Trade with Integrity

Robert Kiyosaki, author of “Rich Dad, Poor Dad”, estimates that only 15% of all Americans are active investors. His definition does not include those of us with 401(k) or IRA plans. If Mr. Kiyosaki is correct, then why should Wall Street matter to the rest of us? Why does the government feel it necessary to use my tax dollars to bail out failing financial institutions if there is no direct impact to 85% of the population? In recent weeks I’ve read news articles and blog posts referencing periods of market downturn in recent history. 1929, “The Great Depression”, (why do they call it “Great” anyway?) 1974, 1987, 1992, 2001, 2003, all these dates signify horrendous drops in the market and if an audio representation of the writers pen existed, those years would be spoken in fearful hushed tones. But I have no recollection of any direct financial impact. My family did not derive any income from investments, so I fell into the unaffected 85%.

How many of our elected officials fall into the 15% category? And if they are “active” investors, how objective can they be? We know that Treasury Secretary Henry Paulson was a former CEO of Goldman Sachs. Actually, three former Goldman Sachs CEOs left the financial megalopolis to serve the government. As CEO at GS, Paulson was instrumental in the repeal of the “net capital rule”, a requirement that brokerages hold reserve capital that limited their leverage and risk exposure. This action coupled with the 1999 Gramm-Leach-Bliley Act put the parent holding company of each of the big American brokerages beyond Security and Exchange Committee (SEC) oversight and many economists point to that as setting the stage for the current financial crisis. SEC Chairman William H. Donaldson did establish a risk management office to monitor signs of future problems, but when Christopher Cox took over in 2005 that office was dismantled. My interpretation of the result: “the inmates are running the asylum”. Why wouldn’t they recommend spending trillions of our tax dollars to bailout their buds.
There are obvious indirect consequences; for example if GM is allowed to fail there will be diasasterous economic consequences in parts of the country. But it won’t stop people from buying cars. And didn’t GM bring this on themselves? The automaker has used the same antiquated business model for eons so couldn’t you say they got too comfy in their plush interiors and fell asleep at the wheel? Dreaming that the boon would last forever? Oil won’t last forever. There is a finite quantity of oil and while the rest of the world is coming to grips with that reality, Detroit has ignored that inevitabitlity. The technology for alternate fuel has existed for over 30 years, but automakers actively lobbied to suppress it’s development. So what’s happening to GM could be considered a necessary correction. And if you agree with that ideology than join me in asking why should we support a business model that is destined to become extinct.
Here’s where that 15% comes in again. If GM goes down, GM investors lose big. I won’t. Nobody in my office will, nobody on my street will. But what about friends of the folks on Pennsyvania Avenue. We will suffer inconveniences as a result of the coming transition in our economy, but good business sense tells us that ones failure is another’s opportunity. Consumers will still consume. A good system will withstand a momentary set back. Unfortunately, the throw of that setback widens because Wall Street denizens and friends think they’re the only ones with money. They must live in an alternate reality because how else do you justify taking money out of hard working, productive, innovative American’s pockets to subsidize poor management and bad behavior?

David Kelsen, Marketing/IT - Integrity Futures Group

by Chris Woodyard, USA Today

As the economic slump deepens, more companies are expected to join General Motors in suspending matches of contributions to their employees’ 401(k) retirement accounts.

GM last week became only the latest on a list of well-known companies trying to conserve cash to weather the downturn by halting 401(k) account matches.

Also among them are Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, broadcast group Entercom and rental car agency Dollar Thrifty Automotive Group.

Employers typically match a portion of workers’ contributions as a way of encouraging them to sock away money for their retirement and as an alternative to funding a pension plan.

Some 2% of 248 employers surveyed this month by human-resources firm Watson Wyatt indicated they have cut back on 401(k) matches as a way of coping with the sinking economy. Another 4% said they may join them in coming months.

Those numbers might be even larger were it not for warnings from experts that cutting back on 401(k) contribution matches can be a morale killer.

“It’s penalizing the folks who are doing the right thing (by) contributing to their retirement,” says Alec Dike, a senior financial counselor for Watson Wyatt. And the suspensions could backfire on companies because “it suggests you are in worse financial straits than you really are.”

But some say the 401(k) system — which has been steadily expanding as pension benefits decline and workers become more responsible for providing for their retirement income — was designed to provide just such flexibility to employers when their business is struggling.

The match is easy to junk because it is essentially a form of profit-sharing by a company, says Jack VanDerhei, research director of the Employee Benefit Research Institute, a Washington think tank.

Frontier, for instance, was kicking in 50 cents for every dollar an employee contributed to his 401(k) up to 10% of his pay, but stopped the matches June 1 after filing for a Chapter 11 bankruptcy reorganization.

For some, it’s not the first time. GM’s suspension of matches to its 401(k) plan last week for 32,000 eligible white-collar employees was the second time this decade that it has yanked its participation.

“I don’t think anybody is happy about it, but people are pretty determined,” says GM spokesman Tom Wilkinson.

Goodyear, which halted 401(k) matching in 2003, plans to resume starting Jan. 1.

“We’re all excited it’s coming back,” says spokesman Scott Baughman.

By Sree Vidya Bhaktavatsalam

Oct. 9 (Bloomberg) — Investors pulled a record $52.1 billion from U.S.-managed stock and bond mutual funds in the past week, seeking the safety of government-insured bank deposits as the financial crisis worsened.

Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus followed $72.3 billion of outflows in September, the most in a single month. Investors deposited $185.5 billion into bank accounts last month through Sept. 22, TrimTabs said, citing U.S. Federal Reserve data.

“People are scared,” Conrad Gann, TrimTabs’ chief operating officer, said in an interview. “This market is different from what we’ve seen before.”

The five largest diversified U.S. stock fund managers, including Fidelity Investments and Vanguard Group Inc., posted an average 28 percent loss this year through Oct. 6, about 2 percentage points worse than the Standard & Poor’s 500 Index, according to Morningstar Inc. Investors mostly switched into fixed-income through August, putting $97 billion into bond funds while withdrawing $74 billion from stock funds, TrimTabs said.

“A lot of our favorite stock funds had financial bets that hurt heavily,” said John Coumarianos, a stock analyst with Chicago-based Morningstar. “Others were heavily weighted in international stocks to boost returns, a move that backfired.”

1987 Comparison

Stock-fund withdrawals represented 1.3 percent of equity assets, said Brian Reid, chief economist at Investment Company Institute, a Washington, D.C.-based mutual-fund industry organization. During the market crash of 1987, stock fund outflows were 3 percent of assets, the ICI said.

Mutual funds held a total of $11.6 trillion on Aug. 31, including $5.6 trillion in stock investments, $1.8 trillion in bonds and about $4.2 trillion in money-market assets, according to ICI data.

Boston-based Fidelity’s U.S. stock funds lost an average of 32 percent, the most among the group, Morningstar said. The $29 billion Magellan Fund has plunged 44 percent this year through yesterday, the worst performer among actively managed U.S. stock funds with assets of more than $20 billion, according to Bloomberg data.

American Funds, Vanguard

“Nine months is a short time to assess properly a fund’s performance,” Fidelity spokeswoman Sophie Launay said in an e- mail. “This is even more relevant in the type of market environment we have seen so far this year, when the market’s higher volatility may cause some long-term investors overwrought with fear to make rash decisions that alter a well diversified portfolio.”

At American Funds, run by Los Angeles-based Capital Group, the average U.S. stock fund declined 28 percent this year. Growth Fund of America, the largest U.S. mutual fund with $179 billion in assets on Aug. 31, fell 33 percent, lagging behind 63 percent of its peers, Bloomberg data show.

Stock funds managed by Vanguard, based in Valley Forge, Pennsylvania, and Baltimore’s T. Rowe Price Group Inc. fell an average of 27 percent. At Franklin Resources Inc. in San Mateo, California, stock funds dropped 28 percent.

The S&P 500 fell 8.9 percent in September including reinvested dividends, the worst one-month performance in six years. The index has fallen 37 percent this year, and today slipped to its lowest level since April 2003.

Bond mutual funds have fallen 4.5 percent this year, Morningstar data show, as investors have shunned all but the safest government-backed debt.

Credit Crisis

The credit crisis that began last year with the collapse of the subprime-mortgage market drove companies such as Lehman Brothers Holdings Inc. into bankruptcy in September and led the U.S. government to enact a $700 billion financial rescue plan.

The Reserve Primary Fund last month became the first money- market fund in 14 years to fall below $1 a share, known as breaking the buck. The decline resulted from losses on short- term debt issued by Lehman and triggered a run on money funds.

The Treasury has started an insurance program that protects investors against losses on money deposited with participating funds. Investment companies with more than 95 percent of money- market fund assets have signed up.

Investors put $49.4 billion into money-market mutual funds in the week ended Oct. 7, according to data compiled by IMoneyNet Inc., of Westborough, Massachusetts.

Vanguard spokeswoman Rebecca Cohen said some investors moved money from stock and bond funds into the firm’s money- market funds, though she called it only a “modest portion of our investor base.”

Investors might have been driven toward banks by an extra measure of protection from the Federal Deposit Insurance Corporation, which announced last month that it would raise its bank deposit insurance to $250,000 from $100,000.

Americans’ retirement plans have lost as much as $2 trillion in the past 15 months, Congress’ top budget analyst estimated Tuesday. The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers’ savings, forcing people to hold off on major purchases and consider delaying their retirement, said Peter Orszag, the head of the Congressional Budget Office.

As Congress investigates the causes and effects of the financial meltdown, the House Education and Labor Committee was hearing from retirement savings and budget analysts on how the housing, credit and other financial troubles have battered pensions and other retirement funds, which are among the most common forms of savings in the United States.

“Unlike Wall Street executives, America’s families don’t have a golden parachute to fall back on,” said Rep. George Miller, D-Calif., the panel chairman. “It’s clear that their retirement security may be one of the greatest casualties of this financial crisis.”

More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30 said they worry they will have to work longer because the value of their retirement savings has declined.

Orszag indicated the fear is well-founded. Public and private pension funds and employees’ private retirement savings accounts — like 401(k)’s — have lost some 20 percent overall since mid-2007, he estimated. Private retirement plans may have suffered slightly more because those holdings are more heavily skewed toward stocks, Orszag added.

“Some people will delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire and will continue working,” Orszag said.

A new AARP study found that because of the economic downturn, one in five workers 45 and older has stopped putting money into a 401(k), IRA or other retirement savings account during the past year, and nearly one in four has increased the number of hours he works.

If you don’t believe now is the time to convert your 401k or IRA into a better investment vehicle, than read the following Wall Street Journal article by Jennifer Levitz:

(P.S. - There are no tax penalties for converting your 401k or IRA into a managed futures account.)

‘Panicky’ investors raiding their 401(k)s

Economic and stock-market tremors are rattling the nest egg.

With stocks falling, credit tightening and unemployment rising, small investors have been raiding their 401(k) accounts or slashing contributions to the popular retirement plans, according to the latest tallies of plan administrators.

Others, eager to shield their portfolios from further damage, are reducing their exposure to stock mutual funds to near record lows.

The behavior — described by some market watchers as panicky in the past week — has led to worries that the retirement prospects are dimming further for Americans, most of whom no longer have private-sector pensions to rely on.

Recent 401(k) winnowing is coming in the form of “hardship withdrawals” — removing cash from the fund, with a 10 percent tax penalty, for exigencies such as job loss, the prospect of losing your home to foreclosure or a big medical expense.

T. Rowe Price Group Inc. in Baltimore saw a 14 percent increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7 percent from April through June, compared with the same time period a year earlier. Principal Financial Group Inc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5 percent this year through Sept. 18, over last year, and that the withdrawal amounts are larger.

All three said they could furnish no withdrawal information about last week, when traffic on their Web sites was up sharply. On Friday, visits to the Fidelity.com Web site were 25 percent higher than the previous high. TIAA-CREF, the big college-retirement fund manager, said calls rose 30 percent over normal last week.

Massachusetts’ Secretary of State William Galvin says his office received numerous calls from people who were in a “panic state” and liquidated portions of their 401(k) accounts last week when the market tumbled, not realizing they triggered tax penalties.

Mr. Galvin, the state’s chief securities regulator, is urging Congress to eliminate the 10 percent penalty on such withdrawals — which comes on top of regular tax rates — for investors who may have acted without knowing the consequences.

Mr. Galvin said relief for individual investors is especially appropriate given the $700 billion bailout fund being proposed to aid financial institutions in the crisis. “If we are providing amnesty to financial services,” then “we ought to provide a few breaks to these people.”

With the decline of the traditional pension, 401(k)s are the main source of retirement coverage for roughly 60 percent of U.S. workers in the private sector. Currently, about $3 trillion in assets are held in 401(k) plans, according to the Investment Company Institute, the industry group for mutual-fund companies.

Many investors are now watching that nest egg shrink, with the Standard & Poor’s 500-stock index down 23 percent this year. Headed into the financial crisis, typical retirement accounts were heavily weighted toward stock mutual funds.

At the same time, 401(k) participants fear they won’t have the time, or the financial wherewithal, to replenish their accounts. In a change of priorities from a year ago, full-time workers now worry more about “just getting by” — meeting day-to-day expenses — than saving for retirement, according to a survey of nearly 1,000 U.S. employees scheduled for release this month by Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV’s Transamerica Life Insurance Co.

But many investors are up against their credit-card limits or, because of the credit crunch, are no longer able to tap their home equity for that needed cash. Instead, they are increasingly turning to their retirement accounts to stay current.

Taxes on 401(k) contributions and investment gains are typically deferred until the funds are withdrawn after age 59½. The Internal Revenue Service permits hardship withdrawals for critical financial situations, but also for other reasons, such as meeting a child’s college tuition or buying a primary residence. Plan sponsors vary in the requirements they place on participants to show such a need, with some requiring documentation.

Because of penalties, financial advisers generally don’t recommend the withdrawals. But they acknowledge that some people may have no other good options. Unlike with a loan taken from your 401(k) plan, the money doesn’t have to be repaid.

Jill Schlesinger, a Providence, R.I., fee-only registered investment adviser who manages 401(k) plans for clients, says, “If it’s the best of the worst options, you should do it. I’d certainly prefer you do that than lose your house or get into some kind of terrible loan situation with your credit-card company.” David Wyss, chief economist at S&P, says that with access to education and home-equity loans down, he’s hearing about more people “tapping their accounts to pay for their kids’ education.”

Mr. Galvin says he has asked two Massachusetts Democrats, Rep. Barney Frank, chairman of the House Financial Services Committee, and Rep. Richard Neal, a senior member of the Ways and Means Committee, to look at temporarily relaxing the rules. Representatives for both congressmen said they would look at Mr. Galvin’s proposal.

Jim Wharton, a 65-year-old retired Sears Holding Corp. manager in Queen Creek, Ariz., says he moved his entire 401(k) balance of $357,000 to certificates of deposits insured by the Federal Deposit Insurance Corp. recently. The money had been invested in a “stable-value” fund, typically a low-risk, low-yield fund that invests in bonds and interest-bearing contracts backed by insurance companies. He says his next move may be “under the mattress.”

According to Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm, the total stock allocation among 401(k) participants is at a five-year low, declining to 62 percent in August from 68 percent a year earlier. Hewitt attributes the decline to an unusually high number of investors transferring money into fixed-income funds. It said it believes the trend continued into September.

Plan administrators are also seeing a wave of employees who are lowering their 401(k) contribution rates — the pretax amounts deducted from paycheck — says Tracy Tucker, spokeswoman for the National Association of Government Defined Contribution Administrators Inc., the Lexington, Ky., organization of plan administrators from local governments. She says some administrators are now “offering presentations on how to survive marketing fluctuations.”

Ms. Schlesinger, the Providence investment adviser, says many workers who were too heavy on stock mutual funds going into the crisis have taken hits on their balance and now wonder what to do.

If they are young, she advises them to rotate slowly into more conservative investments — to avoid selling their investments at a low price.

But, she says, if they are five years or less from retirement she is advising them to immediately protect their portfolio from further decline by moving at least 30% or 40% into fixed-income accounts.

For many investors, that will mean “taking a loss,” she says. She says,“I tell them, ‘I’d like to think that the rescue plan is at the bottom of the market, but what if it’s isn’t? We can’t gamble with that.’”

by David Kelsen

First exposure for most is a list of lists of entities and funds that you know nothing about. The generous company/corporation with whom you are employed, has offered a match of 2%. Meaning they’ll pitch-in 2 cents to every dollar you contribute to the fund, because that’s what it is, a fund that was clocked at $2.4 trillion at the end of 2006. Who gets the interest on that? Hmm…Still generous right? We’ll address that later. But who is actually managing this investment vehicle? There lies the first potential pothole in the long, pock-marked twisting road ahead.

Caveat #1.

Businesses that can afford an experienced investment advisor have the best potential for competent fund management. But all too often the responsibility falls on an overworked, underpaid HR manager who barely has time to tie their shoes let alone stay abreast of the highly complex market fluctuations and strategies that drive the performance of your hard-earned money.

Caveat #2.

In a practice known as “Revenue Sharing” providers (your bosses boss) get a cut of the expense ratio on the funds in your 401k to cover day-to-day administrative costs. Since the fee is charged as a percentage of assets, as the size of your 401k increases, your contribution to the provider increases in kind, even though the providers actual costs are virtually unchanged. Still feeling the love on that 2%?

Caveat #3

The typical 401k investor has no idea how to select a mutual fund to invest in. He is completely and utterly clueless. Faced with a bewildering array of funds, he often follows one of the following strategies:

1. invest a little bit into each fund;
2. invest in the fund with the biggest returns;
3. invest in a couple of funds with the biggest returns (a combination strategy).

All of the strategies above have the effect of encouraging the 401k investor to pursue a risky investing strategy. With the first option, the most conservative, the 401k investor still winds up mostly investing in stocks, because the typical 401k plan offers one safe money market fund, and then a whole bunch of stock funds, so the invest evenly strategy results in most of the money being invested in the stock market.

The second and third strategies are far worse, because the 401k investor puts his money into the sector with the most momentum that is probably the most overpriced. And thus it becomes even more overpriced. But investments don’t go up forever. The NASDAQ finally reached a point where it could go no higher, and then it crashed.

In My Humble Opinion, people who don’t know how to select individual stocks are equally unqualified to select mutual funds. But that’s not what the mutual fund industry wants people to know.

Caveat #4

Insurance companies that run 401(k) plans often package them as annuities. It’s the common format for small plans and 403(b)s, which are geared to teachers, professors and employees of nonprofit organizations. It’s also an expensive one. The insurance company slaps a fee on top of the expense ratio you pay for the mutual funds in the annuity. In return, plan participants can get some type of insurance benefit, like principal protection or the opportunity to annuitize their income stream at retirement, says Michael DeGeorge, the general counsel for the National Association for Variable Annuities.

To be fair, insurance companies have the clout to haggle successfully with asset managers for lower expense ratios on the underlying funds. That said, the combined total of the expense ratio and the insurance fee will still be higher than the cost of other plans. All fees should be explained in the prospectus, but critics of the annuity structure complain they’re not often broken out in quarterly statements. Instead, the provider quietly deducts its fee from the total return on your fund. Unless you study the prospectus, you may never notice.

The average 401(k) plan earns an 8.7% Rate of Return annually. 8.7% annually can accumulate into a substantial amount after 30 or 40 years. Yet opportunity abounds for those who are not faint of heart. With slightly more risk, the potential for reward can be staggering. Several programs in managed futures and commodities continue to do well regardless of market condition. In one study, if you started with $1,000 in Livestock in 2003, your account today would be over $20,000. Now imagine starting with $50k.