Check Your Retirement Plan at Year End

Is your 401(k) plan ripping you off?

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

For most of us, a 401(k) is like a big rock that we don’t want to turn over. We’re afraid of what may be skittering out when we do.

An untold number of 401(k) plans are charging employees too much to manage and administer their retirement kitties. The gremlins of excessive fees add up over time.

While it doesn’t sound like a lot, a one percentage point increase in plan investment fees can cut your retirement income by 28 percent over a work life of 25 years, according to the U.S. Department of Labor (DOL).

Lately, though, employees have silently been winning battles in getting these fees reduced and restoring hope for a decent retirement. Combined with a new DOL rule that will provide expense disclosure, this has been a watershed year for employees fighting to get a decent 401(k) program.

Some 85,000 employees in the $6 billion General Dynamics Corporation (GD) 401(k) plan recently won a settlement in a lawsuit against the company. The workers claimed that they were being overcharged on fees within the plan.

As part of the settlement, the defense contractor’s insurers will put $15 million back into the plan, which will then be regularly reviewed by independent consultants to see that the employees are getting a fair shake on the fees. The company denies any wrongdoing.

Along with another recent case against Caterpillar, Inc. (CAT) by its employees, the General Dynamics suit is a landmark. This litigation represents some of the first victories by employees over bosses who bury and pass along needlessly onerous expenses in 401(k)s.

The General Dynamics settlement is a keystone because it appoints a watchdog, who is in charge of getting the best deal for employees on plan services. For example, administrative fees will be monitored by an independent fiduciary not connected to the company.

Some plans also charge high fees for middlemen called recordkeepers, who are involved in most 401(k)s. Instead of charging reasonable flat fees, these administrators were getting a percentage of assets under management, which was an awful arrangement for employees. The General Dynamics settlement mandated lower expenses for employees.

“Recordkeeping is a commodity,” says Jerome Schlichter, a St. Louis-based labor attorney who represented the General Dynamics employees and workers in similar cases. “Every 401(k) needs one, but cost has nothing to do with the size of the account. It should be a flat fee.”

Schlichter first filed a wave of similar suits against 14 large employers in 2006. Two of the cases have been dismissed, three are in the process of settlement and nine are outstanding.

These suits have shed needed sunlight on practices that few employees know about and most employers are loath to admit. Here are some things you should check with your 401(k) administrator, CFO or human resources department before the end of the year:

• Do you have retail-class funds within your 401(k)? This is the equivalent of Wal-Mart going into another store, buying something off the shelf and charging you the same undiscounted price. Funds within 401(k)s should be institutionally priced. That means expense ratios less than 0.10 percent annually for a stock index fund and 0.15 percent for a bond fund.
• No-bid funds. Your plan administrator should get the best diversified portfolio at the lowest cost. They should bid out services and fund management on a regular basis to do this. That’s their responsibility under federal law.
• Independent Review. An outside expert such as a fiduciary should thoroughly vet the plan to see that vendors are giving you the best price. Every plan can and should do this.

If you have no other contact with your company’s human resource department this year, make sure they are following up on getting you a fair shake in your 401(k). The savings will add up over time and boost your retirement fund.

Every dollar counts in a 401(k) these days since the average American has saved less than 7 percent of the desired amount for a comfortable retirement, reports a Wells Fargo survey.

In the case of General Dynamics, employees will see an additional $1.2 million in their plan.
Sometimes turning over that rock can be quite profitable.

A Holiday Story

Getting the best return on life

By John F. Wasik (Reuters)
Author of The Cul-de-Sac Syndrome

I was in a homeless shelter recently with my daughters and neighbors serving a hot meal to some folks who didn’t have a roof over their heads.

They smiled gratefully and thanked us as they sampled my pasta recipe and other dishes. This was a frozen moment when I had to ponder the investment one makes not in stocks, bonds and funds, but life itself.

My friend Mitch Anthony, speaker and author of “the Bean is Not Green,” always has great insights on this process. He says we need to take stock of our “return on life (ROL).”

Return on life is about measuring what’s important to you in non-tangible terms. A warm place to sleep. A job. Health insurance. A decent meal with people you love.

To evaluate your return on life, you literally have to stop thinking about money. Just stop. Look at what you have and what you can give. What do you value?

“Everyone has a unique set of values,” Mitch tells me. “We have a vision of life. What adds to or subtracts from it? What are our responsibilities to others?”

To gauge ROL, we need to know how much and how often we value certain things. Are we spending too much time at work or worrying about it at home? Do the things that matter most occupy the least amount of our daily existence? What have we put in the backs of drawers that need to be revealed?

In order for us to have this self-conversation, we need to throw out some ideas that have dominated the financial arena and poisoned our lives.

Forget about forecasts.
Nobody has a decent crystal ball, especially after 2008. The world is moving too fast. You can’t plan your life around a business channel. What are your needs? How can you best address them with current resources and time?

Stop focusing on performance.
So you didn’t get a raise or bonus this year. Did you achieve what you set out to do? Are you getting closer to your goals? Life isn’t a steady upward curve. It really looks more like the stock market, which is a jagged line.

Forget about timing.
Some people can plan careers and they are defined by certain milestones: Becoming a manager or partner, getting the big raise, retiring. Life going forward won’t be that simple. We will gradually retire or work into our ninth decades. We will un-retire and pursue different careers. Work isn’t what it used to be.

The one thing we shouldn’t embrace is regret, that indisputable anxiety that we’ve not gotten the best return on life. Or to quote Stephen Sondheim from A Little Night Music: “Isn’t it rich/Isn’t it queer?/Losing my timing/this late in my career?”

The best ROL leaves us with no residue of remorse. It flows organically, like an idea whose time has come. You won’t find it jumping out at you from the business headlines or a blog.

How do you know you’re making a good life investment? You can feel it in your gut, your neck and your heart. I’m not talking about a mutual fund or bond that may or may not pay you back. I’m talking guarantees with the full faith and credit of what makes you tick.

For some, it may be learning piano or a new language. For others, it may be volunteer work or a trip to Antarctica.

I can tell you I’m finding immense pleasure just cooking for my family and others, taking that daily walk and breathing deeply. I can’t value any of these things in monetary terms, but they have value beyond words. I can measure them in warm smiles.

Most importantly, you can gauge your return on life in terms of what you can do for others. This is the compound interest of giving and it could be anything from a kind word to going to a friend’s funeral and talking with survivors.

There’s going to be so much in life that will make you sick with anger and grief. You’ll get a much better return from your life energy if you can multiply good will. That’s the most valuable asset of all.

Happy holidays and peace, prosperity and health!

Halt HAMP

Cut the government’s home modification program

By John F. Wasik, author of The Cul-de-Sac Syndrome

The government’s Home Affordable Modification Program (HAMP) should be scrapped. It was flawed from the beginning and is not going to get much better in helping people keep their homes. It’s time to start over.

This is not a Scrooge-like gesture, and it certainly won’t decrease the surplus population of foreclosed homes on the U.S. market. The HAMP should be put out of its misery because it’s ill conceived and can be replaced with some more effective measures.

If the White House was truly serious about preserving homeownership, it would have never designed HAMP the way it did. It was loaded with laughable incentives for lenders to lower rates on troubled mortgages, including a $1,000 payment to servicers and lenders. What was the White House thinking? Just getting a decent lawyer to open a file could cost a bank $1,000.

Although the government said it has started more than 3.7 loan modifications, it ignores a stark economic reality: in many cases it makes more sense for the bank to continue to foreclose than to work with the borrower. And the people who are in the worst trouble still can’t afford the loan even at a lower interest rate or are jobless.

Bankers won’t say this, but may prefer foreclosure to modification. Then they can get defaulted loans off their books and eventually lend more money. They can also resell the property once it passes through foreclosure. And during the process, they can assess even more fees for late payments.

The most egregious flaw in HAMP and related programs is that it’s voluntary. In far-too-many cases, banks don’t have to do much of anything except show up in court with their team of lawyers, knowing that homeowners are broke and can’t afford decent representation. Banks don’t even have to return phone calls.

Little wonder that Darrell Issa (R-California), the incoming chairman of the House Oversight Committee, wants to dump HAMP. Let’s say that the government has succeeded in obtaining 500,000 permanent loan modifications where mortgage rates are reduced.

If you round up the number of foreclosures from 2008 to the present to about 6 million, that means that more than 90 percent of defaulted loans go into foreclosure. That’s an appalling record if you’re a government agency trying to save homes. Even if the banks manage to survive federal and state probes into allegedly “robo signing” dodgy loan documents, HAMP still won’t be of much help to struggling homeowners.

Persistent unemployment — at 9.8 percent nationally — is going to push even more homeowners into foreclosure. Even the Fed’s $600 billion QE2 easing of long-term rates isn’t going to stem this ongoing tragedy.

Yet killing HAMP without replacing it with a better program is irresponsible. At least three alternatives loom:

Rent-to-own. Let’s say mortgage servicers are granted the property’s title subject to agreement of the borrower and other interested parties as an alternative to foreclosure. Homeowners are not evicted and become renters at a lower monthly payment. They can rebuild equity and can repurchase at a new market value in the future.

Unemployment Forbearance. While these programs are already offered by some lenders, make them widespread and flexible. Lose your job? You can skip principal payments and only pay interest until you or a spouse/partner are re-employed.

Bankruptcy Write-Off. What if you file to reorganize your debts? There needs to be a provision to write down mortgage balances in some way. You can do that with every other kind of debt.

Any change in HAMP will have to acknowledge that the program does nothing to square a home’s mortgaged value with its current market value. In the hardest-hit areas, home prices have dropped from one-third to one half.

Corporations revalue and dispose of downgraded assets all the time and take write-downs every quarter based on various forms of depreciation. Why can’t homeowners do the same? Turnabout is fair play. After all, didn’t the Fed dole some $3.3 trillion in aid to banks during the meltdown, including some $1.25 trillion in distressed mortgage-backed securities?

Congress has imbued the tax code with multiple tax breaks to promote homeownership. You can deduct everything from mortgage interest on first, second and home-equity loans, escape capital gains taxes in most sales and even write off property taxes (if you itemize).

The biggest break of all would be to legally trigger the right to re-negotiate a home mortgage if a property declines in value. If the American dream is still important to Washington, this is a game changer.

Gold Headed for a Bust?

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

John Wasik

Coming soon: the loud thud of a gold bust

Some time in the future the price of gold will crash and it won’t have a fairy-tale ending for the millions of investors who piled on in recent months.

If I could tell you when gold was going to bust, I’d likely be wrong or bigger than Warren Buffett, so I won’t even try. Just be incredibly cautious now. There are too many signs that gold is frothier than a Starbucks cappuccino.

It’s not that I don’t nod in agreement when gold bugs rant about why their metal holds a special value now. The dollar is in deep trouble as the U.S. sinks deeper into debt. Will Portugal and Spain be the next Ireland on the bailout boulevard? Ben Bernanke may not be able to put a dent in U.S. unemployment or the intractable housing crisis.

And yes, I also know the argument on how gold is nowhere near its inflation-adjusted equivalent of its high in January, 1980. According to the Leuthold Group, gold will have to hit $2,400 an ounce to match the $850 high mark it hit in 1980 in real terms. That doesn’t mean it will, of course.

Yet the back story of the world’s financial insecurity isn’t necessarily about gold being the last or only store of value. It just may be the most popular red herring at the moment.

One flaw in the “gold can still climb to $2,000″ argument is that the last boom was due to the hyperinflation of the 1970s and early ’80s. Everyone who is leery of the U.S. debt flooding the bond market is right to suspect that a new version of stagflation (no growth, higher prices) may be upon us.

Right now, though, we’re in a deflationary mode. This “deleveraging” could go on for some time as demand for credit stays low and foreclosures continue to ravage the housing market. Home prices are still falling in some places and hot money has shifted to stocks and commodities because of record-low yields in Treasury securities and savings vehicles.

I also tend to side with the behavioral view of why gold is so popular. Not only is it a play against the continued pessimism on the dollar, it’s a psychological refuge. People think it’s secure because it’s tangible. There’s still a finite amount of gold in a time when you can still print as many dollars as you want — something the Federal Reserve is doing in the short term.

Then there’s the less-often discussed side of gold. Why are they beginning to sell gold in vending machines? Why is the leading gold exchange-traded fund, the SPDR Gold Trust, up more than 19 percent year-to-date even though inflation is barely 1 percent?

Is there an unholy alliance here between a false threat of inflation and irrational exuberance? I think so. I smell a strong aroma of the dot-com mania.

The real story to me is demand for commodities overall. Every developing country needs copper, tin, coal and a host of minerals to build their infrastructures. So they are bidding up prices from the mines of Chile to the coal pits of Australia. That much makes sense to me and it’s definitely a long-term trend.

So I’m suggesting that you become less of a conquistador obsessed with the sun metal and focus on a broad, long-term (buy and hold) portfolio that includes a basket of commodities. You can protect yourself against inflation and take advantage of commodity-price increases.

My two best suggestions are the PowerShares DB Commodity Index (DBC), which holds a number of leading commodities, and the PIMCO Commodity Real Return Strategy Fund (PCRDX), which holds treasury inflation-protected securities and commodity derivatives. It’s a staple in my individual retirement account to stave off inflation.

As for gold, if you’re a real nervous Nellie, maybe you’ll want to invest directly in the metal through coins (Maple Leafs or Pandas are handsome collectibles that I own) or bullion.

Just keep in mind that gold doesn’t pay any dividends, is not directly linked to corporate earnings and has no intrinsic value. And when the hyperinflation fervor goes away, gold will be about as exciting as its less glamorous cousin: lead.

A man displays gold bars at the Sacombank gold bar factory in Vietnam’s southern Ho Chi Minh city January 22, 2010. REUTERS/Kham

A Guide to Charitable Giving

Giving your own way: Doing charity right

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

Charity can get complicated. There is no “wrong” way of giving, but you can certainly maximize your gift in a number of ways.

We all give in our own way. A neighbor recently invited us to help at a homeless shelter. That was his way of giving back.

Service tends to be the best gift because it’s a direct contribution and you can often feel the results. I still can’t express enough gratitude for the meals my neighbors prepared when my wife was ailing last year.

What if you simply want to target a handful of charities to maximize your donations this year? There are thousands of organizations in ever greater need; contributions to the 400 biggest groups dropped 11 percent last year.

Aid to those in poverty is also welcome and addresses a growing need. According to the Census Bureau, some 44 million people in the U.S. fell below the poverty line last year, up from 40 million in 2008.

There is another way of helping that is focused on charitable efficiency. I know this is a strange word to use in altruism, yet it refers to how much of your dollars actually reach the “mission” of the charity.

Like for-profit corporations, non-profits can grossly overpay their executives and waste money.

Some charities burn up a lot of money paying for expensive promotions and events. The more-efficient groups employ more than 80% of their income on programs that actually help people in need.

One of the first places to look when vetting a charity is its Form 990. This will show you how much the group is spending on expenses relative to income. Although it will give you some idea of its efficiency (ratio of income to program spending), you might be better served by using a service like Charity Navigator, which rates thousands of charities. Guidestar is another reliable source.

If you’re concerned about a tax deduction, you’ll need to ask a different set of questions, such as:

* Is the charity registered with the IRS as a 501(c) 3 or 501 (c) 4 group? The IRS permits a deduction for the former but not the latter, which may do lobbying.

* Do you itemize? If you don’t list specific donations on Schedule A on your federal tax form, you can’t claim write-offs, which are limited to from 30 percent to 50 percent of your adjusted gross income. See IRS Publication 526 for a list of what you can deduct.

* Be careful with benefit events. You can only deduct the amount exceeding the fair market value. So if you attended a charity dinner for $250 and the dinner was worth $50, you can only deduct $200. You can’t claim a deduction for your services or for political contributions.

* Stock and other financial gifts are deductible at fair market value. This can get complicated, though, especially if this is involved with estate planning. As with other tax matters, contact your tax planner or lawyer.

You can also be quite creative in the way you give. You could combine service with direct cash gifts. I’ve seen many volunteers who work regular hours with a charity or hospital and provide donations through their estate plan.

Speaking of estate planning, you can contribute before you die through regular ongoing gift programs, set up annuities or charitable remainder trusts, which trigger a larger gift when you pass.

Flummoxed about deciding which cause is worth your contribution? You can delegate your money and decision making to a donor-advised fund, which leaves the donations up to professional managers. These entities are run by nearly every large mutual fund organization such as Fidelity Investments, T. Rowe Price and the Vanguard Group.

Whatever option you choose, keep in mind that charitable planning is a cautious art and shouldn’t be done on impulse. Thousands of charities spend too much on telemarketing (avoid those that do) and too little on the people they are supposed to help. By being careful and doing research, you can aid a lot more people.

Photo: A girl makes a cash donation to the United States fund for UNICEF in Philadelphia, Pennsylvania, January 15, 2010. REUTERS/Tim Shaffer

Going Global for Profit

How to sail the QE2 investment cruise

By John F. Wasik (Reuters)

Author, The Cul-de-Sac Syndrome

If only “QE2″ stood for the famous cruise ship Queen Elizabeth II. When she was sailing (she was retired in 2008), you could plunk down a tidy sum, be guaranteed a handful of exotic locales and come back home safely.

Cruising is probably not the appropriate metaphor for the acronym for the U.S. Federal Reserve’s recent QE2 or “quantitative easing,” which will buy at least $600 billion in long-term U.S. Treasury Bonds. It’s an investment voyage of sorts and could be profitable if you concentrate on overseas ports of call.

The Fed hopes that by bringing down interest rates — and indirectly printing money — that the lower costs of doing business will compel U.S.-based businesses to hire workers and stimulate the doldrums-like economy.

I don’t believe that will happen in a significant way, although if I’m a chief financial officer, I will relish the fact that I can sell more long-term debt at low rates. It certainly will help the bottom line of thousands of corporations. As an individual investor, though, I see QE2 as a way of pounding down the value of the dollar relative to other currencies. That may boost the U.S. export economy somewhat, but not if other countries do the same thing or on a bigger scale. (Hello, China).

Nevertheless, investors who hold stocks or bonds from non-U.S. countries can benefit from the relative drop in dollar valuations. Combined with overseas economic growth, this is a trend worth investing in long term as it may take years before Uncle Sam gets on his feet again.

As Standard & Poor’s strategist Alec Young observed in a recent report, “international equities are huge beneficiaries of QE2-induced cross-market trends…a falling greenback boosts dollar-denominated overseas equity returns.” While it’s too soon to tell if this is a long-term trend, the market has embraced the idea of a cheaper buck. The S&P 500 stock index surged 2.5 percent on November 4 in anticipation of QE2.

Are we watching a genuine rally or just short-term optimism that will be dashed by growth that doesn’t materialize in the U.S.? Many economists are saying that if the Fed’s move backfires, it could fuel an inflationary surge, so keep your eye on increases in the producer price index. Commodity prices have been soaring of late, although much of the run-up is attributed to demand in emerging economies.

In the interim, you need to ask yourself if you have enough exposure to non-U.S. equities and bonds. Financial planners generally advise that non-retirees keep up to 40 percent of their portfolio in international shares.

And don’t neglect domestic companies that have large non-US operations or are major exporters like Caterpillar, Intel and Archer Daniels Midland. They will clearly benefit from the dollar decline. (These are not recommendations, only examples).

Even better vehicles than single stocks are mutual funds or exchange-traded funds. They offer low-cost ways of investing in hundreds of stocks and bonds. This is the pick of the litter:

iShares Emerging Market Index ETF (EEM). The fund invests in the top companies in developing countries.

iShares S&P/Citigroup International Treasury Bond Fund (IGOV). A good way to sample bond yields from across the world.

Vanguard FTSE All-World Stock ex-U.S. ETF (VEU). Don’t like U.S. stocks? This world fund excludes them.

As we watch what QE2 does to the U.S. economy, just keep in mind one thing: This is one of the last arrows in the Fed’s quiver. The Fed may not even hit its target or put a dent in unemployment. If the U.S. economy continues to slide, look for more rough waters ahead.

Photo: The Queen Elizabeth 2 reaches the end of her journey as she arrives in Dubai November 26, 2008. REUTERS/Jumana El Heloueh

How to Ensure Fed Stimulus Won't Fall Flat

By John F. Wasik (Reuters)

Author, The Cul-de-Sac Syndrome

John Wasik

The Federal Reserve can buy all the US Treasury bonds it wants, but it won’t do much other than make corporate treasurers waggily over being able to borrow at incredibly low rates.

As a last-ditch effort to stimulate the US economy, the Fed’s $600 billion initial purchase of US debt, also known as “QE2,” could be better spent directly helping Americans and easing the housing crisis.

Part of the problem is not that interest rates aren’t low enough — short-term rates are practically zero — it’s that there’s little demand because nobody is getting financially ahead through employment, homeownership or 401(k)s. There’s no sense in the middle class of a “wealth effect.” Fear is ruling now. So here are some proven approaches that might help:

A Payroll Tax Holiday. The Fed could boost employment by redirecting its QE2 purchases to offset a payroll tax holiday. This would directly put money in both employers’ and employees’ pockets. It might even stimulate some hiring.

A Really Potent Housing Credit. What would happen if the Fed intervened in the housing market in a meaningful way instead of buying distressed mortgage securities and Treasury debt? It could redirect money (with Congressional blessing and IRS oversight) into paying for homebuyer tax credits.

The last round of $12.6 billion in buyer’s credits ($8,000 for newbies and $6,500 for others) proved to be somewhat successful; 1.8 million people bought homes. Why not even add a sweetener of an additional $1,000 rebate to those who buy vacant, short sale, bank-owned or foreclosed homes? And instead of offering it for a few months, offer it for two years, or at least until the inventory of some 19 million empty homes is whittle down to about 1 million homes or less.

A Retirement Funding Boost. Let’s overhaul the fabled 401(k), the retirement plan that was never meant to be a mainstay of long-term savings. Some 40% of Americans don’t even have access to them at work, with minorities, young people and low-income workers showing the lowest participation rates, according to Demos, a New York-based policy center. Why not make a tax-free contribution to all Americans in a no-fee, universal savings account? Savers would face a tax penalty if they withdrew the money before retirement age, but could still use the assets to borrow against in a pinch.

Since the Fed is now a super-regulator in the wake of financial reform, why doesn’t it impose limits on 401(k) fees, which costs workers an average 20 percent of their retirement kitty over a working life? They could mandate that program expenses can’t exceed those of the federal government’s Thrift Savings Plan. This is probably more of a mission for Congress, though, which has avoided addressing this massive rip-off for years.

Direct Help to States. It’s no secret that a combination of the Great Recession and housing crisis have knocked the stuffing out of state, local and school board revenues. Inflation-adjusted state tax revenue fell nearly 15 percent during the downturn, which was the biggest decline in 50 years, according to the Lincoln Institute of Land Policy. Teachers are being laid off or furloughed and the overall quality of education in the US is suffering.

If the Fed wants to create — or at least preserve employment — it can direct money to the states. I know this is not what the Fed normally does as baron of the banking system, but at least it can make funds available for borrowing to state treasuries through member banks at zero interest. That’s the minimum it can do. Look at the myriad toxic securities-buying programs it set up for Wall Street in 2008!

I realize that many of these suggestions are beyond the Fed’s purview as it’s not in the fiscal stimulus business per se. Yet as a divided Congress begins to organize and study ways of reviving the economy, further enabling the federal government’s debt addiction will do little to find buyers for vacant homes or convince businesses to start hiring.

Without consumers flush with money and gainfully employed, the private sector won’t budge. Lowering long-term interest rates won’t hurt, but it won’t compel banks to lend money in a low-demand environment. It’s like a crazed dog chasing its tail. The Fed still has an awful lot of sticks to throw — if it can only send them in the right direction.

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

How to Invest After the Mid-Term Elections

5 profitable post-election predictions

By John F. Wasik
Author of The Cul-de-Sac Syndrome

Remember that classic carnival ride, the “tilt-a-whirl?” That’s what financial planning will be like under the new Congress, when Republicans control the House of Representatives and the Senate is divided.

Some big decisions need to be made about taxes, retirement and estate planning laws – moves that Congress didn’t make before they recessed for the election.

The wrenching move to the right and the political wrangling about these key topics could be dizzying. That means you can either get motion sickness watching the two parties battle, or you can try to plan for your long-term goals no matter what comes out of Washington.

The most important legislation that didn’t get passed — or even seriously discussed — had to do with tax rates. The estate tax expired at the end of last year. So if someone you knew expired this year, then maybe you and other heirs get a free pass. (Congress could still pass a retroactive tax, though).

Income-tax brackets are also still in limbo. The Bush-era tax rates ranged from 10 percent to 35 percent; they previously ranged from 15 percent to 39.6 percent. Come 2011, if Congress does nothing, the higher rates will automatically return. And low 15 percent rates on dividends and capital gains will also rise. That brings me to my first prediction:

The Bush-era tax rates will remain. I don’t think either party will mess with them on the eve of a presidential election year. The sluggish economy is also a linchpin. There might be some compromise on when the higher rates will kick back in — maybe two or three years from now — if Congress can even reach an agreement on that. For now, though, I would say it’s not likely you will be hit with higher income taxes next year.

The estate tax will return with higher exemptions. Even mega-investor Warren Buffett agrees that some estate tax is necessary. While I don’t think we’ll see a return to the pre-Bush top rate of 55 percent on estates valued at more than $1 million, we’ll see some compromise on how much of an estate will be exempted from the tax. My guess is that Congress will use a proposal crafted by Senators Blanche Lincoln (D-Ark.) and Jon Kyl (R.-Arizona) as a starting point. They suggested a $5 million exemption and 35 percent rate, which is the top marginal income tax rate now. Look for the GOP-dominated House to go for an even higher exemption: $10 million wouldn’t surprise me.

Deficit cutting will eventually impact entitlements. This is a roundabout way of saying the House will begin the painful discussion of how to sustainably fund Social Security and Medicare. On the House side, I would expect to see a revival of personal savings accounts, which were floated during the Bush years, which would be carved out of Social Security contributions.

Medicare, which may run out of money in 18 years, has gotten some breathing room from health care reform, although tax increases or benefit cuts may still be on the table. Some GOP and Tea Party members have also said repealing health reform is at the top of their agenda, so this is a wild card. I don’t think any serious action will take place in 2011 on any of these programs. No matter what happens, fund your Roth IRA or 401(k). Somewhere down the road, a tax increase will eat up more of your retirement funds. Having tax-free income (you pay taxes only on the contributions in Roth funds) will be a big plus.

Retirement savings may be bolstered. There have been “Auto IRA” proposals in various House and Senate committees for years to bolster retirement savings at small businesses that both parties have supported. Yet these programs have never reached the floor of either chamber. They might make it through next year.

Stocks will be a smart investment. Neither party will have any impact on the business cycle. Corporations have trillions sitting in their treasuries; the more mature companies are still paying healthy dividends that beat most pathetic money-market fund yields. It doesn’t make sense to sit on the sidelines waiting for something dramatic to happen. Invest in stocks through an index fund such as the Vanguard Total World Stock exchange-traded fund.

The only thing I can guarantee is that the coming Congressional conflicts won’t be dull. You’ll see all sorts of fur fly over tax rates and paring the federal budget deficit. Just make sure that you’re positioned to take advantage of any economic rebound. That’s one thing that everyone wants to be optimistic about.

Getting the Best Investments for Your Portfolio

By John F. Wasik (Reuters)

Author of The Cul-de-Sac Syndrome

In ETF war, investors finally win

Imagine a financial services war in which prices dropped and benefited both investors and providers.

Such a conflict is waging in the exchange-traded fund (ETF) arena, where commission and fund management fees (”expense ratios”) are both coming down. This is exciting for cost-conscious investors because it can boost your total return with only a handful of funds.

Because you are paying less upfront (no sales charges) and annually (management expense ratios), your net return can be higher.

Leading discount brokers such as Schwab and TD Ameritrade have slashed their commissions on some popular ETFs to zero. Fund managers like Fidelity and Vanguard have also zeroed out commissions for select ETFs through their brokerage platforms.

ETFs are useful tools that most mainstream investors probably don’t know about or understand. They are pools of securities like mutual funds, only they trade on exchanges. Repriced constantly when the market is open, you can only buy them through brokers. Most ETFs are passive index portfolios, so they can keep costs low — much lower than actively managed mutual funds.

Not only are you getting to buy an elite group of ETFs without paying a brokerage fee — only if you buy through the above-mentioned brokers — you’re getting passive broad-basket ETFs at rock-bottom management expenses.

Let’s say you want to buy a global stock fund to get a sampling of stocks across the world. If you went through a full-service broker like UBS, the Swiss bank and brokerage, they might pitch you their Global Allocation A fund (BNGLX). For the privilege of investing in this fund, they’d charge you a stiff 5.5% upfront sales charge plus 1.22% annually in management expenses.

Suppose you wanted to buy a global stock index fund on your own. You could buy the iShares MSCI (ACWI) Index ETF through Fidelity’s online brokerage commission free and pay 0.35% annually. So not only do you get a worldwide stock portfolio, you’re saving three and half times the annual expenses over the UBS fund and the commission.

Picking the right no-commission ETF can get confusing, though. Do you just pick the cheapest funds? The ones with the greatest diversification? Yes and Yes.

It’s fairly simple to construct a core portfolio that will give you most of the world’s stock and bond markets. This is the kind of portfolio you buy and hold. To determine how much you should hold in stocks, it should roughly match your age. The older you get, the less stocks you should own. Disclosure: I own ETFs and mutual funds from Vanguard, iShares and Fidelity in my 401(k)s.

You want your core portfolio to protect against inflation, provide some growth and income. Here’s a low-cost, boiled-down portfolio that gives you a piece of most assets:

The Cheapo Core Portfolio

Fund: Schwab US TIPS Type: (inflation-protect. bonds) Ticker: SCHP Expense: 0.14%
Fund: Vanguard Total Bond ETF Type: (US bonds) Ticker: BND Expense: 0.12%
Fund: Vanguard REIT Type: (real estate trusts) Ticker: VNQ Expense: 0.13%
Fund: iShares World Type: (global stocks) Ticker: ACWI Expense: 0.35%
Fund: PowerShares DB Com Index Type: (commodities) Ticker: DBC Expense: 0.85%

Bear in mind that not all ETFs are commission-free, nor are they worth considering.

The commission war has not touched the entire $1 trillion universe of ETFs — and that’s a good thing. If you want to actively trade ETFs, you should pay more, if for no other reason than to discourage you from market timing and attempting to pick hot sectors at the wrong time.

Fortunately, unlike the real-world shooting wars, the ETF battle will be a win-win situation for those who need to save more for retirement and other goals.

Getting Your College Savings Plan in Shape

By John F. Wasik (Reuters)

A ‘pure’ savings plan for college can still work

You can still put aside enough money for college if you save. Is this the latest American myth?

According to reader Bill H., a “pure” savings approach worked for his children. It also helped they were good students, obtained scholarships and went to state schools.

“When my kids were born I just started putting money away,” Bill tells me. “Mainly, I would save the entire paycheck from any outside income I had…I usually had about $3,000 a year in outside income.”

“I would also try to save about 10 percent from every regular pay check. My salary was not huge, probably averaged about $40,000 to $45,000 a year, but I was usually saving about $7,000 to $8,000 a year.”

Investing in insured certificates of deposit and conservative stock and bond mutual funds, Bill kept at it for 17 years, when he averaged about 7 percent annual return (good luck getting that today) and had accumulated $200,000. He then took the money out of the stock market five years ago and placed the money in insured CDs.

From the interest on his CDs (about $12,000), he was able to fund one daughter’s college payments, supplemented with other savings, her part-time work and a scholarship.

Is this a fairy tale? Bill says he’s able to save because he lives modestly in his Georgia community.

“I drive the same truck I’ve driven for 12 years; my wife has driven the same car for 10 years,” he says. “My kids worked and paid for their own cars. They have no bills other than house, insurance, utilities, clothing and food (about $1,700 monthly). Our biggest bill is taxes.”

As American families are scaling back plans to pay for their children’s college educations, Bill’s family stands out. They are habitual savers and neither of their two daughters will graduate with college debt.

According to a Gallup poll, on average, families have saved about $28,000 for college. Most have to go into debt to foot six-figure tuition bills.

Some of the college savings shortfall is due to family confusion over the best vehicles for college savings. Each state has its own “529” savings plan with multiple options. The Gallup poll showed that nearly half of those surveyed weren’t sure of the best college savings plan. Here are some good ways to get started:

* Don’t just explore your state’s 529 plan, you can choose from any state. I went out of state to invest in Vanguard’s Upromise plan because of the lower costs and conservative management. I wasn’t disappointed since my state (Illinois) had to police an errant bond-fund manager who lost money in mortgage securities.

* Any savings from lifestyle choices are worthwhile. Want to give up cable and save the difference? How about cutting back on your restaurant meals? Any savings can be banked.

* Put your spending to work for you. Both Upromise and Baby Mint, set aside a percentage of your spending with certain vendor and credit cards into college savings funds. I’ve been using Upromise for year and have saved thousand for my daughters.

* Don’t forget scholarships. Several neighbors of mine have negotiated with colleges for “tuition discounts” because their children were good students. Colleges always officially deny they do this, but they can cut their fees if you have other universities making offers.

The most-effective savings program is one that involves an all-out effort. It always surprises me how many ways you can accumulate college funds. You just have to be careful about your choices.

Photo: A graduating senior waves as she arrives at the commencement for Barnard College, where U.S. Secretary of State Hillary Clinton spoke, in New York, May 18, 2009. REUTERS/Chip East

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream

Making Money No Matter How Bad the Economic Climate

How I beat Yale’s David Swensen

By John F. Wasik (Reuters)

It’s not every day that one’s portfolio beats David Swensen, the great money manager of the Yale endowment.

According to the blog Seeking Alpha and MyPlanIQ, that’s what I did over the last year with my humble “Nano” portfolio. How is it possible that I (narrowly) beat Swensen’s portfolio, the product of a man widely considered to be one of the best institutional money managers in the world?

Created in 2006, the Nano is about small expenses, simplification and asset classes that don’t always move in the same direction. There are only five funds in it (see below), and I spread out my money evenly — 20% in each fund. I tried to cover most stocks and bonds with some real estate and Treasury Inflation-Protected Securities (TIPS).

The Nano portfolio was my concerted effort to create a passive, “lazy” portfolio that you would rebalance every year and mostly forget about until you were close to retirement.

While I’d love to continue hoisting my flag, I will warn you that past performance is no guarantee of future return. And I’m no David Swensen, who has an incredible long-term record with Yale. My picks also didn’t make the final cut for MyPlanIQ’s “playoffs” for lazy portfolios. They calculated their returns with their software, which is not open to my scrutiny, so my 0.24 percentage-point besting of Mr. Swensen is no big deal.

Sadly, my bragging rights hit a brick wall when you look at my three year-returns — losing almost 2 percent. But let’s put that in perspective: That’s still not bad considering the S&P 500 Index lost more than 40 percent in 2008. Yet it pales in comparison to Harry Browne’s Permanent portfolio, which gained 7.4 percent during that period.

Browne’s secret it that it performs well when fear rules and stocks are being clobbered; only a quarter of its holdings are in the iShares S&P 500 Index ETF (IVV).

The remainder of Browne’s portfolio is in the SPDR Barclays Capital Long Term Treasury ETF (TLO), money-market funds and the SPDR Gold Trust ETF (GLD). Since gold prices have soared and hit all-time highs in recent years — Browne has traditionally been an ultra-conservative investor — this doesn’t surprise me.

If you absolutely need an ostrich-like “safe not sorry” approach, then stick with Browne. Looking for more growth and have more than a decade to invest before you retire or simply want to take more risk? Then the Nano might be a good fit.

I would be remiss if I didn’t confess that there has been a huge wild card surface since I first crafted the Nano. Like millions of Americans, 2008 changed everything from my career direction to my family portfolio.

Our overall buy-and-hold allocation before that dreadful year was about 70% bonds, 30% income. I’m a believer in long-term growth from corporate earnings around the world.

Then the piano fell from the sky in late 2008, and my wife couldn’t stomach the idea of having all that money in stocks. So we shifted to a 50% stocks, 50% income mix. I would call this a “domestic” rebalancing. Nobody likes to lose money — even if you’re looking at paper losses and don’t plan to retire soon.

I plan to continue to eat my own cooking and would even add two more funds to the Nano portfolio: The Pimco Commodity Real Return Strategy Fund D (PCRDX) for even more diversification and the SPDR Barclays International Treasury Bond Fund (BWX). The core funds include the Vanguard Total Stock Market ETF (VTI); Vanguard Total International (VGTSX); Vanguard REIT (VNQ); iShares Barclays TIPS Bond (TIP) and iShares Barclays Aggregate Bond (AGG).

Echoing my post-2008 chastening, this is a more conservative “son of Nano” portfolio that places more emphasis on income. Place about 14% in each fund. Disclosure: I own most of these funds in one form or another.

No matter what you do, don’t blindly embrace any style of investing before you do a gut check. You really have to make your own decisions as to how much risk you can afford to take.

Still, it’s great to have a sunny year, although it’s always the stormy ones you have plan for to secure your future.

John F. Wasik is a Reuters columnist and author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Caption: David Swensen, Yale University Chief Investment Officer, speaks during an asset management forum in Seoul April 12, 2010. REUTERS/Truth Leem

Most Don't Get Same Deal as JR Ewing

Most Investors Don't Get "JR" Deal When Battling Wall Street Brokers

By John F. Wasik (Reuters)

It would be great if investors who got fleeced by a bad broker got most of their money back like Larry “JR Ewing” Hagman.

The actor who played the rapacious Texas oil baron got more than $11 million in damages and legal fees from Citigroup’s Smith Barney brokerage (now run by Morgan Stanley) unit in a securities arbitration award. Despite his instructions to the contrary, his broker had shifted most of Hagman’s portfolio into stocks, which got burned in the 2008 meltdown. Citi denies any wrongdoing.

Yet Hollywood is not Main Street. Not by a Texas mile. Most investors aren’t made whole when burned by brokers, nor do they reap punitive damages. Most are offered — and agree to — settlements from the brokers.

“In the hundreds of cases I read (in 2008), what appeared to be punitive damages were awarded in less than 5% of the cases,” said Louis Straney, a securities arbitration consultant based in Santa Fe, New Mexico. “Even attorney’s fees and costs are rare, awarded less than 15% of the time.”

The brave minority that chooses to fight the system faces long odds in arbitration hearings. The securities arbitration forum is run by FINRA, a unique industry-run organization that somehow is allowed to police itself, license brokers and protect Wall Street’s interests.

When investors agree to settle, we have little idea how much they receive (or how much they were fleeced) since the industry makes them sign confidentiality agreements when they get their settlements — most likely for a fraction of what they lost. Only settlements of a certain size are required to be reported in the FINRA system.

Brokers have never liked the idea of you suing them. When you sign any standard brokerage agreement, you are locked into their mandatory binding arbitration. While this may be more efficient and less costly than litigation, it can severely limit your ability to recoup your money.

What happens if you go through arbitration and don’t recover any funds or don’t agree with the three-arbitrator panel’s (there is no jury of your peers) decision? You generally can’t appeal it all the way to the Supreme Court. Only in the cases of outright fraud is a decision challenged.

Should you wrestle your way through an arbitration hearing — some 80% of investors don’t make it this far — unlike a court decision, arbitrators don’t have to explain their findings. Since at least one of the arbitrators represents the industry at each hearing (except in new pilot programs), that adds to the perception that brokers have the upper hand.

So there’s a good reason that investors feel they’re not going to get a fair shake when they’ve been wronged by brokers. A University of Cincinnati Law School study found that many survey participants who went through arbitration “with recent comparable experience in a civil court case perceived (securities) arbitration as unfair by comparison.”

Perhaps responding to years of criticism from the plaintiff’s bar and state securities regulators, FINRA recently announced a proposal to allow investors to opt for an all-public arbitration hearing. That means an industry representative wouldn’t be directly involved in a dispute decision.

In a FINRA pilot program that gave investors this new option, some 60 percent chose this route. Reflecting what usually happens when people challenge their brokers, most settled and only 23 of the 560 cases thus far resulted in an award for investors. Still, investors won in 71% of the cases arbitrated with the “all-public” panel versus 50% for a panel with at least one industry arbitrator.

Even with the improved prospect of getting an award, unless the Securities and Exchange Commission decides to remove mandatory arbitration from brokerage agreements — it’s studying that option now — wronged investors may still be stuck in a troubled system run by the brokerage industry.

They certainly won’t be as fortunate as the man who played oilman JR Ewing. Most often they’ll come up disappointed and broke.

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

How to Broadcast Clean, Solar Power

This is a talk I gave at the Northbrook Public Library on the dream of electrical genius Nikola Tesla. He was able to broadcast electricity, which is a core technology for beaming solar-produced power from space to earth stations. This could be a huge source of clean energy in the future.

http://www.chicagopublicradio.org/Content.aspx?audioID=44922

Why Home Prices Won't Rebound Soon

By John F. Wasik (Reuters)

Don’t hold your breath on home appreciation

You may see two full moons in a month before home prices start rising again across the U.S. The rip tide of a huge home inventory, increasing foreclosures, unemployment and more bank woes continue to roil the housing market in most regions.

If you think you’ll see a profit from selling your home or hope to get a home-equity loan based on recent appreciation, you may have to wait a while — maybe a few years.

A host of demons continue to bedevil the U.S. home market. The worst of these gremlins is unemployment. Home sales and prices are directly linked to the number of people working. A jobless rate around 10 percent doesn’t spur home sales.

Nobody is in a hurry to buy homes. According to a recent report by Ned Davis Research, housing prices may not begin to appreciate until the jobless rate goes to 7 percent or lower.

Once the jobless rate gets to about 6 percent, the firm estimates that home prices may begin to rise roughly 2 percent annually or track the historical level of inflation.

“Yes, there is a light at the end of the dark housing tunnel,” writes Joseph Kalish, the report’s author, “but it will take at least two years and possibly more to get there.”

Complicating any housing rebound scenario is the fact that there are millions of unsold homes on the market and more are being acquired and resold by banks through foreclosures.

Kalish estimates that this “excess supply” is between 1.4 million to 2.5 million units. Even with record-low mortgage rates, in a slack economy, those homes don’t sell, so new homebuilding makes no economic sense.

The huge home inventory also puts pressure on banks to sell the homes they own at below-market prices just to get them off their books. Remember, banks are not in the real estate business; they don’t want to own and rent homes.

This tsunami of foreclosures and vacant homes is likely much worse than what most big bankers are willing to admit. Christopher Whalen, a financial analyst with Institutional Risk Analytics in Torrance, California, told the conservative think tank American Enterprise Institute on October 6 that “non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.”

In Whalen’s view, the biggest banks should have been broken up in 2008-2009 instead of propped up with TARP and Federal Reserve funds. Ironically, megabanks like Bank of America got bigger during the crisis by absorbing troubled subprime mortgage-gorged firms like Merrill Lynch.

The recent halt to foreclosure processing by major banks, Whalen noted, was an indication that banks are up to their necks in bad debts that are only getting worse. “The use of loan modification to make bad credits appear ‘current’ is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria,” Whalen stated.

Banks are being swamped with defaults put on overdrive by massive unemployment. The so-called “underemployment” rate of those still looking for full-time jobs but working part-time or who have abandoned their search is 17 percent. These folks can’t afford mortgage payments.

There is one silver lining to all of this mayhem. It’s likely that mortgage rates will remain low for at least another year, possibly longer. Refinance if you can. If you need to repair or add onto your home, now’s a good time.

On the savings side, your only consolation is that you can find thousands of FDIC-insured institutions that are not having financial problems. Credit unions are another strong option. There’s plenty of no- or low-fee competition for your checking, credit card and savings accounts.

You won’t get rich from investing in insured certificates of deposit or other savings accounts, but you won’t lose any money, either. Now is the time to reduce your debts as the megabanks struggle to stay afloat.

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Photo: REUTERS/Rick Wilking

TARP Terrorized the Economy

By John F. Wasik (Reuters)

The bailout was a bust for most American taxpayers

Was the bailout of the U.S. banking, auto and insurance industries worth it?

As the Troubled Assets Relief Program comes to a close, I won’t be popping any champagne corks. The Federal Reserve and U.S. taxpayers are still owed at least $2 trillion and at least two black holes remain in the bailout scenario.

The conventional wisdom is that life as we knew it was preserved and a 1930s-style depression (or worse) was averted.

Yet for millions of Americans, the bailout hasn’t helped them a bit. They are still punch drunk and often jobless from Wall Street’s and the bankers’ Las Vegas benders.

Former Goldman Sachs manager and author Nomi Prins tells me “Main Street is not better off, because it did not receive the lion’s share of the grandiose focus, subsidies, monies and removal of toxic asset aid that the banking sector inhaled into the top levels of their institutions.”

Prins, who authored the definitive autopsy of the meltdown in “It Takes a Pillage,” challenges the idea that the bailout money ever trickled down to people who needed it the most.

“That’s why defaults, delinquencies, foreclosures, bankruptcies and unemployment rates have risen — none of which is an indication of Americans doing better, even as banks repaid TARP and are eager to put the whole ‘mess’ behind them,” Prins said.

You don’t have to look too deep into housing forecasts to see that the U.S. home market still resembles a typhoon-devastated country.

The shadow inventory of homes that could be reverting back to lenders is staggering. There may be as many as “four to 12 million foreclosures yet to come” touching nearly every neighborhood in the country, according to real estate author Ilyce Glink.

One of the reasons the housing debacle seems like a bottomless pit is that the widespread unemployment triggered by the meltdown is pushing ever more homeowners into foreclosure. The American Dream is shattered for them.

While the stated jobless rate is hovering around nine percent, it’s really 12 percent to 20 percent when you include inner-city residents and those who have stopped looking for work and no longer receive unemployment checks.

Meanwhile, the two entities that were supposed to lend stability to the housing market and middle-class neighborhoods — Fannie Mae and Freddie Mac — are on life support.

Will the Obama Administration wind them down, buy their bad loans or simply privatize them? We probably won’t know until well after the November election. In the interim, Prins estimates that taxpayers are on the hook for a nearly $7 trillion implicit guarantee of the mortgage companies and their debts.

Am I ignoring TARP’s silver lining? Financially, it wasn’t a complete bust and taxpayers made money on the funds repaid. The largest financial rescue in history has produced some dividends for the U.S. Treasury. Big banks, Wall Street, goliath insurer AIG, the mortgage market, GM and Chrysler all got loans and will survive — at least until the next crisis.

On paper, taxpayers reaped anywhere from a 10.2 to almost 20 percent return, according to The Banker magazine. That’s $6.8 billion in dividends from institutions like Bank of America, JP Morgan Chase and Wells Fargo.

Along the way, money market funds got rescued, Fannie and Freddie became wards of the state and the world’s largest banks and insurers were saved from their rapacious derivatives trading.

The true measure of whether the $8 trillion pledged thus far on the total bailout was well spent, however, is gauged in lost opportunity cost and unaddressed social capital needs.

Could the financial rescue money have been better spent fixing some $2 trillion in dilapidated levees, bridges, water systems, dams, roads and schools?

Would we have been better off investing the TARP funds in alternative energy, our moribund public transportation infrastructure, curing cancer or providing world-class educations for children struggling to compete in a global economy?

It’s painful to say that while the bailout perhaps saved millions of jobs, it did nothing to create new ones — save for a handful of bureaucrats counting the billions that went to a fortunate few.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

How to Lose Big Money to Small-Time Scamsters

By John F. Wasik (Reuters)

Top investment scams gone wild

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bernie madoff | ETFs | investment scams | ponzi schemes

It’s not hard to find the hottest investment scams. Just read the business headlines. What’s making money?

The who’s who of scamsters are not household names like Bernie Madoff. They are guys working the Internet, selling the next “green technology” or smoothly working Ponzi schemes in church groups. They might even be your neighbor.

I just got an email from someone I didn’t know in England who claims he was beaten and stranded. And all he needed was about $10,000 to get back home! Coincidentally, I also met a fellow with the same story on the streets of Baltimore, although he was asking for considerably less.

These frauds are often hard to identify because our skeptical reasoning is often clouded by trust and greed (on our part), which the perpetrators count on when they work their wiles.

I had a chance to catch up with some state securities cops recently. They are spotting some compelling pitches that are trapping investors all over the country.

Forex Trading. This is short for foreign exchange and currency, which is roughly 50 times the size of the stock market. Schemes involving market-beating software and techniques abound. The biggest banks and institutions trade every day. You think you can beat them?

Exchange-Traded Funds. While ETFs are perfectly legitimate listed pools of money, the idea that you can use them to make a killing on gold, foreign stocks or a single industry is ludicrous. Nobody has a product that can best the market consistently.

Environmental Technologies. Sure, wind and solar look awfully good right now, but the chances you will be able to get in on the ground floor of a breakthrough technology at a good price are slim to none.

Neighbors Selling to Neighbors. Regulators call this “affinity fraud.” They could be part of an association, church, group or investment club. One such scam, called “blind real estate pools,” involve brokers who sell interest in properties — that they don’t actually own. Joe Borg, Alabama Securities Commission director, said he’s seen these schemes popping up in the south. Military families near major bases also are being pitched “Iraqi dinar” schemes, where they are speculating on an upsurge in the country’s currency.

Commodity Scams. Name the commodity and there’s some kind of scam attached to it. With the price of gold hitting record highs, gold-mining fraud has become popular in the West. Others may involve oil and gas extraction.

“Off the books,” special or private placement deals. Unlisted securities are always a perennial trouble spot. Believe me, no small investor is going to get a better deal than the banks and guys on Wall Street. The only people getting rich off of these opportunities are the purveyors of them.

Variable Annuities. Like ETFs, these are legitimate insurance products, although they are rarely suitable for most investors.

How do you avoid these deceptions? Employ the smell test. Are the returns touted far above market rates? Is high performance promised in a short period of time? What are the total fees and commissions involved before a single dollar is invested?

Do some realistic comparisons. Remember, the S&P 500 stock index was down 10 percent over the past decade despite rising 23 percent last year. Also ask for a prospectus and if what is being sold is a listed security.

Better yet, check the background of the broker or adviser selling the investments. Do they have a criminal or disciplinary record? You should be able to check their registration with your state securities regulator or through the securities industry’s BrokerCheck system or through the SEC.

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Photo: Accused swindler Bernard Madoff exits the Manhattan federal court house in New York January 14, 2009. REUTERS/Brendan McDermid

Why Stocks Make Sense Now

Investing in the under-the-radar recovery

By John F. Wasik (Reuters)

Two main theories about the global economy dominate these days: 1) We’re headed for a double-dip recession, and 2) things are getting better at a thick, syrupy pace.

I subscribe to the slow-as-molasses rebound view. While I don’t rule out another European debt crisis, the worsening of the U.S. home market and unemployment or any other calamity, things are slowly getting better. It’s time to start investing in stocks again.

When there’s so much conflicting news in the business headlines, I tend to listen to influential institutional investors like Dan Farley, who manages more than $190 billion for Boston-based State Street Global Investors.

I heard Farley run through some relatively optimistic numbers last week at the Morningstar ETF conference in Chicago. Although Farley admits there are still a bunch of wild cards in the economy, he’s somewhat upbeat.

“Right now, we’re in a stable but shallow recovery mode,” Farley said. “Corporate cash is at a record high of 50 years, and equities have room to grow.”

“Banks are no longer tightening loan requirements and starting to lend; companies are starting to borrow. Hiring plans, inflation and durable goods orders are likely to pick up until (factory) capacity utilization picks up.”

Why look for a silver lining when the U.S. is staring at a $13 trillion national debt, some European countries are still in trouble and the jobs picture remains dark? Farley uses words like “anemic” to describe the nascent recovery and he’s certainly not sanguine about employment, which he doesn’t think will fully rebound until 2015.

Corporations now have a “cash horde” that they can spend on hiring, dividends, stock buybacks or acquisitions, Farley notes.

Naturally, with billions flowing into bonds and gold, this hardly seems like the time to be talking about investing in stocks. For millions, the market psychology is still a “blood in the streets” mentality. But if Farley is right, it’s a good time to position your portfolio for future gains.

Patience is critical now. We’ll eventually exit this trough of the business cycle; companies will have the money to rebuild.

All of this prognostication is for naught if you take a narrow-minded approach to recovery investing. The U.S. may take a long time to fully bounce back, but that shouldn’t stop you from looking at a number of sectors, countries and opportunities. Here are some mistakes to avoid:

Don’t Make Concentrated Bets: That means avoiding trying to pick winners in individual stocks. Your risk is much higher that way. It’s better to pick a basket of stocks like an index fund.

Only focusing on the U.S: Most of the valuation of the world’s stocks is outside America. A better approach is a broadly-diversified world stock fund like the Vanguard Total World Stock Index exchange-traded fund (VT). You get 2,900 holdings in 47 countries in this index fund for a management fee of 0.30% per year (compared to about 1.4% for the average global fund).

Ignoring Dividends: As noted above, big, established corporations have lots of cash for dividends. The SPDR Dividend ETF (SDY) is a good vehicle for capturing these payments.

Ignoring the Little Guys: Not all of the growth will come from the blue chips. The little guys — small and medium-sized companies — tend to bounce back faster during a recovery. The iShares Russell 2000 Index ETF (IWM) owns a broad basket of these stocks.

Ignoring the Developing Countries: You never know where the more robust growth will occur. Will it be China, Indonesia, Brazil, Chile or India? Why even make a bet on a single country? The iShares MSCI Emerging Markets ETF (EEM) does the picking for you.

Another temptation that overly confident investors try to make is to guess exactly when the market is going to turn around. Nobody knows that date and few bet correctly.

You can ease back into the market gradually. If your investment reflexes are like molasses (mine sure are), this is a low-risk approach of getting a piece of the recovery.

John F. Wasik is the author of The Audacity of Help: Obama's Economic Plan and the Remaking of America (www.audacityofhelp.net)

Corporate Dollars and Campaigns a Toxic Brew

The quickest way to bruise your brand

By John F. Wasik

Corporate dollars and political campaigns are like oil and water for well-established retail brands.

Despite the troubling flexibility provided by the Supreme Court case Citizens United, which allowed more direct corporate and union contributions to political campaigns, this freedom can be perilous.

Target learned first-hand how political donations could damage its brand. A public relations disaster followed its contribution to a group backing Tom Emmer, a Republican candidate for Governor in Minnesota, where Target Corp. is based.

According to a study by Brandweek, a trade publication, Target’s reputation was hurt in early August when the donation was revealed — and still hasn’t recovered. The publication’s BrandIndex report showed the company lost one-third of its “buzz” score in 10 days last month, recovered modestly, then fell again during a media backlash. Target’s stock price fell to under $51 a share by Aug. 30, but has since recovered to close above $53 recently.

Not only did the contribution result in a blizzard of op-eds, blogs and negative publicity, it seeded a boycott campaign from the well-funded progressive organization MoveOn PAC.

Brand damage can be severe when corporations muddy their image by backing campaigns.

In Target’s case, shoppers who liked their clean, well-lit discount stores generally expected Target’s image to be apolitical. You don’t have to wander far from a Target checkout to see how the company supports a wide variety of community non-profits. Overt political leanings alienated an untold number of customers.

Direct political funding is bad for business because high-profile retail brands are expected to project this welcoming, multi-cultural image devoid of any agenda outside of free enterprise. They want your business, but they need to do it without a partisan message.

While we wouldn’t be surprised to see a gun manufacturer supporting a pro-second amendment politico, we would be appalled to see a fast-food chain back a pro-life or pro-choice candidate. It’s a horrible fit and sullies a company’s marketing message.

That’s not to say corporations can’t deliver their political dollars in other opaque ways. There are still more than 10,000 lobbyists on Capitol Hill and thousands more in state capitols. They can cloak their donations through trade groups, “527″ organizations or “Astroturf” groups that appear to be grassroots, but are seeded and organized by corporate dollars.

Jane Mayer’s recent New Yorker piece shed light on the Koch family’s various political groups and libertarian promotions.

Have consumers of Koch Industries’ Georgia-Pacific products such as Quilted Northern bath tissue and Brawny paper towels resented the Koch family’s funding of anti-Obama campaigns? Their right-wing bankrolling has largely flown under the radar of mainstream media, yet is constantly monitored by groups such as Sourcewatch.org.

No matter how many watchdog groups there are, corporations have far more money and ways to evade an ever-dimming media spotlight. Corporate-funded “Super PACs” are raising hundreds of millions for mid-term Congressional races.

Super PACs feature groups like American Crossroads, run by former George W. Bush adviser Karl Rove. The group has raised more than $17 million and includes donors like Dixie Rice Agricultural Corp.

Meanwhile, money keeps pouring into campaigns like a breach in an old dam. Political fundraising — now exceeding $2 billion in this cycle — according to the Associated Press, will probably break records this year.

In addition to unions such as AFSCME, IBEW, Laborers and SEIU, the “heavy hitters” in political contributions are AT&T, National Association of Realtors and Goldman Sachs. These groups represent more than $355 million in political donations, based on data through August 22, according to OpenSecrets.org.

As it stands now, it’s unlikely Congress will do anything to dampen the impact of the Citizens United ruling before the November election. Yet open disclosure of direct and indirect special-interest funding is essential, something the proposed Disclose Act attempts to mandate.

No matter what brand of politics you subscribe to, you should know which corporations are backing candidates and why. Corporations already have more than enough lobbying muscle – and those efforts should be fully exposed.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

Get a Good Deal on Closing Costs

How to get a good deal on closing costs

By John F. Wasik

Getting a Good Deal on Closing Costs

Reading the Fine Print is Essential

By John F. Wasik

Although you can get a great deal on mortgage rates, you can easily pay too much on closing costs.

The necessary expenses of appraisals, title insurance, credit checks and other fees can add up to thousands of dollars. You can reduce those costs by getting multiple quotes and negotiating.

With 30-year loan rates averaging around 4.3 percent and 15-year rates at 3.8 percent nationally, according to Freddie Mac, now’s a great time to refinance or buy.

Shopping multiple sources pays off. With closing costs up 37% — that’s an average $3,741 on a $200,000 loan according to bankrate.com, you can put a lot more money in your pocket while getting some of the best rates in a generation.

When I refinanced late last year, I started the process knowing that getting a decent rate was only part of my mission. I wanted to get closing costs under $2,000, which was challenging considering I was seeing most quotes above $3,000.

Not only are closing costs numerous, they can get onerous. In addition to making money on the loan, many lenders will slap on “junk” fees like processing or underwriting. You can avoid these fees by going to another lender or negotiating.

The best financing strategy involves first detailing the fees and your total cost.

“Are you getting the best rate possible for the lowest fees,” says Sam Tamkin, Chicago-based attorney who handles real estate closings. “And if you’re getting an adjustable-rate loan, do you understand how they adjust?”

It’s not unusual for buyers and refinancers to pay from 3% to 5% of the total cost of the home in closing costs. The total expenses are largely a factor of where you live. Large metropolitan areas tend to be most expensive. Here’s a strategy that will help you reduce costs:

• Always sample a variety of lenders and brokers. Consider Internet services, local banks and credit unions. You may be able to apply online for basic quotes, but make sure you get a good faith estimate of all costs. You may need to make some phone calls to get closing estimates.

• Compare all fees. Some lenders charge underwriting and processing while others don’t. If you find a lender with a desirable rate — and their fees are high relative to other lenders — ask them to trim their closing costs. Do this before you sign up for a credit check and send in your Social Security number.

• Title Insurance is costly, yet required. It can range in price from $150 to $1,000 or more. Some states regulate the price. A good mortgage broker may be able to get you the best price.

• Read your HUD-1 statement carefully. This is the form that lists all closing costs before you close and is available at least one day prior to closing. Keep in mind that you can walk away if previously undisclosed fees were added.

While I’ve found that the best rates are often obtained through mortgage brokers — they do the searching for you — there is no such thing as a “no cost loan.” They make their money through a “yield spread premium.” So their profit would be charging you 4.4% on a 4.3% loan — a “spread” of 1 percentage point — for example.

Although there have been several efforts to streamline the closing process, it still can be confusing and you will need to review a mountain of forms. Fully understand what you are signing.

Got any perplexing financial concerns? Let me know. johnwasik@gmail.com

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).”

Although you can get a great deal on mortgage rates, you can easily pay too much on closing costs.

The necessary expenses of appraisals, title insurance, credit checks and other fees can add up to thousands of dollars. You can reduce those costs by getting multiple quotes and negotiating.

With 30-year loan rates averaging around 4.3 percent and 15-year rates at 3.8 percent nationally, according to Freddie Mac, now’s a great time to refinance or buy.

Shopping multiple sources pays off. With closing costs up 37 percent — that’s an average $3,741 on a $200,000 loan according to Bankrate.com — you can put a lot more money in your pocket while getting some of the best rates in a generation.

When I refinanced late last year, I started the process knowing that getting a decent rate was only part of my mission. I wanted to get closing costs under $2,000, which was challenging considering I was seeing most quotes above $3,000.

Not only are closing costs numerous, they can get onerous. In addition to making money on the loan, many lenders will slap on “junk” fees like processing or underwriting. You can avoid these fees by going to another lender or negotiating.

The best financing strategy involves first detailing the fees and your total cost.

“Are you getting the best rate possible for the lowest fees?” asks Sam Tamkin, Chicago-based attorney who handles real estate closings. “And if you’re getting an adjustable-rate loan, do you understand how they adjust?”

It’s not unusual for buyers and refinancers to pay from 3 percent to 5 percent of the total cost of the home in closing costs. The total expenses are largely a factor of where you live. Large metropolitan areas tend to be most expensive.

Here’s a strategy that will help you reduce costs:

• Always sample a variety of lenders and brokers. Consider Internet services, local banks and credit unions. You may be able to apply online for basic quotes, but make sure you get a good faith estimate of all costs. You may need to make some phone calls to get closing estimates.

• Compare all fees. Some lenders charge underwriting and processing fees while others don’t. If you find a lender with a desirable rate — and its fees are high relative to other lenders — ask to trim the closing costs. Do this before you sign up for a credit check and send in your Social Security number.

• Title Insurance is costly, yet required. It can range in price from $150 to $1,000 or more. Some states regulate the price. A good mortgage broker may be able to get you the best price.

• Read your HUD-1 statement carefully. This is the form that lists all closing costs before you close and is available at least one day prior to closing. Keep in mind that you can walk away if previously undisclosed fees were added.

While I’ve found that the best rates are often obtained through mortgage brokers — they do the searching for you — there is no such thing as a “no cost loan.” They make their money through a “yield spread premium.” So their profit would be charging you 4.4 percent on a 4.3 percent loan — a “spread” of 1 percentage point — for example.

Although there have been several efforts to streamline the closing process, it still can be confusing and you will need to review a mountain of forms. Fully understand what you’re signing.

John F. Wasik is author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream and a Reuters columnist.

Photo: Home for sale in Los Angeles REUTERS/Mario Anzuoni