How to Minimize Long-Term-Care Premiums
Choosing the right benefit period plays a big role in how much you'll pay for coverage.
By Kimberly Lankford
June 25, 2009
How long is the average stay at a nursing home and at an assisted-living facility? That information would help me determine how much risk to take in my investments and how much insurance coverage I'll need.
That's a great question. The answer can help you decide if you need long-term-care insurance and, if so, how much coverage to get. It can also help you figure out good strategies for minimizing your premiums.
The average stay for nursing-home residents is 28 months, and the average stay for assisted-living residents is 27 months .
But many of those people receive some other kind of long-term care before or after their stay. About 40% of residents in assisted-living facilities came from an acute-care hospital or a short-stay nursing facility, according to the Association for Long-Term Care Insurance. Also, about 33.5% of assisted-living-facility residents move to a nursing home after they leave the facility, and many nursing-home residents received care in their own home first. On average, a 65-year-old today will need some form of long-term-care services for three years, according to the National Clearinghouse for Long-Term Care Information.
Because of these statistics, I usually recommend that people consider buying a long-term-care policy that provides three years of coverage. You may want a longer benefit period if you have a family history of long-lasting conditions, such as Alzheimer's disease (about one-third of today's 65-year-olds never need long-term-care services, but 20% of today's 65-year-olds are likely to need care for more than five years). The longer the benefit period, the higher the premiums -- lifetime benefits can cost more than double the premiums for a three-year benefit period.
You'll have the most flexibility if you buy a policy with benefits that are "short and fat" rather than "long and lean." If you buy a short-and-fat policy with a $200 daily benefit and three-year benefit period, for example, you're actually buying a pool of $219,000 for care. You can't use more than $200 per day, but if you use less, then you can extend your coverage for well beyond three years.
If you buy a long-and-lean policy with a $100 daily benefit and six-year benefit period, on the other hand, the policy won't pay out more than $100 per day. If your care costs $150 per day, you'll end up paying $50 out of pocket for every day of care.
One way to hedge your bets while lowering the cost is to buy a shared-benefit policy if you're married -- that way, each spouse buys a three-year benefit period, for example, but each can use time from the other's benefit period if one needs coverage for a longer period than the other. If one needs four years of coverage, for example, the spouse can use the remaining two years.
Because care is often received in the home first, it's a good idea to look for a policy with a zero-day waiting period for home care (even though it has a longer waiting period for nursing-home care). Or consider paying extra for a rider that eliminates the waiting period for home care. This is usually a much more cost-effective strategy than lowering the waiting period for all types of care, which can boost your premiums significantly.
The U.S. Department of Health and Human Services' National Clearinghouse for Long-Term Care Information has statistics about the need for care and can also help with your risk analysis.
--------------------------------------------------------------------------------
This page printed from: http://www.kiplinger.com/columns/ask/archive/2009/q0625.htm
All contents © 2009 The Kiplinger Washington Editors
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Investing in Energy using ETFs (from Investopedia.com)
ETFs Provide Easy Access To Energy Commodities
by Rich White
If you fill up a car with gasoline or heat a home with oil or natural gas, you know that rising energy costs have put a dent in your budget. But do you also know how easy it is to buy shares in a brokerage account or IRA that can help you hedge energy commodity price increases?
This article will help investors understand the benefits of investing in energy commodity ETFs and detail choices available to interested investors. It specifically covers investments that seek to track commodities prices - not ETFs that invest in energy sector stocks, in which investment returns are influenced by the overall direction of the stock market and do not always mirror energy commodities prices.
Welcome to the World of ETFs
In recent years, thanks to the growth of exchange-traded funds (ETFs), ownership of energy-sector commodities has become more accessible for individuals. For example, buying one share of the U.S. Oil Fund ETF (AMEX:USO) gives you exposure roughly equal to one barrel of oil. If oil prices rise by 10% in a given period, your investment should theoretically appreciate by about the same percentage. You can own oil through this ETF without incurring the cost normally associated with storage or transport. The only costs that you will pay include brokerage fees to buy and sell shares plus a modest ongoing management fee.
USO is not mentioned as a specific investment recommendation. It is significant because it was the first energy commodity ETF introduced, in February of 2006, and remains one of the most popular by asset size and trading volume. Since USO's introduction, ETF energy commodity choices have greatly expanded.
Why invest in energy commodity ETFs?
ETFs are traded on exchanges (like stocks), and shares may be bought or sold throughout the trading day in large or small amounts.
At the heart of the "energy complex" is crude oil and products refined from it, such as gasoline and home heating oil. Natural gas is a by-product of oil exploration and a valuable product in its own right, used throughout the world for heat and power generation. Lesser products in the energy complex include coal, kerosene, diesel fuel, propane and emission credits.
Energy commodity ETFs can be useful tools for constructing diversified investment portfolios for the following reasons:
1. Inflation hedge and currency hedge potential - Energy has recognized value all over the world, and this value does not depend on any nation's economy or currency. Over time, most energy commodities have held their values against inflation very well. For example, the spot price of a barrel of crude oil increased at an average annual rate of 6.5% per year from 1950 through 2007. Over the same span, the annualized increase in the U.S. Consumer Price Index was 3.9%. Energy prices tend to move in the opposite direction of the U.S. dollar - prices increase when the dollar is weak. This makes energy ETFs a sound strategy for hedging against any dollar declines. (To read more on currency ETFs, check out Currency ETFs Simplify Forex Trades.)
2. Participation in global growth - Demand for energy commodities keeps growing in industrializing emerging markets such as China and India. In 2007, as in most years, the U.S. consumed about 25% of the world's 85 million barrels of total daily oil production, and U.S. consumption has been increasing by about 3% per year, according to the International Energy Agency. Some experts believe that it will be difficult for global oil production to grow in the future due to dwindling reserves, especially in Saudi Arabia. In addition, several of the world's leading oil export nations (ex. Russia, Iran, Iraq, Venezuela and Nigeria) are politically volatile and could be unreliable as future sources of supply.
3. Portfolio diversification - According to modern portfolio theory, investors can increase portfolio risk-adjusted returns by combining low-correlating assets in which returns do not tend to move in the same direction at the same time. However, few asset classes accessible to individual investors have consistently produced low correlations with U.S. stocks. Correlations are measured on a scale of 1 (perfect correlation) to -1 (perfectly negative correlation). Oil is among the few asset classes that have consistently produced very low (or negative) correlations with U.S. stocks. According to FactSet, the correlation between oil futures and the S&P 500 Index was -0.31 for the five-year period 2002-2007. For this reason, investors can expect oil commodity holdings to help diversify and balance stock-heavy portfolios.
4. Backwardation - Backwardation is the most complex (and least understood) benefit of some energy commodity ETFs. These ETFs place most of their assets in interest-bearing debt instruments (such as short-term U.S. Treasuries), which are used as collateral for buying futures contracts. In most cases, the ETFs hold futures contracts with the least time left to delivery - so-called "short-dated" contracts. As these contracts approach the delivery date, the ETFs "roll" into the next shortest-dated contracts.
Most futures contracts typically trade in contango, which means that prices on long-delivery contracts exceed short-term delivery or spot prices. However, oil and gasoline historically have often done the opposite, which is called backwardation. When an ETF systematically rolls backwardated contracts, it can add small increments of return called "roll yield", because it is rolling into less expensive contracts. Over time, these small increments add up significantly, especially if backwardation continues.
Although this explanation may sounds highly technical, roll yield historically has been the dominant source of investment return in oil, heating oil and gasoline futures contracts. According to an analysis by author and analyst Hilary Till, long-term annualized returns of these futures contracts exceeded spot prices significantly, as shown in Figure 1, below, and the major reason for this differential was backwardation roll yield.
Annualized Returns from 1983 to 2004
- Futures Contract Spot Price
Crude Oil 15.8% 1.1%
Heating Oil 11.1% 1.1%
Gasoline (since Jan. 1985) 18.6% 3.3%
Source: "Structural Sources of Return and Risk in Commodity Futures Investments" by Hilary Till(Commodities Now, June 2006)
Figure 1
It should be noted that these energy contracts occasionally move from backwardation to contango for intervals of time. During such times, roll yield may be lower than shown in the table; they may even be negative. Historically, natural gas has not shown the same tendency toward backwardation and roll yield benefit as the three contracts listed in the table.
Types of Energy ETFs
Energy ETFs can be divided into three main groups:
Single contract - These ETFs participate principally in single futures contracts. For example, the iPATH S&P GSCI Crude Oil Total Return Index (NYSE:OIL) exchange-traded note (ETN) participates in the West Texas intermediate (WTI) light sweet crude oil futures traded on the New York Mercantile Exchange. Note: An ETN is an exchange-traded note, a structure that works much the same way as an ETF. PowerShares DB Oil Fund (AMEX:DBO) participates in the same WTI contract.
USO, the pioneering energy commodity ETF, is a subject of some controversy because it nominally participates in a single contract (WTI), while also dabbling in several other energy complex contracts. Therefore, most investors do not consider it be a pure single-contract ETF.
Multi-Contract - These ETFs offer diversified exposure to the energy sector by participating in several futures contracts. The iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) has about two-thirds of its total weight in the energy sector and the remaining one-third in other types of commodities. It tracks one of the oldest diversified commodities indexes, the S&P GSCI Total Return Index.
PowerShares DB Energy Fund (AMEX:DBE) is a pure energy sector fund diversified across commodity types. It participates in futures contracts for light sweet crude oil, heating oil, brent crude, gasoline and natural gas. The ETF seeks to track an index that optimizes roll yield by selecting futures contracts according to a proprietary formula.
Bearish - Energy sector commodities can be volatile, and some investors may want to bet against them at times. The first "bearish" energy commodity ETF is Claymore MACROshares Oil Down tradable Trust (AMEX:DCR). It is designed to produce the inverse of the performance of WTI oil. This ETF is one-half of a pair of MACRO shares, a concept through which two ETFs are issued together but traded separately to track, respectively, the up and down movements in a commodity. (The other half of this pair is Claymore MACROshares Up tradable Trust (AMEX: UCR).
Final Points
While ETFs have made energy sector commodities more accessible to investors, it's important for investors to understand the mechanics of how individual ETFs work. Specifically, investors should realize that virtually all of these ETFs participate in futures contracts, and the "roll yield" of these contracts can be a major source of positive or negative return, depending on patterns of backwardation or contango. Multi-contract ETFs such as GSG and DBE can be a good way to add broad energy exposure across multiple contracts. But at times, some of these contracts may be in backwardation (producing positive roll yield) while others are in contango (producing negative roll yield).
For investors who own stock-heavy portfolios denominated in U.S. dollars and wish to increase diversification and inflation-hedge potential, some energy sector exposure may be advisable. However, it's a good idea to have a long-term horizon for such investments because they can be volatile over brief periods. Crude oil can be an especially valuable commodity for adding diversification because it has consistently produced negative correlations with U.S. stocks.
by Rich White
If you fill up a car with gasoline or heat a home with oil or natural gas, you know that rising energy costs have put a dent in your budget. But do you also know how easy it is to buy shares in a brokerage account or IRA that can help you hedge energy commodity price increases?
This article will help investors understand the benefits of investing in energy commodity ETFs and detail choices available to interested investors. It specifically covers investments that seek to track commodities prices - not ETFs that invest in energy sector stocks, in which investment returns are influenced by the overall direction of the stock market and do not always mirror energy commodities prices.
Welcome to the World of ETFs
In recent years, thanks to the growth of exchange-traded funds (ETFs), ownership of energy-sector commodities has become more accessible for individuals. For example, buying one share of the U.S. Oil Fund ETF (AMEX:USO) gives you exposure roughly equal to one barrel of oil. If oil prices rise by 10% in a given period, your investment should theoretically appreciate by about the same percentage. You can own oil through this ETF without incurring the cost normally associated with storage or transport. The only costs that you will pay include brokerage fees to buy and sell shares plus a modest ongoing management fee.
USO is not mentioned as a specific investment recommendation. It is significant because it was the first energy commodity ETF introduced, in February of 2006, and remains one of the most popular by asset size and trading volume. Since USO's introduction, ETF energy commodity choices have greatly expanded.
Why invest in energy commodity ETFs?
ETFs are traded on exchanges (like stocks), and shares may be bought or sold throughout the trading day in large or small amounts.
At the heart of the "energy complex" is crude oil and products refined from it, such as gasoline and home heating oil. Natural gas is a by-product of oil exploration and a valuable product in its own right, used throughout the world for heat and power generation. Lesser products in the energy complex include coal, kerosene, diesel fuel, propane and emission credits.
Energy commodity ETFs can be useful tools for constructing diversified investment portfolios for the following reasons:
1. Inflation hedge and currency hedge potential - Energy has recognized value all over the world, and this value does not depend on any nation's economy or currency. Over time, most energy commodities have held their values against inflation very well. For example, the spot price of a barrel of crude oil increased at an average annual rate of 6.5% per year from 1950 through 2007. Over the same span, the annualized increase in the U.S. Consumer Price Index was 3.9%. Energy prices tend to move in the opposite direction of the U.S. dollar - prices increase when the dollar is weak. This makes energy ETFs a sound strategy for hedging against any dollar declines. (To read more on currency ETFs, check out Currency ETFs Simplify Forex Trades.)
2. Participation in global growth - Demand for energy commodities keeps growing in industrializing emerging markets such as China and India. In 2007, as in most years, the U.S. consumed about 25% of the world's 85 million barrels of total daily oil production, and U.S. consumption has been increasing by about 3% per year, according to the International Energy Agency. Some experts believe that it will be difficult for global oil production to grow in the future due to dwindling reserves, especially in Saudi Arabia. In addition, several of the world's leading oil export nations (ex. Russia, Iran, Iraq, Venezuela and Nigeria) are politically volatile and could be unreliable as future sources of supply.
3. Portfolio diversification - According to modern portfolio theory, investors can increase portfolio risk-adjusted returns by combining low-correlating assets in which returns do not tend to move in the same direction at the same time. However, few asset classes accessible to individual investors have consistently produced low correlations with U.S. stocks. Correlations are measured on a scale of 1 (perfect correlation) to -1 (perfectly negative correlation). Oil is among the few asset classes that have consistently produced very low (or negative) correlations with U.S. stocks. According to FactSet, the correlation between oil futures and the S&P 500 Index was -0.31 for the five-year period 2002-2007. For this reason, investors can expect oil commodity holdings to help diversify and balance stock-heavy portfolios.
4. Backwardation - Backwardation is the most complex (and least understood) benefit of some energy commodity ETFs. These ETFs place most of their assets in interest-bearing debt instruments (such as short-term U.S. Treasuries), which are used as collateral for buying futures contracts. In most cases, the ETFs hold futures contracts with the least time left to delivery - so-called "short-dated" contracts. As these contracts approach the delivery date, the ETFs "roll" into the next shortest-dated contracts.
Most futures contracts typically trade in contango, which means that prices on long-delivery contracts exceed short-term delivery or spot prices. However, oil and gasoline historically have often done the opposite, which is called backwardation. When an ETF systematically rolls backwardated contracts, it can add small increments of return called "roll yield", because it is rolling into less expensive contracts. Over time, these small increments add up significantly, especially if backwardation continues.
Although this explanation may sounds highly technical, roll yield historically has been the dominant source of investment return in oil, heating oil and gasoline futures contracts. According to an analysis by author and analyst Hilary Till, long-term annualized returns of these futures contracts exceeded spot prices significantly, as shown in Figure 1, below, and the major reason for this differential was backwardation roll yield.
Annualized Returns from 1983 to 2004
- Futures Contract Spot Price
Crude Oil 15.8% 1.1%
Heating Oil 11.1% 1.1%
Gasoline (since Jan. 1985) 18.6% 3.3%
Source: "Structural Sources of Return and Risk in Commodity Futures Investments" by Hilary Till(Commodities Now, June 2006)
Figure 1
It should be noted that these energy contracts occasionally move from backwardation to contango for intervals of time. During such times, roll yield may be lower than shown in the table; they may even be negative. Historically, natural gas has not shown the same tendency toward backwardation and roll yield benefit as the three contracts listed in the table.
Types of Energy ETFs
Energy ETFs can be divided into three main groups:
Single contract - These ETFs participate principally in single futures contracts. For example, the iPATH S&P GSCI Crude Oil Total Return Index (NYSE:OIL) exchange-traded note (ETN) participates in the West Texas intermediate (WTI) light sweet crude oil futures traded on the New York Mercantile Exchange. Note: An ETN is an exchange-traded note, a structure that works much the same way as an ETF. PowerShares DB Oil Fund (AMEX:DBO) participates in the same WTI contract.
USO, the pioneering energy commodity ETF, is a subject of some controversy because it nominally participates in a single contract (WTI), while also dabbling in several other energy complex contracts. Therefore, most investors do not consider it be a pure single-contract ETF.
Multi-Contract - These ETFs offer diversified exposure to the energy sector by participating in several futures contracts. The iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) has about two-thirds of its total weight in the energy sector and the remaining one-third in other types of commodities. It tracks one of the oldest diversified commodities indexes, the S&P GSCI Total Return Index.
PowerShares DB Energy Fund (AMEX:DBE) is a pure energy sector fund diversified across commodity types. It participates in futures contracts for light sweet crude oil, heating oil, brent crude, gasoline and natural gas. The ETF seeks to track an index that optimizes roll yield by selecting futures contracts according to a proprietary formula.
Bearish - Energy sector commodities can be volatile, and some investors may want to bet against them at times. The first "bearish" energy commodity ETF is Claymore MACROshares Oil Down tradable Trust (AMEX:DCR). It is designed to produce the inverse of the performance of WTI oil. This ETF is one-half of a pair of MACRO shares, a concept through which two ETFs are issued together but traded separately to track, respectively, the up and down movements in a commodity. (The other half of this pair is Claymore MACROshares Up tradable Trust (AMEX: UCR).
Final Points
While ETFs have made energy sector commodities more accessible to investors, it's important for investors to understand the mechanics of how individual ETFs work. Specifically, investors should realize that virtually all of these ETFs participate in futures contracts, and the "roll yield" of these contracts can be a major source of positive or negative return, depending on patterns of backwardation or contango. Multi-contract ETFs such as GSG and DBE can be a good way to add broad energy exposure across multiple contracts. But at times, some of these contracts may be in backwardation (producing positive roll yield) while others are in contango (producing negative roll yield).
For investors who own stock-heavy portfolios denominated in U.S. dollars and wish to increase diversification and inflation-hedge potential, some energy sector exposure may be advisable. However, it's a good idea to have a long-term horizon for such investments because they can be volatile over brief periods. Crude oil can be an especially valuable commodity for adding diversification because it has consistently produced negative correlations with U.S. stocks.
Where to Complain? Get Help From Your Elected Officials
Government is a maze. Sometimes the quickest way to get action is to contact your folks in Washington. Use this site to locate them and send them an email:
http://www.visi.com/juan/congress/
Your elected representatves can cut the red tape when it comes to Social Security, Veterans Benefits, Healthcare, Taxes, and other issues.
http://www.visi.com/juan/congress/
Your elected representatves can cut the red tape when it comes to Social Security, Veterans Benefits, Healthcare, Taxes, and other issues.
Safer Strategies for Retirement Portfolios (NY Times)
June 20, 2009
Your Money
For Older Investors, Old Rules May Not Apply
By TARA SIEGEL BERNARD
The stock market’s damage has already been done. And if you’re one of those people near or already in retirement, you already know you’re going to have to work longer, save more or spend less.
But what should you do right now with the money you have left? Should you wade back into the stock market, if you bailed out when the market was plunging? Or if you watched your investments drop and then recover a little in the last few months, should you just hold on? What happens if the market doesn’t fully recover for a long time? (That happened in Japan in the ’90s.)
This economic downturn has been steep enough and frightening enough to undermine the idea that the stock market, over time, will always deliver. So a lot of investors have retreated to a more conservative stance.
The wisdom of that move is debatable. The investment industry warns that becoming too defensive is costly in the long run. Its argument goes something like this: People are living longer, retirement may last 25 or 30 years and stocks are supposed to protect you from the ravages of inflation. And since stocks tend to outpace most investments over long periods of time, the industry says, your savings will do all right in the end.
But some people are no longer comfortable with that logic. There’s even a new study that contends holding stocks over long periods of time may be riskier than previously thought. Robert F. Stambaugh, a finance professor at the Wharton School at the University of Pennsylvania and a co-author of the report, said most investment research only accounted for the risk of short-term market swings around the stock market’s average gain over time. It doesn’t factor in the fact, he said, that the average itself is subject to change.
So what should retirees and pre-retirees make of all of this?
“If another decline in the market is going to bankrupt you or put you out of business or destroy your retirement account, you should not go back into the stock market,” said John C. Bogle, the founder of Vanguard and viewed by many as the father of index investing. “It’s not complicated. The stock market can go up and down a lot and nobody really knows how much and when.”
What’s worked for Mr. Bogle may not work for you, but his method isn’t a bad place to start. “I have this threadbare rule that has worked very well for me,” he said in an interview this week. “Your bond position should equal your age.” Mr. Bogle, by the way, is 80 years old.
That’s a rather conservative recommendation, by many financial planners’ standards. In fact, Vanguard itself offers products that are more aggressive. Its target-date funds — whose investment mix grows more conservative as retirement nears — recommend that people retiring in 2010 (generally, people who are 65) should split their savings evenly between stock and bonds.
Charles Schwab, by contrast, has recently reduced the risk for its target-date funds. The company’s 2010 fund will allocate about 40 percent to stock funds next year, down from 50 percent in the past. “It’s a reflection that our clients’ appetite for risk has changed,” said Peter Crawford, a senior vice president at Charles Schwab Investment Management.
But you shouldn’t simply view your investments through the lens of how much you allocate to different investments (though you will need to come up with a plan). Instead, you should work your way backward. First, consider how much you will need to live when you’re retired and then figure out how you’ll pay for it.
Nearing Retirement
Ideally, you should have started to slowly shrink your stock position over your working career. But some financial planners have become more conservative about that. Before the market’s sharp downturn, Warren McIntyre, a financial planner in Troy, Mich., typically reduced his clients’ stock allocations by about 1 percent each year. Now, for older investors, he ratchets down their stocks by 2 percent each year once they reach 60. So a 65-year-old’s investments would be evenly split between stocks and bonds.
Other planners are taking even more defensive positions. “We are still very concerned about the status of the economic recovery and remain quite defensive as a result,” said Chip Addis, a financial planner in Wayne, Pa., who invests his clients’ portfolios in only 40 percent stocks.
Of course, there’s no one formula. Milo Benningfield, a fee-only planner in San Francisco, for instance, said he put a 61-year-old client in a portfolio with 60 percent in diversified stocks and alternatives (like real estate) and 40 percent in fixed-income (largely split among high-quality, short-term and intermediate-term bonds and cash). But this client can afford to take that risk — the client owns a house, rental property and has other holdings outside the portfolio.
The picture may change for pre-retirees who are 61 and close to meeting their savings goals, but can’t afford to lose any money. “We would ask ourselves to what degree, if any, can you afford equities,” Mr. Benningfield said. If inflation was their only concern, he might invest their money across a ladder of Treasury Inflation-Protected Securities, or TIPS, which are backed by the government and keep pace with inflation.
But since retirees generally spend money on entertainment, health care and food — whose costs often exceed the general rate of inflation — he said he might invest 40 to 50 percent of their money in a portfolio of diversified stock funds (with at least 30 percent of that in international stock funds). But, he added, “Cash is risky, stocks and bonds are risky, life is risky.”
As to those investors who got out of stocks, Mr. Bogle said it might be time for some of them to get back in. “But I would take two years to do it,” he said. “Maybe average in over eight quarters, and do an eighth each quarter. I am just not in favor of doing things in a hurry or emotionally.”
And then? “Don’t touch it,” he said, emphatically. “One of my rules is don’t do something. Just stand there.”
Retirement
Several planners recommended different variations on a similar strategy for retirees. Set aside anywhere from eight to 15 years of your expected expenses — that includes food, utilities, housing, insurance — in bonds and cash. That way, you’ll never have to tap your stock holdings at the worst possible moment.
“Once you have that in place, you feel like you can weather any economic storm,” said Chip Simon, a financial planner in Poughkeepsie, N.Y.
When you have figured out how much it costs to live each year, the next step is to see how much Social Security will cover. Whatever is left needs to be financed by your retirement portfolio. And the general rule of thumb is that you shouldn’t withdraw more than 4 percent of your portfolio (adjusted for inflation) each year. There are different ways to invest your cash and bond holdings.
Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years of annual expenses in a bond ladder, with an equal amount coming due every six months. The ladder can include high-quality corporate bonds, Treasury notes, certificates of deposit or municipal bonds, depending on the retiree’s tax bracket. Mr. Simon takes a similar approach using a 15-year ladder of zero-coupon bonds. He says that investors can start building the ladder in their 50s, with the first rung coming due the year they retire.
Some advisers also say you can guarantee you’ll be able to cover your basic expenses by purchasing an immediate annuity from an insurance company. The annuity pays you a stream of income until you die. “You can buy four small ones from four insurers if you are worried about insolvency risk,” said Dallas L. Salisbury, president of the Employee Benefit Research Institute. “And if you are just worried about inflation protection, you can do TIPS.”
But you should probably delay any annuity purchases because payouts rise with interest rates. With current rates so low, and the possibility of inflation later, advisers said it’s best to wait a few years. You can also research inflation-adjusted annuities, but you’ll receive lower payouts in the beginning, Mr. Benningfield said, adding: “Less than most people can stomach.”
Your Money
For Older Investors, Old Rules May Not Apply
By TARA SIEGEL BERNARD
The stock market’s damage has already been done. And if you’re one of those people near or already in retirement, you already know you’re going to have to work longer, save more or spend less.
But what should you do right now with the money you have left? Should you wade back into the stock market, if you bailed out when the market was plunging? Or if you watched your investments drop and then recover a little in the last few months, should you just hold on? What happens if the market doesn’t fully recover for a long time? (That happened in Japan in the ’90s.)
This economic downturn has been steep enough and frightening enough to undermine the idea that the stock market, over time, will always deliver. So a lot of investors have retreated to a more conservative stance.
The wisdom of that move is debatable. The investment industry warns that becoming too defensive is costly in the long run. Its argument goes something like this: People are living longer, retirement may last 25 or 30 years and stocks are supposed to protect you from the ravages of inflation. And since stocks tend to outpace most investments over long periods of time, the industry says, your savings will do all right in the end.
But some people are no longer comfortable with that logic. There’s even a new study that contends holding stocks over long periods of time may be riskier than previously thought. Robert F. Stambaugh, a finance professor at the Wharton School at the University of Pennsylvania and a co-author of the report, said most investment research only accounted for the risk of short-term market swings around the stock market’s average gain over time. It doesn’t factor in the fact, he said, that the average itself is subject to change.
So what should retirees and pre-retirees make of all of this?
“If another decline in the market is going to bankrupt you or put you out of business or destroy your retirement account, you should not go back into the stock market,” said John C. Bogle, the founder of Vanguard and viewed by many as the father of index investing. “It’s not complicated. The stock market can go up and down a lot and nobody really knows how much and when.”
What’s worked for Mr. Bogle may not work for you, but his method isn’t a bad place to start. “I have this threadbare rule that has worked very well for me,” he said in an interview this week. “Your bond position should equal your age.” Mr. Bogle, by the way, is 80 years old.
That’s a rather conservative recommendation, by many financial planners’ standards. In fact, Vanguard itself offers products that are more aggressive. Its target-date funds — whose investment mix grows more conservative as retirement nears — recommend that people retiring in 2010 (generally, people who are 65) should split their savings evenly between stock and bonds.
Charles Schwab, by contrast, has recently reduced the risk for its target-date funds. The company’s 2010 fund will allocate about 40 percent to stock funds next year, down from 50 percent in the past. “It’s a reflection that our clients’ appetite for risk has changed,” said Peter Crawford, a senior vice president at Charles Schwab Investment Management.
But you shouldn’t simply view your investments through the lens of how much you allocate to different investments (though you will need to come up with a plan). Instead, you should work your way backward. First, consider how much you will need to live when you’re retired and then figure out how you’ll pay for it.
Nearing Retirement
Ideally, you should have started to slowly shrink your stock position over your working career. But some financial planners have become more conservative about that. Before the market’s sharp downturn, Warren McIntyre, a financial planner in Troy, Mich., typically reduced his clients’ stock allocations by about 1 percent each year. Now, for older investors, he ratchets down their stocks by 2 percent each year once they reach 60. So a 65-year-old’s investments would be evenly split between stocks and bonds.
Other planners are taking even more defensive positions. “We are still very concerned about the status of the economic recovery and remain quite defensive as a result,” said Chip Addis, a financial planner in Wayne, Pa., who invests his clients’ portfolios in only 40 percent stocks.
Of course, there’s no one formula. Milo Benningfield, a fee-only planner in San Francisco, for instance, said he put a 61-year-old client in a portfolio with 60 percent in diversified stocks and alternatives (like real estate) and 40 percent in fixed-income (largely split among high-quality, short-term and intermediate-term bonds and cash). But this client can afford to take that risk — the client owns a house, rental property and has other holdings outside the portfolio.
The picture may change for pre-retirees who are 61 and close to meeting their savings goals, but can’t afford to lose any money. “We would ask ourselves to what degree, if any, can you afford equities,” Mr. Benningfield said. If inflation was their only concern, he might invest their money across a ladder of Treasury Inflation-Protected Securities, or TIPS, which are backed by the government and keep pace with inflation.
But since retirees generally spend money on entertainment, health care and food — whose costs often exceed the general rate of inflation — he said he might invest 40 to 50 percent of their money in a portfolio of diversified stock funds (with at least 30 percent of that in international stock funds). But, he added, “Cash is risky, stocks and bonds are risky, life is risky.”
As to those investors who got out of stocks, Mr. Bogle said it might be time for some of them to get back in. “But I would take two years to do it,” he said. “Maybe average in over eight quarters, and do an eighth each quarter. I am just not in favor of doing things in a hurry or emotionally.”
And then? “Don’t touch it,” he said, emphatically. “One of my rules is don’t do something. Just stand there.”
Retirement
Several planners recommended different variations on a similar strategy for retirees. Set aside anywhere from eight to 15 years of your expected expenses — that includes food, utilities, housing, insurance — in bonds and cash. That way, you’ll never have to tap your stock holdings at the worst possible moment.
“Once you have that in place, you feel like you can weather any economic storm,” said Chip Simon, a financial planner in Poughkeepsie, N.Y.
When you have figured out how much it costs to live each year, the next step is to see how much Social Security will cover. Whatever is left needs to be financed by your retirement portfolio. And the general rule of thumb is that you shouldn’t withdraw more than 4 percent of your portfolio (adjusted for inflation) each year. There are different ways to invest your cash and bond holdings.
Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years of annual expenses in a bond ladder, with an equal amount coming due every six months. The ladder can include high-quality corporate bonds, Treasury notes, certificates of deposit or municipal bonds, depending on the retiree’s tax bracket. Mr. Simon takes a similar approach using a 15-year ladder of zero-coupon bonds. He says that investors can start building the ladder in their 50s, with the first rung coming due the year they retire.
Some advisers also say you can guarantee you’ll be able to cover your basic expenses by purchasing an immediate annuity from an insurance company. The annuity pays you a stream of income until you die. “You can buy four small ones from four insurers if you are worried about insolvency risk,” said Dallas L. Salisbury, president of the Employee Benefit Research Institute. “And if you are just worried about inflation protection, you can do TIPS.”
But you should probably delay any annuity purchases because payouts rise with interest rates. With current rates so low, and the possibility of inflation later, advisers said it’s best to wait a few years. You can also research inflation-adjusted annuities, but you’ll receive lower payouts in the beginning, Mr. Benningfield said, adding: “Less than most people can stomach.”
New Rules - Should You Convert to Roth IRA? (WSJ Encore)
JUNE 20, 2009 Making a Good Deal for Retirement Even Better
New tax rules are about to give more people access to a Roth IRA, one of the best savings plans for later life. Here’s how the changes work—and how to get ready.
By KELLY GREENE
Robert Woods has been “chomping at the bit,” he says, to open a Roth individual retirement account. Next year, the 54-year-old American Airlines pilot finally will get the chance.
Starting Jan. 1, the income limits that have prevented many individuals, including Mr. Woods, from converting a traditional IRA or employer-sponsored retirement plan to a Roth will be eliminated. The change—one of the biggest and most important on the IRA landscape in years—will widen the entryway to one of the best deals in retirement planning. With a Roth IRA, virtually all income growth and withdrawals are tax-free.
The new rules come at a time when many IRAs have plummeted in value, meaning the taxes on such conversions (and you do pay taxes when you convert) will likely be lower, as well. And with taxes at all levels expected to rise in coming years, the idea of an account that’s safe from tax increases appeals to many people heading into retirement.
“It’s potentially quite a big deal,” says Joel Dickson, a principal with Vanguard Group in Valley Forge, Pa. “We’re getting a lot of questions, and investors certainly should be thinking about it.”
Here’s a look at how the new rules work, how to take advantage of them—and the possible pitfalls.
Nuts and Bolts
At the moment, many people make too much money to use Roths. Individuals whose modified adjusted gross income for 2009 is $120,000 or more can’t contribute. For couples who file joint tax returns, the cutoff is $176,000.
You aren’t allowed to convert traditional IRA assets to a Roth if your household’s modified adjusted gross income exceeds $100,000. A married person who files a separate tax return is prohibited from converting—no matter how much or how little he or she makes, says Ed Slott, an IRA consultant in Rockville Centre, N.Y.
But while the income limits for funding a Roth will remain, the rules for conversions are about to change.
As part of the Tax Increase Prevention and Reconciliation Act enacted in 2006, the federal government is eliminating permanently, starting Jan. 1, the $100,000 income limit for Roth conversions, as well as the restriction on spouses who file separate tax returns. That should make it easier for people with higher incomes to invest through Roth accounts. The changes also should enable more retirees—who rolled over their holdings from 401(k)s and other workplace savings plans into IRAs—to convert to Roths.
Of course, there’s still the matter of taxes. When you convert assets from a traditional IRA or workplace plan to a Roth, you have to pay income tax on all pretax contributions and earnings included in the amount you convert.
The law does provide some wiggle room, however: You can report the amount you convert in 2010 on your tax return for that year. Or, you can spread the amount converted equally across your 2011 and 2012 tax returns, paying any resulting tax in those years. For example, if you convert $50,000 next year and choose not to declare the conversion on your 2010 return, you must declare $25,000 on your tax return for 2011 and $25,000 on you return for 2012. The two-year option is a one-time offer for 2010 conversions.
The fact that Uncle Sam is allowing you to stretch out your tax bill could help people who convert keep their nest eggs intact. Financial planners uniformly say it makes no sense to convert to a Roth unless you can pay the taxes from a source other than your IRA. If you need to tap your IRA for the tax money, you’re defeating, in part, the purpose of the conversion: to maximize the long-term value of the Roth.
One other note: If you are age 70½ or older and taking required minimum distributions from a traditional IRA or workplace plan, you can’t convert that required withdrawal to a Roth. However, after you take your required minimum distribution for the year, you can convert remaining traditional IRA assets to a Roth. For 2009, Congress has waived required withdrawals in an attempt to help retirees rebuild savings. But required withdrawals resume in 2010.
So, if you’re over the income limits for contributing to a Roth, what’s the simplest way to fund one when the conversion rules change? If you haven’t already done so, open a traditional IRA (which has no income limits), contribute the maximum amount allowable ($6,000 in 2009 for individuals age 50 and older), and convert the assets to a Roth next year.
John Blanchard, a 41-year-old executive recruiter in Des Moines, Iowa, has “maxed out” IRA contributions for himself and his wife since 2006 in anticipation of the 2010 rule change. He plans to convert about $34,000 in holdings next year. “If they would let me do more, I would do more,” he says. “This planning is purely for retirement.”
You could continue this strategy each year after that—opening a traditional IRA and converting it to a Roth. In fact, you would have to use this approach if your income exceeds the limits for making Roth contributions.
But how do you do this—over a number of years—without winding up with multiple Roth accounts? Mr. Slott recommends holding two Roths. When you first convert the assets, put them in your “new” Roth. That way, if that holding suffers a loss in the first year, you can recharacterize it as a traditional IRA so you don’t have to pay tax on value that no longer exists. (More on that below.) If the account increases in value before that deadline expires, you could then transfer the assets to your “old” Roth—after the time to recharacterize expires. Each year, you could repeat those two steps.
Why It’s a Good Idea…Why convert? Roth IRAs have several big advantages over traditional IRAs:
For the most part, withdrawals are tax-free, as long as you meet rules for minimum holding periods. Specifically, you have to hold a Roth IRA for five years and be at least age 59½ for withdrawals to be tax-free. Early withdrawals are subject to penalties.
There are no required distributions. With traditional IRAs, you must begin tapping your account after reaching age 70½. In doing so, you increase your taxable income starting in your 70s.
Your heirs don’t owe income tax on withdrawals. That can be a big deal for middle-aged beneficiaries earning big paychecks. One caveat: Roth beneficiaries do have to take distributions across their life expectancies, and Roth assets are still included in an estate’s value.
The fact that anyone who inherits a Roth could make withdrawals with no income tax has led some older adults to consider Roth conversions as an alternative to life insurance. Jonathan Mazur, a financial planner in Dallas, already has suggested that strategy to Shayne Keller, a 55-year-old semi-retired telecommunications consultant. Mr. Keller’s heart disease has made it tough for him to get life insurance. Instead, he’s now planning to convert a traditional IRA worth about $300,000 to a Roth, and then name his two grandchildren as the Roth’s beneficiaries.
Another big advantage: A Roth IRA provides what many financial planners refer to as tax diversification.
“In the future, when you’re going to be taking assets out of your account, you don’t know what your personal situation is going to be, and you don’t know what tax rates are going to be,” says Sean Cunniff, a research director in the brokerage and wealth-management service at TowerGroupin Needham, Mass. “So, if you already have a taxable account, like a brokerage account or mutual funds, and you have a tax-deferred account like a 401(k) or traditional IRA, adding a tax-free account gives you the most flexibility” to keep taxes low in retirement.
…And Why It’s Not as Easy as It Looks
The trickiest part of paying the tax for a Roth conversion involves the IRS’s pro-rata rule. In short, you can’t cherry-pick which assets you wish to convert.
Let’s say you have a rollover IRA (from an employer’s 401(k) plan) with a balance of $200,000, and an IRA with $50,000. The latter contains $40,000 in nondeductible contributions made over a number of years. As much as you might wish, you can’t convert the $40,000 alone—tax-free—to a Roth IRA.
Rather, you have to follow the pro-rata rule. The IRS says you must first add the balance in all your IRAs—in this case, $250,000. Then you divide nondeductible contributions by that balance: $40,000 divided by $250,000. This gives you the percentage—16%, in our example—of any conversion that’s tax-free. So, let’s say you want to convert $30,000 of your two IRAs to a Roth. The amount of the conversion that would be tax-free would be $4,800 ($30,000 x 0.16).
“If you’re thinking about doing a Roth conversion, leave your 401(k) alone” rather than rolling it into an IRA beforehand to keep your share of nondeductible contributions higher in the calculation above, says John Carl, president of the Retirement Learning Center LLC in New York, which works with investment advisers. And if you’ve already rolled over your 401(k) into a traditional IRA, you may want to roll it back—a move that many employer plans allow, he adds.
Perhaps the toughest part of all this is “gathering the data”—showing which of your past IRA contributions were deductible and nondeductible, says Kevin Heyman, a certified financial planner in Newport News, Va. “You have to keep one heck of a record to know which IRAs were nondeductible over the years.”It’s involved, but possible, to reconstruct your after-tax basis in a traditional IRA, and it makes sense to do it now so you can weigh whether to convert to a Roth in 2010, says Mr. Slott, the IRA consultant.
First stop: tax returns you still have. You’re supposed to keep a running record of nondeductible IRA contributions on IRS Form 8606 and file it with your tax return. If you haven’t done so, you can either buy back your old tax returns from the IRS, using Form 4506, or you can order a free transcript of everything that’s reported about you to the IRS, using Form 4506-T. Included in your transcript is information from IRS Form 5498, which reports contributions you made to an IRA. Other resources are year-end statements from your IRA custodian.
As mentioned above, you should be able to pay any tax involved from a source other than the IRA itself to make the conversion worthwhile. Some retirees already are setting up piggy banks for that purpose. “I’m putting my savings plan together so we have money to pay for the tax,” says Marjorie Hagen, 60, a retired postmaster in Minneapolis. She and her husband plan to convert at least $150,000 in IRA assets next year to give them “more control and flexibility,” she says.
An IRA withdrawal made simply to pay taxes on a Roth conversion could be a particularly bad move for battered investments because you’d be locking in losses. And if you’re under age 59½, you would get dinged with a 10% penalty for withdrawing IRA assets at the time of the conversion. The silver lining, of course, is that those battered investments probably would be taxed at relatively low value, meaning any tax you have to pay should be relatively low, as well.
Indeed, tax rates—what you’re paying now and what you might pay in the future—invariably complicate decisions about whether to convert. Linda Duessel, a market strategist at Federated Investors Inc., an investment-management firm in Pittsburgh, points out that the income tax you pay on a Roth conversion while you’re working would be at your top rate, since it’s added to your regular income. But in retirement, when IRA distributions presumably would help take the place of a paycheck, you’d be paying tax at your “effective” rate, or the total tax you pay divided by your taxable income.
If you expect your income to be lower in retirement—and tax rates to stay about where they are—then a Roth conversion might not make sense. The upshot: Whether you convert or not basically depends on what you expect to happen with your income in retirement, compared with your income while working, and whether you’re more comfortable paying taxes sooner at current rates or betting on lower taxes later.
Strategies to Consider
What’s the best way to take advantage of the rule change? First, keep in mind that you don’t have to convert your entire IRA next year. You can do it piecemeal, as you can afford it, over a number of years. A Roth conversion “isn’t an all-or-nothing option,” says TowerGroup’s Mr. Cunniff. If you hold traditional IRAs made up largely of pretax contributions, such as a 401(k) rollover, your tax bill could be steep. One way to mitigate the tax-bill pain is to get your accountant to help you figure out how much you could convert within your current tax bracket each year without bumping yourself into a higher one.
It’s also a good idea to put converted holdings in a new account, rather than an existing Roth. Here’s why: If the value of your converted assets falls further—after you have paid taxes on their value—you can change your mind, “recharacterize” the account as a traditional IRA, and, in turn, no longer owe the tax. Later on, you could reconvert the assets to a Roth again. (See IRS Publication 590 for the timing details.) This dilutes the tax benefit if you’ve combined those converted assets with other Roth holdings that have appreciated in value.
In fact, you might consider opening a separate Roth for each type of investment you make with the converted money. That way, you could “cherry-pick the losers,” recharacterizing investments that perform poorly, suggests Mr. Slott. Let’s say you made two types of investments—one that doubled in value and another that lost everything. If those investments were in the same Roth, the account value would appear unchanged. But if they were in separate accounts, you could recharacterize the one that suffered—and allow the one doing well to continue appreciating in value as a Roth.
Some owners of IRAs that hold variable annuities with depressed account values are planning to convert those investments to Roth IRAs as well. The current value of the underlying investments in their variable annuities has fallen below their income benefit or death benefit. In that situation, if you convert to a Roth, you’d pay tax on the lower account value—and potentially get a higher benefit in the future tax-free.
Still, if you have a variable annuity and you’re considering a Roth conversion, make sure you value the account according to the latest IRS rules, Mr. Slott cautions. The IRS cracked down on annuity holders using “artificially deflated” variable-annuity values in Roth conversions a few years ago to lower their taxes, he says. “The IRS ruled that you have to get the actual fair-market value of the account from the insurance company and use that number.”
What You Should Do Now
There are a few ways to get ready for next year. Again, as noted above, if you have money to invest, consider funding an IRA before Dec. 31. That way, you can convert those assets to a Roth as soon as Jan. 2.
Also locate and organize your paperwork for any nondeductible IRA contributions you’ve made in the past. By taking that step, you should be able to come up with an estimate of how much of your potential conversion would be taxable. If you expect your 2010 income to be similar to this year’s, you can look up the tax brackets at www.irs.gov to get a ballpark idea of the taxes involved.
Next comes the tough part: Identifying ways to pay those taxes with money outside of your IRA.
To think through all the moving parts, it may help to consult a financial planner or accountant who has extensive experience working with retirees relying on IRAs. The tax rules governing IRAs are intricate, nonintuitive, and arcane. One misstep can unwind a tax-deferred nest egg in a way you might not have intended.
For example, if you’re already taking regular, so-called 72(t) retirement payments, which allow IRA holders to make “substantially equal” withdrawals penalty-free before age 59½, converting that IRA to a Roth is even trickier, Mr. Slott says. The new Roth can contain no other Roth IRA assets, and the 72(t) payments must be continued from the Roth—but no 72(t) payments from the traditional IRA can be converted to the Roth. And if you have company stock in your 401(k), you might wind up with a lower tax bill if you withdraw the stock from the account before doing an IRA rollover and Roth conversion, he adds.
Seek out online tools to help you devise your conversion strategy as well. One resource is Mr. Slott’s Web site, www.irahelp.com, which has a discussion forum where consumers can post questions about Roth IRA conversions and get answers from investment advisers who specialize in IRA distribution work.
At least one free, interactive calculator has been developed to help people think through the decision. Convergent Retirement Plan Solutions LLC, a retirement-services consulting firm in Brainerd, Minn., released a Roth Conversion Optimizer calculator in May for investment advisers with Archimedes Systems Inc., a Waltham, Mass., maker of financial-planning software. A consumer version of the calculator is available at www.RothRetirement.com.
“For the vast majority of middle America, the question is, ‘What’s the best portion of my IRA to put into a Roth?”’ says Ben Norquist, president of Convergent.
The calculator takes several factors into account, including your income needs from retirement assets, future tax rates and the portion of your assets you convert to a Roth. Then, it crunches those variables to show you, using a simple bar graph, the impact of a Roth conversion on your future assets.
One caveat: With any calculator that lets you adjust the future tax rate, as this one does, it’s easy to manipulate the answer if you’re predisposed to doing a conversion now—or avoiding it because you don’t want to pay the resulting tax bill, Mr. Slott says.
Still, the calculator does help you pin down the answer to the big question you should answer for yourself this year, Mr. Norquist says: “If I can take a portion of my assets and shift them over to a Roth, am I going to sleep better knowing they can’t be touched by future tax increases?” If your answer is “yes,” it’s time to start digging out records and number-crunching.
--Ms. Greene is a staff reporter for The Wall Street Journal in New York. She can be reached at encore@wsj.com.
New tax rules are about to give more people access to a Roth IRA, one of the best savings plans for later life. Here’s how the changes work—and how to get ready.
By KELLY GREENE
Robert Woods has been “chomping at the bit,” he says, to open a Roth individual retirement account. Next year, the 54-year-old American Airlines pilot finally will get the chance.
Starting Jan. 1, the income limits that have prevented many individuals, including Mr. Woods, from converting a traditional IRA or employer-sponsored retirement plan to a Roth will be eliminated. The change—one of the biggest and most important on the IRA landscape in years—will widen the entryway to one of the best deals in retirement planning. With a Roth IRA, virtually all income growth and withdrawals are tax-free.
The new rules come at a time when many IRAs have plummeted in value, meaning the taxes on such conversions (and you do pay taxes when you convert) will likely be lower, as well. And with taxes at all levels expected to rise in coming years, the idea of an account that’s safe from tax increases appeals to many people heading into retirement.
“It’s potentially quite a big deal,” says Joel Dickson, a principal with Vanguard Group in Valley Forge, Pa. “We’re getting a lot of questions, and investors certainly should be thinking about it.”
Here’s a look at how the new rules work, how to take advantage of them—and the possible pitfalls.
Nuts and Bolts
At the moment, many people make too much money to use Roths. Individuals whose modified adjusted gross income for 2009 is $120,000 or more can’t contribute. For couples who file joint tax returns, the cutoff is $176,000.
You aren’t allowed to convert traditional IRA assets to a Roth if your household’s modified adjusted gross income exceeds $100,000. A married person who files a separate tax return is prohibited from converting—no matter how much or how little he or she makes, says Ed Slott, an IRA consultant in Rockville Centre, N.Y.
But while the income limits for funding a Roth will remain, the rules for conversions are about to change.
As part of the Tax Increase Prevention and Reconciliation Act enacted in 2006, the federal government is eliminating permanently, starting Jan. 1, the $100,000 income limit for Roth conversions, as well as the restriction on spouses who file separate tax returns. That should make it easier for people with higher incomes to invest through Roth accounts. The changes also should enable more retirees—who rolled over their holdings from 401(k)s and other workplace savings plans into IRAs—to convert to Roths.
Of course, there’s still the matter of taxes. When you convert assets from a traditional IRA or workplace plan to a Roth, you have to pay income tax on all pretax contributions and earnings included in the amount you convert.
The law does provide some wiggle room, however: You can report the amount you convert in 2010 on your tax return for that year. Or, you can spread the amount converted equally across your 2011 and 2012 tax returns, paying any resulting tax in those years. For example, if you convert $50,000 next year and choose not to declare the conversion on your 2010 return, you must declare $25,000 on your tax return for 2011 and $25,000 on you return for 2012. The two-year option is a one-time offer for 2010 conversions.
The fact that Uncle Sam is allowing you to stretch out your tax bill could help people who convert keep their nest eggs intact. Financial planners uniformly say it makes no sense to convert to a Roth unless you can pay the taxes from a source other than your IRA. If you need to tap your IRA for the tax money, you’re defeating, in part, the purpose of the conversion: to maximize the long-term value of the Roth.
One other note: If you are age 70½ or older and taking required minimum distributions from a traditional IRA or workplace plan, you can’t convert that required withdrawal to a Roth. However, after you take your required minimum distribution for the year, you can convert remaining traditional IRA assets to a Roth. For 2009, Congress has waived required withdrawals in an attempt to help retirees rebuild savings. But required withdrawals resume in 2010.
So, if you’re over the income limits for contributing to a Roth, what’s the simplest way to fund one when the conversion rules change? If you haven’t already done so, open a traditional IRA (which has no income limits), contribute the maximum amount allowable ($6,000 in 2009 for individuals age 50 and older), and convert the assets to a Roth next year.
John Blanchard, a 41-year-old executive recruiter in Des Moines, Iowa, has “maxed out” IRA contributions for himself and his wife since 2006 in anticipation of the 2010 rule change. He plans to convert about $34,000 in holdings next year. “If they would let me do more, I would do more,” he says. “This planning is purely for retirement.”
You could continue this strategy each year after that—opening a traditional IRA and converting it to a Roth. In fact, you would have to use this approach if your income exceeds the limits for making Roth contributions.
But how do you do this—over a number of years—without winding up with multiple Roth accounts? Mr. Slott recommends holding two Roths. When you first convert the assets, put them in your “new” Roth. That way, if that holding suffers a loss in the first year, you can recharacterize it as a traditional IRA so you don’t have to pay tax on value that no longer exists. (More on that below.) If the account increases in value before that deadline expires, you could then transfer the assets to your “old” Roth—after the time to recharacterize expires. Each year, you could repeat those two steps.
Why It’s a Good Idea…Why convert? Roth IRAs have several big advantages over traditional IRAs:
For the most part, withdrawals are tax-free, as long as you meet rules for minimum holding periods. Specifically, you have to hold a Roth IRA for five years and be at least age 59½ for withdrawals to be tax-free. Early withdrawals are subject to penalties.
There are no required distributions. With traditional IRAs, you must begin tapping your account after reaching age 70½. In doing so, you increase your taxable income starting in your 70s.
Your heirs don’t owe income tax on withdrawals. That can be a big deal for middle-aged beneficiaries earning big paychecks. One caveat: Roth beneficiaries do have to take distributions across their life expectancies, and Roth assets are still included in an estate’s value.
The fact that anyone who inherits a Roth could make withdrawals with no income tax has led some older adults to consider Roth conversions as an alternative to life insurance. Jonathan Mazur, a financial planner in Dallas, already has suggested that strategy to Shayne Keller, a 55-year-old semi-retired telecommunications consultant. Mr. Keller’s heart disease has made it tough for him to get life insurance. Instead, he’s now planning to convert a traditional IRA worth about $300,000 to a Roth, and then name his two grandchildren as the Roth’s beneficiaries.
Another big advantage: A Roth IRA provides what many financial planners refer to as tax diversification.
“In the future, when you’re going to be taking assets out of your account, you don’t know what your personal situation is going to be, and you don’t know what tax rates are going to be,” says Sean Cunniff, a research director in the brokerage and wealth-management service at TowerGroupin Needham, Mass. “So, if you already have a taxable account, like a brokerage account or mutual funds, and you have a tax-deferred account like a 401(k) or traditional IRA, adding a tax-free account gives you the most flexibility” to keep taxes low in retirement.
…And Why It’s Not as Easy as It Looks
The trickiest part of paying the tax for a Roth conversion involves the IRS’s pro-rata rule. In short, you can’t cherry-pick which assets you wish to convert.
Let’s say you have a rollover IRA (from an employer’s 401(k) plan) with a balance of $200,000, and an IRA with $50,000. The latter contains $40,000 in nondeductible contributions made over a number of years. As much as you might wish, you can’t convert the $40,000 alone—tax-free—to a Roth IRA.
Rather, you have to follow the pro-rata rule. The IRS says you must first add the balance in all your IRAs—in this case, $250,000. Then you divide nondeductible contributions by that balance: $40,000 divided by $250,000. This gives you the percentage—16%, in our example—of any conversion that’s tax-free. So, let’s say you want to convert $30,000 of your two IRAs to a Roth. The amount of the conversion that would be tax-free would be $4,800 ($30,000 x 0.16).
“If you’re thinking about doing a Roth conversion, leave your 401(k) alone” rather than rolling it into an IRA beforehand to keep your share of nondeductible contributions higher in the calculation above, says John Carl, president of the Retirement Learning Center LLC in New York, which works with investment advisers. And if you’ve already rolled over your 401(k) into a traditional IRA, you may want to roll it back—a move that many employer plans allow, he adds.
Perhaps the toughest part of all this is “gathering the data”—showing which of your past IRA contributions were deductible and nondeductible, says Kevin Heyman, a certified financial planner in Newport News, Va. “You have to keep one heck of a record to know which IRAs were nondeductible over the years.”It’s involved, but possible, to reconstruct your after-tax basis in a traditional IRA, and it makes sense to do it now so you can weigh whether to convert to a Roth in 2010, says Mr. Slott, the IRA consultant.
First stop: tax returns you still have. You’re supposed to keep a running record of nondeductible IRA contributions on IRS Form 8606 and file it with your tax return. If you haven’t done so, you can either buy back your old tax returns from the IRS, using Form 4506, or you can order a free transcript of everything that’s reported about you to the IRS, using Form 4506-T. Included in your transcript is information from IRS Form 5498, which reports contributions you made to an IRA. Other resources are year-end statements from your IRA custodian.
As mentioned above, you should be able to pay any tax involved from a source other than the IRA itself to make the conversion worthwhile. Some retirees already are setting up piggy banks for that purpose. “I’m putting my savings plan together so we have money to pay for the tax,” says Marjorie Hagen, 60, a retired postmaster in Minneapolis. She and her husband plan to convert at least $150,000 in IRA assets next year to give them “more control and flexibility,” she says.
An IRA withdrawal made simply to pay taxes on a Roth conversion could be a particularly bad move for battered investments because you’d be locking in losses. And if you’re under age 59½, you would get dinged with a 10% penalty for withdrawing IRA assets at the time of the conversion. The silver lining, of course, is that those battered investments probably would be taxed at relatively low value, meaning any tax you have to pay should be relatively low, as well.
Indeed, tax rates—what you’re paying now and what you might pay in the future—invariably complicate decisions about whether to convert. Linda Duessel, a market strategist at Federated Investors Inc., an investment-management firm in Pittsburgh, points out that the income tax you pay on a Roth conversion while you’re working would be at your top rate, since it’s added to your regular income. But in retirement, when IRA distributions presumably would help take the place of a paycheck, you’d be paying tax at your “effective” rate, or the total tax you pay divided by your taxable income.
If you expect your income to be lower in retirement—and tax rates to stay about where they are—then a Roth conversion might not make sense. The upshot: Whether you convert or not basically depends on what you expect to happen with your income in retirement, compared with your income while working, and whether you’re more comfortable paying taxes sooner at current rates or betting on lower taxes later.
Strategies to Consider
What’s the best way to take advantage of the rule change? First, keep in mind that you don’t have to convert your entire IRA next year. You can do it piecemeal, as you can afford it, over a number of years. A Roth conversion “isn’t an all-or-nothing option,” says TowerGroup’s Mr. Cunniff. If you hold traditional IRAs made up largely of pretax contributions, such as a 401(k) rollover, your tax bill could be steep. One way to mitigate the tax-bill pain is to get your accountant to help you figure out how much you could convert within your current tax bracket each year without bumping yourself into a higher one.
It’s also a good idea to put converted holdings in a new account, rather than an existing Roth. Here’s why: If the value of your converted assets falls further—after you have paid taxes on their value—you can change your mind, “recharacterize” the account as a traditional IRA, and, in turn, no longer owe the tax. Later on, you could reconvert the assets to a Roth again. (See IRS Publication 590 for the timing details.) This dilutes the tax benefit if you’ve combined those converted assets with other Roth holdings that have appreciated in value.
In fact, you might consider opening a separate Roth for each type of investment you make with the converted money. That way, you could “cherry-pick the losers,” recharacterizing investments that perform poorly, suggests Mr. Slott. Let’s say you made two types of investments—one that doubled in value and another that lost everything. If those investments were in the same Roth, the account value would appear unchanged. But if they were in separate accounts, you could recharacterize the one that suffered—and allow the one doing well to continue appreciating in value as a Roth.
Some owners of IRAs that hold variable annuities with depressed account values are planning to convert those investments to Roth IRAs as well. The current value of the underlying investments in their variable annuities has fallen below their income benefit or death benefit. In that situation, if you convert to a Roth, you’d pay tax on the lower account value—and potentially get a higher benefit in the future tax-free.
Still, if you have a variable annuity and you’re considering a Roth conversion, make sure you value the account according to the latest IRS rules, Mr. Slott cautions. The IRS cracked down on annuity holders using “artificially deflated” variable-annuity values in Roth conversions a few years ago to lower their taxes, he says. “The IRS ruled that you have to get the actual fair-market value of the account from the insurance company and use that number.”
What You Should Do Now
There are a few ways to get ready for next year. Again, as noted above, if you have money to invest, consider funding an IRA before Dec. 31. That way, you can convert those assets to a Roth as soon as Jan. 2.
Also locate and organize your paperwork for any nondeductible IRA contributions you’ve made in the past. By taking that step, you should be able to come up with an estimate of how much of your potential conversion would be taxable. If you expect your 2010 income to be similar to this year’s, you can look up the tax brackets at www.irs.gov to get a ballpark idea of the taxes involved.
Next comes the tough part: Identifying ways to pay those taxes with money outside of your IRA.
To think through all the moving parts, it may help to consult a financial planner or accountant who has extensive experience working with retirees relying on IRAs. The tax rules governing IRAs are intricate, nonintuitive, and arcane. One misstep can unwind a tax-deferred nest egg in a way you might not have intended.
For example, if you’re already taking regular, so-called 72(t) retirement payments, which allow IRA holders to make “substantially equal” withdrawals penalty-free before age 59½, converting that IRA to a Roth is even trickier, Mr. Slott says. The new Roth can contain no other Roth IRA assets, and the 72(t) payments must be continued from the Roth—but no 72(t) payments from the traditional IRA can be converted to the Roth. And if you have company stock in your 401(k), you might wind up with a lower tax bill if you withdraw the stock from the account before doing an IRA rollover and Roth conversion, he adds.
Seek out online tools to help you devise your conversion strategy as well. One resource is Mr. Slott’s Web site, www.irahelp.com, which has a discussion forum where consumers can post questions about Roth IRA conversions and get answers from investment advisers who specialize in IRA distribution work.
At least one free, interactive calculator has been developed to help people think through the decision. Convergent Retirement Plan Solutions LLC, a retirement-services consulting firm in Brainerd, Minn., released a Roth Conversion Optimizer calculator in May for investment advisers with Archimedes Systems Inc., a Waltham, Mass., maker of financial-planning software. A consumer version of the calculator is available at www.RothRetirement.com.
“For the vast majority of middle America, the question is, ‘What’s the best portion of my IRA to put into a Roth?”’ says Ben Norquist, president of Convergent.
The calculator takes several factors into account, including your income needs from retirement assets, future tax rates and the portion of your assets you convert to a Roth. Then, it crunches those variables to show you, using a simple bar graph, the impact of a Roth conversion on your future assets.
One caveat: With any calculator that lets you adjust the future tax rate, as this one does, it’s easy to manipulate the answer if you’re predisposed to doing a conversion now—or avoiding it because you don’t want to pay the resulting tax bill, Mr. Slott says.
Still, the calculator does help you pin down the answer to the big question you should answer for yourself this year, Mr. Norquist says: “If I can take a portion of my assets and shift them over to a Roth, am I going to sleep better knowing they can’t be touched by future tax increases?” If your answer is “yes,” it’s time to start digging out records and number-crunching.
--Ms. Greene is a staff reporter for The Wall Street Journal in New York. She can be reached at encore@wsj.com.
What is moving the markets? Computers (WSJ)
JUNE 18, 2009, 9:00 A.M. ET Automated Funds Now Dominate Stock Market; Other Traders Wary
By Rob Curran and Geoffrey Rogow
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The U.S. stock market is increasingly switching to automatic from manual transmission, forcing investors to relearn how to drive.
Investors and pundits are left clutching at straws to explain big moves in the stock market, such as attributing a June 8 bounce to rehashed comments from Nobel Prize-winning economist Paul Krugman. The difficulty in divining a fundamental explanation stems from a structural change in the U.S. stock market: The majority of stock trades now originate with fully automated "high frequency" funds, a phenomenon that has accelerated during the market turbulence of recent years because of the relative success of the strategy.
These funds employ no traders in the conventional sense. They employ no economists or chart trackers. Rather, programmers at funds such as those operated by Citadel Investment Group and Renaissance Technologies outfit computers with strategies based on obscure mathematical correlations. Then the machines trade in and out of stocks at light speed without human intervention, a departure from the "fundamental" investing model that dominated trading for the last century.
The growth of these funds is such that institutions whose names have never appeared in the newspaper are now trading hundreds of millions of shares a day. Major hedge funds that have put other strategies on ice are opening new funds devoted to high-frequency strategies and hiring the mathematicians and computer programmers that run them. Some of the fastest-growing market makers, such as Global Electronic Trading Company, or Getco, also use the automated strategies.
With the rise of these automated funds, the stock market is more prone than ever to large intraday moves with little or no fundamental catalyst. Computers don't analyze the news (although some strategies use headlines as triggers) or seek to justify their buying and selling. Even in the relative quiet of the last three months, investors have often watched individual stocks or sectors move by 10% or more without explanation.
Two-Thirds Of Total Volume
Five years ago, less than one-quarter of U.S. stock-trading volume was generated by "high-frequency" traders, and few considered the funds more than a niche strategy, according to Matthew Rothman, an analyst of quantitative funds for Barclays Capital.
That percentage has since more than doubled even as overall volumes increased, with some estimating as much as two-thirds of daily volume now stems from these funds. The niche's role now overshadows that of mainstream brokers, mutual funds and hedge funds.
In 2007, when the bear market started, the popularity of the funds "started to take off (and went) parabolic when volatility spiked," says Bill Cronin, head of electronic sales for Knight Capital Group Inc. (NITE), a broker that serves many of these funds. High-frequency funds, whose average stock-ownership tenure is counted in seconds or even thousandths of a second, became more profitable the more stocks moved during the session, and it was one of the few areas that saw some profits even during the crash. Their success drew more capital into these model-makers, extending their reach just as other money managers lost assets and reduced trading.
For almost every other category of hedge fund and money manager, what Cronin calls the "ungodly" swings of the market caused losses.
"The volatility opened up the door to make money more easily" for the high-frequency funds, Cronin said. "Now, they're popping up like mushrooms all over the place."
Gaming The Market
Traditional money managers face the increased likelihood of seeing orders "gamed," or deliberately gouged. High-frequency funds have myriad strategies, but many depend on sniffing out "order flow" - or what hedge funds, mutual funds and pension funds that hold stocks for fundamental reasons are buying and selling.
Some conventional brokers such as Joseph Saluzzi, a founder of boutique trading house Themis Trading, consider the high-frequency funds troublesome "locusts...feeding off the equity market." Saluzzi believes the current market structure makes it too easy for a high-speed computer to expose a large order before it's fully executed.
"You have to be cognizant of the fact that these people are out there and they're making a lot of money," said Rich Gates, a portfolio manager for TFS Market Neutral fund in West Chester, Pa.
The Securities and Exchange Commission believes institutional money managers are "sophisticated" enough to trade against the machines without further regulation.
"We don't want to curtail liquidity," said Gene Gohlke, associate director for the SEC. Gohlke said it's up to the managers themselves to make sure other traders aren't manipulating their models.
Saluzzi considers the high-frequency trades "phantom volume." He questions whether the increased volumes from the funds in the last couple of years have mitigated volatility as "liquidity" is thought to do, or increased it.
The popularity of these strategies has spawned a cottage industry called "co-location," or "proximity hosting." Exchanges sell the funds "rack space" in the data centers where their servers process trades to gain an extra couple of milliseconds on the competition. Most exchanges have had to turn customers away because rack spaces are full.
To gauge the prevalence of computerized trading, the SEC may soon tag orders executed by "algorithms." Algorithms are computer programs used to slice and dice many kinds of stock orders.
The regulator did the same thing with program trading - a system of executing batches of orders in tandem. But Cronin, of Knight, said algorithms are ubiquitous for both manual traders and automated traders. The algorithm is not a strategy but an electronic method of executing a trade. Even floor brokers at the New York Stock Exchange use algorithms to trade stocks. Tracking them won't reveal the role played by automated funds in the stock market.
-By Geoffrey Rogow and Rob Curran, Dow Jones Newswires; 212-416-2179; geoffrey.rogow@dowjones.com
By Rob Curran and Geoffrey Rogow
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The U.S. stock market is increasingly switching to automatic from manual transmission, forcing investors to relearn how to drive.
Investors and pundits are left clutching at straws to explain big moves in the stock market, such as attributing a June 8 bounce to rehashed comments from Nobel Prize-winning economist Paul Krugman. The difficulty in divining a fundamental explanation stems from a structural change in the U.S. stock market: The majority of stock trades now originate with fully automated "high frequency" funds, a phenomenon that has accelerated during the market turbulence of recent years because of the relative success of the strategy.
These funds employ no traders in the conventional sense. They employ no economists or chart trackers. Rather, programmers at funds such as those operated by Citadel Investment Group and Renaissance Technologies outfit computers with strategies based on obscure mathematical correlations. Then the machines trade in and out of stocks at light speed without human intervention, a departure from the "fundamental" investing model that dominated trading for the last century.
The growth of these funds is such that institutions whose names have never appeared in the newspaper are now trading hundreds of millions of shares a day. Major hedge funds that have put other strategies on ice are opening new funds devoted to high-frequency strategies and hiring the mathematicians and computer programmers that run them. Some of the fastest-growing market makers, such as Global Electronic Trading Company, or Getco, also use the automated strategies.
With the rise of these automated funds, the stock market is more prone than ever to large intraday moves with little or no fundamental catalyst. Computers don't analyze the news (although some strategies use headlines as triggers) or seek to justify their buying and selling. Even in the relative quiet of the last three months, investors have often watched individual stocks or sectors move by 10% or more without explanation.
Two-Thirds Of Total Volume
Five years ago, less than one-quarter of U.S. stock-trading volume was generated by "high-frequency" traders, and few considered the funds more than a niche strategy, according to Matthew Rothman, an analyst of quantitative funds for Barclays Capital.
That percentage has since more than doubled even as overall volumes increased, with some estimating as much as two-thirds of daily volume now stems from these funds. The niche's role now overshadows that of mainstream brokers, mutual funds and hedge funds.
In 2007, when the bear market started, the popularity of the funds "started to take off (and went) parabolic when volatility spiked," says Bill Cronin, head of electronic sales for Knight Capital Group Inc. (NITE), a broker that serves many of these funds. High-frequency funds, whose average stock-ownership tenure is counted in seconds or even thousandths of a second, became more profitable the more stocks moved during the session, and it was one of the few areas that saw some profits even during the crash. Their success drew more capital into these model-makers, extending their reach just as other money managers lost assets and reduced trading.
For almost every other category of hedge fund and money manager, what Cronin calls the "ungodly" swings of the market caused losses.
"The volatility opened up the door to make money more easily" for the high-frequency funds, Cronin said. "Now, they're popping up like mushrooms all over the place."
Gaming The Market
Traditional money managers face the increased likelihood of seeing orders "gamed," or deliberately gouged. High-frequency funds have myriad strategies, but many depend on sniffing out "order flow" - or what hedge funds, mutual funds and pension funds that hold stocks for fundamental reasons are buying and selling.
Some conventional brokers such as Joseph Saluzzi, a founder of boutique trading house Themis Trading, consider the high-frequency funds troublesome "locusts...feeding off the equity market." Saluzzi believes the current market structure makes it too easy for a high-speed computer to expose a large order before it's fully executed.
"You have to be cognizant of the fact that these people are out there and they're making a lot of money," said Rich Gates, a portfolio manager for TFS Market Neutral fund in West Chester, Pa.
The Securities and Exchange Commission believes institutional money managers are "sophisticated" enough to trade against the machines without further regulation.
"We don't want to curtail liquidity," said Gene Gohlke, associate director for the SEC. Gohlke said it's up to the managers themselves to make sure other traders aren't manipulating their models.
Saluzzi considers the high-frequency trades "phantom volume." He questions whether the increased volumes from the funds in the last couple of years have mitigated volatility as "liquidity" is thought to do, or increased it.
The popularity of these strategies has spawned a cottage industry called "co-location," or "proximity hosting." Exchanges sell the funds "rack space" in the data centers where their servers process trades to gain an extra couple of milliseconds on the competition. Most exchanges have had to turn customers away because rack spaces are full.
To gauge the prevalence of computerized trading, the SEC may soon tag orders executed by "algorithms." Algorithms are computer programs used to slice and dice many kinds of stock orders.
The regulator did the same thing with program trading - a system of executing batches of orders in tandem. But Cronin, of Knight, said algorithms are ubiquitous for both manual traders and automated traders. The algorithm is not a strategy but an electronic method of executing a trade. Even floor brokers at the New York Stock Exchange use algorithms to trade stocks. Tracking them won't reveal the role played by automated funds in the stock market.
-By Geoffrey Rogow and Rob Curran, Dow Jones Newswires; 212-416-2179; geoffrey.rogow@dowjones.com
Citigroup Exchange Offer Update (Bloomberg)
Citigroup Inc. Announces Public Share Exchange Launch, Finalizes Definitive Agreement With U.S. Government
8:00am EDT
Citigroup Inc. announced that it has finalized a definitive agreement with the U.S. Government and will now launch its exchange offers for publicly held convertible and non convertible preferred and trust preferred securities. Under the agreement, the Government will exchange a portion of its preferred securities with an aggregate liquidation value of up to $25 billion for interim securities and warrants and its remaining preferred securities for trust preferred securities. The public exchange offers are currently scheduled to expire on July 24, 2009, subject to extension by Citi. Assuming full participation of holders of convertible and non convertible public preferred and trust preferred securities in the exchange offers, Citi will convert into common shares approximately $58 billion in aggregate liquidation value of preferred stock and trust preferred securities.
Citi Press Release http://www.citigroup.com/citi/press/2009/090610a.htm
8:00am EDT
Citigroup Inc. announced that it has finalized a definitive agreement with the U.S. Government and will now launch its exchange offers for publicly held convertible and non convertible preferred and trust preferred securities. Under the agreement, the Government will exchange a portion of its preferred securities with an aggregate liquidation value of up to $25 billion for interim securities and warrants and its remaining preferred securities for trust preferred securities. The public exchange offers are currently scheduled to expire on July 24, 2009, subject to extension by Citi. Assuming full participation of holders of convertible and non convertible public preferred and trust preferred securities in the exchange offers, Citi will convert into common shares approximately $58 billion in aggregate liquidation value of preferred stock and trust preferred securities.
Citi Press Release http://www.citigroup.com/citi/press/2009/090610a.htm
Bargains in Emerging Markets (from Smartmoney.com)
As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game. The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster. Even better news: Some pros are finding they don’t have to pay a lot to own profitable foreign stocks. The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.
It was only two years ago that investors plowed more than $16 billion into emerging-market mutual funds, trying to find the next big Chinese Internet start-up or Russian coal mine. Unfortunately, like many investing trends, a lot of people piled into emerging-market stocks just as they peaked. Growth did slow around the world, and the stocks tanked. Even with this spring’s market rally, emerging-market stocks, as a group, have lost more than 40 percent since October 2007.
However, many of these nations are not mired in the housing market disasters that plague wealthier countries, and their banking systems are healthier as a consequence. Meanwhile, millions of people in these nations are moving into their middle class. The fortunes of these countries aren’t completely beholden to the health of the U.S. economy, either. China’s economy, for example, is expected to grow at least 5 percent in 2009.
For decades, stocks in China, Chile and other emerging nations traded at a significant discount to their American counterparts. By mid-2007, some were trading at a premium. The market wipeout brought emerging-market valuations closer to their normal discount. Of course, that return to normal cost some investors a lot of money, but the lower prices could give new investors a chance to buy into growing nations at a more reasonable price.
Here are five picks—all of which are listed on U.S. stock exchanges.
China Mobile
More than 160 million mobile phones were purchased in China in 2008, and analysts expect that number to grow another 5 percent this year. That bodes well for Hong Kong-based China Mobile, which has almost 75 percent market share of mobile-phone service in China. It has 470 million subscribers—a throng 50 percent larger than the entire U.S. population. Amazingly, analysts estimate there are still several hundred million Chinese who don’t yet have a mobile phone but eventually could. In the short term, if cash-strapped consumers are forced to choose between a landline and a mobile phone, they usually opt to go wireless, says Phil Kendall, director of the global wireless practice at market research firm Strategy Analytics.
The Chinese government restructured the country’s phone industry last year, allowing its biggest landline company, China Telecom, to join a wireless market formerly occupied by just China Mobile (CHL: 50.74*, +0.06, +0.11%) and China Unicom. But even with the competition, China Mobile’s dominant market position allows the company to negotiate favorable rates with vendors. In 2007 the company launched its own instant-messaging system for its phones, allowing it to keep more revenue than if it used a system made by Microsoft or another firm.
China Mobile’s stock trades at about 11 times 2010’s expected profits, well below its 10-year average price/earnings ratio of more than 24. China Mobile has said the sluggish economy and increased competition will temper its growth this year, but it will still grow. Many analysts remain confident the company will continue to increase revenue and profits steadily over the next several years, global recession or not. In the meantime, the stock has a 3.9 percent dividend yield, so investors are paid to wait for the economy to improve.
HDFC Bank
Many of the senior executives of Mumbai-based HDFC Bank (HDB: 101.20*, -0.83, -0.81%) are native Indians who worked for Citibank and other Western banks outside India. But when they opened their bank in 1995, when there were very few private banks in India, they came home to serve Indian customers. As banks worldwide loaded their balance sheets with exotic, risky mortgages, HDFC stuck with serving India’s burgeoning middle class. About 70 percent of HDFC’s revenue still comes from plain old retail banking, like issuing credit cards and loaning money to small businesses. That has kept it from having to take write-downs that burdened many other banks, says Ferrill Roll, portfolio manager for Harding Loevner, which owns HDFC shares.
HDFC’s toughest competition is from state-owned banks. While HDFC branches offer more efficient service, according to analysts, state-run banks reach much more of India’s 1.1 billion population. In India, government banks carry the perception of increased safety, and consumers worldwide find it annoying to switch banks.
Despite these challenges, HDFC is well positioned to attract new customers. Over the next two decades, the country’s middle class will grow from about 5 percent of the population to more than 40 percent, creating the world’s fifth-largest consumer market, according to McKinsey & Co. Assuming HDFC keeps up its superior customer service, it stands to capture a large share of this new market.
HDFC shares have rallied sharply in recent weeks, so investors might want to wait for a pullback before buying. With a P/E ratio of 21 times next year’s estimated earnings of $590 million, HDFC is not the cheapest bank stock. But analysts expect the bank to increase profits 25 percent in its fiscal 2010 (which started in April) and another 26 percent in fiscal 2011. “It’s one of the best-managed banks in the world,” says Cabot Money Management’s Lutts, who also owns the stock.
Vale
The booming economies of China, India and other emerging nations gave mining firm Vale (VALE: 19.24*, -0.13, -0.67%) years of spectacular profit and revenue growth, solidifying its position as one of Brazil’s largest companies and the world’s largest producer of iron ore. Vale’s main competitive advantage over rivals BHP Billiton of Australia and English firm Rio Tinto is its top-quality, plentiful iron ore deposits, says Tony Robson, cohead of mining research at BMO Capital Markets. China is the biggest market for Vale’s iron ore, accounting for more than 17 percent of the company’s revenue. China’s steel production (iron ore is a primary component of steel) is expected to decline only slightly this year, thanks to the nation’s quick implementation of an infrastructure-focused economic stimulus package, says Jorge Beristain, head of Americas metals and mining research for Deutsche Bank Securities. Vale has expanded its client base in China, adding small and medium-size steel mills to compensate for the reduced demand from the larger mills. Vale CEO Roger Agnelli has said he expects iron ore exports to China to hold steady for the rest of 2009.
Still, the global downturn has forced the Rio de Janeiro–based firm to scale back projects and cancel some others, and the company recently cut its capital spending plans for 200 to $9 billion from $14 billion. Investors have pounded down Vale’s shares over the past year as the price of iron ore has tumbled. Longer term, however, many analysts are confident that Vale will benefit from an economic recovery worldwide. In the meantime, the stock trades at 13 times this year’s expected profits of $8.5 billion.
SQM
It certainly helps any company to have a corner on the market. Half the customers who buy specialty fertilizer from Chile’s Sociedad QuÃmica y Minera de Chile (SQM: 36.26*, -0.59, -1.60%) can’t easily substitute anything else for the product, says Brian Chase, head of Southern Cone and Andean Equity Research and Strategy for J.P. Morgan. Crops such as tobacco, wine grapes and blueberries need special fertilizers that only SQM can provide in the region.
Much of SQM’s competitive advantage comes from its access to the Atacama Salt desert in Chile, land rich with nitrates, iodine, potash and lithium, all useful in fertilizer production. Besides having a monopoly on fertilizer in Chile, SQM also claims a 30 percent share of the world’s market for lithium (used in hybrid-car batteries) and 33 percent market share of iodine (used in X-ray dye and LCD televisions). Asia accounted for 15 percent of SQM’s $1.8 billion in revenue last year, and Chase expects that share to rise as China increases its fertilizer imports to help feed its people.
SQM is not immune to the global downturn, of course. Many fertilizer stocks, including SQM’s, fell dramatically in the second half of 2008 as fertilizer prices dropped. Yet demand for the company’s all-organic fertilizer should continue to grow. Farmers need to use organic fertilizer to have their fruits and vegetables certified as organic by the U.S. Department of Agriculture and similar government bodies in other countries. Demand for high-end fertilizer might actually increase in an economic slowdown, as people eat at home more and seek out high-quality ingredients, says Jim O’Leary, manager of the Touchstone International fund.
Analysts predict a modest bump in SQM’s earnings this year over last. In 2008, SQM posted earnings of $501 million, a 179 percent increase over 2007 earnings. Don’t expect such a monster gain this year, but analysts still predict a 14 percent gain in profits. The stock trades at about 22 times estimated earnings of $627 million, about its 10-year average P/E.
CNOOC
As the global economy slowed and the price of oil tanked over the past year, oil companies around the world pulled back on drilling for crude. But that’s not the case with China National Offshore Oil Corp., the giant firm that brings up oil from, you guessed it, the ocean waters off the coast of China. The firm, commonly known as CNOOC (pronounced see-nook) is increasing its capital spending by 19 percent in 2009, to $6.8 billion. The company can sell anything it brings up from the ocean floor. In fact, Hong Kong–based CNOOC (CEO: 141.35*, +0.28, +0.19%) sells oil to its major Chinese rivals because the other two can’t produce enough on their own.
CNOOC is majority-owned by the Chinese government. It teams up with major oil companies that have the expertise to build and operate offshore drilling platforms. When they find oil, CNOOC shares in the profits. When they don’t, the foreign companies bear all the costs.
Don’t expect its profits to be even close to the $6.4 billion in made in 2008, however, because the price of oil has fallen to around $60 from its $147 peak last July. CNOOC has no refining business, so its profits are tied almost exclusively to the price of crude. Still, it cost the company, on average, only about $20 to bring up a barrel of oil from the sea in 2008, Xiao Zongwei, CNOOC’s general manager of investor relations, told SmartMoney. So even if the price of oil resumes its descent, CNOOC should yield fatter profit margins relative to other oil companies, says Steve Cao, comanager of the AIM Developing Markets fund, which also owns the stock.
At nearly 16 times this year’s lower profits, CNOOC is not a steal. But some analysts feel that its growth prospects over the long term should command a premium. China’s fuel needs will only rise as the country’s growing middle class hits the road in its new cars, analysts say.
It was only two years ago that investors plowed more than $16 billion into emerging-market mutual funds, trying to find the next big Chinese Internet start-up or Russian coal mine. Unfortunately, like many investing trends, a lot of people piled into emerging-market stocks just as they peaked. Growth did slow around the world, and the stocks tanked. Even with this spring’s market rally, emerging-market stocks, as a group, have lost more than 40 percent since October 2007.
However, many of these nations are not mired in the housing market disasters that plague wealthier countries, and their banking systems are healthier as a consequence. Meanwhile, millions of people in these nations are moving into their middle class. The fortunes of these countries aren’t completely beholden to the health of the U.S. economy, either. China’s economy, for example, is expected to grow at least 5 percent in 2009.
For decades, stocks in China, Chile and other emerging nations traded at a significant discount to their American counterparts. By mid-2007, some were trading at a premium. The market wipeout brought emerging-market valuations closer to their normal discount. Of course, that return to normal cost some investors a lot of money, but the lower prices could give new investors a chance to buy into growing nations at a more reasonable price.
Here are five picks—all of which are listed on U.S. stock exchanges.
China Mobile
More than 160 million mobile phones were purchased in China in 2008, and analysts expect that number to grow another 5 percent this year. That bodes well for Hong Kong-based China Mobile, which has almost 75 percent market share of mobile-phone service in China. It has 470 million subscribers—a throng 50 percent larger than the entire U.S. population. Amazingly, analysts estimate there are still several hundred million Chinese who don’t yet have a mobile phone but eventually could. In the short term, if cash-strapped consumers are forced to choose between a landline and a mobile phone, they usually opt to go wireless, says Phil Kendall, director of the global wireless practice at market research firm Strategy Analytics.
The Chinese government restructured the country’s phone industry last year, allowing its biggest landline company, China Telecom, to join a wireless market formerly occupied by just China Mobile (CHL: 50.74*, +0.06, +0.11%) and China Unicom. But even with the competition, China Mobile’s dominant market position allows the company to negotiate favorable rates with vendors. In 2007 the company launched its own instant-messaging system for its phones, allowing it to keep more revenue than if it used a system made by Microsoft or another firm.
China Mobile’s stock trades at about 11 times 2010’s expected profits, well below its 10-year average price/earnings ratio of more than 24. China Mobile has said the sluggish economy and increased competition will temper its growth this year, but it will still grow. Many analysts remain confident the company will continue to increase revenue and profits steadily over the next several years, global recession or not. In the meantime, the stock has a 3.9 percent dividend yield, so investors are paid to wait for the economy to improve.
HDFC Bank
Many of the senior executives of Mumbai-based HDFC Bank (HDB: 101.20*, -0.83, -0.81%) are native Indians who worked for Citibank and other Western banks outside India. But when they opened their bank in 1995, when there were very few private banks in India, they came home to serve Indian customers. As banks worldwide loaded their balance sheets with exotic, risky mortgages, HDFC stuck with serving India’s burgeoning middle class. About 70 percent of HDFC’s revenue still comes from plain old retail banking, like issuing credit cards and loaning money to small businesses. That has kept it from having to take write-downs that burdened many other banks, says Ferrill Roll, portfolio manager for Harding Loevner, which owns HDFC shares.
HDFC’s toughest competition is from state-owned banks. While HDFC branches offer more efficient service, according to analysts, state-run banks reach much more of India’s 1.1 billion population. In India, government banks carry the perception of increased safety, and consumers worldwide find it annoying to switch banks.
Despite these challenges, HDFC is well positioned to attract new customers. Over the next two decades, the country’s middle class will grow from about 5 percent of the population to more than 40 percent, creating the world’s fifth-largest consumer market, according to McKinsey & Co. Assuming HDFC keeps up its superior customer service, it stands to capture a large share of this new market.
HDFC shares have rallied sharply in recent weeks, so investors might want to wait for a pullback before buying. With a P/E ratio of 21 times next year’s estimated earnings of $590 million, HDFC is not the cheapest bank stock. But analysts expect the bank to increase profits 25 percent in its fiscal 2010 (which started in April) and another 26 percent in fiscal 2011. “It’s one of the best-managed banks in the world,” says Cabot Money Management’s Lutts, who also owns the stock.
Vale
The booming economies of China, India and other emerging nations gave mining firm Vale (VALE: 19.24*, -0.13, -0.67%) years of spectacular profit and revenue growth, solidifying its position as one of Brazil’s largest companies and the world’s largest producer of iron ore. Vale’s main competitive advantage over rivals BHP Billiton of Australia and English firm Rio Tinto is its top-quality, plentiful iron ore deposits, says Tony Robson, cohead of mining research at BMO Capital Markets. China is the biggest market for Vale’s iron ore, accounting for more than 17 percent of the company’s revenue. China’s steel production (iron ore is a primary component of steel) is expected to decline only slightly this year, thanks to the nation’s quick implementation of an infrastructure-focused economic stimulus package, says Jorge Beristain, head of Americas metals and mining research for Deutsche Bank Securities. Vale has expanded its client base in China, adding small and medium-size steel mills to compensate for the reduced demand from the larger mills. Vale CEO Roger Agnelli has said he expects iron ore exports to China to hold steady for the rest of 2009.
Still, the global downturn has forced the Rio de Janeiro–based firm to scale back projects and cancel some others, and the company recently cut its capital spending plans for 200 to $9 billion from $14 billion. Investors have pounded down Vale’s shares over the past year as the price of iron ore has tumbled. Longer term, however, many analysts are confident that Vale will benefit from an economic recovery worldwide. In the meantime, the stock trades at 13 times this year’s expected profits of $8.5 billion.
SQM
It certainly helps any company to have a corner on the market. Half the customers who buy specialty fertilizer from Chile’s Sociedad QuÃmica y Minera de Chile (SQM: 36.26*, -0.59, -1.60%) can’t easily substitute anything else for the product, says Brian Chase, head of Southern Cone and Andean Equity Research and Strategy for J.P. Morgan. Crops such as tobacco, wine grapes and blueberries need special fertilizers that only SQM can provide in the region.
Much of SQM’s competitive advantage comes from its access to the Atacama Salt desert in Chile, land rich with nitrates, iodine, potash and lithium, all useful in fertilizer production. Besides having a monopoly on fertilizer in Chile, SQM also claims a 30 percent share of the world’s market for lithium (used in hybrid-car batteries) and 33 percent market share of iodine (used in X-ray dye and LCD televisions). Asia accounted for 15 percent of SQM’s $1.8 billion in revenue last year, and Chase expects that share to rise as China increases its fertilizer imports to help feed its people.
SQM is not immune to the global downturn, of course. Many fertilizer stocks, including SQM’s, fell dramatically in the second half of 2008 as fertilizer prices dropped. Yet demand for the company’s all-organic fertilizer should continue to grow. Farmers need to use organic fertilizer to have their fruits and vegetables certified as organic by the U.S. Department of Agriculture and similar government bodies in other countries. Demand for high-end fertilizer might actually increase in an economic slowdown, as people eat at home more and seek out high-quality ingredients, says Jim O’Leary, manager of the Touchstone International fund.
Analysts predict a modest bump in SQM’s earnings this year over last. In 2008, SQM posted earnings of $501 million, a 179 percent increase over 2007 earnings. Don’t expect such a monster gain this year, but analysts still predict a 14 percent gain in profits. The stock trades at about 22 times estimated earnings of $627 million, about its 10-year average P/E.
CNOOC
As the global economy slowed and the price of oil tanked over the past year, oil companies around the world pulled back on drilling for crude. But that’s not the case with China National Offshore Oil Corp., the giant firm that brings up oil from, you guessed it, the ocean waters off the coast of China. The firm, commonly known as CNOOC (pronounced see-nook) is increasing its capital spending by 19 percent in 2009, to $6.8 billion. The company can sell anything it brings up from the ocean floor. In fact, Hong Kong–based CNOOC (CEO: 141.35*, +0.28, +0.19%) sells oil to its major Chinese rivals because the other two can’t produce enough on their own.
CNOOC is majority-owned by the Chinese government. It teams up with major oil companies that have the expertise to build and operate offshore drilling platforms. When they find oil, CNOOC shares in the profits. When they don’t, the foreign companies bear all the costs.
Don’t expect its profits to be even close to the $6.4 billion in made in 2008, however, because the price of oil has fallen to around $60 from its $147 peak last July. CNOOC has no refining business, so its profits are tied almost exclusively to the price of crude. Still, it cost the company, on average, only about $20 to bring up a barrel of oil from the sea in 2008, Xiao Zongwei, CNOOC’s general manager of investor relations, told SmartMoney. So even if the price of oil resumes its descent, CNOOC should yield fatter profit margins relative to other oil companies, says Steve Cao, comanager of the AIM Developing Markets fund, which also owns the stock.
At nearly 16 times this year’s lower profits, CNOOC is not a steal. But some analysts feel that its growth prospects over the long term should command a premium. China’s fuel needs will only rise as the country’s growing middle class hits the road in its new cars, analysts say.
Successful Career Change Advice (from Investors.com)
Investors.com - Lessons From Job Shifts
Shared via AddThis
Lessons From Job Shifts
By Adelia Cellini Linecker
Posted 06/03/2009 05:05 PM ET
Gone are the days when you spent your entire career with one company. Today's work force expects and seeks career changes. The lure of opportunities pushes people to accept challenges and turn them into learning experiences.
Career changes offer chances to land skills, says Kathryn Hall, whose career took her from lawyer to ambassador to winemaker.
Here's what you can learn:
• Assets count. "There are skills that you learn in one venue and they help you in the next setting," Hall told IBD.
Drawing from her experience as a lawyer, Hall tweaked her negotiating skills to suit her needs as U.S. ambassador to Austria. "I had a personal role, a business management role and a policy role," she said of her 1997-2001 tenure in Vienna. "A good negotiator understands the person you negotiate with. You need to know where they are coming from and know their culture."
• Challenges spur growth. New positions mean adjustments. Hall moved from a private law practice to the public arena when she ran for assistant city attorney in Berkeley, Calif., in the early 1970s.
The campaign taught her resilience. "Running for office is really like having psychoanalysis in front of millions of people," Hall said. "The challenge was learning to adapt to criticism and to recognize that it's not personal."
• Dreams change. Most people are destined for various work, says Pamela Skillings, author of "Escape From Corporate America."
"If you're like most people, you have a complex collection of interests, talents and priorities," she wrote. "At the same time, as you grow and evolve and your life circumstances change, your criteria for what makes a true calling may also change."
Changing jobs makes you more flexible to explore new areas.
• Confidence builds. While the first transition might cause anxiety, subsequent changes get easier.
"Have confidence that the most important skills for your new job are skills you have likely developed in your prior career, such as discipline, judgment, time management and interpersonal skills," Hall said.
• Open minds thrive. Don't let experience block growth. A career change can teach you to accept different ways of doing things.
"Be ready to learn new skills, and don't be hesitant to admit what you don't understand," Hall said.
• Research is key. Be smart about where you make the leap. Changing careers into a dead end will prove costly and demoralizing. "Look to growing industries like green products and services or health care," Hall said. "Don't wait for the business world to go back to normal. It won't. We are facing a widespread recalibration throughout the private sector. Look for new normals."
• Passion is a guide. This is a tough time to make career changes, Hall says. If you do something you love, you'll be so much better at it and you'll be a happier person.
Pick a career that you love or a job that leads to that career because "that's where your talents are," said Hall, owner of Hall Wines and who returned to the family business of running vineyards in Mendocino, Calif. "I always knew that someday I'd return to the business of winemaking, because it has been a part of my life ever since I can remember."
© 2009 Investor's Business Daily, Inc. All rights reserved. Investor's Business Daily, IBD and CAN SLIM and their corresponding logos are registered
Shared via AddThis
Lessons From Job Shifts
By Adelia Cellini Linecker
Posted 06/03/2009 05:05 PM ET
Gone are the days when you spent your entire career with one company. Today's work force expects and seeks career changes. The lure of opportunities pushes people to accept challenges and turn them into learning experiences.
Career changes offer chances to land skills, says Kathryn Hall, whose career took her from lawyer to ambassador to winemaker.
Here's what you can learn:
• Assets count. "There are skills that you learn in one venue and they help you in the next setting," Hall told IBD.
Drawing from her experience as a lawyer, Hall tweaked her negotiating skills to suit her needs as U.S. ambassador to Austria. "I had a personal role, a business management role and a policy role," she said of her 1997-2001 tenure in Vienna. "A good negotiator understands the person you negotiate with. You need to know where they are coming from and know their culture."
• Challenges spur growth. New positions mean adjustments. Hall moved from a private law practice to the public arena when she ran for assistant city attorney in Berkeley, Calif., in the early 1970s.
The campaign taught her resilience. "Running for office is really like having psychoanalysis in front of millions of people," Hall said. "The challenge was learning to adapt to criticism and to recognize that it's not personal."
• Dreams change. Most people are destined for various work, says Pamela Skillings, author of "Escape From Corporate America."
"If you're like most people, you have a complex collection of interests, talents and priorities," she wrote. "At the same time, as you grow and evolve and your life circumstances change, your criteria for what makes a true calling may also change."
Changing jobs makes you more flexible to explore new areas.
• Confidence builds. While the first transition might cause anxiety, subsequent changes get easier.
"Have confidence that the most important skills for your new job are skills you have likely developed in your prior career, such as discipline, judgment, time management and interpersonal skills," Hall said.
• Open minds thrive. Don't let experience block growth. A career change can teach you to accept different ways of doing things.
"Be ready to learn new skills, and don't be hesitant to admit what you don't understand," Hall said.
• Research is key. Be smart about where you make the leap. Changing careers into a dead end will prove costly and demoralizing. "Look to growing industries like green products and services or health care," Hall said. "Don't wait for the business world to go back to normal. It won't. We are facing a widespread recalibration throughout the private sector. Look for new normals."
• Passion is a guide. This is a tough time to make career changes, Hall says. If you do something you love, you'll be so much better at it and you'll be a happier person.
Pick a career that you love or a job that leads to that career because "that's where your talents are," said Hall, owner of Hall Wines and who returned to the family business of running vineyards in Mendocino, Calif. "I always knew that someday I'd return to the business of winemaking, because it has been a part of my life ever since I can remember."
© 2009 Investor's Business Daily, Inc. All rights reserved. Investor's Business Daily, IBD and CAN SLIM and their corresponding logos are registered
Retirement Rescue - How long to get back what you lost (Motley Fool)
Get back what you just lost
BY Chuck Saletta,
The Motley Fool
© 1995-2009 The Motley Fool. All rights reserved.
The Motley Fool — 05/27/09
Nothing about the 2008 financial meltdown was enjoyable. But perhaps the worst part isn't the investment principal we've all lost, but rather the time those investments represent. If you've been diligently scrimping and saving your whole career to amass your retirement nest egg, the market meltdown may have set you back quite a few years.
Just how far back you've been set depends on how much your portfolio has fallen -- and how you plan to invest to salvage what you can from what's left. The table shows how many years it will take for your portfolio to recover to pre-crash levels, based on how far it has fallen and what investing returns you might expect in the future:
Loss
6% Returns 7% Returns 8% Returns 9% Returns 10% Returns
25% 4.9 4.3 3.7 3.3 3.0
30% 6.1 5.3 4.6 4.1 3.7
35% 7.4 6.4 5.6 5.0 4.5
40% 8.8 7.6 6.6 5.9 5.4
45% 10.3 8.8 7.8 6.9 6.3
50% 11.9 10.2 9.0 8.0 7.3
55% 13.7 11.8 10.4 9.3 8.4
60% 15.7 13.5 11.9 10.6 9.6
As bleak as some of those numbers might seem, all hope is not lost. There are still several things you can do right now to help make up for that lost time.
Save more
If you can invest a little bit extra to help make up for those spectacular losses, you could potentially knock years off that recovery time. For instance, if you can add 5% of the dollars you lost to the amount you're currently saving for your retirement each year, the time to recover what you've lost now looks like this:
Loss 6% Returns 7% Returns 8% Returns 9% Returns 10% Returns
25% 4.0 3.5 3.2 2.9 2.6
30% 4.7 4.2 3.8 3.4 3.2
35% 5.4 4.9 4.4 4.0 3.7
40% 6.1 5.5 5.0 4.6 4.3
45% 6.8 6.2 5.6 5.2 4.8
50% 7.5 6.8 6.2 5.8 5.4
55% 8.1 7.4 6.8 6.3 5.9
60% 8.8 8.1 7.4 6.9 6.5
In other words, if your formerly $150,000 portfolio is now a $100,000 portfolio, you've lost $50,000. If you can save an additional $2,500 (5% of that lost $50,000) each year, you can earn back your cracked nest egg in far less time.
Try for larger returns
Regardless of whether or not you plan to sock away a bit more each month, one thing is constant across both those tables. The higher the returns you can earn on your money, the faster you'll get back your lost nest egg. That more likely than not means you'll need to stay invested in stocks. And yes, even in spite of the 2008 meltdown, there's good reason to believe that you can still grow your money over the long term by investing it in the stocks of quality companies.
In fact, financial and economic crises are nothing new. Looking back over the past 25 years, we've had quite some spectacular meltdowns. They've included:
The S&L crisis
Black Monday
The bursting dot.com bubble
The aftermath of the September 11 attacks
The bursting real estate and debt bubbles
Even including all those significant crises, check out how well investments in these companies have turned out over the past quarter-century:
Company $1,000 Turned Into Annualized Returns
Lockheed Martin (LMT) $12,020.90 10.5%
General Electric (GE) $12,629.03 10.7%
Mattel (MAT) $17,285.71 12.1%
PPG Industries (PPG) $18,230.05 12.3%
Disney (DIS) $24,397.73 13.6%
McDonald's (MCD) $31,612.57 14.8%
Cola-Cola (KO) $33,141.79 15.0%
Data from Yahoo! Finance as of Dec. 29, 2008. Includes splits and dividends.
While past performance is still no guarantee of future results, it has to be comforting to know that you could have invested through all that mess and still wound up doing just fine.
Work longer
Additionally, if you're physically able and enjoy working, why not stick around another year or two? As my colleague Selena Maranjian points out, there are many ways in which spending more time punching the clock can help you achieve that retirement of your dreams.
On top of her sage advice, remember that even if you do need to work a few more years to retire comfortably, you don't have to work at your current job. If there's a less well-paying but far more personally fulfilling role you'd rather have, why not spend those extra work years doing that instead? You just might find that those years become a pleasure rather than a burden.
Lower your projected costs
There's also the very real possibility that you might have been setting your sights a bit higher than you needed to. Life changes around retirement age, in ways that can dramatically affect your cost of living, often for the better.
Will your children be on their own by the time you're ready to retire? Will your mortgage be paid off, or will you be willing to downsize your home to save on living expenses? How much are you paying on work-related expenses that you won't need to pay once you've retired? Plus, Social Security and Medicare taxes stop once you stop drawing a salary, and at some point, you might even be eligible to draw benefits from those programs.
Each one of those life changes can significantly affect the amount of money you need to shell out just to cover the basic costs of living. If you've been investing for your retirement based on the assumption that those expenses would be permanent, you might have been saving far more than you needed. If you can scale back your expenses without significantly damaging the lifestyle you expect from your retirement, you might not even need to earn all of that lost money back.
All of the above?
In reality, the best solution for you to salvage your own retirement might be some combination of all four of those strategies. The more strong tools you properly put to use, the better your chances of making up for the time you lost in the 2008 market crash. When all is said and done, what matters most is getting yourself to and through a happy, healthy, and fulfilling retirement.
--------------------------------------------------------------------------------
© 1995-2009 The Motley Fool. All rights reserved.
BY Chuck Saletta,
The Motley Fool
© 1995-2009 The Motley Fool. All rights reserved.
The Motley Fool — 05/27/09
Nothing about the 2008 financial meltdown was enjoyable. But perhaps the worst part isn't the investment principal we've all lost, but rather the time those investments represent. If you've been diligently scrimping and saving your whole career to amass your retirement nest egg, the market meltdown may have set you back quite a few years.
Just how far back you've been set depends on how much your portfolio has fallen -- and how you plan to invest to salvage what you can from what's left. The table shows how many years it will take for your portfolio to recover to pre-crash levels, based on how far it has fallen and what investing returns you might expect in the future:
Loss
6% Returns 7% Returns 8% Returns 9% Returns 10% Returns
25% 4.9 4.3 3.7 3.3 3.0
30% 6.1 5.3 4.6 4.1 3.7
35% 7.4 6.4 5.6 5.0 4.5
40% 8.8 7.6 6.6 5.9 5.4
45% 10.3 8.8 7.8 6.9 6.3
50% 11.9 10.2 9.0 8.0 7.3
55% 13.7 11.8 10.4 9.3 8.4
60% 15.7 13.5 11.9 10.6 9.6
As bleak as some of those numbers might seem, all hope is not lost. There are still several things you can do right now to help make up for that lost time.
Save more
If you can invest a little bit extra to help make up for those spectacular losses, you could potentially knock years off that recovery time. For instance, if you can add 5% of the dollars you lost to the amount you're currently saving for your retirement each year, the time to recover what you've lost now looks like this:
Loss 6% Returns 7% Returns 8% Returns 9% Returns 10% Returns
25% 4.0 3.5 3.2 2.9 2.6
30% 4.7 4.2 3.8 3.4 3.2
35% 5.4 4.9 4.4 4.0 3.7
40% 6.1 5.5 5.0 4.6 4.3
45% 6.8 6.2 5.6 5.2 4.8
50% 7.5 6.8 6.2 5.8 5.4
55% 8.1 7.4 6.8 6.3 5.9
60% 8.8 8.1 7.4 6.9 6.5
In other words, if your formerly $150,000 portfolio is now a $100,000 portfolio, you've lost $50,000. If you can save an additional $2,500 (5% of that lost $50,000) each year, you can earn back your cracked nest egg in far less time.
Try for larger returns
Regardless of whether or not you plan to sock away a bit more each month, one thing is constant across both those tables. The higher the returns you can earn on your money, the faster you'll get back your lost nest egg. That more likely than not means you'll need to stay invested in stocks. And yes, even in spite of the 2008 meltdown, there's good reason to believe that you can still grow your money over the long term by investing it in the stocks of quality companies.
In fact, financial and economic crises are nothing new. Looking back over the past 25 years, we've had quite some spectacular meltdowns. They've included:
The S&L crisis
Black Monday
The bursting dot.com bubble
The aftermath of the September 11 attacks
The bursting real estate and debt bubbles
Even including all those significant crises, check out how well investments in these companies have turned out over the past quarter-century:
Company $1,000 Turned Into Annualized Returns
Lockheed Martin (LMT) $12,020.90 10.5%
General Electric (GE) $12,629.03 10.7%
Mattel (MAT) $17,285.71 12.1%
PPG Industries (PPG) $18,230.05 12.3%
Disney (DIS) $24,397.73 13.6%
McDonald's (MCD) $31,612.57 14.8%
Cola-Cola (KO) $33,141.79 15.0%
Data from Yahoo! Finance as of Dec. 29, 2008. Includes splits and dividends.
While past performance is still no guarantee of future results, it has to be comforting to know that you could have invested through all that mess and still wound up doing just fine.
Work longer
Additionally, if you're physically able and enjoy working, why not stick around another year or two? As my colleague Selena Maranjian points out, there are many ways in which spending more time punching the clock can help you achieve that retirement of your dreams.
On top of her sage advice, remember that even if you do need to work a few more years to retire comfortably, you don't have to work at your current job. If there's a less well-paying but far more personally fulfilling role you'd rather have, why not spend those extra work years doing that instead? You just might find that those years become a pleasure rather than a burden.
Lower your projected costs
There's also the very real possibility that you might have been setting your sights a bit higher than you needed to. Life changes around retirement age, in ways that can dramatically affect your cost of living, often for the better.
Will your children be on their own by the time you're ready to retire? Will your mortgage be paid off, or will you be willing to downsize your home to save on living expenses? How much are you paying on work-related expenses that you won't need to pay once you've retired? Plus, Social Security and Medicare taxes stop once you stop drawing a salary, and at some point, you might even be eligible to draw benefits from those programs.
Each one of those life changes can significantly affect the amount of money you need to shell out just to cover the basic costs of living. If you've been investing for your retirement based on the assumption that those expenses would be permanent, you might have been saving far more than you needed. If you can scale back your expenses without significantly damaging the lifestyle you expect from your retirement, you might not even need to earn all of that lost money back.
All of the above?
In reality, the best solution for you to salvage your own retirement might be some combination of all four of those strategies. The more strong tools you properly put to use, the better your chances of making up for the time you lost in the 2008 market crash. When all is said and done, what matters most is getting yourself to and through a happy, healthy, and fulfilling retirement.
--------------------------------------------------------------------------------
© 1995-2009 The Motley Fool. All rights reserved.
Understanding Your Health Insurance (Florida Insurance Consumer Advocate)
Understanding your Health Insurance
By Sean Shaw, Florida Insurance Consumer Advocate
In my position as Florida’s Insurance Consumer Advocate, I often hear about how health insurance is letting our citizens down. Most often the complaint is that health insurance benefits are decreasing thereby leaving many people owing substantial amounts to health care providers after their health insurance has paid its share.
Due to rising health care costs, many health insurance plans have reduced covered benefits and pay less for what is covered. This can create overall confusion as to how our health insurance works. In the past major, medical insurance provided coverage when we went to the doctor, hospital, pharmacy or other health care facility. One just presented their insurance card, paid what they were told – which was usually very little - and went on our way. Now there are Health Maintenance Organizations (HMO) plans, Exclusive Provider Organization (EPO) plans, Preferred Provider Organizations (PPO) plans and hybrids or combination plans that we must try to navigate. These plans control costs by limiting coverage to a select group of health care providers. Insured’s must use these “in network” providers in order to maximize coverage. Given this framework, it is easy to make a misstep and end up owing health care providers a lot of money. In addition plan managers, as opposed to the treating doctor, have increasing power to decide how and when benefits may be used.
HMO plans have strict requirements to see only their providers; generally a primary care physician will control and direct your health care. You must go to the HMO’s hospitals, doctors or pharmacists. It is up to you, the subscriber, to verify that the providers are in the network. The only exception is for out of the coverage area emergencies, in that situation you are required to notify the HMO. Florida statutes outline the payment protocols in this situation.
Some HMO plans have provisions called Point of Service (POS) riders that may allow you to go to a doctor out of the network, but there are usually strict requirements, prior authorizations to obtain, deductibles, copayments and coinsurance to be paid. Additionally, if the provider charges more than the HMO allows, you are responsible for the difference. The POS rider gives you some added freedom, but make sure you understand the restrictions and cost.
EPO plans are similar to HMO plans in that you usually select a primary care physician who decides whether or not you can go see a specialist. You are limited to a restricted group of network providers and if you go out of the network there is usually limited coverage or no coverage at all.
PPO plans resemble historical major medical coverage, but with different benefit levels. Usually the highest level of coverage and protection comes from using “in network” providers. You generally have lower deductibles, lower copayments and lower coinsurance to pay. You also have protections from “balance billing,” whereby the network provider can’t charge more than the pre-negotiated amount. In this type of plan you usually have a lower level of benefits if you choose to go “out of network.” You have the freedom to select any provider you choose, but selecting “out of network” providers will generally subject you to higher deductibles, higher levels of copayments and coinsurance. You are not protected from balance billing. In other words, you are responsible for the difference between what the health insurance allows and what the “out of network” provider or hospital charges. Sometimes these differences can be substantial. This can be especially problematic when being treated in a hospital. Many hospitals subcontract with radiologists, anesthesiologists, pathologists and emergency room physicians who may not agree to accept the discounts the hospital has negotiated. You may go to the “in network” hospital and end up being treated by subcontracted providers, each of which may bill you separately. Here are some tips to prevent unexpected costs:
Read your insurance materials carefully
Your insurance plan may only cover “in network” doctors. They will be listed in a provider directory, but it is best to check on the plans website and verify with the provider.
If your plan does not cover “out of network” care, you will have to pay the whole bill.
If your plan does cover out of network care, you will still have to pay part of the bill. You usually have to pay more for “out of network” care and you DO NOT have protection from balance billing.
You may have to get your health insurance plans approval before you go “out of network” or before your have certain medical procedures.
Your insurer may cover some “out of network” care in emergency situations or in situations where their network does not have provider of the specialty you need.
Ask Questions
Ask whether your doctor, hospital, facility, or pharmacy is in your specific health insurance plans network. DO NOT ASK IF A DOCTOR OR HOSPITAL TAKES YOUR INSURANCE!! This question is far too open ended. Too many different plans are offered by each insurer, they may offer HMO plans, EPO plans, PPO plans, etc. A provider could be “in-network for the PPO, but not for the HMO. If this is the case, and you are in an HMO, you would be “out of network” if you received services. If you have doubt, call the plans 800 number or visit their website and inquire. It is your responsibility to verify the participation status of the providers you use.
If you are planning to go to the hospital, ask if your doctor and all treating doctors are “in network.” Even if the hospital is “in network,” your treating doctor may be “out of network”, which will cost you.
Get help understanding your insurance plan, its benefits and restrictions. Inquire with the doctors billing coordinator, your employer’s benefits coordinator, or your insurance agent.
Take notes; get names, dates and times of everyone you talk with regarding claims, bills and disputes. Keep all correspondence, including postal stamped envelopes.
Evaluate the Cost Ahead of Time
If you are going “out of network,” ask for the billing codes, known as CPT codes in advance of the treatment, then share them with your health care plan to see if there will be coverage. Ask for this information in writing – both for the code information and from your health care plan regarding coverage. You may also ask if the doctor will discount the work, they may prior to service, they usually won’t afterwards.
Prior to receiving service, verify whether or not you need prior authorization from your primary care physician, or your plan.
Verify whether or not you need to satisfy any deductibles and how much.
What to do if your health care plan denies your claim or pays less than you think should be paid
You have appeal rights. Read your plan document and it will outline your appeal procedures. You may also check with your employer or your agent.
HMO plans have an additional statutory appeal procedure following appeal denials through the plan. It is called the Statewide Subscriber Assistance Panel. HMO plans are required to provide instructions for appealing to the Panel.
If you can’t pay, try to negotiate the bill and payment plan with your doctor or hospital.
Be wary of credit card offers to cover medical bills. The interest rate may be very high, or start low and change to a higher rate without notice.
Your doctors billing coordinator, or your employers benefit manager may assist you in filing claim forms and appeals.
The Department of Financial Services, Division of Consumer Services at 1-877-693-5236 or visit http://myfloridacfo.com may be able to assist you by intervening with your health care provider. Consumer assistance guides are available online.
By Sean Shaw, Florida Insurance Consumer Advocate
In my position as Florida’s Insurance Consumer Advocate, I often hear about how health insurance is letting our citizens down. Most often the complaint is that health insurance benefits are decreasing thereby leaving many people owing substantial amounts to health care providers after their health insurance has paid its share.
Due to rising health care costs, many health insurance plans have reduced covered benefits and pay less for what is covered. This can create overall confusion as to how our health insurance works. In the past major, medical insurance provided coverage when we went to the doctor, hospital, pharmacy or other health care facility. One just presented their insurance card, paid what they were told – which was usually very little - and went on our way. Now there are Health Maintenance Organizations (HMO) plans, Exclusive Provider Organization (EPO) plans, Preferred Provider Organizations (PPO) plans and hybrids or combination plans that we must try to navigate. These plans control costs by limiting coverage to a select group of health care providers. Insured’s must use these “in network” providers in order to maximize coverage. Given this framework, it is easy to make a misstep and end up owing health care providers a lot of money. In addition plan managers, as opposed to the treating doctor, have increasing power to decide how and when benefits may be used.
HMO plans have strict requirements to see only their providers; generally a primary care physician will control and direct your health care. You must go to the HMO’s hospitals, doctors or pharmacists. It is up to you, the subscriber, to verify that the providers are in the network. The only exception is for out of the coverage area emergencies, in that situation you are required to notify the HMO. Florida statutes outline the payment protocols in this situation.
Some HMO plans have provisions called Point of Service (POS) riders that may allow you to go to a doctor out of the network, but there are usually strict requirements, prior authorizations to obtain, deductibles, copayments and coinsurance to be paid. Additionally, if the provider charges more than the HMO allows, you are responsible for the difference. The POS rider gives you some added freedom, but make sure you understand the restrictions and cost.
EPO plans are similar to HMO plans in that you usually select a primary care physician who decides whether or not you can go see a specialist. You are limited to a restricted group of network providers and if you go out of the network there is usually limited coverage or no coverage at all.
PPO plans resemble historical major medical coverage, but with different benefit levels. Usually the highest level of coverage and protection comes from using “in network” providers. You generally have lower deductibles, lower copayments and lower coinsurance to pay. You also have protections from “balance billing,” whereby the network provider can’t charge more than the pre-negotiated amount. In this type of plan you usually have a lower level of benefits if you choose to go “out of network.” You have the freedom to select any provider you choose, but selecting “out of network” providers will generally subject you to higher deductibles, higher levels of copayments and coinsurance. You are not protected from balance billing. In other words, you are responsible for the difference between what the health insurance allows and what the “out of network” provider or hospital charges. Sometimes these differences can be substantial. This can be especially problematic when being treated in a hospital. Many hospitals subcontract with radiologists, anesthesiologists, pathologists and emergency room physicians who may not agree to accept the discounts the hospital has negotiated. You may go to the “in network” hospital and end up being treated by subcontracted providers, each of which may bill you separately. Here are some tips to prevent unexpected costs:
Read your insurance materials carefully
Your insurance plan may only cover “in network” doctors. They will be listed in a provider directory, but it is best to check on the plans website and verify with the provider.
If your plan does not cover “out of network” care, you will have to pay the whole bill.
If your plan does cover out of network care, you will still have to pay part of the bill. You usually have to pay more for “out of network” care and you DO NOT have protection from balance billing.
You may have to get your health insurance plans approval before you go “out of network” or before your have certain medical procedures.
Your insurer may cover some “out of network” care in emergency situations or in situations where their network does not have provider of the specialty you need.
Ask Questions
Ask whether your doctor, hospital, facility, or pharmacy is in your specific health insurance plans network. DO NOT ASK IF A DOCTOR OR HOSPITAL TAKES YOUR INSURANCE!! This question is far too open ended. Too many different plans are offered by each insurer, they may offer HMO plans, EPO plans, PPO plans, etc. A provider could be “in-network for the PPO, but not for the HMO. If this is the case, and you are in an HMO, you would be “out of network” if you received services. If you have doubt, call the plans 800 number or visit their website and inquire. It is your responsibility to verify the participation status of the providers you use.
If you are planning to go to the hospital, ask if your doctor and all treating doctors are “in network.” Even if the hospital is “in network,” your treating doctor may be “out of network”, which will cost you.
Get help understanding your insurance plan, its benefits and restrictions. Inquire with the doctors billing coordinator, your employer’s benefits coordinator, or your insurance agent.
Take notes; get names, dates and times of everyone you talk with regarding claims, bills and disputes. Keep all correspondence, including postal stamped envelopes.
Evaluate the Cost Ahead of Time
If you are going “out of network,” ask for the billing codes, known as CPT codes in advance of the treatment, then share them with your health care plan to see if there will be coverage. Ask for this information in writing – both for the code information and from your health care plan regarding coverage. You may also ask if the doctor will discount the work, they may prior to service, they usually won’t afterwards.
Prior to receiving service, verify whether or not you need prior authorization from your primary care physician, or your plan.
Verify whether or not you need to satisfy any deductibles and how much.
What to do if your health care plan denies your claim or pays less than you think should be paid
You have appeal rights. Read your plan document and it will outline your appeal procedures. You may also check with your employer or your agent.
HMO plans have an additional statutory appeal procedure following appeal denials through the plan. It is called the Statewide Subscriber Assistance Panel. HMO plans are required to provide instructions for appealing to the Panel.
If you can’t pay, try to negotiate the bill and payment plan with your doctor or hospital.
Be wary of credit card offers to cover medical bills. The interest rate may be very high, or start low and change to a higher rate without notice.
Your doctors billing coordinator, or your employers benefit manager may assist you in filing claim forms and appeals.
The Department of Financial Services, Division of Consumer Services at 1-877-693-5236 or visit http://myfloridacfo.com may be able to assist you by intervening with your health care provider. Consumer assistance guides are available online.
Free Financial Education Podcasts from FDIC
FDIC Introduces a Portable Audio (MP3) Version of the Money Smart Financial Education Curriculum
FOR IMMEDIATE RELEASE
June 4, 2009
The Federal Deposit Insurance Corporation (FDIC) has released the Money Smart Podcast Network, the portable audio (MP3) version of the award-winning Money Smart financial education. The new version of Money Smart is suitable for use with virtually all MP3 players so that consumers of all ages can learn to make informed and prudent financial decisions while "on the go."
"Innovations and new product offerings make financial education even more important than ever. Just as products innovate, delivery channels for financial education must innovate, said FDIC Chairman Shelia C. Bair. "The new audio version of Money Smart is a tool for consumers to learn on their own, and it is also a tool for educators seeking an innovative way to supplement traditional classroom instruction."
With verbal descriptions and topic based scenarios, the audio version of Money Smart utilizes detailed dialogue to convey basic critical financial information. These segments are grouped into four general categories. The release of the Money Smart Podcast Network is part of the FDIC's ongoing effort to integrate the unbanked and underbanked into the financial mainstream.
The Money Smart Podcast Network was released at the University of the District of Columbia (UDC). UDC is a Historically Black College and University and the only urban public land grant institution in the nation. UDC's Cooperative Extension Service already delivers the instructor-led version of Money Smart to low-and moderate-income Washington, DC residents, and will be the FDIC's first partner in distributing the MP3 version of Money Smart to consumers. According to Jackie Boynton, Vice President of Marketing, Communications, and Alumni Relations at UDC, "We are pleased to be the first partner of this extremely important financial initiative and are looking forward to continuing to partner with the FDIC on other initiatives such as this one."
The portable audio version of Money Smart is available free of charge, easily reproduced, and has no copyright restrictions. For more information, or to order copies, visit: www.fdic.gov/moneysmart.
The Money Smart curriculum brings proven results in how those who complete the curriculum manage their finances. Over two million consumers have had the opportunity to learn how to better manage their finances and more effectively use mainstream banking services through the Money Smart curriculum.
FOR IMMEDIATE RELEASE
June 4, 2009
The Federal Deposit Insurance Corporation (FDIC) has released the Money Smart Podcast Network, the portable audio (MP3) version of the award-winning Money Smart financial education. The new version of Money Smart is suitable for use with virtually all MP3 players so that consumers of all ages can learn to make informed and prudent financial decisions while "on the go."
"Innovations and new product offerings make financial education even more important than ever. Just as products innovate, delivery channels for financial education must innovate, said FDIC Chairman Shelia C. Bair. "The new audio version of Money Smart is a tool for consumers to learn on their own, and it is also a tool for educators seeking an innovative way to supplement traditional classroom instruction."
With verbal descriptions and topic based scenarios, the audio version of Money Smart utilizes detailed dialogue to convey basic critical financial information. These segments are grouped into four general categories. The release of the Money Smart Podcast Network is part of the FDIC's ongoing effort to integrate the unbanked and underbanked into the financial mainstream.
The Money Smart Podcast Network was released at the University of the District of Columbia (UDC). UDC is a Historically Black College and University and the only urban public land grant institution in the nation. UDC's Cooperative Extension Service already delivers the instructor-led version of Money Smart to low-and moderate-income Washington, DC residents, and will be the FDIC's first partner in distributing the MP3 version of Money Smart to consumers. According to Jackie Boynton, Vice President of Marketing, Communications, and Alumni Relations at UDC, "We are pleased to be the first partner of this extremely important financial initiative and are looking forward to continuing to partner with the FDIC on other initiatives such as this one."
The portable audio version of Money Smart is available free of charge, easily reproduced, and has no copyright restrictions. For more information, or to order copies, visit: www.fdic.gov/moneysmart.
The Money Smart curriculum brings proven results in how those who complete the curriculum manage their finances. Over two million consumers have had the opportunity to learn how to better manage their finances and more effectively use mainstream banking services through the Money Smart curriculum.
Investing - the New Normal (Bloomberg Opinion)
Gross, Grantham, Bogle Lift Lid on ‘New Normal’: John F. Wasik
Commentary by John F. Wasik
June 1 (Bloomberg) -- If this past year has taught investors anything, it is that conventional wisdom has suffered a thousand cuts.
Stocks don’t always beat bonds. It may not make sense to always have 60 percent or more in stocks and 40 percent in bonds. Stock markets may actually reward politicians.
Three pallbearers of the established canon are Bill Gross, the co-chief investment officer of Pacific Investment Management Co.; Jeremy Grantham, chairman of GMO LLC; and John Bogle, founder of Vanguard Group.
All are beacons in a troubled industry. When I caught their talks at the Morningstar Inc. investment conference in Chicago on May 28, I expected to hear dour forecasts. Yet I didn’t expect notes on the revolution that is undermining the beliefs that investors held during growth eras.
Gross, the world’s most successful bond-fund manager, described what his firm calls the “new normal” investing environment. While he sees “accelerating inflation” toward the latter part of a three- to five-year cycle, he says almost every accepted notion about investing should be examined.
Weak earnings growth translates into “getting used to a 301(k)” -- as opposed to a robust 401(k) -- retirement fund. Stocks won’t always outperform bonds and having dominant positions in equities may not make sense.
Changing Outlook
In Gross’s outlook, the dollar will lose its status as the reserve currency; Brazil, India and China (forget Russia) will offer the best growth; and the U.S. is “consumed out.”
“Everything in this new normal world should be questioned,” Gross said.
What is normal? Certainly not an environment that rewarded investors with 10 percent returns in stocks every year as Wall Street said it would before the dot-com, housing and credit crashes dashed that myth.
That means the accepted wisdom of having 60 percent to 80 percent in stocks may be obsolete and unprofitable. The only guarantees are that the U.S. government will be selling trillions in Treasuries; Americans may start seriously saving again; and the consumer economy may be shrinking long term due to the aging of the population.
Grantham, whose bearish views can often be amusing in the way he presents them, sees some reasonable values in the stock market now, although he’s not sure that a robust rally is in the offing. He also warns that “you can bet on” a bubble forming in emerging-markets stocks.
Grantham’s Optimism
Like many observers, Grantham also sees Americans saving more and consuming less.
“We forgot to save in the last decade because of home prices,” he said. “Now we’ll have to work longer and be more frugal in order to retire.”
Grantham’s only palpable stock-market optimism -- always in short supply in his forecasts -- is the third year of a U.S. presidential cycle.
“Historically, year three has outperformed years one and two by about 22 percent,” he noted. “And there’s never been a major bear market in year three of a presidential cycle.”
For most of us stung by the wretched returns of last year, though, 2011 is too long to wait. That’s why I prefer Bogle’s fundamental approach to portfolios. It doesn’t involve any charts and almost no forecasts.
Bogle says his formula is based on one’s age. The older you are, the more you should have in bonds, approximately matching a percentage of fixed-income investments to your age.
Sage Advice
As one who mostly takes his own advice, Bogle said his allocation produced only an 11 percent loss in his portfolio last year when others with higher percentages in stocks lost from 30 percent to 50 percent.
Of those who got scorched last year, “98 percent of all investors would be willing to swap places with me,” Bogle said.
In keeping with his bedrock views that passive investing through low-cost index funds prevails over time, Bogle eschews absolute return and commodity funds.
What each sage investor neglected to mention was an ever- greater need to customize portfolios not only to hedge market risks but personal labor-market risks as well.
Are you in a profession or industry that’s wobbly right now? Do you have the resources to retrain or re-educate yourself? At the very least, your savings and investments should support some vocational flexibility in these dynamic times.
That’s perhaps the only piece of conventional wisdom that hasn’t changed.
(John F. Wasik, author of “The Cul-de-Sac Syndrome,” is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.
Last Updated: June 1, 2009 00:00 EDT
Commentary by John F. Wasik
June 1 (Bloomberg) -- If this past year has taught investors anything, it is that conventional wisdom has suffered a thousand cuts.
Stocks don’t always beat bonds. It may not make sense to always have 60 percent or more in stocks and 40 percent in bonds. Stock markets may actually reward politicians.
Three pallbearers of the established canon are Bill Gross, the co-chief investment officer of Pacific Investment Management Co.; Jeremy Grantham, chairman of GMO LLC; and John Bogle, founder of Vanguard Group.
All are beacons in a troubled industry. When I caught their talks at the Morningstar Inc. investment conference in Chicago on May 28, I expected to hear dour forecasts. Yet I didn’t expect notes on the revolution that is undermining the beliefs that investors held during growth eras.
Gross, the world’s most successful bond-fund manager, described what his firm calls the “new normal” investing environment. While he sees “accelerating inflation” toward the latter part of a three- to five-year cycle, he says almost every accepted notion about investing should be examined.
Weak earnings growth translates into “getting used to a 301(k)” -- as opposed to a robust 401(k) -- retirement fund. Stocks won’t always outperform bonds and having dominant positions in equities may not make sense.
Changing Outlook
In Gross’s outlook, the dollar will lose its status as the reserve currency; Brazil, India and China (forget Russia) will offer the best growth; and the U.S. is “consumed out.”
“Everything in this new normal world should be questioned,” Gross said.
What is normal? Certainly not an environment that rewarded investors with 10 percent returns in stocks every year as Wall Street said it would before the dot-com, housing and credit crashes dashed that myth.
That means the accepted wisdom of having 60 percent to 80 percent in stocks may be obsolete and unprofitable. The only guarantees are that the U.S. government will be selling trillions in Treasuries; Americans may start seriously saving again; and the consumer economy may be shrinking long term due to the aging of the population.
Grantham, whose bearish views can often be amusing in the way he presents them, sees some reasonable values in the stock market now, although he’s not sure that a robust rally is in the offing. He also warns that “you can bet on” a bubble forming in emerging-markets stocks.
Grantham’s Optimism
Like many observers, Grantham also sees Americans saving more and consuming less.
“We forgot to save in the last decade because of home prices,” he said. “Now we’ll have to work longer and be more frugal in order to retire.”
Grantham’s only palpable stock-market optimism -- always in short supply in his forecasts -- is the third year of a U.S. presidential cycle.
“Historically, year three has outperformed years one and two by about 22 percent,” he noted. “And there’s never been a major bear market in year three of a presidential cycle.”
For most of us stung by the wretched returns of last year, though, 2011 is too long to wait. That’s why I prefer Bogle’s fundamental approach to portfolios. It doesn’t involve any charts and almost no forecasts.
Bogle says his formula is based on one’s age. The older you are, the more you should have in bonds, approximately matching a percentage of fixed-income investments to your age.
Sage Advice
As one who mostly takes his own advice, Bogle said his allocation produced only an 11 percent loss in his portfolio last year when others with higher percentages in stocks lost from 30 percent to 50 percent.
Of those who got scorched last year, “98 percent of all investors would be willing to swap places with me,” Bogle said.
In keeping with his bedrock views that passive investing through low-cost index funds prevails over time, Bogle eschews absolute return and commodity funds.
What each sage investor neglected to mention was an ever- greater need to customize portfolios not only to hedge market risks but personal labor-market risks as well.
Are you in a profession or industry that’s wobbly right now? Do you have the resources to retrain or re-educate yourself? At the very least, your savings and investments should support some vocational flexibility in these dynamic times.
That’s perhaps the only piece of conventional wisdom that hasn’t changed.
(John F. Wasik, author of “The Cul-de-Sac Syndrome,” is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.
Last Updated: June 1, 2009 00:00 EDT
Exchange Traded Notes (ETNs) from Tradingmarkets.com
ETNs vs ETFs - Which Fits You Best?
By Dave Goodboy | TradingMarkets.com
A relative newcomer to the world of exchange traded products, Exchange Traded Notes (ETNs) were first created by Barclay's in 2006 and have become an interesting alternative to Exchange Traded Funds (ETFs).
ETFs and ETNs are very similar in the fact that they both trade on an exchange like a stock, follow an underlying product and are easily accessible to investors. However, they differ remarkably in the way they are designed. This article will explain the differences between ETNs and ETFs as well as provide examples of ETNs so that you can choose which exchange traded product fits your investment criteria.
ETNs are issued by Morgan Stanley, Barclays, Credit Suisse, Goldman Sachs and UBS. There are approximately 56 ETNs currently trading, including the iPath ETNs such as Crude Oil (OIL ), Dow Jones Commodity Index (DJP ), EUR/USD Exchange Rate (ERO ).
More exotic underlying products for ETNs are being added all the time. These exotic tools presently include the VIX Mid-Term Futures (VXZ.P) and Global Carbon (GRN).
Let's start by taking a closer look at the actual built of an ETN as compared to an ETF
ETNs are a structured products created as a senior debt note by the issuing banks. In simple language, this means that the ETN is dependent on the credit of the underlying bank. Therein lays the first design difference. ETFs represent a stake in the actual underlying product and are not subject to the same credit risk. For the investor, there is more risk in ETNs due to the above and actual market risk. ETFs, on the other hand, are subject only to market risk. Although, ETNs are issued by major, top rated banks, if their credit rating is cut, it will negatively affect the ETN regardless of the underlying market move.
In the current environment of surprising negative bank news occurring almost daily, this is becoming a critical factor in choosing to invest in ETNs. On a more positive note, ETN track the underlying product/indexes exactly unlike ETFs. The reasoning behind this is a bit odd, but makes sense if you think about it. ETNs are guaranteed to track the underlying product tic for tic by the issuing bank. They replicate the performance exactly; wherein ETFs often have limits imposed making an exact replica impossible.
Of course, the exact tracking is minus the management fee imposed by the ETN. The management fee is the only payment or distribution in the ETN, which brings us to the next difference -- Taxes. ETFs are subject to make yearly capital gain and income distributions which are taxable events for the holder. ETNs do not make these distributions so the investor can defer taxation until the ETN is sold or matures.
In a sense, the ETN is more like a bond, and ETFs are more like stocks. If you are confident in the long term viability of the issuing bank, ETNs offer advantages not found in ETFs.
David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.
By Dave Goodboy | TradingMarkets.com
A relative newcomer to the world of exchange traded products, Exchange Traded Notes (ETNs) were first created by Barclay's in 2006 and have become an interesting alternative to Exchange Traded Funds (ETFs).
ETFs and ETNs are very similar in the fact that they both trade on an exchange like a stock, follow an underlying product and are easily accessible to investors. However, they differ remarkably in the way they are designed. This article will explain the differences between ETNs and ETFs as well as provide examples of ETNs so that you can choose which exchange traded product fits your investment criteria.
ETNs are issued by Morgan Stanley, Barclays, Credit Suisse, Goldman Sachs and UBS. There are approximately 56 ETNs currently trading, including the iPath ETNs such as Crude Oil (OIL ), Dow Jones Commodity Index (DJP ), EUR/USD Exchange Rate (ERO ).
More exotic underlying products for ETNs are being added all the time. These exotic tools presently include the VIX Mid-Term Futures (VXZ.P) and Global Carbon (GRN).
Let's start by taking a closer look at the actual built of an ETN as compared to an ETF
ETNs are a structured products created as a senior debt note by the issuing banks. In simple language, this means that the ETN is dependent on the credit of the underlying bank. Therein lays the first design difference. ETFs represent a stake in the actual underlying product and are not subject to the same credit risk. For the investor, there is more risk in ETNs due to the above and actual market risk. ETFs, on the other hand, are subject only to market risk. Although, ETNs are issued by major, top rated banks, if their credit rating is cut, it will negatively affect the ETN regardless of the underlying market move.
In the current environment of surprising negative bank news occurring almost daily, this is becoming a critical factor in choosing to invest in ETNs. On a more positive note, ETN track the underlying product/indexes exactly unlike ETFs. The reasoning behind this is a bit odd, but makes sense if you think about it. ETNs are guaranteed to track the underlying product tic for tic by the issuing bank. They replicate the performance exactly; wherein ETFs often have limits imposed making an exact replica impossible.
Of course, the exact tracking is minus the management fee imposed by the ETN. The management fee is the only payment or distribution in the ETN, which brings us to the next difference -- Taxes. ETFs are subject to make yearly capital gain and income distributions which are taxable events for the holder. ETNs do not make these distributions so the investor can defer taxation until the ETN is sold or matures.
In a sense, the ETN is more like a bond, and ETFs are more like stocks. If you are confident in the long term viability of the issuing bank, ETNs offer advantages not found in ETFs.
David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.
Bank of America Tender Offer for Preferred Stock
Bank of America Announces Exchange Offer For Certain Series of Preferred StockCHARLOTTE, N.C., May 28 /
-- - Bank of America Corporation today announced that it is commencing an offer to exchange up to 200 million shares of common stock for outstanding depositary shares of certain series of preferred stock.
The exchange offer is subject to the terms and conditions described in the Offer to Exchange dated May 28, 2009, and the related Letter of Transmittal, which will be filed with the Securities and Exchange Commission.
The exchange offer will expire at midnight, New York City time, on June 24, 2009, unless extended or earlier terminated by Bank of America. Holders of the depositary shares eligible for the exchange will be able to tender their depositary shares, or withdraw their previously tendered depositary shares, any time prior to the expiration of the exchange offer.
The exchange offer would increase Bank of America's Tier 1 common capital by an amount equal to the aggregate liquidation preference of the depositary shares exchanged. The shares issuable in the Exchange Offer are part of Bank of America's previously announced plan to exchange common stock for (non-government) perpetual preferred stock. Bank of America believes that these actions will assist in meeting its $33.9 billion indicated Supervisory Capital Assessment Program (SCAP) buffer set by the Federal Reserve.
Bank of America is offering to issue shares of common stock in the exchange offer in the applicable consideration amount per depositary share specified in the table below. The number of shares of common stock issuable for each exchanged depositary share will be equal to this consideration amount divided by the average of the daily per share volume-weighted average price of Bank of America common stock for each of the five consecutive trading days ending on and including June 22, 2009 (the second business day prior to the scheduled expiration date of the exchange offer). Bank of America will announce this common stock average price no later than 9 a.m., New York City time, on June 23, 2009. One of the conditions of the exchange offer that must be satisfied or waived is that the common stock average price be $10 or greater.
Acceptance CUSIP No. of Series of Preferred Stock NYSE Consideration
Priority Depositary Represented by Ticker for Depositary
Level Shares Depositary Shares Symbol Share
1 060505815 Floating Rate Non-Cumulative BAC PrE $16.25
Preferred Stock, Series E
2 060505583 Floating Rate Non-Cumulative BML PrL $16.25
Preferred Stock, Series 5
3 060505633 Floating Rate Non-Cumulative BML PrG $15.00
Preferred Stock, Series 1
4 060505625 Floating Rate Non-Cumulative BML PrH $15.00
Preferred Stock, Series 2
5 060505617 6.375% Non-Cumulative BML PrI $17.00
Preferred Stock, Series 3
6 060505740 6.625% Non-Cumulative BAC PrI $17.50
Preferred Stock, Series I
7 060505724 7.25% Non-Cumulative BAC PrJ $18.75
Preferred Stock, Series J
8 060505765 8.20% Non-Cumulative BAC PrH $20.50
Preferred Stock, Series H
9 060505559 8.625% Non-Cumulative BML PrQ $21.00
Preferred Stock, Series 8
If the number of shares of common stock issuable in exchange for depositary shares that are validly tendered and not properly withdrawn as of the expiration date exceeds 200 million, Bank of America will accept for exchange that number of depositary shares that does not result in a number of shares of common stock being issued in the exchange offer in excess of 200 million. In that event, acceptance of validly tendered depositary shares will be based on priority levels assigned to each series of preferred stock described below (with priority level 1 being accepted first). Acceptance of the depositary shares also may be subject to proration, as described in the Offer to Exchange.
The exchange offer is subject to a number of conditions which must be satisfied or waived by Bank of America on or prior to the expiration date, as described in the Offer to Exchange.
The terms of the exchange offer and procedures for validly tendering and withdrawing depositary shares are described in detail in the Offer to Exchange and related materials, copies of which may be obtained without charge from the information agent for the exchange offer, D.F. King & Co., Inc., by calling (800) 829-6551 (toll free) or (212) 269-5550 (collect). The Offer to Exchange also will be available free of charge on the SEC's website at www.sec.gov after it is filed as an exhibit to the tender offer schedule.
The exchange offer is being made to holders of depositary shares in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 3(a)(9) of the Securities Act. This press release is not an offer to purchase or an offer to exchange or a solicitation of acceptance of an offer to exchange any securities, and the exchange offer is being made only pursuant to the terms of the Offer to Exchange and the related materials.
-- - Bank of America Corporation today announced that it is commencing an offer to exchange up to 200 million shares of common stock for outstanding depositary shares of certain series of preferred stock.
The exchange offer is subject to the terms and conditions described in the Offer to Exchange dated May 28, 2009, and the related Letter of Transmittal, which will be filed with the Securities and Exchange Commission.
The exchange offer will expire at midnight, New York City time, on June 24, 2009, unless extended or earlier terminated by Bank of America. Holders of the depositary shares eligible for the exchange will be able to tender their depositary shares, or withdraw their previously tendered depositary shares, any time prior to the expiration of the exchange offer.
The exchange offer would increase Bank of America's Tier 1 common capital by an amount equal to the aggregate liquidation preference of the depositary shares exchanged. The shares issuable in the Exchange Offer are part of Bank of America's previously announced plan to exchange common stock for (non-government) perpetual preferred stock. Bank of America believes that these actions will assist in meeting its $33.9 billion indicated Supervisory Capital Assessment Program (SCAP) buffer set by the Federal Reserve.
Bank of America is offering to issue shares of common stock in the exchange offer in the applicable consideration amount per depositary share specified in the table below. The number of shares of common stock issuable for each exchanged depositary share will be equal to this consideration amount divided by the average of the daily per share volume-weighted average price of Bank of America common stock for each of the five consecutive trading days ending on and including June 22, 2009 (the second business day prior to the scheduled expiration date of the exchange offer). Bank of America will announce this common stock average price no later than 9 a.m., New York City time, on June 23, 2009. One of the conditions of the exchange offer that must be satisfied or waived is that the common stock average price be $10 or greater.
Acceptance CUSIP No. of Series of Preferred Stock NYSE Consideration
Priority Depositary Represented by Ticker for Depositary
Level Shares Depositary Shares Symbol Share
1 060505815 Floating Rate Non-Cumulative BAC PrE $16.25
Preferred Stock, Series E
2 060505583 Floating Rate Non-Cumulative BML PrL $16.25
Preferred Stock, Series 5
3 060505633 Floating Rate Non-Cumulative BML PrG $15.00
Preferred Stock, Series 1
4 060505625 Floating Rate Non-Cumulative BML PrH $15.00
Preferred Stock, Series 2
5 060505617 6.375% Non-Cumulative BML PrI $17.00
Preferred Stock, Series 3
6 060505740 6.625% Non-Cumulative BAC PrI $17.50
Preferred Stock, Series I
7 060505724 7.25% Non-Cumulative BAC PrJ $18.75
Preferred Stock, Series J
8 060505765 8.20% Non-Cumulative BAC PrH $20.50
Preferred Stock, Series H
9 060505559 8.625% Non-Cumulative BML PrQ $21.00
Preferred Stock, Series 8
If the number of shares of common stock issuable in exchange for depositary shares that are validly tendered and not properly withdrawn as of the expiration date exceeds 200 million, Bank of America will accept for exchange that number of depositary shares that does not result in a number of shares of common stock being issued in the exchange offer in excess of 200 million. In that event, acceptance of validly tendered depositary shares will be based on priority levels assigned to each series of preferred stock described below (with priority level 1 being accepted first). Acceptance of the depositary shares also may be subject to proration, as described in the Offer to Exchange.
The exchange offer is subject to a number of conditions which must be satisfied or waived by Bank of America on or prior to the expiration date, as described in the Offer to Exchange.
The terms of the exchange offer and procedures for validly tendering and withdrawing depositary shares are described in detail in the Offer to Exchange and related materials, copies of which may be obtained without charge from the information agent for the exchange offer, D.F. King & Co., Inc., by calling (800) 829-6551 (toll free) or (212) 269-5550 (collect). The Offer to Exchange also will be available free of charge on the SEC's website at www.sec.gov after it is filed as an exhibit to the tender offer schedule.
The exchange offer is being made to holders of depositary shares in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 3(a)(9) of the Securities Act. This press release is not an offer to purchase or an offer to exchange or a solicitation of acceptance of an offer to exchange any securities, and the exchange offer is being made only pursuant to the terms of the Offer to Exchange and the related materials.
Obama's deal for GM Bondholders (WSJ)
JUNE 1, 2009 Majority of GM Bondholders Back Debt-for-Equity Deal
By SHARON TERLEP and KEVIN HELLIKER
DETROIT -- General Motors Corp. moved a step closer to what it hopes will be a smooth bankruptcy process after a majority of investors holding $27 billion in the company's bonds agreed to forgive the debt for equity in the new company.
A battle with the group was one of the biggest hurdles GM faced in orchestrating a quick exit from Chapter 11.
The Obama administration plans to usher GM into bankruptcy court Monday as part of its ambitious effort to remake the American car industry at the tail end of its decades-long decline. President Barack Obama is expected to announce the government's plans for GM in a speech that will try to convey the message that the government can rebuild GM and Chrysler LLC and salvage some of the taxpayers' investments.
The auto maker, living on U.S. government loans, faces a Monday deadline imposed by the Obama administration. GM announced Friday that Chief Executive Fritz Henderson would give a press conference on Monday in New York outlining proceedings that would likely take place.
Initially, the company said getting bondholders to agree to a debt swap was its best chance for avoiding Chapter 11. But the latest plan is designed to expedite a bankruptcy filling more than to avoid it. As part of the agreement, bondholders pledged not to oppose GM's reorganization in court.
Under the plan, the Treasury would provide GM with $30 billion in loans to keep running through a bankruptcy, in addition to $20 billion already given to the company. GM won't have to repay the loans; instead, the government will turn them into a controlling stake in the company. The United Auto Workers union would end up with at least a 17.5% stake in the new company after agreeing to concessions that will save GM about $10 billion in obligations to retiree health care as well as billions more on labor costs. In exchange, GM agreed to use a soon-to-be-determined idled plant to build a small car in the U.S.
GM and the Obama administration, encouraged by Chrysler's progress in bankruptcy court over the past month, hope the company could emerge in as little as 30 days. GM, however, could still face challenges from hundreds of dealers its trying to shut down. The company also is still negotiating with Delphi Corp., its bankrupt former parts arm.
It could be six to 18 months before GM becomes a publicly traded company again, administration officials said.
Under its restructuring plan, GM will shed billions in debt, gain billions in work-force savings, will close more than a dozen factories and reduce its network of dealers.
Amid those savings, the most crucial question facing GM -- and every other player in the global automotive industry -- is when demand will return, and with what force. Since January, new-vehicle sales in the U.S. have dropped nearly 40% to an annual rate of fewer than 9.5 million units a year. At that level, even Toyota Motor Corp. is losing money.
Although General Motors is most likely headed for bankruptcy, the car maker used to be king of the road and part of the fabric of American life.
Under the restructuring plan, the new GM would break even when the rate of new-vehicle sales in America reached 10 million a year -- by industry standards a highly competitive benchmark. In the view of analysts, economic recovery will unleash pent-up demand, pushing U.S. sales far past GM's break-even point, if not within reach of the historic peak of more than 17 million new-vehicle sales back in 2000.
But a new GM won't prosper without halting a decades-long slide in U.S. market share, to 22% in 2008 from 45% in 1980. In doing so, it faces a legacy of inconsistent quality that turned large swaths of the American market toward more-reliable foreign models.
Although GM in recent years has made tremendous gains in quality and design, a big question is whether it can maintain that progress following the retirement this year of Robert Lutz as vice chairman of global product development. Legendary for his role in developing such hot models as Chrysler's Dodge Viper and the Ford Explorer, Mr. Lutz came to GM in 2001 and launched a product turnaround that garnered two North American Car of the Year Awards and propelled Buick to the top of the J.D. Power & Associates long-term quality rankings.
GM's most anticipated car-in-the-works -- the electric-powered Chevrolet Volt -- is the brainchild of Mr. Lutz. "Can we keep it going -- that's the million-dollar question," says Jack Keebler, a former Motor Trend editor whom Mr. Lutz hired to review cars during the development process.
Mr. Keebler believes the progress will continue, saying GM has passed "the tipping point."
Bondholders had until Saturday evening to voice support for a new offer that would give them a 10% share of the restructured company and warrants for another 15%.
An ad hoc committee representing major bondholders agreed to support the offer and encouraged other big investors to back the deal. A group of dissident bondholders represented by Thomas Lauria, also a lawyer for holdouts in the Chrysler case, fought against the deal. He argued that small, individual bondholders were left with no voice as the Treasury negotiated directly with GM's large institutional holders.
It was up to Treasury, which brokered the deal, to determine whether enough bondholders agreed for the offer to stand. A spokesman for the bondholder committee said approximately 54% of the bonds have indicated their support and that 975 institutions either sent support letters or gave indications of support.
The government sweetened the offer last week after bondholders overwhelmingly rejected an earlier proposal that would have left them with 10% equity in the new GM.
Analysts' estimates have bondholders coming out of the new deal with around 10 cents on the dollar, compared to as little as nothing under the old offer.
Write to Sharon Terlep at sharon.terlep@dowjones.com and Kevin Helliker at kevin.helliker@wsj.com
Printed in The Wall Street Journal, page A1
By SHARON TERLEP and KEVIN HELLIKER
DETROIT -- General Motors Corp. moved a step closer to what it hopes will be a smooth bankruptcy process after a majority of investors holding $27 billion in the company's bonds agreed to forgive the debt for equity in the new company.
A battle with the group was one of the biggest hurdles GM faced in orchestrating a quick exit from Chapter 11.
The Obama administration plans to usher GM into bankruptcy court Monday as part of its ambitious effort to remake the American car industry at the tail end of its decades-long decline. President Barack Obama is expected to announce the government's plans for GM in a speech that will try to convey the message that the government can rebuild GM and Chrysler LLC and salvage some of the taxpayers' investments.
The auto maker, living on U.S. government loans, faces a Monday deadline imposed by the Obama administration. GM announced Friday that Chief Executive Fritz Henderson would give a press conference on Monday in New York outlining proceedings that would likely take place.
Initially, the company said getting bondholders to agree to a debt swap was its best chance for avoiding Chapter 11. But the latest plan is designed to expedite a bankruptcy filling more than to avoid it. As part of the agreement, bondholders pledged not to oppose GM's reorganization in court.
Under the plan, the Treasury would provide GM with $30 billion in loans to keep running through a bankruptcy, in addition to $20 billion already given to the company. GM won't have to repay the loans; instead, the government will turn them into a controlling stake in the company. The United Auto Workers union would end up with at least a 17.5% stake in the new company after agreeing to concessions that will save GM about $10 billion in obligations to retiree health care as well as billions more on labor costs. In exchange, GM agreed to use a soon-to-be-determined idled plant to build a small car in the U.S.
GM and the Obama administration, encouraged by Chrysler's progress in bankruptcy court over the past month, hope the company could emerge in as little as 30 days. GM, however, could still face challenges from hundreds of dealers its trying to shut down. The company also is still negotiating with Delphi Corp., its bankrupt former parts arm.
It could be six to 18 months before GM becomes a publicly traded company again, administration officials said.
Under its restructuring plan, GM will shed billions in debt, gain billions in work-force savings, will close more than a dozen factories and reduce its network of dealers.
Amid those savings, the most crucial question facing GM -- and every other player in the global automotive industry -- is when demand will return, and with what force. Since January, new-vehicle sales in the U.S. have dropped nearly 40% to an annual rate of fewer than 9.5 million units a year. At that level, even Toyota Motor Corp. is losing money.
Although General Motors is most likely headed for bankruptcy, the car maker used to be king of the road and part of the fabric of American life.
Under the restructuring plan, the new GM would break even when the rate of new-vehicle sales in America reached 10 million a year -- by industry standards a highly competitive benchmark. In the view of analysts, economic recovery will unleash pent-up demand, pushing U.S. sales far past GM's break-even point, if not within reach of the historic peak of more than 17 million new-vehicle sales back in 2000.
But a new GM won't prosper without halting a decades-long slide in U.S. market share, to 22% in 2008 from 45% in 1980. In doing so, it faces a legacy of inconsistent quality that turned large swaths of the American market toward more-reliable foreign models.
Although GM in recent years has made tremendous gains in quality and design, a big question is whether it can maintain that progress following the retirement this year of Robert Lutz as vice chairman of global product development. Legendary for his role in developing such hot models as Chrysler's Dodge Viper and the Ford Explorer, Mr. Lutz came to GM in 2001 and launched a product turnaround that garnered two North American Car of the Year Awards and propelled Buick to the top of the J.D. Power & Associates long-term quality rankings.
GM's most anticipated car-in-the-works -- the electric-powered Chevrolet Volt -- is the brainchild of Mr. Lutz. "Can we keep it going -- that's the million-dollar question," says Jack Keebler, a former Motor Trend editor whom Mr. Lutz hired to review cars during the development process.
Mr. Keebler believes the progress will continue, saying GM has passed "the tipping point."
Bondholders had until Saturday evening to voice support for a new offer that would give them a 10% share of the restructured company and warrants for another 15%.
An ad hoc committee representing major bondholders agreed to support the offer and encouraged other big investors to back the deal. A group of dissident bondholders represented by Thomas Lauria, also a lawyer for holdouts in the Chrysler case, fought against the deal. He argued that small, individual bondholders were left with no voice as the Treasury negotiated directly with GM's large institutional holders.
It was up to Treasury, which brokered the deal, to determine whether enough bondholders agreed for the offer to stand. A spokesman for the bondholder committee said approximately 54% of the bonds have indicated their support and that 975 institutions either sent support letters or gave indications of support.
The government sweetened the offer last week after bondholders overwhelmingly rejected an earlier proposal that would have left them with 10% equity in the new GM.
Analysts' estimates have bondholders coming out of the new deal with around 10 cents on the dollar, compared to as little as nothing under the old offer.
Write to Sharon Terlep at sharon.terlep@dowjones.com and Kevin Helliker at kevin.helliker@wsj.com
Printed in The Wall Street Journal, page A1
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