2005 in Review (2006-01-30)

2005 in Review

(2006-01-30) by David John Marotta

If your returns were poor last year, you were in good company. The S&P 500 gained only 4.9% and the Dow was down 1.4%. Indexes, however, are poor indicators of what wisely invested balanced portfolios should return. A better diversified portfolio would have earned over 10% in 2005.

Many investors and advisors view asset allocation as the investment mix between stocks and bonds. The stocks selected are usually US large-cap, and the bonds are also all US. Since US bonds returned about 2.4% and US large-cap returned a paltry 4.9%, no asset allocation mix between the two could produce a return better than about 5%.

We recommend a much more diverse asset allocation. Domestically, mid-cap was the place to be this year. The S&P 400 MidCap Index returned 12.4% and the Russell 2000 (small-cap) returned 8.1%. A mix of mid and small-cap historically beats large-cap and often provides a boost to returns. Taken by themselves they are more volatile, but as a smaller portion of a broad asset allocation they actually reduce volatility. Reducing average volatility while increasing average returns is a win-win proposition diversified investors enjoy.

Overall, value funds (7.8%) beat growth funds (6.4%) this year but among mid-cap stocks, mid-cap growth funds (16.3%) beat mid-cap value funds (11.5%). Although mid-cap growth funds beating mid-value funds was the exception last year, it teaches an important investment lesson: diversification over all of the investment styles helps smooth and boost returns. No one can predict the future.

US stocks and US bonds are just two of the six major asset classes we use for diversification. Foreign stocks, foreign bonds, and hard asset stocks are the three categories most commonly underrepresented in most investor’s portfolios.

One of the biggest factors in foreign investing during 2005 was the strengthening of the US dollar against foreign currencies as the Federal Reserve raised interest rates. In past years, foreign investments benefited from the value of the dollar dropping against foreign currencies. This year reversed that trend and the Dollar Index was up 12.6% for the year. Normally this would mean that foreign investments would lose 12.6% in terms of US dollars. This, however, did not dampening foreign investments much.

Foreign Bonds, which performed well over the past few years lost only 3.2% during the year. Foreign stocks faired much better.

The MSCI EAFE international index gained 26% in countries’ local currencies and (only) 10.9% in US dollars. The 15% difference between local currencies and US dollars is because the Euro lost more against the dollar than other currencies. Emerging market currencies, on the other hand, did not lose as much against the dollar.

The MSCI Emerging Market Index gained 31.5% in local currencies and still gained 30.3% in US dollars. The currencies of emerging market stocks held their value against the US dollar much better than the currencies of developed nations. This is the second year that emerging markets have produced large gains.

In summary, the indices most people listen to on the news each day were the bellwether of nothing worthwhile. The smart investors last year were diversified across multiple sectors and globally invested.

Review the asset allocation of your investments. We suggest expanding your investment mix to include foreign stocks, foreign bonds, and hard asset stocks. Adding these to a diversified portfolio of US stocks and bonds will reduce the average volatility of your portfolio while boosting returns.

from http://www.emarotta.com/article.php?ID=164

Eight Steps to Fix Your Broken Credit (2006-01-23)

Eight Steps to Fix Your Broken Credit

(2006-01-23) by David John Marotta

Part three in a three-part series on monitoring and managing your credit

Debt problems destroy your credit history and isolate you from a host of economic privileges and opportunities. If your credit report was a wake up call to get out of debt, you may be wondering what to do next. The first step to stop the hemorrhaging is simply to not borrow another penny until you are completely out of debt. The rest of this article will only benefit those in debt willing to make this commitment.

Avoid dealing with "credit repair firms". Don’t waste your time opening new accounts. Moving won't help either. Your credit history will gradually repair itself.

The first and most important step to getting out of debt and reestablishing good credit is to admit your past mistakes. No one has ever been able to overcome their problems until after they have first admitted them. Yes, this is the hardest part, but also the beginning of the way out.

Now, to get out of debt, here are the steps. Walk carefully.

TOTAL YOUR DEBTS AND REDUCE YOUR RATES

1. List your debts. List WHO you owe money, the AMOUNT you owe, and the INTEREST RATE you are paying. Most people who are in debt avoid looking at these statements. The truth is often difficult to face, but facing this information honestly is important.

2. Call every place you owe money. This is especially important if you are delinquent in your payments. Let your lenders know you will be trying to pay off your debt and ask for their assistance. Ask them for a lower rate of interest. Negotiate. Ask them for a payment schedule you can actually pay. Lenders are not gentle with over-spenders who have to be wrestled to the mat for payment. But they are surprisingly kind to those who call promising to pay and asking for help.

3. If possible, consolidate all your debt into the lowest possible interest rate. You can get information on low-rate, no-fee credit cards at www.cardtrak.com. Consider consolidating with a credit card that offers several months with little or no interest. These can give you some grace period to reduce your debt.

4. If you can't consolidate everything to one low interest rate, pay as much as you can on the debt with the highest interest rate while paying the minimum on everything else.

5. Put your high interest rate cards someplace safe. Ask your mother-in-law to hold them. Do whatever it takes. These are not to be used while you are getting out of debt. It doesn’t matter what wonderful perks are offered for using these cards. They are never worth the cost, trouble and heartache they caused your family.

PAYDOWN YOUR DEBTS

6. Try to reduce your fixed expenses and use the difference saved each month to pay off your debt. Eliminate features on your phone or drop channels from your cable plan. Read this column for regular tips on budgeting for ways to live proportionately within whatever amount you earn.

7. Make one-shot reductions in your debt. Hold a yard sale and use all the proceeds to pay down your debt. Pay cash for everything and use all your change to pay down your debt. Take an evening job or use all of a spouse's income for the next few months to pay down your debt.

8. Take drastic measures until debt-free. No eating out. No movie rentals. No discretionary spending. Realize that some people live on half of what you make. They use 65% of that for their regular expenses, save 15%, put 10% away for large purchases, and give 10% away to charities. If they can do that, you can live without cable television and gym membership until you are out of debt.

Is financial freedom worth it? The choice is yours.

from http://www.emarotta.com/article.php?ID=163

Creating A Ladder for Retirement Income (2006-01-16)

Creating A Ladder for Retirement Income

(2006-01-16) by David John Marotta

Part 3 on credit reporting will resume next week after our seminar.

Laddered bonds are an effective means of finishing that climb to financial success. For the 75 million baby boomers who begin turning 60 this year, this simple investment tool can help America’s soon-to-be retirees maintain financial health in the years to come. If you are retired or planning on retiring soon, a tailor-made laddered bond portfolio can provide a dependable income stream without compromising your growth investments—even during your retirement years!

I hear two main, albeit misinformed, views about bonds. Some recommend retirees hold all of their investments in bonds to guard against losing their investment in the market just when they will need the money the most. Others advise the exact opposite: avoid bonds because of the market always outperforms bonds.

Both are overreactions. Diversification is the best means of guaranteeing an income stream while allowing for growth. Like the iron rods below deck in the center of sailing ships, bonds keep you upright in stormy weather so that you can enjoy a smooth ride.

In the years before retirement, while accumulating wealth, your portfolio mix is not as critical. In fact, with time on your hands, there is considerable room for mistakes. As long as you are adding to your portfolio you can weather most storms in the financial markets. Living off your income and continually saving will keep your portfolio value heading up even if your investment plan is somewhat lackluster.

This does not hold true once you are retired. Invest too conservatively and your assets won’t keep up with increases in the cost of living and you will run out of money. Without your income to support your lifestyle and add to you investments your portfolio must have significant appreciation.

Invest too aggressively and you may still be penniless at the eleventh hour. A dip in the market will dramatically change the value of your portfolio. And with no additional money being invested, what you do take out for living expenses in a down market represents a large portion of your wealth. The portion you must spend in down years will never rebound, and the setback can also cause you to run out of money.

Bonds have an important place in a portfolio while you are adding to your portfolio, but during retirement and in the fives years beforehand their use becomes critical. We use bonds to provide enough stability to give our clients an income stream for 5-7 years at a time. With a guaranteed income for 5-7 years, you are then free to invest the remainder of your portfolio in appreciating stock. (Remember, you have a time horizon of at least 5-7 years with this strategy to weather the storms.) If the markets drop, you won’t need to try to live off a depreciated portfolio, further disabling your future income.

For clients with sufficient total assets, we recommend a tailor-made laddered bond portfolio. This is comprised of individual bonds that mature at the time of need for the amount of need. A laddered bond portfolio should also include bonds which increase in size providing assets maturing in amounts that go up by the rate of inflation. Unlike bond funds, individual bonds have no expenses, which helps boost your returns.

Part of any laddered bond portfolio should also include structuring your bonds so that you receive interest payments in different months. Since bonds pay interest twice per year, buying six individual bonds will allow you to set up your bonds so that you receive one interest payment each month. The interest from the bonds could be used as income, or if the bonds have been purchased to mature as expenses are needed then the bond income can be invested back into appreciating stocks.

Investing the additional interest generated by a bond portfolio allows you to continue dollar cost averaging into the markets even during retirement. These stock investments appreciate in value and provide growth in your portfolio assets.

To keep your cash stream flowing, sell some appreciated stock and buy a new bond to add to the end of your ladder when markets are right. When the market has done well, take some of your profits off the table and buy individual bonds maturing in a year at the end of your ladder.

Conversely, when the markets drop, postpone adding a bond to your ladder until your stock portfolio rebounds. This is the exact opposite of what the majority of investors are doing. Most investors will sell their stocks after a bad year in the markets and buy bonds. Then, after a good year in the markets they will sell their bonds and go back into stocks.

We recommend being a contrarian. Follow your overriding investment strategy, but when stocks do poorly, rebalance your portfolio with more stocks. And when stocks do well, take some of your profits and buy an additional year of bonds maturing.

Using this method of laddering your bonds will provide 5 years of guaranteed income and the opportunity to reinvest for growth. The longest downturn we have seen thus far in the markets is 3 years. A 5-year laddered bond portfolio will allow you to get through a slump without depleting your portfolio when it’s at its lowest.

For added stability, we invest in both US and foreign bonds since these markets do not move in sync. For instance, in 2002 when US bonds made 17%, due to a weaker dollar foreign bonds made about 40%.

For large portfolios, we recommend individual bonds. For medium-sized portfolios, we buy exchange traded bond funds. Although exchange traded funds do have transaction costs, they have low expense ratios and can be purchased in smaller amounts. For small portfolios, we use mutual bond funds. We also use bond funds to help us rebalance portfolios.

For additional information on bonds, we invite you to join us at our offices this Thursday, Jan 19th, 2006 at 4:30PM for a presentation on "Ensuring Portfolio Income" by Chris Genovese of Fixed Income Securities.

from http://www.emarotta.com/article.php?ID=162

Sifting Through Your Own Credit Dirt (2006-01-09)

Sifting Through Your Own Credit Dirt

(2006-01-09) by David John Marotta

Part two in a three-part series on monitoring and managing your credit

Credit bureaus track your financial moves closely. They are in business to find the financial dirt many living on the edge of credit worthiness would rather keep buried. Better credit has a financial value and companies are not likely to take your word for it. But since mistakes are made, you have a stake in reviewing your credit report for inaccuracies or strange activities that could mean you have been the victim of identity theft.

The Fair Credit Reporting Act and the Fair and Accurate Transfers Act (FACT) now entitles you to review your credit records once a year for no charge. You may request your annual credit report from each of the three credit reporting agencies, TransUnion, Experian, and Equifax.

To request your credit reports, visit the central source online at www.annualcreditreport.com or call 1-800-FACT-ACT. We suggest staggering your credit checks throughout the year. If you and your spouse each request a copy of your credit separately, you can check one of your reports every two months.

Five factors are considered when calculating your overall credit worthiness: your previous credit history, your current level of indebtedness, the length of time your credit has been in use, the types of credit you have, and your pursuit of new credit. A mathematical model determines your credit score, based on these factors.

Your free credit report will not include a copy of your credit score. To see your score, you will need to pay the credit bureau. Unless there is an over-riding cause, save your money. You can learn everything you need to know about your credit by a careful review of the free portion of your report.

Check each part of your credit report carefully to ensure its accuracy. The reporting agencies do not all have the same information. But what they collect falls into four main categories: personal information, account information, inquiries, and alerts.

Part one lists your personal information. You should see your social security number, date of birth, current and previous addresses and employment history. Your age, gender, ethnicity, and location do not affect your credit in anyway.

Part two catalogues all of your account information. Your accounts are likely divided up into accounts in good standing and those which are past due. For each account listed, you will see your account number, contact information for the lender and the type of account—whether the account is a mortgage, revolving (credit card), or an installment account. The date the account was opened, the payment history, current payment status, account balance, and credit limit will also be listed.

Closed accounts will continue to appear on your report. Check the status of the accounts you requested to be closed. Next, for open accounts, look at the account activity section. Do your balances match your records? Do you have any accounts you thought closed but remain open? What about the payment history?

Part three lists all of the inquiries into the status of your credit. Inquiries into your credit history may negatively impact your credit score. "Hard" inquiries are those you initiate by filling out a credit card application or by authorizing an employer to see your credit history. Hard inquiries can negatively affect your credit if it appears you are quickly expanding your credit beyond your means. "Soft" inquiries are those made by companies for solicitation purposes or from current lenders checking on the ongoing credit health. Soft inquiries do not affect your credit.

Part four may be called "alerts" or "potentially negative items." This part of your report can wreck your credit score. If you have been turned over to a collection agency or if you have any public records such as bankruptcy, tax liens, foreclosures, lawsuits, or garnished wages on file, these will be listed in this section.

Under FCRA rules, you may dispute the inaccuracy with the credit reporting agency, and the credit reporting agency must investigate the dispute and respond to you within 30 days. Information which is incomplete, incorrect, or unverifiable must be removed from your credit history within 30 days. Agencies may not report negative information which is older than seven years, or ten years for bankruptcy. For more information on dispute procedure, visit www.ftc.gov/credit.

from http://www.emarotta.com/article.php?ID=161

Learn What Credit Stalkers Know About You (2006-01-02)

Learn What Credit Stalkers Know About You

(2006-01-02) by David John Marotta

Part one in a three-part series on monitoring and managing your credit

With Christmas come and gone, you may be dreading the sight of credit card bills. Regardless of your credit card debt, the new year is a good time to check your credit history. What you don’t know about your own credit history may kill your opportunities for future borrowing.

If you plan on applying for a new job or applying for a credit card, car or home loan, you may want to check your credit report first. A 2004 report by the U.S. Public Interest Research Group found one in four credit reports have serious errors which could significantly lower your chances of being approved for a loan or credit card.

Employers and potential creditors will look at your credit report as an indication of your character and credit-worthiness for short and long-term loans such as a credit card, car loan, or a home loan. Even if you think you have good credit, begin the new year by checking the facts on your credit report anyway. Your credit report will outline your full credit history. And, it can help you verify you have not been the victim of identity theft.

Establishing good credit or bad credit takes time. As does fixing errors which appear on your report. Discovering these problems while sitting in your bank’s loan office is no way to win.

An amendment to the Fair Credit Reporting Act and the Fair and Accurate Transfers Act (FACT) now requires each of the consumer reporting agencies to provide you with a free copy of your credit report once each year. To get a complete look at your credit report card, you’ll need to request a copy from each of the credit reporting bureaus, Equifax, TransUnion, and Experian.

Your credit report includes both personal and credit repayment history. Included in the personal information section is your name, address, social security number, current and previous addresses, and employment history. I recently checked my credit history and discovered that one of the digits of my social security number had been incorrectly entered on an account. It was listed as an SSN alias in the report.

The bulk of your report outlines your current lines of credit, your payment history, and any potentially negative items such as companies who have denied your requests for credit. It also lists companies who have requested your credit history and any companies you have authorized to view your credit for business or insurance purposes. Review this information for accuracy.

To request your free credit reports, visit the central source for free on-line credit reporting at www.annualcreditreport.com. From that site, you can view a copy of your credit report from one or all of the bureaus. Or, call toll-free (877) FACT-ACT to request your free annual disclosure from the agencies. Your report will be mailed to you within 15 days.

For verification purposes, you will be asked a series of security questions. In my case, I was asked how much my mortgage payment was each month, what county I lived in and the make and model of my car.

Beware of bogus credit companies claiming to offer free credit reports. Entering the wrong web address may land you at a bogus credit reporting site. These sites claiming "free" credit reports may be a trap to garner your personal information. Remember, there are only three official credit reporting agencies.

Each of the three credit bureaus will try to sell you a detailed report of your credit. Some offer credit reporting packages for as little as $5.95 or as much as $68.70. You do not need to purchase these products. Proceed carefully on the websites and click only on the free credit report offer.

To get the maximum benefit, stagger when you check your free reports throughout the year. Your spouse is entitled to free credits reports as well. By alternating with your spouse, you can check your shared credit every two months.

Schedule for checking your credit reports
January	You request a report from TransUnion
March	Your spouse requests report from Equifax
May	You request a report from Experian
July	Your spouse requests a report from TransUnion
September	You request a report from Equifax
November	Your spouse requests a report from Experian

You may be entitled to more than one free credit report this year. If you were denied employment or insurance, if you are on welfare, if you have been a victim of identify theft, if your request for credit has been denied, or unemployed and plan on looking for a job within the next 60 days, you may request a second free credit report from each credit bureau.

from http://www.emarotta.com/article.php?ID=160