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.