, Kiplinger

Nobody likes a downturn. But play your cards right during a market crash, and you could avoid taxes on your stock gains for years to come.

Tax season reminds me just how much I love a good stock market crash.

When my accountant recently informed me that I wouldn't have to pay taxes on nearly $50,000 in profits I netted last year from the sale of stocks (including three in the Practical Investing portfolio), it occurred to me that I should share my crash-oriented portfolio-restructuring and -rebalancing strategy.

In a nutshell: I save big moves for times of crisis. That allows me to rejigger the mix of stocks, bonds and cash in my portfolio and to trigger losses at the same time. My method is not as meticulous as the regular rebalancing that most advisers encourage. But for those of us with taxable accounts who are willing to accept a little financial messiness, my strategy can work nicely.

You see, the greatest thing about capital losses is that they never expire. Tax rules allow you to use losses to offset gains, plus up to $3,000 in ordinary income, every year. When you have excess losses, you get to roll them forward to be used in future years.

So when you have an opportunity to trigger big losses -- far more than you'd be able to use in a year -- and to rebalance or restructure your portfolio at the same time, you should jump at the chance. After all, that sort of opportunity doesn't come along every day. You really need a market crash like those that occurred in 2002 and 2008. Eventually, we'll have another bear market -- and perhaps another crash -- so it pays to be prepared.

The best way to explain it is with an example. Back in 2008, when the market was falling through the floor, I sold my main mutual fund holding, Vanguard Total Stock Market Index (VTSAX). I had built up the holding over the previous ten years by making regular monthly contributions into a taxable account.

Why a taxable account? Mainly because of its flexibility. I have assets in tax-deferred retirement accounts, too. But because you have to pay income taxes on withdrawals from IRAs, 401k plans and the like (and generally penalties on withdrawals made before age 59?), you shouldn't use the money in those kinds of accounts for emergencies or, say, to buy a car. I think everyone should have money in a taxable account for such needs.

My taxable account was worth more than $300,000 at one point, well over my cost of roughly $257,000. When the market dropped in late 2008, the account's value fell to $177,000. Selling triggered an $80,000 loss.

The moment the sale cleared, I started buying. I didn't want to repurchase shares in the same fund, and I couldn't if I wanted to preserve the tax losses. (Tax rules bar claiming a tax loss when you repurchase the same or "substantially identical" shares within a month of a sale.)

My portfolio was loaded with big-company stocks, and I had wanted to shift money into smaller companies and real estate stocks for some time, but didn't want to trigger taxable gains. The market upheaval gave me the chance to make the move with positive tax consequences.

I like what this restructuring did for my portfolio, too. I put the proceeds into three exchange-traded stock index funds: Half went to Vanguard Mid-Cap ETF (VO), 25 percent to Vanguard Real Estate Investment Trust ETF (VNQ) and the rest to Vanguard Large Cap ETF (VV).

While all stock indexes have been soaring since the bull market began in 2009, the mid-cap and REIT ETFs have performed extraordinarily well. Over the past five years through March 7, both funds have more than tripled in value (including reinvested dividends). I'll have to pay taxes on those gains eventually, of course -- but not anytime soon.

Site Search