You can travel abroad without your credit card, but there are many advantages to having it, including protecting yourself against potentially serious problems.
Safety in numbers, we're always taught. It's smarter to go out late at night with someone accompanying you than to make your way alone, and those who hike in the rugged wilderness without a companion could wind up like that guy in "127 Hours." Some personal finance and travel experts offer a similar take on traveling in foreign lands with credit cards. You're better off with them than without them.
Not that you shouldn't bring along some cash. If you don't, that could be problematic as well. "You can't go to the souk in Istanbul with a credit card. You've got to pay with cash," says David Litman, the CEO of GetaRoom, a hotel booking site that specializes in finding low rates. "There are people you will have to tip, and that's generally going to be with cash. You have to have a mix, but everything I can put on a credit card, I do."
Think this is overplaying the idea that traveling without a credit card could invite disaster? Consider the following:
1. If your cash and cards are lost or stolen, only credit cards can be replaced immediately. For example, if your hotel room is broken into and your cards are stolen, your first call should be to the local authorities. Then, you'll want to call the issuing bank to notify it of the theft. The best credit card companies will send you a replacement immediately and make sure you're financially set to continue your journey or return home. That's a part of their customer service.
With a debit card, as long as you call your bank within two business days, even if your checking account was cleaned out, you should eventually get all of your money back, except possibly the first $50. But you likely won't see it until the next business day, which could mean begging the American embassy to put you up for a night.
And if you only brought cash and that's what was stolen, keep your fingers crossed that the authorities rival their fictional counterparts on "Law & Order" or "Hawaii Five-0." Then, just maybe, you won't have to beg your family members to wire you enough money to get back home.
2. If you become sick, a credit card can speed up your treatment. Sure, it's unlikely, but Litman throws out a pretty terrifying scenario: "Let's say you're in Zimbabwe and you come down with dysentery, and you need $20,000 for a private aircraft to take you to another country where you can get better treatment," says Litman. "If your limit is $10,000 and you need your credit raised, and you explain what's going on and can fax over a doctor's certificate, they'll give you that."
That's a lot of hypotheticals, and the outcome would depend on your relationship with your credit card issuer -- we can imagine situations where you're still out of luck -- but his point is well taken. If you're stuck in another country with a desperate need for money, your odds of getting some quickly are a heck of a lot better with your credit card issuer than with your debit card's bank or having to wait for your relatives to collect and wire over some funds.
3. Credit card exchange rates won't drain your budget as fast. True, many credit cards charge a foreign transaction fee for purchases (not all: Capital One is free of them, and certain cards from Chase, Citi and American Express have removed the foreign transaction fee). But even then it's usually cheaper to pay the fee than to convert your American dollars or traveler's checks into foreign currency.
Why is it cheaper? "Credit card purchases are exchanged at the interbank exchange rate, usually the best rate one can get for currency exchange," says Howard Dvorkin, founder of the nonprofit Consolidating Credit Counseling Services.
4. Credit cards won't accidentally pay the wrong amount. Think about the scenarios that might happen if you wouldn't know a rupee or a peso if a Brink's truck full of them crashed into you. "If you're not familiar with the currency, it's so easy to put down the wrong bill," Litman says. "I've seen that happen, and while most people are honest, some are not."
Speaking of dishonest people, most major credit cards offer purchase protection. Whether that protection covers purchases made outside the U.S. depends on your issuer and your relationship with the issuer. But it's just another reason many people swear by credit cards for all their shopping at home and abroad.
5. Credit cards make it easy to rent a car, secure a hotel room and book a flight. A lot of people love traveling with credit cards due to travel perks. The best credit cards, for instance, will let you collect frequent flier miles. But, sure, if you aren't one of those people, a debit card will get you a flight just fine, whereas paying for an airline ticket with cash can be problematic -- and even cause suspicion from an airline. In this post 9/11-era, do you really want that?
And paying for a hotel room and a rental car with a debit card can be even trickier. You may come through perfectly OK, but you'll want to call ahead if you can, to make sure that the rental car company accepts debit cards. Then you'll want to ask if the company will make you pay a deposit for renting a car. Some companies will tack on an extra $200 or $300 that won't be available in your checking account until you return the car.
Some hotels may let you hold the room with a debit card but then turn you away at the desk because you plan on paying with that debit card. Or they may let you pay with the debit card but add on one of those holds of several hundred dollars.
And given that it can be hard enough to stay in a hotel and use a rental car in America with a debit card, you can imagine how things might go in another country if you have a language barrier to overcome as well.
In the end, is it possible to travel abroad and be just fine without credit cards? Of course. But credit cards are arguably the best insurance travelers have that their photo album isn't filled with pictures of the family sleeping on a park bench next to the London Underground.
View the original article here
Friday, October 14, 2011
Thursday, October 13, 2011
4 hidden risks to your portfolio
A market like this one is difficult enough without accidentally adding risk to your portfolio. But a little knowledge and perspective can help you stay calm and avoid big blunders.
In recent days, queasy investors have run from stocks to bonds and cash, then back to stocks. But when investors react to daily market moves, they often go too far, experts say. Instead, smaller tweaks might be more beneficial.
Investing is inherently risky -- stock prices drop, companies default on their debt, even sitting in cash runs the risk of failing to keep up with inflation. And much of it, investors don't control -- including an unprecedented ratings downgrade for U.S. government debt, for example, or the precipitous, unforeseen market drops of the past two weeks.
Even so, there is plenty you can do as an investor to control risk, including making sure there's enough diversity in your investments to prevent everything from moving in lock step. You should also have a clear, long-term plan, which can offer perspective when the short term doesn't go your way. "If you focus on those big levers that you absolutely can control then you actually stand a great chance of being successful," says Chris Philips, senior investment analyst for Vanguard's investment strategy group.
Obviously, there's no way to eliminate all the risks in investing. Sometimes, surviving a market swoon feels like exactly that: survival. But there's no reason to make it worse than it has to be. Here are four common investing mistakes that add unnecessary risk to a portfolio -- and how to fix them:
Reality: Some bonds are safer than others.
Until last week, U.S. Treasurys were considered risk-free, with no chance at all that the issuer (aka Uncle Sam) would fail to pay up. Post-downgrade, investors may be able to see a bigger picture: Bonds of all kinds can carry hidden risks. They still have a place in a portfolio, advisers say, usually to generate income and to provide stability -- when stocks fall, bonds often rise, or at least don't fall as much as stocks. But within the universe of bonds, there's a wide range of risk, which make some issues far more vulnerable to big losses than others. The more a bond pays in yield, the riskier it is. High-yield corporate bonds, for example, commonly called junk bonds, can offer yields an average 6.6 percentage points above Treasurys. They also have a higher risk of default. Over the past 12 months, 2.2% of high-yield bonds defaulted, according to Standard & Poor's Global Fixed Income Research; during the same period, no investment-grade bonds did.
The fix: Don't chase yield.
Even with high-yield bonds, the odds are still in the investor's favor, but they're also some of the most volatile issues around, with prices that tend to rise and fall more like jittery stocks than mellow bonds. To reduce risk, investors should have no more than 7% of their bond portfolios in high-yield bonds, says Ron Florance, managing director of investment strategy at Wells Fargo Private Bank. Investors should diversify with other bonds, such as municipal bonds, investment-grade corporates and foreign issues, he adds. And while investors can't control rising interest rates, which also erode the value of bonds, Florance recommends sticking to bonds with short maturities -- about seven years or less -- because they will get hurt less if rates go up.
Reality: A dozen funds -- or even a mix of stocks and bonds -- may not cut it.
Households that invest in mutual funds own about seven funds apiece, on average, according to 2010 data from the Investment Company Institute, a mutual fund industry trade group. That ought to be enough to get good and diversified, no?
A closer look often reveals that even with a passel of funds, portfolios can be far more concentrated than they first appear. Investors often fail to realize that they can be holding two or more funds with very similar strategies, which isn't always apparent in a fund's name or track record, says Todd Rosenbluth, a mutual fund analyst for S&P Equity Research. An investor who owned the $61 billion Fidelity Contrafund (FCNTX) and the $24 billion T. Rowe Price Growth Stock (PRGFX) fund, for example, would end up essentially doubling down on information technology and consumer discretionary stocks, according to S&P.
View the original article here
In recent days, queasy investors have run from stocks to bonds and cash, then back to stocks. But when investors react to daily market moves, they often go too far, experts say. Instead, smaller tweaks might be more beneficial.
Investing is inherently risky -- stock prices drop, companies default on their debt, even sitting in cash runs the risk of failing to keep up with inflation. And much of it, investors don't control -- including an unprecedented ratings downgrade for U.S. government debt, for example, or the precipitous, unforeseen market drops of the past two weeks.
Even so, there is plenty you can do as an investor to control risk, including making sure there's enough diversity in your investments to prevent everything from moving in lock step. You should also have a clear, long-term plan, which can offer perspective when the short term doesn't go your way. "If you focus on those big levers that you absolutely can control then you actually stand a great chance of being successful," says Chris Philips, senior investment analyst for Vanguard's investment strategy group.
Obviously, there's no way to eliminate all the risks in investing. Sometimes, surviving a market swoon feels like exactly that: survival. But there's no reason to make it worse than it has to be. Here are four common investing mistakes that add unnecessary risk to a portfolio -- and how to fix them:
Reality: Some bonds are safer than others.
Until last week, U.S. Treasurys were considered risk-free, with no chance at all that the issuer (aka Uncle Sam) would fail to pay up. Post-downgrade, investors may be able to see a bigger picture: Bonds of all kinds can carry hidden risks. They still have a place in a portfolio, advisers say, usually to generate income and to provide stability -- when stocks fall, bonds often rise, or at least don't fall as much as stocks. But within the universe of bonds, there's a wide range of risk, which make some issues far more vulnerable to big losses than others. The more a bond pays in yield, the riskier it is. High-yield corporate bonds, for example, commonly called junk bonds, can offer yields an average 6.6 percentage points above Treasurys. They also have a higher risk of default. Over the past 12 months, 2.2% of high-yield bonds defaulted, according to Standard & Poor's Global Fixed Income Research; during the same period, no investment-grade bonds did.
The fix: Don't chase yield.
Even with high-yield bonds, the odds are still in the investor's favor, but they're also some of the most volatile issues around, with prices that tend to rise and fall more like jittery stocks than mellow bonds. To reduce risk, investors should have no more than 7% of their bond portfolios in high-yield bonds, says Ron Florance, managing director of investment strategy at Wells Fargo Private Bank. Investors should diversify with other bonds, such as municipal bonds, investment-grade corporates and foreign issues, he adds. And while investors can't control rising interest rates, which also erode the value of bonds, Florance recommends sticking to bonds with short maturities -- about seven years or less -- because they will get hurt less if rates go up.
Reality: A dozen funds -- or even a mix of stocks and bonds -- may not cut it.
Households that invest in mutual funds own about seven funds apiece, on average, according to 2010 data from the Investment Company Institute, a mutual fund industry trade group. That ought to be enough to get good and diversified, no?
A closer look often reveals that even with a passel of funds, portfolios can be far more concentrated than they first appear. Investors often fail to realize that they can be holding two or more funds with very similar strategies, which isn't always apparent in a fund's name or track record, says Todd Rosenbluth, a mutual fund analyst for S&P Equity Research. An investor who owned the $61 billion Fidelity Contrafund (FCNTX) and the $24 billion T. Rowe Price Growth Stock (PRGFX) fund, for example, would end up essentially doubling down on information technology and consumer discretionary stocks, according to S&P.
View the original article here
Wednesday, October 12, 2011
5 strategies for a new bear market
If the last couple of weeks have left you unsettled, it’s no wonder. The tactics used by these mutual funds can help you defend your wealth against a falling market.
In what seemed like the blink of an eye, the stock market's spring swoon mutated into a summer surge. Then, just as quickly, the rally gave way to a huge sell-off. Clearly, investors are unsettled and uncertain about the future -- with good reason.
Risks abound: Joblessness remains disconcertingly high, and economies in the U.S. and much of the developed world are fragile. Notwithstanding the latest bailout of Greece, investors worry that that nation, as well as the bigger countries of Italy and Spain and even the U.S., could default on their debts.
Timing the stock market is notoriously hard, and we don't encourage you to try to. But if the market's gyrations leave you queasy, you may want to go on the defensive. Fortunately, plenty of mutual funds, employing a wide array of strategies, let you do just that.
Here are five approaches to protecting your portfolio, listed in order of increasing complexity.
Some plain, old-fashioned stock funds have proven records of outpacing their brethren in tough times. They do this by picking stocks that tend to hold up well in down markets, raising some cash when they have trouble finding bargain-priced stocks (but not enough to be considered market timers), or some combination of the two. The problem with these kinds of funds is that they will almost always suffer at least a bit in periods of stress, and because every bear market is different, they may not do as well in future downturns as they have in the past.
Launched in 1970, Sequoia Fund (SEQUX) has compiled a distinguished record, first under Richard Cunniff and William Ruane, disciples of value-investing guru Benjamin Graham, and more recently under Robert Goldfarb and David Poppe. The fund invests in large, predictable businesses that have a lot of cash on their balance sheets but not much debt -- and thus can weather tough economic times. In addition, the managers let the fund's cash position expand when they have trouble finding attractive opportunities -- at last report, 21% of Sequoia's assets were in cash.
Over the past 10 years, Sequoia returned an annualized 6.1%, topping Standard & Poor's 500 Index ($INX) by an average of 3.4 percentage points per year (all returns are through June 30). The fund shone especially brightly during the two big bear markets of the '00s. In 2008, it lost 27%, 10 points less than the S&P 500's decline; in 2002, when the index sank 22.1%, Sequoia dropped only 2.6%. Looking at Sequoia another way, it captured 77% of the monthly increases in the S&P 500 from Jan. 1, 2000, through June 30, 2011, but shared in only 48% of the index's declines.
DGHM All-Cap Value Investor (DGHMX) differs from Sequoia in three notable ways: It's only four years old, it's practically unknown, and it stays fully invested at all times. The fund stood out during the 2008 market conflagration, dropping a relatively modest 22.4% that year. And private accounts run by fund sponsor Dalton, Greiner, Hartman, Maher held up well during the 2000-02 bear market. The accounts, which employ the same bargain-hunting strategy as the fund, essentially matched the S&P 500's 22.1% decline in 2002 but earned double-digit gains in both 2000 and 2001, down years for the market.
DGHM invests mainly in high-quality, undervalued companies that are leaders in their industries and generate strong free cash flow (the cash profits left after the capital outlays needed to maintain a business). The mutual fund is run by 10 analysts, each of whom is responsible for a sector. One of the fund's earliest and best-performing holdings is Teradata (TDC, news), a digital storage company whose stock has more than doubled since September 2007.
Balanced funds can cut your stock losses through a simple maneuver: They hold less in stocks. The typical balanced fund invests about two-thirds of its assets in stocks and the rest in bonds. Vanguard Wellington (VWELX), one of the oldest and cheapest balanced funds (annual expense ratio: 0.30%), benefits from an extra dose of an all-too-rare ingredient: common sense. At least a year before mortgage securities started to implode in 2007, co-manager Edward Bousa began selling shares of banks that had stockpiled them.
View the original article here
In what seemed like the blink of an eye, the stock market's spring swoon mutated into a summer surge. Then, just as quickly, the rally gave way to a huge sell-off. Clearly, investors are unsettled and uncertain about the future -- with good reason.
Risks abound: Joblessness remains disconcertingly high, and economies in the U.S. and much of the developed world are fragile. Notwithstanding the latest bailout of Greece, investors worry that that nation, as well as the bigger countries of Italy and Spain and even the U.S., could default on their debts.
Timing the stock market is notoriously hard, and we don't encourage you to try to. But if the market's gyrations leave you queasy, you may want to go on the defensive. Fortunately, plenty of mutual funds, employing a wide array of strategies, let you do just that.
Here are five approaches to protecting your portfolio, listed in order of increasing complexity.
Some plain, old-fashioned stock funds have proven records of outpacing their brethren in tough times. They do this by picking stocks that tend to hold up well in down markets, raising some cash when they have trouble finding bargain-priced stocks (but not enough to be considered market timers), or some combination of the two. The problem with these kinds of funds is that they will almost always suffer at least a bit in periods of stress, and because every bear market is different, they may not do as well in future downturns as they have in the past.
Launched in 1970, Sequoia Fund (SEQUX) has compiled a distinguished record, first under Richard Cunniff and William Ruane, disciples of value-investing guru Benjamin Graham, and more recently under Robert Goldfarb and David Poppe. The fund invests in large, predictable businesses that have a lot of cash on their balance sheets but not much debt -- and thus can weather tough economic times. In addition, the managers let the fund's cash position expand when they have trouble finding attractive opportunities -- at last report, 21% of Sequoia's assets were in cash.
Over the past 10 years, Sequoia returned an annualized 6.1%, topping Standard & Poor's 500 Index ($INX) by an average of 3.4 percentage points per year (all returns are through June 30). The fund shone especially brightly during the two big bear markets of the '00s. In 2008, it lost 27%, 10 points less than the S&P 500's decline; in 2002, when the index sank 22.1%, Sequoia dropped only 2.6%. Looking at Sequoia another way, it captured 77% of the monthly increases in the S&P 500 from Jan. 1, 2000, through June 30, 2011, but shared in only 48% of the index's declines.
DGHM All-Cap Value Investor (DGHMX) differs from Sequoia in three notable ways: It's only four years old, it's practically unknown, and it stays fully invested at all times. The fund stood out during the 2008 market conflagration, dropping a relatively modest 22.4% that year. And private accounts run by fund sponsor Dalton, Greiner, Hartman, Maher held up well during the 2000-02 bear market. The accounts, which employ the same bargain-hunting strategy as the fund, essentially matched the S&P 500's 22.1% decline in 2002 but earned double-digit gains in both 2000 and 2001, down years for the market.
DGHM invests mainly in high-quality, undervalued companies that are leaders in their industries and generate strong free cash flow (the cash profits left after the capital outlays needed to maintain a business). The mutual fund is run by 10 analysts, each of whom is responsible for a sector. One of the fund's earliest and best-performing holdings is Teradata (TDC, news), a digital storage company whose stock has more than doubled since September 2007.
Balanced funds can cut your stock losses through a simple maneuver: They hold less in stocks. The typical balanced fund invests about two-thirds of its assets in stocks and the rest in bonds. Vanguard Wellington (VWELX), one of the oldest and cheapest balanced funds (annual expense ratio: 0.30%), benefits from an extra dose of an all-too-rare ingredient: common sense. At least a year before mortgage securities started to implode in 2007, co-manager Edward Bousa began selling shares of banks that had stockpiled them.
View the original article here
Monday, October 10, 2011
How to pick stocks in an ugly market
Given the turbulent markets, cash may seem like the best place to be. But if you’re willing to take a little risk for a chance at higher returns, look for a dividend stock with a currency kicker.
What if you can't muster the optimism to buy beaten-up growth stocks today -- and yet you're not so pessimistic that you're out in the backyard burying gold? Over the weekend I started thinking about stocks that pay dividends, but in some currency other than dollars. It strikes me as an attractive combination.
You have to have a degree of long-term optimism to buy growth stocks during the current global sell-off. And maybe you don't right now -- what with the continuing euro debt crisis, the downgrade of U.S. debt to AA from AAA by Standard & Poor's, and stock market reaction Monday that had a whiff of panic. Quite possibly this doesn't feel like a time to be buying any of the stocks I picked in my Aug. 5, column, "10 go-go stocks for a no-grow world."
Maybe you can muster a degree of long-term optimism, but the short term looks very dark. And you're not sure how long that short term will last -- a few days or a few weeks?
In that case, sitting in cash feels like the right thing to do. Buy some gold? Gold topped $1,700 an ounce Monday morning on buying in Asia. It's probably still a good hedge -- if the next stop is $2,000, that's a 17% gain from here. But it's expensive and carries its own risk of a correction. Plus, it has the drawback of not paying any yield. Bonds? Certainly not U.S. Treasurys as everyone tries to figure out the ramifications of the U.S. downgrade.
Because I don't know how long current market conditions might last, I recommend you think about safety, certainly, but safety that pays a little bit. And that's led me to what I'm calling a safe, currency-enhanced dividend play.
For example, I've been thinking, a dividend yield of 3.47% on shares of DuPont (DD, news) looks attractive compared with the 2.34% yield on the 10-year U.S. Treasury. Sure, DuPont is rated just A for the long term by S&P. But that A looks a little better today than it looked when the U.S. was AAA just last Friday.
The one thing that troubles me about DuPont, though, is that this U.S.-based (but global) company does business and pays its dividends in dollars. When it comes to doing business around the world, a weak dollar that promises to become weaker still is a mixed blessing. It certainly gives a U.S. company a pricing edge against competitors that sell in stronger currencies. (I'd hate to be a chemical company selling its goods in Swiss francs right now, for example.) On the other hand, it also raises the cost of raw materials especially those that aren't priced in dollars. I don't think you can call a weaker dollar a plus or a minus for all U.S. companies. Which it is and how much depends on a specific company's mix of business.
But there's no doubt that, all else being equal, I'd prefer if DuPont paid me its dividend in something other than dollars. If the dollar continues to weaken, that dollar-denominated dividend stream will be worth a little less each day.
What would I prefer? Not euros or yen, certainly. But there are still strong currencies in the world. Swiss francs. Canadian and Australian dollars. The Swedish krona and the Norwegian krone. With each drop in the dollar, the euro or the yen, the value of dividend streams from companies doing business in these currencies increases to anyone collecting those dividends in a weak-currency country.
That's not to say that you should pile into just any strong-currency dividend stock. Remember that a strong currency is a mixed blessing for the company doing business in that currency. A Swedish manufacturer going head to head with a U.S. manufacturer is facing a competitor able to sell its goods for less to many customers every time the dollar falls. At the same time, the goods of the Swedish manufacturer get just a little more expensive to many customers every time the krona appreciates. If you want to see the damage that having to compete in a strong currency can do to companies, just take a look at the devastation in Brazil's goods exporting sector from the strong real.
So, again, you need to look at the pluses and minuses of a strong currency on any company. I like Nestlé (NSRGY, news), 3.42% yield paid in Swiss francs, for example. But I worry about the pressure a strong franc puts on the company's prices around the world. (The degree to which Nestlé produces its products locally mitigates some of the competitive disadvantages of a strong Swiss franc.)
So what would be my ideal strong-currency, dividend stock -- besides the obviously strong-currency bit, of course?
View the original article here
What if you can't muster the optimism to buy beaten-up growth stocks today -- and yet you're not so pessimistic that you're out in the backyard burying gold? Over the weekend I started thinking about stocks that pay dividends, but in some currency other than dollars. It strikes me as an attractive combination.
You have to have a degree of long-term optimism to buy growth stocks during the current global sell-off. And maybe you don't right now -- what with the continuing euro debt crisis, the downgrade of U.S. debt to AA from AAA by Standard & Poor's, and stock market reaction Monday that had a whiff of panic. Quite possibly this doesn't feel like a time to be buying any of the stocks I picked in my Aug. 5, column, "10 go-go stocks for a no-grow world."
Maybe you can muster a degree of long-term optimism, but the short term looks very dark. And you're not sure how long that short term will last -- a few days or a few weeks?
In that case, sitting in cash feels like the right thing to do. Buy some gold? Gold topped $1,700 an ounce Monday morning on buying in Asia. It's probably still a good hedge -- if the next stop is $2,000, that's a 17% gain from here. But it's expensive and carries its own risk of a correction. Plus, it has the drawback of not paying any yield. Bonds? Certainly not U.S. Treasurys as everyone tries to figure out the ramifications of the U.S. downgrade.
Because I don't know how long current market conditions might last, I recommend you think about safety, certainly, but safety that pays a little bit. And that's led me to what I'm calling a safe, currency-enhanced dividend play.
For example, I've been thinking, a dividend yield of 3.47% on shares of DuPont (DD, news) looks attractive compared with the 2.34% yield on the 10-year U.S. Treasury. Sure, DuPont is rated just A for the long term by S&P. But that A looks a little better today than it looked when the U.S. was AAA just last Friday.
The one thing that troubles me about DuPont, though, is that this U.S.-based (but global) company does business and pays its dividends in dollars. When it comes to doing business around the world, a weak dollar that promises to become weaker still is a mixed blessing. It certainly gives a U.S. company a pricing edge against competitors that sell in stronger currencies. (I'd hate to be a chemical company selling its goods in Swiss francs right now, for example.) On the other hand, it also raises the cost of raw materials especially those that aren't priced in dollars. I don't think you can call a weaker dollar a plus or a minus for all U.S. companies. Which it is and how much depends on a specific company's mix of business.
But there's no doubt that, all else being equal, I'd prefer if DuPont paid me its dividend in something other than dollars. If the dollar continues to weaken, that dollar-denominated dividend stream will be worth a little less each day.
What would I prefer? Not euros or yen, certainly. But there are still strong currencies in the world. Swiss francs. Canadian and Australian dollars. The Swedish krona and the Norwegian krone. With each drop in the dollar, the euro or the yen, the value of dividend streams from companies doing business in these currencies increases to anyone collecting those dividends in a weak-currency country.
That's not to say that you should pile into just any strong-currency dividend stock. Remember that a strong currency is a mixed blessing for the company doing business in that currency. A Swedish manufacturer going head to head with a U.S. manufacturer is facing a competitor able to sell its goods for less to many customers every time the dollar falls. At the same time, the goods of the Swedish manufacturer get just a little more expensive to many customers every time the krona appreciates. If you want to see the damage that having to compete in a strong currency can do to companies, just take a look at the devastation in Brazil's goods exporting sector from the strong real.
So, again, you need to look at the pluses and minuses of a strong currency on any company. I like Nestlé (NSRGY, news), 3.42% yield paid in Swiss francs, for example. But I worry about the pressure a strong franc puts on the company's prices around the world. (The degree to which Nestlé produces its products locally mitigates some of the competitive disadvantages of a strong Swiss franc.)
So what would be my ideal strong-currency, dividend stock -- besides the obviously strong-currency bit, of course?
View the original article here
How to really fix the federal budget
Families and businesses count and add the numbers honestly. They invest and plan for the future, and borrow when it makes sense. Washington could take a lesson.
The U.S. budget is broken.
No, no, I don't mean that the U.S. is deeply in debt, so deeply that some wonder if we can ever dig ourselves out. And I don't mean that our annual deficit, an estimated $1.65 trillion for fiscal 2011 year, threatens to soar even higher.
I mean that the actual federal budget, the mechanism that's supposed to tell us whether our finances are in good or bad shape, and whether they're getting better or worse, is broken. It doesn't give us an accurate picture of our financial health. And as for giving us guidance for where we're headed, well, it's like using a meat thermometer to gauge the weather, like timing a soft-boiled egg with a sundial, like deciding what to wear by looking at average daily temperatures, like . . . .
Don't get me started.
As a result the entire battle over raising the debt ceiling, cutting the annual federal budget and even, maybe, raising taxes (excuse me, enhancing revenue) someday is a battle fought between two armies blundering across the landscape wrapped in the deepest Scots haar fog and whacking about with their claymores at friends, foes and innocent sheep alike.
And a balanced budget amendment? Nobody can possibly decide whether it's a good idea, a disaster, or a harmless joke, given the present state of our governmental budgeting. To start, what do the terms "budget" and "balanced" even mean in Washington?
OK, enough of a rant. Let's get down to brass balance sheets. We can start with those definitions for "budget" and "balanced."
Look at the scorecard constructed by the Congressional Budget Office for President Barack Obama's fiscal 2011 budget. Revenue, estimates the CBO, will come to $2.27 trillion. But note that only $1.7 trillion of that is "on-budget" revenue according to the CBO. The budget office calls the additional $570 billion "off-budget" revenue.
The same terminology turns up on the spending side. On-budget spending amounts to $3.2 trillion, with off-budget spending adding up to $497 billion.
If you're looking to balance the something called THE budget, what numbers do you look at? And what is off-budget spending anyway?
Turns out most of what's off the budget comes from the collection of Social Security taxes -- revenue -- and payment of Social Security benefits. That money goes into (and flows out of) the Social Security Trust Fund and doesn't get counted as part of the budget. Although as you know if you've been following the current debate about the debt ceiling, Social Security checks do seem, strangely enough for an off-budget item, to come out of the U.S. budget. (Another off-budget item is the U.S. Postal Service. And some spending moves between off- and on-budget. The costs of the Iraq War were initially covered through special emergency appropriations, for example, and weren't "on budget.")
Let's say you define what you mean by budget, maybe by putting all the off-budget items into the budget to create what's called a unified budget. You've still got another problem definition. What do you mean by "balanced"?
Let's say, it's the 1990s and the Social Security Trust Fund is taking in more than the government is paying out. That was true during much of the Clinton presidency (and, in fact, until relatively recently). But you know that this is a temporary situation. As the baby boomers continue to age, the time will come when the trust fund is taking in less than the government is paying out. So considering the absolutely predictable future obligations, when is the budget balanced?
That's a problem with the expected. Now, how about the unexpected? Hurricane Katrina made landfall near New Orleans at the end of August 2005. By October 2005, Congress had appropriated $62.3 billion in supplementary spending for disaster relief and recovery. Even then, voices in Congress argued against that spending because it would increase what was seen at the time as a large deficit.
Or how about the expected unexpected? By this, I mean the business cycle. We know -- or at least everyone except Alan Greenspan knows -- that the economy will go through boom and bust cycles. During the booms, tax revenues will soar and expenditures for some things -- unemployment benefits, for example -- will fall. If the government does nothing to change spending -- such as passing a huge tax cut -- the budget will move toward surplus. During the bust years, tax revenues will fall as the economy slows and the costs of things such as unemployment benefits will climb. The budget will move toward deficit, especially if the government decides that the downturn is severe enough to justify increased spending on infrastructure projects, say, or tax cuts or credits to spur hiring.
We know from the history of the Depression -- from the budget-balancing efforts of President Herbert Hoover and in the very earliest part of President Franklin D. Roosevelt's administration -- and from the 1937 relapse into Depression -- that balancing a budget during a downturn, which requires cutting government spending, makes the downturn worse. When the bust in the cycle produces what some economists call a demand recession, marked by falling private demand for goods and services, increased government spending on goods and services can lessen the depth and duration of the downturn.
So is your definition of a balanced budget one that is always in balance no matter what strikes the economy? Or is it one that says "emergency" spending is OK, even if it puts the budget into the red? (And if the latter, you still have to define "emergency.")
View the original article here
The U.S. budget is broken.
No, no, I don't mean that the U.S. is deeply in debt, so deeply that some wonder if we can ever dig ourselves out. And I don't mean that our annual deficit, an estimated $1.65 trillion for fiscal 2011 year, threatens to soar even higher.
I mean that the actual federal budget, the mechanism that's supposed to tell us whether our finances are in good or bad shape, and whether they're getting better or worse, is broken. It doesn't give us an accurate picture of our financial health. And as for giving us guidance for where we're headed, well, it's like using a meat thermometer to gauge the weather, like timing a soft-boiled egg with a sundial, like deciding what to wear by looking at average daily temperatures, like . . . .
Don't get me started.
As a result the entire battle over raising the debt ceiling, cutting the annual federal budget and even, maybe, raising taxes (excuse me, enhancing revenue) someday is a battle fought between two armies blundering across the landscape wrapped in the deepest Scots haar fog and whacking about with their claymores at friends, foes and innocent sheep alike.
And a balanced budget amendment? Nobody can possibly decide whether it's a good idea, a disaster, or a harmless joke, given the present state of our governmental budgeting. To start, what do the terms "budget" and "balanced" even mean in Washington?
OK, enough of a rant. Let's get down to brass balance sheets. We can start with those definitions for "budget" and "balanced."
Look at the scorecard constructed by the Congressional Budget Office for President Barack Obama's fiscal 2011 budget. Revenue, estimates the CBO, will come to $2.27 trillion. But note that only $1.7 trillion of that is "on-budget" revenue according to the CBO. The budget office calls the additional $570 billion "off-budget" revenue.
The same terminology turns up on the spending side. On-budget spending amounts to $3.2 trillion, with off-budget spending adding up to $497 billion.
If you're looking to balance the something called THE budget, what numbers do you look at? And what is off-budget spending anyway?
Turns out most of what's off the budget comes from the collection of Social Security taxes -- revenue -- and payment of Social Security benefits. That money goes into (and flows out of) the Social Security Trust Fund and doesn't get counted as part of the budget. Although as you know if you've been following the current debate about the debt ceiling, Social Security checks do seem, strangely enough for an off-budget item, to come out of the U.S. budget. (Another off-budget item is the U.S. Postal Service. And some spending moves between off- and on-budget. The costs of the Iraq War were initially covered through special emergency appropriations, for example, and weren't "on budget.")
Let's say you define what you mean by budget, maybe by putting all the off-budget items into the budget to create what's called a unified budget. You've still got another problem definition. What do you mean by "balanced"?
Let's say, it's the 1990s and the Social Security Trust Fund is taking in more than the government is paying out. That was true during much of the Clinton presidency (and, in fact, until relatively recently). But you know that this is a temporary situation. As the baby boomers continue to age, the time will come when the trust fund is taking in less than the government is paying out. So considering the absolutely predictable future obligations, when is the budget balanced?
That's a problem with the expected. Now, how about the unexpected? Hurricane Katrina made landfall near New Orleans at the end of August 2005. By October 2005, Congress had appropriated $62.3 billion in supplementary spending for disaster relief and recovery. Even then, voices in Congress argued against that spending because it would increase what was seen at the time as a large deficit.
Or how about the expected unexpected? By this, I mean the business cycle. We know -- or at least everyone except Alan Greenspan knows -- that the economy will go through boom and bust cycles. During the booms, tax revenues will soar and expenditures for some things -- unemployment benefits, for example -- will fall. If the government does nothing to change spending -- such as passing a huge tax cut -- the budget will move toward surplus. During the bust years, tax revenues will fall as the economy slows and the costs of things such as unemployment benefits will climb. The budget will move toward deficit, especially if the government decides that the downturn is severe enough to justify increased spending on infrastructure projects, say, or tax cuts or credits to spur hiring.
We know from the history of the Depression -- from the budget-balancing efforts of President Herbert Hoover and in the very earliest part of President Franklin D. Roosevelt's administration -- and from the 1937 relapse into Depression -- that balancing a budget during a downturn, which requires cutting government spending, makes the downturn worse. When the bust in the cycle produces what some economists call a demand recession, marked by falling private demand for goods and services, increased government spending on goods and services can lessen the depth and duration of the downturn.
So is your definition of a balanced budget one that is always in balance no matter what strikes the economy? Or is it one that says "emergency" spending is OK, even if it puts the budget into the red? (And if the latter, you still have to define "emergency.")
View the original article here
Saturday, October 8, 2011
Keeping your cool in a brutal market
In rough times, the usual advice for everyday investors is to stick to your plan and avoid rash moves. But that’s not easy to do. These strategies may help.
When the markets roil, many advisers stick to the same mantra: Stay with the long-term plan. Don't do anything rash. In fact, don't do anything at all. But even for committed buy-and-hold investors, that's easier said than done.
The market is officially in roller-coaster territory now. Two weeks ago, the Standard & Poor's 500 Index ($INX) was up a very respectable 5% for the year. Late last week, the index went negative. Investors finding it tough to stick with their long-term investment plan these days are not alone. Most investors buy high and sell low, most of the time, say experts.
"I've gotten a ton of calls," says David Peterson, the president of Peak Capital Investment Services in Highlands Ranch, Colo. "But the advice I've given is not to panic. We've gone through corrections before, and if you look at where the market was a year ago, we're still up from that."
Sometimes, panic can be instructive, advisers say. If a long-term plan looks good only when the market's going up, then maybe it's not such a great plan. After all, a solid investment strategy should be tailored to include enough risk-taking to help you achieve your long-term goals, but not so much that you freak out over every decline in the market. But if this is a question of mind over matter, there are strategies that can help you do the right thing.
Any decisions you make during a volatile period will be colored by your emotional state, says Terrance Odean, a finance professor at the University of California, Berkeley's Haas School of Business who has studied investor behavior. "You don't want to be making your decisions under emotional duress," he says. "Movies are good. I once under similar circumstances read three of Raymond Chandler's books in a row. If you're in California, you might consider the beach."
If you can temporarily avoid thinking about the temptation to sell your holdings to avoid further losses, advisers say, it's often enough to get you back on track and refocused on your long-term investing goals.
Of course, tuning out isn't for everyone. E-Trade Financial customers took the opposite approach on the first big down day; logins to the online broker's mobile trading platform were up 30% compared with the previous week, and mobile trades hit an all-time high, nearly twice as many as the previous week's average. Whether you're tuning in or tuning out, try to keep things in perspective.
Take a deep breath, and take a look at a one-year chart of the market, says Christopher Larkin, E-Trade's senior vice president of the U.S. retail brokerage. "It's really going to ease your mind," he says. (Really. On a yearlong chart, the market's still up.)
Having a long-term investing plan doesn't mean sitting on your hands, says Fran Kinniry, a principal in Vanguard's Investment Group. If you want a portfolio that's half stocks and half bonds, you've got to buy stocks when prices drop and sell when they rise to keep things in balance. Sure, most investors do the opposite. But how do you feel when you walk into the mall and spy a 50% off sign?
"In most purchases, the way to get people interested is to put them on sale," says Kinniry. "And the reality is that the market is cheaper today than it was yesterday."
Investment options have been growing exponentially since the market downturn in 2008, as more investors want better protection against losses, Larkin says. After a sharp slide, the cost of such portfolio insurance does rise, but it's still out there for investors who decide the protection is worth the cost, he says. For example, buying a put option gives you the right to sell a stock at a set "strike price" until a certain date; the value of the option increases the further the stock falls below that strike price. While prices for such options vary, recently you could protect a $120,000 position in the SPDR S&P 500 (SPY, news) for about $7,500, or 6% of its value, according to data provided by E-Trade.
In some cases, selling part of a position so you can sleep better at night isn't such a bad idea, says Marc Pearlman, an investment adviser based in Williamsville, N.Y. "For the person who's prepared, they already know that under these circumstances they might take a loss, and it's not a panic," he says.
However, this strategy shouldn't be relied on to unmethodically dump positions. Pearlman recommends making the tiniest possible change needed to calm your nerves, but still maintain your stakes until things settle down.
When you sit down to make or revise your long-term financial plan, you probably do it in a moment of relative calm. "Our appetite for risk depends a good deal on our emotional state," Odean says.
What seems like a reasonable amount of risk when you're feeling good might seem insanely reckless on a day when the market plunges. The next time you're going over your plan, consider dialing back the amount of risk a bit, "acknowledging that when fear grabs you, it's hard to stick with the plan, and starting off with a more conservative plan than you would if you were Spock from 'Star Trek,'" Odean says.
To help investors figure out their true risk tolerance, E-Trade offers portfolio stress tests, showing how much a given investment might lose in a repeat of various market calamities, Larkin says.
View the original article here
When the markets roil, many advisers stick to the same mantra: Stay with the long-term plan. Don't do anything rash. In fact, don't do anything at all. But even for committed buy-and-hold investors, that's easier said than done.
The market is officially in roller-coaster territory now. Two weeks ago, the Standard & Poor's 500 Index ($INX) was up a very respectable 5% for the year. Late last week, the index went negative. Investors finding it tough to stick with their long-term investment plan these days are not alone. Most investors buy high and sell low, most of the time, say experts.
"I've gotten a ton of calls," says David Peterson, the president of Peak Capital Investment Services in Highlands Ranch, Colo. "But the advice I've given is not to panic. We've gone through corrections before, and if you look at where the market was a year ago, we're still up from that."
Sometimes, panic can be instructive, advisers say. If a long-term plan looks good only when the market's going up, then maybe it's not such a great plan. After all, a solid investment strategy should be tailored to include enough risk-taking to help you achieve your long-term goals, but not so much that you freak out over every decline in the market. But if this is a question of mind over matter, there are strategies that can help you do the right thing.
Any decisions you make during a volatile period will be colored by your emotional state, says Terrance Odean, a finance professor at the University of California, Berkeley's Haas School of Business who has studied investor behavior. "You don't want to be making your decisions under emotional duress," he says. "Movies are good. I once under similar circumstances read three of Raymond Chandler's books in a row. If you're in California, you might consider the beach."
If you can temporarily avoid thinking about the temptation to sell your holdings to avoid further losses, advisers say, it's often enough to get you back on track and refocused on your long-term investing goals.
Of course, tuning out isn't for everyone. E-Trade Financial customers took the opposite approach on the first big down day; logins to the online broker's mobile trading platform were up 30% compared with the previous week, and mobile trades hit an all-time high, nearly twice as many as the previous week's average. Whether you're tuning in or tuning out, try to keep things in perspective.
Take a deep breath, and take a look at a one-year chart of the market, says Christopher Larkin, E-Trade's senior vice president of the U.S. retail brokerage. "It's really going to ease your mind," he says. (Really. On a yearlong chart, the market's still up.)
Having a long-term investing plan doesn't mean sitting on your hands, says Fran Kinniry, a principal in Vanguard's Investment Group. If you want a portfolio that's half stocks and half bonds, you've got to buy stocks when prices drop and sell when they rise to keep things in balance. Sure, most investors do the opposite. But how do you feel when you walk into the mall and spy a 50% off sign?
"In most purchases, the way to get people interested is to put them on sale," says Kinniry. "And the reality is that the market is cheaper today than it was yesterday."
Investment options have been growing exponentially since the market downturn in 2008, as more investors want better protection against losses, Larkin says. After a sharp slide, the cost of such portfolio insurance does rise, but it's still out there for investors who decide the protection is worth the cost, he says. For example, buying a put option gives you the right to sell a stock at a set "strike price" until a certain date; the value of the option increases the further the stock falls below that strike price. While prices for such options vary, recently you could protect a $120,000 position in the SPDR S&P 500 (SPY, news) for about $7,500, or 6% of its value, according to data provided by E-Trade.
In some cases, selling part of a position so you can sleep better at night isn't such a bad idea, says Marc Pearlman, an investment adviser based in Williamsville, N.Y. "For the person who's prepared, they already know that under these circumstances they might take a loss, and it's not a panic," he says.
However, this strategy shouldn't be relied on to unmethodically dump positions. Pearlman recommends making the tiniest possible change needed to calm your nerves, but still maintain your stakes until things settle down.
When you sit down to make or revise your long-term financial plan, you probably do it in a moment of relative calm. "Our appetite for risk depends a good deal on our emotional state," Odean says.
What seems like a reasonable amount of risk when you're feeling good might seem insanely reckless on a day when the market plunges. The next time you're going over your plan, consider dialing back the amount of risk a bit, "acknowledging that when fear grabs you, it's hard to stick with the plan, and starting off with a more conservative plan than you would if you were Spock from 'Star Trek,'" Odean says.
To help investors figure out their true risk tolerance, E-Trade offers portfolio stress tests, showing how much a given investment might lose in a repeat of various market calamities, Larkin says.
View the original article here
Friday, October 7, 2011
More in debt than Uncle Sam
As Americans ridicule their government for running up huge deficits, household balance sheets are in their worst shape in 80 years. But investment discipline can start to repair the damage.
You may remember J. Wellington Wimpy, more commonly known simply as Wimpy, Popeye's beloved friend from the iconic comic strip. Wimpy was soft-spoken and intelligent, but also cowardly, lazy, stingy and gluttonous. A true scam artist, Wimpy usually finagled his favorite meal, a hamburger, from some unsuspecting patron at the local diner. Wimpy's parsimonious ways included his famous con line, "I'll gladly pay you Tuesday for a hamburger today."
Decades later, this character, created in 1932 during the Great Depression, has become a symbol of fiscal irresponsibility.
Today, the United States is facing its own Wimpy-esque moment in the form of the debt ceiling. The free burgers have flowed for some time now, but the patrons have grown wise to the scam. The pitch of pushing off today's payment until some future Tuesday has become a bit haggard and worn thin for many in America.
Simply look to Greece, Portugal, Spain and other countries to see what it is like to have one's hamburgers taken away. The forced diet does not look pretty.
Strangely, as the U.S. citizenry passionately criticizes its government for running up a budget deficit, a greater irony is afoot: When it comes to debt management, Americans are, sadly, worse than their government.
While government debt sits at 94% of national revenue, U.S. household debt sits at a whopping 107% of personal income.
The household balance sheets of Americans are in worse condition than at any time since the Great Depression. The ratio of household debt to gross domestic product is greater than at any time since 1929. And while we all are trying to comprehend what life will be like as a poorer nation, many Americans have not yet comprehended their own personal poverty.
From the early 1940s through the late 1960s, an ethos of saving before spending ruled the roost. If you sought to buy a house, a 20% down payment was required. Similarly, substantial savings were required to buy a car. Home furnishings, clothing and more were purchased primarily with cash.
By the 1970s, however, rampant inflation helped form a debt culture that found footing and gained steam.
If you saved, inflation threatened to erode the value of your savings, while the price of your desired purchases continued to rise. What was the point of saving when you could buy with little to nothing down, deduct interest from your federal tax obligations and have those things you longed for?
Over the coming decades, American household debt ballooned, eventually doubling from $7 trillion to $14 trillion between 2001 and 2007. Debt fears, however, were assuaged by the rapidly growing value of real estate; homeowners used equity lines to buy more property and cars, as well as pay for vacations and toys. Burgers were flowing for all.
Then in 2008, the sudden and violent decline in home prices revealed just how bad the debt binge had been. Tuesday had finally arrived, and, like Wimpy, our wallets were a bit too thin to meet our obligations.
A renewed focus on government fiscal irresponsibility should lead us to honest self-examination. At the heart of this audit should be confronting personal debt and embracing basic investing disciplines.
Each person must make a decision to feed the debt furnace or build a retirement engine.
Like Wimpy, we all experience the gnawing hunger to consume more than we need. Each time we reach out, through credit, for a burger today, we take our future dollars and throw them into the blazing furnace of consumption. The heat of the moment is delightful, but the result is the poverty that's unfolding before our nation.
When we behave like wise and disciplined investors, we resist our pulsing appetites, take our hard-earned dollars and direct a predetermined portion to smart, long-term investments. In doing so, such investors build an engine through the miraculous power of compounding interest.
Unlike Wimpy and other debtors, this interest works in your favor. Ben Franklin understood that for such savers, "money can beget money, and its offspring can beget more." Albert Einstein called compounding the "eighth wonder of the world."
Those who reject debt and invest wisely create a powerful engine, so that Tuesday's obligations can be fully met on time, leaving a few burgers to spare.
View the original article here
You may remember J. Wellington Wimpy, more commonly known simply as Wimpy, Popeye's beloved friend from the iconic comic strip. Wimpy was soft-spoken and intelligent, but also cowardly, lazy, stingy and gluttonous. A true scam artist, Wimpy usually finagled his favorite meal, a hamburger, from some unsuspecting patron at the local diner. Wimpy's parsimonious ways included his famous con line, "I'll gladly pay you Tuesday for a hamburger today."
Decades later, this character, created in 1932 during the Great Depression, has become a symbol of fiscal irresponsibility.
Today, the United States is facing its own Wimpy-esque moment in the form of the debt ceiling. The free burgers have flowed for some time now, but the patrons have grown wise to the scam. The pitch of pushing off today's payment until some future Tuesday has become a bit haggard and worn thin for many in America.
Simply look to Greece, Portugal, Spain and other countries to see what it is like to have one's hamburgers taken away. The forced diet does not look pretty.
Strangely, as the U.S. citizenry passionately criticizes its government for running up a budget deficit, a greater irony is afoot: When it comes to debt management, Americans are, sadly, worse than their government.
While government debt sits at 94% of national revenue, U.S. household debt sits at a whopping 107% of personal income.
The household balance sheets of Americans are in worse condition than at any time since the Great Depression. The ratio of household debt to gross domestic product is greater than at any time since 1929. And while we all are trying to comprehend what life will be like as a poorer nation, many Americans have not yet comprehended their own personal poverty.
From the early 1940s through the late 1960s, an ethos of saving before spending ruled the roost. If you sought to buy a house, a 20% down payment was required. Similarly, substantial savings were required to buy a car. Home furnishings, clothing and more were purchased primarily with cash.
By the 1970s, however, rampant inflation helped form a debt culture that found footing and gained steam.
If you saved, inflation threatened to erode the value of your savings, while the price of your desired purchases continued to rise. What was the point of saving when you could buy with little to nothing down, deduct interest from your federal tax obligations and have those things you longed for?
Over the coming decades, American household debt ballooned, eventually doubling from $7 trillion to $14 trillion between 2001 and 2007. Debt fears, however, were assuaged by the rapidly growing value of real estate; homeowners used equity lines to buy more property and cars, as well as pay for vacations and toys. Burgers were flowing for all.
Then in 2008, the sudden and violent decline in home prices revealed just how bad the debt binge had been. Tuesday had finally arrived, and, like Wimpy, our wallets were a bit too thin to meet our obligations.
A renewed focus on government fiscal irresponsibility should lead us to honest self-examination. At the heart of this audit should be confronting personal debt and embracing basic investing disciplines.
Each person must make a decision to feed the debt furnace or build a retirement engine.
Like Wimpy, we all experience the gnawing hunger to consume more than we need. Each time we reach out, through credit, for a burger today, we take our future dollars and throw them into the blazing furnace of consumption. The heat of the moment is delightful, but the result is the poverty that's unfolding before our nation.
When we behave like wise and disciplined investors, we resist our pulsing appetites, take our hard-earned dollars and direct a predetermined portion to smart, long-term investments. In doing so, such investors build an engine through the miraculous power of compounding interest.
Unlike Wimpy and other debtors, this interest works in your favor. Ben Franklin understood that for such savers, "money can beget money, and its offspring can beget more." Albert Einstein called compounding the "eighth wonder of the world."
Those who reject debt and invest wisely create a powerful engine, so that Tuesday's obligations can be fully met on time, leaving a few burgers to spare.
View the original article here
Monday, October 3, 2011
Time to prepare for a new recession
With the US credit downgrade and continued market turmoil, the odds of another recession keep rising. Take a close look at where your portfolio stands in stocks, funds, bonds and gold.
The risk of another recession in the U.S. is growing, and investors need to adjust their portfolio holdings accordingly.
The downgrade of U.S. Treasury debt late last week only underscores the need to examine the investments you own, why you own them and the risk you're taking. The types and amount of domestic and international stocks in your portfolio, and your opinion of emerging markets, cash and U.S. government bonds -- even the reason for owning gold -- all need to be reassessed in order for your investments to thrive in a challenging, slow- or no-growth environment.
"At this point, it's only a question of whether (a recession) has already begun," said David Rosenberg, the chief economist and strategist at Toronto-based investment manager Gluskin Sheff.
Investors clearly believe they already know the answer, given the punishing sell-off in stocks worldwide over the past several days.
And now that debt-ratings firm Standard & Poor's has stripped the U.S. of its triple-A rating for the first time, dropping it a notch to AA+ out of concern over the U.S. political process, both stock and bond investors have yet another imperative to consider new ways to take advantage of less-forgiving market conditions.
"We are not likely done with this correction, as the factors that triggered this sell-off have yet to be addressed, let alone successfully resolved," said Sam Stovall, the chief investment strategist at Standard & Poor's Equity Research, in a note to clients on Friday.
While another recession within 12 months is more likely -- many observers now put the odds at about one in three -- those who believe the economy will escape this mud-stained "soft patch" without a setback may ultimately be right.
Regardless, it's clear that the investing playbook is changing. Here's what you need to know to stay ahead in the game:
Stock investors realize the U.S. economy has been on a slow track, but until last month the overriding belief was that domestic growth would improve over time.
So when the Federal Reserve's stimulus package known as QE2 stopped at the end of June, investors also knew the frail patient would still need help getting around. The hope was that a robust corporate sector would provide support with capital spending and job creation.
Then the picture darkened. The confidence-sapping debt-ceiling debate, Washington's newfound austerity and economic data that cast doubt about the efficacy of QE2 has stoked fears that recession, not inflation, is the gravest threat to fragile U.S. and global markets.
"What we had was an artificial recovery propped up by deficit spending and monetary stimulus," said Rob Arnott, founder of Research Affiliates, a Newport Beach, Calif.-based investment management firm.
"If the private sector failed to have its animal spirits invigorated by the fiscal and monetary stimulus, then the stimulus failed," he added. "And that puts us back into a recession that never really ran its course."
Such a backdrop isn't conducive to either corporate or consumer spending. Accordingly, risk-averse investors are now focusing on the return of capital more than return on capital. Stock and fund buyers are embracing traditional "recession-proof," dividend-rich sectors such as utilities, health care and consumer staples.
Within those sectors, look for companies that have above-average dividend yields, are flush with cash and sell goods and services that people need regardless of the economy. In the best cases, solid businesses can take advantage of weaker rivals to gain market share and emerge from a downturn even stronger.
"A focus on hybrids or income-equity portfolios that generate a yield far superior than what you can garner in the Treasury market makes perfect sense," Gluskin-Sheff's Rosenberg said in an e-mail.
More sophisticated investors can maximize their return potential by reducing exposure to riskier assets such as small, aggressive growth stocks and adopting a bigger-is-better approach, Rosenberg added.
"Relative-value strategies that can go short low-quality and high-cyclical equities while going long a basket of high-quality and low-cyclical equities will be a moneymaker in this environment," he said.
Mutual funds designed to make money when the market loses are also worth considering as a hedge. Jeffrey Hirsch, the editor-in-chief of the Stock Trader's Almanac, favors two so-called bear-market funds, Grizzly Short Fund (GRZZX) and Federated Prudent Bear Fund (BEARX).
Hirsch said he expects further stock declines: "My number is Dow 10,000," he said, referring to his near-term target for the Dow Jones Industrial Average ($INDU).
"Avoid taking any hasty long positions in individual stocks and the broad market," he added. "You can probably buy anything you want cheaper over the next few months."
Still, with volatility and uncertainty swirling, don't take anything for granted. Investors need to keep an especially close eye on their portfolios, as conditions can change quickly. Health care and consumer staples, for example, are two areas to be a cautious about overweighting, as they tend to lag when the market begins another upward move, said Stuart Freeman, the chief equity strategist at Wells Fargo Advisors.
View the original article here
The risk of another recession in the U.S. is growing, and investors need to adjust their portfolio holdings accordingly.
The downgrade of U.S. Treasury debt late last week only underscores the need to examine the investments you own, why you own them and the risk you're taking. The types and amount of domestic and international stocks in your portfolio, and your opinion of emerging markets, cash and U.S. government bonds -- even the reason for owning gold -- all need to be reassessed in order for your investments to thrive in a challenging, slow- or no-growth environment.
"At this point, it's only a question of whether (a recession) has already begun," said David Rosenberg, the chief economist and strategist at Toronto-based investment manager Gluskin Sheff.
Investors clearly believe they already know the answer, given the punishing sell-off in stocks worldwide over the past several days.
And now that debt-ratings firm Standard & Poor's has stripped the U.S. of its triple-A rating for the first time, dropping it a notch to AA+ out of concern over the U.S. political process, both stock and bond investors have yet another imperative to consider new ways to take advantage of less-forgiving market conditions.
"We are not likely done with this correction, as the factors that triggered this sell-off have yet to be addressed, let alone successfully resolved," said Sam Stovall, the chief investment strategist at Standard & Poor's Equity Research, in a note to clients on Friday.
While another recession within 12 months is more likely -- many observers now put the odds at about one in three -- those who believe the economy will escape this mud-stained "soft patch" without a setback may ultimately be right.
Regardless, it's clear that the investing playbook is changing. Here's what you need to know to stay ahead in the game:
Stock investors realize the U.S. economy has been on a slow track, but until last month the overriding belief was that domestic growth would improve over time.
So when the Federal Reserve's stimulus package known as QE2 stopped at the end of June, investors also knew the frail patient would still need help getting around. The hope was that a robust corporate sector would provide support with capital spending and job creation.
Then the picture darkened. The confidence-sapping debt-ceiling debate, Washington's newfound austerity and economic data that cast doubt about the efficacy of QE2 has stoked fears that recession, not inflation, is the gravest threat to fragile U.S. and global markets.
"What we had was an artificial recovery propped up by deficit spending and monetary stimulus," said Rob Arnott, founder of Research Affiliates, a Newport Beach, Calif.-based investment management firm.
"If the private sector failed to have its animal spirits invigorated by the fiscal and monetary stimulus, then the stimulus failed," he added. "And that puts us back into a recession that never really ran its course."
Such a backdrop isn't conducive to either corporate or consumer spending. Accordingly, risk-averse investors are now focusing on the return of capital more than return on capital. Stock and fund buyers are embracing traditional "recession-proof," dividend-rich sectors such as utilities, health care and consumer staples.
Within those sectors, look for companies that have above-average dividend yields, are flush with cash and sell goods and services that people need regardless of the economy. In the best cases, solid businesses can take advantage of weaker rivals to gain market share and emerge from a downturn even stronger.
"A focus on hybrids or income-equity portfolios that generate a yield far superior than what you can garner in the Treasury market makes perfect sense," Gluskin-Sheff's Rosenberg said in an e-mail.
More sophisticated investors can maximize their return potential by reducing exposure to riskier assets such as small, aggressive growth stocks and adopting a bigger-is-better approach, Rosenberg added.
"Relative-value strategies that can go short low-quality and high-cyclical equities while going long a basket of high-quality and low-cyclical equities will be a moneymaker in this environment," he said.
Mutual funds designed to make money when the market loses are also worth considering as a hedge. Jeffrey Hirsch, the editor-in-chief of the Stock Trader's Almanac, favors two so-called bear-market funds, Grizzly Short Fund (GRZZX) and Federated Prudent Bear Fund (BEARX).
Hirsch said he expects further stock declines: "My number is Dow 10,000," he said, referring to his near-term target for the Dow Jones Industrial Average ($INDU).
"Avoid taking any hasty long positions in individual stocks and the broad market," he added. "You can probably buy anything you want cheaper over the next few months."
Still, with volatility and uncertainty swirling, don't take anything for granted. Investors need to keep an especially close eye on their portfolios, as conditions can change quickly. Health care and consumer staples, for example, are two areas to be a cautious about overweighting, as they tend to lag when the market begins another upward move, said Stuart Freeman, the chief equity strategist at Wells Fargo Advisors.
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