Wednesday, January 27, 2010

Don't Forget Your Retirement Plan when Starting a Business

Many of us have the urge to take our futures into our own hands.  Rather than look for a conventional job, we strike out on our own and start a business.  While this is an exciting and sometimes frightening idea, we need to keep our retirement plans in focus.

To do this, you will need to consider a great number of options.  The sole proprietorship, the small business of choice for the vast majority of us offers the retirement planner a great deal of latitude.

To find out just what options this sort of plan offers, visit our sister site for the answers.

Monday, January 25, 2010

Surprise! Green Goes Black: SRI funds beat the S&P 500

They have long been derided by mainstream investors.  And in many cases, with good reason.  Socially Responsible mutual funds were small (higher risk), cost more (generally at the top of the list for fees-charged) and unable to beat the usual benchmarks most funds are held against.  That is until this year.

As it turns out, investing in socially responsible funds would have done the investor a world of good while doing the world some good.  We all know now that actively managed mutual funds outperformed the S&P 500 index in 2009.  While critics suggest that this is cyclical - and they may be right on some counts - the fact that 65% of these SRI funds who focus on businesses doing the "right thing" not only for their shareholders but the world in which these shareholders live, took much of the investment world by surprise.  Read more to find out whether it is socially responsible to outperform.

Paul Petillo is the Managing Editor of

Friday, January 22, 2010

The Pressure to Invest: Incentives to Buy Your Clients

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

Monday, January 18, 2010

The Roth Debate

You don't know what your taxes will be when your retire.  You don't really know whether your retirement expenses will exceed your projections or not.  In fact, your retirement picture might just be a little on the hazy side of things.  So how do you make the decision of whether to use a Roth 401(k) or the traditional 401(k)?

This can be easier than you think.  More...

Thursday, January 14, 2010

The Walk-Away Investment

Seems that there isn't a day goes past that I am not asked about the concept of buying a house.  These questions usually come from younger workers who may be barely into their thirties.  And the answer I offer them is not what they want to hear.  In fact, it flies in the face of everything they have ever heard about home buying, much of it now like the retirements of our parents: not something we can count on for us.

But what about you or someone you know who might find themselves underwater in their homes? Can you walk away?  Will you know why?

For more on this topic, visit Is Owning a Home No Longer Smart Money Management?

Paul Petillo is the Managing Editor of

Wednesday, January 13, 2010

Why Some Company Matches Fail to Match Your Objectives

Just because there is a company match doesn't make it the match you should take.

We know about diversity.  We know about spreading the risk.  We know that we are supposed to be investors, eyeballing retirement. We should know better. Why then, do we continue to take the offering of the company's stock in our 401(k)?

There are several reasons.  First of which is how your company’s 401(k) plan in structured. When an employee becomes eligible to begin investing in the plan, they often find that the company match, the funds the company invests with you, up to a certain percentage, is often only offered in the company’s stock.  And because we are always suggesting that the employee take the company match, at the very least, they take our advice and begin to load up their portfolio with shares of their employer.

Often, when this sort of offering is available, it is one of the few buy-and-hold restrictions in the plan.  That means that if the fortunes of your company drop, for whatever reason – poor quarterly earnings, lackluster forecasts or simply a cyclical turn of events, the employee must ride out the downturn. This can be a big deal if the employee is long-term and because of that, has a huge chunk of their retirement tied up in that stock.

More on owning stock in your company.

Paul Petillo is the Managing Editor of

Monday, January 11, 2010

Retirement Planning: Fixed Income is Worrisome

If retirement is the goal, why would you handicap your chances of arriving when you imagined? Evidence of this shift has challenged those imaginations: Year-to-date  (third quarter 2009), the US household sector is shown to have purchased $529 billion of US treasuries. Granted, a great deal of this was due to money flowing into more conservative 401(k) investments via mutual funds. This pace, the purchase of approximately 45% of what the Treasury was selling, is four times that of the previous year.

This sort of immunization has not gone unnoticed. The problem with many of these commitments to a more conservative approach may be creating a bubble of their own.  These types of debt instruments are based on price and yield.  As one goes up, the other goes down.  The more someone is likely to pay for a bond, the lower the yield that is offered. 

If this sort of pace continues, and it looks as if it may as the temptation to be able to even consider retirement strengthens as the economy gradually improves.

But with more people flocking towards these fixed income investments, the price paid will begin to become unattractive, in large part because inflation remains benign.  That won’t last forever.  And when those conservative investors begin to realize that the yield is now negative to inflation, the selling will begin.

The real paradox will then kick in.  Now what? More

Friday, January 8, 2010

Should You Shift Your Investment Style Now?

If a picture or in this instance, a graph could speak volumes, this one would. In 2009, actively managed funds, despite lower inflows, outperformed their respective benchmarks handily.

In any given year, a handful of active mutual funds will do better than the benchmark index fund. And investors are usually warned, and I obligated to as well, that what is hot today or last quarter, even over the past year in all likelihood will not be so after you invest. This is why it is always recommended to look much further afield, at least five years, ten is even better see how well a fund has performed.

Should you switch your investment style in your retirement portfolio as a result? Read more here.

Paul Petillo is the managing editor of

Thursday, January 7, 2010

Your 401K Retirement Plan: Is it What You Know?

Can too much information be a bad thing? As we enter in the next decade, already eight days old, most of us have broken, or fudged just a little, on the New Year's resolutions we promised ourselves. In many cases, these commitments to change your lifestyle, reverse the bad habits, or embrace some new ones are often loftier than life allows. While change is good and change is constant, it is also incredibly difficult.

Now we have two senators attempting to give 401(k) investors a glimpse of their futures. Currently, the Social Security Administration does this in the form of a projection delivered to you just before your birthday. This statement is designed to help you track your employer contributions. But it also gives you some idea how much monthly income you can expect. For numerous people eyeballing retirement, this is the jumping off point. From here, they make calculations on how much they will need to save on their own to make up the difference in what they perceive as a livable, post-work income. The question is: would this be helpful with your 401(k) balance?

In many cases it would. But in an equal number of instances, it could be more trouble than it is worth. The bill introduced to the Senate by Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis. would require plan sponsors to give a snapshot of the future, a look at how much your 401(k) is worth in real dollars, calculated with inflation in mind. (Even Social Security doesn't take their projections that far.)

AARP, the Women's Institute for a Secure Retirement and the Retirement Security Project all support the idea of giving current workers a glimpse of where they stand in the future based on what they are doing today. Those blessing offer a counterpoint to the criticisms that have arisen to the proposed bill.

Consider where the vast majority of us are. After things went south in 2008 and early 2009, three things happened to the 401(k). One, many of us stopped contributing in part because our employers stopped matching those contributions. Two, we moved to the sidelines taking our losses into cash or other types of conservative investments. Or three, we moved what was left in a target date fund.

This investment interruption will come back to haunt us. But it is an indication that we have not come far enough along in this journey to call ourselves smart investors. Had we done nothing: kept our portfolios where they were, kept investing even if the match disappeared, and even increased that contribution if the match went away, we would be back to even if not further along. But we didn't.

And now, the good senators what to tell you how bad things really are. If you look at the average account balance, which is estimated all over the place by whomever you happen to talk to, the average monthly withdrawal rate from your 401(k) when you retire is around $300 a month. The Employee Benefit Research Institute and the Investment Company Institute made their calculations based on year-end 2008 account balances of $45,519. If you use that number, the monthly distribution would be closer to $225. Scary to think that all your 401(k) will do is pay your utility bills.

The critics fear that this sort of information will force folks to invest in riskier investments to try and regain some of those lost portfolio balances. While that might be an okay maneuver for the younger investor (40 years or younger), the older you get, the more worrisome this is. If you fall into either of these groups, the same advice applies:

1. Increase your contribution. Most of us average about 6-7%. Even a couple of increased percentage points can have some long-range differences in that balance at the time of distribution.
2. Get out of your company stock. Investors remain over invested in one company and no one worth their mettle will tell you this is good idea. Even if your company is on a tear. If your 401(k) matches only with company stock, invest only to the match.
3. Have more than one fund. Many folks are either indexed in an S&P500 fund or fully invested in a target date fund (one that picks the year you want to retire and adjusts your portfolio accordingly). Spread your risk. You will need to take some in order for your money to grow and many of us will want to take more than we should. By spreading it around among three of four funds, you can at least be more helpful to your retirement than harmful.

Paul Petillo is the Managing Editor of

Monday, January 4, 2010

Variable Annuities of a Different Sort

Older investors may have a new annuity to examine in 2010. It may be simply a better-for-the-insurer version of the old variable annuity mouse trap. Younger investors also need to take note of this variable annuity product as well.

Annuities come in all sorts of flavors. Single premium annuities are an all-in type that is purchased in a lump sum. Flexible annuities spread the payments over a period of time. Sometimes these are deferred until a later date whereby the investor can withdraw money all at once or in scheduled payments. Investments grow in a tax-deferred environment. Fixed annuities offer the investor the lowest risk (in part because the insurance company invests in bond funds) which insures your principal is never lost. Immediate annuities are also lump sum investments that begin distributions immediately.

But there is a new variable annuity product coming to market that will attempt to lure a wide range of investors into its trap. Everyone should take notice of what this investment/insurance product offers in large part because the sales pitch is designed to play off your fear of losing what you already have gained.. Question is whether you understand what this trap means to your retirement and whether it is worth paying the high cost.

Paul Petillo is the Managing Editor of

Saturday, January 2, 2010

Five Investment Questions for 2010

Should you consider past results? By all means.
Is longevity important? Yes, but not necessarily the fund’s length of service.
Does size matter? How do you determine size would be of greater importance.
Who’s your Daddy? The larger the company the greater the likelihood your fund has orphan funds embedded in your portfolio.
How so do you diversify? A little of this, a little of that

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