British budget battle

The new coalition government in the U.K. is doing something remarkable: cutting spending. As you might imagine, this is not going over well among those who are recipients of government money (including the one-in-five British workers employed by government).

The ax-and-tax budget plan also increases the value-added tax and raises the tax rate on capital gains. That's making for even more unhappy Brits.

Below is a tongue-in-cheek "mash up" of last week's House of Commons speech by George Osborne, Chancellor of the Exchequer (the British Cabinet minister responsible for economic and financial matters). A few days before the speech, Osborne said that unless Britain takes strong steps to reduce its $1.4 trillion national debt, it will be "on the road to ruin" like Greece.

Warning: prepare to hear plenty of screaming.

Posted by Joseph at 2:05 PM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): government spending

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Long-term vs. short-term

This probably seems counterintuitive, but in investing short-term outcomes are much less predictable than long-term outcomes. That's why being successful over the long haul involves ignoring much of what is happening in the short term.

Consider this quote from Bob Reynolds, CEO of Putnum Investments, in an interview published this week by Morningstar:

So much of investing — probably the most critical point — is time horizon. It's having a real grasp on what you are investing for.

The most interesting thing about the market is that the longer-term your time horizon, the more predictable the market is. I think it's...being able to put together the right portfolio, and then taking that type of view of the market and not react to day-to-day movement. (emphasis mine)

That's easy to lose sight of, particularly because the market seems to flit from one short-term preoccupation to the next. One month it's the collapse of the dollar, then it's the debt troubles in Greece, then it's slowing growth in the U.S and the fear of a double-dip recession.

It's important to recognize that the market always has a boogey man. There has to be one, almost by definition, for the market to function in balancing the bullish and bearish case.

That's where the importance of time horizon comes in. The longer yours is, the more you can tune out this day-to-day, week-to-week, month-to-month endless cycle. The shorter your time horizon is, the more damage these short-term issues can do to your portfolio.

But that's also why you adjust your portfolio allocation as you age, to counteract the fact that you are more vulnerable to short-term market displacements due to your shorter time horizon.

Posted by Mark at 9:05 AM | Comments (0) | TrackBack
Category(s): Investing Principles
Tag(s): long-term perspective, time horizon

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Happy Anniversary to...us!

Time for a stroll down memory lane: twenty years ago Boris Yeltsin was elected president of the Russian Federation, East and West Germany re-united, and Iraq invaded Kuwait. In technology, Microsoft rolled out Windows 3.0 and a guy named Tim Berners-Lee developed something call the World Wide Web. On Wall Street, broker Drexel Burnham Lambert filed for bankruptcy, while the Dow Jones industrial average hit a record high of 2,870.

And in Louisville, Ky., the first issue of the Sound Mind Investing newsletter rolled off the press.

Much has changed during the past two decades, but one thing has stayed constant: our motivation for doing what we do! SMI's raison d'etre has always been to encourage and enable our readers to become generous givers.

In our just-released 20th anniversary issue, founder and publisher Austin Pryor revisits SMI's abiding heartbeat in a piece entitled, Feeling the Father's Pleasure. It's available here — free to subscribers and not-yet subscribers alike!

Also free this month, guest writer Shannon Plate offers advice on close-to-home options that can help you trim your entertainment-related spending, and Austin explains how not all price/earnings ratios are created equal.

Rounding out our July articles (for subscribers):

• We tell you how to avoid getting locked into a below-market rate in a long-term CD;
• Executive Editor Mark Biller explains why competing threats to the economy are keeping each other in check — for now; and
• Pastor and author John Piper answers this question: Should an expectation of eternal rewards be a motivation for becoming a generous giver?

Not yet an SMI subscriber or web member? Today's a great day to sign up! If you become a web member, you'll gain full access to the July issue — plus step-by-step details on how to implement our time-tested investing strategies.

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Category(s): SMI General Announcements
Tag(s): new issue

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Debt-relief programs often put debtors in deeper hole

A year ago, in an article titled Settle A Debt for Less than You Owe?, we looked at so-called debt settlement companies, noting that (to put it charitably) they tend to over-promise and under-deliver.

[R]eaching a debt settlement isn't quite as easy as [these companies'] ads imply. A settlement works only if you qualify and only if everything goes just right....

[I]f things go wrong, the debtor could end up with more debt, an angry creditor, a severely damaged credit score, perhaps a lawsuit — plus be out hundreds (maybe thousands) of dollars in fees.

We also warned that "this is definitely a 'let-the-buyer-beware' area. The field of debt settlement is replete with firms that appear to be little more than scams."

On Saturday (June 19), the New York Times published a helpful (though somewhat heavy-handed) front-page follow-up.

[Debt] settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer's debt is actually reduced.

State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry's proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises.

Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors....

In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.

"What they don't tell their customers is when you stop sending the money, creditors get angry," said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. "Collection agents call. Sometimes they sue. People think they're settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit."...

In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a "national debt relief stimulus plan."...

"The vast majority of companies provided fraudulent and deceptive information," said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.

The Federal Trade Commission is expected to release new rules (PDF) this summer aimed at curbing abuses in the debt settlement industry. In addition, several states may act to cap fees that debt settlement companies charge.

As we noted in Settle A Debt for Less than You Owe?, a more fruitful approach for those struggling with significant debt problems is to work with a nonprofit credit-counseling agency to set up a debt-management plan (DMP). A DMP helps consumers pay their debts (in full) over 36-60 months.

DebtAdvice.org, the website of the National Foundation for Credit Counseling, offers a searchable database of such counseling agencies.

Posted by Joseph at 10:45 AM | Comments (0) | TrackBack
Category(s): Family Finances
Tag(s): debt, debt-settlement

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Getting ready for Christmas

"Christmas Club accounts are now largely a thing of the past (undercut by the rise of easy credit)..." — so I wrote in the current issue of the Sound Mind Investing newsletter in an article on multiple savings accounts (subscribers' link).

That's true — Christmas Clubs have faded into the past for the most part.

But a reversal may be in the offing. Sears/Kmart promoted a Christmas Club program last year. Now, the New York Times reports another major retailer is rolling out such a club for this year:

Toys "R" Us is counting on an Eisenhower-era tactic to get consumers to spend this Christmas. The toy retailer will begin offering a "Christmas Savers Club" [this week] that allows shoppers to put money away with the company for holiday gifts.

Participants will receive a card similar to a gift card, and can contribute funds to it through cash or credit card payments. As an incentive Toys "R" Us will add 3 percent interest on the balance.

The program is a throwback to what banks and credit unions offered in the 1950s and 1960s before credit cards allowed people to spend money they did not have.

Our Level 2 article focused on Christmas Clubs run by banks, but many retailers had them too back in the day — to build customer loyalty, of course. That's exactly what Toys "R" Us is going for.

Shoppers can sign up for the program in Toys "R" Us stores, either at the cash register or the customer service stand. The company will add the interest on the balance as of Oct. 16, and the funds will be available Oct. 31 for purchases at Toys "R" Us and Babies "R" Us stores and Web sites.

Earning 3% is nothing to sneeze at these days, but unless you are absolutely, positively planning to buy something from Toys "R" Us — and you know exactly how much you're going to spend — it's probably better to set aside your Christmas savings in an earmarked bank account.

Earlier this week, I talked about the benefits of having multiple earmarked accounts with host Bob Crittenden on Faith Radio's Faith Meeting House program. Listen below (13 min.) — or download an mp3 (right click/save as).

Posted by Joseph at 10:10 AM
Category(s): Family Finances
Tag(s): radio, savings, savings strategies

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The (overdraft) protection racket

"We're willing to offer protection — for a fee. But if you want it, you'll have to sign up." That's the message many banks and credit unions are sending to their debit-card customers, as implementation nears for new Federal Reserve rules (PDF) on debit card overdrafts. You may be told that you will lose "important protections" or "a valuable safeguard" if you don't opt in.

Below is a snippet of the letter I received from my bank late last week.

MarketWatch's Chuck Jaffe has the background on what this is all about:

[Under current rules,] if someone present[s a debit] card against insufficient funds, [most banks will] make good on the transaction, put the account into the negative and tack on a fee of up to $40, putting the account further into the red....

All told, banks collected $38.5 billion in this type of overdraft fee alone in 2009, according to Moebs Services, a Chicago-based bank-industry consulting firm.

Under the Federal Reserve's new rules — which go into effect July 1 on new accounts and August 15 for existing customers — banks can only charge an overdraft fee on ATM and debit transactions if they first get customers to opt in to overdraft services.

If you don't opt in — and don't arrange for one of your accounts to back up another — and there's not enough in the account to cover a transaction, and you try to use your card against an inadequate balance, the purchase or withdrawal will be declined.

Sure, it's no fun being told that your card won't be accepted, but are you willing to shell out $30 or more to avoid embarrassment? Besides getting rejected might push you to get serious about the tasks of documenting your spending and balancing your checkbook.

"For many people, an overdraft is something accidental, where they haven't reconciled the account or recognized that their spouse just went out and bought something on another debit card linked to the account," said Gerri Detweiler, author of The Ultimate Credit Handbook....

"I just don't think that saving face with a clerk is worth 35 or 40 bucks a pop," Detweiler said.

Jaffe also quotes Greg McBride, senior financial analyst for BankRate.com: "Nothing will ever solve this problem better than knowing your balance and simply managing your spending so that overdrafts are never a problem." Amen.

By the way, recurring debit-card transactions — i.e., auto drafts for regular bills, such as a mortgage payment — are exempt from the new rules. If you overdraw, the bank will cover the transaction — and, of course, you'll pay a fee.

For a quick primer on debit cards (including some significant downsides of using one), see Mary Hunt's article, "What You Need to Know About Debit Cards," in the current issue of the Sound Mind Investing newsletter.

Update: The overwhelming majority of checking-account holders never overdraft their accounts, according to the FDIC. Most overdrafts are concentrated among about 14% of users (see graph).

Posted by Joseph at 8:30 AM | Comments (1) | TrackBack
Category(s): Family Finances

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Donations down, but "religious" giving holds steady

A newly published report on U.S. charitable giving, from the Giving USA Foundation and the Center on Philanthropy at Indiana University, finds that charitable contributions fell 3.6% (or -3.2% inflation-adjusted) in 2009. Overall giving for the year was $303.75 billion, down from $315.08 billion in 2008.

A closer look at the numbers reveals that giving by individuals has not dropped appreciably, nor has giving to religious causes.

Individual giving — which accounts for three-fourths of all charitable donations — fell an estimated 0.4% last year, but when adjusted for inflation (or deflation in 2009) that isn't actually a change from the previous year.

Giving to religion — the largest giving category — fell by just 0.7% (or -0.3% adjusted for deflation), but that came after an estimated 2008 increase of 0.8%. In other words, religious giving, though not growing, held roughly steady during the financially tumultuous years of 2008 and 2009. (It should be noted, however, that if the 2008 number is adjusted for inflation, religious giving showed a decline for that year, not an increase.)

The report probably understates religion-related giving because not all such giving shows up under "Religion." Donations to the Salvation Army, for example, are found under "Human Services." A donation to a seminary would fall under "Education."

Where did the big 2009 declines occur? The largest declines were in charitable bequests (-23.9%), foundation grant-making (-8.9%), donations to foundations (-8%), and contributions to "public-society benefit organizations," such as the United Way (-4.6%).

Two more interesting facts:

• Contrary to common assumptions, corporate giving accounts for a small portion of overall donations — only 4%.
• Almost half of all giving comes from just 10% of the population — those with a household income higher than $100,000. (Related: part of SMI's mission statement is "We want to help you have more so you can give more"!)

A word on the report's methodology: the Giving USA study is based on estimates, not concrete numbers. "We use estimating methods developed by experts in philanthropy, statistics, and economics to project what household tax returns and IRS Form-990s submitted by nonprofits will show two or more years down the road, after the Internal Revenue Service completes its analyses," Giving USA says.

Posted by Joseph at 10:55 AM | Comments (0) | TrackBack
Category(s): Giving and Stewardship
Tag(s): charitable donations, giving

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When Treasuries are hotter than stocks

The U.S. government has never been more in debt, and some economists see fiscal disaster ahead. Even so, the hottest investments going are... (wait for it!): U.S. Treasury notes and bonds — much to the consternation of economists and analysts who predicted otherwise.

The New York Times tells the story:

In a reprise of the flight to safety that occurred during the financial crisis of 2008 and early 2009, people have been parking cash in Treasuries and fleeing stocks, which, of course, have had better long-term returns historically....

This time around, the great cash migration started with the debt crisis in Greece and elsewhere in Europe, not in the United States, but the effects on the American stock and bond markets have nonetheless been severe.

Last month, for example, the Standard & Poor's 500-stock index dropped 8.2 percent....

For people holding Treasury bonds, it's been one of the best of times. In May, long-term Treasury mutual funds outperformed every traditional category of stock fund, according to Morningstar data, returning 5 percent....

[A] vast majority of economists and market strategists were forecasting a different chain of events. Treasury yields were universally expected to be rising, not falling, as the United States recovered from a deep recession. The domestic economy is, in fact, growing, and corporate profits have been rising, but the European crisis has overturned many expectations.

All of which goes to show that the future — even the short-term future — is tough to predict. In fact, in some ways the short term is more difficult to predict than the long term.

Here's the way the NYT sums it up:

[I]t would appear that there is some reason for long-term optimism for stock investors. For the short run, alas, more volatility is probably in order.... Unless you're focused on a distant horizon, it may be a difficult summer.

If you are focused on a distant horizon, it may be best to just ignore the market and focus instead on having some summer fun.

Posted by Joseph at 9:25 AM | Comments (0) | TrackBack
Category(s): Current Market Events
Tag(s): safety, Treasuries, volatility

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What $13 trillion could buy

In case you missed the news, the U.S. federal debt crossed the $13-trillion mark last week.

Because the human mind has trouble comprehending a number that large, the folks at SmartMoney ran a few calculations and have put $13 trillion into terms easier to understand:

• With $13 trillion, Americans could buy nine 32-gigabyte iPhones (the 3GS model) for every human being on the planet;
• For $13 trillion, 68 million students could be sent to Yale University (four years of room and board at $190,000);
• $13 trillion could buy every person in the U.S. one item off of McDonald's dollar menu every day for the next 115 years;
• $13 trillion could buy round-the-clock on-call medical care for the entire population of the U.S. — for 30 years;
• For $13 trillion, everyone in the U.S. could spend the next 60 years hanging out everyday at Disneyland (based on the cost of Disney Premiere Passport ticket).

Of course, for $13 trillion we could also pay off the national debt. If we paid down $1 million per day (assuming interest was not accruing), we could have the debt completely wiped out in just 36,000 years!

In its just-released "Annual Report on the Public Debt" (PDF), the Treasury Department estimates the debt will grow to $19.6 trillion by 2015. If you're not among the faint of heart, check out the U.S. debt clock here.

Update: Want to help reduce the debt? Check out this official U.S. government page.

Posted by Joseph at 9:45 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): national debt

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One of the best things you can do to stay out of financial trouble

The fundamentals of good financial management aren't difficult, but they do require 1) planning and 2) discipline to stick with your plan.

In a short interview Monday on Alabama's Faith Radio, SMI assistant editor Joseph Slife (right) talked with host Bob Crittenden about the importance of having a savings plan. In a follow-up to air soon, he'll discuss a simple way to make sure your savings plan works.

Use the audio player below to listen — only 7 minutes!

Posted by Matthew at 11:09 AM | Comments (0)
Category(s): Family Finances
Tag(s): radio, savings, savings strategies

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New regulations likely to add to money fund woes

In our March issue, we reported (subscriber's link) on new money-fund regulations advanced by the U.S. Securities and Exchange Commission.

Those regs took effect last week, and Marketwatch's Chuck Jaffe (right) says they're likely to make money-market funds — already scraping bottom on yields — even more unattractive to savers who are seeking yield as well as safety.

Under the new rules...money funds must hold more liquid assets and limit their investments to only the highest-quality securities. In addition, they must reduce the average maturity of the securities they hold.

Furthermore, retail or taxable money-market funds must now hold at least 10% of assets in cash or highly liquid securities — think Treasurys — that can be converted to cash within one day. At least 30% of a money fund's assets must be in cash or Treasurys that mature in 60 days or less, or that can be converted into cash within a week....

The top-yielding money market funds currently are generating almost nothing for shareholders, with the best individual money funds paying out less than 0.2% and the top tax-exempt funds generating about 0.25%, according to Crane Data, which tracks the money-fund business. If anything, the new rules will drive those rates even closer to zero....

[Meanwhile, t]he top-yielding bank savings accounts and interest-bearing checking accounts carry annual percentage rates four or five times higher, according to BankRate.com.

That may not seem like much difference, but every little bit counts. An investor with $100,000 in cash to park will earn about $3.50 per day in an online savings account paying 1.3%, but will earn just 35 cents per day on a money fund paying 0.13%. The returns are miserable in both cases, but the extra $1,150 — and the plus of having Federal Deposit Insurance Corp. protection — is worth leaving the money fund.

Jaffe concedes that the day may come when "the new safety measures...pay off and protect shareholders." But right now, by mandating a reduction in risk, the regulations will make it even more difficult for MMFs to climb out of the low-yield hole.

To learn more about various options for savers, visit SMI's Savings Accounts page.

Posted by Joseph at 1:20 PM | Comments (0) | TrackBack
Category(s): Mutual Funds
Tag(s): money market funds, savings

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"It's a five-star fund!" So what?

A five-star mutual fund isn't like a five-star movie. A great film from 2007 is still a great film. But a mutual fund that was stellar a few years ago may be a laggard today.

Even so, many investors select funds the way they select films. The look to the "star" system to make a decision. (The star system for mutual funds [PDF] was developed in the 1980s by Morningstar and revised in 2002.)

As Marketwatch reports, "looking to the stars" almost guarantees underperformance.

In meeting after meeting earlier this year, [Tim Courtney] and his colleagues at Burns Advisory Group had recommended mutual funds to prospective clients, only to be hit with the same response almost every time: Why are you telling me to invest in a three-star rated fund?

That sums up the way many investors allocate money to funds — look at products that have four- or five-star ratings from investment researcher Morningstar Inc., take that as a seal of quality, and hope for the best. Such decisions are perhaps even more common in volatile markets, when anxious investors view top-ranked funds as somehow better-equipped to handle adversity....

The trouble is that investors seem to forget that star ratings are backward-looking, based on a fund's past performance, and studies have shown the ratings have no predictive value....

Courtney and his colleagues went back to Dec. 31, 1999 and studied the subsequent 10-year performance of five-star rated funds. What he found might convince investors to kick their star-rating habit.

Of the 248 stock funds with five-star ratings at the start of the period, just four still kept that rank after 10 years. And the 218 domestic stock funds with the rating typically lagged their category averages over the period — not just the benchmarks, but other mutual funds....

In other words, it's not just that five-star funds don't, on average, continue to lead their peers — they actually do worse in subsequent years.

At SMI, we don't let stars get in our eyes. Instead, our Fund Upgrading methodology gauges how a fund is performing now by looking at its most recent performance (within the past 12 months). This is fundamentally different from Morningstar's star system, which focuses on longer-term (3-, 5-, and 10-year past performance). Upgrading leads us to the best current performers, regardless of how many stars these particular funds have by their names in the Morningstar database.

Consider this overview of our current universe of 20 mutual-fund recommendations:

• Five-star funds: 3
• Four-star funds: 6
• Three-star funds: 4
• Two-star funds: 7

As you can see, 17 (85%) of our current Upgrading recommendations rate fewer than five stars — 11 of them (55%) rate fewer than four stars.

The star system is no doubt well-intended, but it leads far too many people to make decisions that yield inferior results. Research has shown that recent past performance tends to persist into the immediate future. It has also shown that longer-term past performance has little — if any — predictive value.

Those stars may be pretty, but they aren't likely to help you choose better funds. Upgrading, on the other hand, is likely to help you choose better funds. And SMI's approach has beaten the market in 10 out of the past 11 years.

Learn more about Fund Upgrading and SMI's other time-tested strategies. And for details on how to become a Sound Mind Investing print subscriber and/or web member, click the sign-up button below.

Posted by Joseph at 9:25 AM | Comments (0) | TrackBack
Category(s): SMI Model Portfolios
Tag(s): five-star funds, investing strategies, mutual funds

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Are stocks currently safer than bonds?

That's the question being raised (and answered) by Chris Davis, head of the Davis Funds. He says the answer is "yes" (Marketwatch has the story).

Davis (left) thinks bonds may be okay over the next year or two — the bond bubble (as he sees it) could last another couple years. But he thinks stocks are a safer haven when looking out over the next decade.

It's a significant warning — and not an unfamiliar one for SMI readers. We've been beating the "Bonds-are-starting-to-look-scary, given-that-they're-the-supposedly-safe-part-of-your-portfolio" drum for a while now.

Last October we urged our readers to re-evaluate the safe part of their portfolios. And in this month's issue, we look at buying individual bonds rather than bond funds (subscribers' link) as one potential solution to the same problem Davis is concerned about: a future of rising interest rates.

Who is Chris Davis and why should we care what he thinks? Here's how MarketWatch describes him:

While Davis may not be a household name to many investors, he represents a long and storied brand in the fund business, a third-generation fund manager whose firm runs $65 billion in assets, and whose management acumen is widely hailed as being a model of sound thinking.

That doesn't necessarily mean Davis is right. But he adds another angle to the theme we've been warning about for a while now, which makes the Marketwatch article worth a quick read.

Posted by Mark at 9:35 AM | Comments (0) | TrackBack
Category(s): Current Market Events
Tag(s): bonds, safety, stocks

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