Understand the risks of index funds
Fund giant Fidelity recently slashed the annual expenses on its big index funds to 0.10% of assets. In comparison, the Vanguard 500 Index charged 0.18% of assets, according to an article in Money. During the first 8 months of 2004, the $97-billion Vanguard 500 Index took in $3 billion in new investments.
Should we get ready for index mutual fund price wars? Not exactly, but the growing popularity of these investment vehicles has some competing fund companies taking serious steps. But before you invest your money in a fund that simply mirrors the S&P 500 Index, surgeon investors should be aware of a few things.
Fees outweigh gains?Over the past 10 years, the S&P 500 has averaged ?annualized returns of 10.7%, compared with 8.6% for actively managed large-cap funds, and have averaged 12.8% and 11.1%, respectively, over the past 20 years. A reason for the difference is that index funds buy and hold stocks within the index they track, which makes them less expensive to run. Most blue-chip funds take an average of more than one percentage point a year out of returns before they make a trade.
According to a study conducted by the Consumer Federation of America and Fund Democracy, not all index funds are created equal. The average S&P 500 Index fund charges 0.82% or more than some actively managed funds, which can make a big difference even in a short period of time. Suppose you invested $20,000 into the class A shares of the Morgan Stanley S&P 500 Index in 1997, which charges 0.70%?plus an up-front sales load. You would have about $1,100 less today ($24,620 versus $25,720) than if you had invested the money in the Vanguard 500 Index.
Pay more for the same?Although you may be paying extra for an active fund manager, you might end up owning the same companies that are in the index. According to Money, when funds do well and attract more cash from investors, they have to buy more stocks. Invariably, investors end up owning many of the big stocks that are in the S&P 500 Index and end up pay-ing more for an actively managed fund that bears a strong resemblance to an index fund.
Keep in mind, however, that the S&P 500 represents only 77% of the value of all US stocks. There are approximately 4,500 smaller companies to be considered. The Vanguard Total Stock Market Index tracks the Dow Jones Wilshire 5000, which includes both small- and large-cap companies. These funds offer maximum diversification from a single investment source.
As risky as the sector?Because in?dex funds in many ways mirror the market segments they follow, they are also susceptible to risk. As the article explains, companies listed on the S&P 500 automatically assume a bigger portion of the index as their market value increases. The more popular a stock is, the more of it an index fund will own.
For example, when the tech and telecom bubble burst in 2000, the Van?guard 500 Index had 39% of its as?sets in tech-type stocks, contributing to a 37% drop in value over the next 2 years. Similarly, by the time the market bottomed out in 2002, the fund held only 16% of its assets in those areas, proving that an index fund is generally no safer than the sector it follows.
It's important to remember that while investing in index funds has its advantages, there are no guarantees. Doing your homework prior to making any investment decision is the best course of action.?Ed Rabinowitz
Hoping to catch income and capital appreciation, many people in today's uncertain stock market chase after performance like a dog after its own tail. With interest rates still near 40-year lows, where can surgeon investors turn to fight off inflation, the bane of investing, and still garner outstanding returns? Authors Don Schreiber Jr. and Gary E. Stroik maintain that the only constant in investing is dividends, and their book All About Dividend Investing: The Easy Way to Get Started (McGraw-Hill; 2004) provides compelling evidence for this often forgotten investment medium. A distribution of a company's earnings, dividend-paying stocks have garnered superior performance for over a century?despite stock market highs and lows?while reducing short-term risk and maximizing long-term growth. With a combined investing experience of over 40 years, Schreiber and Stroik find that dividend stocks are the glue that holds a portfolio together and work for just about any investor at any stage of investing by lowering risk, providing growth, and steadily increasing over time. This step-by-step guide helps in?vestors identify underpriced dividend-paying companies, choose dividend ratios, and then assemble the best picks into a solid and successful dividend portfolio.
Skip the room and board and buy a condo
Can you imagine throwing away over $7,000 per year over the next 4 years? An increasing number of parents with college-bound kids cannot either. With average 2004?2005 room and board costing $7,434 at private 4-year colleges and $6,222 at public 4-year colleges, according to the College Board, some parents are investing in the future of their children's education through real estate. Low interest rates and flexible financing have provided an opportunity for 6% of investment buyers to purchase a second home for their college student, according to the Wall Street Journal. Buying a condo or townhouse allows your child to pick their own roommate, someone who potentially helps offset housing costs, and provides a tax write-off for parents. Although many wait until sophomore year of college, some parents start as early as grade school in the hope that their child will attend a college in a particular area. The drawback: If you purchase a property before your child is in college, there is no guarantee that they will want or will be able to attend the college you choose for them. Also, many colleges require first-year students to live on campus. Your best bet may be to wait until your child is a student, and then decide if purchasing a second home is the right investment for you.
Strategies to lower homeowner's insurance
Although you may not have much control over skyrocketing malpractice premiums, you can lower your homeowner's insurance premiums by as much as 10% to 20%, according to the AAII (Ameri?can Association of Individual Investors) Journal. Consider the below strategies:
Ask for a discount?Factors such as proximity to a fire station, type of building materials used, and retiree status may qualify you for a discount. Many insurers also reward customer loyalty of 5 or more years with lower rates.
Look for a package deal?Many com?panies offer a discount if you purchase multiple policies, such as homeowner's, auto, and life. Shop around first: separate policies from different in?surers may be a better deal.
Don't insure your land?Unless your home is on a cliff and the ground falls out from underneath it, your land's value will remain constant?it's the building that you need to worry about. Insure your house and its contents only against theft, fire, hurricanes, and other natural disasters.
Install safety devices?Smoke detectors, burglar alarms, fire and police alarms, and deadbolt locks function as double-duty safety and discount devices, according to many insurance carriers.
Up the ante?Reduce your overall insurance premium by assuming more risk. Keep in mind that raising your de?ductible means that you cannot make claims for smaller items and will have to pay for repairs out of pocket.
Wedding day frocks adorned with credit score
Before taking a walk down the aisle and into wedded bliss, soon-to-be brides and grooms should first sit down and settle their financial issues together. According to Investment News, Jim Trippon of Trippon Wealth Management LLC states that couples need to do the following before making a commitment: understand each other's financial goals; see each other's credit score and report; and create a manageable written budget. Although such topics may seem unromantic to couples on the verge of exchanging vows, the Illinois Certified Public Accountants Society in Chicago urges engaged pairs to complete a 10-point financial compatibility quiz, which can help foster awareness of what finances and financial habits individuals will be brining into a marriage. InvestmentNews also states that young couples need to understand that dividing assets in a divorce is more difficult than discussing money before marriage. Although a prenuptial agreement may seem like a good idea, Trippon says they create friction. Instead, he advises his wealthy clients to set up separate trusts for individual assets, which is a simpler and cleaner method of managing premarital finances. When discussing a sensitive topic such as money, it's always best for couples to seek out the guidance of a neutral and objective third-party professional, such as an accountant or financial planner.
Save on college with reciprocity agreements
If your college-bound child has their heart set on studying entomology, but your state college does not offer the program, don't be bugged that you may have to pay the high costs of out-of-state tuition in order to fulfill your child's dream. Instead, see if your state has reciprocity agreements with interstate institutions of higher learning. The Acade?mic Common Market, a reciprocity agree?ment among the 16 states that comprise the Southern Regional Academic Board (www.sreb.org), offers students the op?portunity to study one of 1,400 un?dergraduate or graduate programs that their state may not offer. Institutions grant an out-of-state waiver annually for students who qualify and are accepted in?to a school's program. The Midwest Higher Exchange Compact (www.mhec.org) of?fers a Midwest Student Exchange Pro?gram for six of its 11 participating states. Public colleges and universities charge out-of-state students no more than 150% of the in-state resident tuition rate for specific programs. For example, if a particular public college offers instate students a tuition of $10,000 and out-of-state students a tuition of $30,000, this program would ensure that out-of-state students eligible for the program would pay a tuition no higher than $15,000. For private institutions a 10% reduction is offered. Similar programs exist for other states, including the New England Regional Student Program offered by the New England Board of Higher Ed?ucation (www.nebhe.org) and the West?ern Interstate Commission for Higher Education (www.wiche.edu), which of?fers three programs: the Western Un?dergraduate Exchange, the Western Regional Grad?uate Program, and the Professional Student Exchange Pro?gram. The only states that do not offer reciprocity agreements are South Dakota, Rhode Island, Delaware, New Jersey, New York, and Pennsylvania.
Buy now, pay much more later
Every bargain-hunting surgeon has heard retail stores touting the amazing deal of no-interest payments for a whole year and similar incentives. According to BankRate.com, while this may sound like a great buy, there are some serious caveats. If you are able to pay off your purchase within a year without paying any interest, then it is a great deal. But if you take your time to make the payments and the interest kicks in, you may be in a bind. At that point, the finance company applies the interest retroactively effective to your purchase date, which can get very expensive. The buy now, pay later campaign is also problematic. If you're taking advantage of such an opportunity because you can't afford the item right now, how can you be so sure you can afford it when the payments start? It's best to hold off the purchase until you can save the money to buy it outright. If you can pay for the item at once, you avoid the risk of high-interest payments, which will cost you much more in the long run.
Beware of banks bearing gifts and other offers
You could make good use of a new computer, and $50 cash back is a very tempting offer. Many financial institutions use tactics such as these to attract new customers, but are the gifts worth it? Before allowing temptation to sway you into switching financial institutions or applying for another credit card, think twice. FDIC Consumer News of?fers some suggestions on how you can decide if the carrot dangled in front of you is indeed a golden opportunity.
Let a gift become a tiebreaker. If you are torn between two identical programs from two or more competitors, it's okay for the gift to become a deciding factor. But it's never a good idea to allow the gift to become the sole reason for opening a new account.
Don't forget the other gift tax. Did you know that the bank must report the fair market value for any gift worth more than $10 to the IRS as income? This rule also applies to multiple gifts totalling more than $10 as well.
Read the fine print. That $1,000 computer may be a tempting reason to buy a $20,000 certificate of deposit (CD), but make sure you look at the terms of the deal. If you need to withdraw any money within 10 years (before the end of the CD's term), the bank can deduct the computer's cost from the balance in addition to adding a penalty for early withdrawal.
Special offers and plans for overseas calls
Finally, making an overseas phone call will cost less than your actual cell phone. Although international landline, domestic landline, and cell-phone rates have dropped over the years?the average international landline call cost $0.52 in 2000 compared with only $0.20 in 2003?international rates for cell phones remained high, despite the demand. According to the Wall Street Journal, Americans in 2003 chatted for over 2 billion minutes to international callers, up 36% from 2002. Now providers such as Verizon Wireless and T-Mobile offer discounted international calling packages in addition to their standard plans, which charge extra for expensive international calls without an international subscription. For only $3.99 per month, Verizon Wireless offers rates that start at $0.09 per minute to over 100 countries within their network through their In?ter?national Long Distance Value Plan, saving cost-conscious consumers over 55% per minute plus standard airtime. T-Mobile offers call plans north and south of the US border for an additional $4.99 per month plus $0.05 per minute to Mexico and $0.09 per minute to Canada. With such substantial discounts for international rates, you now have no excuse not to call your madre or mere.
Web sites to hunt bargains for you
Move over BizRate. Several up-and-coming Web sites are positioning themselves to outperform the average online deal purveyor, according to the Wall Street Journal. Combing the Internet for the cheapest prices around on anything from apparel to electronics and more, these newcomers offer new features that give veterans like Yahoo Shopping and Froogle, Google's answer to the bargain hunt, a run for their money. Become.com links consumers to the Web sites of more than 7 million products from 500 merchants. Although it only encompasses 2.5 million, Smarter.com provides pictures of the actual products and direct links to the Web page on the merchant's Web site, and you can narrow your search by price range and brand. In reaction to growing concerns over Internet fraud, BuySafeShopping.com provides up to $25,000 of insurance from an independent third party with its Bonded Shopping?.
Deal?ers are carefully screened by a comprehensive BuySafe inspection to verify the seller's identity and capabilities. It's not just consumers who benefit from comparison-shopping Web sites, of course. Mer?chants gain greater visibility by listing their products, and bargain shoppers get the best prices around.