Saving for Retirement

Q: I am trying to do some year-end tax planning. I own stock in a company that has lost a lot of share value this year. I still think it will turn around. Can I sell the stock, take a loss for tax purposes, and then buy it back?

Q: What is an ETF?

Q: What does it mean when a mutual fund "goes ex-dividend?"

Q: What investments will look good with rising interest rates on the horizon?

Q: What is a credit score?

Q: The stock market took off in 2003 and, as usual, I missed it. What is the best way to invest in stocks?

Q: I don't understand what is happening in the mutual fund industry. Should I sell all my funds?

Q: Is this a good time to get back in the stock market?

Q: What is default risk?

Q: Can I find good financial advice on the Internet?

Q: What do you think of this kind of investment: If I put my money in for five years and the market goes up, I will increase my principal; if the market goes down, I am guaranteed a return of principal?

Q: I have come into a lump sum of money (as a result of being a beneficiary on an account) and would like to know how to invest it in a way that would put me at moderate to low risk of losing principal. I have no immediate need for the money and am open to most investment options except for a tax-deferred account.

Personal Finance Article-September 2001. Financial experts are forever urging us to start saving while we are still young.. Read more...

Q: I am trying to do some year-end tax planning. I own stock in a company that has lost a lot of share value this year. I still think it will turn around. Can I sell the stock, take a loss for tax purposes, and then buy it back?

A: If you buy the same stock within 30 days before or after you sell your shares, you can't deduct the loss. If you wait for 30 days, you can take the loss this year and then buy it back.

Q: What is an ETF?

A: Exchange-traded funds are a hybrid between a mutual fund and a stock. Like a mutual fund, they are made up of various securities, often those in a particular index such as the Standard & Poor's 500 stock index. But the funds trade on the stock exchange rather than being purchased from a fund company.

There are pros and cons to the ETFs. For example, you must always pay a commission to buy them whereas some fund companies will offer their funds with no commission. Regular mutual funds are priced just once a day after the market close. The ETFs are priced and repriced constantly during the day, like a stock.

ETFs are an interesting option. I suggest you do some research. Here are some web sites to look at. Remember that the information provided might not always be completely objective. You must judge for yourself. www.ishares.com; www.morningstar.com; www.amex.com.

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Q: What does it mean when a mutual fund "goes ex-dividend?"

A: This is a timely question because many funds pay out their dividends toward the end of the year. Portfolio managers buy and sell securities throughout the year, generating capital gains and losses for the fund. The fund must pay out the capital gains at least once a year. They are part of the fund's total return.

When a fund pays out gains, the fund's share price drops to reflect it. If you look at your mutual fund statement, you will see that you received a capital gains distribution that resulted in a purchase of a certain number of new shares. So your investment will be worth the same amount, but you will have more shares valued at a slightly lower net asset value (NAV). This capital gain is taxable to fund shareholders.

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Q: What investments will look good with rising interest rates on the horizon?

A: When interest rates rise, it is a good time to lock in liabilities and a bad time to lock in assets. Here's what that means. When interest costs rise, borrowing costs us more. So if you take out an adjustable rate mortgage, the rate you pay is likely to go up, perhaps putting you in a squeeze. Ditto with credit cards. The rates on most cards are pegged to some federal funds' rate. When that goes up, so does your credit card rate.

Watch your credit card bills carefully. One of the cards that I hold was recently sold from one bank to another. My interest rate went from 13.99 percent to 27.99 percent. Worse yet, the bank added a late fee and charged me no matter how soon I paid the bill. One month, I sent in payment before I got the bill and they charged me a "minimum interest fee" even though I had no outstanding balance. Keep careful watch on all loans. The other side of the coin is that interest rates on bank accounts and money market funds should also rise. Don't buy long-term bonds because rising rates will make the rates on current bonds look unattractive.
Many financial advisors recommend TIPS or Treasury inflation-indexed securities. The U.S. Treasury began offering them in 1997. They offer a fixed interest rate, which has ranged from 1.5 to 2.5 percent. But if inflation picks up, the value of the bond also increases. TIPS can be purchased through mutual funds.

It's never wise to make major adjustments for changes in the economic environment. Just bear in mind that borrowing will cost more and income investing should pay more.

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Q: What is a credit score?

A: A credit score is a number, calculated by a computer, that is used to evaluate your creditworthiness. The computer compares certain things about you -- like how much money you earn, how long you've been using credit, whether you've made payments on time -- to other groups of people who have repaid their loans. In this way, the computer allows a lender to make a prediction of whether you will repay the loan.

Supporters of credit scoring argue that it allows certain people to get credit even though they have no credit history. For instance, a recent MBA graduate would be likely to get a car loan because the computer would kick out a score that indicates recent MBA grads repay their debt.

The downside is that you might be denied credit by a computer because it has your data scrambled up or because you hold too many credit cards or move around a lot.
No one knows exactly what data goes into a credit score. But we do know that holding fewer credit cards is better than holding more. Paying on time is a must. In "The Ultimate Credit Handbook," Gerri Detweiler says, "The more you look like other people who pay their bills on time, the more likely it is the computer will approve your application."

Stability at home and on the job and good payment history raise your score. The scoring system looks at how close you are to the limits on your cards, what you spend money on and how much you ask for in cash advances.

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Q: The stock market took off in 2003 and, as usual, I missed it. What is the best way to invest in stocks?

A: Consistency and commitment. I have talked with many small investors who began investing when they started working or when they got married and continued to invest small, regular amounts throughout their working years.

The investment they chose was less important than their commitment to invest through thick and thin.

Over the last decade, American investors have been ill served by the excessive media attention focused on investing, getting rich, retiring early and playing the market. I'll bet the average investor did better before they had so much news. A handful of investors enjoy spending a big chunk of their time following the market and the fortunes of various companies. But most of us would be better off simply tucking the money away each month in a solid, well-managed fund that does not charge too much in expenses. This is like the story of the tortoise: the hare is jumping in and out, in and out, of the stock market based on intuition or daily news or what the neighbor says. Once again the tortoise, which invests regularly through a 403 (b) or other retirement plan or even with a taxable account, wins the race.

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Q: I don't understand what is happening in the mutual fund industry. Should I sell all my funds?

A: No. The news from the fund industry is indeed disheartening. Most of it can be summed up by saying that some mutual fund managers have been trading for their own accounts or allowing large, institutional investors to trade after hours when they already know which way the fund will move, ensuring them a profit.

Funds that do this are clearly taking advantage of their shareholders. And who needs this kind of news about his mutual fund on top of the tales of corporate greed and fraud and the reality of a difficult economy?

But responding to a scandal by bailing out of the product is rarely the correct decision. We need to understand the issues so that we can make the right decisions. I am a shareholder of Enron Corp. I am also a shareholder in several mutual funds. The value of my investment in Enron is just pennies, thanks to that company's blowup. The illegal trading by some mutual fund managers, in contrast, means that I stand to lose just pennies.

I certainly don't want to defend fund managers who profited at the expense of their shareholders. Many executives have already been forced out of their jobs for doing exactly that.

On the other hand, mutual funds do offer safeguards that help protect shareholders. Your investment is diversified over many stocks and you are invested in a pool of assets with many other shareholders. This is not to excuse malfeasance. But it is to reassure investors that their investments will not be wiped out.

Employers have a fiduciary responsibility to protect employees and most employers have reacted quickly to move pension and defined contribution plans from mutual fund companies that have acted improperly. With the regulatory heat on from both the Securities and Exchange Commission and Elliot Spitzer, the New York Attorney General, we can feel some optimism that the fund industry will be cleaned up.

When the stock market tumbled in 2000 and then the bad news about companies like Enron and Tyco and Arthur Andersen became public, I revisited my own retirement portfolio. I saw that I wasn't as smart as I thought I was, certainly not smart enough to buy individual stocks. My mutual funds suffered much less than the technology stocks I purchased. More recently, with the daily news rolling out about fraud in the mutual fund business, I took another look at my portfolio. I have one fund at a company that has been cited for wrongdoing. I have decided to keep it for now.

The best advice I can offer on how to avoid fund companies that put the interest of their managers above that of their shareholders is to look at the fund's total expenses. Low expenses mean that more of your money is going to work for you.

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Q: Is this a good time to get back in the stock market?

A: This is one of the questions I receive most often. The answer is yes and no. Successful investors learn that they should always be in the stock market. It's impossible to predict when the market will take off and when it will sink.

Yet too many of us invest everything in the stock market when it is soaring, like it was in 1999 and then, after getting burned, we take everything out of the market.

The better course is to remain invested in a diversified portfolio with a good dose of stocks, some bonds and perhaps some real estate, which you can buy in a Real Estate Investment Trust (REIT.)

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Q: What is default risk?

A: Credit or default risk is the chance that a borrower won't repay. When you buy a bond, you are lending money to the issuer. The greater the credit risk, the greater the interest rate a borrower or issuer of securities must pay. That's why high-yield or "junk bonds" carry the highest interest rates.

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Q: Can I find good financial advice on the Internet?

A: This is a wonderful question. We often receive notes suggesting a particular web site for teachers. Surely, there are many good ones. But the concern about financial web sites is the fine line between objective, editorial advice and advice from the sponsors who pay for the sites. Not surprisingly, the sponsors usually give this advice: Buy our products. Many financial web sites have blended these two sources of information so than even a savvy investor could get confused. For instance, a story might provide advice on what insurance products you need and then offer a flashing "Click Here for an Instant Quote." A reader could be forgiven for thinking that the journalist who wrote the objective piece is now telling you where to buy the product. I don't think that's the case. The "instant quote" comes from a vendor who sells that product and has paid to advertise on that web site.

The web has made it more difficult for consumers to get good information because it's harder to discover who is providing the information. Perhaps you trust what you read in the Wall Street Journal or in NEA Today. When you go online, it's much harder to establish the credibility of the person providing the advice.

That's true across the board, of course. My daughter's history teacher told the class that not all banks guarantee depositor's accounts up to $100,000. I knew he was wrong and my daughter challenged him the next day. In response, he handed her something he printed out from an online site that said not all banks make this guarantee. But what it didn't say was that any bank that didn't make this guarantee was operating illegally. Although the Internet has changed our lives by providing instant information to help us make better decisions, we must be careful to see if the information provider stands to gain anything by our decision.

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Q: What do you think of this kind of investment: If I put my money in for five years and the market goes up, I will increase my principal; if the market goes down, I am guaranteed a return of principal?

A: This type of investment is very appealing to people who have been burned by the markets and the economy like most of us have over the past three years. Everyone wants a guarantee but with an upside. And why not?

Here's why: You can't get something for nothing. If the vendor of this product is promising to return your money if the market goes down, that means he can't be investing all your money in the market. Think about it. Suppose you invest $1,000 and the market goes down 25 percent in the next five years. The vendor must return $1,000 to you. If he had invested all of it in the stock market, he'd have to make up the difference out of his own pocket. So he has to hedge his bets, perhaps using bonds and other more sophisticated hedging techniques. That means that if the market goes up 25 percent, your $1,000 will grow less than that. To offer the guarantee, the vendor has to give up some of the upside potential.

This is not to denigrate the investment. But often investments like this are designed to appeal to the emotional part of us that says: I don't want to lose any money. Make sure you understand that if the market soars, you won't make as much as your friends who are fully invested.

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Q: I have come into a lump sum of money (as a result of being a beneficiary on an account) and would like to know how to invest it in a way that would put me at moderate to low risk of losing principal. I have no immediate need for the money and am open to most investment options except for a tax-deferred account.

A: A financial planner would say that you have not provided enough information about yourself. Although you say that you want moderate to low-risk investments, that you have no immediate need for the money and no need of tax deferral, the unanswered questions are your age, how long you can leave the money invested and what you will use it for.
Treasury bills, which can be purchased online at www.treasurydirect.gov would guarantee your principal. But the income would be quite small, probably too small to keep pace with inflation. So you probably want to go a step out from that and buy a conservative mutual fund, perhaps a balanced mutual fund made up of both stocks and bonds. Warning: These funds can lose principal in a down market so you need to be committed for the long haul if you choose one.

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Personal Finance Article-September 2001

Financial experts are forever urging us to start saving while we are still young. This is the message: Start when you're young and retirement will cost you just pennies a day in savings.
But here's the rub. Some of us haven't started and we are no longer young. I frequently get mail from people who feel frustrated on this score. They include single parents and others whose retirement savings plans have been derailed by major illness, college for the kids, aging parents. One single Mom who is approaching 50 wrote: "No matter how I slice it, it's not going to be enough."

I think this is a particularly frustrating scenario for baby boomers. It seems the Gen Xers have a leg up on us when it comes to saving. Sometimes I feel that they're ahead of me not just for their stage of life but even in real terms. Still, I refuse to believe it's hopeless. Here are some things aging boomers should think about:

1. It's never too late to start. One of my big gripes with personal finance advice is that it can make everything sound so hopeless. We read that we'll need several million dollars worth of life insurance, $50,000 a year to educate our kids, and several million more for retirement. Meantime, we're struggling to buy the groceries and pay the mortgage and take a trip home to visit a sick mom.

The truth is most people don't have all that money put away. I know because I interview people all the time. I interviewed a doctor who had four kids who would enter college in the next six years. He hadn't saved a penny. I interviewed a woman who took a job buyout at age 50 with $10,000 in the bank.

Talking about the ideal amount of savings causes people to throw in the towel. It's like saying you can't go out for dinner and the movies tonight unless you look like Gwyneth Paltrow. Let's not give up. Just start chipping away at it. If you have nothing, set up an automatic investment plan with a no-load mutual fund company and start with $50 a month. Make a game of it to see how much you can increase your monthly investment by the beginning of next year.

2. Avoid panic. One of the biggest dangers facing those who feel they've gotten a late start is that they will attempt to compensate by taking bigger risks. Don't do it. Pick a conservative fund. Go easy.

3. Look for creative solutions. One of the members of the online community I moderate told us that she was 51 with little savings but with $30,000 equity in her home when she got the retirement wake-up call. She used that equity as down payment on a beachside condo and then bought another rental, using some creative financing. So now she has two rentals plus her residence and she's also gotten started in a 401 (k) and an IRA. "I won't have a million dollars," she says. "But I feel like I'm getting somewhere."

4. Face up to the fact that you may be working longer. Don't dread it. Plan for it. I am so tired of seeing cover stories in the personal finance magazines showing suntanned couples in their 40s enjoying retirement on their yachts.

I've often wondered why these magazines sell. It must be because people are so unhappy with the life they have now that they want to get on the yacht. Thinking about early retirement helps them forget about looking for pleasure and satisfaction in their current life. They put their nose to the grindstone with the goal of earning leisure time later. It's always easier to say: I'll be happy when I look like Gwyneth Paltrow.

I think that's silly. It's giving up today for tomorrow. Each of us has a special skill or talent or passion, something that we are meant to do. It's your job to find it. When you find it, you can structure your life around it so that you enjoy yourself now - and later too.

The ideal way to age is to shift your focus a bit from your full-time occupation now to what you might enjoy doing part-time - or even full-time - once you retire. Every day we change in some interesting ways that open up new opportunities too. Keep an eye out for them.

Last winter the New York Times ran a front-page article about how Americans are retiring later, reversing a long-time trend toward earlier retirement. That trend will continue. I think we should plan for it to make the most of it, to do the jobs we love to do.

5. Get some additional training or education. It doesn't have to be computer programming, although that might be helpful. Maybe you want to study Italian or weaving or Zen Buddhism or carpentry. Perhaps you want to take a karate or yoga class. Life is meant to be lived, not endured waiting for a golden retirement. Look for doors you can open that will heighten your satisfaction in life as well as your earning power.

And remember, as one of the members of my online newsgroup say, we might not be young. But we have wisdom and experience.

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Mary Rowland is a nationally known business and finance writer. The former personal finance columnist for the New York Times and former co-host of a nationally syndicated radio show, Ms. Rowland is the author of several investment books and speaks regularly to consumers and financial planners about investing and personal finance.