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.

Thursday, April 17

4 reasons to brace for more volatility

4 reasons to brace for more volatility
Business Week | By Charlie Bilello, U.S. News & World Report

The last five years have been anything but typical for stocks. Here are 4 factors that point to a bumpier market ahead, and 4 ways investors can prepare for it.

It's hard to believe, but the bull market is now five years old. From the lows in March 2009, the Standard & Poor's 500 Index ($INX) has advanced over 180 percent in what is now one of the longest and strongest bull markets in history.

Given this extraordinary advance, it is tempting for investors to rest on their laurels, expecting more of the same going forward. However, I would caution against such complacency as the next five years are likely to look quite different than the last. Let's review some important market factors.

Stocks were unquestionably cheap in March 2009. Economist Robert Shiller's P/E 10 or "CAPE" ratio, which looks at real price-to-earnings ratios of the S&P 500 over a decade, was a low 13.3, meaning stocks were priced to deliver above average returns going forward -- and this is precisely what occurred.

Fast-forward to today and you have the opposite setup. The Shiller P/E 10 ratio now stands above 25, well over its historical average, with stocks priced to deliver below-average returns going forward. Although this is not a short-term signal of market performance, this valuation metric has been one of the best predictors of long-term returns.

In March 2009, bearish investors outnumbered bulls by over 20 percent in the Investors Intelligence Sentiment Poll, which is a collection of forecasts by investor newsletter writers. Few people were expecting positive returns for equities in the year ahead. Entering this year, we saw the polar opposite. The bulls outnumbered the bears by over 45 percent in the same sentiment poll, which is an extreme reading historically.

Sentiment is an important factor to monitor because at sentiment extremes, the market often moves in the opposite direction of the crowd. Our studies confirm this, as forward returns are best when there is a high level of bearishness in the Investors Intelligence Poll. When there is a high level of bullishness -- as there is today -- few are left to buy, and forward returns tend to be below average.

In March 2009, the U.S. economy was also at the tail end of the worst recession since the Great Depression. Equity markets often post their best returns at the end of a recession and beginning of a new expansion, and we saw just that in 2009.

In June of this year, the economic expansion will hit five years, or 60 months. According to the National Bureau of Economic Research, the average expansion since World War II has lasted 58 months. We are therefore long in the tooth of this expansion.

That is not to say that this cannot be an above-average expansion, but that we are more likely to be closer to the end of the cycle than the beginning. This is important, as the most severe and lengthy bear markets are historically associated with a recession.

In the early spring of 2009, the Federal Reserve was still in the early stages of implementing what would become the most aggressive monetary policy in history. Fast forward to today and interest rates are still at or near zero and we are on the third round of quantitative easing. The Federal Reserve is expected to continue to wind down this latest round of quantitative easing this year, at which point the focus will shift to potential changes in the federal funds rate.

Though we'll never know exactly how much easy monetary policy contributed to stock market gains over the past five years, few would deny that it has been an important psychological factor. Without this psychological support system in place, investors should at the very least expect to see higher volatility in the markets. When the first round of quantitative easing and the second round of quantitative easing were wound down in 2010 and 2011, we saw just that. Volatility rose in those years and we witnessed sizable corrections of 17 percent and 21 percent in the S&P 500 index.

Investors need to understand that the last five years are not a typical five-year period and that the next five years are unlikely to look the same. Given the prospect of increasing risk and volatility in the equity markets going forward, investors should consider taking some of the following steps:

1. Rebalance your portfolio. Given the extraordinary stock market gains, investors are likely holding a higher percentage of equities today than their risk tolerance dictates. If they haven't already rebalanced their portfolios by reducing equity exposure and increasing exposure to other asset classes, now would be an appropriate time to do so.

2. Increase quality. Now is not the time to swing for the fences by choosing speculative names. Increasing exposure to high quality, larger-cap names that tend to hold up better during periods of market stress is a prudent move given the above factors. Additionally, as many experts view U.S. small-cap valuations to be among the highest in the world, lightening exposure to this area of the market could help reduce volatility going forward.

3. Go abroad. Although U.S. stocks are near all-time highs and at the higher end of their valuation spectrum, this is not true across the globe. In many emerging markets in particular, stocks have declined over the past three years and are at the lower end of their valuation spectrum. Increasing exposure to these areas could help boost long-term returns.

4. Raise cash or look to alternatives. There are few asset classes that can offer true protection during a volatile period for equities. Cash and uncorrelated alternative investments are two areas for investors to consider, especially for those investors nearing retirement who cannot withstand a large decline in their portfolio.

Wednesday, April 16

How to find an affordable summer camp

How to find an affordable summer camp
Business Week | By Raechel Conover,

You can send your kids to a fun, fulfilling camp this summer without breaking the bank.

With fond memories of cabin mates, campfires, swimming pools, and s'mores, it's no wonder parents who went to summer camp want their children to have the same enriching experience they enjoyed.

Whether kids go to sleep-away camp or a day program, they can gain new skills, experiences, friends, and their own memories to cherish.

One good place to start your search is the American Camp Association's website. After filling out a quick questionnaire, you'll receive a customized list of summer camps based on your answers. The summer camp programs that are a good fit can send you information directly. Here are some things to consider before you settle on one:

All this comes at an average cost of $690 per week for each overnight camper and about $300 for each day camper, according to estimates by the American Camp Association.

Still, there are plenty of city, state, and non-profit groups that offer cheap summer camps for kids. Nine out of 10 ACA-accredited camps offer financial aid to help families with the expense. Our guide to cheap summer camp programs can help you find day and sleep-away options that are a good fit for your child.

YMCA: This worldwide organization is an excellent source of cheap summer camps for kids that range from weeklong sleep-away camps to day camps offering everything from camping skills to cultural enrichment and sports training. With more than 2,600 locations in the U.S., there's likely a "Y" in your neighborhood.

Boys & Girls Clubs of America: This national organization's goal is to foster youth growth and development, and it reaches out to all kids, including those who can't afford other community programs. All clubs offer youth-oriented programs for enrichment and include a game room, sports area, and teen center. Many also offer arts and crafts, a learning/tech center, and classes such as dance, drama, or martial arts. There are thousands of clubs in the U.S., and many offer summer camp programs.

City- or park-run programs: Summer camps organized by your city or local park can be low-cost and offer the convenience of a nearby site. Check with your city or municipal office or the local parks and recreation department to find out what type of youth programs are available. Many city-sponsored summer camps are cheap and run in conjunction with the public school system.

Local high school, community college, or university: Many community colleges and some high schools and universities offer cheap summer camps for youths in grades 1-12. Classes may include anything from archery, softball, and tennis to art, drama, and writing. Contact local schools to see what's on offer.

Local religious or faith-based organizations: Religious or faith-based aid societies often sponsor cheap summer camp programs. Options often include half-day, daily, or weeklong camps. Check local community centers and houses of worship for summer camps in your area.

Local non-profit organizations: Some non-profit, children- and family-oriented organizations offer cheap summer camp options for children. The Children's Aid Society, for instance, runs numerous summer camps in the New York City area for children of all ages. Contact similar organizations in your area to find out if they're mounting summer camps this year.

Look at your budget and decide how much you're willing or can afford to spend on a summer camp program. In general, sleep-away summer camps are more expensive than their day-only counterparts. And remember to include the cost of supplies and "extras." At more rural summer camps, your child may need camping gear such as a tent or sleeping bag. Sleep-away campers will need enough luggage to hold at least a week's worth of clothing. Either way, you'll need to stock up on sunblock, swimsuits, and other summer accessories.

If you're worried about costs, keep in mind that summer camp programs can be within reach of families on a budget. While camps range from a hundred dollars to a couple thousand, Parenting points out several ways to get help with the expense:

Pay for a day camp much the same as you pay for day care -- with a flex plan through your employer or as a tax write-off.Check for summer camp scholarship programs and other financial aid. If you attended the same camp, your alumni status may warrant financial assistance.Look for foundations that help families fund summer camp for kids.

Once you've established your budget, determine whether your child would prefer a sleep-away or day camp program. Younger children and first-time campers may benefit from a day program that returns them home daily. Sleep-away camps offer a more immersive experience, but make sure the facilities, meals, and location suit the needs of your family.

Talk to your child about the activities he or she wants to pursue, and decide what your family wants to gain from the summer camp experience. There are many types of summer camp programs, ranging from coed and general-interest to single-sex, subject-focused, and academic. For instance, if your child is interested in theater, he or she may thrive in a performing arts summer camp with like-minded campers.

Consider the ages of the other campers and the activities offered, and select a summer camp that will attract a pool of potential friends for your child. Make sure there are enough campers around your child's age that he or she can participate in age-appropriate activities with others.

Determine up front just how far you're willing to drive, either to drop off and pick up your child each day or to visit at a sleep-away camp. For a day camp program, also consider how much travel time your camper can tolerate, regardless whether you or the camp provide the shuttle service. For a sleep-away camp, figure out how often you want to visit (or how often your child wants you to visit) over the course of their stay. If this is your child's first time at summer camp or the child is not confidently independent, you may need to eliminate camps that are far away.

Find out as much as you can about the counselors, including their experience and backgrounds and their styles of guidance and discipline. Ask about the staff-to-camper ratio. For younger children, the ratio should be five to eight children to each counselor, while older children are fine with eight to 10 campers per counselor. The best way to check out the facilities and/or campground and speak to the counselors is to visit. (You may want to plan a visit the summer before you expect to enroll your child.) Ask the camp director for references and get in touch with parents and campers who can speak about their experiences.

If your child has any special medical, dietary, or other needs, choose a summer camp that has experience accommodating similar requirements. For medical needs, make sure the counselors or staff are trained to provide care and that the camp is located within close range of a nearby hospital.

Choose a summer camp accredited by the American Camp Association, which sets standards for safety and quality.

Tuesday, April 15

5 do-good ETFs that beat the market

5 do-good ETFs that beat the market
Business Week | By Aaron Levitt, InvestorPlace

Want to invest with a clear conscience? Socially responsible funds no longer have to sacrifice profits to take the moral high ground.

In a growing trend, many investors are now building portfolios based in part on their morals and values. Dubbed "socially responsible investing," or SRI, these investors essentially add several screens to shift through various stocks in order to comply with various environmental, social and governance (ESG) requirements.

The hope is that the underlying SRI portfolio will produce a strong financial return as well as a good social one. And those returns have been getting much, much better.

Socially responsible investing used to be considered the whipping boy in terms of total returns, often falling behind broad indexes and "sin" related industries like tobacco, booze and gambling. However, with major pensions and sovereign wealth funds now using their immense size to influence management on ESG policies, SRI returns have improved.

According to Goldman Sachs (GS), firms that are considered to be leaders in socially responsible investing have also been leaders in terms of stock performance as well -- averaging an extra 25 percent over the longer term. This echoes similar research conducted by Allianz. Between 2006 and 2010, the German insurance group found that investors could have added an additional 1.6 percent a year to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.

The bottom line is that investors no longer have to sacrifice their morals when looking for investment returns. Here are five of the easiest ways to make your portfolio a little more socially responsible.

The iShares MSCI KLD 400 Social (DSI) ETF should be the first stop for any investor looking to add a dash of social responsibility to their portfolio.

The ETF's underlying index tracks 99 percent of all the stocks in the United States. That includes large- mid- and small-cap firms. First, index provider MSCI kicks out all tobacco, gambling, firearms/weapons, nuclear power, adult entertainment and GMO seed producers in the USA Investable Market Index. It then uses various socially responsible investing screens to weight DSI's holdings and create its underlying portfolio.

The SRI ETF currently tracks 400 different firms and charges just 0.50 percent -- or $50 per $10,000 -- in expenses.

And while the removal of those various "sin" industries may at first blush seem like a drag on DSI's performance, it has actually been the opposite. The socially responsible investment managed to post a 35.5 percent return in 2013 -- besting the venerable S&P 500 ($INX). Over the last five years, that outperformance continues.

For investors who want to eliminate the volatility of owning smaller firms from their portfolios, the iShares MSCI USA ESG Select ETF (KLD) is a solid choice.

The $250 million KLD tracks U.S. large- and mid-cap stocks screened for positive socially responsible investing characteristics and excludes tobacco companies. Index provider MSCI first looks at its broad MSCI USA index -- which contains about 250 stocks. The indexer then applies a standard set of criteria to weight each stock, and those with stronger weights get more prominent placement in the new SRI index. That produces a portfolio of 107 different stocks -- with top holdings in Apple (AAPL) and renewable energy-focused utility NextEra Energy (NEE).

Overall, technology and financial firms make up the bulk of KLD's holdings.

Returns for the socially responsible investing fund have been pretty strong. KLD managed to post a nearly 31 percent total return in 2013. While that slightly underperformed the broader S&P 500 ($INX), KLD has beaten the benchmark index over the past five years. Like its sister fund DSI, expenses for KLD run just 0.50 percent.

While most social responsible managers tend to focus on a variety of ESG screens, a common theme is environmental issues and how firms react to the concept of sustainability. The often ignored Huntington EcoLogical Strategy ETF (HECO) taps into the various firms making efforts on this front.

However, this is not an ETF of solar and wind power producers.

Sponsor Huntington Bancshares (HBAN) defines "ecologically focused companies" as firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally oriented projects.

The actively managed fund picks out what the managers believe are the best targets in the previously mentioned MSCI KLD 400 Social Index. Currently, the fund holds 56 different firms including Starbucks (SBUX) and chipmaker Texas Instruments (TXN).

That active focus has produced some hefty returns as well. HECO managed to return nearly 30 percent in 2013 and is up nearly 4 percent year-to-date. Expenses for the ETF are bit on the high side, however, currently at 0.95 percent.

While the previous three SRI ETFs track big passive indexes, AdvisorShares Global Echo ETF (GIVE) is a little bit different.

The fund is actively managed as a "core" solution, meaning it holds both stocks as well as fixed income instruments and bonds. All of these holdings are scrutinized for various socially responsible investing and ESG requirements before being added to GIVE's underlying portfolio. However, since it is actively managed, these holdings can and do change on a daily basis. The ETF also holds a nearly 4.2 percent weighting in the previously mentioned DSI ETF.

Here's where GIVE gets interesting.

The ETF charges a monster 1.61 percent in expenses. However, 0.40 percent of that is donated to Philippe Cousteau Jr.'s -- Jacques Cousteau's grandson -- Global Echo Foundation. The foundation's mission is to provide funding solutions "to many of the challenges facing the world community from social issues impacting women and children to environmental conservation."

Unfortunately, that hasn't done much to bring investors to the fund, as GIVE has only attracted around $9 million in assets so far – possibly because investors in the ETF don't actually get to claim a tax deduction from the donation.

The newest entrant into the socially responsible investing world is the ALPS Workplace Equality ETF (EQLT).

The premise of EQLT is to focus on "America's leading equality-minded corporations," meaning EQLT will track those firms that provide support and benefits to their lesbian, gay, bisexual and transgender (LGBT) employees.

EQLT uses the Human Rights Campaign Corporate Equality Index and only selects stocks that score 100 percent in the metric. The metric basically looks at a company's hiring practices and whether or not it provides healthcare and other benefits to same-sex partners or spouses. Currently, EQLT has around 162 different holdings.

However, the kicker for EQLT is that many of its holdings -- like spirits maker Brown-Forman (BF.B) or casino operator Caesars (CZR) -- aren't necessarily typical ESG fair. That could turn off some investors looking at EQLT for socially responsible investing. Another potential problem for the new fund is its hefty 0.75 percent expense ratio.

The space is still pretty new, so the choices are a bit limited, but if you're interested in socially responsible investing, these funds are your best bets.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Monday, April 14

The 3 most common credit report errors

The 3 most common credit report errors
Business Week | By Bethy Hardeman, U.S. News & World Report

When scouring your credit report, pay attention to your address and credit limit information. And don't gloss over details like your name.

Everyone makes mistakes, and credit bureaus are no exception. In fact, a Federal Trade Commission study last year found that one in four consumer credit reports contain errors – these include everything from minor mistakes to outrageous oversights.

It’s important to know what to look for when you’re checking for mistakes in your credit reports. There are three types: identity errors, incorrect account details and fraudulent accounts.

The three major credit bureaus are Equifax, Experian and TransUnion. Each bureau maintains its own database of consumer data, including personal information, account information and payment history. This information is included in your credit reports.

From time to time, a credit bureau – or all three – will get some information wrong. Some of these errors are minor. For instance, one bureau might have your street address incorrect. It’s annoying, but it won’t hurt your credit.

Other times, it’s a more serious error: Your name could become mixed up with someone else’s, and you could begin seeing some of his accounts on your credit report. This will affect your credit either positively or negatively, depending on his payment history.

Sometimes the bank or lender providing information about your accounts to the credit bureaus gets things wrong. On the other hand, the credit bureau could incorrectly process the information provided. For instance, your credit card could be displaying the wrong credit limit, your mortgage might have the incorrect origination date or your auto loan could show as “open” when it’s clearly been closed.

This is the most serious error out there, since it means someone has used your identity – including your name, Social Security number and other personal data – to open and begin using an account. If there’s a line of credit on your credit report that you didn’t open, you’ll want to move quickly to ensure that the fraudster can’t continue opening accounts in your name. You can do so by adding a security freeze on your credit reports.

A security freeze will prohibit you – or anyone posing as you – from opening any new lines of credit. Keep the freeze on your account until you’ve sorted out what’s going on and taken the appropriate steps to prevent fraud from happening to you again, including signing up for a credit monitoring service. You also might want to consider changing your Social Security number.

Once you’ve identified an error on your credit report, you’ll need to dispute it with the credit bureau or directly with the information provider.

Disputing with the credit bureau. This is the most conventional route and is best for disputes involving incorrect personal information on your credit report. Get a copy of your credit report(s) containing the error, gather supporting documentation for your case and write a letter to the appropriate credit bureau(s) describing your specific dispute. Make it clear and concise. After you’ve made a copy for your own files, send the letter to the credit bureau. The credit bureau is legally required to investigate your dispute and will typically do so within 30 days of receiving the notification.

Disputing with the information provider. If your bank or lender is reporting incorrect information to the credit bureaus, or if someone else opened an account in your name, start by contacting your bank or lender (the information provider) directly. Find an email address or phone number, and make notes of any conversations you have with a representative. Sometimes, talking to your lender directly can facilitate the dispute process.

The bottom line: Now that you know which common errors to look for, remember that you’re responsible for clearing up mistakes. You’re entitled to one free copy of your credit report from each of the three credit bureaus each year. Stay on top of things by checking your credit reports often to make sure they’re accurate.

Saturday, April 12

7 ways your 401k is improving

7 ways your 401k is improving
Business Week | By Jennie L. Phipps,

Will 401k's become American retirees' savings plan of choice? Here's how they're evolving to fit the times.

People retiring in 20 or more years are going to be the first recent generation to retire relying mostly on their own savings from 401ks and the like.

Whether this approach is good enough to provide a comfortable retirement for most people remains to be seen, but Jeanne Thompson, a vice president at Fidelity Investments, the nation's largest provider of these retirement savings plans, is optimistic. She says, "The Pension Protection Act of 2006 was a sweeping reform that put in place guardrails to strengthen 401ks. All of the nuts and bolts are there to give 401ks the durability to become the primary savings vehicle."

The system is still evolving. Thompson points to these retirement planning industry trends that aim to further strengthen 401ks:

More Roth 401ks. About twice as many plans compared with 2009 -- about 42 percent -- have added Roth options. These allow participants to pay taxes on the money as it goes in rather than when it comes out. Thompson says they are especially attractive for younger workers who are in the early years of their careers and not making big salaries or facing big tax liabilities. Paying taxes at this point allows workers to build a bigger, more secure retirement savings base and manage the risk of higher future tax rates.

Greater availability of self-directed brokerage options. More employers -- about 40 percent -- are giving workers who are experienced investors the option of using the broad array of stocks, bonds and mutual funds available outside of their 401k plan lineups. Thompson says this option is particularly attractive to older investors with more money to manage.

More employees enrolled automatically. At companies with 401k auto enrollment, on average 84 percent of workers participate compared with slightly more than 50 percent when enrollment isn't automatic. "Inertia takes over," Thompson says.

Ways to compare plan features. More employers are demanding industry-specific benchmarking information from their 401k providers and some of them are sharing that info with their employee participants. If you're not getting this information, ask your human resources department because it may be available.

More high-deductible health plans with health savings accounts, or HSAs. Thompson says more employers are offering this option to hold down insurance costs, and it's particularly attractive to younger, healthier workers, as well as older workers saving to cover health care costs in retirement. "Many people are over insured," Thompson says. "They pay $300 to $400 a month for insurance, but they only go to the doctor once a year. If they choose a high-deductible plan, they pay less per month and they can put the difference in an HSA where there is triple tax savings -- money goes in tax free; it earns tax-fee interest, and it goes out tax-free."

More savers choosing target-date funds. Many employers are making target-date funds the default option, and 33 percent of workers are either going with the flow or deliberately choosing this option. A smaller percentage of employees have a personally managed option, which provides a very specific array of investments based on information the worker provides about his personal financial situation. On average, workers who use the managed option pay an additional 50 basis points (half a percent) in annual fees.

More focus on the bottom line. Increasingly employers are making available tools that help workers translate savings into projected monthly income streams in retirement. If your employer isn't, then ask. This is an inexpensive benefit that can make your retirement planning much more effective.

Friday, April 11

Looking for higher dividends from abroad

Looking for higher dividends from abroad
Business Week | By Bruce W. Fraser, Bankrate

The grass may or may not be greener on the other side, but the yields are often higher. Here's how to pick up some good-quality, foreign dividend stocks.

Looking for some yield? Who isn't, these days?

When investors seek dividend yields, many only consider U.S. stocks. U.S. companies paid out a record $311.8 billion in dividends in 2013, beating the 2012 record of $281.5 billion, according to Standard & Poor's. But traditionally, foreign company stocks sport higher yields.

"It's a huge universe, and it's true that most foreign stock markets do have higher dividend yields than the U.S.," says Josh Peters, editor of Morningstar's DividendInvestor newsletter.

With about 67 percent of the world's dividends coming from outside the U.S., according to MSCI, it's worth looking beyond national borders.

"The dividend yield of the U.S. stock market using the S&P 500 ($INX) as a benchmark has been in the 2 percent range, plus or minus," says Peters. "That's one of the lowest yields in the world. Currently, 3 percent to 4 percent in yields are readily attainable in a lot of foreign markets."

So how do you pick good, high-yielding foreign dividend stocks? You can either choose them individually or invest in a mutual fund with foreign equity holdings that pay dividends.

Another option is to buy an exchange-traded fund, or ETF, that focuses on foreign dividend stocks. The vast majority of ETFs track a market index. "The idea behind buying is you believe in buying high-yielding equities, but don't want an active strategy," says Morningstar ETF analyst Abby Woodham. "You just want to buy a whole market."

"The rationale for buying a foreign dividend-focused ETF is the same as buying a domestic ETF," she adds. "Most of the total return on equity markets comes from dividends."

While neither research firms Morningstar nor Lipper categorizes funds by whether they pay dividends, Lipper has two groups of mutual funds that hold foreign dividend-paying stocks: global equity income funds and international equity income funds.

At Morningstar, senior fund analyst Gregg Wolper says foreign dividend-paying funds are likely to fall into the large-value-fund category.

Many financial pros searching for either domestic or foreign dividend-paying stocks are value managers, meaning they search for stocks thought to be undervalued in relation to their fair value.

Don Schreiber Jr., CEO of WBI Investments in Little Silver, N.J., says U.S. stocks are looking relatively expensive. "There are good value-shopping opportunities in international dividend stocks right now," says Schreiber, the co-author of "All About Dividend Investing."

Although Schreiber describes himself as a value manager, "We go beyond just the search for value," he says. "We buy stocks when they're cheap, when they're trading at a low price from where they normally trade. This way you have a high probability of being able to sell to somebody else at a more expensive price."

Daniel Kern, president and chief investment officer of Advisor Partners in Walnut Creek, Calif., says the key things his firm looks for are "whether the company has a history of paying dividends, whether they have a consistent cash flow necessary to sustain dividends and have a balance sheet to provide a stable business foundation."

Another strategy is to buy a stock when its yield is low and wait until it goes up. Both Novartis (NVS), a Swiss pharmaceutical company with a significant presence in the U.S., and Canadian beer company Molson Coors (TAP) were yielding below their norms in early 2013, but are expected to increase their dividend growth rates over time, according to value manager Karl H. Graf, founder of Graf Financial Advisors in Wayne, N.J.

"Dividend yield is not our primary consideration," says Graf. "Of course, we consider it. To us, what matters most is that the dividends are likely to go up year over year. What we're interested in is the growth rate and the sustainability of it."

For his two model portfolios, Peters looks for companies exhibiting good cash flows and growth prospects, paying current yields ranging from 3 percent to 5 percent, and preferably with no tax withheld. Three favorites that fit these criteria are British stocks: Royal Dutch Shell (RDS.A), Vodafone (VOD) and pharmaceutical GlaxoSmithKline (GSK). Notably, all three pay dividends without withholding taxes.

Foreign governments routinely withhold 10 percent to 15 percent in taxes from foreign dividend payments. The U.K. is an exception. Because the U.S. and U.K. have a tax treaty, there is no withholding tax on dividends paid to U.S. investors.

"I figure Shell's dividend will grow 4 percent to 6 percent a year in the foreseeable future," says Peters. "Vodafone's dividend has been growing at 7 percent a year lately, but it's likely to be flat for the next year or two before starting to grow again. That said, the cash Vodafone is now collecting from its stake in Verizon Wireless minimizes the risk of any dividend cut. GlaxoSmithKline faces limited patent expirations, unlike many pharmaceuticals in the U.S."

Because foreign taxes are withheld, generally dividend-paying stocks and funds should be housed in a regular taxable account. Otherwise, if you own the foreign stock or fund in an individual retirement account or 401k, you don't get any credit for those taxes withheld, says John M. Smartt Jr., a CPA and registered investment adviser in Knoxville, Tenn.

Of course, investing in foreign dividend-paying stocks and funds is not without risks, which include currency fluctuations and political and economic uncertainties. So you might want to stick to U.S. multinationals with businesses that invest overseas.

"A multinational like Coca-Cola (KO) or General Electric (GE) based in the U.S. is going to pay dividends in dollars," says Peters, "so currency fluctuations are not a consideration."

Accounting and reporting standards in foreign countries also tend "to be less rigorous and regulatory oversight not particularly zealous," Peters says, in contrast to U.S. companies "whose statements are in English and have to conform to regularity standards you're familiar with."

Also, the vast majority of companies in the U.S. pay dividends every three months, and they are less likely to cut their dividends. Overseas companies commonly pay dividends semiannually or annually.

Financial pros also warn against being attracted to a dividend-paying stock solely by the high yield. Rather, they advise, you should follow a total return approach, which combines income and capital appreciation. High-dividend yields sometimes tend to be unsustainable.

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