Tuesday, October 26, 2010

Getting Your College Savings Plan in Shape

By John F. Wasik (Reuters)

A ‘pure’ savings plan for college can still work

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 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

Wednesday, October 20, 2010

Making Money No Matter How Bad the Economic Climate

How I beat Yale’s David Swensen

By John F. Wasik (Reuters)

YALE/INVESTMENTIt’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

Saturday, October 16, 2010

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.

Friday, October 15, 2010

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.


Tuesday, October 12, 2010

Why Home Prices Won't Rebound Soon

By John F. Wasik (Reuters)

Don’t hold your breath on home appreciation

FINANCIAL/MORTGAGESYou 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

Tuesday, October 5, 2010

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.”

Monday, October 4, 2010

How to Lose Big Money to Small-Time Scamsters

By John F. Wasik (Reuters)

Top investment scams gone wild

MADOFF/BAILIt’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