Where the Professionals are Investing (WSJ)

Where the Financial Gurus Are Putting Their Own Money

By Eleanor Laise, The Wall Street Journal

Last update: 3:27 p.m. EST Jan. 29, 2009

In times of market strife, financial gurus often tell investors to think long-term and stay the course. Some of them even put their own money where their mouth is.

A sampling of high-profile industry veterans, academics and brokerage-firm chiefs reveals that many are hanging on to holdings battered by last year's market slide and busily hunting down new opportunities, particularly among bonds and beaten-down value stocks. Some are snapping up municipal bonds, inflation-indexed securities and steady-Eddie dividend-paying stocks.
And they're generally upbeat about the prospects for long-term retirement savers.
"I think this is a marvelous time to be investing," says Rob Arnott, the 54-year-old chairman of Research Affiliates LLC, an investment-management firm in Newport Beach, Calif. "There are more interesting opportunities out there now than any of today's investors have ever seen." Financial stars are facing some of the same retirement-planning headaches as ordinary investors. Many suffered substantial losses last year in a market that crushed nearly everything. But unlike many small investors, they're patiently waiting and watching for bargains rather than making a mad dash for havens like cash or Treasury bonds or drastically revising their asset-allocation plans. And where possible, they're even stepping up their savings to put more cash to work in the market.
Certain parts of the bond market are priced for a scenario that's worse than the Great Depression.
Great investing minds don't always think alike, of course. John Bogle, the 79-year-old founder of mutual-fund giant Vanguard Group, says he has only about 25% of his portfolio in stocks, for example, while David Dreman, the 72-year-old chairman and chief investment officer of Dreman Value Management LLC, says he has a roughly 70% stock allocation. They do appear to have one thing in common, though: patience -- a trait many small investors lack. Last year, 401(k) participants shifted around 5.7% of their balances, compared with just over 3% in a typical year, according to consulting firm Hewitt Associates. Money flowed out of stock funds and into bond investments, money-market funds and stable-value products. And many fed-up and tapped-out investors have stopped contributing to retirement accounts altogether.

But this is hardly the time to hunker down and take bets off the table, financial pros say. Don Phillips, managing director at investment research firm Morningstar Inc., says he invests his entire individual retirement account in the Clipper Fund, a large-cap stock fund that lost about 50% last year. Early this year, he made the maximum IRA contribution to that fund, just as he has for the last 20 years. "It's long-term money, and you have to look at it that way," he says.
Here's how some top investing experts are now allocating their own retirement savings and handling the heavy blows being dealt by a volatile market.
Bonds
While many financial gurus say they're starting to spot some great opportunities in stocks, they believe the bargains in select corners of the bond market are even better. "Certain parts of the bond market are priced for a scenario that's worse than the Great Depression," Mr. Arnott says.
I earn my money and spend my money in dollars, and I don't need to take currency risk.

One favored area is Treasury Inflation-Protected Securities, or TIPS, a type of Treasury bond whose principal is adjusted based on changes in the inflation rate. Ten-year Treasurys currently yield only about 0.9 percentage point more than 10-year TIPS, indicating that investors believe inflation will remain quite low in the coming years. Mr. Arnott says he boosted his TIPS allocation "in a very big way" in his personal taxable account toward the end of last year because he expects a substantial increase in inflation in the next three to five years.
Municipal bonds also look attractive to many longtime investors. Munis are typically exempt from federal and, in many cases, state and local income taxes. Many are now yielding substantially more than comparable Treasury bonds. In his taxable account, Mr. Bogle holds two muni-bond funds: Vanguard Limited-Term Tax-Exempt and Vanguard Intermediate-Term Tax-Exempt.

Burton Malkiel, a 76-year-old economics professor at Princeton University and author of "A Random Walk Down Wall Street," says he boosted his allocation to highly rated tax-exempt bonds in his taxable account late last year, since yields available on some of these bonds were "unheard of." Some market watchers believe that it's time to take on more risk in their bond portfolios. Even investment-grade corporate bonds offer high yields, and below-investment-grade junk bonds yield far more than that. Mr. Arnott boosted his allocation to investment-grade corporate bonds in his personal taxable account late last year because the market had reached "irrationally high yields," he says. And Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School and senior adviser to exchange-traded-fund management firm WisdomTree Investments, has recently raised his allocation for junk bonds.
"Stocks and high-yield bonds will move together as the crisis passes," rebounding from their depressed levels, the 63-year-old Mr. Siegel says.
Stocks
Financial gurus are picking through the wreckage of last year's stock-market meltdown to find the best bargains.
Emerging-markets stocks have 'gotten cheap enough to really give value now.'
Jeremy Siegel, the Wharton SchoolSome are looking for companies with strong market positions and juicy dividends. Muriel Siebert, founder and chairwoman of brokerage firm Muriel Siebert & Co., has recently been buying shares of companies like Pfizer (
PFE) Inc., Altria Group (MO) Inc., and General Electric (GE) Co. "I don't mind buying a stock on the bottom and waiting," says the 76-year-old Ms. Siebert. "But I do think when you get a market like this, you should be paid while you wait." Pfizer and Altria yield roughly 8%, while GE yields over 9%.
Some battered stocks in the energy sector also look like bargains, Mr. Dreman says. He likes oil and gas exploration and production companies like Anadarko Petroleum (APC) Corp., Apache (APA) Corp., and Devon Energy (DVN) Corp. If we don't have a long world-wide recession -- a scenario that Mr. Dreman thinks oil prices currently reflect -- "we'll see much higher prices for oil again," he says.
More From the Gurus
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Though foreign stocks were generally hit harder than U.S. shares last year, some gurus aren't rushing to invest overseas. Mr. Bogle, who says he has a very small allocation for international stocks, notes that investors poured money into foreign funds in recent years, chasing their strong returns, while yanking money out of lagging U.S. stock funds. "To me that's a red warning flag on a very tall flagpole on a very windy day," he says. "I also earn my money and spend my money in dollars, and I don't need to take currency risk."

Other experts say that emerging-markets stocks, which were hit especially hard last year, are starting to look tempting. If these shares take another dip, they could become "extremely interesting," Mr. Arnott says. Mr. Siegel keeps one-quarter to one-third of his foreign-stock allocation in emerging markets, and "they've gotten cheap enough to really give value now," he says. He has bought some more of these shares as they've declined in recent months.
Jim Rogers, a 66-year-old veteran commodities investor based in Singapore, is putting new money into Chinese shares. He's focusing on sectors of the economy that the Chinese are pushing to develop, such as agriculture, water, infrastructure and tourism.
Market gurus are also finding some bargains among alternative investments. Mr. Rogers is putting some new money into commodities, particularly agricultural commodities. "We're burning a lot of our food in fuel tanks right now," he says. And Mr. Siegel recently added some U.S. real estate investment trusts to his portfolio, which got "very cheap" after declining sharply last year, he says.
Staying the Course
Sticking to principles they've developed over decades in the market allows people who live and breathe investments to be relatively relaxed about their retirement portfolios.
I don't mind buying a stock on the bottom and waiting. But I do think when you get a market like this, you should be paid while you wait.
Muriel Siebert, Muriel Siebert & Co.Morningstar's Mr. Phillips, 46, has made it easier to stay the course. He has relinquished responsibility for allocating his 401(k) account, leaving those decisions in the hands of a managed-account program run by a unit of Morningstar. The program, which he started using in 2007, has "actually been very good for me," Mr. Phillips says. "They started putting me into things like TIPS and high-quality bond funds that I'd never had in the portfolio before."
And when they do suffer substantial losses, they tend not to panic. Mr. Phillips remains committed to his battered Clipper Fund, though it lagged the Standard & Poor's 500-stock index by about 13 percentage points last year. Ms. Siebert says she took a "very substantial loss" in Wachovia Corp. stock, which plummeted last year before the company was sold to Wells Fargo (WFC) & Co., but she's hanging on to the Wells Fargo stock she received "until I see a reason not to."
She is, however, a bit sensitive when asked about her portfolio's overall performance last year. "Do you want to see a grown woman cry?" she asks.


Write to Eleanor Laise at eleanor.laise@wsj.com

Retirement Rescue - Annuities (from Bankrate.com)

Check annuities for retirement rescue

By Melissa M. Ezarik • Bankrate.com


In a crowd of average Joes and Janes, you'll be hard-pressed to find anyone who knows a lot about annuities, but you'll likely find plenty with a generally negative feeling about them.

That connotation may be well-deserved, yet in today's volatile investment climate annuities might represent a safe haven.

Tom Warschauer, professor of finance at San Diego State University, says, "The insurance industry has not done a very good job recommending products that specifically fit their clients' needs. They look at what they want to sell and find a place for them in everyone's portfolio."

One big issue has been the lack of transparency about charges embedded in annuity products, and since it's difficult to decipher those costs, "There's a lot of room for abuse," says Warschauer, who's also a professor of finance and director of the Center for the Study of Personal Financial Planning at the university.

Beth Almeida, executive director of the National Institute on Retirement Security agrees. "The costs associated with the purchase of individual annuities eat away at the overall retirement nest egg. So a retiree may get a regular check, but their overall retirement income is diminished."

But in today's uncertain and volatile market, "retirees and near-retirees are likely seeking safe haven," says Almeida. And Warschauer agrees, annuities "have some very valuable uses in retirement planning" in this economic climate.

During your working years, return on investment is generally the primary focus. But in retirement, "the new ROI is 'reliability of income,'" says Robert E. Sollmann Jr., senior vice president of MetLife's Retirement Strategies Group.

"The painful lesson we are learning from today's market is that the conventional wisdom -- 'diversify' -- isn't cutting it. International, commodities, U.S. stocks are all down. The guarantees provided by annuities that can deliver regardless of market performance" are needed to balance a retirement plan, Sollmann says.

Think annuities may be worth a look? With so many annuity types, it's easy to get overwhelmed by possibilities. Here are some directions that experts say pre-retirees and retirees should consider.

Let's start with some basic definitions: Annuities are life insurance contracts sold by insurance companies, brokers and other financial institutions that provide a regular periodic payment to a policyholder for a specified period of time. They are paid for before retirement in exchange for lifetime payments after retirement and are intended to provide a regular level of retirement income to meet day-to-day living expenses.


They come in two general categories:


• Fixed annuity. The insurance company guarantees the principal pays a minimum rate of interest. As long as the company is financially sound, money in a fixed annuity will grow -- and not drop -- in value. The growth in value or benefits paid may be fixed at a dollar amount, at an interest rate, or by a specified formula. The interest rate usually starts out as a fixed percentage and is adjusted annually.
• Variable annuity. Your money is invested in a fund similar to a mutual fund -- but one open only to that insurance company's investors. The amount paid out depends on the performance of that fund.

"I'm a real advocate of fixed annuities," says Warschauer, who compares it to a fixed vs. variable mortgage rate. "It's obvious with a fixed mortgage you're more secure. When you're in your retirement years, you really want to be able to count on the cash in-flow, and the fixed annuity does that." Of course, the fact that it's fixed means it doesn't go up with inflation. His recommendation: Package a growth element within your IRA or 401(k), and then shift money out into immediate fixed annuities for daily living expenses.

On the variable annuity route, consider products that come with bonuses or guarantees such as living benefit riders, says Bayne Northern, a national sales manager for Penn Mutual Life's Annuity Distribution System. Variable annuities that include bonuses "may actually 'replace' what you have just lost in the market."

But guarantees as part of a variable annuity come at an added expense, cautions Peter Miralles, president of Atlanta Wealth Consultants. In addition, he says, "Generally the guarantees are diminished when withdrawals are made while the market value is down."

Shaun Golden of Golden Wealth Management in Riverhead, N.Y., concurs about living benefit riders, which can be found in today's variable annuity contracts, offering a "lifetime of guaranteed income regardless of financial market conditions." Golden, who has positioned a portion of his clients' assets into these types of annuities, says he's getting expressions of appreciation for protecting "the income which we count on each month."

Sollmann says variable annuities with an income rider are worth considering for those who are still saving for retirement who want the potential to grow assets along with income protection, even in down markets.






More annuity choices
Among the many other annuities available:

Immediate (or income) annuity. Available as fixed, variable or a combination of both, the immediate annuity is designed to produce a stream of income soon after its purchase. This option would generally appeal to someone age 60 or older. Deferred annuities can be annuitized to become immediate annuities. Warschauer believes fixed immediate annuities are what near-retirees and retirees should consider first.

Deferred annuity. You give the company a large sum upfront or make monthly payments until you reach retirement age. The money grows tax-free until you retire. This works best for someone who has a big chunk of change to put down and at least 20 years for the money to grow tax-free before setting up a schedule of lifetime payments that would start after retirement.

Lifetime income annuity. This product provides income for the remaining life of a person (or people, if a two-life annuity is purchased), according to the Insurance Information Institute. The amount paid depends on age, the amount paid into the annuity, and (if it's a fixed annuity) an interest rate set by the company. David F. Babbel, professor of insurance and finance at The Wharton School at the University of Pennsylvania, says lifetime income annuities should play a substantial role -- 40 percent to 80 percent of retirement assets -- in the retirement arrangements of most people.

Inflation-adjusted annuity. This feature is one that is added to lifetime income annuities that protects one's purchasing power, regardless of whether inflation or deflation occurs, Babbel says, adding that only a handful of insurers offer this feature. He also suggests seeking an annuity with a preset annual rate of increase, such as 1 percent to 6 percent per year. As an alternative to the inflation-adjusted annuity, he suggests having a fixed immediate annuity with a deferred, flexible premium annuity as a supplement. The flexible premium annuity can be activated as needed, "and if inflation really takes off, you can use the flexible premium feature to increase the size of your annuity," he says.

Seek stability
A final word of wisdom that's especially important in today's market: Be careful whom you do business with. "An insurance company can go out of business," points out Warschauer. "There is no guarantee that if a company goes out of business, they won't take the variable annuity or fixed annuity holders with them."

That's why it's worth taking the time to do some research to find out how solid a company you're thinking of buying from. Check out:

A.M. Best WWW.AMBEST.COM
Moody's Investors Service WWW.MOODYS.COM
Standard & Poor's WWW.STANDARDANDPOORS.COM
TheStreet.com Ratings (formerly Weiss Ratings) WWW.WEISSRATINGS.COM


According to Warschauer, Weiss has had a reputation for doing the best job in predicting failure in insurance companies, although users have to pay to access information. With national firms, he adds, a company being licensed in the State of New York is a good sign of stability, since their insurance commissioner's department is "probably the best known with being careful with regulations."

Regarding worries over financial stability, Warschauer points out that ordinarily the industry purchases each other's customers when a company goes under. "They will buy that package of annuities and take them over. But there have been cases where the annuities have simply failed." Conclusion: Annuities can be a rescue vehicle for many retirees -- just proceed with caution.

Melissa Ezarik is a Connecticut-based freelance writer.