Ric Edelman radio show recap 12-29-07

This week’s show had a wide array of topics and valuable information. 2007 was quickly reviewed noting the volatility, money new year resolutions were also discussed. A few client questions about suspect ads and solicitations were shared. Taxes were also a topic including information on the AMT relief bill passed on the last day congress was in session. Also covered were loans, college savings, and trusts. Sprinkling in a couple questions about International equities and fixed income investing, add in insurance, portfolio construction, and mutual fund distributions. I think one of best subjects was, do you really need diversity in financial advisors?

Ric is ready for 2007 to be over. It has been a volatile year in the U.S. stock market. In May Edelman financial services sent clients an update noting the market was up 9% and warned them not to get cocky. They were concerned about the housing market and subprime lending. Not to forget the war and other problems in the Middle East. In the last eight months we’ve given back half the gain of the first four months of 2007. The Dow Jones real estate index is down 17% YTD. Not all sector are off, oil is up 58% and gold is up double digits. Edelman said 2007 is a great example of why it is unwise to make big bets or guesses. Instead build a highly diverse and strategic portfolio that invests across all asset classes. This lowers risk and volatility while delivering the returns you need to achieve your objectives.

New Years resolutions, money is often near the top of the list. Some money themes include paying off debt, saving more, and making smarter decisions. Ric was floored by the last one. How do you define that? Decisions that work out well? Using that criteria you can’t know if it was smart or not until after the fact and that won’t help you. Instead Ric thinks it wise to make educated & informed decisions as opposed to shooting from the hip, gut instinct, or hold your nose and close your eyes. Ric went on to say investing is not just an art but also a science. There is an academic scientific approach to proper portfolio management. All to often that eludes most retail consumers and is available to big institutions. This is no longer true, if you have questions call and ask Ric or if you can’t get through on the air as always you are welcome to call his office during the week and his staff will be glad help you. The same number works for both situations 1-888-752-6742.

Before taking calls Ric shared an e-mail from a listener questioning an ad that was heard on a previous program. It was felt the ad for an investment opportunity was questionable and contrary to the type Ric offered on the program. Ric said the program is syndicated on the ABC radio network and broadcast over most of the largest markets across the Country. You do need to be aware the advertising during the show is independent of the show itself. The question was why this is allowed to air on the show. Ric has no involvement or control over ads. Edelman advised all to use same consumer protection strategy and attitudes that you use anywhere else. Another e-mail was forwarded to Ric from a client. It was a pitch from an advisor try to sell an IRA account. The e-mail made this claimed “Fellow planners for my clients from Edelman Financial have encouraged our client to take advantage of this IRA”… in short it was a claim this person was being endorsed by Ric. This is false. On occasion this happens, if you get one of these solicitations you are encouraged to send it to Ric and ask. That is not to say all ads are false. There are some Ric is familiar with is happy to say he is aware of them and it is true. You are just as likely if not more to get an answer back saying he never heard of them and doesn’t know what they are doing, be careful. Trust but verify. In yet another item sent to Edelman by a client was a claim of fabulous returns. Investment advisors are required by SEC rules to report performance data. They have to use specific method that assures fairly and completely the returns that clients receive. The method used is Global Investment Performance Standards (GIPS®). http://www.gipsstandards.org/

Edelman is in procession of a document from a very large well known money management firm that has published performance data for itself and it is not GIPS certified. It lacks their fee in the calculation of performance. It also does not include all the portfolios for all the clients. It is miss leading and not legitimate. For example they show a one year return of 24%. Only by reading the fine print you learn it is not Jan-Dec. it is July- June. Also buried in the fine print is this statement “back tested and model performances have certain limitations and do not reflect actual client performance. Actual client accounts vary significantly. The performance figures do not take into consideration actual trading, advisor fees, or transaction costs. All of which when deducted would reduce returns. The back tested performance results also differ from actual performance because it is achieved through the retroactive application of our models.” It would be funny if it weren’t so sad the lengths some will go to in order to drum up business.

In the final day of the Congressional session a crisis was averted for 20 million new victims of the AMT. The AMT, or Alternative Minimum Tax was put on hold for 2007. If they don’t act in 2008 35 million of us will get hit. The bill will cost $51 billion in lost revenues but spending was not cut to pay for it so we can pretty well count on taxes increasing in the future. In case you didn’t know the IRS will need 7 weeks to program the computers. If you have to file the AMT you filing will have to be delayed 5 weeks and if you are due a refund it could be delayed by as much as a month.

Caller is 45 years old married and been saving for years. He currently has $124,000 4.9% money market accounts, bonds of $104,000, a few assorted stocks, EE bonds, and three houses one of which they live in, the other two are rented. Edelman complimented him on amassing that amount at the tender age of 45. He went on to highlight the difference between making money and managing money, they are two different skill sets. This a perfect occasion to assemble a strategically academically applied portfolio. It should invest in a highly diverse manor. The current stocks were selected by talking to relatives. Ric equated it to stuffing stuff in the attic. Then years later asking where did all this stuff come from! A good way to start is write down all the assets on one piece of paper so you know what you have and where it is. Then you examine your goals and objectives which in this case is a retirement home and income beginning in 15 or 20 years. This time horizon allows a comprehensive portfolio without unnecessary worry about volatility. It would go beyond the current mix of stocks, bonds and real estate. It would also include International securities and natural resources. This would lower risks while yielding a long term competitive return. You can learn more about this in Ric’s new book “The Lies about Money” or at his web site under the GPS section. https://www.advisorlynx.com/secure/edelman/

E.C. I've looked this over and find it a very useful starting point. If you are on track it will verify this for you.

Caller has a home equity variable line of credit that started at 8% and is now 7.25% and is wondering if that lowering trend will continue the next year or two. Ric’s answer, nobody knows for sure. The best advice is to convert it to a fixed rate. This should be in the six to seven percent range. If rates go up you’re happy if they go down refinance.

Caller noted Israel has many highly successful high tech companies and is wondering about clustering investment money in Israel. Ric is not a fan of making any big bets investing, This year Japan is down about 11% after several good years. This year the Israel stock market is up 32%, Brazil was up 44% in 2007, India is up 46% this year. Hong Kong is up 37% this year, China 165%!!! If you buy aggressively in any of those markets now you will be buying high. You maybe no better served by buying in Countries that are down either. A better approach is to buy them all by investing very broadly Internationally. This can be done using an ETF.

This caller is aware of a bank offering foreign CDs in one case from Iceland paying 11% for 3 months. Last year Edelman heard similar pitches for Swiss annuities now it is Icelandic CDs. The bank in Iceland will not have FDIC protection and the currency risk is unknown. It is highly unlikely your actual return will be 11%. If it was likely you would receive 11% everybody would be doing it. You still would pay U.S. taxes on what ever you obtain. If there is a tax treaty with Iceland you wouldn’t have to worry about double taxation. If you do receive a tax credit to avoid the taxes it would cost more in tax preparation fees. All in all better to avoid this offer.

Ric started hour two warning listeners that mutual funds have or will be making distributions that will trigger taxes in non sheltered accounts. This year those distributions are likely to be higher than normal due to the volatile year and funds doing disproportionate amount of trading. It is possible you could be facing a hefty tax bill, even on funds that lost money for the year. The way to avoid this problem is to seek funds with low turn over. Typically a good place to start your search is to look for institutional funds and exchange traded funds.

Caller has been in a home for 19 years and has a $200,000 mortgage in her name and that of her deceased spouse. They both have revocable living trusts set up and the lender is not aware of his passing. When she sells the house will she have to pay off the loan from the sale, his trust, or will she have to pay half the balance from her funds? Edelman said years ago trusts were used to avoid paying debts. That is not so prevalent today, trusts are an estate planning tool. Ric said it would be best to go to the attorney that set up the trust and get advised on how to structure the transaction.

Average daily cost of a private room in a nursing home is $209 daily, only $15 more than a semi-private room. A home health aid will cost you on average over $37 per hour. At some point one out of every two of those over age 65 will require long term care services. So be prepared.

Caller is 63 retired and collecting social security. He has $600,000 in IRAs at Fidelity. Last summer he was considering moving half or all of it to Ric’s firm. He was advised not to split it and only move half by an Edelman rep. He wanted to divide it in order to compare performance. Ric is not so concerned that he would only be moving half his money but the reason why. Generally investors are in the habit of trying things out before jumping in all the way, and this is a good attitude but it can be counter productive. If he moves half is account after a year the caller will discover one of the two accounts did better than the other. Edelman said the trap is the caller could make a long term investment decision based on one year’s data. This can lead to buying high or selling low. It is much better to use a long term perspective. Ric’s firm has been in business twenty years and uses a two hundred year history in the markets to build portfolios. Why make a long term investment decision on only one persons experience over one year? It is not that they want all his account or none. Ric sited several examples of folks trying something new before making a big commitment; with a new beverage do you sip or chug, we test drive cars before we buy them, check previews before going to the movies, ask about a new restaurant, look at a home before buying, people have even been known to date before getting married. This mind-set can be a problem in the investment advisor selection process. If you try a new drink and take a sip you can be sure all the other sips in that glass will be the same. Unfortunately that doesn’t work with investing. The performance of the next twelve months has nothing to do with the last twelve months or the next ten years after that. Many things that affect our investments are in a constant state of flux. Interest rates change, inflation changes, value of the Dollar changes, Stock market valuations change, the economic environment and political winds change. Social attitudes and natural disasters happen. All these things affect our investing performance. Some investors buy last years hot fund or sector only to be disappointed when they realize after the fact circumstances have changed and so have the returns they were expecting.

After the break Ric elaborated on splitting accounts among several advisors. He pointed out by doing so you could be making errors. No questions about it by having multiple accounts and advisors you do achieve diversification, or do you? You could be getting conflicting advice, then how do you decide which to follow? You could also be getting redundant advice and being over weighted or under weighted in certain asset classes. In this case you could end up doing more paper work and receiving no benefit. It is possible you will pay higher fees. Most firms charge based on account values and the rate decreases as the amount increases.

Caller has questions about off shore accounts and wants to know how to go about this. Ric got a good laugh when he asked why. The caller heard on the radio Former President Clinton has all his money in the Cayman Islands. Ric said during the week he will attempt to verify if President Clinton does indeed have his money off shore. Stay tuned. There are two ways to move money off shore, one legal the other not. When you move money off shore you still have to report everything you do with accounts to the IRS just as you do the standard on shore accounts. Failure to do so is tax fraud and can lead to jail time. Some people move accounts off shore not to avoid taxes but creditors, by and large due to lawsuits. Money can be moved by wire transfers. If you do so you can’t move the money back, as Ric said you have to go there and visit your money. It is really impractical.

Caller owns a fund that hired a new manager they came in and sold a great deal of the holdings. Prior to cleaning house the fund price was around $21. The long term distribution was $9.41, the short term was $1.25. The total distribution was about 53% of the share value. It is a long term holding and the current value is below his cost when he bought it. If he sells it on Monday can he take it as a loss on his taxes. Edelman said yes he should do so and that will help off set the gains from the distribution. Use the proceeds to purchase a new investment. Just make sure you don’t buy back the same one unless you wait more than 30 days to avoid the wash sale rule. Ric said this a horrific example of the business practice of the retail mutual fund industry. Look at buying funds with low turn over in the past 5 or 10 years and how long the manage has been there. They on average stay four years and frequently like in this case the new manager sells many of the assets and triggers huge capital gains. Edelman said just because a fund is old and been in business for years don’t treat it like an old fund. If they get a new manager treat it like a new investment. When you get news of a manger change you might have to act.

E.C. might be a good idea to set a Google alert with you fund name.

Caller is looking at a 529 plan in Maryland and has two options. One prepaid college tuition trust and one a college investment plan. Does the prepaid option make sense? Ric said for all states not just in Maryland it isn’t a good idea. The prepaid plan only pays tuition, which is about half the cost of attending college. Room and board can also be significant costs plus it requires the child to go to school in one particular State school. What if you move before the child begins college? Ric also doesn’t like the rate of return since it only keeps pace with inflation. Ric much prefers the college saving plan. You can expect a higher return and use the money for any college in the Nation. It can also be used for all college expenses like room & board, books, and computers.

Caller’s husband is a retired teacher and they bought a long term care plan when they retired 19 years ago from Penn Treaty. The premiums have been going up dramatically the past few years. Ric says years ago Penn Treaty had a reputation for offering policies at a lower price than other companies then dramatically bumping them up. Edelman suggested looking at it from this stand point; If the premiums had not gone up they would have gone out of business and you’d have no coverage, what you are paying now is what you would have been paying all along with another policy, if you switch to a new policy now due to age the premiums will as high if not higher. Still it is worth checking into a new policy and compare. It is also a good idea to contact the State Insurance commissioner and see if Penn Treaty is financially sound.

Ric Edelman radio show recap 12-8-07

Ric opened by sharing some statistics that demonstrate not all Real Estate values are dropping across the Nation. For example according to Forbes magazine in Salt Lake City prices have climbed over the past year by 22%. Redding PA up 11%, Glen Falls NY up 11%, Cumberland MD up 9%, Binghampton NY up 20%, Spokane WA up 10%, Salem OR up 17%. Ric wonders if the angst is affecting as many people as the media suggests. Unless you are buying or selling a house you really don’t need to worry about any of the headlines.

Caller 51 years old makes $40,000 per year and has yet to beginning investing in mutual funds for retirement. He owns three real estate properties valued at $1.2 Million, one he lives in. The other two are worth about 500K and the 250K they have mortgages of 100K and 125K respectively. Both have positive cash flow and he has owned them for 12 years and 2 years. Both have appreciated in value since purchase. Edelman says this shows there are lots of ways to build wealth. However Ric is worried about liquidity. The lack of liquidity is one of the things that makes real estate risky compared to stocks or bonds. Also his asset allocation is not diverse. He is 100% in local residential real estate. Ric prefers a plan to sell one of the properties and use the proceeds to diversify into other asset classes. The liquidity and diversification would help lower risks without lowering the rates of return. In fact in the long haul it may improve the returns. Over the last fifty years returns in the stock market average twice that of real estate.

Caller would like to know the differences between Index Funds and ETFs. In some cases an Index Fund and ETF are pretty much the same. The big difference is the ETFs in general are much cheaper to own. Vanguard for example built a reputation on low cost Index funds and Ric doesn’t use any of them, he does use some of their ETFs due to the lower expense ratio. Other advantages to ETFs are better management. Many Indexes are constructed in a poor fashion for investors. For example the S&P 500 was built as a means to gauge the U.S. economy not as an investment vehicle. Ric goes into detail in this in many of his books. ETFs also allow for intra day current pricing.

Caller in the Army phoned from Iraq. He is seeking advice on where to put his money now. While deployed all his income is excluded from taxes. He is contributing to the Thrift savings plan to the maximum. Is that worth continuing since he is not paying taxes this year? Edelman says to continue contributing to maintain the tax deferral of those funds after he returns home. Since he is in a tax free situation this year it would be a great time to start a Roth IRA. In addition the caller has no expenses and wonders what to do with of the remainder of his income while he is in this unique position. Ric says to invest what ever is available into ordinary investments using mutual funds and ETFs. As always do so in a highly diverse way to balance return with risk. The best way to reduce risk is to reduce the percentages of money in any one investment.

Caller asked for a definition of stock options. Ric said there are two types of stock options. The kind you buy on your own and those obtained from the company you work for. Furthermore the kind you can get from work can be either non qualified or ISO (incentive stock options). Edelman’s book “The Truth about Money” goes into greater detail on how to handle stock options at work. All options are the same regardless of if you buy them or get them as a result of employment. If you buy a stock you need all the cost to buy each share and have all that money at risk. With options you normally buy the right to buy or sell the stock at some point in the future at a specific price. This costs much less than the share price. You then decide to buy it or “exercise” your option. This can get complex, there are eight types of options. You can buy the right to buy or sell a stock, you sell the right to buy it or sell the right to sell it. All of these can be done while owning or not owning the stock. Six out of eight of these are very speculative. And frequently end up as a 100% loss. Some are defensive in nature. Around 50% of people that invest in options lose money before commissions. Factoring in commissions around 80% lose money. However if you are given stock options at work this can be a valuable benefit.

Caller asked if renting is a terrible idea. Not everyone is a good candidate for home ownership. You don’t need to worry about budgeting for maintenance and taxes. It is a lifestyle choice keeping in mind unless you plan to stay 7 years it is probably a good idea to rent from a financial perspective.

Caller was reassigned a new advisor after his old one left the firm. The new one has suggested and implemented a 10% stop loss orders on all his stock holdings. So far this has resulted in selling low in the recent market environment. To make matters worse in most cases the stock price has recovered. Ric explained briefly how a stop loss works and went on to say he is not a fan of that strategy. In some circumstances after a nice gain or a stock hits a price target you may use a stop lose to protect that gain. Edelman says the best way to avoid this whole problem is get out of individual stocks and into mutual funds. Perhaps this new advisor is churning the account. Ric said the caller chose his original advisor, don’t let the firm choose the successor.

Caller has been nervous about his equity investments the last couple years and is now in money market funds. His long term plans are retirement in ten years plus. Ric asked the caller for a prediction on if the stock market will be higher in ten years. He thought he would be and so did Edelman. If this is the case invest today and not worry about current market volatility, this will be irrelevant ten years from now. If watching the daily gyrations bothers you stop looking instead of stop investing. Ignore the short term volatility and stay focused on the long term trend. Be sure to invest in a highly diverse manor. Diversification breeds the safety of a competitive return without taking the big risks. Often the problem is not so much the investments but the attitude about those investments and being unwilling to hold onto them over a long time frame.

Caller has 401(k) money form a previous job and would like to know where to move it or if he should keep it in the plan it is currently in. He is getting a pitch to move it into an AXA “accumulator” proprietary product with a 6% guarantee. Ric said it sounds like an annuity and if that is what it is Edelman says not to go that way. You don’t need the tax deferral since it is a retirement account or the annuity expense. Get a second opinion from a fee based advisor versus a commissioned sales person to get objective advice.

Caller has a 529 plan for grandchildren ages 9 and 11 with about $55,000 in each account. All the money is in one fund. Ric said there are other choices available in the plan she is in. The good news is they can stop contributing new money to the plans unless they can be very confident they will be going on to advanced degrees. If there is money left after the kids graduate the remainder withdrawn will have to pay taxes plus a 10% penalty. Unused money can also be transferred to 529 account for a child related to the one it was set up for. One could set up an additional trust account for the retirement of the children using a Retirement InCome for Everyone Trust. http://www.ricetrust.com/q.asp

Caller has been investing for around ten years and thinks he may be to diversified. In that time his account has gained one percent. Ric said it is possible to have to much diversity, it can get to the point of redundancy. The idea is to have a proper asset allocation model that you receive competitive returns. The goal of diversity is not to lose the ability to generate positive results but to reduce volatility. On a risk adjusted basis diversification should allow you earn competitive returns without suffering much downside. Edelman suggested either his allocation is not proper or he is using sub-standard investments. To identify the problem and find a solution Ric suggested running it by a financial advisor. Ric and his staff routinely do this for clients and invited anyone to get any questions answered by calling his office at 1-888-752-6742 during the week.

I’ve used the tool on Ric’s site called “Guide to Portfolio Selection” and find it helpful.

https://www.advisorlynx.com/secure/edelman/

Sy Harding Confirms MACD Buy Signal

It was reported today on the "Sy Harding" forum in the facebook group "Investing for the Long Term" that Sy Harding had returned to a fully invseted position on on November 28, 2007.


Click chart to see full sized chart courtesy of stockcharts.com

Runner Twentysix wrote 17 minutes ago:

Sy confirmed his date this morning saying on this mornings blog entry:"Our Seasonal Timing Strategy entry signal came late this year compared to signals over the last 50 years. It was triggered Nov. 28, just two days after the correction bottom. "S&P close that day 1469.72S&P low close was 1407.22 on Nov. 26My rebalance back in date was Nov. 21 with a close of 1416.77

We reported the MACD had given a signal on Monday, December 03, 2007 at Sy Harding MACD Buy Signal

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Ric Edelman radio show recap 12-1-07

Ric had another show with a wide range of topics. They probed how to find out what all the costs of investment advice is and buying a foreign IPO. He also cover designating beneficiaries for an IRA, positioning your funds for retirement distributions, and need for life insurance. Perhaps the best call was from an elderly couple that may have been making a big mistake to save some paper work. Other topics were using ETFs to save costs, should I put all my money in T-bills, and reverse mortgages. The Mutual fund scandal of the week segment consisted of a list of some of the firms involved in the illegal market timing scandal of the past few years. The detailed list is in his book “The Lies About Money”. As always should you have any questions you are invited to Call Ric and his team during the week at 1-888-752-6742. Ric has a series of seminars coming up at various locations around the country from more info go to this link. http://www.ricedelman.com/cs/home

Caller recently retired and received a lump sum of $300,000 and is apprehensive about some of the advice she is getting on how and where to invest. Among her biggest concerns are fees and sketchy information on expected rates of return. She was told the person was paid by the company. Edelman took the opportunity to say this is very common when dealing with stock brokers or insurance agents that sell loaded funds often with 12b-1 fees. Ric acknowledged every investment advisor makes a living providing investment advice. Ric said “Wall Street is known for many things but none of them are charity”. All fees or compensation are ultimately paid by the client. The best way to get answers in writing is to ask for form ADV. This discloses all the cost of that account and what services are provided. Every financial advisor is required to give to every client on a yearly basis form ADV. If an advisor doesn’t have an AVD it means they are not an advisor, it means they work on a commission as a stock broker or insurance agent. When dealing with an advisor you pay two expenses, the first is the advisor fees. This is either a commission on each transaction or a percentage of assets under management, or an even hourly rate AKA fee only. The second portion is the cost of the investments themselves. This includes expense ratios and SAI (Statements of Additional Information). The next step in the process is to look at the investments to see if you are getting proper diversification to fill your own unique objectives, time horizon, and risk tolerance.

Caller would like to invest in a foreign company stock that is going public in January on the London Stock Exchange. This would require an ADR in the U.S. Ric says it is highly unlikely and IPO would issue an ADR. Furthermore Ric said that is not something you would want to do. The majority of IPOs go down in value. There are a limited number of shares and if they are anything worth owning institutional investors get it all. If they don’t want it then neither should you. Upon further questioning the caller was thinking of investing 20% of his investment capital in this venture. I am sure you can guess what Ric’s reaction was.

Caller is looking to name beneficiaries for his IRA. He was thinking of using a trust and his children could set up a beneficiary IRA later. Edelman said no, once it goes into the trust, it owns the asset. The trust then distributes the assets per trust rules. If you use a trust as beneficiary you give up all flexibility. The ideal method would be to have an IRA account for each child and each IRA having one beneficiary.

Caller is looking to retire in 3-5 years and has a TIAA-CREF account. The deposits have been equally split between TIAA traditional and CREF stock fund for 24 years. She is thinking of starting to pull money out of the TIAA portion and move it to CREF. With TIAA you can only pull out 10% a year, they won’t allow lump sum distributions. Ric likes the idea of staring to withdraw it from TIAA now. CREF now is offering a bond fund in addition to the stock fund to help with allocation positioning. Ric advises everyone to get your money out of a TIAA account and move it into CREF since TIAA is not liquid and pays a terribly low rate of return.

Caller is 30 years old with no spouse or children and wonders if he needs life insurance. He has a $10,000 policy his parents bought for him as a child. He has since added another $10,000. It has about $1,000 cash value. Ric advised him to cash it out and pay off a credit card debt. He don’t need life insurance. Instead of wasting money on these types of policies parents should buy a small rider on their life insurance to cover funeral cost if needed.

Caller has been converting to index mutual funds and now to ETFs to save on expenses and avoid style drift and achieve lower turn over. The question is if you dollar cost average in new money to the equity portion how does this affect rebalancing. Edelman said the big advantages of a diverse portfolio is you aren’t reducing your returns nearly as much as you will reduce your risks. Ric explained the difference between the money already invested and the new money you are about to invest. When Dollar Cost Averaging the most effective way is to put it all into stock funds. Then periodically rebalance as needed.

Caller is trying to buy a put option in his IRA and the brokerage won’t permit it. Ric says he can’t because it isn’t allowed to invest in an IRA with borrowed money. To trade options requires a margin account and by definition a margin account uses borrowed money.

Caller is seeking an opinion on a reverse mortgage. The house is valued at $250,000 and has a mortgage of $100,000. They can’t be used if you have a current mortgage. Citigroup got involved in the reverse mortgage business earlier this year and Edelman is hopeful in the future he can recommend them but it is too early to tell. For now reverse mortgages are not consumer friendly due to lack of competition. Some problems are; money sent out monthly is limited, for most people the amount is not meaningful. The fees are exorbitant often around a 12% sign up fees along with high interest rates. Ric suggested refinance the mortgage, cash out that mortgage and pay himself a monthly income or even sell the home and move.

Couple in early 80s each has a revocable living trust. They own a combined 50 different stocks and mutual funds and are thinking of selling them and put the proceeds into index annuities. Ric said why? He wants to avoid paper work. Ric Edelman jokingly said he could give all the money away and have no paper work. They do have children they want to leave the money to after they are gone. Ric said the annuity idea was not a good one. Ric said he and other advisors can do the paper work for clients. The annuity is only going to offer a portion of the return the stock market will due to the fees. Plus don’t forget the surrender period of in some cases 7-10 years. A couple in their 80s could very well need large amounts of money for long term care or other things before the surrender period is finished.

Caller is worried about the recent volatility and thinking of putting all his money in treasury bills, it is currently in money markets after pulling it all out of the stock market. Any pitfalls in this strategy? Yes, there is a big risk is you might be wrong and decide to get back into equities when prices are much higher. Better to stick with a broadly diversified portfolio keeping in mind goals, time horizon, and risk tolerance.

Ric Edelman radio show recap 12-1-07

Ric had another show with a wide range of topics. They probed how to find out what all the costs of investment advice is and buying a foreign IPO. He also cover designating beneficiaries for an IRA, positioning your funds for retirement distributions, and need for life insurance. Perhaps the best call was from an elderly couple that may have been making a big mistake to save some paper work. Other topics were using ETFs to save costs, should I put all my money in T-bills, and reverse mortgages. The Mutual fund scandal of the week segment consisted of a list of some of the firms involved in the illegal market timing scandal of the past few years. The detailed list is in his book “The Lies About Money”. As always should you have any questions you are invited to Call Ric and his team during the week at 1-888-752-6742. Ric has a series of seminars coming up at various locations around the country from more info go to this link. http://www.ricedelman.com/cs/home

Caller recently retired and received a lump sum of $300,000 and is apprehensive about some of the advice she is getting on how and where to invest. Among her biggest concerns are fees and sketchy information on expected rates of return. She was told the person was paid by the company. Edelman took the opportunity to say this is very common when dealing with stock brokers or insurance agents that sell loaded funds often with 12b-1 fees. Ric acknowledged every investment advisor makes a living providing investment advice. Ric said “Wall Street is known for many things but none of them are charity”. All fees or compensation are ultimately paid by the client. The best way to get answers in writing is to ask for form ADV. This discloses all the cost of that account and what services are provided. Every financial advisor is required to give to every client on a yearly basis form ADV. If an advisor doesn’t have an AVD it means they are not an advisor, it means they work on a commission as a stock broker or insurance agent. When dealing with an advisor you pay two expenses, the first is the advisor fees. This is either a commission on each transaction or a percentage of assets under management, or an even hourly rate AKA fee only. The second portion is the cost of the investments themselves. This includes expense ratios and SAI (Statements of Additional Information). The next step in the process is to look at the investments to see if you are getting proper diversification to fill your own unique objectives, time horizon, and risk tolerance.

Caller would like to invest in a foreign company stock that is going public in January on the London Stock Exchange. This would require an ADR in the U.S. Ric says it is highly unlikely and IPO would issue an ADR. Furthermore Ric said that is not something you would want to do. The majority of IPOs go down in value. There are a limited number of shares and if they are anything worth owning institutional investors get it all. If they don’t want it then neither should you. Upon further questioning the caller was thinking of investing 20% of his investment capital in this venture. I am sure you can guess what Ric’s reaction was.

Caller is looking to name beneficiaries for his IRA. He was thinking of using a trust and his children could set up a beneficiary IRA later. Edelman said no, once it goes into the trust, it owns the asset. The trust then distributes the assets per trust rules. If you use a trust as beneficiary you give up all flexibility. The ideal method would be to have an IRA account for each child and each IRA having one beneficiary.

Caller is looking to retire in 3-5 years and has a TIAA-CREF account. The deposits have been equally split between TIAA traditional and CREF stock fund for 24 years. She is thinking of starting to pull money out of the TIAA portion and move it to CREF. With TIAA you can only pull out 10% a year, they won’t allow lump sum distributions. Ric likes the idea of staring to withdraw it from TIAA now. CREF now is offering a bond fund in addition to the stock fund to help with allocation positioning. Ric advises everyone to get your money out of a TIAA account and move it into CREF since TIAA is not liquid and pays a terribly low rate of return.

Caller is 30 years old with no spouse or children and wonders if he needs life insurance. He has a $10,000 policy his parents bought for him as a child. He has since added another $10,000. It has about $1,000 cash value. Ric advised him to cash it out and pay off a credit card debt. He don’t need life insurance. Instead of wasting money on these types of policies parents should buy a small rider on their life insurance to cover funeral cost if needed.

Caller has been converting to index mutual funds and now to ETFs to save on expenses and avoid style drift and achieve lower turn over. The question is if you dollar cost average in new money to the equity portion how does this affect rebalancing. Edelman said the big advantages of a diverse portfolio is you aren’t reducing your returns nearly as much as you will reduce your risks. Ric explained the difference between the money already invested and the new money you are about to invest. When Dollar Cost Averaging the most effective way is to put it all into stock funds. Then periodically rebalance as needed.

Caller is trying to buy a put option in his IRA and the brokerage won’t permit it. Ric says he can’t because it isn’t allowed to invest in an IRA with borrowed money. To trade options requires a margin account and by definition a margin account uses borrowed money.

Caller is seeking an opinion on a reverse mortgage. The house is valued at $250,000 and has a mortgage of $100,000. They can’t be used if you have a current mortgage. Citigroup got involved in the reverse mortgage business earlier this year and Edelman is hopeful in the future he can recommend them but it is too early to tell. For now reverse mortgages are not consumer friendly due to lack of competition. Some problems are; money sent out monthly is limited, for most people the amount is not meaningful. The fees are exorbitant often around a 12% sign up fees along with high interest rates. Ric suggested refinance the mortgage, cash out that mortgage and pay himself a monthly income or even sell the home and move.

Couple in early 80s each has a revocable living trust. They own a combined 50 different stocks and mutual funds and are thinking of selling them and put the proceeds into index annuities. Ric said why? He wants to avoid paper work. Ric Edelman jokingly said he could give all the money away and have no paper work. They do have children they want to leave the money to after they are gone. Ric said the annuity idea was not a good one. Ric said he and other advisors can do the paper work for clients. The annuity is only going to offer a portion of the return the stock market will due to the fees. Plus don’t forget the surrender period of in some cases 7-10 years. A couple in their 80s could very well need large amounts of money for long term care or other things before the surrender period is finished.

Caller is worried about the recent volatility and thinking of putting all his money in treasury bills, it is currently in money markets after pulling it all out of the stock market. Any pitfalls in this strategy? Yes, there is a big risk is you might be wrong and decide to get back into equities when prices are much higher. Better to stick with a broadly diversified portfolio keeping in mind goals, time horizon, and risk tolerance.

Ric Edelman radio show recap 11-17-07

Ric is officially worried about the market. Not the stock market, he is worried about the Money Market. If you have money in a Money Market account you are not alone. Currently about $3 Trillion are in Money Market Funds in the U.S. $11 Trillion are in Mutual Funds so over 25% is in Money Market Funds. Money Market Funds are in many cases replacing bank accounts as they offer better yield than bank savings and several of the conveniences we have become accustom to. Ric is worried because of the sub prime lending crisis. In most cases it is unknown who owns the mortgages? CMO, CDO, and now SIV have and are being bought by Mutual Funds particularly bond Mutual Funds. It has now come to light many Money Market Funds have been buying these packages of debt securities. Historically Money Market Funds bought very short term things like Treasuries. Lately some have been buying commercial paper or debt issued by corporations. Because of defaults some of the commercial paper is now worth much less than it was bought for. Money Market Funds are (or have been) valued at a Dollar a share and don’t fluctuate. This week Bank of America deposited $600,000,000 of their own money into their Money Market Funds to compensate for the lost value due to SIVs to keep share value at a Dollar. Credit Suisse, Wachovia, Legg Mason, and others have made similar moves. The worst case scenario is estimated Money Market Funds may go to .95 per share which wouldn’t be the end of the World. Ric brings this up to illustrate many investors don’t know what is going on or what is in their Money Market Funds. The fear on Wall Street is if the Funds allow MM funds to be worth less than a Dollar there will be a panic and folks will liquidate accounts. This would damage the credibility of the entire Mutual Fund Industry. Ric is not worried about what he owns or his clients own, they have checked it out and avoided Money Market Funds that bought the risky paper. The Funds he recommends invest almost exclusively in Treasuries. Ric said we all should check out our exposure to the sub prime mess in the Money Market Funds we own. Remember Money Market Funds are not FDIC insured. Some maybe MBIA insured but their stock has fallen off 23% since September and most of that in the last month.
http://finance.yahoo.com/q/ta?s=MBI&t=3m&l=on&z=m&q=l&p=&a=&c=

Ric mentioned a Bank of America ad in the New York Times concerning IRAs. Contrary to popular belief IRA does not stand for Individual Retirement Account but Individual Retirement Arrangement. IRA is based on section 408 of the IRS code. It addresses how one may Individually Arrangement for Retirement. An IRA is not an account. This fundamental point we all need to understand about our retirement savings. An IRA is not an investment but think of it more like a bucket we are allowed to put a certain amount of money each year and get a tax benefit. Once the money is in that bucket you can buy nearly any investment you want. The investment you get is in large part determined on where you get your bucket. Typically if you get your bucket at a bank you are going to be encouraged to buy bank products. If you go to a mutual fund company you can be pretty sure you’ll end up in mutual funds. Going to a brokerage firm could lead to an array of things. Insurance agents will more than likely put your IRA money in an annuity.


Caller asked if his bank Money Market Account was safe from loss in the sub prime crisis. Ric said they are insured by FDIC. Ric suggested anyone that has concerns call the bank, brokerage firm, advisor, or mutual fund and ask what your exposure is. Ask if or to what extent you are invested in SIVs. Many large institutions are so large they will step in a support a loss in Money Market Funds. Lower yielding Money Market accounts don’t necessarily indicate a safety problem but it is a function of a shorter term. The longer out you go the higher yield you can expect.

Caller asked about recent stock market volatility and if Ric thought it better to hold on or capitalize on it. Ric said he doesn’t like either choice. Ric likes to consider every available choice, don’t limit yourself. One should not run away in fear and exit the market or buy things that have been the latest hot trend or sector. Better to sit tight and do nothing and let time in the market work for you. It is not in your best interest to make short term decisions for a long term horizon. This caller is 30 years from retiring and a Ric pointed out worrying about volatility today is not worth worrying about. Does anyone think what you did in 1977 had any impact on what is going on in the market in 2007? Trying to capitalize on every market swing is impossible but by taking a long term view you are going to get rich by default. Ignore the short term noise, buy and hold a well diversified group of good investments for the best long term results. Ric suggested going to his web site and checking on the Guide to Portfolio Selection page for help in building your own properly diverse portfolio. http://www.edelmanfinancial.com/cs/determining_the_right_portfolio_for_you

A series of law suits are underway and more are expected against 401(k) plans. Ric ordinarily isn’t a fan of class action suits but this one is the exception. 401(k) and 403 (b) plans have a series of mutual fund choices. The average retail mutual fund is now charging 3% per year in total expenses. Did you ever notice on your statement are fees disclosed? If you knew the fees were excessive you won’t allow it to happen. We should be seeking to have the option to invest in ETFs that have much lower fees.

Caller has a 401(k) and moving to a new job. He has rolled it over into an IRA. The broker is suggesting converting it into a Roth IRA. Ric said not to do it. It does not increase wealth all it does is accelerate the tax liability. The roll over is easy but selecting the investments within the IRA is what needs to become the focus. Invest in a highly diversified way keeping in mind your goals, risk tolerance, and time horizon. In his new Book “The Lies About Money” has a section that will teach you how to invest money effectively.

Caller has a custodial account for her niece and is thinking of changing it to a 529 plan. Either will have an equal effect her financial aid eligibility. Ric likes the idea of moving it to a 529 plan since it converts a taxable account to a tax free account. In this case it is not a big deal since the child needs the money for college in one year. If the child is younger then it is a big deal. Another pitfall of the Custodial accounts is upon age 18 or 21 the child can use the money as they see fit instead of the intended purpose.


Target date funds and lifestyle or life cycle funds are getting criticism. This can’t come soon enough for Ric. It is a fad salesmen are pushing and they frequently leave investors open to undue stock market risk, they are limited in diversity, and suffer weak performance. Compass Institute released a paper saying these type funds have about an 8% gains in up markets and lose7% in down markets, while a properly allocated diverse portfolio will over the long haul will do 16%.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20071105/FREE/711050339/1009/TOC

Caller owns Fannie Mae and wonders what the definition of decoupling is. Should she keep it or sell it? Ric doesn’t give stock recommendation on the air because it isn’t possible to gather enough information on things like risk tolerance and objectives in a few minutes on the phone. He used the analogy of calling a Doctor and asking for a prescription for a new drug you saw on a TV ad. The Doctor is going to require an office visit to know everything that is going on in your body so they don’t miss anything. Stop looking at the trees and step back and take a look at the forest. Ric would need to know more than the caller owns Fannie Mae. Things like what else they own, what percentage is Fannie of her portfolio total? When will the money be needed, and how much do you have now? Where is all of your money currently invested? Ric warned against the talking heads telling you the next hot tip. Ric shared a quote “If you don’t know who you are Wall Street is a very expensive place to find out” If you are talking to a financial advisor you should be talking more about you and who you are than what you are going to invest in. If you can’t get in during the broadcast you can always cal Ric’s office anytime to get your question answered at 1-888-752-6742.

Caller is torn between whether or not to participate in a deferred comp plan . He is 31 and in a lower tax bracket. The plan has limited choices. Should he invest after tax money in an account where he has a wider selection? Ric said in the 28% and higher tax bracket deductibility makes more sense. Maybe wait until he is in the 28% bracket to enroll. Another aspect, legally in a deferred comp plan the money belongs to the employer, so if they go bankrupt the money is gone. If you do decide to enroll make sure it is a solvent company.

Caller shared a few years ago he helped the small company he works for set up a 401(k) program. They hired firm to manage it and not even the firm they paid disclosed the fees. Ric said one of the tricks they use is using class A shares that have a front end load instead of pooling the money and getting a volume discount that saves everyone money. It is all because the fees don’t show up on the statements and people don’t know what’s going on. The best course of action is to ask about fees, get an accurate answer and get it in writing.

Caller was looking for thoughts on where to invest for both short term and long term. Does he need two accounts? Ric said yes the short term of three years or less bank accounts are the place to be. Longer term the goal is college for his daughter. Ric said to go with a 529 savings plan. He reviewed the advantages of 529 plans.

Caller has $440,000 in his Federal thrift plan and is worried about his allocation it is 60:20:20 in C, F, and I funds and he has a 15 year time horizon. Ric thought it was appropriate. This caller was congratulated for accumulating that sum at age 44, he did it simply by putting aside 10% of his salary since he started working. A great lesson on building wealth slow and steady.

Caller asked why it is better to pay taxes later than sooner. Is it because you will be in a lower bracket later? Ric said no, he is not taking into account future unknown tax rates. It is if you pay taxes now there is les money in your account to grow. As to future tax changes it is best to evaluate things as they change. That is why financial planning is a process and not a product. Make decisions today based on the best available information. On the other hand we are pretty sure capital gains rates will go up in 2010 if not sooner so in this case it makes sense to sell underperforming investments and pay 15% now vs. paying higher rates down the road.

Caller asked the difference between ETFs and HOLDRs. Ric is not a fan of HOLDRs and don’t use them. They only trade in round lots, are far less diversified, and don’t offer any particular benefits to investors. ETFs are more liquid and diverse.

Caller has $68,000 in credit card debt spread over 19 cards. She just received a windfall of $22,000 from her parents with no strings attached but her father did recommend she call Ric and get a plan. Ric said write down all 19 cards and sort them by interest rate. Pay off the highest first and work your way down the list. Ric asked if she was adding to the balance. She was not adding new charges but the interest charges are increasing by more than the monthly payments. The money was spent to supplement an income that went down. Ric’s fear is she won’t change the spending habit and she will pay down the debt and build it right back up again. The cause of the debt is lifestyle, the debt is a symptom. Spending habits need to change.

ECRI interview on bloomberg radio

Tom Keene of Bloomberg radio interviewed Lakshman Achuthan on Friday November 16, 2007. I thought it was a very good as it went into greater detail than you often get in a short few minutes on TV.

ECRI is cautious on Europe, indicators show profits, inventories, capital, employment, and interest rates have Europe looking worse. They have been going down for some time. U.S. GDP growth this year has been stronger than Europe. This is a fact not a forecast but it is hard to find someone that will recognize that. It seems now the strong Euro vs. U.S. Dollar has gotten comparable to the shoe shine boy giving J. P. Morgan stock tips. Or maybe supermodels doing an infomercial for Euros. The Dollar is critical to ECRI analysis. If it begins affecting import prices its one of many drivers of U. S. inflation. An example would be oil prices. On the other hand the positive side is U.S. exporters look attractive abroad.

Germany is the weakest now in Europe. Domestic demand is low and a stronger Euro is making exports more expensive. Japan and France are not happy with the weak Dollar. The three largest economies in the World are saying the U. S. Dollar is too low.

All this is to be expected things do not move in a straight line, they have their ups and downs or cycles. Bouts of euphoria and excess pessimism is psychological and that can get tricky. It can be a component of the slowing growth we have ahead of us now.

Despite what is going on in the big economies the developing economies abroad. India and China look good. Even some of the less developed economies like Korea, Taiwan, Australia, and Canada are looking pretty good.

The same forecasting techniques used in the manufacturing or over all economy apply to the services sector of our economy. Using coincident and leading services indicators you find it less dramatic but it does ebb and flow. As you near a recession service growth goes to about zero, otherwise services are always growing. They look at over all services by dividing it between financial and non financial. Now leading indicators of financial have fallen to the thirty seven month low. Growth outlook has worsened, it’s not over yet however. That is part of the correction we are dealing with now. Non financial services are slowing but at a much more modest pace. Six out of ten of us work in Non financial services in the U.S. That part of the economy is slowing but not dramatically and that is a large part of why a recession is not on the radar screen now.

4.16% yield on the ten year treasury indicates recession fears in the markets. Keep in mind the markets don’t always get it right as to where the business cycle is headed so it could merely be a signal of a slowdown. 70% of the time a slowdown is followed by lower inflation. After Katrina the yield on ten year treasuries went below 4%. Could also be a flight to quality and money abroad in Petro Dollars. Speaking of oil the interviewer quoted oil prices and asked if the 200 day moving average gets in the $90s per barrel does it tilt us over the edge? Lakshman said it certainly part of the slowdown story. But, as long as jobs and incomes are there you can make it work. In 2004 and 2005 we had 70% spike in oil and this one is a little bigger so it is more dangerous but it doesn’t mean you have to have a recession.

Ric Edelman radio show recap 11-10-07

Ric opened the show this week sharing a few simple questions a shockingly high percentage of investors got wrong on a survey by Deloitte Consulting. These were investors, not people off the street. One of the questions was; If you had $100 and received 2% interest after one year how much would you have? One out of three got it wrong. He then mentioned the stock market recent downward volatility, pointing out why one uses asset allocation and never recommends 100% in equities. You should also never try getting in and out of the stock market. If you do get out of the stock market where do you deploy the proceeds? Bank savings after inflation and taxes don’t beat the inflation rate. Ric said those properly allocated are not freaking out over recent activity. If you can’t get through to the show as it airs you are welcome to dial 1-888-752-6742 to get any question you may have answered at no cost or obligation.

Ric offered a way to help get through the holiday shopping season debt free. Make a list of all the people you are going to buy gifts. Don’t write down what you are going to buy next to each name, but how much you can spend on each person. Add up the grand total, if it is beyond your means cut the list until you reach a level you can afford. Be sure to include sales, wrapping items, cards and shipping fees in your budget. When you begin shopping withdraw the amount of your budget and buy Travelers checks. Then go to the store without your credit card.

Caller has a pension and 403(b). The pension is going to be discontinued and she will receive some pension benefits when she retires. The 403(b) is changing administrators and will have a match. Her question was should she transfer the 403(b) to the new plan or leave it where it is? Ric recommends an IRA rollover for the old plan to gain more flexibility. In the new plan participate to the maximum to take advantage of matching free money.

Ric warned folks to avoid a new fad on Wall Street. It is called a “One thirty - thirty fund”. It is a mutual fund and invests all your money plus borrows another 30% to invest. Then it shorts another 30% in stocks. It is also known as a long short fund. Ric shared in the last six months money flows in these types of funds have surged 77%.

FINRA has a new rule taking affect in May on variable annuities. Under this new rule brokers are required to consider things like age, income, financial situation, needs, experience, objectives, intended use of annuity, time horizon, existing assets, liquidity needs, risk tolerance, and taxes. You will also need to be informed of the material features of the annuity such as surrender charges, potential tax penalty, fees and costs and market risk. Brokers must then have a reasonable basis that the investor will benefit from the annuity features and do a suitability determination. Those of you that own annuities today, did the person that sold it cover all these and more prior to your purchase? For more info; http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P037404

Ric took a call concerning buying life insurance on strangers as a profit making business. Ric does not endorse the practice. He said it is unethical and expects the life insurance industry will have to put a stop to it or it will cease to exist. Premiums are calculated in such a manor that a certain amount of those taking out coverage will let it drop prior to having to pay out benefits. When insurance is issued for money making reasons that policy will not lapse and eventually the insurance company is going to have to pay a benefit. It looks like a good deal in the short run but if it continues either life insurance will get much more costly or it may not be available period. The negative societal effects are why Ric says to avoid these arrangements.

A caller has over time collected a hodge podge of stocks, funds and sector funds. Ric said this can be dangerous, it can be redundant, and in this case he was 100% in equities. Ric recommends other asset classes like bonds, real estate, commodities, international securities and natural resources. The way to go about this is come up with a plan of what your investments should look like. Start by asking your self when you want to retire and how much money do I need at that time. Then allocate your funds accordingly so you earn the rate of return you need to reach your objective.

Caller has an IRA and the beneficiary is a trust and he will be making required minimum distributions next year. Upon his demise he would like to leave the money to his current and second wife. Upon her demise he would like what is left to go to his children by his first marriage. Ric said these are conflicting goals from a tax perspective. Ric suggested a perhaps a more realistic approach might be to let the current wife have the IRA money and go buy a life insurance policy for his children so they get the benefit tax free. Leaving an IRA to a trust is not a good idea from a tax perspective since it needs to be fully paid out over at most a five year period. This maximizes and accelerates the tax liability.

Ric shared the weekly “Mutual Fund Scandal”. Ric said this one is perhaps the most egregious example of fraud and abuse in the retail mutual fund industry. Some managers have been found to be investing their own money the opposite of the way they invest the money in the funds they manage. They often sell stocks in their own personal brokerage account while buying them in the funds they run. Ric said this could be the ultimate conflict of interest.

Caller asked about the pros and cons of variable life insurance. Ric said that was easy there aren’t any pros. They only people that recommend variable life insurance are the people that want to sell it. Like many insurance products it is not bought rather sold. They do pay very high commissions that is the incentive to sell them.

Caller completely in International stocks because it has been doing so well. He wonders if a recession is coming will it be better in a money market or leave it overseas. Ric does not agree with this philosophy it is a form of market timing. Ric asked the caller’s age, which is 42. The money will be invested at least another 20 years. Ric asked if he thought the stock market will be higher 20 years from now. He thought it would be. If the market is going to be higher in 20 years why worry about if there is going to be a recession next year? Why fuss about short term decisions when you are involved in a long term investment environment? What is the point? With market timing approach you need to right each time you make a move or you will hurt yourself. Taking a long term view you only need to be right once in predicting the market will be higher in twenty years. Investing is not a sprint but a marathon. It doesn’t have to be complex or involve a lot of time, knowledge, or initial amount of money.

Caller attend on of Ric’s seminars and has a degree in finance and learned more in two hours from Ric than four years at university. He is having trouble maxing out his thrift savings plan and Roth IRA. Which one is the higher priority? Ric likes the retirement account at work but thinks there has to be a way to do both. If the need to fund the Roth is $4,000 a year, that equates to under a $100 a week. Look to budgeting and cutting out something. The caller then asked Ric to review his allocation. He is 54 years old and retiring in six years. Ric said to call his office where they can look at it greater detail plus include all his other savings and investments to see if you are truly properly allocated and secondly it is impossible to be properly allocated using only the government thrift savings plan. The five choices are not enough to provide a diversified asset allocation.

Caller is considering converting an IRA to a Roth IRA and for this year his marginal tax rate will be 25%. He would like Ric’s opinion on converting up to just under moving into the 28% bracket. It is hard to write that check to the IRS. It is a complicated decision but in the overwhelming majority of cases Ric says it is not worth it. You often end up prepaying the tax, you aren’t lowering your taxes. For some it makes sense as it allows future IRA distributions to be tax free. It doesn’t interfere with social security taxation, doesn’t reduce deductibility of itemized exceptions, and other things that save taxes down the road. Under current rules it might make more sense to wait until 2010. Keep in mind we will have elections between now and then. This is another example of just how hard it is to do long term planning in an environment where the tax and estate rules are changing almost yearly. Make decisions based on the laws in place today not on future expectation because things do change.

Ric shared a tactic credit card companies are “teaching” financial literacy class on college campuses. In this case they got free food as part of the class and of course filling out an application for a credit card. College students are marketing targets for credit cards. Ric said to talk with your kids about this since today the number one reason kids drop out of school is they can’t afford it. Twenty years ago it was only bad grades. Maybe get their credit report and see if or just how much plastic debt they have. It is even a good idea for your three year old to help guard against identity theft.

Bob Brinker Update for November 11, 2007

Allan Coleman reports in the facebook "Bob Brinker Discussion Forum" on today's "Moneytalk with Bob Brinker" that Bob Brinker is still bullish and the S&P500 is in Bob's buy zone:

Jack Sxxxx asked:

I missed the show today...my computer didn't record it. What did Brinker have to say about the market today?????????????/ Jack

Allan Coleman (no network) replied to Jack's post 21 minutes ago.

Bob didn't mention anything different than he's said in the past , Jack . Bob's first hour commentary was about how wrong the bad news bears have been for years now . The S & P 500 is about where Bob suggested to buy in earlier this summer . Although Bob didn't mention it on today's show , he expects the mid 1600's next year . In short , Bob is still bullish .

Record Moneytalk with your computer. It automatically finds a station and records the show for you. No need to stay home tied to your computer. Listen live or listen at your leisure.

Does The Stock Market Follow The Business Cycle?

"Looking ahead, we're facing a broad based slowdown in economic growth, but have plenty of room to slow without slipping into recession"

By Lakshman Achuthan
(This is one in a series of occasional opinion columns by market participants.)

NEW YORK (Dow Jones: 3-November-2007)--Last February, U.S. stocks suffered their worst one-day loss since September 2001, prompted by a major sell-off in Chinese stocks, higher oil prices and concern about housing and subprime lending. The drop in stock prices was blamed in part on former Fed chairman Alan Greenspan's assessment of a one-third probability of a U.S. recession this year.

Since then we've seen a considerable rise in recession probability banter. But when someone says they see a 50% chance of recession aren't they simply saying they're clueless about whether a recession is likely? A coin flip would be just as useful. Is there any objective evidence to support this recession fear? And to what extent are stock price downturns linked to directional shifts in the economy anyway?

Stock Prices and Economic Growth

It is well known that stock prices are an imperfect leading indicator of recessions and recoveries. As the economist Paul Samuelson famously quipped, "The stock market has predicted nine out of the last five recessions." But in reality, the relationship between economic cycles and stock prices is less erratic than such a comment might imply. Historically, cyclical upswings and downswings in stock prices have almost a one-to-one correspondence with upturns and downturns in economic growth.

ECRI's U.S. Long Leading Index (USLLI) is designed to anticipate cyclical turns in the economy, but the USLLI does not contain stock prices. Because the USLLI has a longer average lead over the economy than stock prices do, peaks and troughs in USLLI growth typically anticipate peaks and troughs in stock prices.

Meanwhile, growth in ECRI's Weekly Leading Index (WLI), designed to anticipate turning points in economic growth, has somewhat shorter leads than the USLLI, and may be used to confirm earlier signals of cyclical turns from USLLI growth.

Because stock prices are included in the WLI, the average lead time of WLI growth over turning points in economic growth is comparable to that of stock prices, though the WLI's leads are more stable.

Cyclical turns in WLI growth have shorter leads than USLLI growth, but longer leads than stock prices, against growth rate cycles. Thus, in terms of the typical sequence of events, USLLI growth turns first, WLI growth confirms those turns, stock prices follow the turns in WLI growth, and finally, cyclical turns in economic growth follow.
ECRI doesn't try to predict stock prices per se, but we can assess stock market risk. This risk is not a constant and really depends on where you are in the business cycle - an issue addressed by the USLLI and WLI.

For example, right now, things are not as risky as, say, in late 2000, but we've moved into a riskier phase of the business cycle than we were in just a few months ago. Depending on your risk profile, you may want to wait for USLLI and WLI growth to turn back up, because that will telegraph the low-risk, high-return phase of the business cycle.

Stock Price Corrections and Economic Cycles

While there is a fairly reliable sequence of cyclical turns in USLLI growth, WLI growth, stock prices and economic growth, there can be exceptions. A key question is whether sharp plunges in stock prices contain useful information about cyclical downturns in economic cycles or represent just noise. To answer this, ECRI examined the daily S&P 500 Index since 1950 and calculated the percent drop in each correction. Then, we collected the declines that measured at least 5%, approximating the size of the drop early this year. Remarkably, we found that three-quarters of the 84 such corrections (before 2007) in stock prices occurred during periods following USLLI and WLI growth downturns.

This relationship held in early 2007, as the USLLI and WLI had turned up, suggesting that the 6% February drop in stock prices was not a harbinger of weaker growth ahead.

Fast forward eight months and we all know that GDP rose 3.8% in the second and 3.9% in the third quarter, while stock prices recovered their February losses and are up almost 8% this year.

The Price of Crying Wolf

Basically, stock market corrections tend to be larger and nastier in certain phases of the business cycle, like when our leading indexes point to slowing growth. That slowing phase of the cycle has reemerged as a result of fresh downturns in the ECRI leading indexes beginning this summer. Some of the blame for this downturn goes to poor recession forecasting.

For over a year dire recession predictions have garnered headlines, despite objective data to the contrary. The fact is that median real home prices, which have been at the epicenter of growth concerns, stopped falling and rose from September 2006 through March of 2007, while GDP rebounded to above trend in the second quarter.

These realities blindsided Wall Street, forcing major houses to slash their 2007 rate cut forecasts last June from a range of 75 to 100 basis points to zero.

For adjustable rate mortgages due to be reset in the coming months, the likelihood of rates staying high was bad news that reduced their worth, especially in the subprime category. Thus, the abrupt invalidation of pessimistic projections helped precipitate the credit crisis. This in turn has had a material impact on economic fundamentals, contributing to renewed weakness in both the home price outlook and the broader economy.

Knowing the Nuances

For the past half a year, GDP measures show the economy growing solidly above trend. In the third quarter, the same report shows inflation falling to a 44-year low. That was a textbook Goldilocks economy.

Looking ahead, we're facing a broad based slowdown in economic growth, but have plenty of room to slow without slipping into recession. Most importantly, the objective ECRI leading indexes that correctly forecast past recessions - in real-time and without false alarms - remain above past recessionary readings.

Also, it is significant that the Fed has cut 75 basis points in six weeks. While the credit crisis is certainly a major concern, most observers underestimate the extent of receding underlying inflationary pressures. This means the Fed has more leeway to cut rates to alleviate the home price downturn and broader economic slowdown.

These are the nuances of the current U.S. growth rate cycle slowdown. One thing is for sure. The path of the USLLI and WLI will change, and we'll change our tune accordingly, because ECRI's outlook is not based on gut feel, but rather an objective reading of the fundamental drivers of the business cycle. This approach has kept us from being blindsided by recessions for many, many years.

-By Lakshman Achuthan; lakshman@businesscycle.com

Lakshman Achuthan is the managing director of the Economic Cycle Research Institute, (ECRI), an independent organization focused on business cycle research and forecasting in the tradition established by Geoffrey H. Moore. Lakshman is the managing editor of ECRI's publications, a member of Time magazine's board of economists, the Levy Institute's Board of Governors and the New York City Economic Advisory Panel. He is co-author of "Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy" published by Doubleday. Opinions expressed are those of the author not of Dow Jones Newswires

New I-Bond Rates, November 2007 reset

Posted on our Facebook Forum by Runner Twentysix October 17, 2007.

All data is in to estimate the new variable reset beginning in November for existing I-Bonds.

The CPI-U history for the six month reset period (Mar. 2007-Sep. 2007) is as follows:

Mar. CPI-U 205.352
Apr. CPI-U 206.686
May. CPI-U 207.949
Jun. CPI-U 208.352
Jul. CPI-U 208.299
Aug. CPI-U 207.917
Sep. CPI-U 208.49

The Sep. jump in CPI was large. This brings the new rates up from the trend we were seeing of a dismal reset.

My estimate for the new rates for existing bonds will be the following when their 6-month reset period arrives.

Base----Rate
1.0%----4.07%
1.1%----4.17%
1.2%----4.27%
1.3%----4.38%
1.4%----4.48%
1.6%----4.68%
2.0%----5.09%
3.0%----6.10%
3.3%----6.41%
3.4%----6.51%
3.6%----6.71%

Current I-Bonds are at a 1.3% base rate, which means if you buy them before the end of this month, you will get 3.74% followed by 4.38% at their next reset in 6 months.

If they leave the base rate at 1.3%, new Nov issue bonds would carry a 4.38% rate.

Check the Treasury Direct website www.treasurydirect.gov on October 1, 2007 for the actual new base rate.

BND: Info on Vanguard's Total Bond ETF

Phil asked this question in our facebook Bob Brinker Discussion Forum:

Phil Bradford (Inland Empire, CA) wrote 14 hours ago:

The total bond ETF by Vanguard, symbol BND, has been discussed for a simplified fixed income allocation. For the life of me, I can not find out its duration. Can someone tell me what the duration of this bond ETF is?
Thanks.

I replied to Phil's post:

You replied to Phil's post 12 hours ago

• BND: Fundamental Data As of 6/30/2007
• Average Weighted Maturity (years) 7.30
• Average Coupon 5.50%
• Average Duration (years) 4.70


• Memorize "etfconnect" as in http://www.etfconnect.com/select/fundpages/fixed_etf.asp?MFID=176476
  and
  beware of Premium/Discount = 0.33%

How to subscribe to Kirk Lindstrom's Investment Newsletter: http://home.netcom.com/~kirklindstrom/Newsletter/Subscribe.html

Phil Bradford (Inland Empire, CA) replied to your post 5 minutes ago:

As usual you rock!
Thanks.
Phil

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Allan Coleman's "GNMA Table" & Junk Bond Fund (VWEAX) Update

Allan Coleman posted on our Facebook Forum Sep 23, 2007 at 3:39 PM:

Here is your purchase , Tom , along with miine of the Vanguard GNMA fund on Friday at $10.17 a share .

For the Record :

$9.91 - " codfish " , and " hoover26 "

$9.93 - Capt. Kirk , " codfish " , " Moonlight " for a substantial purchase , " retiredinprescot " , " runner26 " for a definite second purchase , and myself for a second purchase

$9.94 - " destroyerman " , " Moonlight " , " runner26 " , " somedude3 " , and myself

$9.95 - " unnamed friend "

$9.96 - " cpa111 " , " jnosm " , " Moonlight " , " runner26 " , " somedude3 " , " and " AL_W " bought into the overall bond market when GNMAs were at this price

$9.98 - " Moonlight " , and " somedude3 "

$10.00 - " Icha " , Mary " mapgal " , " Moonlight " , " retiredinprescot " , " runner26 " , " somedude3 , and myself

$10.01 - " CGM64 " , " and " unnamed friend "

$10.08 - " runner26 "

$10.09 - " cpa111 " , and " unnamed friend "

$10.10 - " codfish "

$10.13 - " davey52 "

$10.14 - " cpa111 " , and " runner26 "

$10.17 - " Tom " , and myself

$10.19 - " Tom " , and myself

$10.20 - myself

$10.35 - " unnamed friend "

My average purchase price is $10.05 with my highest price paid is $10.20 . These are the figures I need to calculate when I can sell my GNMAs in the future as as to NOT have a principal loss in my GNMA investment . As long as I keep my sale when GNMA prices are at or above $10.20 a share , I'll have principal appreciation . And if I want to get into more detail than that , my average purchase price is $10.05 .

In addition , I also made my second Vanguard High - Yield ( junk ) bond fund ( VWEAX ) at $6.04 a share . With my first purchase of this fund at $6.00 , that puts my average purchase price for this fund at $6.02 a share . I also need this data in order to figure out when it may make sense to sell this fund later too .

The Yield Curve as a Leading Indicator

So, Recession or No Recession that is the question. My interpretation of the Dynamic Yield curve is we will not have a recession. There were many instances in the last year or so where the yield curve inverted (in 2006 feb., mar., nov., dec. & in 2007 jan., feb. ) but the limited duration and relatively low interest rates due to Foreign Capital inflows were among the mitigating factors which negated the Recession signal for the Yield curve. In other words the yield curve inversions sited never would have taken place if the long end yield was not pushed lower due to the demand of surplus foreign capital looking for a safe harbor here in the US.

In my never ending quest to discern good market valuation tools and market directional indicators, I am revisiting the use of the yield curve as a reliable tool to presage when a recession would likely occur for the US economy.

The bottom line for me as an investor is the yield curve is an excellent predictive tool to use, and "since 1960, a yield curve inversion (as measured by the difference between ten-year and three-month Treasury rates) has preceded every recession on record. In fact, in terms of monthly averages, the ten-year rate was at least 12 basis points below the three-month rate before every recession in that period."

As an investor I use the 3 month Tbill to compare to the long end of the yield curve (currently the 10 year US Tbond but in prior years the 30 year Tbond was used). The reason for not using the very short end Fed Funds rate for comparison is simply because it is subject to direct manipulation by the Fed to control monetary policy. In addition I factor out external noise such as demand buying of our long end by Foreigners by keeping the level of relative interest rates in mind as an offsetting factor.

Below I present 2 reference articles which support my premise that the Yield Curve is a reliable indicator if used and interpreted properly. 

The first article is from the Federal Reserve Bank of New York written in October 2005 Author: Arturo Estrella (Senior Vice President in the Capital Markets Department of the Research and Statistics Group at the Federal Reserve Bank of New York).

The Q&A portion is a little tedious to read so I will try and highlight by bolding the salient points.

==============
Reference Article #1:
==============

The Yield Curve as a Leading Indicator 
October 2005

Author: Arturo Estrella

A broad literature originating in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity. Today, there exists a substantial body of evidence from which various useful stylized facts have emerged. This catalogue of some of the salient findings takes the form of answers to frequently asked questions. An extensive bibliography is also included.

Note from the NY Fed: Views expressed are the author's and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.

Questions & Answers

Q. What does the evidence say, in short?

A. The difference between long-term and short-term interest rates ("the slope of the yield curve" or "the term spread") has borne a consistent negative relationship with subsequent real economic activity in the United States, with a lead time of about four to six quarters. The measures of the yield curve most frequently employed are based on differences between interest rates on Treasury securities of contrasting maturities, for instance, ten years minus three months. The measures of real activity for which predictive power has been found include GNP and GDP growth, growth in consumption, investment and industrial production, and economic recessions as dated by the National Bureau of Economic Research (NBER). The specific accuracy of these predictions depends on the particular measures employed, as well as on the estimation and prediction periods. However, the results are generally statistically significant and compare favorably with other variables employed as leading indicators. For instance, models that predict real GDP growth or recessions tend to explain 30 percent or more of the variation in the measure of real activity. See Estrella and Hardouvelis (1991). The yield curve has predicted essentially every U.S. recession since 1950 with only one "false" signal, which preceded the credit crunch and slowdown in production in 1967. There is also evidence that the predictive relationships exist in other countries, notably Germany, Canada, and the United Kingdom. See Estrella and Mishkin (1997) and Bernard and Gerlach (1998).

Q. What maturity combinations work best?

A. When the yield curve is used to predict inflation (e.g., as in Mishkin (1990a, 1990b), interest rate maturities are matched precisely with the forecast horizons for inflation. For instance, to predict the difference between inflation expected in the next five years and inflation expected in the next year, the difference between five-year and one-year Treasury yields is used. When forecasting real activity, in contrast, the best results are obtained empirically by taking the difference between two Treasury yields whose maturities are far apart. At the long end, the clear choice seems to be a ten-year rate, which is the longest maturity available in most countries on a consistent basis over a long sample period. At the short end, there is a wider variety of choices. An overnight rate, such as the fed funds rate, is close to the extreme of the maturity spectrum. However, its usefulness as an indicator of market expectations is confounded by its fairly direct control by the Federal Reserve. A common choice currently is the two-year Treasury rate, perhaps because of the liquidity of the associated instruments. Background research in connection with Estrella and Mishkin (1998) suggested that the three-month Treasury rate, when used in combination with the ten-year Treasury rate to predict U.S. recessions, provides a reasonable combination of accuracy and robustness over long time periods. In the end, most term spreads are highly correlated and provide similar information about the real economy, so the particular choices with regard to maturity amount mainly to fine tuning and not to reversal of results. The caveat is that a benchmark that works for one spread may not work for another. For instance, the ten-year minus two-year spread may invert earlier than the ten-year minus three-month spread, which tends to be larger.

Q. Is it the level or the change in the spread that matters?

A. With many leading economic indicators, either individual variables or indices, analysts focus on the change or growth rate in the variable as a forecaster of future real economic conditions. In contrast, it is the level of the term spread - not the change - that helps forecast both recessions and changes in real economic activity. For recessions, it is clearly the level that matters. In a probit model of the probability of recession, a given change in the spread can have a very different impact, depending on the initial level of the spread. When the curve is very steep, say the spread is above 300 basis points, a change of 50 basis points in the spread hardly changes the probability of recession. However, if the spread starts out at 50 basis points, a decrease of that magnitude may raise the implied probability by 10 percentage points or more. Theoretical explanations of these empirical results are not easily formulated. A suggestive heuristic argument is that the term spread, being a difference between interest rates of different maturities, incorporates an element of expected changes in rates and is thus indicative of future changes in real activity. In 1996, the Conference Board added the yield curve spread to its index of leading indicators, focusing on monthly changes in the spread. Note, however, that it announced in June 2005 that it would adjust its procedures so as to focus on the level of the spread and not on the change.

Q. Does it matter if changes are driven by the short or the long end?

A. The best forecast of future real activity is provided by the level of the term spread, not the change in the spread, nor even the source of the change in the spread. Thus, if a low or negative value of the spread is reached via an increase in the short-term rate or a decrease in the long-term rate, it is only the low level that matters. In the six months preceding the trough of each yield curve inversion in the United States since 1960, we see a decline in the ten-year Treasury rate in two of seven cases (before the 1990-1991 and 2001 recessions) and an increase in the other cases. The direction of the change in the ten-year rate at the time of the signal does not appear to be indicative of the strength or duration of the subsequent recession. It is clear, however, that each recessionary episode is preceded (with varying lead times) by a substantial increase in the short-term rate.

Q. Is an inversion required for a signal?

A. Although economic theory suggests that the yield curve should help forecast real output, no theory establishes a clear connection specifically between yield curve inversions and recessions. However, since 1960, a yield curve inversion (as measured by the difference between ten-year and three-month Treasury rates) has preceded every recession on record. In fact, in terms of monthly averages, the ten-year rate was at least 12 basis points below the three-month rate before every recession in that period. In contrast, very low positive levels of the spread have been observed without a subsequent recession. Specifically, there were two episodes in the 1990s in which the term spread attained very low positive levels (42 and 12 basis points respectively), but did not invert. In both of those cases, economic activity continued unabated after the troughs or low points for the spread. Thus, using inversion as a benchmark, there were no "false positives" during the period. While inversions and recessions may not be inevitably connected by theory, they correspond to extreme values of the term spread and output growth, respectively, which are in fact theoretically linked.

Q. Does the signal have to be persistent?

A. Daily or even intraday changes in the term spread can be substantial. For example, for the spread between ten-year and 3-month rates, one-day changes of over 25 basis points occur about 2½ percent of the time. In some cases, these changes may be driven by market expectations of economic fundamentals and consequently may be persistent. In many instances, though, high-frequency changes in the spread may result from temporary demand or supply imbalances in the markets for Treasury securities, which may be quickly reversed and thus may not be truly reflective of changes in expectations about real economic conditions. One way to distinguish between perceived changes in fundamentals and temporary market phenomena is to trace the persistence of yield curve signals. A signal that lasts only one day may be dismissed, but a signal that persists for a month or more should be looked at carefully. Statistically, these distinctions may be captured by using data averaged over one month or more, which is quite common in the literature, or by including lagged effects in the model, as in Chauvet and Potter (2005).

For answers to the following Questions see the linked article:

Q. How and when were the relationships first identified?
Q. How long have these relationships existed, and do they still hold?
Q. Are formal models needed to extract the information content in the yield curve, or are there also rules of thumb?
Q. What statistical models have been formulated?
Q. Which interest rates to use: Treasuries, fed funds, Eurodollar, swap, corporate?
Q. Is the evidence robust over time?
Q. How do binary models that predict recessions compare with models that forecast continuous dependent      variables (e.g., real GDP or industrial production growth)?
Q. How does the yield curve compare with other indicators?
Q. How does the yield curve perform out of sample, and can it be supplemented with other indicators?
Q. How are predictions related to monetary policy?
Q. How are predictions related to market expectations of the economy?
Q. Is there causality from economic activity to the yield curve?
Q. Should we expect the predictive power of the term spread for real activity to persist?

The second reference which supports the premise of my article is entitled: Yield Curve Inversion - Necessary But Not Sufficient Recession Condition by Paul Kasriel.

Note: as the first reference article stated, the results you get depend on the input used specifically, the distinction here is the short end used for comparison for this reference article was the fed funds rate not the 3 month Tbill which led to a slightly different conclusion as indicated by the title of this second reference article.  

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Reference Article #2:
==============

Yield Curve Inversion Necessary But Not Sufficient Recession Condition

by Paul Kasriel

December 21, 2005

As shown in the chart below, each of the past six recessions (shaded areas) was preceded by an inversion in the spread between the Treasury 10-year yield and the fed funds rate. But there were two other instances of inversion - 1966:Q2 through 1967:1 and 1998:Q3 through 1998:Q4 - immediately after which no recession occurred. It would appear, then, that an inverted yield curve is more of a necessary condition for a recession to occur, but not a sufficient condition. That is, if the spread goes from +25 basis points and to -25 basis points, a recession is not automatically triggered. Rather, whether an inversion results in a recession would seem to depend on the magnitude of the inversion and, to a lesser extent, the duration of it. Recession-signaling aside, the yield curve remains a reliable leading indicator of economic activity. Although the spread going from +25 basis points to -25 basis points might not result in a recession, it does indicate that monetary policy has become more restrictive. For a description of the theoretical underpinnings of why the yield spread is a leading indicator, see http://www.northerntrust.com/library/econ_research/weekly/us/pc070805.pdf. For some descriptive data on the past eight spread inversions, see the table below.