Your Retirement Plan in 2012

This article originally appeared at BlueCollarDollar.com and was written by Paul Petillo

"Time is free, but it's priceless. You can't own it, but you can use it. You can't keep it, but you can spend it. Once you've lost it you can never get it back." Harvey MacKay

One of the key elements in any financial transaction is time. If you want to retire, you must consider the amount of time. If you want to borrow, how long you have to pay it back can be translated into dollars and cents. Investing; timing they suggest can't be down but is important nonetheless.

If you are twenty, time is on your side. If you are thirty, there is time left. If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone. And older than that, time is no longer on your side. It accompanies us through life like some dark passenger. It reflect back on us from the mirror. And when we look at our retirement plan, it stares at us without guilt or shame. Time is the truth.

When I first began writing these predictions, and I've been churning out these year end ditties for over a decade, many were laced with optimism, some with an urging that we learn the lesson and move forward armed with knowledge of past mistakes, and still others were exercises in reality. In 2012, we have some opportunities and some problems awaiting us, left on the table as we symbolically turn the calendar wiping out 2011. But it won't leave quietly.

So I have a few thoughts about what you can do - resolutions of sorts but not the drastic sort we make and break almost within hours of promising ourselves at midnight.

Increase your contribution I start with this obvious chant for two reasons: you aren't making a large enough contribution and two, I would be remiss in not telling you this right from the start. And I'm not just speaking to those with a 401(k).

There are the millions of you who are forced to (and because of that are not likely to) finance your own retirement through an individual retirement account. We lament at the worker who literally only has to sign up at his workplace and doesn't. And far too often, we say little about the person who has to sign-up (after finding a fund), commit with a fortitude that is somewhat lacking and to contribute some of their paycheck via direct deposit every week or month. That effort, it seems is a much more involved hurdle.

In 2012, the investment world will be little changed. It will roil and confuse and gyrate and possibly even nose dive - just as it has for decades. It will react to news - if not from Europe form China or even the presidential elections (which ironically tend to be excellent years to invest). This will have you second-guessing your investments. But this will only apply if you have no idea how much risk you can take.

Pay attention to diversification You may not be capable of rebalancing, the act of making sure that your investments are directed evenly across many investments. This is much harder than it seems. As long as you are involved - and that is YOU in capitals - the struggle to keep balance will not get any easier.

For the vast majority of us, mutual funds will be the investment vehicle of choice. These investments will see more movement towards fee reductions. Which is a good thing. Fees will and always have been a subtraction of gains. This makes an excellent argument for indexing.

Choosing six index funds across the following cross-sections of the markets will not solve the problem of rebalancing (some will do better than others) but it will provide diversification. Index the largest companies (an S&P 500 fund), a mid-cap fund (the next 400 companies in size), small-caps (the next 2000), an international fund (an index of the largest countries (those with established banking systems even if they are currently troubled and will continue to be so in 2012), an emerging market fund (after international funds, the most risky) and a bond index (one that covers as much fixed income as possible).

Some of you will wonder if exchange traded funds (ETF) wouldn't be just as good if not better than simple indexing. In 2012, ETFs will continue to drill down ever deeper into sectors of the markets that add risk along with the illusion of an index. ETFs will become more actively managed in 2012 offering you more risk at a lower cost. Cheap doesn't mean better. 2012 will be year of the ETF. If you are unsure what these investments are, consider this conversation I had with David Abner of Financial Impact Factor Radio recently to help explain what these investments are and how they work.

Focus on your financial well-being This refers to your credit score. It continues to impact your financial future and will become increasingly harder to ignore. A new credit rating service agency will add to the difficulty in 2012 and not only will the current scoring impact costs such as insurance, it will seek to trace the breadcrumbs of your financial life more thoroughly that the big three do.

There is little likelihood that the job market will increase as many of our returning troops will flood the marketplace, taking numerous jobs from your kids just out of college. Which means another year with your kids at home. The only answer to this problem is to continue to tighten down your budgets in 2012. As I mentioned earlier: "If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone."

And you must do this understanding that inflation - not the reported number but the real number in your grocery bill - will still chip away at your wealth. This means you will move in two opposite directs in 2012: saving and investing more for your fleeting future (at least 6% but 10% would be best) and spending less in the present (easy of you don't use credit).

And the housing market will improve for those who have repaired any damaged credit or who have saved enough of a down payment to buy a house. people are still buying and selling. These people have found that while the market is not accessible to all, it is for those that have done right by their personal finances.

Do all of that this may not seem like a new year - but it will be a better year!

In Your Retirement Plan: Should ETFs 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 byVanguard 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.

Without a Clue about Money, Retirement and Investing

By now, most of my regular readers know what I do not like in the world of financial products. The annuity galls me (a mix of insurance and mutual funds that doesn’t do either well), the ETF (which mimics the indexed mutual fund but allows you to trade it just like a stock and pay for the privilege of trading just like a stock) and any tool that gives you the impression that you can set it and forget it.  There are others, but at the top of that list is the target-date fund.

The products are all hyped and re-hyped by the those that sell them as the easiest way to wealth.  The belief that sales people from the world of finance care about your well-being or what is known as fiduciary responsibility, may be the biggest mistake the vast majority of us make.  And the folks who make these mistakes are often wary of every other type of sales approach in every other facit of their lives.

So why, when it comes to target date funds do they simply believe the following: pick a date in the future and our mutual fund manager will adjust and readjust the underlying holdings of the account to protect your hard earned money, so, that when you retire, you will have a conservative allocation of funds that will serve you well into the future?

Click here to read more about target date funds from Paul Petillo, managing editor Target2025.com

Rebuilding Your Wealth: What's Wrong with the 401(k)?

Your 401(k) is in trouble. While the concept of a self-directed retirement plan is, at least in theory a good idea, it was never meant to be all there is. So many components go into a the proper operation of such plans, it is hard to get a bead on which move is right and which might spell disaster.

So let's briefly examine some of the do's and don'ts of 401(k) investing:

Do: Participate. No matter how little your employer offers in the way of incentives, called matching contributions or even if they offer none at all, you need to be in the plan. Plan on a minimum contribution of 5%.

Don't: Believe that it isn't any good. There are a great many of these employer sponsored plans that are essentially worthless. They charge fees that are too high, offer too few good funds from which to chose, and lack good any real fiduciary responsibility (something the employer is required to do).

Do: Buy funds. There will, in almost every plan on the planet, be mutual funds to choose from in your 401(k). Mutual funds are essentially investors who feel as thogh the effort of pooling money spreads diversity and risk over a greater number of stocks than they would have been able to purchase individually. A fund manager is the person(s) you hire to make investment decisions for this group. The fund will charge fees for this.

Don't: Buy company stock. A lot of 401(k) plans are designed to force you to buy the company's stock. Some will do this by limiting any match to this purchase and prohibit you to sell those shares. This is still not a good reason to buy this stock or any other. When you put too much money into one stock (same goes for buying too specific of a fund in large quantities) you run the risk of jeopardizing your portfolio's overall performance. This is where many 401(k) plans got into trouble.

Do: Diversify. For many people, diversification is simply purchasing an index fund (a fund that tracks a particular sector be it the total market of the Standard and Poors 500 list of the top market capitalized companies. (Capitalization refers to the number of shares outstanding multiplied by the share price.)

Don't: Index funds/Target-dated Funds/ETFs. Index funds are very tax efficient and charge very low fees to manage. This is due to their passive nature. Once the index is bought, until the index is changed, there is no more trading. As money comes in from investors, it is simply used to purchase more stocks of the companies in the index. (Use index funds outside of your 401(k) and pay the taxes on them while the rates are still historically low). Target dated funds are a relatively new product and just about every 401(k) has something like this. They may call it a life style fund. These funds pick a date in the future when you would like to retire and the fund manager gradually alters the fund's focus from aggressive (although many are not too aggressive) to a conservative format as the fund gets closer to the target date (of your retirement). ETFs are not a good idea for 401(k) plans because they charge the employee each time they purchase more and in a 401(k), this happens every time you get paid.

Do: Pay attention. If you have built a portfolio that is diversified (some growth, some value, some international or emerging markets and further spread these funds to include large, mid and small cap areas) you will need to open your statement or check it online each month. Look for changes in fees, changes in the 10 largest holding and any statements that the fund manager might make.

Don't: Overreact. When markets rise, don't try to adjust your underlying funds to follow. When markets swoon, stay where you are. In a rising market, because of dollar cost averaging, you will buy less as the price goes up. In a falling market, you will buy more as the share price is discounted.

Do: Think first. Your 401(k) is your future, directed by you. Never withdraw money from this fund either by loan or by any other means. This single action will take years to fix. If you leave a company, roll your 401(k) into an IRA.

Don't: Panic. Things will get bad but they never stay that way. Your 401(k) is not a cash account and should not be eyeballed to save you from financial bumps in the road - even those bumps seem like they will last for a long time.

The All ETF 401(k)

Exchange Traded Funds, like many new products that have hit the investment market in the last ten years or so, have made steady inroads among hardcore investors looking to use these often specifically indexed funds to "park" money as a hedge against other trades or as way to take advantage of a broader market bet. These are professional maneuvers that come with costs and are probably not good for the average investor.

First off, let me explain what an ETF is. Exchange Traded Funds are basically index funds. Index funds are basically passive in nature, mimicking a published list of the stocks grouped together, such as the top 500 companies (published by Standard and Poors) allowing the investor to purchase a fixed group. They can also be broken down further to include numerous other indexes from mid-cap, small-cap and indexes of stocks from around the world. These funds, like their mutual fund counterparts have sliced and diced the world into segments.

For instance, if you think India is the next big hot spot. There is an ETF that buys the broad market along with some smaller regions in that country. Do you believe that Latin America will recover first? There is an ETF that allows you to play that economy. Perhaps you feel as though a stake in a commodity such as oil or gold is the next best place to invest. There are ETFs for that as well. Even bonds are covered.

ETFs, because they fall outside the realm of mutual fund regulation, also offer some savvy investor the ability to short (borrowing shares in the hope that the price will fall and then, buying the less-expensive shares) or leverage (using some stocks as collateral for purchasing more shares) or buy real estate without the REIT.

And while that sounds like a world we should all play in, for most of us it simply won't work.

Because Exchange Traded Funds are traded throughout the day, investors using them can buy and sell a position without waiting for the 4pm close that mutual funds have. The downside: ETFs also create brokerage charges in and out of the position and because of that, do not give the impression that this is a park and hold investment. The double downside: this create volatility that rattles the market in the hour before the close.

There is also a transparency and a legacy issue. Despite the publicized passivity of the fund, there is not always a good indication of just what the index represents at any one given moment. They also have not been around long enough to compare to mutual funds. New ETFs pop up everyday as the world gets chopped up into increasingly smaller chunks. And this creates a problem as well. Index funds stick to the index they track or the index they claim to mimic. ETFs can have some style drift within the fund making them difficult to pinpoint with any real accuracy.

ETFs are index fund cheap as well. An upside for any investor looking to keep the overall expenses of investing at a minimum. They rarely mention the cost of trading these funds, just the convenience.

The question is: do they belong in your 401(k)? Sharebuilder thinks so and has announced their launch of a new program for advisers to sell. Designed to make the interaction small businesses have with these registered investment advisers (RIAs) easier and more seamless, low cost ETFs will make up 100% of what these plans offer.

According to ShareBuilder these "investment offering consists of a preset line-up of 16 ETFs from popular funds offerings like a S&P 500 ETF to important fixed asset categories like treasury inflation protected securities (TIPs) not common today in most plans. ShareBuilder 401k also provides five model portfolios to help make it easy for participants to get off on the right foot."

Once again, is this right for your retirement portfolio? While we have discussed how fees can eat up a great deal of the potential profits an investor might expect. And if they are hidden as they so often are (the fees I am referring to are more from the adviser end of things) as little as a one percent increase over what a small business is paying could impact returns over the course of a working career as much as 17%. Sharebuilder promises that this new plan will be less expensive to operate with features such as auto-enrollment and auto-rebalancing thrown in for good measure.

But by making the plan completely ETFs, the risk level drops considerably. The average employee will relinquish more control to index funds than is needed to raise your portfolio's earning potential. Small plans will have a limited number of the these index-type offerings narrowing the potential for better-than-average results. In fact, your results using only ETFs will be average.

ETFs can be used as a tool for investors. But to have them solely as a tool for those planning on retiring, seems to serve the adviser more than the client.