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Archive for the ‘investing’ Category

Don’t Buy That Mutual Fund!

Thursday, November 15th, 2007

If you’re thinking about investing in a new mutual fund this year, hold off! Many mutual funds pay capital gains distributions next month – and that can result in a large tax bill for shareholders. Call the mutual fund you’re interest in and find out when the distribution date is; make your purchase after that date. 

 In the meantime, Regent Atlantic, a fee-only financial advisory firm in Chatham, NJ, suggest an alternative to holding cash: Buy a tax-efficient exchange-traded fund for now, and then swap over to the mutual fund once the distributions are complete. Here are some of the ETFs they currently recommend holding as an alternative to cash between now and the year’s end:


 #1 Short Term Taxable Bonds – Vanguard Short Term Bond ETF (BSV)


  #2 Short Term Tax-Exempt Bonds  – iShares S&P National Municipal Bond Fund (MUB)


  #3 Short Term Treasury Inflation Bonds iShares Lehman TIPS Bond Fund (TIP)


#4 US Large Cap — Powershares FTSE RAFI 1000 (PRF)


#5 International Large Cap — Powershares FTSE RAFI Ex US (PXF) 

#6 US Small Cap – iShares Russell 2000 Index Fund (IWM)

#7 International Small Cap — SPDR S&P International Small Cap (GWX)

#8 Emerging Markets –- Vanguard Emerging Markets VIPER (VWO)

#9 International Real Estate — DJ Wilshire International Real Estate ETF (RWX) 

More Tips from Your Money and Your Brain

Thursday, October 18th, 2007

My Oct. 19 Yahoo!Finance column reviews the book “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich” by Money magazine’s Jason Zweig. The full story can be found here. Jason had a host of great tips to offer in our interview — here are a few more that didn’t make the column:  

Don’t go with your gut. “We worship intuition in America – we love stories about people who acted on their gut feelings and turned out to be right,” says Zweig. “Your gut can be a really good guide to lots of decisions – which person to trust in a negotiation or a social setting. But gut feelings about which stock to buy are almost certainly lousy, and have to learn to distrust them and become more mindful about how you’re investing.” 

You are not smarter than the market.  “I think that there’s a real ideology in this country that gets people into trouble — that you can and should beat the pros at their own game,” Zweig says. “The idea is: The people on Wall Street are trying to beat the market all day long, they measure their progress minute to minute, and they aren’t good at it, so why don’t you try to beat them? Most of that is true. Professional investors are trying to beat the market over the short term and they’re not very good at it. But the fallacy is anybody can win this game. Just because the professionals are no good at it doesn’t mean the rest of us are.” 

Focus instead, Zweig says on winning your own game – and don’t worry about who else is losing their game. Determine your long-term goals are, put a solid financial plan in place and follow it. “The worst imaginable thing you can do is listen to Pied Pipers who tell you ‘here are seven tricks to beat the pros at the game,’” says Zweig. “That game will make you miserable.” 

Here’s how to win your game: Be reasonable about your forecasts. Set realistic goals based on historical evidence – you’re kidding yourself if you expect to earn more than 10 percent a year in U.S. stocks.  Calculate your risk – remembering not only how much you might gain if you’re right, but how much you might lose if you are wrong. Keep expenses under control, by minimizing trading commissions and holding your investments for at least a year to minimize capital gains taxes.

Rule out any mutual fund expenses higher than 1 percent for U.S. stock funds; 0.75 percent for government bond funds; 1.25 percent for small stock or high-yield bond funds; and 1.5 percent for international stock funds. As Zweig writes, “Hot returns come and go, but expenses never die.” He also advises dollar-cost averaging your way into an investment to smooth out the investment’s ups and downs. 

Play before you buy: At Yahoo!Finance you can set up a “portfolio tracker” to set up an interactive list of your imaginary investments. By monitoring all your buys and sells, and then comparing them to an objective benchmark like the S&P 500, you can gauge your decision-making skills before you put your money where your mouth is. 

“Never confuse brains with a bull market,” Zweig writes. If someone boasts about how good his stock picks are, remember to check whether the segment of the market he invested in performed even better. (A technology investor, for instance, might brag that he earned 48 percent in 2003, but the Goldman Sachs tech-stock index rose 53 percent that year.) 

Beware forecasters who claim they can accurately predict the direction of the market. Financial marketers have such an immense volume of data to slice and dice, they can “prove” anything, Zweig notes. He gives the example of a money manager who tried to find one statistics that would have best predicted the performance of U.S. stocks from 1981 through 1993. He found one that predicted the market with 75 percent accuracy: the total volume of butter produced each year in Bangladesh. Those who tout statistics, Zweig says, will never reveal the theories they tested and rejected in the past.  

Rules to Invest By

Saturday, October 13th, 2007

I just finished reading Jason Zweig’s new book, “Your Money & Your Brain: How the New Science of  Neuroeconomics Can Help Make You Rich.” Watch my October 19 Yahoo!Finance column for a full review.  Zweig outlines a host of neurological and biological quirks that make us do dumb things with our money.

At the moment, I am struggling with one of these behaviors — procrastination. Last December, I opened a single-K – a 401(k) for corporations that employ just one person, or an individual and their spouse — so I could sock away more for retirement. I did well on the socking away part. Unfortunately, it’s all in cash. The bigger the pile gets, the harder it is to pull the trigger and invest it, because I’m worried about losses if I pick the wrong investment. This is an irrational fear, since I won’t be touching the money for at least two decades. 

One problem is that I haven’t created a broad set of financial policies and procedures to follow, as Zweig recommends in his book. I should have made decisions about where the single-K funds would go before I opened the account. Zweig’s book is worth buying for Appendix 3 alone — which offers a sample “Investment Policy Statement” for an imaginary couple, John and Jane Doe. He says your personal statement should include:

1) the purpose of the portfolio

2) your expectations

3) time horizon

4) diversification strategy

5) rebalancing plan (when and how will you rebalance)

6) evaluation of performance (what benchmarks will your compare your portfolio to?)

7) frequency of evaluation (how often will you evaluate performance?)

8) adding and subtracting (under what conditions will you add more to the account, or withdraw money)

9) “we will never…” (a statement of what you won’t do, to keep your brain from making you do dumb things, like trading on tips or hunches) 

For more inspiration on establishing your financial guidelines, check out Berkshire Hathaway’s 2006 annual report. Warren Buffet and Charlie Munger lay out clear and straightforward principles for potential acquisitions: 

1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units), 

2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations), 

3) Businesses earning good returns on equity while employing little or no debt, 

4) Management in place (we can’t supply it), 

5) Simple businesses (if there’s lots of technology, we won’t understand it), 

6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown). For more detail, see page 25 of the report. 

When I rolled my 401(k) from a former employer over to an individual retirement account a few years ago, I worked with a fee-only financial planner to make sure the portfolio reflected my appetite for risk and my long-term retirement goals. Time to stop procrastinating and give him a call.  

Diversification, Allocation, and Rebalancing

Friday, August 24th, 2007

Feeling some jitters about the roller-coaster stock market? This week’s Yahoo!Finance column discusses why, once you figure out an allocation strategy for your investments, the best move is to do nothing at all.

What follows is a how-to for novice investors who don’t understand how portfolio allocation works.  

Allocation is a tool based on the old adage “don’t put your eggs in one basket.” When you’re contributing to a 401(k) or an Individual Retirement Account, your impulse may be to throw everything into a single mutual fund and be done with it forever.  

But you need diversification—putting some of your investments in stocks and some in bonds—because this reduces the risk of losing money. The financial markets tend to move in cycles. Stocks may be up while bonds are down. Different types of stocks move in and out of favor as well: At one point, investors might be hot for small company stocks and their prices go up, while demand wanes for large-cap stocks, and they decline in price. Then it reverses. Or, foreign stocks become the rage.

The goal is to maintain a mix of stocks and bonds, so your portfolio is like a fleet of aircraft carriers, solidly navigating rough seas, rather than the Titanic, sunk by a single iceberg. Asset allocation spreads around your risk and smoothes out the ups and downs of your portfolio.

In 1990, Harry Markowitz won the Nobel Prize in economics. He developed a theory that suggests almost 92 percent of your investment returns come from asset allocation. In other words, the kinds of investments you choose are more important than the specific choices you make within each category.

A classic rule of thumb suggests you subtract your age from 100, and invest that amount in stocks, the rest in bonds. So if you’re 35, you should put at least 65 percent of your money in stocks. Personally, I always put more in stocks than that model suggests for my long-term goals, because I feel comfortable with the risk. I may end up disappointed, but I gotta be me!

Risk tolerance is a very individual decision. Once you decide how much of your portfolio you want to put in stocks, you need to choose among the mutual funds available. One classic scenario suggests your portfolio mimic the makeup of the market itself, by investing: 

-70 percent of your stock allocation in a large-cap fund

-20 percent in mid-cap fund

-10 percent in a small-cap fund 

Under this model, here is what a $10,000 investment would look like:  -$2,500 in bonds-$7,500 in stock funds, with $5,250 (70 percent of stock allocation) in a large-cap fund; $1,500 (20 percent of stock allocation) in a mid-cap fund; and $750 (10 percent of stock allocation) in a small-cap fund 

Investment advisors suggest you consider at least some exposure to stocks of companies outside the U.S. for more diversity. So of the portion of your portfolio allocated to stocks, you might consider investing:

-65 percent a large-cap fund

-15 percent in mid-cap fund

-10 percent in a small-cap fund

-10 percent in a fund that invests in foreign companies 

In dollar terms, a $10,000 investment in this portfolio would look like this:

-$2,500 in bonds -$7,500 in stock funds, with $4,875 in a large-cap fund; $1,125 in a mid-cap fund; $750 in a small-cap fund; and $750 in a foreign fund. Within each of those categories (large, medium, small, foreign) you can choose growth or value styles of investing; growth funds tend to be more aggressive, and carry more risk. 

Once you establish your allocation strategy you should revisit that strategy once a year—no more, no less, and realign your investments to reflect it. This is called rebalancing: It’s like driving down a highway, and your car begins to drift to one side or the other. You want to correct the steering and get yourself back in the center lane. If one of your funds has zoomed in value, it will now make up a bigger percentage of your overall portfolio than it did a year ago. You would sell some of that fund to return to your original allocation. You would take the proceeds from that sale and use it to buy more of the fund that has slipped below the original allocation. 

Example: Original Allocation Strategy:

-70 percent in Snow White Large-Cap Fund

-20 percent in Bashful Mid-Cap Fund

-10 percent in Happy Small-Cap Fund 

Twelve months later, the funds rise or fall in value; you now have:

-75 percent in Snow White Large-Cap Fund

-20 percent in Bashful Mid-Cap Fund; and

-5 percent in Happy Small-Cap Fund 

To rebalance at the end of the year, you would sell 5 percent of the Snow White Large-Cap fund, and buy 5 percent of the Happy Small-Cap Fund.

You may have heard the classic investment phrase “buy low, sell high.” It simply means you should invest in assets when they are low in price, and sell them when the price goes up. Unfortunately, many investors often do the opposite—they see the price of stocks decline and they panic and sell. Or they notice that everyone is buying a certain kind of stock, and they all pile in after one another. But you want to be the investor who is buying when everyone else is panicking and selling; and selling when everyone else is caught up in a buying frenzy.

This takes a tremendous amount of discipline, and a realization that you’re in this for the long haul. Choosing an allocation strategy and sticking with it by rebalancing once a year helps you stay the course, and shelter your investments from your emotional reaction to what’s happening in the market. 

Turnover and Taxes

Friday, May 25th, 2007


This week’s Yahoo!Finance column is about minimizing fees on your mutual fund investments. Bottom line: Find a fund with as few fees and expenses as possible, but don’t let the tail wag the dog. Go with a fund that’s a solid performer – one that ranks at least in the top quarter of funds in its category for five- and ten-year returns.

That said, it’s still important to consider what that investment performance might cost in terms of taxes. When a mutual fund manager buys or sells stocks in the portfolio, it triggers tax consequences. The amount of buying and selling that goes on in a fund is called turnover. According to the Securities and Exchange Commission, more than 2.5 percent of the average stock fund’s total return is lost each year to taxes—much higher than the amount lost to fees.

If you are holding your funds in a 401(k), IRA or other tax-sheltered account, you are protected from the taxes related to high turnover—but the fund’s shareholders do get hit with transaction costs related to lots of buying and selling. However, if you buy a mutual fund outside of a tax-advantaged account—let’s say, to save for a home purchase — you will pay taxes every year on fund distributions, even if you reinvest those dividends in the fund, and don’t sell any shares.


In general, avoid funds where the manager is buying and selling like crazy. Morningstar’s reports on mutual funds include a percentage that indicates how much turnover a fund has each year. If a fund has turnover of 100 percent, that means, during the year, it sold all of the stocks it held and bought different ones. (If turnover is higher than 100 percent, that means it sold all of its stock during the year, bought others, and then sold some of those and bought others.) Obviously, an index fund, which buys and holds the stocks that are in a particular index, will have extremely low turnover.


According to Morningstar, the average turnover of managed U.S. stock funds is between 73 and 74 percent, (depending on whether it has a front-end or deferred load). The National Association of Investors Corporation, an education group for individual investors, suggests its members look for turnover of 20 percent or less.

The ETF/Index Fund Debate

Friday, May 25th, 2007


This week in Yahoo I wrote about mutual fund fees, and how they can drag on your investment returns over time. I wanted to go into more depth here about an issue I mentioned in the column – ETFs versus traditional index funds.


I own an exchange-traded fund and an index funds that both benchmark the S&P 500. I bought the index fund before ETFs became popular, and have hung onto it, since it’s a long-term investment for my kids’ college expenses. I invested in the ETF because the fees related to owning it were miniscule, even lower than the index fund, which was pretty cheap.

Since they’re both benchmarking the same index, and one has lower fees, the ETF should produce better investment returns. But a new study by the Wall Street Journal and Morningstar found that’s not the case. “Ultra-low-cost conventional index funds outperform ETFs a lot more often than not,” the Journal found. Here’s the link, but you need a subscription to view the story.

ETFs are similar to index funds — both track the performance of specific market indexes – except ETFs trade like stocks on a stock exchange. Mutual funds are priced just once a day, when markets close at 4pm EST. ETFs often claim to be more tax-efficient than mutual funds, and do have much lower fees than conventional mutual funds. But you can’t dollar-cost-average (invest a little bits of money on a regular basis) into an ETF, because the brokerage fees will offset your gains.

The Journal says ETFs are catching on with individual investors. The two largest issuers, Barclay’s Global Investors and State Street Global Advisors, say about half of U.S. ETFs that they manage are in individual accounts.

I maintain a small E*Trade account in which I trade ETFs for fun. Over the years, I’ve owned QQQQ (which tracks the Nasdaq); IWN (a small-cap ETF that tracks the Russell 2000); EFA (an international ETF that tracks developed markets like Europe, Australia and Hong Kong); IYZ (tracks telecom stocks); ICF (a REIT ICF managed by Cohen & Steers) and IBB (tracks biotech stocks), among others. I generally buy them when a sector is out of favor and sell them when they hit my target. I like them because buying an ETF is less risky than investing in just one or two companies in a specific sector. Some I’ve held onto for a year or two before I sold them; others for a few months.

The Journal compared returns of ETFs with those of conventional index funds, asking Morningstar to crunch performance data back to 1997 for some of the biggest and best-known ETFs and index funds in each of four categories: the Standard & Poor’s 500-stock index, the total U.S. stock market, international stock markets and a broad-based U.S. bond index. They also examined after-tax performance data that fund companies are required to disclose.

The conclusion: Big, low-cost index funds from Fidelity Investments and Vanguard Group outperformed the ETFs in most of the comparisons the Journal did. For the 40 time periods studied, the mutual funds won the race in 34 — including a sweep of the one-, three-, and 10-year after-tax categories.

The Journal says the results seem surprising since ETFs heavily promote their tax advantages. But only one ETF, Vanguard Total Stock Market ETF, got a spot in the Journal’s after-tax winners’ circle, in a tie with two index funds for the best five-year annualized result — 7.26%.

Moreover, the index mutual funds still ruled, even when returns were calculated without using the fund’s elite share classes, which carry lower fees than non-elite shares. Conventional funds still won about three quarters of the contests.

Granted, the difference between the mutual fund winner and ETF loser was often small – about 0.05 percentage points. But over time, that can add up. An investor who puts $250,000 into one of the lowest-cost S&P 500 funds would have $4,877,444 in 30 years, assuming a 10.5% gross return each year (in line with the broader market’s historical average), the Journal reports. On the other hand, if the fund returns 10.45% a year, the investor would end up with $4,811,615, about $66,000 less.

Would that we all had $250,000 laying around to throw into an index fund.

More best-kept financial planning secrets

Friday, April 13th, 2007


In my April 13 Yahoo!Finance column, I asked a group of experts to reveal the best-kept secrets in financial planning. Click here to see the top secrets. I couldn’t fit every idea in the column, so I’ve included them below:


Keep it simple. “Investors are bombarded with information every time they open a paper, go online, or talk to a friend,” says Catherine Gordon, Principal of Vanguard Financial Planning. “They hear, ‘it’s time for large caps, it’s time for small caps, it’s time for gold and precious metals. It’s nearly impossible to keep up.”Investors should focus instead on building a well-diversified, low-cost portfolio for the long-term, Gordon says: “It doesn’t sound all that exciting, but the reality is that when it comes to investing, it’s really the key to long-term success.”



Use 529 plans to save for your own continuing education. Many older Americans are going back to college or planning to do so in the future, and the growth in online education offers nearly limitless possibilities, says Joe Hurley, founder and CEO of If this is something you are thinking about doing, on either a full-time or part-time basis, consider opening up a 529 plan and naming yourself the beneficiary. The 529 plan allows for tax-deferred investment growth and tax-free distributions for qualified higher education expenses. You may even get a state income tax deduction for your contributions depending on where you live. “This strategy is best for individuals with grandchildren or other family members who will be attending college in the future,” says Hurley. “That way, if you change your mind about going back to school, you can leave the funds in the 529 plan for later use by your family members, thereby avoiding the tax and penalty you would owe by liquidating your 529 plan through “non-qualified” distributions.”

Understand the ‘why’ of your financial plan. “The basics of financial planning are simple — spending less than you earn, systematically saving, spreading your risk and sharing with others,” says Lisa Horuczi Markus, author of the new book Living a Blessed Life: Walking in Faith, Growing in Wealth. “What hangs most people up is the ‘why do it?’ If the end goal is just being rich and powerful, that’s not enough of a ‘why’ for most people. What makes the difference is being inspired by a goal or purpose greater than ourselves. That’s when you see people achieve true wealth.”

It’s not what you make, it’s what you keep. “Financially, you are worth what you save, not what you earn,” says Karen Sheridan of Money Mystique Asset Management in Lake Oswego, Ore. “A fancy salary may be nice, but a growing net worth is mandatory. Many people with big salaries live paycheck to paycheck. If you don’t manage $50,000, you won’t manage $150,000.”

Start saving and planning early. “The earlier you start saving, the more time your money has to compound,” says Sophie Beckmann, CFP®, CPA at A.G. Edwards & Sons. “I know this might not be a big secret, but most people choose to disregard it.” People who develop savings habits early usually also get a handle on how to pay down and avoid credit card debt early on as well – which can have a significant impact on wealth over time. Meanwhile, early birds who have a plan for where to invest their dollars from the get-go will get the biggest return. “The plan should include an assessment of your risk tolerance, time frame and goals,” Beckmann adds.

Understand asset allocation. “Many investors don’t realize that greater than 90 percent of an investor’s total return is predicated on the asset allocation decision, not individual investment selection,” says Greg McBride, CFA and senior financial analyst at In other words, the kinds of investments someone chooses is more important than the specific choices he or she makes within each category. Big, small, growth, value, U.S., foreign—how do you choose which areas of the market and which funds to invest in?

This is the art of asset allocation, in which you put your money into different areas of the market to spread around your risk and smooth out the ups and downs of your portfolio. Harry Markowitz, who won the Nobel Prize in economics, suggests that more than 90 percent of your investment returns come from asset allocation. (I explain this in more depth in my book, Money and Happiness; also see the investor education section at

Got any best-kept financial planning secrets? Comment below.

When the CEO becomes king of his castle, short the stock

Thursday, April 12th, 2007


I loved this piece “When Boss Buys a Trophy Home” in the Wall Street Journal on April 12 by Judith Burns. (You may need a subscription to the Journal to read the piece.) Crocker Liu and David Yurmack, finance professors at Arizona State University and New York University, respectively, found that when the CEO of an S&P 500 company buys a trophy home for himself, it’s a bearish sign for the firm he’s leading. Burns writes: “Investors who short the shares of companies after the CEO has moved into a palatial home would reap returns of 29 percent after one year, and 46 percent after two years, the study estimates.” When the boss sold stock to purchase the home, the company’s shares performed even worse over time.

The average CEO lives in a home with 11 rooms that’s 5,600 square feet; roomy, but not as big as the researchers expected. Researchers speculate that the castle-buying is a signal the CEO has become “lazy, entrenched and entitled,” or is demoralizing employees with his imperial ways. It may also be an indication of insider trading – using the home purchase to dump shares of the company stock based on non-public information about the company.

At minimum, it must imply a loss of focus – getting caught up in plans for the private polo field or boat house can be a distraction when you’re trying to run a multi-billion-dollar corporation. The quintessential example of the focused CEO: Warren Buffet, who still lives in the Omaha home he purchased for $31,000 in 1958.

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