OCT 22, 2012 17:53 UTC
CHICAGO (Reuters) – Short of stockpiling bullion in your basement, an ETF is the most cost-effective vehicle for owning gold. But you cannot just pick any fund out of the available list of seven bullion-based funds and expect it to perfectly track the price of gold and offer the lowest expense ratio.9
First of all, no exchange-traded fund will track the price of gold perfectly because returns are offset by costs — management fees and brokerage costs to buy them. Gold ETFs vary in fees, with the average annual expense ratio for the category at 0.54 percent, although you can find a fund charging as low as 0.25 percent. You need to weigh carefully what’s important to you: The size and liquidity of the fund or annual expenses. Which fund you buy depends upon how you plan to own it.
As I have mentioned in the past, gold is not a perfect investment. Many pundits legitimately claim gold is a shadow currency because major banks, traders and governments buy it to hedge against currency devaluations. When the dollar gains against other currencies or consumer confidence comes back in the United States or Europe, though, gold will not shine. Rising U.S. interest rates in the U.S. will also hurt the metal’s price.
Since gold is so volatile, do not invest more than 10 percent of your portfolio in it. You would need look no farther than last Friday for an example of the risk; gold fell nearly 2 percent — its biggest one-day drop in three months.
Two funds are leaders in terms of size and visibility: the SPDR Gold Trust and iShares Gold Trust. These two ETFs come up most often in lists of recommended funds.
WHY THE SPDR?
Gold ETFs are fairly convenient vehicles. They hold the metal for investors in huge vaults. If investors buy shares, they buy more gold. Fueled by anxiety over U.S. and European debts, about $8 billion has flowed into gold ETFs in the third quarter — the highest quarterly inflow in two years — according to ETFTrends.com, a site that follows exchange-traded funds.
The big gorilla of gold ETFs is the SPDR Gold Trust (GLD). With assets of more than $74 billion, it’s one of the largest ETFs of any kind. The fund’s manager says it keeps its 1.3 metric tons in the vault of HSBC bank in London, or in “vaults of sub-custodians.”
While holding the SPDR is much less expensive than purchasing the metal and storing it yourself, the managers charge you 0.4 percent annually for this service, which is just under the average for this kind of fund (0.54 percent). The fund is up 13 percent year to date and has risen 20 percent for the past three years.
For frequent traders, the SPDR’s liquidity makes it a good choice since its volume in terms of shares (more than 3 million daily) and options traded is the highest of any gold fund.
THE iSHARES OPTION
You could save on annual expenses and reap a slightly better longer-term return by owning the iShares Gold Trust (IAU), which also holds about $10 billion in bullion. The fund’s expense ratio — what the manager charges you for managing the fund each year — is just 0.25 percent. It has returned about 23 percent over the past three years through October 19 and 6.6 percent year to date. I hold this fund in my 401(k).
The iShares fund is gaining assets because of its initial cost advantage, which is a real plus for long-term holders like me. It holds more than $11 billion in gold and trades about 1.4 million shares daily.
That is because costs matter. Let us say you invest $50,000 in both funds and obtain an annual 10 percent return over 20 years. Due to the lower expense ratio for the iShares fund, you’d have $9,486 more than the SPDR fund over that period, according to the SEC Mutual Fund Cost Analyzer. This figure includes total fees and foregone earnings lost to expenses but not brokerage commissions to buy shares. In this basic cost analysis, the iShares fund comes out ahead for buy-and-holders.
With both of these funds, be aware that gold, like all metals prices, will continue to be volatile. There are no guaranteed returns or dividends that will be paid quarterly in all kinds of economic climates. It’s worth watching how central banks, hedge funds and speculators regard the future of the metal. If they are not long-term buyers — they were pulling back slightly last week — gold prices may not breach the $1,800 level.
However you choose to label it, gold prices don’t predict the future and certainly would not help you much if economies turn around. The metal pays an “anxiety premium” that moves inversely to the dollar’s relative value. When you bet on gold, you are also betting on U.S. — and often global — economic fallbacks and inflation. It is still more like disaster insurance, only it will not fix your home after a catastrophe.
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s
(Follow us @ReutersMoney or here Editing by Beth Pinsker Gladstone and Kenneth Barry)
OCT 19, 2012 16:15 UTC
CHICAGO, Oct 19 (Reuters) – While inflation has been tame in
recent years, there are few forecasters who believe it will
remain so in the future.
But when inflation bites again is a moot question.
Predictions of its imminent return have been wrong for years.
The key is having portfolio protection in place now so that it
won’t devastate your fixed-income holdings and reduce your
future quality of life.
Because even having been forewarned, it’s not so easy to
protect your portfolio against inflation, which will erode your
purchasing power over time. The difficulty is that there’s no
perfect hedge against it. Treasury Inflation-Protected
Securities (TIPS), are the natural choice, but they are linked
to the flawed Consumer Price Index (CPI).
Commodity funds and gold are worthy considerations, although
they have their shortcomings as well. Keep in mind that
commodities and gold have their own cycles based on supply,
demand and other factors, so past returns may not be reliable
indicators of what the future holds. There’s a reason why
commodities are so volatile.
A blended portfolio that employs a number of inflation
beaters is the best approach. Just be careful to balance it
according to the amount of risk you can stomach.
TIPS gain in value when inflation is rising, but are an
imperfect gauge of prices. In a disclaimer published with every
CPI report, the government states “the CPI is a statistical
estimate that is subject to sampling error because it is based
upon a sample of retail prices and not the complete universe of
The CPI comes up short, for example, in tracking housing
prices, which are partially measured through “owner-equivalent
rents.” And it’s not a complete measure of the broad spectrum of
commodity prices, which can be better tracked — although
imperfectly — through commodity funds.
No matter how you measure inflation, it’s clear that it can
impair your purchasing power and depress bond prices. What’s
more important is whether you are able to keep up with the rise
in the cost of living.
The latest CPI report from the U.S. Bureau of Labor
Statistics showed a 2 percent annual increase in September.
While that number was mostly driven by higher energy prices
(gasoline, fuel oil), it was rising at the fastest pace since
April. The more telling figure is inflation-adjusted hourly
earnings, which fell 0.3 percent from August to September. Wages
aren’t keeping up with inflation and this has been a problem for
years. Fortunately, there’s something you can do to bolster your
In deciding upon an inflation hedge for your portfolio, you
have to weigh the risk-return trade-off. I asked Prof. Craig
Israelsen, a finance professor at Brigham Young University, to
generate four different portfolio allocations that illustrate
the risk-return scenario:
1. Replacing bonds with TIPS – Let’s say you are concerned
that inflation is coming back and also astutely concerned that
your bonds will lose value. You want to keep it simple, so you
have a 60 percent stocks, 40 percent TIPS allocation. Your
3-year annualized return through Sept. 30 would be about 12
percent and nearly 8 percent over a decade. That’s about two
percentage points better than a standard 60-40 mix of stocks and
bonds. The volatility, as measured by three-year standard
deviation, would be a relatively low 9 percent.
2. Replacing bonds with metals – With the same stock
percentage, you invest 40 percent in a precious metals fund
instead of bonds. Your 10-year return rises to 11.4 percent
while your three-year performance drops to nearly 10 percent.
Volatility, however, more than doubles to about 20 percent.
3. Reduce stocks to 50 percent – Keep bonds at 30 percent
with 20 percent in precious metals. Your three-year volatility
drops to just under 13 percent with three- and five-year returns
just under 10 percent.
4. Half stocks, 30 percent bonds, 20 percent commodities -
Your three-year return rises to just over 10 percent, while over
the decade you gain 8.5 percent. Volatility, though, drops about
two percentage points over the previous portfolio.
As you can see, it is easy to capitalize on the “anxiety
premium” that metals pay and capture some of the global demand
that commodities funds track. But these strategies come at a
price in terms of higher volatility and higher fund expenses.
How do you construct these portfolios? The simplest way is
through low-cost mutual and exchange-traded funds.
The iShares Barclays TIPS Bond ETF tracks an index
of U.S. inflation-adjusted bonds. Stocks can be represented by
the SPDR S&P 500 ETF. A worthy bond ETF is the SPDR
Barclays Capital Aggregate Bond fund. Metals are tracked
by the Vanguard Precious Metals and Mining Fund ;
commodities by the PowerShares DB Commodity Index Tracking fund
While TIPS are an imprecise, though less-volatile, tracker
of the cost of living, they move in the opposite direction of
stocks. If you lean towards conservative investing, TIPS may be
a better fit than metals or commodities, although it’s not a bad
idea to incorporate some metals and commodities to cover a
broader range of inflation threats.
OCT 15, 2012 17:00 UTC
CHICAGO (Reuters) – At a time of high-frequency robotic trading, market volatility and elephantine economic uncertainty, joining forces with your family and neighbors for an investment club might sound like a sucker’s game.
The truth is that most investors won’t beat the market once they subtract transactions costs, timing errors and holding onto losers. So perhaps it’s no surprise that when finance professors Brad Barber and Terrance Odean of the University of California researched returns in the 1990s at the height of the investment club boom they found that about 60 percent of the clubs failed to beat a market index.
But there’s more value to pooling your resources than just comparing your returns to the S&P 500. Investment clubs still make sense because they bootstrap fundamentals. You focus on how to analyze a company for its sales, earnings and future direction. You scrutinize management for its ability to increase profits and earnings per share.
Instead of picking companies based on familiarity or gut feeling, you work with rational models of long-term stock picking. Over time, you figure out how to create a portfolio of solid companies, re-invest dividends and save money.
There’s a great deal of learning that happens in a social setting that you may not be able to do by yourself or by browsing online. That’s why even though membership numbers have plummeted since their heyday when there were 35,000 clubs in 1998, there are still some 8,600 local clubs across the country run through BetterInvesting.
I have to admit that I’m not the least bit impartial about investment clubbing. My family had been involved in a club for more than 15 years, until we liquidated our holdings in 2009 to pay emergency medical expenses. I researched and wrote about the movement in my “Investment Club Book” (Warner Books, 1995) and addressed club fairs from Seattle to New York. Disclosure: Outside of token gifts, some book sales and travel expenses, I’ve not received honoraria or direct compensation from speaking to any club chapter.
LEARNING IS FUNDAMENTAL
What I found in my time in an investment club is learning a complex and often intimidating subject with friends and family is a lot more productive than trying to tackle it alone. There’s a powerful social incentive with investment clubs. With peers or family members, investing can not only be a social event, it offers encouragement to stay the course in all kinds of markets and regularly invest fixed monthly amounts.
Although we got hit hard like all stock investors during the years we were invested, we survived the dot-com and 2008 crashes with enough money for a reserve fund. We held on – and even bought more shares – when most investors were bailing. Remember “buy low, sell high?” That’s what you’re better able to do in a group setting with a consensus.
Here’s what you need to know if you’re thinking about forming a club:
1. Form a club with people you know, like and trust.
BetterInvesting (www.betterinvesting.org) offers a wealth of support such as a magazine, software, local chapters and investment classes if you join, but there are also plenty of other resources online.
2. Invest on a regular basis, re-invest dividends.
Most large- and medium-sized companies offer dividend-reinvestment plans that will plow dividends back into buying new shares at no commission cost.
3. Emphasize quality and consistency in stock selection.
Look at how earnings, sales and earnings per share may grow. Pick companies with solid franchises, leadership in their industries and reliable dividends.
4. Buy low and hold, and don’t try to time the market.
If share prices dip – and the fundamentals of your companies look solid – buy more shares. “Dollar-cost average” this way and you won’t pay top dollar for shares over time.
5. Stay the course.
Club members will come and go or get discouraged. Markets will always be jittery. Set a fixed monthly amount to invest and vote on how to invest and diversify. It’s a group effort that doesn’t have to result in a huge profit. You’re doing this to learn about investing and save money. It should be fun.
If you choose to start a club, go into it with eyes wide open. Almost no one is going to beat the market after all expenses are tallied. My family club didn’t even come close. And you’re probably going to hold onto losers for purely emotional reasons and not buy and sell at optimal times. But what you gain from analyzing companies, reinvesting dividends and building wealth slowly is priceless.
(Follow us @ReutersMoney or here Editing by Beth Pinsker Gladstone and Steve Orlofsky)
OCT 12, 2012 12:30 UTC
CHICAGO, Oct 12 (Reuters) – There aren’t too many places
left to look for higher yields these days. The usual go-to
baskets of high-yield and foreign bonds, REITs and high-dividend
stocks are pretty well picked over.
One little-known vehicle to Main Street investors is Master
Limited Partnerships (MLPs), publicly traded entities that own
assets such as pipelines. Because of their unique structure,
partnerships – which can be focused on energy holdings but may
also invest in alternatives such as timber and real estate -
generate a lot of cash that is distributed to limited partners.
Spurred by global and domestic demand for oil, refined petroleum
products and natural gas, for example, energy partnerships are
constantly expanding. In the last few years, the oil and gas
boom in North America has triggered robust growth.
Sparked by a combination of increased exploration and
recovery, indexes that track energy MLPs have outperformed
individual benchmarks representing utility companies, real
estate investment trusts and the S&P 500 index over the past 10
years, according to the Alerian MLP Index. In the decade ending
June 29, the MLP index returned 16.7 percent, compared to 5.3
percent for the S&P 500 Index and 10.7 percent for utility
In the past three years, MLPs have averaged 27 percent,
compared to 16.4 percent for the S&P 500. The partnerships have
mostly thrived because they have been linked to long-term energy
trends and not the global banking, credit and real estate
For investors interested in diversification, MLPs offer
returns that rarely follow in lockstep with big stocks. Since
they more closely track energy prices and not stock-market
sentiment, their correlation of 0.48 to the S&P 500 is
relatively low, compared to 0.74 for real estate investment
trusts, publicly traded companies that own properties. A perfect
correlation is 1.00. The lower the correlation with common
stocks, which tend to dominate most growth portfolios, the more
protection you’ll obtain from equity sell-offs.
MLP holdings can be desirable if you’re heavily invested in
common stocks, but there are other trade-offs that make them
more volatile and costly.
Here are five tips for getting the most out of your
1. For lower risk, don’t buy individual partnerships.
If you buy individual MLPs, you’re over-exposed to a single
company. And they may be illiquid, meaning if you wanted to
sell, you’d be unable to sell quickly. Since you become a
partner when you buy them directly, you also have to deal with
K-1 tax forms, which make your tax planning more complex and
2. Look for ETFs that package MLPs.
A handful of exchange-traded, mutual and closed-end funds
hold MLPs. If you hold partnerships through these vehicles,
you’re relying upon managers to buy a mix of companies that
affords you some diversification and reduces your single-company
3. Get a broad mix of MLPs.
The ALPS Alerian MLP ETF holds big-name
energy/pipeline partnerships like Kinder Morgan Energy
and Enbridge Energy. The fund is yielding almost 6
For a more diversified mix, consider the First Trust North
American Energy Infrastructure fund, which has 36
percent of its portfolio in long-established utility companies
such as Dominion Resources and the Southern Company
. The First Trust fund is up 5 percent for the three
months through Sept. 29. It opened on June 19 of this year.
4. Understand the Risks.
While MLP funds offer you a variety of partnerships in one
package, they are not risk-free. Their values are linked to
commodity prices. If there are dips in oil or gas prices or
oversupply issues, their prices will suffer. Since they tend to
specialize in a small segment of the energy business, MLP funds
are concentrated in a small number of companies that will often
move in the same direction. They are not guaranteed in any way
and their tax treatment can be complicated.
And if oil or natural gas prices collapse, you’ll be at even
more risk; they are much more volatile than stocks or bonds. The
five-year standard deviation, a gauge of volatility, on the
Steelpath Select 40 A fund, for example, is 33,
compared to 20 for the Vanguard 500 Index fund, which
holds the most popular U.S. common stocks, as of Oct. 10. The
lower the standard deviation, the lower the price variance.
These are not investments for nervous Nellies.
5. Know the costs.
You are also paying for the convenience of owning multiple
MLPs. The ALPS product, for example, charges 0.85 percent
annually for expenses, compared to 0.57 percent for the industry
If you think of MLP funds as limited ways of boosting your
income portfolio, don’t get too concentrated in them because
while you’re boosting yield, you’re also adding considerably
more risk and investment management fees. They are not
substitutes for core holdings like broad-based bond and stock
OCT 8, 2012 16:25 UTC
CHICAGO (Reuters) – Exchange-traded index funds are a bit like mobile phones — models offer an increasing array of features over time, while prices on even the plain-vanilla models keep falling.
So, in step, prices have been dropping lately on garden-variety ETF index expenses. Typically these have offered rock-bottom costs on most products, relative to actively managed mutual funds. Yet there are several components of ETF pricing, so you need to be careful. You could miss some of the nuances and pay more than you should.
The good news is that competition is forcing expense ratios down to near-institutional-pricing levels. Now you can pay roughly what big money managers do for entire baskets of stocks, bonds and other vehicles. (An expense ratio is what a money-management firm charges you every year for owning their ETFs — a percentage based on assets under management. Generally, the lower the expense ratio, the better, since more of your money is being invested and not going into the manager’s pocket.)
The latest salvo of price cuts came from the discount broker Charles Schwab, which recently reduced fees by up to 59 percent on its 15 ETFs, which hold more than $7 billion in assets. Schwab is trying to play catch-up with the three giants in the field — Blackstone/iShares, State Street’s SPDRs and Vanguard Group — which offer an even wider selection of low-cost ETFs.
Expenses on Schwab funds range from 0.04 percent for its Multi-Cap Core Fund to 0.20 percent for its International Small/Mid-Cap Growth fund. How does that compare with previous levels? Expenses on the Mid-Cap ETF were cut in half, from 0.13 percent to 0.07 percent, while others were trimmed by as little as 0.02 percentage points.
While this sounds like counting pennies, it makes a difference over time. Say you had a large-company stock fund in your 401(k), had $100,000 invested and were paying 1 percent annually. Drop that expense to 0.04 percent and you’d have $107,000 more if your fund returned 5 percent annually over 30 years, according to the Securities and Exchange Commission’s Mutual Fund Cost Analyzer (here
). The SEC’s calculator shows money lost to expenses and forgone earnings — gains you would’ve made if expenses were lower.
If expense ratios were all you needed to scout when buying an ETF, I would suggest that you buy the cheapest index ETFs possible to cover stock, bond, real estate and commodities markets across the world. But here’s what else you need to consider:
1. Look at the bid/ask spread.
Since ETFs are traded on exchanges, the spread is the difference between the highest and lowest prices for buying and selling. Generally, the smaller, or “tighter,” the spread, the better for you, the investor. Higher bid/ask spreads mean you’re paying a premium for ETFs, which adds to your transaction costs. According to the website Indexuniverse.com, which tracks index funds, bid/ask spreads on the Schwab group, for example, are as high as 0.12 percent for the Schwab International Equity ETF. When you’re shopping for ETFs, look for the funds with the lowest bid/ask spreads, which can be as little as a penny for large ETFs such as the Vanguard S&P 500 ETF.
2. How large is the average capitalization of the securities within the ETF?
ETFs containing megacap blue-chip stocks generally have the tightest bid/ask spreads because the stocks within the fund are highly liquid. As you get lower down the food chain into thinly traded small-cap or international stocks and other vehicles such as real estate investment trusts, the bid/ask spreads widen.
3. How closely does the ETF track an underlying index?
Some track more closely than others. ETFs following large, widely followed indexes such as the S&P 500 should be really close to the underlying benchmark. If they don’t track an index closely — more than 0.10 percent variation is a warning sign — that means you’re veering further away from the total return on your chosen basket of securities.
4. What kind of trading commission are you paying?
Since ETFs are securities traded on an exchange, you have to go through a broker to buy and sell them. Deep-discount online brokers typically offer the lowest commissions, but many large mutual-fund managers offer commission-free ETFs on a select group of ETFs, which are typically their most popular funds.
As you become more discerning about the total cost of ETF ownership, consider replacing actively managed mutual funds in your retirement and other portfolios such as 529 college savings plans with ETFs.
A good place to start is your 401(k) portfolio. Under new Department of Labor disclosure rules, your employer is required to disclose the expense ratios and the actual dollar amounts you pay for each fund in your plan. How much are you paying and how much can you save?
If you’re paying more than 0.50 percent annually for any fund, it’s time to ask your employer to find lower-cost funds. Since it’s likely that you’re paying the expenses on the funds within your portfolio, any savings you can reap can help improve your total performance. As I’ve illustrated above, even seemingly small cuts in expenses can help you accumulate bigger returns over time.
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s) (Editing By Heather Struck, Beth Pinsker Gladstone and Douglas Royalty)
OCT 1, 2012 15:40 UTC
CHICAGO, Oct 1 (Reuters) – As global economies from Beijing
to Berlin struggle to keep their heads above water, a new wave
of stimulus spending is under way. Given that infrastructure
spending is almost always a function of population growth -
which does not seem to be slowing down in emerging markets -
this is a potent trend if you are a long-term investor.
While any nascent U.S. plan depends upon the outcome of the
November election, the agenda for other countries is full speed
ahead. The Chinese government recently announced new program of
$1 trillion yuan ($157 billion) in infrastructure spending – its
second major wave since 2008. And while most of Europe is still
in a swoon, alternative energy is a big part of the
infrastructure boom in Germany and Japan, where nuclear power is
being ratcheted down. That means more solar panels, wind farms,
biofuels and digital grid installations.
Developing countries also are surging ahead with
infrastructure spending. India, Brazil and other nations are
investing in electrical transmission systems, roads and
telecommunications. It is estimated that “investment
requirements in electricity transmission and distribution are
expected to double through to 2025-30, road construction to
almost double and to increase by almost 50 percent in the water
supply and treatment sector,” according to the Organization for
Economic Co-Operation and Development.
This long-term, global building boom translates into more
business for steelmakers, electrical equipment/telecom
manufacturers, road builders and public works systems and
In the United States, infrastructure spending has been going
on as part of President Barack Obama’s 2009 stimulus package -
although that money has been mostly spent – and more recently
included in a transportation bill. Although Congress has been
reluctant to green-light another major stimulus plan, if Obama
wins a second term, he is promising increased spending.
“I’ll use the money we’re no longer spending on war to pay
down our debt and put more people back to work – rebuilding
roads and bridges; schools and runways,” Obama said in his
nomination speech at the Democratic National Convention on Sept.
Unlike China, which is investing in new ports, high-speed
rail and entire cities, the American plan would focus on fixing
crumbling bridges, roads and public education facilities – and
it may go forward with bipartisan support.
WHERE TO PUT YOUR MONEY
The most specialized play in infrastructure is in
alternative energy, or so-called clean-tech stocks that focus on
renewable power production. Included in this group are giant
companies that make power transmission equipment for building or
updating electrical grids including Siemens AG and
ABB Ltd. The PowerShares Cleantech ETF holds
companies like these, which gives you a stake in the worldwide
shift to greener power sources.
If you are favoring specific countries, then a specialized
exchange-traded fund (ETF) like the EGShares China
Infrastructure fund is one consideration. The fund
holds major companies such as China Telecom Corp Ltd,
China Railway Group Ltd and China Oilfield Services
Ltd, which are part of an index of Chinese
infrastructure stocks. Like most emerging-market funds, this
ETF carries currency and political risk.
Another single-country play is the EGShares Brazil
Infrastructure ETF, which is most heavily weighted
toward utilities and industrial companies. Also consider the
India Infrastructure fund.
For more global coverage, consider the iShares S&P Emerging
Markets Infrastructure Index fund, in which electrical
utilities and industrials again dominate. But the managers give
you an index-based sampling of Chinese, Korean and Brazilian
An even broader selection of infrastructure companies is
found in the iShares S&P Global Infrastructure Index ETF
, which invests in the United States, Canada, Germany and
other countries. It is a much more diverse mix that includes
mainstream utilities like Pacific Gas & Electric Corp
and international shipping firms such as Cosco Pacific Ltd
Better yet, increase your exposure to a wide basket of
international stocks through an index fund that represents
global companies. That way, you will reap returns from every
industry in a variety of countries. For that purpose, you would
need a fund like the iShares MSCI ACWI Index fund,
which tracks an all-country world index of more than 9,000
Since all of these investments are long-term in nature -
hold them over years, not months – it will take some time before
you see significant returns. Many of the sector funds have had
disappointing results in the past year because big money
managers have shifted away from utilities, which have dominated
many of the portfolios I have mentioned.
SEP 28, 2012 12:35 UTC
CHICAGO (Reuters) – While there’s some comfort in a slowly improving U.S. economic climate, the majority of Americans are still trying to close a prosperity gap that has widened in the last ten years.
There is the painful realization that a combination of stagnating wages, job loss, recessions and depletion of wealth is morphing the middle class into a “muddled class” unable to keep up with the cost of living. This decline has been most pronounced over the past decade.
The most recent Census Bureau study showed that real median household income fell eight percent from 2007 through last year, and is almost nine percent lower than the 1999 level. Can families climb back? It’s possible, but not without some financial rigor.
As many analysts have noted, the early part of this century has been a lost decade for most of the middle class. Some income experts cite a “Gini Index,” which measures the disparity between higher and lower income groups. A zero means perfect equality between groups, and one is perfect inequality; meaning a huge gap between the lower and middle class and upper-tier earners.
Between 2010 and 2011, the Gini index increased 1.6 percent, to 0.477, the first time the measure showed an annual increase since 1993, the Census Bureau noted. Higher inequality translates into more losers than winners based on the sheer size of the middle class, echoing dozens of other reports showing that the top one percent of the population is reaping most of the benefits of economic growth and tax advantages.
The multiple roundhouse punches of the dot-com meltdown, two recessions and the 2008 housing meltdown wiped out much of the 43-percent gain in net worth that middle-income families experienced from 1992 to 2001. That’s when the bulk of white-collar wage earners were involuntarily moved into 401(k) plans and stock mutual funds as the housing market kept rising.
According to a recent study by the Pew Research Center, median net worth of middle-income families dropped 28 percent from 2001 to 2010, which “erased two decades of gains”. Net worth is basically what you own, minus liabilities such as debt. With paltry 401(k) savings and loss in home equity, many households now have a negative net worth.
The lost decade hurt unmarried, non-college educated Americans from ages 30 to 44 the hardest. Least impacted were those over 65, who were largely enjoying the protection of Medicare, Social Security and guaranteed defined-benefit pensions.
Given that the economy is not going to show a robust rebound soon, and some jobs may be lost for good due to automation, downsizing and off-shoring, is there any way to reclaim prosperity if you’re slipping into the muddled class? Here are some strategies to move forward:
* Cost out and compare your lifestyle – When Pew did its study, it asked middle-income Americans to estimate their lifestyle costs. The median amounts were $85,000 per year in the East, $60,000 in the Midwest and $70,000 in the South and West. Those living in rural areas said $55,000 was the right amount. If you’re living above your means in any area — and you can relocate or lower your cost of living — you could save money.
* Refinance – You can still take advantage of generational lows in mortgage rates as the housing market rebounds. Want to re-build your net worth? Take your mortgage payment savings and direct it into your retirement accounts. Buy funds that invest in high-quality, dividend-paying stocks such as the SPDR S&P International Dividend ETF (DWX), which gives you global diversification and decent dividend payments.
* Stay married – Those who stayed married from 2001 to 2011, according to Pew, saw their incomes rise almost 4 percent, compared to a more than 3 percent decline for those who separated or divorced. If your marital relationship is on an even keel, it tends to translate into more economic stability.
* Invest in your human capital – More education, especially courses that update your vocational skills, is always a good idea, particularly if a spouse can support you while you’re learning. Those who had more education, i.e. graduate degrees, fared much better in income growth than those without college degrees.
* Reduce your investment expenses – This is the low-hanging fruit of rebuilding your net worth. Are you paying more than one percent annually in expenses on your 401(k) or other mutual funds? That’s too much. You can easily pay half as much and invest the difference. Look to iShares, Vanguard, Fidelity, Schwab and SPDR groups for savings. (I invest in Vanguard, Fidelity and iShares funds because their costs are low and their fund offerings are numerous).
How do you reclaim a lost decade of economic destruction? You can’t make up the difference overnight. But if you can refocus on lifestyle, savings and investments that make sense for you, it will be easier to find a more prosperous path.
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s
(Editing by Heather Struck and Andrew Hay)
SEP 19, 2012 17:23 UTC
(Reuters) – To most Main Street investors, the post-2008 era has been something of an epic hangover. By and large, they have continued to eschew stocks for the palliative comfort of bonds.
Was it worth sitting out the last few years? What has actually been going on here since 2009, although it has been well-disguised at times, is a bull market. While the course of the bull has been highly uneven, it may continue if corporate earnings remain solid and there are no major calamities. And it may gain even more momentum if the new round of Fed easing boosts the U.S. economy in a significant way.
Of course, the euro zone muddle, lagging U.S. employment, meager consumer confidence and unseen other crises do not bode well for stocks. They never do. Yet there is the strong possibility that U.S. stocks will continue to head higher, defying the worst headlines.
First, some needed perspective. Stocks are still risky investments and always will be, although the best time to buy them is often when public perception is pessimistic. Share prices reflect real expectations of earnings, dividends and growth in what the underlying companies sell. The market is more volatile than in the past due to robotic, high-frequency trading and global news that travels at the speed of light. If you want something predictable to calm your nerves, buy a dog or cat.
Yet most large companies are profitable now and are sitting on a total combined estimate of $2 trillion in cash, which they are loath to spend on hiring and capital equipment. Consumer demand is not quite robust enough for their collective taste as most of the industrialized world deleverages.
Despite the anomaly between sour investor sentiment and generally strong corporate earnings, the bull market continued apace. As of September 6, the upsurge in the S&P 500 Index that commenced on March 9, 2009, had run 42 months for a 112 percent gain, the Leuthold Group reported in its latest “Perception” newsletter. That handily beat the average bull-market advance of 83 percent in rallies between 1929 and 2009.
The most recent advance comes close to the average bull-market run of 45 weeks for that period, Leuthold found. Overall, the recent ascent ranks as the sixth-largest since the beginning of Franklin Delano Roosevelt’s first term.
Even more surprising is that other huge rallies have occurred when the economic outlook was bleak. The biggest run-up was from June 1, 1932, to March 6, 1937 – 318 percent – during the early years of the Great Depression. Maybe that comeback was more psychological as FDR bucked up the country during the early New Deal years. After 1937, though, there was not another triple-digit bull run until 1942 when the country was headlong into war production.
WHAT COULD ROPE THE BULL
What will pull the legs out from under the bull’s charge? There has been all too much conventional wisdom that if the Democrats regain their hold on the White House and Senate, that will trigger a decline. Conversely, if tax-cutting Republicans capture the White House and Congress, that will trigger a stock rally.
If you are waiting for either party to win, you could be missing profitable opportunities. Leuthold finds no meaningful difference in the return of the S&P 500 Index under the stewardship of either party – going back to 1928. (Note: Prior to 1957, when S&P launched its index of 500 stocks, the company used other capitalization-weighted stock indexes with fewer stocks, dating back to 1923.)
The S&P Index shows a median return of 27.5 percent for Democrats and 27.3 percent under Republicans. The ten biggest rallies are evenly split between the GOP and Democrats, with the first term of FDR and Obama and both Clinton terms topping the list. The markets likely fully priced in the likelihood of a winner before each election, so when the ballots were counted, large investors had long since made their moves.
And contrary to public opinion, having some bumps in a bull market promotes buying opportunities. Since a pullback that lasted from April through June, investor sentiment has rebounded.
Notes Sam Stovall, chief equity strategist for S&P Capital IQ in its September 10 Outlook, “Since 1945, whenever the S&P 500 Index has recovered from a pullback (decline of 5 percent to 10 percent), it recorded an additional average price advance of 4.6 percent (median) and 7.8 percent (mean) in approximately six months. Therefore, if history repeats itself – and there’s no guarantee it will – the S&P 500 could advance to between 1,500 and 1,550 before year end.”
The S&P 500 Index was down 0.3 percent at 1,457 on Tuesday afternoon. The index is up about 15.6 percent so far this year.
Even if you cannot muster an ounce of passion for stocks right now, you should consider how they fit into your portfolio. If you still need growth and/or dividends, they should be a core holding to take advantage of market gains.
Are you focused on income and lower volatility? Consider the SPDR S&P Dividend ETF, which invests in the 60 highest-yielding stocks in the S&P 500 Index. A similar fund – the PowerShares International Dividend Achievers ETF – provides more global exposure.
Other than geopolitical gremlins in the euro zone and a major slowdown in China, the major roadblocks to a continuing rally are the health of the U.S. and European economies. Consumer demand and employment are the sputtering engines hobbling both regions at the moment. The “fiscal cliff” of the Bush-era tax cuts expiring at the end of the year is also a concern, although we may see some less-bovine movement on that after the election.
(The author is a Reuters columnist. The opinions expressed are his own.)
(Editing by Lauren Young and Matthew Lewis)
SEP 18, 2012 18:44 UTC
Sept 18 (Reuters) – To most Main Street investors, the
post-2008 era has been something of an epic hangover. By and
large, they have continued to eschew stocks for the palliative
comfort of bonds.
Was it worth sitting out the last few years? What has
actually been going on here since 2009, although it has been
well-disguised at times, is a bull market. While the course of
the bull has been highly uneven, it may continue if corporate
earnings remain solid and there are no major calamities. And it
may gain even more momentum if the new round of Fed easing
boosts the U.S. economy in a significant way.
Of course, the euro zone muddle, lagging U.S. employment,
meager consumer confidence and unseen other crises do not bode
well for stocks. They never do. Yet there is the strong
possibility that U.S. stocks will continue to head higher,
defying the worst headlines.
First, some needed perspective. Stocks are still risky
investments and always will be, although the best time to buy
them is often when public perception is pessimistic. Share
prices reflect real expectations of earnings, dividends and
growth in what the underlying companies sell. The market is more
volatile than in the past due to robotic, high-frequency trading
and global news that travels at the speed of light. If you want
something predictable to calm your nerves, buy a dog or cat.
Yet most large companies are profitable now and are sitting
on a total combined estimate of $2 trillion in cash, which they
are loath to spend on hiring and capital equipment. Consumer
demand is not quite robust enough for their collective taste as
most of the industrialized world deleverages.
Despite the anomaly between sour investor sentiment and
generally strong corporate earnings, the bull market continued
apace. As of Sept. 6, the upsurge in the S&P 500 Index
that commenced on March 9, 2009, had run 42 months for a 112
percent gain, the Leuthold Group reported in its latest
“Perception” newsletter. That handily beat the average
bull-market advance of 83 percent in rallies between 1929 and
The most recent advance comes close to the average
bull-market run of 45 weeks for that period, Leuthold found.
Overall, the recent ascent ranks as the sixth-largest since the
beginning of Franklin Delano Roosevelt’s first term.
Even more surprising is that other huge rallies have
occurred when the economic outlook was bleak. The biggest run-up
was from June 1, 1932, to March 6, 1937 – 318 percent – during
the early years of the Great Depression. Maybe that comeback was
more psychological as FDR bucked up the country during the early
New Deal years. After 1937, though, there was not another
triple-digit bull run until 1942 when the country was headlong
into war production.
WHAT COULD ROPE THE BULL
What will pull the legs out from under the bull’s charge?
There has been all too much conventional wisdom that if the
Democrats regain their hold on the White House and Senate, that
will trigger a decline. Conversely, if tax-cutting Republicans
capture the White House and Congress, that will trigger a stock
If you are waiting for either party to win, you could be
missing profitable opportunities. Leuthold finds no meaningful
difference in the return of the S&P 500 Index under the
stewardship of either party – going back to 1928. (Note: Prior
to 1957, when S&P launched its index of 500 stocks, the company
used other capitalization-weighted stock indexes with fewer
stocks, dating back to 1923.)
The S&P Index shows a median return of 27.5 percent for
Democrats and 27.3 percent under Republicans. The ten biggest
rallies are evenly split between the GOP and Democrats, with the
first term of FDR and Obama and both Clinton terms topping the
list. The markets likely fully priced in the likelihood of a
winner before each election, so when the ballots were counted,
large investors had long since made their moves.
And contrary to public opinion, having some bumps in a bull
market promotes buying opportunities. Since a pullback that
lasted from April through June, investor sentiment has
Notes Sam Stovall, chief equity strategist for S&P Capital
IQ in its Sept. 10 Outlook, “Since 1945, whenever the S&P 500
Index has recovered from a pullback (decline of 5 percent to 10
percent), it recorded an additional average price advance of 4.6
percent (median) and 7.8 percent (mean) in approximately six
months. Therefore, if history repeats itself – and there’s no
guarantee it will – the S&P 500 could advance to between 1,500
and 1,550 before year end.”
The S&P 500 Index was down 0.3 percent at 1,457 on Tuesday
afternoon. The index is up about 15.6 percent so far this year.
Even if you cannot muster an ounce of passion for stocks
right now, you should consider how they fit into your portfolio.
If you still need growth and/or dividends, they should be a core
holding to take advantage of market gains.
Are you focused on income and lower volatility? Consider the
SPDR S&P Dividend ETF, which invests in the 60
highest-yielding stocks in the S&P 500 Index. A similar fund -
the PowerShares International Dividend Achievers ETF -
provides more global exposure.
Other than geopolitical gremlins in the euro zone and a
major slowdown in China, the major roadblocks to a continuing
rally are the health of the U.S. and European economies.
Consumer demand and employment are the sputtering engines
hobbling both regions at the moment. The “fiscal cliff” of the
Bush-era tax cuts expiring at the end of the year is also a
concern, although we may see some less-bovine movement on that
after the election.
SEP 14, 2012 16:17 UTC
CHICAGO, Sept 14 (Reuters) – The Federal Reserve’s new round
of quantitative easing may have sparked as much early enthusiasm
as the opening of a new fall fashion show. Yet as with other
ballyhooed events, the initial warm reception may prove
The Fed’s latest buying spree of Treasury and
mortgage-backed securities will keep U.S. interest rates low and
drop them incrementally lower. And Wall Street
initially cheered the Fed by propelling both the Dow Jones
industrial average and the S&P 500 Index to their
highest levels since 2007 on Thursday. The once-battered Nasdaq
Composite Index even climbed to its highest level since
On the employment, manufacturing and housing fronts, though,
there is only so much the Fed can do to revive those markets -
and it will do nothing to fix the euro zone – so don’t take
Thursday’s rally too seriously. By adopting a tandem strategy of
targeted hedging and global investing, you can still ride out
continuing anxieties in Washington and Europe. And there are
side effects to this stimulus, too. So if you are looking for
investing strategies, you might want to employ some of these
1. Think inverse
Fed easing typically means the dollar’s value against other
currencies is likely to drop and commodities including precious
metals will gain. If you are concerned about further hits to the
buck, there is something you can do about it. There is an
“inverse” exchange-traded fund for the dollar, the PowerShares
DB US Dollar Index Bearish ETF, which uses futures
contracts to short the dollar. Gold also does well when the
greenback sinks. Consider the SPDR Gold Trust, which
holds gold bullion and tracks the price of the metal fairly
Note: these ETFs are complex and volatile vehicles that
should be used only if you need to protect your portfolio
against large currency swings. Currencies and metals are
notoriously difficult to predict; never think you have the
ability to successfully time this market.
2. Bet with your head, not over it
Since it is always difficult to bet against something – you
need a trader’s steely nerves to know when to get in and out -
it is a much better strategy to invest for long-term
appreciation. Financial service companies certainly will relish
and profit from the low Fed rates for a few more years, barring
another derivatives-fueled calamity. Consider the iShares Dow
Jones US Financial ETF, which holds financial giants
such as JP Morgan Chase & Co, Wells Fargo & Co
and American Express Co.
3. Think international
The Fed stimulus also bolsters the balance sheets of large
multinational companies. If you are a corporate treasurer, this
is a great time to keep borrowing at some of the lowest rates in
a generation, expand into more global markets and invest in
research and development.
The Vanguard Mega Cap 300 Index ETF provides a
sampling of the largest U.S.-based companies such as Apple Inc
, Exxon-Mobil Corp, General Electric Co
and Procter & Gamble Co. Most of these companies are
cash-rich and have a growing global presence.
4. Beware of politics
What could derail the first-blush QE3 euphoria is the
inability of Congress and the White House to come to terms on
the looming fiscal cliff, when U.S. taxpayers may get hit with
about one-half trillion dollars’ worth of tax increases
resetting from Clinton-era levels on Jan. 1. The Fed’s actions
will have no direct impact upon Congressional logjams.
Falling off the cliff will be perilous for the struggling
U.S. economy, possibly even triggering a recession if Congress
does not act. The situation is so threatening that the
Congressional Budget Office recently estimated that some 2
million jobs will be lost and U.S. economic growth will be
pinched by nearly 3 percent if all the tax increases on income,
dividends, capital gains, payroll and estates go into effect.
The ratings agency Moody’s also threatened to lower the top
credit rating for the United States if its even larger budget
issues are not resolved soon.
While the Fed’s program to buy Treasury and mortgage
securities may be bullish for big borrowers and lenders, it is
likely to have little impact on household wealth, especially if
there is no strong rebound in housing. The Obama administration
has yet to announce what it plans to do with Fannie Mae and
Freddie Mac, the two quasi-public mortgage companies that
account for the lion’s share of new mortgage volume. Freddie and
Fannie were seized by the U.S. Treasury in late 2008 during the
What you will need in great supply is patience, as it
appears that none of Washington’s fiscal perils will be resolved
soon. Congressional observers see little, if any, meaningful
action on budget or tax issues before the Nov. 6 election.
Europe is still a work in progress. In the interim, anxiety over
this widespread uncertainty will continue to roil the markets.
The ensuing uncertainty still works in your favor, though:
It is a good time to add to your portfolio durable stocks that
will do well no matter who is in power next year.
John F. Wasik is a columnist for Reuters and author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.
ANY OPINIONS EXPRESSED HERE ARE THE AUTHOR’S OWN.
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