Libor Rising to the Occasion
PIMCO Short-Term (PTSHX) and more buttoned-up Fidelity Conservative Income Bond(FCONX) are two of our favored active ultrashort bond funds that have benefited from these market dislocations.What You Will Find Here
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Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts
How to Invest in a Rising Rate Environment (Morningstar)
PIMCO Short-Term (PTSHX) and more buttoned-up Fidelity Conservative Income Bond(FCONX) are two of our favored active ultrashort bond funds that have benefited from these market dislocations.
Protect Your Retirement (Fidelity)
Five ways to protect your retirement income
Five rules of thumb to help protect your savings and income—now and in the future.
- FIDELITY VIEWPOINTS
- – 01/08/2015
If you’re nearing or in retirement, it’s important to think about protecting what you've saved and ensuring that your income needs are met now and in the future. Here are five rules of thumb to help manage the risks to your retirement income.
1. Plan for health care costs.
With longer life spans and medical costs that historically have risen faster than general inflation—particularly for long-term care—managing health care costs can be a critical challenge for retirees.
According to Fidelity’s annual retiree health care costs estimate, the average 65-year-old couple retiring in 2014 will need an estimated $220,000 to cover health care costs during their retirement, and that is just using average life expectancy data.1 Many people will live longer and have higher costs. And that cost doesn’t include long term care (LTC) expenses.
According to the U.S. Department of Health and Human Services, about 70% of those age 65 and older will require some type of LTC services—either at home, in adult day care, in an assisted living facility, or in a traditional nursing home. The average private-pay cost of a nursing home is about $90,000 per year according to MetLife, and exceeds $100,000 in some states. Assisted living facilities average $3,477 per month. Hourly home care agency rates average $46 for a Medicare-certified home health aide and $19 for a licensed non-Medicare-certified home health aide.
Consider: Purchase long-term-care insurance. The cost is based on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you’ll potentially be paying for them.
If you are still working and your employer offers a health savings account (HSA), you may want to take advantage of it. An HSA offers a triple-tax advantage: You can save pretax dollars, which can grow and be withdrawn state and federal tax free if used for qualified medical expenses—currently or in retirement.
2. Expect to live longer.
As medical advances continue, it's quite likely that today’s healthy 65-year-olds will live well into their 80s or even 90s. This means there's a real possibility that you may need 30 or more years of retirement income.
An American man who’s reached age 65 in good health has a 50% chance of living 20 more years, to age 85, and a 25% chance of living to 92. For a 65-year-old American woman, those odds rise to a 50% chance of living to age 88 and a one-in-four chance of living to 94. The odds that at least one member of a 65-year-old couple will live to 92 are 50%, and there’s a 25% chance at least one of them will reach age 97.2 And recent data suggest that longevity expectations may continue to increase.
Without some thoughtful planning, you could easily outlive your savings and have to rely solely on Social Security for your income. And with the average Social Security benefit being just over $1,294 a month, it likely won’t cover all your needs.3
Consider: To cover your income needs, particularly your essential expenses, you may want to use some of your retirement savings to purchase an annuity. It will help you create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.4
3. Be prepared for inflation.
Inflation can eat away at the purchasing power of your money over time. This affects your retirement income by increasing the future costs of goods and services, thereby reducing the purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree’s purchasing power. Our hypothetical example below shows that $50,000 today would be worth only $30,477 in 25 years, even with a relatively low (2%) inflation rate.
Consider: While many fixed income investments and retirement income sources will not keep up with inflation, some sources, such as Social Security, and certain pensions and annuities can help you contend with inflation automatically through annual cost-of-living adjustments or market-related performance. Investing in inflation-fighting securities, such as growth-oriented investments (e.g., individual stocks or stock mutual funds), Treasury Inflation-Protected Securities (TIPS), and commodities, may also make sense.
4. Position investments for growth.
A too-conservative investment strategy can be just as dangerous as a too-aggressive one. It exposes your portfolio to the erosive effects of inflation, limits the long-term upside potential that diversified stock investments can offer, and can diminish how long your money may last. On the other hand, being too aggressive can mean undue risk in down or volatile markets. A strategy that seeks to keep the growth potential for your investments without too much risk may be the answer.
The sample target asset mixes below show some asset allocation strategies that blend stocks, bonds, and short-term investments to achieve different levels of risk and return potential. With retirement likely to span 30 years or so, you’ll want to find a balance between risk and return potential.
Consider: Create a diversified portfolio that includes a mix of stocks, bonds, and short-term investments, according to your risk tolerance, overall financial situation, and investment time horizon. Doing so may help you seek the growth you need without taking on more risk than you are comfortable with. Diversification and asset allocation do not ensure a profit or guarantee against loss. Get help creating an appropriate investment strategy with our Planning & Guidance Center.
5. Don't withdraw too much from savings.
Spending your savings too rapidly can also put your retirement plan at risk. For this reason, we believe that retirees should consider using conservative withdrawal rates, particularly for any money needed for essential expenses.
A common rule of thumb is to use a withdrawal rate of 4% to 5%. Why? We examined historical inflation-adjusted asset returns for a hypothetical balanced investment portfolio of 50% stocks, 40% bonds, and 10% cash, to determine how long various withdrawal rates would have lasted. The chart to the right shows what we found: In 90% of historical markets, a 4% rate would have lasted for at least 30 years, while in 50% of the historical markets, a 4% rate would have been sustained for more than 40 years.
Consider: Keep your withdrawals as conservative as you can. Later on, if your expenses drop or your investment portfolio grows, you may be able to raise that rate.
In conclusion
After spending years building your retirement savings, switching to spending that money can be stressful. But it doesn't have to be that way if you take steps leading up to and during retirement to manage these five key risks to your retirement income, as outlined above.
Motley Fool NINE FACTS YOU NEED TO KNOW ABOUT INVESTING
Sometimes it just takes a number or two to deliver a life changing realization.
- You may be more prepared for retirement than you think.Say, you have only $75,000 socked away for retirement, and you are already 45. You have a lot more saving and investing to do in order to build a comfortable retirement. But, you are still above average. Fifty-three percent of American workers have saved less than $25,000 for retirement (excluding the value of their home), and 35% have less than $1,000 saved.
- You can probably amass much more money than you think. If you have 30 years until retirement and you can sock away $8,000 per year that grows by an annual average of 8%, you can accumulate close to $1 million. You have only 20 years until retirement and can sock away $10,000 a year growing at 8% annually, you will end up with close to $500,000.
- It is kind of easy to outperform most managed stock mutual funds. An inexpensive, broad market index fund is likely to outperform most managed stock mutual funds. For example, the S&P 500 outperformed about 80% of large cap stock funds over the decade concluding at the end of June, 2015.
- Dividends can turbocharge your investing. A study of Russell 3000 companies dating back to 1992 found dividend payers returned about four percentage points more per year, than the average non-payers, when weighted equally. Between 1927 and the end of 2012, reinvested dividend income made up 42% of large cap returns, 36% of mid cap returns and 31% of small cap stock returns.
- Day trading or excessively active trading can wreck your returns. The most active traders reaped the lowest returns. Indeed, between 1992 and 2006, 80% of active traders lost money, and only 1% of them could be called predictably profitable.
- Inflation can cut your purchasing power in half. Over the long haul, inflation has averaged about 3% annually. That number may not seem bad, but over 20 years it is enough to give $100,000 the purchasing power of just $54,000.
- Do not count on your home as an investment. Think of your home as a comfortable place to live, but not necessarily a great investment. A Nobel-prize-winning economist’s data suggest that housing prices have grown at a compound annual rate of just 0.3% over the past century (inflation-adjusted), while S&P 500 has averaged roughly 6.5%.
- Stocks rose 1,100-fold over the last 70 years. Over the last 70 years, the S&P 500 advanced 1,100-fold, which is enough to turn a single modest $1,000 investment into more than a million dollars. Consider that statement in light of the many double-digit market crashes, recessions, and even the Great Depression. The lesson: over the long haul, stock markets tend to rise, not just in a straight line.
- You can slash your tax rate nearly in half by being a long-term investor. The capital gains rate on short term investments (those held a year or less) is the same as your income tax, which is 25% for most people and 28% for higher earners. On long-term capital gains, though (from assets held for more than a year), most people will face a tax hit of just 15%.
Why You Should Contribute to Your IRA Now - Social Security is Not Enough (ICMA Retirement Corporation)
Growth of Retiree Costs Versus Social Security Benefits 2000-2015
Chart of the Week for November 6, 2015 - November 12, 2015
Inflation is one of the many factors that people planning for retirement should consider. Its compounding effect over time can erode retiree's standard of living in retirement years. Since inflation does not impact all products and services evenly, people planning for retirement need to factor on inflation for the products that they purchase.
Recently, the Social Security Administration announced that for the third time in six years, there will be no cost of living adjustment increase for Social Security recipients, as the average inflation rate continues to be low. The chart above compares the growth of Social Security benefits to the inflation of some expenses incurred by retirees for the time period 2000-2015. While benefits grew by 43% during the period, expenses such as Medicare Part B rose 131% and Heating Oil rose 159%. The inflation of many products and services grew by multiples of the benefits growth rate. This trend reinforces the thought that Social Security should only be one part of your retirement strategy if you are seeking to maintain your standard of living in retirement.
© Copyright 2015 ICMA Retirement Corporation, All Rights Reserved. This information is intended for educational purposes only and is not to be construed as investment advice or a solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed here. Past performance is not necessarily indicative of future performance.
Inflation and Retirement (ICMA)
Retirement Account Purchasing Power - Inflation Impact
Chart of the Week for June 8, 2012 - June 14, 2012
In retirement, it is not only spending that affects the value of a retirement account -- inflation impacts it as well. Inflation is defined as a general rise in the prices of goods and services. So as inflation increases, the purchasing power of savings, such as retirement assets, decreases. In other words, savings will not buy as much.
For example, the above graph illustrates the effect of different levels of inflation on the purchasing power of a retirement account, assuming: no withdrawals, no contributions, no other earnings, and retirement at age 65. The first case (blue) assumes no inflation so the purchasing power of the fund is maintained at $100,000 over time. In the second case (gold), inflation is assumed at 2.5% per year, approximately the level of inflation over the past 20 years. In this case, the average amount of goods and services which could be purchased after 10 years, at age 75 is reduced by over 22% to $77,633 and by almost 40% after 20 years at age 85 to $60,269. And if the inflation rate were to rise to 5.0% per year (green), the average purchasing power of the fund would drop 40% in 10 years at age 75 and nearly two thirds (64%) after 20 years at age 85. And that is before any withdrawals for any types of expenses.
When setting financial goals for retirement, inflation is one of the factors that should be included in the considerations. If portfolio returns do not offset inflation, the purchasing power of the account will be reduced. Conversely, if the portfolio returns exceed inflation, the purchasing power of the account will grow. Depending on your risk tolerance, time horizon, and investing goals, each investor should balance risk and reward to create their own portfolio. Remember, the next 20 years may, or may not, look like the last 20 years.
© Copyright 2012 ICMA Retirement Corporation, All Rights Reserved. This information is intended for educational purposes only and is not to be construed as investment advice or a solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed here. Past performance is not necessarily indicative of future performance.
Chart of the Week for June 8, 2012 - June 14, 2012
In retirement, it is not only spending that affects the value of a retirement account -- inflation impacts it as well. Inflation is defined as a general rise in the prices of goods and services. So as inflation increases, the purchasing power of savings, such as retirement assets, decreases. In other words, savings will not buy as much.
For example, the above graph illustrates the effect of different levels of inflation on the purchasing power of a retirement account, assuming: no withdrawals, no contributions, no other earnings, and retirement at age 65. The first case (blue) assumes no inflation so the purchasing power of the fund is maintained at $100,000 over time. In the second case (gold), inflation is assumed at 2.5% per year, approximately the level of inflation over the past 20 years. In this case, the average amount of goods and services which could be purchased after 10 years, at age 75 is reduced by over 22% to $77,633 and by almost 40% after 20 years at age 85 to $60,269. And if the inflation rate were to rise to 5.0% per year (green), the average purchasing power of the fund would drop 40% in 10 years at age 75 and nearly two thirds (64%) after 20 years at age 85. And that is before any withdrawals for any types of expenses.
When setting financial goals for retirement, inflation is one of the factors that should be included in the considerations. If portfolio returns do not offset inflation, the purchasing power of the account will be reduced. Conversely, if the portfolio returns exceed inflation, the purchasing power of the account will grow. Depending on your risk tolerance, time horizon, and investing goals, each investor should balance risk and reward to create their own portfolio. Remember, the next 20 years may, or may not, look like the last 20 years.
© Copyright 2012 ICMA Retirement Corporation, All Rights Reserved. This information is intended for educational purposes only and is not to be construed as investment advice or a solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed here. Past performance is not necessarily indicative of future performance.
Stocks, Bonds, Cash and Inflation - the last 30 years
Chart of the Week for March 30, 2012 - April 5, 2012
When investing in any asset class, such as stocks, bonds or cash equivalents (U.S. 30 Day Treasury Bills), an investor assumes some level of risk. Securities with higher return potential typically carry more risk of not meeting return expectations or even possibly losing some or all of the amount invested. Stocks, for example, are typically more risky than bonds or cash equivalents, but have historically offered higher return possibilities. The graph above illustrates the relationship between risk and reward in different asset classes between February 1982 and February 2012.
We can see the growth of inflation and of a $1 invested in three different asset classes beginning at the end of February 1982. After 30 years, the $1 invested in stocks, as measured by the S&P 500 Index, would have grown to $26.56. If that same $1 was invested in bonds, as measured by the U.S. Long-Term Government Index, the investment would be worth $22.03. If the $1 was allocated completely to cash equivalents, represented by U.S. 30 Day T-Bills, its value would be $3.84, only slightly better than inflation. As a result of inflation, $2.40 is needed in February 2012 just to buy what $1.00 bought in February 1982.
Over the 30 year period, stocks outperformed bonds and cash equivalents, and stayed well ahead of inflation. However, stocks carried the most risk as demonstrated by the volatility in the blue line and if the chart stopped in December 2008, bonds outperformed stocks. Depending on your risk tolerance, time horizon, and investing goals, each investor should balance risk and reward to create their own portfolio. Remember the next 30 years may not look like the last 30 years.
© Copyright 2012 ICMA Retirement Corporation, All Rights Reserved. This information is intended for educational purposes only and is not to be construed as investment advice or a solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed here. Past performance is not necessarily indicative of future performance.
When investing in any asset class, such as stocks, bonds or cash equivalents (U.S. 30 Day Treasury Bills), an investor assumes some level of risk. Securities with higher return potential typically carry more risk of not meeting return expectations or even possibly losing some or all of the amount invested. Stocks, for example, are typically more risky than bonds or cash equivalents, but have historically offered higher return possibilities. The graph above illustrates the relationship between risk and reward in different asset classes between February 1982 and February 2012.
We can see the growth of inflation and of a $1 invested in three different asset classes beginning at the end of February 1982. After 30 years, the $1 invested in stocks, as measured by the S&P 500 Index, would have grown to $26.56. If that same $1 was invested in bonds, as measured by the U.S. Long-Term Government Index, the investment would be worth $22.03. If the $1 was allocated completely to cash equivalents, represented by U.S. 30 Day T-Bills, its value would be $3.84, only slightly better than inflation. As a result of inflation, $2.40 is needed in February 2012 just to buy what $1.00 bought in February 1982.
Over the 30 year period, stocks outperformed bonds and cash equivalents, and stayed well ahead of inflation. However, stocks carried the most risk as demonstrated by the volatility in the blue line and if the chart stopped in December 2008, bonds outperformed stocks. Depending on your risk tolerance, time horizon, and investing goals, each investor should balance risk and reward to create their own portfolio. Remember the next 30 years may not look like the last 30 years.
© Copyright 2012 ICMA Retirement Corporation, All Rights Reserved. This information is intended for educational purposes only and is not to be construed as investment advice or a solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed here. Past performance is not necessarily indicative of future performance.
Beware the Wealth Killers (from Ken and Daria Dolan)
Dolans.com
Beware These 9 Wealth Killers
by Ken Dolan October 22, 2008 10:13 AM
Posted in: Family & Money
These are scary times, indeed. Even the talking heads on TV tell us that we're in uncharted territory. And based on our 20+ years of experience in the financial business, this is one of the few times that we actually agree with them!
Between economic (and natural) catastrophes...banking disasters...more and more scams…and bad news upon more bad news, it's no wonder that people are tempted to stuff their cash under their mattress!
Yes, it's been a tough year to grow your money. But to make matters even worse, there are also serious threats that can eat away at your hard-earned dollars.
As they say, "Forewarned is forearmed." If you know what threats are out there, you can take steps now to protect your money.
To that end, we've pulled together these top 9 threats to guard against AND what you must do about them. Read on...
Money Threat #1: Inflation.
Dare we say the dreaded "I" word? (May as well since we're in the thick of inflation now!)
Inflation affects more than just the cost of the products you buy – it can also affect the price of your loans since inflation generally pushes interest rates up…not to mention that it can negatively influence your investments because many companies grow more slowly during inflationary times.
Sit tight. Prices will eventually drop again – they always do. In the meantime, cut corners where you can. Save more. You should also start a "rainy day" fund, if you don't have one already. You can quickly calculate how much you need to set aside for emergencies here. (/calculators/How_Much_Do_I_Need_For_Emergencies.html)
Money Threat #2: Stock market losses.
In the midst of the banking crisis and the tumbling real estate and mortgage markets, woe is Wall Street. This turmoil in the stock market affects your retirement, your savings and your financial health as a whole.
Whatever you do, don't spend one more day invested in stocks if you're uncomfortable doing so. Rule #1 in our 10 Simple Rules of Investing (/invest_wisely/dolans_10_rules_of_investing.html) is to "Know thy sleep quotient." In a nutshell, that means reduce your risk if you're staying awake at night worrying about your investments.
Remember: There are always safer places to put your money. Just don't lose your shirt in THESE investments.
Money Threat #3: Bank problems
Many of us who never worried about the safety of our assets in a bank are now very concerned…with good reason. This whole financial crisis is FAR from over.
You can never be too cautious, so first check the safety of your bank through Veribanc (http://www.veribanc.com/ConsumerReports.php) (800/44-BANKS). They provide ratings on all U.S. federally-insured financial institutions. Another source is Weiss Ratings (http://www.weissratings.com/) , which includes a free list of the strongest- and weakest-rated banks in the nation. (You should also be aware of our 5 Warning Signs Your Bank Could Be In Trouble. (/banking/bank-failure-warning-signs.html) )
Also, make sure that your bank is FDIC insured. But don't be hasty – you need to know specifically what's covered and what's not. Find out in How to Protect Your Bank Deposits (/banking/fdic-insurance.html)
Money Threat #4: Weak dollar.
You may think that our weak dollar only affects us if we travel overseas. Not true.
It actually poses a lot of problems for our personal wealth as well. Since we don't manufacture much in the U.S. anymore, a lot of the products we purchase – from cars and wines to toys and clothes – are imported from foreign markets. A weak dollar makes them more expensive.
Also, since we're so dependent on foreign oil, a weak dollar keeps fuel costs high AND, as interest rates remain low, we don't earn as much on investments like CDs and bonds.
One solution, if you can stand the volatility and risk, is to consider a small investment in gold. (Click here for 4 ways to profit from a weak dollar. (/invest_wisely/investing_with_a_weak_dollar.html) )
Money Threat #5: The Presidential election.
We're not about to tell you who to vote for, but you need to know how Wall Street reacts when it comes to electing our highest public official.
Typically, if a Democrat is winning in the weeks leading up to an election, the stock market goes crazy and sells off in advance. It then usually rallies sometime after the new president takes his oath.
On the other hand, if a Republican is winning, the market usually rallies beforehand, then typically sells off not long after he takes office.
No matter what happens, if you plan to stay in the market (and we think it's treacherous to be there at the moment), be prepared for some short-term losses at the very least.
[Money Threat #6: Fluctuating energy prices.
Sure, gas prices are dropping...but for how long? (As long as we're importing oil, the risk of skyrocketing prices will always be there!)
Higher energy prices affect more than just the prices at the pump. They often lead to higher prices not only for essential goods such as food, but for just about anything that needs to be transported by truck or air.
They have a profound impact on your everyday products, not to mention the economy at large. And historically speaking, recessions often follow oil price surges.
What to do? The key is conservation. Slow down the demand. Carpool to work or take public transportation (or work from home a few days a week if your company allows it). You can find four other ways to save gas here (/save_more/gallery/high-gas-prices.html) .
Money Threat #7: Excessive household debt.
In The Millionaire Next Door, authors Thomas Stanley and William Danko noted that most self-made millionaires save or invest 15 to 20 percent of their income. The other side of the coin is that average Americans spend 18% of their disposable income paying off their debts. What a nightmare!
The obvious lesson learned is you'll never become a millionaire when you have a desk full of loans and credit card bills to pay each month. Find out how to become completely debt-free in 10 simple steps. (/debt_management/gallery/living-debt-free.html)
Money Threat #8: Being under-insured.
It's estimated that two out of three homes nationwide are under-insured. That's a scary statistic – especially in light of all of the natural disasters over the last few months.
Here's another frightening fact: Many homeowners with older insurance policies don't know that since the late 1990s they've had to specifically request a "guaranteed replacement" policy. Meaning if they don't, their policy may set pay-out limits that may not be enough to cover the cost to repair or rebuild their home. In the unlikely event of a disaster, the potential financial loss is staggering.
Eliminate your risk. Check your homeowner's policy. Then get our checklist to be sure you're prepared, just in case: What to Do When Disaster Strikes (/family_money/gallery/what-to-do-when-disaster-strikes.html) .
Money Threat #9: Money scams
If you receive an offer in the mail (or from a telemarketer) that sounds too good to be true, either look at it more closely…or, even better, pitch it.
One piece of mail you're much better off ignoring is a letter promising "mortgage rescue assistance." It has 'scam' written all over it. Remember, you do not and should not pay money to ANYONE to stay out of foreclosure. If you need help, consult a real estate attorney or call HOPE NOW at 1-800-995-HOPE
And…if you have a child applying to colleges this year, beware the scholarship scams, which "guarantee" a scholarship for a $50 to $1,500 fee. Ha!
Don't forget to forward this information to a friend who may need it!
Copyright © 2011 Dolans.com. All Rights Reserved.
Beware These 9 Wealth Killers
by Ken Dolan October 22, 2008 10:13 AM
Posted in: Family & Money
These are scary times, indeed. Even the talking heads on TV tell us that we're in uncharted territory. And based on our 20+ years of experience in the financial business, this is one of the few times that we actually agree with them!
Between economic (and natural) catastrophes...banking disasters...more and more scams…and bad news upon more bad news, it's no wonder that people are tempted to stuff their cash under their mattress!
Yes, it's been a tough year to grow your money. But to make matters even worse, there are also serious threats that can eat away at your hard-earned dollars.
As they say, "Forewarned is forearmed." If you know what threats are out there, you can take steps now to protect your money.
To that end, we've pulled together these top 9 threats to guard against AND what you must do about them. Read on...
Money Threat #1: Inflation.
Dare we say the dreaded "I" word? (May as well since we're in the thick of inflation now!)
Inflation affects more than just the cost of the products you buy – it can also affect the price of your loans since inflation generally pushes interest rates up…not to mention that it can negatively influence your investments because many companies grow more slowly during inflationary times.
Sit tight. Prices will eventually drop again – they always do. In the meantime, cut corners where you can. Save more. You should also start a "rainy day" fund, if you don't have one already. You can quickly calculate how much you need to set aside for emergencies here. (/calculators/How_Much_Do_I_Need_For_Emergencies.html)
Money Threat #2: Stock market losses.
In the midst of the banking crisis and the tumbling real estate and mortgage markets, woe is Wall Street. This turmoil in the stock market affects your retirement, your savings and your financial health as a whole.
Whatever you do, don't spend one more day invested in stocks if you're uncomfortable doing so. Rule #1 in our 10 Simple Rules of Investing (/invest_wisely/dolans_10_rules_of_investing.html) is to "Know thy sleep quotient." In a nutshell, that means reduce your risk if you're staying awake at night worrying about your investments.
Remember: There are always safer places to put your money. Just don't lose your shirt in THESE investments.
Money Threat #3: Bank problems
Many of us who never worried about the safety of our assets in a bank are now very concerned…with good reason. This whole financial crisis is FAR from over.
You can never be too cautious, so first check the safety of your bank through Veribanc (http://www.veribanc.com/ConsumerReports.php) (800/44-BANKS). They provide ratings on all U.S. federally-insured financial institutions. Another source is Weiss Ratings (http://www.weissratings.com/) , which includes a free list of the strongest- and weakest-rated banks in the nation. (You should also be aware of our 5 Warning Signs Your Bank Could Be In Trouble. (/banking/bank-failure-warning-signs.html) )
Also, make sure that your bank is FDIC insured. But don't be hasty – you need to know specifically what's covered and what's not. Find out in How to Protect Your Bank Deposits (/banking/fdic-insurance.html)
Money Threat #4: Weak dollar.
You may think that our weak dollar only affects us if we travel overseas. Not true.
It actually poses a lot of problems for our personal wealth as well. Since we don't manufacture much in the U.S. anymore, a lot of the products we purchase – from cars and wines to toys and clothes – are imported from foreign markets. A weak dollar makes them more expensive.
Also, since we're so dependent on foreign oil, a weak dollar keeps fuel costs high AND, as interest rates remain low, we don't earn as much on investments like CDs and bonds.
One solution, if you can stand the volatility and risk, is to consider a small investment in gold. (Click here for 4 ways to profit from a weak dollar. (/invest_wisely/investing_with_a_weak_dollar.html) )
Money Threat #5: The Presidential election.
We're not about to tell you who to vote for, but you need to know how Wall Street reacts when it comes to electing our highest public official.
Typically, if a Democrat is winning in the weeks leading up to an election, the stock market goes crazy and sells off in advance. It then usually rallies sometime after the new president takes his oath.
On the other hand, if a Republican is winning, the market usually rallies beforehand, then typically sells off not long after he takes office.
No matter what happens, if you plan to stay in the market (and we think it's treacherous to be there at the moment), be prepared for some short-term losses at the very least.
[Money Threat #6: Fluctuating energy prices.
Sure, gas prices are dropping...but for how long? (As long as we're importing oil, the risk of skyrocketing prices will always be there!)
Higher energy prices affect more than just the prices at the pump. They often lead to higher prices not only for essential goods such as food, but for just about anything that needs to be transported by truck or air.
They have a profound impact on your everyday products, not to mention the economy at large. And historically speaking, recessions often follow oil price surges.
What to do? The key is conservation. Slow down the demand. Carpool to work or take public transportation (or work from home a few days a week if your company allows it). You can find four other ways to save gas here (/save_more/gallery/high-gas-prices.html) .
Money Threat #7: Excessive household debt.
In The Millionaire Next Door, authors Thomas Stanley and William Danko noted that most self-made millionaires save or invest 15 to 20 percent of their income. The other side of the coin is that average Americans spend 18% of their disposable income paying off their debts. What a nightmare!
The obvious lesson learned is you'll never become a millionaire when you have a desk full of loans and credit card bills to pay each month. Find out how to become completely debt-free in 10 simple steps. (/debt_management/gallery/living-debt-free.html)
Money Threat #8: Being under-insured.
It's estimated that two out of three homes nationwide are under-insured. That's a scary statistic – especially in light of all of the natural disasters over the last few months.
Here's another frightening fact: Many homeowners with older insurance policies don't know that since the late 1990s they've had to specifically request a "guaranteed replacement" policy. Meaning if they don't, their policy may set pay-out limits that may not be enough to cover the cost to repair or rebuild their home. In the unlikely event of a disaster, the potential financial loss is staggering.
Eliminate your risk. Check your homeowner's policy. Then get our checklist to be sure you're prepared, just in case: What to Do When Disaster Strikes (/family_money/gallery/what-to-do-when-disaster-strikes.html) .
Money Threat #9: Money scams
If you receive an offer in the mail (or from a telemarketer) that sounds too good to be true, either look at it more closely…or, even better, pitch it.
One piece of mail you're much better off ignoring is a letter promising "mortgage rescue assistance." It has 'scam' written all over it. Remember, you do not and should not pay money to ANYONE to stay out of foreclosure. If you need help, consult a real estate attorney or call HOPE NOW at 1-800-995-HOPE
And…if you have a child applying to colleges this year, beware the scholarship scams, which "guarantee" a scholarship for a $50 to $1,500 fee. Ha!
Don't forget to forward this information to a friend who may need it!
Copyright © 2011 Dolans.com. All Rights Reserved.
Straight Facts about Retirement in the USA (Morningstar)
Improving Your Finances
25 Shocking but True Statistics About RetirementBy Christine Benz | 07-28-11 | 06:00 AM |
It's summer. Much of the country has been coping with scorching heat. But you still might not welcome this bucket of cold water: a passel of statistics about how many retirees are woefully underprepared for the financial challenges of retirement.
The goal of aggregating these numbers isn't to send you lurching to your closest bar cabinet. After all, you personally might be in much better financial shape during retirement than the following averages suggest. And even if you're not, you still might have time to make some adjustments to your plan so that you can avoid coming up short.
Herewith, 25 shocking but true statistics about the state of retirement in the United States.
19: Percentage of U.S. workers participating in a defined-contribution plan, such as a 401(k), in 1980.
52: Percentage of workers participating in a defined-contribution plan in 2004.
$71,500: Average balance of Fidelity 401(k) account holders at the end of 2010, based on 11 million accounts.
$740,000: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and no inflation.
$1 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 3% inflation rate.
$1.25 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 5% inflation rate.
45: Percentage of retirees who don't factor inflation into their retirement planning.
13: Percentage of retirees who look at least 20 or more years into the future when planning for retirement.
21 and 17: Average number of years, respectively, that women and men in the U.S. will be retired.
25: Percentage of 401(k) participants ages 56-65 who had more than 90% of their accounts in equities at year-end 2007.
42: Percentage of the target equity weighting for those retiring in 2010 according to Morningstar's Lifetime Allocation Indexes.
$1,000: Monthly Social Security benefit a retiree would receive if he begins collecting benefits this year, at age 62, assuming an annual income of $50,000.
$1,951: Monthly Social Security benefit if same retiree delays receipt of Social Security benefits until age 70.
72: Percentage of Social Security recipients who begin collecting benefits at age 62.
34: Percentage of retirees who rely on Social Security for 90% or more of their income needs during retirement.
40: Percentage of average wage earners' income that Social Security replaces.
80: Percentage rule of thumb for how much of one's pre-retirement income will be needed during retirement.
$230,000: Amount that a 65-year-old couple retiring in 2011 will need to pay for medical care throughout retirement.
40: Estimate of the average percentage increase in 2011 premiums on long-term care insurance policies issued by John Hancock.
45: Percentage of Americans ages 40-64 who believe the government will pick up the tab for their long-term-care needs.
$2,000: Amount of countable assets to be eligible for Medicaid to cover long-term-care costs in most states.
70: Percentage of Americans over age 65 who will need some form of long-term-care services during their lifetimes.
$162,000: Average annual costs for private-room nursing home care in Manhattan in 2011.
$60,000: Average annual costs for private-room nursing home care in St. Louis in 2011.
2.4 years: Average length of stay in a long-term care facility.
25 Shocking but True Statistics About RetirementBy Christine Benz | 07-28-11 | 06:00 AM |
It's summer. Much of the country has been coping with scorching heat. But you still might not welcome this bucket of cold water: a passel of statistics about how many retirees are woefully underprepared for the financial challenges of retirement.
The goal of aggregating these numbers isn't to send you lurching to your closest bar cabinet. After all, you personally might be in much better financial shape during retirement than the following averages suggest. And even if you're not, you still might have time to make some adjustments to your plan so that you can avoid coming up short.
Herewith, 25 shocking but true statistics about the state of retirement in the United States.
19: Percentage of U.S. workers participating in a defined-contribution plan, such as a 401(k), in 1980.
52: Percentage of workers participating in a defined-contribution plan in 2004.
$71,500: Average balance of Fidelity 401(k) account holders at the end of 2010, based on 11 million accounts.
$740,000: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and no inflation.
$1 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 3% inflation rate.
$1.25 million: The amount of assets needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and a 5% inflation rate.
45: Percentage of retirees who don't factor inflation into their retirement planning.
13: Percentage of retirees who look at least 20 or more years into the future when planning for retirement.
21 and 17: Average number of years, respectively, that women and men in the U.S. will be retired.
25: Percentage of 401(k) participants ages 56-65 who had more than 90% of their accounts in equities at year-end 2007.
42: Percentage of the target equity weighting for those retiring in 2010 according to Morningstar's Lifetime Allocation Indexes.
$1,000: Monthly Social Security benefit a retiree would receive if he begins collecting benefits this year, at age 62, assuming an annual income of $50,000.
$1,951: Monthly Social Security benefit if same retiree delays receipt of Social Security benefits until age 70.
72: Percentage of Social Security recipients who begin collecting benefits at age 62.
34: Percentage of retirees who rely on Social Security for 90% or more of their income needs during retirement.
40: Percentage of average wage earners' income that Social Security replaces.
80: Percentage rule of thumb for how much of one's pre-retirement income will be needed during retirement.
$230,000: Amount that a 65-year-old couple retiring in 2011 will need to pay for medical care throughout retirement.
40: Estimate of the average percentage increase in 2011 premiums on long-term care insurance policies issued by John Hancock.
45: Percentage of Americans ages 40-64 who believe the government will pick up the tab for their long-term-care needs.
$2,000: Amount of countable assets to be eligible for Medicaid to cover long-term-care costs in most states.
70: Percentage of Americans over age 65 who will need some form of long-term-care services during their lifetimes.
$162,000: Average annual costs for private-room nursing home care in Manhattan in 2011.
$60,000: Average annual costs for private-room nursing home care in St. Louis in 2011.
2.4 years: Average length of stay in a long-term care facility.
For Real - How Much is Inflation? (from icma-rc.org)
Food and Energy Prices Driving Overall Inflation
Chart of the Week for March 25 - March 31, 2011
Inflation is a general increase in prices and is carefully monitored to gauge economic health. Too much, too little, or unexpected changes in inflation is generally thought by economists to be detrimental to the economy. Inflation is typically measured by the Consumer Price Index ("CPI"). This index is calculated by measuring the average change in price of a given basket of goods.
Core CPI is the same index, with volatile food and energy prices excluded. The chart above illustrates the trend in these two versions of the CPI over the past two years.
Core CPI remained around 2% in 2009, but falling food and/or energy prices drove the overall CPI into negative territory for much of the year.
In 2010, Core CPI dropped to under 1% with food and/or energy prices remaining fairly stable until the fourth quarter.Thus far in 2011, supply constraints, primarily stemming from the improving global economy and political unrest in the Middle East, have propelled a rise in food and energy prices. This change has been a key factor in the overall CPI increase from 1.5% in December 2010 to 2.1% in February 2011.
The Federal Reserve Open Market Committee ("FOMC") met on March 15, 2011, and issued a press release stating its expectation that the upward pressure of energy and other commodity prices on inflation will be transitory. Therefore, the FOMC will continue purchasing longer-term Treasury securities and maintaining a target range for the federal funds rate at 0 to 1/4 percent. However, the FOMC will act to stem inflation, should it threaten the economic recovery.
While Overall and Core CPI remain low, they have been trending upwards. This change has been felt by consumers in higher prices of food and energy and is being monitored by Federal Reserve.
© Copyright 2011 ICMA Retirement Corporation, All Rights Reserved.
Chart of the Week for March 25 - March 31, 2011
Inflation is a general increase in prices and is carefully monitored to gauge economic health. Too much, too little, or unexpected changes in inflation is generally thought by economists to be detrimental to the economy. Inflation is typically measured by the Consumer Price Index ("CPI"). This index is calculated by measuring the average change in price of a given basket of goods.
Core CPI is the same index, with volatile food and energy prices excluded. The chart above illustrates the trend in these two versions of the CPI over the past two years.
Core CPI remained around 2% in 2009, but falling food and/or energy prices drove the overall CPI into negative territory for much of the year.
In 2010, Core CPI dropped to under 1% with food and/or energy prices remaining fairly stable until the fourth quarter.Thus far in 2011, supply constraints, primarily stemming from the improving global economy and political unrest in the Middle East, have propelled a rise in food and energy prices. This change has been a key factor in the overall CPI increase from 1.5% in December 2010 to 2.1% in February 2011.
The Federal Reserve Open Market Committee ("FOMC") met on March 15, 2011, and issued a press release stating its expectation that the upward pressure of energy and other commodity prices on inflation will be transitory. Therefore, the FOMC will continue purchasing longer-term Treasury securities and maintaining a target range for the federal funds rate at 0 to 1/4 percent. However, the FOMC will act to stem inflation, should it threaten the economic recovery.
While Overall and Core CPI remain low, they have been trending upwards. This change has been felt by consumers in higher prices of food and energy and is being monitored by Federal Reserve.
© Copyright 2011 ICMA Retirement Corporation, All Rights Reserved.
How to Make Money from Inflation (WSJ)
WEEKEND INVESTOR
FEBRUARY 5, 2011.How to Profit From Inflation
The Scourge of Rising Prices Hasn't Hit Home Yet, but the Underlying Signs Point to Trouble Ahead. Here's What You Should Do Now.
By BEN LEVISOHN and JANE J. KIM
Inflation,long a sleeping giant, is finally awakening. And that could present problems—along with opportunities—for investors.
A quick glance at the overall inflation numbers might suggest there is little reason to worry. The most recent U.S. Consumer Price Index was up just 1.5% over the past year. Not only was that lower than the historical average of about 3%, but it was uncomfortably low for Federal Reserve Chairman Ben Bernanke, who prefers to see inflation at about 2%.
What to Do Now
Sell
Cash and Bonds: Treasurys, long-term bonds
Stocks: Financials, utilities and consumer staples
Hard Assets: Gold, real estate
Buy
Cash and Bonds: Floating-rate funds, inflation-linked CDs
Stocks: Small-company value stocks
Hard Assets: Commodities, real-return funds
Yet it is a much different situation overseas, particularly in the developing world. In South Korea, the CPI rose at a 4.1% clip in January from a year earlier, higher than the 3.8% estimate. In Brazil, analysts expect prices to rise 5.6% this year, exceeding the central-bank target of 4.5%. China, meanwhile, has been boosting interest rates and raising bank capital requirements to keep inflation, which rose to 4.6% in December, in check.
"Emerging market economies are overheating," says Julia Coronado, chief economist for North America at BNP Paribas in New York. "They need to slow growth or inflation will become destabilizing."
Even some developed economies are seeing rising prices. Inflation in the U.K. surged to 3.7% in December, while the euro zone's rate climbed to 2.4% in January, the fastest rise since 2008.
Much of the uptick has been driven by commodity prices. During the past six months, oil has jumped 9%, copper has gained 36% and silver has shot up 56%. Agricultural products have soared as well: Cotton, wheat and soybeans have risen 100%, 24% and 42%, respectively. That's a problem because rising input prices "work their way down the food chain to CPI," says Alan Ruskin, global head of G-10 foreign-exchange strategy at Deutsche Bank.
Of course, the main inflation driver is usually wages—and that isn't a factor in the U.S., where high unemployment has kept a lid on pay for three years.
Yet there isn't a historical blueprint for the inflation scenario that seems to be unfolding now. Not only has the global economy changed drastically since the last big inflationary run during the 1970s, but the lingering effects of the recent debt crisis remain a wild card.
For investors, that means traditional inflation busters such as real estate and gold might not work as expected, while other strategies might perform better.
So how should you position your portfolio? The best approach, say advisers, is to tweak asset allocations rather than overhaul them. That involves dialing back on some kinds of bonds, stocks and commodities and increasing holdings of others. Here's a guide:
What to Sell
• Bonds. The price of a bond moves in the opposite direction of its yield. When inflation kicks up, interest rates usually move higher, pressuring bond prices. Even buy-and-hold investors get hurt, because higher inflation erodes the real value of the interest payments you receive and the principal you get back when the bond matures.
'There is no historical blueprint for the inflation scenario that seems to be unfolding now.'.The drop is usually most extreme in longer-dated bonds, because low yields are locked in for a longer period of time. So inflation-wary investors should shorten the maturities of their bonds, say advisers.
The safest bonds, especially Treasurys, are usually hardest hit, because those are the most influenced by changes in rates—unlike corporate bonds, whose prices also move based on credit quality. From September 1986 through September 1987, for example, as inflation moved higher, Treasurys dropped 1.2%.
It might even make sense to dial back on Treasury inflation-protected securities, whose principal and interest payments grow alongside the CPI. That's because investors already have flooded into TIPS, driving up prices and driving down the real, inflation-adjusted yields. A typical 10-year TIPS, for example, yields just 1.1% after inflation, compared with an average of more than 2% in recent years.
With so little cushion, long-term TIPS carry a higher risk of loss for investors who are forced to sell before the bonds mature. "Even if inflation is rising, you can still lose money," says Joseph Shatz, interest-rate strategist at Bank of America Merrill Lynch.
• Hard assets. Real estate may be a classic inflation hedge, but it seems likely to disappoint investors this time around. Even though rising inflation should put upward pressure on home prices, the twin forces of record-high foreclosures and consumers reducing their debt loads are expected to mute price gains for several years, says Milton Ezrati, senior economist at asset manager Lord Abbett. That's a far cry from the 1970s, when the median home price rose 43%, according to U.S. Census data.
Gold is another traditional inflation hedge that might be less effective now. With prices already having more than quadrupled over the past nine years, many strategists see substantial inflation already factored into the price.
Hot Commodities
Commodities that are more closely tied to industrial or food production seem better positioned now than gold, say advisers.
Historically, gold has moved with the money supply. During the last 30 years, the correlation has been about 69%, according to FactSet data. (A correlation of 100% means two indexes move in lockstep all the time; a correlation of minus-100% means they move in perfect opposition.) Based on the money supply alone, gold is priced 25% above where it should be, says Russ Koesterich, chief investment strategist at BlackRock Inc.'s iShares.
• Stocks. Equities can be a decent hedge against creeping inflation, because companies are better able to pass off costs to customers. But when input costs suddenly jump, profit margins take a hit.
At the same time, the higher interest rates that accompany inflation prompt investors to demand more profits for each dollar invested. As a result, price/earnings ratios tend to shrivel. Over the past 55 years, the average trailing P/E ratio of a stock in the Standard & Poor's 500-stock index has fallen to 16.95 during periods with inflation running between 3% and 5%, from 19.24 during periods with inflation of 1% to 3%, the most common inflation range since 1955, Mr. Koesterich says.
Sectors that are sensitive to interest rates, including financials, utility stocks and consumer staples, are especially vulnerable, say advisers.
What to Buy
• Cash and bank products. Money-market mutual funds are more attractive in inflationary environments because the funds invest in short-term securities that mature every 30 to 40 days, and therefore can pass through higher rates quickly. In an extreme example, money funds posted yields over 15% during the inflation-ravaged 1970s and early 1980s, says Pete Crane of Crane Data, which tracks the funds.
A growing number of inflation-linked savings products are cropping up as well. Incapital LLC, a Chicago investment bank, says it has seen a pickup recently in issuances of certificates of deposit designed for a rising-rate environment. Savers, for example, can invest in a 12-year CD whose rate starts at 3% then gradually steps up to 4.25% starting in 2015, and peaks at 5.5% starting at 2019 until the CD's maturity in 2023.
A caveat: If inflation eases and rates fall, investors could get burned, since the issuer may call the CDs and investors would lose out on the higher rates at maturity.
• Bonds. One way to reduce the impact of rising inflation on bond holdings is to build a bond ladder—buying bonds that mature in, say, two, four, six, eight and 10 years. As the shorter-term bonds mature, investors can reinvest the proceeds into longer-term bonds at higher rates.
"A bond ladder is best for someone who doesn't mind holding them for up to 10 years," says Jeff Feldman, an adviser in Rochester, N.Y.
Highly cautious investors might prefer the I Bond, a U.S. savings bond that earns interest based on a twice-yearly CPI adjustment. Although the current yield on I Bonds is only 0.74%, that yield is likely to move higher on May 1, the next time the rate is adjusted. I Bonds aren't as volatile as TIPS and appeal to conservative, buy-and-hold investors. The interest may also be tax-free for some families for education expenses.
More adventurous types might consider the inflation-protected government debt of other nations, which carry higher yields along with greater risks. The SPDR DB International Government Inflation-Protected Bond Fund is an international inflation-protected bond exchange-traded fund designed to do well if inflation in overseas countries moves higher. The fund returned about 6.8% in 2010 and 18.5% in 2009, according to Morningstar Inc.
• Bank-loan funds. Another way to exploit rising inflation is through mutual funds that buy adjustable-rate bank loans, many of which are used to finance leveraged corporate buyouts. So-called floating-rate funds are structured so that if interest rates rise, they collect more money. During periods of rising rates, floating-rate funds usually outperform other bond-fund categories. In 2003, for example, as investors anticipated higher interest rates and a stronger economy, bank-loan funds gained 10.4% while short-term bond funds gained 2.5%.
Now, amid expectations of rising inflation, investors are once again flocking to these funds, pouring in about $7.6 billion into loan funds in the fourth quarter of last year, according to Lipper Inc.—more than double the previous quarterly record set in 2007. The pace has accelerated this year, with investors putting in about $3.4 billion thus far.
After gaining almost 10% last year, the funds shouldn't be counted on for much price appreciation, says Craig Russ, who co-manages $22.7 billion of floating-rate investments across three floating-rate funds and other accounts at Eaton Vance Corp., including the Eaton Vance Floating Rate Fund. But the funds generate plenty of income, yielding about 4% to 5% now, according to Morningstar.
Price Increases
From Aug. 2, 2010 through Feb. 4, 2011:
Cotton: +100%
Silver: +50%
Soybeans: + 42%
Copper: +36%
Wheat: +24%
.
Be warned: Floating-rate funds can get creamed when investors fear the underlying loans are too risky. In 2008, for example, bank-loan funds lost 29.7%, although they zoomed 41.8% in 2009, according to Morningstar. What's more, banks are beginning to make riskier "covenant-light" loans that carry fewer stipulations for corporate borrowers—a sign of frothier trends in the market.
Given the potential for volatility, floating-rate funds are best viewed as a complement to—not a replacement for—investors' core bond holdings. Among Morningstar's picks in this category is the Fidelity Floating Rate High-Income Fund, among the more conservative in the category.
• Commodities. Materials that are more closely tied to industrial or food production seem better positioned now than gold, say advisers. The trick is to find the best investment vehicle.
The easiest way for small investors to gain exposure to most commodities is through exchange-traded funds, many of which use futures contracts. But such funds can be dangerous because they often face "contango"—when the price for a future delivery is higher than the current price. The result: The ETFs lose money as they buy new contracts, even when prices are rising.
The losses can be extreme. In 2009, for instance, while the price of natural gas rose 3.4%, the United States Natural Gas Fund lost 56.5% as a result of rolling over futures contracts.
Some firms have rolled out ETFs that aim to address the problem. One of Morningstar's picks is the U.S. Commodity Index Fund, run by U.S. Commodity Funds LLC. The portfolio buys the seven commodities that are most "backwardated"—the opposite of "contango," so rolling contracts should result in a profit—along with the seven commodities with the most price momentum.
"USCI provides an outlet for investors who want broad commodities exposure but don't want to worry about the daily dynamics," says Tim Strauts, a Morningstar analyst.
Other funds play inflation by holding many different assets to protect against rising prices no matter where they show up. The IQ Real Return ETF, launched in 2009 by IndexIQ, aims to provide a return equal to the CPI plus 2% to 3% over a two- to three-year period. To get there, it invests across a dozen or so inflation-sensitive assets—including currencies and commodities.
• Stocks. One corner of the market tends to do better when prices rise suddenly: small-company value stocks. "Because value and small stocks tend to be fairly highly [indebted] companies, inflation reduces their liabilities," says William Bernstein of Efficient Frontier Advisors LLC, an investment-advisory firm in Eastford, Conn.
From January 1965 through December 1980, for example, inflation averaged 6.6% a year. The Ibbotson Small-Cap Value Index posted average annual returns of 14.4%, according to Morningstar's Ibbotson Associates, double the S&P 500's 7.1% gain.
Morningstar's picks in the small-cap value fund category include Allianz NFJ Small Cap Value, Diamond Hill Small Cap, Perkins Small Cap Value and Schneider Small Cap Value. Just be warned: Small value stocks have had a good run recently, returning 134%, on average, since March 6, 2009.
In the end, the particulars of any inflation-fighting plan may not be as important as developing a plan in the first place.
"The real problem you run into with any kind of inflation hedges," says Jay Hutchins, a financial adviser in Lebanon, N.H., "is that if you don't already have them when inflation is around the corner, you've missed the boat."
Write to Ben Levisohn at ben.levisohn@wsj.com and Jane J. Kim at jane.kim@wsj.com
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
FEBRUARY 5, 2011.How to Profit From Inflation
The Scourge of Rising Prices Hasn't Hit Home Yet, but the Underlying Signs Point to Trouble Ahead. Here's What You Should Do Now.
By BEN LEVISOHN and JANE J. KIM
Inflation,long a sleeping giant, is finally awakening. And that could present problems—along with opportunities—for investors.
A quick glance at the overall inflation numbers might suggest there is little reason to worry. The most recent U.S. Consumer Price Index was up just 1.5% over the past year. Not only was that lower than the historical average of about 3%, but it was uncomfortably low for Federal Reserve Chairman Ben Bernanke, who prefers to see inflation at about 2%.
What to Do Now
Sell
Cash and Bonds: Treasurys, long-term bonds
Stocks: Financials, utilities and consumer staples
Hard Assets: Gold, real estate
Buy
Cash and Bonds: Floating-rate funds, inflation-linked CDs
Stocks: Small-company value stocks
Hard Assets: Commodities, real-return funds
Yet it is a much different situation overseas, particularly in the developing world. In South Korea, the CPI rose at a 4.1% clip in January from a year earlier, higher than the 3.8% estimate. In Brazil, analysts expect prices to rise 5.6% this year, exceeding the central-bank target of 4.5%. China, meanwhile, has been boosting interest rates and raising bank capital requirements to keep inflation, which rose to 4.6% in December, in check.
"Emerging market economies are overheating," says Julia Coronado, chief economist for North America at BNP Paribas in New York. "They need to slow growth or inflation will become destabilizing."
Even some developed economies are seeing rising prices. Inflation in the U.K. surged to 3.7% in December, while the euro zone's rate climbed to 2.4% in January, the fastest rise since 2008.
Much of the uptick has been driven by commodity prices. During the past six months, oil has jumped 9%, copper has gained 36% and silver has shot up 56%. Agricultural products have soared as well: Cotton, wheat and soybeans have risen 100%, 24% and 42%, respectively. That's a problem because rising input prices "work their way down the food chain to CPI," says Alan Ruskin, global head of G-10 foreign-exchange strategy at Deutsche Bank.
Of course, the main inflation driver is usually wages—and that isn't a factor in the U.S., where high unemployment has kept a lid on pay for three years.
Yet there isn't a historical blueprint for the inflation scenario that seems to be unfolding now. Not only has the global economy changed drastically since the last big inflationary run during the 1970s, but the lingering effects of the recent debt crisis remain a wild card.
For investors, that means traditional inflation busters such as real estate and gold might not work as expected, while other strategies might perform better.
So how should you position your portfolio? The best approach, say advisers, is to tweak asset allocations rather than overhaul them. That involves dialing back on some kinds of bonds, stocks and commodities and increasing holdings of others. Here's a guide:
What to Sell
• Bonds. The price of a bond moves in the opposite direction of its yield. When inflation kicks up, interest rates usually move higher, pressuring bond prices. Even buy-and-hold investors get hurt, because higher inflation erodes the real value of the interest payments you receive and the principal you get back when the bond matures.
'There is no historical blueprint for the inflation scenario that seems to be unfolding now.'.The drop is usually most extreme in longer-dated bonds, because low yields are locked in for a longer period of time. So inflation-wary investors should shorten the maturities of their bonds, say advisers.
The safest bonds, especially Treasurys, are usually hardest hit, because those are the most influenced by changes in rates—unlike corporate bonds, whose prices also move based on credit quality. From September 1986 through September 1987, for example, as inflation moved higher, Treasurys dropped 1.2%.
It might even make sense to dial back on Treasury inflation-protected securities, whose principal and interest payments grow alongside the CPI. That's because investors already have flooded into TIPS, driving up prices and driving down the real, inflation-adjusted yields. A typical 10-year TIPS, for example, yields just 1.1% after inflation, compared with an average of more than 2% in recent years.
With so little cushion, long-term TIPS carry a higher risk of loss for investors who are forced to sell before the bonds mature. "Even if inflation is rising, you can still lose money," says Joseph Shatz, interest-rate strategist at Bank of America Merrill Lynch.
• Hard assets. Real estate may be a classic inflation hedge, but it seems likely to disappoint investors this time around. Even though rising inflation should put upward pressure on home prices, the twin forces of record-high foreclosures and consumers reducing their debt loads are expected to mute price gains for several years, says Milton Ezrati, senior economist at asset manager Lord Abbett. That's a far cry from the 1970s, when the median home price rose 43%, according to U.S. Census data.
Gold is another traditional inflation hedge that might be less effective now. With prices already having more than quadrupled over the past nine years, many strategists see substantial inflation already factored into the price.
Hot Commodities
Commodities that are more closely tied to industrial or food production seem better positioned now than gold, say advisers.
Historically, gold has moved with the money supply. During the last 30 years, the correlation has been about 69%, according to FactSet data. (A correlation of 100% means two indexes move in lockstep all the time; a correlation of minus-100% means they move in perfect opposition.) Based on the money supply alone, gold is priced 25% above where it should be, says Russ Koesterich, chief investment strategist at BlackRock Inc.'s iShares.
• Stocks. Equities can be a decent hedge against creeping inflation, because companies are better able to pass off costs to customers. But when input costs suddenly jump, profit margins take a hit.
At the same time, the higher interest rates that accompany inflation prompt investors to demand more profits for each dollar invested. As a result, price/earnings ratios tend to shrivel. Over the past 55 years, the average trailing P/E ratio of a stock in the Standard & Poor's 500-stock index has fallen to 16.95 during periods with inflation running between 3% and 5%, from 19.24 during periods with inflation of 1% to 3%, the most common inflation range since 1955, Mr. Koesterich says.
Sectors that are sensitive to interest rates, including financials, utility stocks and consumer staples, are especially vulnerable, say advisers.
What to Buy
• Cash and bank products. Money-market mutual funds are more attractive in inflationary environments because the funds invest in short-term securities that mature every 30 to 40 days, and therefore can pass through higher rates quickly. In an extreme example, money funds posted yields over 15% during the inflation-ravaged 1970s and early 1980s, says Pete Crane of Crane Data, which tracks the funds.
A growing number of inflation-linked savings products are cropping up as well. Incapital LLC, a Chicago investment bank, says it has seen a pickup recently in issuances of certificates of deposit designed for a rising-rate environment. Savers, for example, can invest in a 12-year CD whose rate starts at 3% then gradually steps up to 4.25% starting in 2015, and peaks at 5.5% starting at 2019 until the CD's maturity in 2023.
A caveat: If inflation eases and rates fall, investors could get burned, since the issuer may call the CDs and investors would lose out on the higher rates at maturity.
• Bonds. One way to reduce the impact of rising inflation on bond holdings is to build a bond ladder—buying bonds that mature in, say, two, four, six, eight and 10 years. As the shorter-term bonds mature, investors can reinvest the proceeds into longer-term bonds at higher rates.
"A bond ladder is best for someone who doesn't mind holding them for up to 10 years," says Jeff Feldman, an adviser in Rochester, N.Y.
Highly cautious investors might prefer the I Bond, a U.S. savings bond that earns interest based on a twice-yearly CPI adjustment. Although the current yield on I Bonds is only 0.74%, that yield is likely to move higher on May 1, the next time the rate is adjusted. I Bonds aren't as volatile as TIPS and appeal to conservative, buy-and-hold investors. The interest may also be tax-free for some families for education expenses.
More adventurous types might consider the inflation-protected government debt of other nations, which carry higher yields along with greater risks. The SPDR DB International Government Inflation-Protected Bond Fund is an international inflation-protected bond exchange-traded fund designed to do well if inflation in overseas countries moves higher. The fund returned about 6.8% in 2010 and 18.5% in 2009, according to Morningstar Inc.
• Bank-loan funds. Another way to exploit rising inflation is through mutual funds that buy adjustable-rate bank loans, many of which are used to finance leveraged corporate buyouts. So-called floating-rate funds are structured so that if interest rates rise, they collect more money. During periods of rising rates, floating-rate funds usually outperform other bond-fund categories. In 2003, for example, as investors anticipated higher interest rates and a stronger economy, bank-loan funds gained 10.4% while short-term bond funds gained 2.5%.
Now, amid expectations of rising inflation, investors are once again flocking to these funds, pouring in about $7.6 billion into loan funds in the fourth quarter of last year, according to Lipper Inc.—more than double the previous quarterly record set in 2007. The pace has accelerated this year, with investors putting in about $3.4 billion thus far.
After gaining almost 10% last year, the funds shouldn't be counted on for much price appreciation, says Craig Russ, who co-manages $22.7 billion of floating-rate investments across three floating-rate funds and other accounts at Eaton Vance Corp., including the Eaton Vance Floating Rate Fund. But the funds generate plenty of income, yielding about 4% to 5% now, according to Morningstar.
Price Increases
From Aug. 2, 2010 through Feb. 4, 2011:
Cotton: +100%
Silver: +50%
Soybeans: + 42%
Copper: +36%
Wheat: +24%
.
Be warned: Floating-rate funds can get creamed when investors fear the underlying loans are too risky. In 2008, for example, bank-loan funds lost 29.7%, although they zoomed 41.8% in 2009, according to Morningstar. What's more, banks are beginning to make riskier "covenant-light" loans that carry fewer stipulations for corporate borrowers—a sign of frothier trends in the market.
Given the potential for volatility, floating-rate funds are best viewed as a complement to—not a replacement for—investors' core bond holdings. Among Morningstar's picks in this category is the Fidelity Floating Rate High-Income Fund, among the more conservative in the category.
• Commodities. Materials that are more closely tied to industrial or food production seem better positioned now than gold, say advisers. The trick is to find the best investment vehicle.
The easiest way for small investors to gain exposure to most commodities is through exchange-traded funds, many of which use futures contracts. But such funds can be dangerous because they often face "contango"—when the price for a future delivery is higher than the current price. The result: The ETFs lose money as they buy new contracts, even when prices are rising.
The losses can be extreme. In 2009, for instance, while the price of natural gas rose 3.4%, the United States Natural Gas Fund lost 56.5% as a result of rolling over futures contracts.
Some firms have rolled out ETFs that aim to address the problem. One of Morningstar's picks is the U.S. Commodity Index Fund, run by U.S. Commodity Funds LLC. The portfolio buys the seven commodities that are most "backwardated"—the opposite of "contango," so rolling contracts should result in a profit—along with the seven commodities with the most price momentum.
"USCI provides an outlet for investors who want broad commodities exposure but don't want to worry about the daily dynamics," says Tim Strauts, a Morningstar analyst.
Other funds play inflation by holding many different assets to protect against rising prices no matter where they show up. The IQ Real Return ETF, launched in 2009 by IndexIQ, aims to provide a return equal to the CPI plus 2% to 3% over a two- to three-year period. To get there, it invests across a dozen or so inflation-sensitive assets—including currencies and commodities.
• Stocks. One corner of the market tends to do better when prices rise suddenly: small-company value stocks. "Because value and small stocks tend to be fairly highly [indebted] companies, inflation reduces their liabilities," says William Bernstein of Efficient Frontier Advisors LLC, an investment-advisory firm in Eastford, Conn.
From January 1965 through December 1980, for example, inflation averaged 6.6% a year. The Ibbotson Small-Cap Value Index posted average annual returns of 14.4%, according to Morningstar's Ibbotson Associates, double the S&P 500's 7.1% gain.
Morningstar's picks in the small-cap value fund category include Allianz NFJ Small Cap Value, Diamond Hill Small Cap, Perkins Small Cap Value and Schneider Small Cap Value. Just be warned: Small value stocks have had a good run recently, returning 134%, on average, since March 6, 2009.
In the end, the particulars of any inflation-fighting plan may not be as important as developing a plan in the first place.
"The real problem you run into with any kind of inflation hedges," says Jay Hutchins, a financial adviser in Lebanon, N.H., "is that if you don't already have them when inflation is around the corner, you've missed the boat."
Write to Ben Levisohn at ben.levisohn@wsj.com and Jane J. Kim at jane.kim@wsj.com
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
Floating Rate Notes to Cope with Rising Interest Rates (Wall St Journal)
Floating-Rate Notes Resurface As Economy Grows Again
By Katy Burne of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Corporate borrowers are switching up the composition of their debt sales, throwing more floating-rate notes into the mix to entice investors who believe interest rates may be about to rise sooner and faster than expected.
Nearly $26 billion, or 23%, of the investment-grade bonds marketed in the U.S. so far this year have had floating rates, according to data provider Dealogic, making it the busiest January for so-called floaters since 2007. That compares with $57.4 billion, or 7% of the supply, for all of 2010.
Bankers expect to see more floaters this year for two reasons: Issuers are suddenly comfortable selling them; and investors are eager to buy them to position their portfolios for a potential rise in rates.
"People have had the view for the last year, or year and a half, that short-term rates aren't going higher any time soon, and that is not an environment where you think you can make money on floating-rate debt," said Jim Merli, head of debt origination and syndicate at Nomura Holding Americas Inc.
"Now that is starting to change," Merli added, "because there is stronger economic data, and other central banks outside the U.S. are making noises about raising short-term rates."
Data over the last few months have been supportive of a more bullish outlook on the economy, with more job creation, a rising stock market, and strong corporate earnings over the past two weeks.
"While there are certainly headwinds like unemployment and weak wage gains, the data is far more balanced and the growth camp seems to have the scales tipping in its favor," said David Ader, head of government bond strategy at broker-dealer CRT Capital Group.
To be sure, floating-rate deals account for only a fraction of the market share they had in the middle of the last decade, and the volume outstanding has fallen by 40% since end of 2007 to $428.9 billion now. But issuers are warming up to them again.
Financial institutions tend to be the biggest issuers of floating-rate debt, to bring their funding in line with assets such as floating-rate loans. Financial firms, including insurers as well as banks, have accounted for 63% of the U.S. high-grade issuance in dollar volume so far this year, the highest percentage for any January since at least 1995, when Dealogic started keeping records.
About 57% of that total was from banks, although units of non-financials like brewer Anheuser-Busch InBev SA/NV and energy giant Total SA have recently issued floaters, too.
AB In-Bev's strategy of pairing fixed- with floating-rate debt was "a function of the expected long-term recovery of the economy versus the short-term opportunity to benefit from historically low rates," said Scott Gray, director of global funding and financial markets at the company in New York.
Johnson Controls Inc. was in the market Tuesday with $350 million of three-year floating-rate notes as part of a $1.6 billion deal.
Heavy issuance by foreign banks has also contributed to the rise in these securities. They borrow in the U.S. because investor appetite is stronger here than in their domestic markets. January saw the largest volume of these so-called Yankee deals--dollar-denominated bonds sold by foreign firms in the U.S.--than any other month on record.
"Since the euro markets were less friendly to new issuance, floater deals that would normally have come as euro bonds were instead dollar issues," said Guy LeBas, chief fixed income strategist at Janney Capital Markets in Philadelphia.
Most of the floating-rate debt sold this year has been clustered around two- and three-year maturities, as was the case in 2009. Last year's issuance was more evenly spread between three-, five- and 10-year floaters, helping to stem the pace at which maturing debt exceeded new supply.
There is about $32 billion of floating-rate, Federal Deposit Insurance Corporation-insured bonds under the government's Temporary Liquidity Guarantee Program maturing this year, said LeBas, all of which needs to be refinanced--including $5 billion in the first quarter.
"Given that all the government-guaranteed debt from 2009 is maturing in 2011, banks will be able to issue short-term floaters beyond that maturity cliff," said Justin D'Ercole, head of Americas investment-grade syndicate at Barclays Capital. "As opposed to the last two years, when it would have had the effect of adding to their massive wall of maturities, it now fits into their debt-distribution profile."
LeBas said while there is marginally greater demand for floaters based on concerns about rising rates, investors are better off buying short-dated, fixed-rate debt. If rates rise and the income on the bond resets progressively higher, an investor would win out over time only if rates rise enough to offset the lower income in the early going.
"Rates would have to rise quite rapidly for it to make sense to accept such a low initial coupon," he said.
Last Thursday, ABN AMRO Bank N.V. sold $2 billion of fixed- and floating-rate bonds, with the $1 billion of floaters pricing at 1.77 percentage points over Libor, equivalent to a coupon of 2.07%, and the $1 billion of fixed-rate notes pricing with a coupon of 3%.
"Investors are using these floaters to shorten duration and express their view on the pace of future Fed tightening," said Michael Hyman, head of investment-grade credit at ING Investment Management, who participated in the ABN AMRO deal.
-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com
By Katy Burne of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Corporate borrowers are switching up the composition of their debt sales, throwing more floating-rate notes into the mix to entice investors who believe interest rates may be about to rise sooner and faster than expected.
Nearly $26 billion, or 23%, of the investment-grade bonds marketed in the U.S. so far this year have had floating rates, according to data provider Dealogic, making it the busiest January for so-called floaters since 2007. That compares with $57.4 billion, or 7% of the supply, for all of 2010.
Bankers expect to see more floaters this year for two reasons: Issuers are suddenly comfortable selling them; and investors are eager to buy them to position their portfolios for a potential rise in rates.
"People have had the view for the last year, or year and a half, that short-term rates aren't going higher any time soon, and that is not an environment where you think you can make money on floating-rate debt," said Jim Merli, head of debt origination and syndicate at Nomura Holding Americas Inc.
"Now that is starting to change," Merli added, "because there is stronger economic data, and other central banks outside the U.S. are making noises about raising short-term rates."
Data over the last few months have been supportive of a more bullish outlook on the economy, with more job creation, a rising stock market, and strong corporate earnings over the past two weeks.
"While there are certainly headwinds like unemployment and weak wage gains, the data is far more balanced and the growth camp seems to have the scales tipping in its favor," said David Ader, head of government bond strategy at broker-dealer CRT Capital Group.
To be sure, floating-rate deals account for only a fraction of the market share they had in the middle of the last decade, and the volume outstanding has fallen by 40% since end of 2007 to $428.9 billion now. But issuers are warming up to them again.
Financial institutions tend to be the biggest issuers of floating-rate debt, to bring their funding in line with assets such as floating-rate loans. Financial firms, including insurers as well as banks, have accounted for 63% of the U.S. high-grade issuance in dollar volume so far this year, the highest percentage for any January since at least 1995, when Dealogic started keeping records.
About 57% of that total was from banks, although units of non-financials like brewer Anheuser-Busch InBev SA/NV and energy giant Total SA have recently issued floaters, too.
AB In-Bev's strategy of pairing fixed- with floating-rate debt was "a function of the expected long-term recovery of the economy versus the short-term opportunity to benefit from historically low rates," said Scott Gray, director of global funding and financial markets at the company in New York.
Johnson Controls Inc. was in the market Tuesday with $350 million of three-year floating-rate notes as part of a $1.6 billion deal.
Heavy issuance by foreign banks has also contributed to the rise in these securities. They borrow in the U.S. because investor appetite is stronger here than in their domestic markets. January saw the largest volume of these so-called Yankee deals--dollar-denominated bonds sold by foreign firms in the U.S.--than any other month on record.
"Since the euro markets were less friendly to new issuance, floater deals that would normally have come as euro bonds were instead dollar issues," said Guy LeBas, chief fixed income strategist at Janney Capital Markets in Philadelphia.
Most of the floating-rate debt sold this year has been clustered around two- and three-year maturities, as was the case in 2009. Last year's issuance was more evenly spread between three-, five- and 10-year floaters, helping to stem the pace at which maturing debt exceeded new supply.
There is about $32 billion of floating-rate, Federal Deposit Insurance Corporation-insured bonds under the government's Temporary Liquidity Guarantee Program maturing this year, said LeBas, all of which needs to be refinanced--including $5 billion in the first quarter.
"Given that all the government-guaranteed debt from 2009 is maturing in 2011, banks will be able to issue short-term floaters beyond that maturity cliff," said Justin D'Ercole, head of Americas investment-grade syndicate at Barclays Capital. "As opposed to the last two years, when it would have had the effect of adding to their massive wall of maturities, it now fits into their debt-distribution profile."
LeBas said while there is marginally greater demand for floaters based on concerns about rising rates, investors are better off buying short-dated, fixed-rate debt. If rates rise and the income on the bond resets progressively higher, an investor would win out over time only if rates rise enough to offset the lower income in the early going.
"Rates would have to rise quite rapidly for it to make sense to accept such a low initial coupon," he said.
Last Thursday, ABN AMRO Bank N.V. sold $2 billion of fixed- and floating-rate bonds, with the $1 billion of floaters pricing at 1.77 percentage points over Libor, equivalent to a coupon of 2.07%, and the $1 billion of fixed-rate notes pricing with a coupon of 3%.
"Investors are using these floaters to shorten duration and express their view on the pace of future Fed tightening," said Michael Hyman, head of investment-grade credit at ING Investment Management, who participated in the ABN AMRO deal.
-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com
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