A Question of Balance

We are all familiar with the most popular stories from “The Tales of a Thousand and One Nights”. But what you may not know is that this expansive collection of stories has no named author or authors, no dates or places of composition and no single national tradition. In Marina Warner’s new book “Stranger Magic” she offers this guideline to the stories: “I think,” she writes, “that the reader should enrich what he is reading. He should misunderstand the text; he should change it into something else.” She believes that the reality of magic resides at two poles: one the poetic truth and the other bound in inquiry and speculation.

We as investors are guilty of wishing for, even trying to conjure magic for our investments and the portfolios in which they are nested. We attempt to make the leap from the known to the unknown, to embrace the magical thinking of a thousand different storytellers. And like this tale, there is always another story left incomplete at dawn.

So I thought today on the Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Neil Plein we’d discuss the magical thinking around the portfolio rebalance. We have watched with great amazement, our investments rebound and take on new life in 2012. Markets are up and this is one of those rare feel-good moments. Unfortunately, feeling good isn’t something you relax with when it comes to how you are invested. In fact, the maintenance these portfolios require is often counterintuitive. If your car, for instance is running and performing as it should, we are not inclined to look under the hood for potential problems. Rebalancing a portfolio however requires you to do just that: look for a problem where you might not have thought one exists. As I mentioned earlier, there are a thousand and one ways to do this. So let’s start there.

A quick glance at your statement might reveal a strong move to the upside. Why should we do anything?

How do we know when to do this and I have asked numerous guests who come on the show how do we pick our risk level, which is essential in the rebalancing?

How do we get beyond the concept of funding our losing positions and selling off our winning ones in an effort to adjust our portfolios?

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com and BlueCollarDollar.com,
Dave Kittredge of FinancialFootprint.com and Neil Plein of InvestnRetire.com

Is Real Estate Part of Your Retirement Portfolio?

We have been told to diversify our portfolios. We have been told, and Boomers will know exactly what I am speaking of, to re-balance the risk in our portfolios as we age. We should go from a more risk prone investment to one that is more stable, even fixed as we head towards and eventually retire.

That's good advice and there are a number of ways to do exactly that. But one you may not have considered involves investing in real estate through the use of REIT or real estate investment trust.

As Will Rogers once said: "Don't wait to buy land, they aren't making any more of it.” But we have developed it making the ground far more valuable and those who own what’s on it, in some instances richer because of it. Over the last couple of days we have focused on your immediate real estate. While your home is not an investment per se, it is often considered one. Owning a hundred homes, or a shopping center or an office tower is an investment. The roof over your head, not so much an investment as a stewardship. You pay for it, you fix it up, you might even spend your entire life in it but at some point, you pass it on to the next owners. And you care for it in that manner, improving it so it is saleable to those next in line.

On this edition of the Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Dave Ng, we have someone who has focused his career on real estate as an investment: Brad Thomas. Mr. Thomas researches and writes on a variety of real estate based fixed- income alternatives including both publicly-traded and non-traded REITs or real estate investment trusts. He has a broad background in capitalization and sustainable net lease investing. Mr. Thomas currently writes weekly articles for Seeking Alpha and Forbes where he maintains “real time” research on many of the equity REITs and retailers.

Among the topics Brad explained included the risk of owning these investments, how they are structured and the dividends they offer, how to analyze their worth and most importantly, how these investments react to various economic forces. REITs have been around for over five decades and are a widely suggested part of a diversified portfolio.


This is a must listen show for not only the curious investor but those looking to better understand the subject of REIT investments.

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com/BlueCollarDollar.com and Dave Kittredge and Dave Ng of FinancialFootprint.com

The show is broadcast daily, online at 6amPST/9amEST.

The Five W's of Retirement Planning

Most of you recognize those five Ws from a class on journalistic writing. Or perhaps it is simply a process of decision making that you have developed on your own. Either way, retirement poses the same questions, queries that everyone needs to answer at some point.

Who - There is no pat answer to the question of who should or shouldn't retire. For some, a career choice made decades ago will simply not allow you to go beyond the traditional retirement age. Those folks have always known that they not only should retire, But that they have to. And even as debates seem to suggest that working longer is an option, I fear that these folks who simply can't seem to muster the physical willpower to go another day are being left out of the conversation.

It is more than a simple blue-collar equation, one where your physical work life has been such that your body will fight you each morning the alarm clock rings. For others, who consider themselves white-collared but doing the mundane tasks that are mentally draining, the same sense of not being able to go on another day, the answer to the question is now.

To answer the who might be easy. But to answer the other questions, not so much. If you are fortunate enough to have some kind of career that allows you a few extra years of income production, you will benefit mightily. For those who can't, a couple of expectation adjustments will be necessary.


What - Most folks don't project what retirement will look like until they are so close that the options have been culled to the point where only few choices remain. This question needs to be answered long before the "age" approaches. This might involve a cold, hard look at where you live and if staying where you are is do-able. While it seems as if we are getting ahead of our questions, what retirement will look like is unknown and only somewhat subject to plans. Yet, some conversation about what you expect is in order as you approach fifty. Once at that age and beyond, tailoring your "what" should be the focus of your equation.


When - If you have answered who and what you are, the when would seem to be easier to answer. But often it is a coordinated affair, aligning your retirement with your spouse or perhaps with a certain work goal. But retirement doesn't and shouldn't be a stop sign on a road well lived. It should be more of a yield, a merger into into another place in the journey. It might look like work to an outsider. But to you, when should mean the ability to segue nto something you have always wanted to do. If there is a paycheck involved - great. If not, just as wonderful.


Where - For some reason, this is a very stressful decision. If you live somewhere you really like for whatever reason, where is a moot point. You will be happier staying put and living your life surrounded by those people, places and things that your pre-retirement life found enriching. But if it is the other way around, spend some time, preferably before you work your last day, examining your options.

It would probably be wise to involve your family in your thought processes if only to give them time to prepare. Why? Life happens fast and sometimes things go wrong. It will be your family that will help you through this trying time and they should know as much in advance of your decision to prepare as well.


Why - This might simply be answered by a question: why not. No one can make this determination for you but you.

ETFs: Are These Investments Needed in Your Retirement Plan?

Boomers are often faced with a decision that will be framed in such a way as to make it seem the only logical choice. As the mutual fund verses ETF debate begins to gain steam, some truths need to be considered.

Mark Twain suggested: "The reason we hold truth in such respect is because we have so little opportunity to get familiar with it." This will be the selling point for exchange traded funds: you will hear that they are less expensive, that they are better than the mutual funds - many of them indexed, and that you should own them in your 401(k).

They will suggest you overlook the cost of trading them, the fact that they tempt you to trade them more frequently than ou would a mutual fund and in doing so, allow you to follow the herd on any given day, a behavioral no-no for every investor. So what exactly is the attraction that they want us to see? Are mutual funds better or worse than ETFs?

The answer depends on who you are. If the sort of investor who believes that they can make small moves to harness big gains, then you should probably avoid the lure of ETFs. Exchange traded funds are mutual funds that can be traded just like stocks. They tend to have lower fees than their comparable cohort the mutual fund but the commissions that brokers charge for these trades tend to erase the advertised returns you might get.

If you are the sort of investor who buys to hold, then the surprising choice would be ETFs. Yet you will need to harness the inner trader in you that wants to succumb to the temptation to trade. This sounds easy. But in truth, is no easy feat.

So let's run some numbers comparing a total stock market ETF sold by Vanguard and a total stock market index sold by the same company. The ETF (trade as VTI) carries and expense of 0.07%. The mutual fund version of the same thing (bought as VTSMX) levies a 0.18% fee on investors. The former has no minimum investment,; the later wants $3,000 to begin. So we'll start there and propose a hopeful return over 10 years of 4%.

In the first calculated example, the investor made no additional contributions to the investment. Vanguard does suggest that they charge no brokerage fees but they do charge a $20 annual fee for the account. This might be much higher when accessing these funds through your 401(k) and there may be additional brokerage fees. So we'll assume a $10.00 brokerage fee - as I said, yours might be lower and in most cases, the brokerage charge is on both ends of the transaction.

Based on the above numbers, the ETF, once purchased and held begins to creep past, in terms of raw returns by the third year. By the 10th year, you will have saved about $19.41 in fees giving you a net gain for your ETF of $32.82. 

But begin adding to the security on a regular basis (say $200 a month) and the differences are much more notable. To add to the ETF in equal proportions over the same 10 year period would cost you $1021 in commission costs and with this money not working for you, the sacrifice in what each would be worth at the end of the 10-year investment period used in our example in addition to the trading cost would leave you with over $1200 less in the ETF account.

Inside a 401(k), where regular contributions rule the way you invest, ETFs can give the average investor less of an opportunity than proponents suggest they will. In a taxable account, bought without commissions such as Vanguard offers and purchased in large lump sums, ETFs slightly trump their mutual fund siblings.

Will you take the time to learn the truth about yourself before making the decision on which investment is better? You are the debate. 

Paul Petillo is the managing editor and founder of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Your Home: Is it Part of the Plan?

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners. And there is no doubt that this a good thing, a lesson learned that was far too painful but often, those tales are. But there is another game afoot in the world of mortgages, even as the largest lenders pull the plug on the process: the reverse mortgage.

Most of us don't envy those who are toying with this option. We know two things about these folks: one they own quite a bit of their house, referred to as equity and two, these homes are owned by cash-strapped people older than 62.

The reverse mortgage is a rather simple product with relatively simple goals. Because those who are considering this option are often older and in possession of much of the house they live in. This pool of cash is a very tempting option to a fixed income or one where retirement savings no longer is able to keep up with the cost of living. There are a variety of reasons they may need to tap this cash in their homes from medical bills to simply poor money management.

So the concept of tapping some of that equity is quite appealing. A reverse mortgage essentially gives you the money that your house is worth. Ron Lieber recently visited this topic in the New York Times explaining "reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout may also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years."

The problem is getting a lender to do that. Many of the biggest banks have pulled away from offering the product, not because they don't think it is a good idea. But because those they lend the money to tend to fall behind on key elements of the loan agreement: paying taxes and keeping the house in sale-able condition. Aside from a check with the feds, there is no credit check on the applicants.

So banks, seeing the issue of foreclosing on granny because she opted for the lump sum payout and failed to keep current on those obligations have decided the bad PR will come with too steep a price. So enter the second and third tier lenders who will, without a doubt fill the void.

This could create several issues. The first would be fewer loans or on the flip side, loans that revert back to why this type of mortgage got its bad rep in the first place. Fees will be higher in a space with fewer competitors. Elderly will sign more complicated documents that will force them to maintain a fund for emergencies - which on the surface isn't a bad thing but could turn turn out to require higher funding balances than needed, leaving the reverse mortgager with less cash for the effort.

Another issue might be in how your heirs feel about the whole process. Often, parents,who may have mentored their children on the subject of money and financial prudence and who now find their finances in need of some review, may not be willing to or may be too embarrassed to ask for help. If there is no dialogue, the whole process might come as a surprise for kids who thought that house would eventually become part of the estate. And once these second and third tier lenders begin the process of foreclosing, it is often too late for the children to step in to help.

There are some key things to consider here. The first is what options do your parents have? Can they downsize? If not, can you talk to them about the options? Often this conversation needs to happen but it also needs to approached with great care and consideration. But once the barrier has been breached, you can move to include yourself in their financial affairs before it is too late.

This is also some tricky water to navigate. But the effort is worthwhile. If they need the money, and many older Americans will, attempt to get them to allow you to help budget the funds. In the future, HUD will probably set rules about creditworthiness and because many older Americans have little or no recent credit history, this might prove an obstacle at a time when they are already facing one too many. Helping them build some creditworthiness will enable them to be in a better position - with your help - to get the best deal possible.

Once you have gained their trust, you can include your input with their financial planners, with their attorneys and possibly with their medical doctors, all of whom may not be able to tell you what their clients or patients are deciding. You can take control of the vital payments that need to be made and keep things in good financial order.

So this summer, take a moment when visiting your parents or grandparents and have the discussion. And while you are at it, consider a plan to pay off your mortgage as well. (You can find recent articles about this topic here.)

Paul Petillo is the founder and managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.

Baseline Decisions about Retirement: Calling it Quits

There is no accurate predictive tool to tell you what the next year, five, or ten will be like. You can’t even make an educated guess. You can make a few assumptions. But the real truth is you will be making those based on biases, illusions, and dreams that may or may not come true. So who do you cross the threshold of retirement with any degree of confidence? Perhaps a little real time preparation would be nice.

Most of the people (Boomers) thinking about retirement know one or two things: first and not the least, they no longer want to work. This sort of commitment will come from a sector of the working population who has felt the largets physical toll on their bodies. That doesn’t mean that they have labored so hard – although many do – it suggests physical exhaustion with getting up, going to workplace that no longer holds any interest other than a paycheck, and may be causing you more mental grief, which often translates into physical problems, than would otherwise be worth it.

The second is that you think you can afford it. In either of these two instances, the desire may outweigh the resources. But you are willing to give it a try. Here are a couple of things you should consider before you make the leap.

Refinance. If you are still paying on your mortgage, while you are working is the best time to get a new deal. If the statistics hold true, you probably do not own your house. Unlike your parents, who entered retirement in full ownership of the home they lived in, you will be entering into this time-of-no-work with a mortgage hanging over your head. Get the lowest possible interest rate possible and if you can draw some of the equity, make some improvements that will make the home more liveable and in need of less maintenance.

Now you have a baseline for your shelter needs. Your car may or may not be something you will need but I’m willing to bet, you’ll want one. While the lure of a sports car or something similarly racy is appealing as you approach second youth, keep in mind that you will need to get in and out of it and so will your friends.

You still have to eat, do stuff and be entertained. If you haven’t begun tracking your budgetary needs by now, start. Now cut them by about a third. Even if you believe that you have saved enough and have enough to live on, you won’t spend as much in the fifth year of retirement as you will in the first. And ten years into it, the number will go down further. So calculating a third of what you use now will not only take into consideration your diminishing activities, but the cost of inflation, taxes and insurance (which includes health).

Understand this: You need a will to keep things out of probate. But you do not want to think of your assets as inheritable. What some planners call capital preservation is fine while you are closing in on retirement – in other words, while you are still working – but preserving capital once retired can be a foolish and costly mistake. Preserving capital for your heirs is not and should not be part of your plan. There a two things you should know. As you age, you will spend less money on leisure and more on your health. The second thing you should know: keep your risk low but if your income needs a boost, tap your capital in reserves. Each $50,000 saved will net about $500 a month (at a reasonable 5% return) for eight to nine years. That can be a real boost to your lifestyle and help with any health insurance gaps.

Understand this, part two: If you are married, one of you will die first, Regrettable but true, one spouse will survive the other and in many instances, it will be the woman. Good financial prudence and smart decisions at retirement will make this transition much easier. When calculating pension benefits or annuity decisions, do so based on the fact that your spouse will need money after you die. You may have to live on less. BUt the peace of mind will be the legacy you leave to your partner. Don’t worry about the kids. Just your spouse and his/her welfare after-the-fact.

So the bottom line is: get your home finances in order (refinance, repair, and re-evaluate), understand the constraints of fixed incomes (cars, entertainment, health concerns), be sure you have a will and make sure your kids know your finances, have met your lawyer or financial planner and are authorized to speak with them, and lastly, do what you can to stay healthy – both before you retire and after the fact. Nothing will get cheaper. But then, it never has in your lifetime. If you have to work longer, keep in mind that $50,000/5%/$500 rule, understanding that five years more work at $6,000 a year in contributions to an IRA (more to a 401(k)) will get you very close to having that amount eight years into your retirement.

All of this of course is based on the assumption that you have done your best, used your plans at work and have lived life smartly. If not, there is little time to waste.

Paul Petillo is the managing editor of Target2025.com and BlueCollarDollar.com and is a fellow Boomer

Your Retirement Investments Might Have Risk but are they a Risk?

Are mutual funds a systemically important financial risk? It seems that so far, the answer is no. To explain what this dreaded SIFI label actually means, the NYU Stern School of Business has developed a risk indicator and alist of the top banks and CEOs capable of bringing the whole system down should their activities run into problems.

Senator Chris Dodd and Rep. Barney Frank, authors of the Dodd-Frank comprehensive financial reform law began identifying which institutions could be the most troublesome for the economy as a whole should they fail. It was one thing suggesting that all banks with $50 billion plus in assets be labeled as SIFI. But other institutions could also create risk and in the time since the creation of the reform law, other large entities have scrambled to get out of the way. Ideally, the right balance, not too many and not too few, something the Brookings Institute suggests as a Goldilocks problem, is what the law is aiming to create.

At a recent conference held in February, Doug Elliot asked the question: "So, if you’re going to define systemically important financial institutions you have to have some concept of what systemic risk is.  And you have to have some way of measuring it, at least in some subjective manner.  And are then setting a threshold to say where does something go from having too little systemic risk to worry about to enough that it should be treated separately here?" Mr. Elliot is well known as a former investment banker, former head and founder of COFFI, his own think tank, and a very prolific and insightful writer on financial reform issues with a book soon to be published titled "Uncle Sam in Pinstripes".

The biggest fear is what is known as a domino effect. Essentially, if a number of SIFI act in unison or a number of institutions engage in the same financial activities with an SIFI labeled entity, failure would knock one, then the next over, creating a systematic breakdown. But identifying who is at the greatest risk is a lot tougher than it sounds. Mr. Elliot points out that both irrational panic, such as a run on a bank creates, and rational panic, such as identifying the problem but making a wrongheaded assumption that whatever the problem is, it isn't really that bad, can both add to the systematic tumbling of one institution, and then another.

The recent crisis had a component about it that it turns out isn't all that unusual. In fact, most of the problems in the recent history all possess the same problems: assets that were overvalued and folks knew it and leverage that was chasing it, even if it knew it was overvalued. This embracing of risk is what causes systems to break and in some cases, have the potential for bringing the whole of the economy down with it.

Given their size, mutual funds were considered as well in the discussion (which can be found here). They are not directly leveraged nor are they intermediaries (such as insurers and re-insurers) or affiliates of larger financial institutions. In fact, mutual funds are generally referred to as pass-through entities. But some funds have worried regulators based on their size. But that size is not threatening if it isn't used as leverage.

The one exception Mr. Elliot pointed out was the money market mutual fund, an entity that many believe is, or should I say, was, as a safe as a bank - at least in the mind of the average investor. A buck, they thought was always a buck, until one moment during the financial crisis, when a MMF declared ti wasn't. Investors were told that there was risk. But with this sort of situation having never occurred, the risk was set aside for most investors.

While mutual funds may have escaped the scrutiny of those studying these financial risks, hedge funds, institutional investors (pensions) and some investment firms have not. Just because some funds fit some of the criteria, of which six are listed, doesn't mean that the Frank-Dodd regulations would necessarily miss this group altogether. They do have size but because of the number of funds available, they provide numerous substitutes for the services and products they provide investors.

There is an adequate degree of separation from other financial firms, an borrowing that they may do (leverage) is clearly stated by most funds in their charter. While many of the largest funds do face some liquidity risk if investors lose faith in the ability of the fund to perform, it usually occurs as a dribble of discontent rather than a one day sell-off. Mutual funds tend to keep a limited amount of cash on hand so a sell-off would be something that whole of the marketplace would be experiencing rather than just a handful of large funds (which all tend to be indexed to the market and not actively managed entities. In truth, funds that become too large, tend to lumber when attempting to move in either direction.

Those large index funds are passive. But some large bond funds may not be but their size keeps any sort of maturity mismatch from occurring. And the existing level of regulatory oversight provided by the SEC is seen as adequate to protect the overall system from any imminent problems.

Although MMF aren't necessarily problematic, as the Investment Company Institute, the lobby arm of the industry points out: "a liquidity backstop could provide reassurance to investors and thereby limit the risk that liquidity concerns in a single fund might spur in-creased redemptions".  There is a possibility that hedge funds might see this as an opportunity to roll what they do into into mutual funds. But the regulations provided by the SEC make this not as attractive.

It may be too soon for the mutual fund industry to breath a sigh of relief. While one or more of the 243 rules and 59 studies commissioned by Dodd-Frank may still find mutual funds in the crosshairs of the reform law, the industry believes that this will not happen.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer

Is Investing a Journey?

J.K.Galbraith once said: "The world of finance hails the invention of the wheel over and over again, often in a slightly unstable version."  Why then do we continually fall prey to the lure of something new or even the advice of those who suggest that the future is easily told?

As investors, we look for patterns where there are none. We look to others who have been down one path, boast that their way is the right way, and no matter how crooked the journey, we follow nonetheless. It is difficult to be a contrarian, to fight off the preached legitimacy of what appears to be profound wisdom and to look beyond the fact that for every buyer, there is a seller who had a reason to unload their last be-all-to-end-all decision?

We are often beset by the desire to do something, a reflex called action bias. To not do anything if often seen as indecision. We have discussed risk often in these posts as something you should understand even if once you have that understanding, it is no longer something you can logically argue as worthwhile or even worth it. James Montier suggested that: "Risk clearly isn't a number. It is a multi-faceted concept, and it is foolhardy to reduce it to a single figure." Yet we try and use the search for this tolerance as something permanent, unwavering throughout the years of our investing lives.

"This time is different" is famously ignored quote by Sir John Templeton as the four most dangerous words in investing. I leave you with a poem today, something written decades ago about the path that men and women take based on the path that men and women have taken before.


"The Calf-Path"
by Sam Walter Foss. Public Domain
One day through the primeval wood
A calf walked home as good calves should;
But made a trail all bent askew,
A crooked trail as all calves do.
Since then three hundred years have fled,
And I infer the calf is dead.
But still he left behind his trail,
And thereby hangs my moral tale.
The trail was taken up next day
By a lone dog that passed that way;
And then a wise bell—wether sheep
Pursued the trail o'er vale and steep,
And drew the flock behind him, too,
As good bell—wethers always do.
And from that day, o'er hill and glade,
Through those old woods a path was made.
And many men wound in and out,
And dodged and turned and bent about,
And uttered words of righteous wrath
Because 'twas such a crooked path;
But still they followed — do not laugh -
The first migrations of that calf,
And through this winding wood-way stalked
Because he wobbled when he walked.
This forest path became a lane
That bent and turned and turned again;
This crooked lane became a road,
Where many a poor horse with his load
Toiled on beneath the burning sun,
And traveled some three miles in one.
And thus a century and a half
They trod the footsteps of that calf.
The years passed on in swiftness fleet,
The road became a village street;
And this, before men were aware,
A city's crowded thoroughfare.
And soon the central street was this
Of a renowned metropolis;
And men two centuries and a half
Trod in the footsteps of that calf.
Each day a hundred thousand rout
Followed this zigzag calf about
And o'er his crooked journey went
The traffic of a continent.
A hundred thousand men were led
By one calf near three centuries dead.
They followed still his crooked way.
And lost one hundred years a day,
For thus such reverence is lent
To well-established precedent.
A moral lesson this might teach
Were I ordained and called to preach;
For men are prone to go it blind
Along the calf-paths of the mind,
And work away from sun to sun
To do what other men have done.
They follow in the beaten track,
And out and in, and forth and back,
And still their devious course pursue,
To keep the path that others do.
They keep the path a sacred groove,
Along which all their lives they move;
But how the wise old wood-gods laugh,
Who saw the first primeval calf.
Ah, many things this tale might teach —
But I am not ordained to preach.


Do we need to follow the same path?


Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

Are Munis Next?

If you are a municipal bond investor, you have done either one of two things. Believed the recent rhetoric about the imminent bankruptcy of numerous large American cities and with thosebankruptcies, a default on the municipal bonds they have issued or do not believe that this can happen.

Those that believe have been reported as selling their investments, divesting almost a third of what was invested in these securities since November of last year. This makes less knowledgeable investors skittish to say the least and worried - as all bond investors tend to be - that you will ve left holding what are essentially worthless securities.

Volatility has been seen in this market and if Vanguard's recent withdrawal from the muni ETF market is any indication, you might be right. But some logical evidence points to other reasons why this is overblown.

Many 30-year AAA tax-free bonds now yield over 5%. )These ratings are key to the quality of these bonds. Lower ratings mean higher yield offerings and with it, an outward indication that risk exists. But if you are in the top federal tax bracket, you’d have to earn almost 8% in a taxable bond to get that kind of after-tax yield. In this interest rate environment, that’s nothing to sniff at.

Plus, municipal bond issuance will drop to $350 billion this year from $430 billion last year. If you took Economics 101, you know that decreasing supply generally firms prices up.

The extension of the Bush era tax cuts do play a role as do the slumping US Treasury rates. Some experts, Bill Gross, the man who manages Pimco investments recently declared, “I don’t subscribe to the theory that there will be lots of municipal bankruptcies.”

Panic creates the illusion that there are bubbles in certain markets, municipal bond markets not excluded. Ignoring risks make people worry more than they should. The bottom line: there is volatility in every investment and the chance you will lose money. But municipal bonds will not default  en masse anytime soon. Unless of course, the economy fails to recover.

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

The High Net Worth Boomer and the Lies They Tell

You would like to think that we are all truthful. But that may not be the case. Are Baby Boomers, more specifically those considered high net worth, telling a story about their retirement that isn't quite truthful?

Oscar Wilde probably said it best: "What we have to do, what at any rate it is our duty to do, is to revive the old art of Lying.” Nowhere is this resurgence in the falsehood more prevalent than when we tell a surveyor about our finances. When they look extremely bleak, we tell them they look even worse. When they look okay, we tell them they are really good. It is in our natures to tell lies considering we do it when we smile.

Evidently, a group of wealthy Baby Boomers told a survey group from Bank of America/Merrill Lynch that their retirement not only looked promising but was much better than their parent's retirement was. This is pretty lofty talk from a group that just a couple of years ago was not one bit happy with where their portfolios had gone in the wake of the financial meltdown. Now, $250,000 in investable asets is enough to warrant such retirement superlatives as "freedom" and "relaxation".

What changed? True the markets recovered over the ensuing couple of years. But I doubt that this had anything to do with it. many of these folks, like all age and wealth groups did, panicked at the sudden rebalancing of their portfolios by market forces. Unaccustomed to an all-inclusive debacle, many moved into much more conservative type investments and in the process, created their own mini-bubble in the bond market.

The rest of us moved into target date funds, a sketchy hybrid of funds designed to rebalance our aggressive natures for us. If you are older, the fund you plopped the remaining balance of your 401(k) is close to your age - so you too may have benefited from the updraft of conservatively invested enthusiasm. I wrote about this relationship with the bond market a couple of days ago suggesting that if their isn't a bubble in the bond market, it is because it won't pop when it reaches the end of its run; it'll hiss itself into normalcy.

It may be that this group has a better restructuring plan in place or they are simply lying to themselves - and the surveyors. Consider this: $250,000 in investable assets was consider the borderline between the rest of us schmucks and the high-net worth individual. I'm sure that this number is not even close to the actual investable assets these people had. It is our carrot.

One thing that stands out with the group surveyed is the change in attitude about what retirement is. They mostly believe working in retirement is a way to stay physically and mentally engaged. And for many, it is. For those with less than $250,000 in investable assets, it often isn't the case.

But these high-net worth folks worry about the same things you do: the cost of health care, the cost of children still living at home and that there portfolios, no matter how well managed, might not be enough. So they smile when they say they have it better than their parents and do so while lying about how much better.

And these high-net worth folks are not short on advice, even if they didn't take their own. Get a financial adviser as early as possible, they suggest and of course start early. Good pieces of hindsight advice that they were told as they began their working careers - and didn't follow.

About this advice to use financial advisers earlier. Then there was a survey conducted in 2006, when things were going great: housing values were appreciating, the markets were humming along, and early retirement was well within reach or it was assumed to be. And the results show a complete turnaround in thinking from then to now.

Back then - keep in mind these were the good times - another survey was published: In it, the following: "According to a new MyWay Investment Advisors (MWIA - an independent financial planning and investment advisory firm) survey, 98% of respondents would change the way they work with their advisor with 43% saying they wanted to change the amount they paid for the financial advice and services. This compares to only 13% of advisors who would look to improve how they currently operate, including pricing for clients.. The survey focused on how individuals would like to be treated by their financial advisor or investment professional and how they would like to pay for those services.

"The survey targeted the individuals with annual incomes greater than $75,000 and $150,000 to $600,000 in invested assets, including 401Ks. A duplicate survey was sent to financial planners, investment managers, insurance sales people and other financial industry professionals to compare responses." Why has this advice changed? Pricing and the way pricing is structured has evolved. Yet the higher the net worth, no matter what you pay, you pay more than you should.

So which is the truth? Are they happy now or were they happy then? The most telling piece of info coming from that survey: "When it comes to financial advice, however, financial advisors isn't where most of those surveyed go for information. Only 27% utilize financial advisors while over half (56%) get advice from a friend, publications or on their own.

"Of those that have a financial advisor, only 18% are happy with him or her. a whopping 56% say they are dissatisfied and 23% still have not made a decision."

This means one thing. We can no longer look to those we consider net-worth wealthy for guidance in how to become net-worth wealthy ourselves. Retirement has become a reality and an illusion. It is something we want and fear, something we strive for and are repelled by, something that is both possible and impossible. Yes it is a conundrum.

But it is your puzzle to figure out. And the simplest way to do that is figure out if you are willing to live on less than you have now. You don't need a financial adviser to tell you that you probably haven't invested enough. You know that you are probably wrangling more debt that you would like. You know that your contribution to your 401(k) is les than it should be. And you know that your goals concerning retirement are lofty than they are on paper.

Your balance sheet needs to be revisited and often. You need to double your 401(k) contribution now, no matter what age you are. There are numerous, almost painless ways of doing this including channeling the tax relief on your Social Security payroll tax (2% for the next two years) or simply increasing your contribution by 1% for every month of the upcoming year. You have the pieces to solve this puzzle. It all depends on how much you want to lie. The rich can. So can you.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Boomers Plan on Travel: So Perhaps Should Your Investments

Boomers plan on travelling in retirement, which is certainly a noble goal. But perhaps some of your investments should be gin the journey in advance.

First off, this is not the kind of thing you want to sink all of your investment dollars in. That might sound like a disclaimer, but the very idea that you could own a mutual fund that acted conversely to the way you want to react, a mutual fund that sold when markets were high and feasted when the markets were in trouble, and did so in many instances without so much as your normal hands-on knowledge, seems radical. You're an investor and you act like one.

Or you're an investor who knows that you aren't rational. And that is most of us. But a new study as uncovered that if you own a mutual fund far from where you live, you will allow it to do what it should do when the time is right. In other words, the farther away from your investment, as Miguel Ferreira of the Universidade Nova de Lisboa in Portugal, Massimo Massa of INSEAD in France and Pedro Matos of the University of Southern California found out, the more you agree with the hedge fund-like attitude the fund exhibits.

Hedge funds have long since known that you need a presence in the place you invest. It wasn't until a paper by Melvyn Teo of the Singapore Management University uncovered the fact that a geographic presence is key to investment success. This sort of "boots-on-the-ground" approach does make sense. If you know your marketplace, chances are you will know all of the nuances about that investment area. But this new study suggests that the farther you are away from that sort of investment, the better the investment does.

In a diversified portfolio, you probably own a few funds that you are taking a risk with - something in the emerging markets, an international fund or a hybrid of the two. Good advice has always suggested that some limited exposure to what occurs in far-away places adds some seasoning to an otherwise straightforward portfolio. Little did many of us know until recently was that this sort of investment will do better because it is so far out of our field of expertise.

Perhaps the worst thing that can happen to a mutual fund manager is the reaction of the herd or herd mentality. Once the herd begins to move in one direction or the other, hence the description, there is little anyone can do to stop the momentum from gaining speed. I don't need to tell you that the most recent example of just such a herd reaction was during the most recent downturn. Once the well-informed investors began to retreat, other investors, via the alerts from the media, began to follow.

For a mutual fund manager, this is the worst of all possible events. Keep in mind, most mutual funds don't keep a lot of cash laying around. When the occasional investor exists, they sell something and pay them off. But when an entire herd heads for the door, the selling simply opens the market wound wider and the bloodbath begins.

Hedge funds don't allow this to happen which allows them to take a position that might be contrary to what the markets are doing. In other words, they can buy what you don't want and sell what you think is hot and make money on either end of the investment equation. But the ability to do this is made possible by the knowledge that their underlying portfolio is not affected by the herd. That's not to say that their investors don't panic, but the lock-up keeps them from mucking up the plan - for the hedge fund manager and the other investors - by trying to head for the door when they probably should be buying more.

Now what Ferreira, Massa and Matos discovered was a sort of geographic lock-up. The farther away from the fund the actual investor was, the higher the likelihood that they would allow the fund, with the local address to do what it needed to do without interference. In other words, the less you knew about what was happening, the better the fund was likely to do. Distance turned these far-away funds into de facto hedge-funds.

In a nod to the hedge fund industry, they wrote: “This intuition is similar to the one proposed for hedge funds: Hedge funds take advantage of mutual fund investors’ fire sales. When mutual funds are forced to sell to meet redemption calls, hedge funds buy the assets liquidated at fire sale prices (Chen, Hanson, Hong, and Stein, 2008). The fact that mutual funds intermediate a way higher fraction of asset under management than hedge funds suggests that this effect represents a large-scale “limits of arbitrage” phenomenon, way more important for the economy.”

In other words, mutual fund managers who essentially swoop into a location, buy what they think is a good buy (not saying that their research is faulty) and fly back to the home office, lack the physical understanding that a geographic embeddedness offers. In other words, if you live there, you know better what is going on. Even in a global economy with the world seemingly wired to give you information in a split second, being somewhere is still better in terms of investments.

As I said when I began, this is not a recommendation to put whatever you have in places far away from where you live. But rather a shortfall of what we understand about where we invest. If there had been lock-ups in place for mutual funds, there is a distinct possibility that the downturn would not have been as severe. While hedge funds use lock-ups to prevent investors from forcing redemptions of what would be illiquid investments, mutual funds could use the same rule to control herd mentality and protect the patient, long-term investor in the process.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com, radio show host of Financial Impact Factor and a fellow Boomer

Is your retirement account suffering from Investment Paralysis

Boomers should take note of the seemingly robust economy around us as we head into the holiday season. The stock markets seem to be poised for what has been termed often as the "Santa Claus rally". Consumers, at least according to business surveys, are beginning to spend. And this is all occurring, while in the shadows, the economy or its numbers remain little changed. That and most of us are still suffering from investment paralysis.

Here we are, years after the fall of 2008, and the average middle class worker still has an account balance that is far from where it should be - if they plan on retiring. When most of us think is retirement age, we think in terms of what has been the generally accepted retirement age. This unfortunately is a failure on two fronts: yours and the plan sponsor.


Your responsibility is in the contribution.According to a Wells Fargo survey (pdf) conducted among 357 plans, middle class is defined as: "those aged 30 to 69 with $40,000 to $100,000 in household income or $25,000 to $100,000 in investable assets and those aged 25 to 29 with income or investable assets of $25,000 to $100,000." This group knows that they will need more than $300,000 to fund a basic retirement yet, on average those balances fall far short of that goal with $20,000. Is it any wonder that this group is increasingly buying into the notion that working longer is a fact of life in the post-downturn world?

Most of the middle class group contributes only about 7% of their pre-tax income to these plans. And if the survey is any indication, much of the fault lies in the employer's approach to these plans. The study suggests that employers are concerned about their legal liabilities in helping their employees even as they acknowledge the shared role in helping those workers.

These fiduciary concerns are widespread among plan sponsors who worry that should they provide advice, and that advice doesn't meet employee expectations, they will see the plan sued.

This has led these employers to look for plans that offer third party advice, shifting the liability to another player. What they fail to embrace is that using a TPA (third party administrator) doesn't lessen the liability. While 89% of the plan sponsors understand that there is a need for retirement help, only 71% (as of 2009) think that they should help those employees understand what the plan can do for them.

In order of importance, and in reality, employers do something else entirely and your defined contribution plan's ability to get you there is reflective of this lackluster effort. Only 35% of the DC sponsors surveyed think that education is important, 22% encourage greater participation and increased contributions, 9% think investment diversification is important while only 2% facilitate the planning process by pointing out what is need in retirement and helping their employees use the plan to achieve this.


Are more funds in the plan the answer? Some DC sponsors believe they are and are looking to increase their offerings. But often, plans with more than fifteen funds aren't necessarily giving the employee more choices that suit their needs. The new choices are often in the form of target date funds and other more conservative investment offerings. This is often done at the exclusion of more suitable offerings (such as aggressive mutual funds for younger workers). Once again, they fear retribution for suggesting anything akin to risk.

DC sponsors are worried about what the industry calls investment paralysis. Too many funds, studies have suggested, often have lower overall participation rates that those with 15 fund or fewer in their plans. Because there is a growing movement to offer auto-enrollment, choosing a fund for that new employee often requires the plan to carry a wide variety of target date funds to pinpoint a "potential" retirement year.


But understanding the need and acting on it, from both a participants point-of-view and that of the DC sponsor are often far from what they are actually doing. Plan sponsors need to understand more than just the investment array, plan design, distribution options, education and communication, and fees charged by the plan. It is their fiduciary responsibility, one that carries legal risks if mishandled, to measure their plan's impact. Only 15%, according to the survey do so.

The employer still offers matching contributions in many defined contribution plans. But how and what are a matter of debate. Many still offer matches that are tied to company stock, put restrictions on access to those matching funds, and use the auto-increase contribution system as a way to offset raises. Often, maintaining the 401(k) plans they might have, as many of the companies surveyed suggested, is done for the sole purpose of getting and retaining new employees. This, in light of less-than-robust private hiring, might come at a reduction of other benefit programs.


If you are still in a DC plan and your employer's match is not as adequate as it should be, this doesn't let you off the hook. You still need to save more, much more than you are presently doing. While it is true that 5% is the cut-off point where pre-tax contribution investments don't impact take-home pay, some sacrifice on the employee's end is needed. And this should be done,match or no match.

If your employer's 401(k) plan is not as robust as it should be or doesn't fit your age needs, open an IRA or Roth IRA on your own. Contributing to both plans (10% to your 401(k) and the maximum allowed to an IRA or Roth IRA) is your responsibility. While we still look to the company we work for for guidance, and even to the point where we believe they care about us and our retirement future, the facts are not bearing this fuzzy feeling out in the surveys I have read.

As Laurie Nordquist, director of Wells Fargo Institutional Retirement Trust said: "If people aren't willing to pay for advice they are going to get a more vanilla approach to planning," adding, "But a simple plan is better than no plan."

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

Retirement Doubts

There is absolutely no doubt that the retirement planning horizon is as diverse as those who are attempting to navigate it. In other words, there is no set formula for one group that can be used for another. On one side of the equation, we have those who can see the chance that they might retire and on the other, are those with doubts.

Those doubts exist in both groups. Older workers have seen the deterioration in their defined contribution account balances, the gradual and systematic elimination of pensions and the growing pressures that being sandwiched between both children and parents who are beginning to accept what they see as inevitable. That inevitability has been translated into simply working longer than they had previously anticipated to get the retirement that resembles that of a generation prior.

This group knows that they will need to invest more for their future at a time when they can't seem to free up any extra income to do so. They run calculations. They do math. And then, with all of this somewhat depressing information in front of them, they seem to be doing what would be counterintuitive: they become conservative in those investments.

The younger group, the college graduate, the young workers just entering the workplace and those who have been struggling with new families have a unique opportunity that has long since past the other group. They have time.

Many of these workers will enter the workforce where there is no pension, where they anticipate the benefits of Social Security will be limited and attainable farther away than that of their older cohorts and a marketplace that served the older workers with longer bull markets that are not likely to exist in the future. That bull market, a term defined as positive movement in the stock market, helped their parents in ways that will not be there for them.

From 1982 to 2000, most of those in 401(k) plans saw balances rise without limit - or so it seemed. Since that point, we have seen two bubbles burst, stock market returns become more volatile and faith that this investment vehicle has stalled.

Yet those 401(k) plans still offer the best opportunity to do better than their parents at battling the potential of increased taxes, rampant inflation and that volatility. these 401(k) plans are shifting, often in dramatic fashion. Matching contribution are less than in those bull market years and for this group, they can expect that they will stay that way. But there are some changes taking place that could help this group more so than their older counterparts.

These changes include the increased presence of Roth 401(k)s in those defined contribution plans. Whereas older workers would need to calculate their taxes when making a change into these sorts of plans from a traditional 401(k), younger workers can begin at this point. The Roth 401(k) allows for after-tax contributions, which for most younger workers means that earning less (being taxed less) is a hidden benefit. Rollovers from a traditional plan comes with a tax bill. Beginning at this point, as younger workers can do, will not have any taxable impact.

But the best way for younger workers to avail themselves of this opportunity should be done in a tandem approach to the plan. If you contribute 5% of you pre-tax income, you will not in most instances, impact a dime of your take-home pay. At this point, finding an additional 5% to put in the Roth 401(k) side of the plan not only hedges against taxes in the future but gives you the ability to know this money is yours, the taxes you paid at a younger age will be less than at rate you might receive as you age, get pay increases and promotions.

This group should also know that this should be the time of your most aggressive investment strategy. Yes it will be a rough ride. But having time to recover is worth the risk. You have to contribute and stay in it through thick and thin to benefit. You can retire doing this even if you have no idea what your retirement will look like.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

Boomer Investors Know: Mutual Fund Fees are Important

Boomer investors know better than most. They understand that no one ever said it was going to be easy being an investor. Mutual Funds, the mainstay of our 401(k) retirement plans and IRAs are no different than any other investment. They offer numerous layers, a multitude of nuances and of course, risk. And despite all of the information floating out in the public domain, the ability to tell one fund from the other is still difficult.

So the question is: Can you do the mathematical calculations required to find out how much your mutual fund is going to cost you? Chances are you might say yes, if you consider yourself a very savvy investor, able to filter all of the costs in the prospectus into a final number, understand the tax implications known and as yet unknown, and then be certain that you are right – or as close to right as humanly possible.

But chances are you can’t. Instead you fall squarely into the camp of investors who either have no clue or look at one guiding number and the vast majority of you are 401(k) or IRA investors as well. That number, widely advertised by the one group that lobbies in favor of mutual funds, Investment Company Institute or ICI comes in at an average of about 1.17% for all actively managed funds.

Most financial professionals, understanding that this is the average, suggest it as the top any client or interested investor should pay for the privilege of a little more risk than a simple index provides. Some also understand that this is more a moving target and unless they raise the cap to 1.5% as the max, they may exclude some of the better performing funds in the investment world, even at a slightly higher price.

Read the full article from Target2025.com on mutual fund math.

Is Your Retirement in Your Client's Hands?

Your retirement horizon is within ten-years.  You don't know whether the investments you have made will provide enough of a post-work income.  What if your company offered you an investment option you couldn't refuse?  Not simply an investment that would do better for you but also for the very businesses your company works with?  Would this be a smart move?  Would you cave to peer pressure and perhaps company pressure as well?

A recent article in the New York Times focused on a start up mutual fund crossed my desk recently. The article, written by Stuart Elliott, dealt with the advertising agency Kirshenbaum Bond Senecal & Partners in New York, part of MDC Partners.

While Mr. Elliott normally deals with the advertising industry, this particular article offered something different. Two employees of the firm believed that if the company had an investment stake in the clients they represent (eighteen of the thirty clients they work with are traded on major exchanges), the focus on their client’s success would improve – with any luck, as their employee’s interest in those businesses via investment would as well.

To that end, MDC launched a new index with those companies as the template for the fund. “The index,: Mr. Elliott writes, “was the brainchild of two Kirshenbaum Bond employees: Aric Cheston, partner and creative director, and Matt Powell, chief technologist. They will each receive a cash bonus of $10,000 from MDC.” The fund, with the ticker symbol KBSPX has yet to show up on any searches as yet.

“Agency executives are opening a brokerage account with another client, the Vanguard Group, into which will be deposited 300 shares of each of the 18 companies."

Mr. Elliott explains further that “The 300 employees of Kirshenbaum Bond will be offered long-term cash and compensation incentives to mirror the performance of the stocks in the index, which they will be able to track each trading day on an intranet on the agency’s Web site.

“MDC is spending an estimated $500,000 to start the index, which includes contributing four restricted shares of MDC stock to the fund for each Kirshenbaum Bond employee, for a total of 1,200 shares.”

Why is this important? Read more about "Skin in the Game: Is investing in your clients worth the Risk?"


Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer.

Breaking Bad Investment Habits in the New Year

We all have them, some worse than others. The older we get the more dangerous these habits become. Boomers need to be extremely cautious with every investment decision.

Most of us look at the turn of a calendar year with the hope that the investment mistakes we made in the previous year will not be made in the new one. This is noble and in many cases futile. These attempts are usually too difficult to handle, which is why, in many cases you haven't done anything before this point.

But with little effort, you can change how you invest. For the vast majority of us, investing requires far too much time. It requires continued education (which I fully recommend), frequent monitoring (which can involve little more than opening your statement just to make sure your investments are going where you intended) and a clear-cut understanding of where you are on the timeline (beginning to invest or at it for awhile).

Altering bad investment habits is not that difficult. Five Tips for 2010...

Paul Petillo is the Managing Editor of Target2025.com is also a fellow Boomer.

What will 2010 Bring?

2010 will be the year of stabilization. A year where, if you have a job, you will probably still be working at the beginning of 2011 and if you are not, you may find employment; one where if you are prudent (and by that I mean not-so-conservative but cautious), you will find the equity markets still performing better (but not better than expected); one where we have learned lessons that should not be soon forgotten.

Read the full article from Paul Petillo, Managing Editor of Target 2025.com and a fellow Boomerhere.

The IRA Option

Some of us may be entering a new job that does not have a 401k or has one that you do not feel is as good as the one you just left. And your employer won't let you keep your money where it was. What to do?

Rolling your 401k into an IRA is another matter. This is for the investor who has some concept of what lies before them. If I were to guess, this type of investor has had an active roll in how their former employer's 401k was allocated. They paid close attention to diversity, perhaps even following conventional wisdom of limiting risk as they aged.

For this retirement investor, the IRA rollover is viable option. It allows closer control of how this money is invested with a variety of considerations weighed with each decision. Not only will this investor spread their allocation over a number of funds, they will do so with an eye on fees and expenses, a consideration of performance of the fund under both good and adverse conditions, and clearheaded understanding of the risks involved.

IRAs cannot be borrowed against and restrict a penalty-free withdrawal of money before 59 1/2 years old. But the choices are the primary attraction. This investor knows, and you should as well, the risks of building a successful IRA portfolio also increase. The biggest concern is investments that crossover.

What 401k plans are supposed to do is provide the investor with a fiduciary responsibility to provide the right tools for their employees. You, as an IRA investor are on your own.

You must monitor the funds you invested in for a change in investment strategy, style drift (when a fund manager invests on the edges of what s/he was hired to do; such as when they invest in large-caps when mid-caps are the focus), and an increase in turnover (a cost for trading repeatedly that the shareholder pays for directly, often done in an attempt to boost returns in the short-term, like at the quarter's end). You bear the burden of this responsibility to your future.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer.