What are the Disadvantages of ETFs?

Posted by dfederman on Jan 12, 2012 in Investor Education | Comments Off

In general, the advantages of ETFs compared to mutual funds are that they are significantly lower in cost and much greater in transparency. And, of course, ETFs, like Index mutual funds, provide broadly diversified exposure to an asset class without the problem of style drift that mutual funds incur.

So what are the disadvantages of ETFs? The disadvantages, when it comes down to it, boil down to how investors use ETFs. For example,there are 1400 ETFs from which to choose. How do you know you are choosing the right ones?

Below are some of the characteristics of ETFs that trap investors, and therefore can be viewed as “disadvantages.”

Niche ETFs – Many ETFs are sliced so thin, there is not real diversification. For example, there is an ETF that tracks Peruvian mining stocks in which three companies account for 45% of the funds holdings. There is also an ETF that tracks smartphone suppliers and another that tracks hard drive makers. This type of market segmenting attracts short-term speculators who are looking to make a quick profit by trading or selling short. Furthermore, many of these niche ETFs have less than $10 million in assets, which is not enough for the fund company to earn a profit.If the fund company cannot earn a profit, they may need to close the fund, causing you a headache.

Leveraged ETFs - These ETFs sound good in theory, but are terrible in practice. Due to the nature of volatility, these 2x and 3x bull and bear ETFs never accomplish what the investors thinks it will accomplish. These ETFs are intended to track DAILY price changes, not long-term trends. Inevitably, these bull and bear ETFs attract greed and fear.

ETFs with few assets - If you’re choosing an ETF, make sure it has plenty of liquidity. i.e. You want to make sure you can easily get in and out of the fund at a fair market price.

Momentary pricing – Remember the “flash crash” on May 6, 2010? Active traders who chose to sell their ETFs during the DJIA’s 1000 point decline caused a permanent loss. This would have been impossible for mutual fund investors because mutual funds price once a day. So in this sense, momentary pricing is a disadvantage.

Buying Time for Europe?

Posted by dfederman on Jan 11, 2012 in Investor Education | Comments Off

Description

Recent stock market activity appears to be headline driven, depending on the latest news from the euro zone. The euro zone nations are reeling from crisis after crisis. Is now a good time to pick up some bargains?

The S&P 500 Index has been a hostage to the headlines, up one day and down the next, depending largely on events in Europe and questions about what they could mean for the U.S. economy. A recent example was the November 30 rally on the news that the Federal Reserve will lead an effort by six central banks to increase global liquidity and avert a credit crisis.¹

While the action was a welcome intervention following tense negotiations among heads of state, it is likely that the agreement will not address the root cause of the problem: a lack of confidence in European sovereign debt.²

Too Much Borrowing

Europe’s challenges stem from a history of significant government borrowing by Italy, Spain, Greece, Ireland, and Portugal, among other countries. When the Greek financial crisis first erupted in 2010, questions about contagion led to borrowing costs that suddenly were unaffordable for Greece and many of its euro zone neighbors. A one-trillion-euro bailout fund was created in October 2011, but it quickly became apparent that the fund was not adequate. Standard & Poor’s has put euro zone countries on credit watch, indicating their bond ratings may be lowered if the situation is not addressed.³

Looking Ahead: Slow Growth and Contraction

The Organization for Economic Cooperation and Development (OECD) anticipates that economic growth will be muted — or it will potentially contract; with the United States in better shape than many countries within the euro zone.

Source: OECD Economic Outlook, November 2011.

What Investors Can Do

Although there are no guarantees, the following strategies may help to maintain a portfolio’s value as events unfold in the euro zone:

• Diversify bond holdings. Many sovereign nations, including the United States, maintain strong credit ratings and the capability to repay bondholders. That said, diversifying fixed-income holdings to include corporate and municipal offerings and being selective in your choices could make your portfolio less dependent on developments in one area of the bond market.⁴
• Investigate revenue streams outside of Europe. Organizations that do a significant amount of business in North America or emerging markets may help to insulate your portfolio from the worst of Europe’s problems.⁵
• Look for companies that generate cash. Organizations with consistent profits may be in a strong position to withstand a credit crunch if lending standards tighten.

Diversifying your bond holdings, looking for revenue streams outside of Europe, and identifying companies that generate cash may be beneficial strategies for mitigating the impact of euro zone developments on your portfolio.

Source/Disclaimer:

¹Source: money.cnn.com, “Dow Closes with Largest Gain Since March 2009,” November 30, 2011.

²Source: Standard & Poor’s Equity Research U.S. Sector Outlook, “Debt Drag,” November 22, 2011.

³Source: Standard & Poor’s, “Standard & Poor’s Puts Ratings on Eurozone Sovereigns on CreditWatch with Negative Implications,” December 5, 2011.

⁴Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Interest income on municipal bonds may be subject to the alternative minimum tax. Municipal bonds are federally tax free, but other state and local taxes may apply.

⁵Emerging markets are generally more volatile than the markets of more-developed foreign nations, and therefore you should consider this market risk carefully before investing. Investors in international securities may be subject to higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.

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January 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by  Dan Federman, CFP^® , a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

Medications and Seniors

Posted by dfederman on Jan 5, 2012 in Investor Education | Comments Off

Medications are the most effective and popular tool physicians use to treat and cure illnesses. As time progresses, there are more and more medications available for the treatment of disease.

This progress in medicine allows us to live longer and more independently than ever before. At the same time, it seems that we may be taking too many pills. As a group, older Americans take more medications than any other portion of the U.S. population. The use of medications in older adults is likely the result of the increased occurrences of chronic conditions such as diabetes, heart disease, and high blood pressure. Without the effective use of medications, these conditions would be uncontrollable, and they could lead to disastrous results for many older Americans. As advantageous as medications may be, however, there are associated risks that appear to be amplified as an individual ages.

Physically, as the body ages, the ability to absorb medications into the blood stream changes. This affects how the medications react once they have been taken. Many older adults are taking a variety of medications to control more than one chronic condition. Problems with medications can manifest themselves in a number of ways. The first and most common is that the individual may experience adverse side effects that occur in addition to the desired therapeutic effect. Side effects may vary depending on the individual’s disease state, weight, gender, ethnicity, and general health. The older an individual is, however, the more likely the individual is to experience side effects.

Another, more problematic issue with medications is drug interactions. Drug interactions occur when the combination of two or more medications causes a negative reaction. There are three types of drug interactions described by the Food and Drug Administration (FDA). The following is taken from the FDA website:

Drug-condition interactions occur when a medical condition you already have makes certain drugs potentially harmful. For example, if you have high blood pressure or asthma, you could have an unwanted reaction if you take a nasal decongestant.

Drug-food interactions result from drugs reacting with foods or drinks. In some cases, food in the digestive track can affect how a drug is absorbed. Some medicines also may affect the way nutrients are absorbed or used in the body.

Drug-alcohol interactions can happen when the medicine you take reacts with an alcoholic drink. For instance, mixing alcohol with some medicines may cause you to feel tired and slow your reactions.

In order to get the best results possible from your medicines and avoid the interactions described above, The Estate Planning & Elder Law Firm suggests you take the following steps:

Keep an updated list of current medications with you and share them with each physician you see. Many problems arise when an individual sees multiple physicians and none of them is completely informed about other prescribed medications.

Be sure to tell your physician of all medications you take, especially over-the-counter medicines, herbal supplements, and vitamins.

Limit alcoholic beverages if instructed by a physician. Americans over the age of 65 consume more alcoholic beverages than any other age group in America. Studies show a small amount of alcohol can have health benefits, but too much alcohol causes problems.

Take all medications exactly as prescribed, and, if you find yourself having a problem with a medication, then make an appointment to see your physician. Do not simply stop taking any medicine.

Consult a pharmacist. The American Society of Consultant Pharmacists and the Commission for Certification in Geriatric Pharmacy certifies pharmacists as Certified Geriatric Pharmacist (“CGP”). Individuals with a CGP designation have demonstrated expertise in the principles of geriatric pharmacotherapy and the provision of pharmaceutical care to the elderly. If you are an older adult and have questions regarding how your medicines affect you, then you may consider having a CGP perform a medication review. While the CGP cannot change your medicines, the CGP can analyze how you are taking your medications and make suggestions for you to take to your physician to help you get an improved result.

Medicines allow us to live longer, happier, and healthier, but as with anything else, too much can be a bad thing. The Estate Planning & Elder Law Firm recommends that seniors be proactive when it comes to medications. If you are interested in having a medication review, The Estate Planning & Elder Law Firm can assist you with finding a CGP.

High Yields Prove Elusive

Posted by dfederman on Jan 3, 2012 in Investor Education | Comments Off

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With Treasuries paying rates in the low 2% range, investors have to search far and wide to find better yields

Where can you find yields higher than the Treasury? Find some suggestions here.

Historically, many retirees and preretirees have looked to their portfolios as a potential source of income. In the current environment, finding these sources is no easy task. Ten-year U.S. Treasury bonds yield only 2.2%, and dividend-paying stocks within the S&P 500 are yielding 2.5%.¹

But there are opportunities for higher yields that investors may want to consider. Higher yields can mean greater risk, so it is important to understand risk and potential return with any investment.

Potential Sources

When looking for yields that currently exceed U.S. Treasury securities, you may want to review the following:

• As of September 30, 2011, corporate high-yield bonds, as measured by the Merrill Lynch High-Yield Master II Index, generated yields of 9.54%. Keep in mind that the yields of some corporate high-yield bonds compensate investors for default rates that historically have been higher than the broader fixed-income universe.²
• Higher-yielding sectors within the S&P 500 have included Telecommunication Services, which yielded 5.59% as of September 30, 2011, and Utilities, which yielded 4.27%.³ Standard & Poor’s believes that expense control and broadband growth will support dividends for the Telecommunication Services sector. For Utilities, Standard & Poor’s anticipates that higher revenue among electric utilities and expanding gross margins for gas utilities will cause the sector’s dividend yield to be maintained.
• Emerging market sovereign debt, as measured by the Merrill Lynch Emerging Market Sovereign Bond BBB U.S. Dollar Index, yielded 4.65% as of September 30, 2011. Emerging market debt provides exposure to markets where economic growth currently exceeds the developed world while avoiding troubled European markets.⁴

Yield and Your Portfolio

The following tips may help you evaluate higher-yielding investments at a time when finding yield remains a challenge.

• Review an investment’s exposure to risk as well as its potential return. High-yield bonds historically have experienced higher default rates than investment-quality issues. Keep in mind that bond prices decrease when interest rates rise, opening bondholders to downside risk if inflation increases and market interest rates rise from their current lows. Holding a bond to maturity eliminates this secondary market risk.
• Diversify sources of yield. Relying too much on one or two income-oriented securities can leave you exposed to unanticipated changes in the financial markets.
• Consider your asset allocation. Since yield is available from both stocks and bonds, you may be able to create a high-yielding portfolio within the framework of your desired asset allocation. Within a stock allocation, equities within the S&P 500 Dividend Aristocrats have increased dividends every year for at least 25 years. Municipal bonds may present tax benefits for fixed-income investors.⁵

The variety of yield sources available presents opportunities to craft an income-generating portfolio suitable for many different risk profiles and time horizons.

Source/Disclaimer:

¹Yields are as of September 30, 2011. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, they offer a fixed rate of return and fixed principal value.

²Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. They may not be suitable for all investors.

³Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.

⁴Emerging markets are generally more volatile than the markets of more-developed foreign nations, and therefore you should consider this increased market risk carefully before investing. Investors in international securities may be subject to higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.

⁵Municipal bonds are federally tax free, but other state and local taxes may apply.

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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

Efficient Funding of Long-term Care Insurance

Posted by dfederman on Dec 28, 2011 in Investor Education | Comments Off

Efficient Funding of Long-term Care Insurance

Over the next 20 years, the number of Americans age 65 years and older will more than double to 71 million, comprising roughly 20% of the U.S. population.

Greater longevity among the Baby Boom generation will also contribute to increased demand for long-term care services; those surviving to age 65 years can expect to live an average of 20 more years. As Baby Boomers live longer, their chance of needing some form of long-term care services will rise as well. Roughly 70% of people over the age of 65 years require some form of long-term care, and more than 30% will receive some nursing home care in their lifetime.

Long-term care is expensive, and the cost is rising every year. Currently, the average annual cost of a one-year stay in a private room at a nursing home in a Virginia metropolitan area is $77,380. Future long-term care will be even more expensive. If costs rise at just 3% annually (a conservative estimate), then 20 years from now a one-year stay in a nursing home will cost approximately $139,757. It’s easy to see how long-term care expenses can threaten or even wipe out your retirement savings and jeopardize any assets you had planned to leave your loved ones.

With the Standard & Poor’s (S&P 500) index returning an average of only 2.72%2 a year for the last ten years and a one-year certificate of deposit returning an average of under 1.0%, it may seem like an insurmountable task to save enough money to fund a retirement and potential long-term care costs.

The experienced attorneys at The Estate Planning & Elder Law Firm can help you come up with creative options to help plan for your family’s future long-term care costs. Let’s take a look at one of the innovative funding solutions someone might want to consider.

Let’s assume that Cheryl, age 56 years and Frank, age 58 years, are a married, working couple with assets in excess of $500,000, mostly in certificates of deposits. Cheryl’s mother has Alzheimer’s disease and has been in a nursing home for the past six years. Cheryl and Frank have seen first-hand how her mother’s nursing home expenses have decimated her parents’ retirement nest egg. To avoid this from happening to them, Cheryl and Frank want to plan ahead for their own retirement.

Cheryl and Frank can purchase a shared long-term care insurance policy that will cost them roughly $4,000 annually if they are in good health. Cheryl and Frank can then take $75,000 from one of their certificates of deposit that is maturing and purchase a Single Premium Immediate Annuity (SPIA) with a “Life with Cash Refund” payout option.

SPIA income payments with specific life insurance companies can be set up to automatically pay the long-term care insurance premiums each year to ensure the policy stays in force for life. Also, beginning in 2010 (thanks to the Pension Protection Act), income payments from a SPIA can fund a long-term care insurance policy. If set up properly, these income payments can be federal income tax free. Thus, using a SPIA to fund long-term care insurance premiums creates not only a tax-efficient funding solution, but also a convenient way to help protect Cheryl and Frank’s lifestyle and portfolio from the high costs of long-term care.

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C.

If you are interested in having an Elder Law attorney from The Estate Planning & Elder Law Firm, P.C. speak at an event, then please call them at:

Maryland (301) 214-2229
Virginia (703) 243-3200
Washington DC (202) 223-0270

For a review of your financial plan and investment portfolio, contact a financial adviser at Ariba Asset Management at 1-800-808-7488

As Rents Rise, Is It Time to Buy?

Posted by dfederman on Dec 27, 2011 in Investor Education | Comments Off

Description

As the nation’s home ownership rate shows signs of creeping back up, so too does the average monthly rent paid by those who don’t yet own their homes. With that in mind, this article reviews key considerations for those considering making the transition from renter to owner.

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The cost of renting is on the rise. Is now a good time to buy?

The number of Americans who own their home increased modestly during the third quarter, yet remained below the level recorded one year earlier. The seasonally adjusted home-ownership rate rose to 66.1% from 66%; it stood at 66.7% during the third quarter of 2010. The rate approached 70% during the recent housing boom.

The rental vacancy rate rose to 9.8% from 9.2% in the second quarter, although it was down from 10.3% year-over-year. The national rental rate climbed to $1,004 in the third quarter, up from $981 one year earlier.

For today’s renters, low interest rates continue to create an ideal opportunity to purchase a first home. Even if interest rates begin to creep upward, starting out with a solid understanding of mortgages could help you identify the best deals and save you thousands of dollars over the years. For example, if a mortgage has a fixed rate, it means that you’ll pay the same interest rate during the entire life of the loan; the interest rates on an adjustable-rate mortgage may vary from year to year. Here are some additional factors to consider:

• Shorter terms = lower rates, but higher payments. The “term” of a mortgage is the amount of time you have to pay off your loan. For example, a mortgage with a 15-year term requires to you repay your entire debt, plus interest, within 15 years. In general, shorter-term mortgages offer lower interest rates than longer-term loans. But shorter-term mortgages also require you to make higher monthly payments in order to meet the more aggressive schedule.
• Points are up-front fees. Some lenders may want you to pay “points” when you sign a mortgage. A point is essentially a fee equal to 1% of the value of the mortgage. For example, three points on a $100,000 mortgage translates to $3,000. Your willingness to pay points may help you negotiate a lower interest rate, but that decision should depend on how long you plan to own the property, and how long it would take for your lower monthly payments to compensate for the additional up-front expense.
• Prequalifying can give you a head start. Prequalifying for a mortgage, which involves working with a lender before you find a home to determine how much you’ll be able to borrow, has important benefits. It lets you focus on houses you know you can afford, and it may save precious time once you decide to make an offer.
• Debt makes a difference. Lenders look at something called your “debt to income” ratio to determine how much mortgage you can afford. In general, no more than 28% of your monthly income should go toward housing expenses; overall debt shouldn’t consume more than 36% of income. However, lenders have the flexibility to make case-by-case decisions.

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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.