Nearly eighty million strong, Gen Y is loosely defined as those born between 1980 and 1994 (or 2005 depending on who you talk to). Raised in a kid-centric time, many continue to be coddled by helicopter parents not willing to wean their precious lot from the proverbial financial teat. As a result, Gen Y’s expectations of the workforce are vastly different from baby boomers and even the closely-related Generation X.

“When they get to the workplace, they have a sense of entitlement, a need for validation, difficulty in really discerning what to do because their whole lives were managed,” says Christine Hassler, a Gen Y career expert and consultant to American Express on Millennials. “They have challenges with making decisions and have expectations of work-life balance. They want their opinion to matter and [want to work] for a company that is really making a difference.”

Major employers are struggling to understand this often fickle demographic, choosing instead to focus on candidates familiar with the corporate structure. And in this fragile economy, a new employee who can hit the ground running is an asset. ”I’m seeing a lot of corporations saying they know they need to engage Gen Y and hire young employers because it costs less, but they don’t want to take the risk of hiring someone without work experience,” says Hassler.

Corporate America is also waiting for this demographic to conform to the old playbook, something completely foreign to Generation Y, says Garrison Wynn, CEO of career management website Wynn Solutions and author of “The Real Truth About Success.” They were told they could have everything they wanted and could be whatever they wanted to be. ”They’ve come to collect on that,” Wynn says. “That’s what they expect. So, when they get in a job interview and it looks like the path isn’t going to be good enough or fast enough, then they’re not interested.”

Volatility in global markets, weak domestic growth and persistent economic concerns in Europe are also complicating an organization’s willingness to expand, despite high corporate profits. “The pain of downsizing and the destruction of the organization is so difficult that companies are playing it safe,” says Jackie Greaner, North America practice leader, talent management and organization alignment for Towers Watson. “It’s hard in this type of market, where it goes up and down to such a degree; it leaves everyone feeling less than confident about the state of the economy.”

The labor market hasn’t been this dire for twenty-somethings for more than 60 years. Nationally, employment among those aged 16 to 29 dropped from 67.3 percent in 2000 to 55.3 percent in 2010, according to new data released from U.S. Census Bureau’s American Community Survey. Across age groups, the 2007 to 2010 employment-to-population ratio plummeted faster than any other comparable period since 1948 — the year the government began tracking data. Even a college education isn’t helping: For those 25-years-old or more with a bachelor’s degree or higher, more than 13 million are out of the labor force, according to the same survey.

For recent college graduates who either couldn’t find that first job or who have been laid off,  the ramifications of prolonged joblessness may last for years to come. Even when the job market improves, there may be a large segment of the population that has been skipped over because they missed out on years of work experience that would have added to their skills and capabilities, says Greaner. Not only will this cohort have to compete with fresh college grads, they’ll have missed out on critical earning years. ”If you leave an organization and three or four years later get into the market, that compounding on compensation is very hard to make up at any point,” says Greaner.

This pervasive joblessness and lack of earning power could have great implications for the broader economy — delayed household formation as college grads move back in with Mom and Dad and a difficult path to the middle class. Generation Y is known for being “the first generation that actually likes their parents,” so the tendency to move back home after college or layoffs was already quite prevalent says Peter Singer, senior fellow with the Brookings Institution. But couple this tendency with the fallout of a recession and unstable growth and, “It was like it got hit with steroids,” he says.

What companies are reaching out and getting it right?

But some companies — in particular, their human resources and recruiting departments – are listening. “The companies that are doing it well and right know that it’s really about the culture you create,” says Ryan Healy, co-founder and COO of Brazen Careerist, a career-management site for young professionals. “The companies that are really successful … are sitting down and defining what is our mission, what is our culture and how do we want people to perceive us. They are then turning that culture outward and trying to show the world, through various means, here is what it’s like in our company,” he says.

After watching their parents log long hours for corporate America with zero semblance of work-life balance, humanizing a faceless corporation and training opportunities are important to the Gen Y demographic. Opportunities to interact with the brand they represent is imperative. “They grew up with technology at their fingertips since they were very small children.  Technology has formed their generation and they’re used being able to engage and interact with companies,” says Hassler.

Hassler and Healy cited Zappos as a leader in the field, both for promotion of an alternative corporate culture and transparency — another imperative for the Gen Y employee. The online discount footwear retailer has an entire website, Zappos Insights, dedicated to “how the Zappos family does business.”  Potential employees can sign up for a full-day corporate tour or request a free Culture Book — a behemoth of a “dictionary” that details an “open and honest view” of what the Zappos culture means to current employees.

“They don’t have a dress code and are famous for bringing new employees in for two-weeks of training. At the end, they will say ‘Anyone not sure they want to be here can come up and we’ll give you a $2,000 check to go home.’ ” They want to make sure that everyone has bought in,” says Healy.

What other sectors are getting it right? Healy says tech startups are very attractive to the Gen Y employee for the simple fact that they aren’t trying too hard. “When companies ask what they can do to attract Generation Y, I always say look to start ups because they’re the ones who don’t have to put a plan or strategy in place to appeal to Gen Y, they just do because of who they are,” he says.

Working with a large peer group brings out the best in Gen Y, which is where large consulting firms and the major accounting firms like KPMG and Ernst & Young are excelling, says Healy.

“No generation has ever been more effective on a team,” says Wynn. “You get a team of people in their 20s together and the information flows, the egos are low, they make decisions effectively, they don’t take things personally and if they have problems, they get over them. They believe that every single problem comes with its own existing solution and that is an amazing thing and it will take us into the future.”

These boomerang kids get a lot of flack, and rightly so in some respects. But as they’re forced to grow and change, so too should the companies hiring them. “I try to tell people who are my age [50]that wishing someone is like you is a terrible strategy. That’s called hope and it’s wonderful but hope is not a strategy,” says Wynn. “If they were like you, than they couldn’t be better than you and for evolution to move forward, we need to have people who are better than we are. A 25-year-old is going to have a better idea. Not next week, but soon.”

Those are four words no spouse wants to hear from their
partner, especially when it comes to investing and retirement
planning.

Just ask David Rothberg. Rothberg, 59, and his wife heavily
invested in tech giant Cisco way back in the mid-1990s. She
wanted to shift money into bonds instead. But that’s not
Rothberg’s style. “I’m an aggressive investor, and the market
was going up 30 percentage points per year, so why would I
invest in something that would get us six percent?”

As the technology boom went bust, Cisco’s revenue fell for
the first time in the company’s history. By the summer of 2001,
sales were down one-third compared to six months prior. Cisco
stock had lost 68 percent of its value in 10 short weeks.

“I should have listened to my wife, but I didn’t,” says
Rothberg, an ophthalmologist based in Clearwater, Florida.

Are these verbal jousts between couples hindering financial
decisions? According to new research from Charles Schwab Corp,
they are.

The survey revealed that a majority of Americans, single or
married, believe that planning for one’s golden years is smooth
sailing for the non-married cohort.

Among the survey’s findings:

-53 percent of married Americans and more than two-thirds
(69 percent) of singles believe financial decisions are easier
to make when single.

-58 percent of those who are married say the decision about
when to retire would be easier if they were single, while 62
percent believed deciding where to retire would also be easier
without a spouse.

-More than one-quarter of married clients surveyed (27
percent) said they bounced financial decisions off someone
other than their spouse.

COMPLICATIONS

Indeed, advisers tend to agree, saying that risk tolerance,
age differences and overall health and lifestyle considerations
only complicate the planning process.

“I do a lot of marital counseling, not by choice and not on
purpose,” says Wayne Copelin, president and founder of Copelin
Financial Advisors in Sugar Land, Texas.

“Married people have similar concerns, but for a single
person, it’s not only easier, it feels easier. If you have a
husband and wife, you’re putting the mortality of two people
together.”

Over the past 50 years, there has been a sharp decline in
marriage across the United States.

In 1960, two-thirds (68 percent) of all twenty-somethings
were married, but in 2008, just over a quarter (26 percent)
walked down the aisle, according to data from the Pew Research
Center. The most recent data from the Census Bureau shows that
for the first time in history, married couples account for
fewer than half of all households (48 percent).

And while the general perception may be that singles have
it easy, those going solo are falling short when it comes to
getting their financial houses in order.

According to the Schwab survey, 85 percent of married
Americans are already saving for retirement, compared with 67
percent of singles across all age groups. More than one-third
(38 percent) of married Americans express confidence in their
retirement readiness compared to just 32 percent of those who
are single.

SINGLES SAVE LESS

“There are occasionally people who save more because
they’re single, and they don’t have the responsibility of a
spouse or children. They’re able to have that discipline, but
typically, we’ve found single people don’t save as much because
they’re out trying to do more on their own,” says Gordon Tudor,
principal at Wealth Analytics, an advisory firm in San Diego,
Calif.

The numbers are even more startling for single women. About
40 percent of female baby boomers are single, which represents
a rise of 10 percent from 1989, according to AARP. Among
unmarried women over 60, nearly one in six lived in poverty in
2008, according to the Center for American Progress.

As a single mother, Jerri Will, 59, says most of her income
and time went to raising her two daughters.

“At 50, when they were out of the house and married, I
started saving for my retirement fast and furiously,” says
Will, an entrepreneur and Schwab client.

Will has been investing aggressively for the past nine
years, dividing her assets between dividend-paying stocks and
rental properties to ensure she has a steady monthly income -
an important consideration for singletons.

One single person in retirement spends 70 percent to 75
percent of what a couple spends, according to a report from the
American Academy of Actuaries. On a per-person basis, the cost
of living for singles is 40 percent to 50 percent higher than
that for married people.

“It’s statistics like these that highlight how important it
is for women, especially single women, to take control of their
retirement future,” says Colleen O’Brien, vice president and
branch manager at the San Ramon, California Schwab location.

“If you polled most women, they’re all writing the checks
to pay for expenses in the home. They’re capable of making sure
the bills are paid. But when it comes to the investment piece,
they hand it over to their husbands because it’s intimidating,”
she says. “The longer they go on like this, the less say they
have in the conversation.”

While it may be easier to plan for retirement with only one
person to consider, a second opinion can be just what your
portfolio needs.

After 2002, Rothberg began investing more in fixed-income,
and his wife took the initiative to educate herself by joining
an investing group.

“I did take her advice,” he says. “Eventually.”

(Editing by Lauren Young)

Those are the four words no spouse wants to hear from their partner, especially when it comes to investing and retirement planning.

Just ask Dr. David Rothberg. Rothberg, 59, and his wife heavily invested in tech giant Cisco way back in the mid-1990s. She wanted to shift money into bonds instead. But that’s not Rothberg’s style: “I’m an aggressive investor, and the market was going up 30 percentage points per year, so why would I invest in something that would get us six percent?”

As the technology boom went bust, Cisco’s revenue fell for the first time in the company’s history. By the summer of 2001, sales were down one-third compared to six months prior. Cisco stock had lost 68 percent of its value in 10 short weeks.

“I should have listened to my wife, but I didn’t,” says Rothberg, an ophthalmologist based in Clearwater, Florida.

Are these verbal jousts between couples hindering financial decisions? According to new research from Charles Schwab Corp, they do. The survey revealed the majority of Americans — both single and coupled — believe planning for your golden years is likely smooth sailing for the non-married cohort.

Among the survey’s findings:

• 53 percent of married Americans and more than two-thirds (69 percent) of singles believe financial decisions are easier to make when single.
• 58 percent of those married say the decision when to retire would be easier if they were single, while 62 percent say the decision where to retire would also be easier without a spouse.
• More than one-quarter of married clients surveyed (27 percent) say they bounce financial decisions off of someone other than their spouse.

And advisers tend to agree — noting risk tolerance, age differences and overall health and lifestyle considerations only serve to complicate the planning process. “I do a lot of marital counseling, not by choice and not on purpose,” says Wayne Copelin, president and founder of Copelin Financial Advisors in Sugar Land, Texas. “Married people have similar concerns, but for a single person –  it’s not only easier, it feels easier. If you have a husband and wife, you’re putting the mortality of two people together.”

Over the past 50 years, there has been a sharp decline in marriage across the U.S. In 1960, two-thirds (68 percent) of all twenty-somethings were married, but in 2008, just over a quarter (26 percent) walked down the aisle, according to data from the Pew Research Center. The most recent data from the Census Bureau shows for the first time in history, married couples account for less than half of all households (48 percent).

And while the perception is singles have it easy, those going solo are falling short when it comes to getting their financial houses in order. According to the Schwab survey, 85 percent of married Americans are already saving for retirement, compared with 67 percent of singles across all age groups. More than one-third (38 percent) of married Americans express confidence in their retirement readiness compared to just 32 percent of those who are single.

“There are occasionally people who save more because they’re single, and they don’t have the responsibility of a spouse or children. They’re able to have that discipline, but typically, we’ve found single people don’t save as much because they’re out trying to do more on their own,” says Gordon Tudor, principal at Wealth Analytics, an advisory firm in San Diego, California.

And the numbers are even more startling for single women. About 40 percent of female baby boomers are single now, which represents a rise of 10 percent from 1989, according to AARP.  Among unmarried women over 60, nearly one in six lived in poverty in 2008, according to the Center for American Progress.

As a single mother, Jerri Will, 59, says most of her income and time went to raising her two daughters. “At 50, when they were out of the house and married, I started saving for my retirement fast and furiously,” says Will, an entrepreneur and Schwab client.

Will has been investing aggressively for the past nine years, dividing her assets between dividend-paying stocks and rental properties to ensure she has a steady monthly income — an important consideration for singletons. One single person in retirement spends 70 percent to 75 percent of what a couple spends, according to a report from the American Academy of Actuaries. On a per-person basis, the cost of living for singles is 40 percent to 50 percent higher than that for married people.

“It’s statistics like these that highlight how important it is for women, especially single women, to take control of their retirement future,” says Colleen O’Brien, vice president and branch manager at the San Ramon, California Schwab location.

“If you polled most women, they’re all writing the checks to pay for expenses in the home. They’re capable of making sure the bills are paid. But when it comes to the investment piece, they hand it over to their husbands because it’s intimidating,” she says. “The longer they go on like this, the less say they have in the conversation.”

While it may be easier to plan for retirement with only one person to consider — a second opinion can be just what your portfolio needs. After 2002, Rothberg began investing more in fixed-income, and his wife took the initiative to educate herself by joining an investing group. ” I did take her advice … eventually,” he says.

As the first wave of that pig-in-a-python generation – the 79 million Americans born between 1946 and 1964 – move into retirement, experts warn a boomer stock sell-off could cause equity valuations to plummet, likely sending the portfolios of young investors into a tailspin.

“The peak of the valuation in U.S. equities was 10 years ago,” says T. Doug Dale Jr., an adviser with Security Ballew Wealth Management in Jacksonville, Mississippi. “Valuation levels are coming down. You have a lot of baby boomers selling off assets as they need to liquidate for retirement and that will further exacerbate the decline in valuations.”

Researchers from the San Francisco Federal Reserve recently said that demographics actually point to a bearish trend in stocks. Aging populations create headwinds in the market, they said after studying the link between demographics and asset prices.

The Fed researchers looked at the ratio of investors aged 40 to 49 (those likely trying to build equity) to those aged 60 to 69 (those likely to be shifting allocation toward safer investment vehicles such as bonds).

They then compared this ratio to the year-end price/earnings ratio from 1954 to 2010 and found a strong correlation between shifting demographics and stock prices. Their results spell bad news for a full market recovery:

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13 percent relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027.

PREPARING FOR THE WORST

Not all younger investors are fleeing in panic.

“I’ll probably just ride it out – if it’s not great at first, we probably won’t be pulling much out anyway,” says 30-year-old Ruth Recktenwald, a Silicon Valley semiconductor technician. “If we take a loss, then we take a loss.” Recktenwald and her husband annually invest in their 401(k)s, IRAs and Roth IRA accounts, and allocate their money to nothing riskier than broad-based index funds. They’re following the traditional advice that young investors should aggressively seek returns, allocating most of their portfolios in equities.

But some people, like David Hefty, CEO and co-founder of Hefty Wealth Partners in Auburn, Indiana, say that traditional buy-and-hold strategy is out of whack with changing demographics. As a Gen X investor himself, Hefty, 34, says what worked for the baby boomers won’t work for the generations of investors to come. He tells his clients to move their money around more aggressively.

“When you look at what happened with the boomers, you see that when we came out of a recession in 1982 there was an unprecedented bull market,” Hefty says, adding the parents of Gen Y investors are stuck in the 1990′s with a buy-and-hold mentality they’re likely passing on to the next generation.

But research suggests Generation Y investors may already be shying away from equities, adopting a conservative approach thanks to the psychological baggage of the Great Recession. A recent survey by MFS Investment Management shows 40 percent of Gen Y investors said they agreed with the statement: “I will never feel comfortable investing in the stock market,” while another 30 percent said protecting principle was their primary investment objective.

“Will that generation wind up being more conservative than the generations ahead of it? I would say yes,” says Dale. “The generation that went through the Great Depression is what they’re going to wind up looking like.”

Advisers tell younger investors to steer a path between abject fear of stocks and blind allegiance. Here are some of the ways they say Gen X and Gen Y can build their own fortunes without getting slammed when the older folk sell.

GO TACTICAL

Tactical asset allocation (TAA) is an active-management portfolio strategy that involves shifting your money among various asset classes in response to market conditions. It flies in the face of the traditional buy-and-hold strategy that boomers know and love.

“In your 401(k), do your homework and find a tactical management solution,” says Hefty. “Push your HR department to make sure you get what you need to be successful.”

Hefty believes his firm’s tactical strategy will allow his clients to not only protect assets, but also to make money in a secular bear market as they did in the 2008-2009 financial crisis. “We’re 100 percent in cash right now and this is fantastic for us,” he says. “When things really start breaking down in the next few months, we’ll probably start shorting the market to make money on the way down. Once it starts to bottom out and everyone in the country pulls out, we’ll start buying stocks and ride it back up.”

A word of caution for investors: Not all tactical managers are alike, and over the years there has been a lot of academic research pointing to the difficulty, if not impossibility, of profitably timing the market. Timing is everything in a tactical strategy, so it amplifies the risks of active management. In other words, the more flexibility your manager has, the more room for error. Also, active trading could increase fees and taxes.

DON’T BE SCARED, BE GREEDY

The most famous and wealthy investor in the world – Warren Buffett – may have been on to something when he said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

When other investors are panicking, don’t fall prey to a herd mentality, says Frank Fantozzi, president and CEO of Planned Financial Services in Cleveland, Ohio. “Whenever there is chaos, there is opportunity,” he says.

When you look at the psychology of investing, people are often their own worst enemy – buying when the market is rising and selling off when they think it’s tanking. “It’s been proven time and time again that when you look at the average rate of return for a mutual fund and compare it to the average individual investor return, the average investor return is usually less than 50 percent” of the funds’ return. says Fantozzi. So, don’t trust your gut. Do the opposite.

Depending on your investment time horizon, a plummet in stock prices may be an ample opportunity to get greedy and load up on cheap equities, says Dale. “You have to be willing to buy more when stocks are down,” he says. Even if your own holdings take a hit, if your timeline is long enough you should bounce back, cashing into the time-value of your investment.

THINK GLOBAL

The U.S. is not the economic powerhouse it used to be. In the 70′s, the U.S. made up two-thirds of global GDP. Now, it sits around one-third, says Dale. “What that means is today, if you limit yourself to just investing domestically, you’re limiting yourself to a third of the world’s investing opportunities,” he says.

Developing countries in the emerging world are growing at higher growth rates. As the global economy rebounded in 2010, lower-income countries (per capita incomes with less than $30,000 per year) averaged 6.6 percent growth compared to high-income countries (more than $30,000) that averaged 2.9 percent growth. Asian countries currently account for one-quarter of the world’s middle class, but by 2020 that portion will likely double, accounting for more than 40 percent of global middle class consumption, according to the Organization for Economic Co-operation and Development (OECD). That’s another reason, Dale says, to hold assets outside the U.S., particularly in emerging markets.

The demand from the new middle class will not only bolster global equities, but will likely help domestic valuations as well. “The people on a global level who are starting to invest, the people in Asia and South America, are developing a sense of middle class. Where are they going to put their money? There is going to be some level of demand from that group, even if it’s 10 to 15 percent of what the U.S. is,” says Fantozzi.

Bottom line? Be an active and engaged investor. If you sit on the sidelines, you’ll likely miss an opportunity to either save your bacon or make some. “Any time you go through economic hardship, money is in motion. Those who are standing on the tracks lose all their money and those who are standing off to the side, collect all the money. During these types of times, think of who you know – your family, friends, colleagues – more of them will stand on the tracks than will step to the side,” Hefty says.

(Editing by Linda Stern and Beth Gladstone)

As the first wave of that pig-in-a-python generation – the 79 million Americans born between 1946 and 1964 – move into retirement, experts warn a boomer stock sell-off could cause equity v
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“The peak of the valuation in U.S. equities was 10 years ago,” says T. Doug Dale Jr., an adviser with Security Ballew Wealth Management in Jacksonville, Mississippi. “Valuation levels are
536870913
543387501
as they need to liquidate for retirement and that will further exacerbate the decline in valuations.”

Researchers from the San Francisco Federal Reserve recently
said that demographics actually point to a bearish trend in stocks. Aging populations create headwinds in the market, they said after studying the link between demographics and asset prices.

The Fed researchers looked at the ratio of investors aged 40 to 49 (those likely trying to build equity) to those aged 60 to 69 (those likely to be shifting allocation towards safer inves
536870913
1953326446

They then compared this ratio to the year-end price/earnings ratio from 1954 to 2010 and found a strong correlation between
shifting demographics and stock prices. Their results spell bad
news for a full market recovery:

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13 percent
536870913
544367980

PREPARING FOR THE WORST

Not all younger investors are fleeing in panic.

“I’ll probably just ride it out – if it’s not great at first, we probably won’t be pulling much out anyway,” says 30-year-old Ruth Recktenwald, a Silicon Valley semiconductor technician. ”
536870913
1231429751
index funds. They’re following the traditional advice that young investors should aggressively seek returns, allocating most of
their portfolios in equities.

But some people, like David Hefty, CEO and co-founder of Hefty Wealth Partners in Auburn, Indiana, say that traditional buy-and-hold strategy is out of whack with changing demographics. As
536870913
543236167
1819880970

“When you look at what happened with the boomers, you see that when we came out of a recession in 1982 there was an unprecedented bull market,” Hefty says, adding the parents of Gen Y inve
536870913
1937010546

But research suggests Generation Y investors may already be
shying away from equities, adopting a conservative approach thanks to the psychological baggage of the the Great Recession. A recent survey by MFS Investment Management shows 40 percent of Gen
536870913
542711913
feel comfortable investing in the stock market,” while another 30 percent said protecting principle was their primary investment objective.

“Will that generation wind up being more conservative than the generations ahead of it? I would say yes,” says Dale. “The generation that went through the Great Depression is what they’re
going to wind up looking like.”

Advisers tell younger investors to steer a path between abject fear of stocks and blind allegiance. Here are some of the ways they say Gen X and Gen Y can build their own fortunes without
getting slammed when the older folk sell.

GO TACTICAL

Tactical asset allocation (TAA) is an active-management portfolio strategy that involves shifting your money among various asset classes in response to market conditions. It flies in the f
536870913
1633903904

“In your 401(k), do your homework and find a tactical management solution,” says Hefty. “Push your HR department to make sure you get what you need to be successful.”

Hefty believes his firm’s tactical strategy will allow his clients to not only protect assets, but also to make money in a secular bear market as they did in the 2008-2009 financial crisis
536870913
773857879
money on the way down. Once it starts to bottom out and everyone in the country pulls out, we’ll start buying stocks and ride it back up.”

A word of caution for investors: Not all tactical managers are alike, and over the years there has been a lot of academic research pointing to the difficulty, if not impossibility, of prof
536870913
1769234786
words, the more flexibility your manager has, the more room for
error. Also, active trading could increase fees and taxes.

DON’T BE SCARED, BE GREEDY

The most famous and wealthy investor in the world – Warren
Buffett – may have been on to something when he said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

When other investors are panicking, don’t fall prey to a herd mentality, says Frank Fantozzi, president and CEO of Planned Financial Services in Cleveland, Ohio. “Whenever there is chaos,
536870913
544499813

When you look at the psychology of investing, people are often their own worst enemy – buying when the market is rising and
selling off when they think it’s tanking. “It’s been proven time and time again that when you look at the average rate of return for a mutual fund and compare it to the average individual inve
536870913
1937010546

Depending on your investment time horizon, a plummet in stock prices may be an ample opportunity to get greedy and load up on on cheap equities, says Dale. “You have to be willing to buy m
536870913
1869767968

THINK GLOBAL

The U.S. is not the economic powerhouse it used to be. In the 70′s, the U.S. made up two-thirds of global GDP. Now, it sits
around one-third, says Dale. “What that means is today, if you
limit yourself to just investing domestically, you’re limiting yourself to a third of the world’s investing opportunities,” he says.

Developing countries in the emerging world are growing at higher growth rates. As the global economy rebounded in 2010, lower-income countries (per capita incomes with less than $30,000 pe
536870913
1914730853
1684825376
according to the Organization for Economic Co-operation and Development (OECD). That’s another reason, Dale says, to hold assets outside the U.S., particularly in emerging markets.

The demand from the new middle class will not only bolster global equities, but will likely help domestic valuations as well. “The people on a global level who are starting to invest, the
people in Asia and South America, are developing a sense of middle class. Where are they going to put their money? There is going to be some level of demand from that group, even if it’s 10 t
536870913
1864380725

Bottom line? Be an active and engaged investor. If you sit
on the sidelines, you’ll likely miss an opportunity to either save your bacon or make some. “Any time you go through economic hardship, money is in motion. Those who are standing on the tracks
536870913
543977331
1819025523
(Editing by Linda Stern and Beth Gladstone)

Investors pulled $31.3 billion out of U.S. equity funds in the two weeks ending August 10, reaching outflow levels not seen since the stock market collapse of March 2009.

Finding the reason behind that seemingly irrational sell-off may require more analysis than most economists or stock market watchers can perform. Perhaps the motivations behind our investing decisions are actually a question better put to neuroscience.

“Certainly, economic fundamentals play a valuable role in the value of assets and the prices that things trade for. But when individuals are making buy-and-sell decisions they can be very influenced on what is going on in their brains, including emotions,” says Lisa Kramer, associate professor of finance at the Rotman School of Management at the University of Toronto. Kramer has done extensive research on how human emotion — specifically in relation to seasonal depression — influences financial decisions and financial markets.

“We’re prone to weighing recent information more heavily than more historical information. The fact that we’ve just been through a financial crisis in the last couple of years is looming large on our minds,” she says.  “When we see things start to go south again in the market, we go to that bad place in our minds and I think that can drive us to act impulsively more so than we would have a few years ago before we lived through this kind of volatile period.”

This historical hangover, coupled with the understanding of the body’s risk/reward system, has lead researchers to hypothesize that an investor’s urge to buy or sell at the wrong time could be a by-product of our neural processes overriding reason.

Kramer explains if one were to do a functional MRI analysis while an investor was in the process of making a financial decision — let’s say whether to buy a stock or a bond — “you’ll find that the part of the brain that’s activated when somebody makes the risky choice is called the nucleus accumbens (NACC) and it’s activated when people are experiencing pleasurable, things like food or sex. The part of the brain that’s activated when people make the safe choice is called the anterior insula and it’s more associated with pain and fear,” she says.

Richard Peterson, M.D., a former quantitative trader and managing partner at MarketPsych, agrees, adding investors are still experiencing anger and mistrust of the financial services industry.

“When people feel disgust, it activates the anterior insula. That area of the brain is known to prevent risk taking,” he says. “Since the crisis began, no more money has entered the market. In fact, it has stayed out entirely. People are not reinvesting, they’re feeling disgusted, our data shows that, and it appears to be through this neural mechanism.”

Peterson writes in his paper “The Neuroscience of Investing: FMRI of the reward system,” that the brain’s reward system, connected to one of the brain’s five dopamine pathways, coordinates the search for, pursuit and evaluation of potential reward. The activation of this system, when it comes to collective investing, could have broader implications for financial markets and the economy.

Activation of the reward system results in particular types of behavior and emotion, characterized among investors as greater risk-taking, increased impulsivity, enhanced positive feelings, and greater physical arousal.  Loss avoidance behavior and emotions are timid, protective, fearful, and risk-averse.  When activated among large groups, reward approach behavior can impact the economy as a whole, leading to stock market bubbles, increased consumer purchasing, higher investment risk-taking, and an increased use of credit.  Loss avoidance, on the other hand, is seen when people decrease borrowing, sell off assets, and report decreased financial confidence (and even fear.)

In terms of behavioral finance and investing,  Franklin D. Roosevelt was spot on when he made the now-famous quote “the only thing we have to fear is fear itself,” says Brian Bruce, CEO of Hillcrest Asset Management and managing director of the Center for Investment Research.

“The volatility is of our own making. The thing we fear the most, because we fear it, we create it,” he says. “The frustrating part is you can create this self-fulfilling prophecy. Even if we aren’t headed for a recession, if  everyone is scared to death — consumers stop spending, businesses stop hiring and stop investing –  than you’ll create one. If you just act normally, things will be fine.”

Advisers are experiencing the by-product of these emotions, even for clients in a defensive portfolio position. When it seemed the markets were on an upswing earlier this year, investors were hungry for gains.

“Over the past six months, I’ve had to explain to more clients why they need to stay defensive rather than chasing returns.  I can lock in a return of eight percent at some point this year which could turn into a loss of seven percent in two weeks,” says Jeff Link, partner at Guardian Capitol Advisors LLC. “I have more conversations with clients where I’m trying to get them to stay the path we’ve laid out for them even though it looks like we may be wrong.”

So, what does this type of research mean for the financial services industry? Understanding an investor’s fight or flight mentality is integral to advisers, writes Gregg S. Fisher, a CFA and CFP, in his paper “Behavioral finance from a practitioner’s viewpoint.”"For those of us focused on the risk side of the equation, understanding the behavioral component of the decision-making process is essential to our understanding of market dynamics – particularly in periods of financial stress like the past decade, in which we saw two equity market corrections of approximately 50 percent each,” he writes.

For investors? There are periods of market volatility and uncertainty that will determine prices, but rational analysis of fundamentals will eventually prevail. Tune out the market chatter and listen to your adviser. “The markets are overly driven by emotion and those that will profit will understand that they need to take that emotion out of it and stay calm. Invest on the facts,” says Bruce.

Just make sure you and your adviser are on the same page, Peterson advises. “If you don’t resonate with your adviser, you’ll jump off the [investment] plan even if it’s solid. If you don’t buy into them or don’t trust them, you’ll panic when markets are down 23 percent.”

“It was an add-on before, something extra that they did to be kind or nice, but I think it’s now a business magnet for dealing with all different parts of an individual’s wealth,” says Eileen Heisman, CEO and President, National Philanthropic Trust.

“They’re not just dealing with private equity investing or alternative investments or making sure the money is going to the next generation through tax planning – philanthropy has become a central part of relationship management because it’s so much a part of a high-net-worth individual’s life.”

Looking to give back by donating your dollars or expertise? Reuters Money interviewed executives from some of the most prominent financial institutions to see how they stack up in the philanthropic space.

Bank of America

What makes the services unique? Gillian Howell,  national private philanthropy executive with Bank of America, believes it’s the “depth and breadth of our expertise and specialization,” that differentiates the bank from its competition. With 179 people, with an average of 15 years experience each working with high-net-worth and ultra-high-net-worth individuals, they boast a national reach with regional and local expertise.

Along with services for individual investors, BofA also manages institutional philanthropy under the group’s Philanthropic Solutions umbrella. “We’ve got a nice synergy between the two of them that makes them pretty unique too,” she says.

Leader in technology:
BofA’s philanthropy division gives away approximately $300 million in grants annually, making it one of the largest such divisions in the country. The bank understands the importance of streamlining and efficiency.  The Search for Grants website boasts information on more than 120 foundations. Interested parties can search for not-for-profit organizations based on geography, mission and focus — a service they hope to broaden.

“We would [like to]become the behind-the-scenes foundation’s administrator for clients,” says Howell. “If a family foundation wanted to set up a website to receive applications for the foundation, we would be the virtual office behind that, providing all the processing, due diligence and back-office work on those grant applications which would be a huge advantage to our clients.”

BofA is also working on a new program called Internet Grant Application Module, or IGAM, which will allow the acceptance of online applications for discretionary foundations. “It’s such an easy, streamlined way of doing business and moves you from the paper based processing – there can be stacks upon stacks for foundations and grants. The fact that a family or foundation can receive these online as opposed to an 85-page packaged application is real progress.”

Harris Private Bank

What makes their services unique? “Philanthropy is not about how much money you give, it’s about process and attitude,” says Claudia Sangster, director of philanthropy, estate and trust services with Harris my CFO, Inc.

Sangster and her team approach philanthropy from a discovery basis, allowing easy integration to Harris’ other private banking services. ”Philanthropy is an equal player at the table with investment advisers, risk managers, the tax compliance side, along with tax planning and estate planning,” she says. “I don’t feel like we’re a step child added to services as an after thought.”

Sangster is part of a team of  advisers, allowing interaction with other key players, “So that we have a great understanding of the client’s wealth and the generations that are involved.”

Multigenerational giving:
Harris’ services are customizable, depending on the needs of an individual and family. “Wealth is one of those things that comes in all shapes and sizes, and families are the same,” Sangster says.

The team is somewhat agnostic in terms of what vehicles and areas of interest are pursued, instead focusing on building a framework for families to establish a legacy and pass on values to younger generations.

“I’m finding our clients are looking for guidance and education in how to be effective grant-makers and how to give collaboratively as a family,” Sangster says.  “It builds their bonds of intimacy and creates a better understanding of each other. Hopefully, they are more able to collaborate on not just philanthropy but all aspects of wealth management.”

Morgan Stanley

What makes their services unique? “A number of years ago, we decided not to have our platform come out of a trust company or the asset-management side of the firm,”  says  Melanie Schnoll Begun, managing director of philanthropic services at Morgan Stanley Smith Barney. “It sits in wealth management and is available for our advisers or their best clients. Unlike many of our competitors, our team is not out there with the mindset that we need to open up a donor-advised account.”

New systems and social media
The firm has recently launched new foundation-management services in an effort to alleviate administrative burden for clients. “The goal with philanthropy is to have fun with it,” says Schnoll Begun, so they are using technology to make running a family foundation simple. “It allows clients to have a wonderful vehicle to give, but not have the burden of running the back office,” she says.

The firm is also creating a social media platform that can be used as a way to connect and learn from other philanthropists. It can also ensure they get the information they need on impact, which Schnoll Begun believes is the number one concern for her clients. “They want accountability and they want timely reporting by the non-profits they’re giving to. Through the social media platform, they’ll be able to make timely decisions on organizations,” she says.

UBS

What makes their services unique? Bill Sutton, head of philanthropic services at UBS Wealth Management Americas, believes it’s the firm’s global reach that sets it apart from the competition. “We have philanthropy offices in Zurich, the U.S., Singapore, Australia, Paris, and Hong Kong.  We’ve created a knowledge-exchange platform to bring our clients together to collaborate,” he says.

Their expansive network allows clients new to the U.S. to invest in their heritage countries and facilitates partnering with co-funders around the world. Because of this global reach, UBS was named the best global philanthropy services provider by the Euromoney Private Banking Survey in 2010 and 2007.

Programs that connect:
For the past 10 years, UBS has hosted the Global Philanthropy Forum, which brings together philanthropic thought leaders and 150 of UBS’s wealthiest clients to exchange ideas and develop new approaches to philanthropy. This year’s conference will focus on bridging the wealth gap.

“We try to keep it focused and tight on our client’s interests. We work with over 3,500 private foundations just in the U.S. and well over 15,000 charities, and of course thousands more around the world, so we do a lot of work to connect our ultra-high end clients with their peers,” says Sutton.

“I haven’t thought of doing that [renovation] since 2008 for financial reasons,” says DeFore. Between 2001 and 2004, DeFore sunk roughly $500,000 into his 11,000-square-foot, Washington-area home, which he purchased for $1.1 million 10 years ago.

Before the crash, his property was valued at approximately $1.9 million. But a recent appraisal during a refinancing revealed his home was now valued at $1.3 million. “We’ve probably over-built for the neighborhood, which is a high-end neighborhood — nothing less than five-acre estates with pools and tennis courts,” he says.

DeFore is one of a growing list of homeowners delaying renovations, thanks to an anemic economic recovery. Spending on home improvement dipped in the second quarter of this year, with the National Association of Home Builders’ (NAHB) Remodeling Market Index falling from 46.5 in the first quarter to 43.9 in the second.

The remodeling market is expected to remain weak through 2012, with renovation spending projected to be down four percent through the first quarter of next year, according to the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

“I think that largely has to do with the broader economy and what’s going on in the housing market,” says Kermit Baker, director of the Remodeling and Futures program. “Housing prices looked like they were recovering and then fell again, and that’s pretty critical for remodeling. It’s difficult for a home owner to take on a home improvement project if they’re not convinced that home prices are stable.”

And as the economy continues to stall, shoppers are also avoiding the aisles of home improvement stores. Earlier this month, consumer sentiment plummeted to its lowest level in three decades, helping to cripple the outlook for building-supply stores like Lowes. The home-improvement chain reported weaker-than-expected quarterly sales earlier this week and cut its fiscal outlook.

Bernie Smith, CEO of Masterworks, a luxury home-building and remodeling firm, has a large, high-end client base made up mostly of athletes, entertainers and executives in the Atlanta, Georgia area. He has been in the business for more than 30 years and says building permits have dropped from roughly 8,000 annually, down to 400. “Those people have been the hardest to get to spend money because they live in big homes and don’t need to do any renovations. They’re sitting on their dollars and waiting to see what happens,” Smith says.

But it’s not all doom and gloom for builders. Some independent contractors say business is booming. “We started in 2008, which is probably the worst time ever, and we’ve grown every single year and turned a profit,” says Nick Neboshynsky, owner of Home Improvement Zone, which caters to high-end clients in the Annapolis, Maryland area. “First year we did around $300,000 profit, last year we did almost $500,000 and this year we’re past that level,” he says.

His high-end clients, who predominantly pay in cash, were buffered from the downturn, Neboshynsky says. “They can take that money and invest it in their homes, knowing that home values will rebound, or have it sit in the bank collecting half a percent [interest] or invest it in the stock market and lose all of it. They know they want to do something with their money, they want to make themselves more comfortable,” he says.

Ron Seltzer is one of those people. The  Malibu-area CPA and his wife bought their home in June for $1.18 million and decided it was the perfect time to sink $200,000 into a massive renovation, using the downturn to their advantage. “We were able to negotiate pretty well on a lot of the items that are part of the remodel. Vendors are hungry and we’re trying to use that to our advantage as much as possible,” Seltzer says. “We’ve been at or below our allowance for each item.”

Smith says “everybody who walks in the door” is looking for a deal, most presenting multiple quotes from contractors when negotiating. “It’s crazy. They’re looking for that contractor who is willing to do it cheaper than it costs to do the job and who is just desperate to get a check,” he says.

Smith cautions that the new surge of cut-throat bartering often ends up biting the homeowner in the long run. The old adage rings true: you get what you pay for. “Some people call us back six months later with a job partially finished and they don’t know what to do with it because the builder went bankrupt.”

Despite the possibility of a slow economic turnaround, Smith is optimistic about 2012, believing an uptick in business will come from pent-up demand. “A lot of these folks who are executives in the high-end market are starting to realize some good bonuses. Their companies are surviving and profitable and they’re ready to spend some money. They’re less nervous about the value of their property and are ready to spend on ‘wants’ and not on an investment.”

So while some may be putting that “man cave” or “master suite” on hold, the prospect of another renovation may not be far behind — especially when looking ahead to retirement.

DeFore is now considering an addition to his home for his wife’s parents. The money his in-laws receive from the sale of their Michigan property will finance the renovation and help with monthly mortgage payments and utility bills. “I’m getting free construction, plus a couple of hundred dollars for maintenance on the house, which would allow me and the whole gang to stay there during retirement,” he says.

DeFore’s daughter has also recently moved home and offered to contribute to the monthly payment pool if she can upgrade her living quarters for herself and her daughter.

“In these times, people are doing unusual and out-of-the-box kinds of things … We can turn this into a family compound if people are willing to chip in, reduce the monthly mortgage and then we would all be able to stay. I like these people, I like having my granddaughter around,” DeFore says.

“I knew the Fed statement was coming out and rates had dropped to historically low levels, and it just seemed like an opportune time. I hadn’t even thought about it until then,” says Sass, who owns his own marketing research company.

Their original mortgage had a 20-year amortization period – at a 4.875 percent rate – with 12 years remaining. They are rolling it over into a 10-year mortgage with a 3.5 percent rate. “I was able to knock a couple of years off the term with a very modest increase in the monthly payment,” Sass says. “It seemed like a no-brainer to me.”

Sass and his wife are both 55, so retirement is on the horizon. “The opportunity to look 10 years out and know that – unless things change – we won’t have a mortgage when we retire looked like a smart decision,” Sass says, adding the overall savings on interest by reducing his term will be in the neighborhood of $20,000.

Sass is one of many jumping on the refinance bandwagon in the wake of the current financial crisis. Mortgage applications shot up 21.7 percent for the week ending August5, according to the Mortgage Bankers Association Market Composite Index. The spike was largely driven by a 30.4 percent jump in the group’s refinancing index.

“In a few years, these rates will be a memory that people talk about at cocktail parties. Just like when our parents talked about how low interest rates were when they bought their homes,” says Dan Nigro, principal at Warfield Consultants in Montclair, New Jersey. “These are the kind of levels that people should lock in for the long term and it certainly is what the government has in mind.”

But the question remains: With the average rate on a 30-year fixed mortgage hovering just below 4.5 percent – the lowest levels for 2011 according to LendingTree.com – should consumers jump to refinance or buy a new home? Or should they wait for a new bottom?

Now is the time to act, says Alex Stenback, who writes at the blog “Behind the Mortgage” and is a mortgage banker with Residential Mortgage Group, a division of Alerus Financial. “Don’t get lulled into a sense of complacency over what the Fed says about interest rates. They can move up, and this window can shut much faster than people imagine,” he cautions.

Greg McBride, senior financial analyst at Bankrate.com, agrees. Since Standard & Poor’s downgrade of the U.S. credit rating from AAA to AA on August 5, Treasury yields have fallen. “But mortgage rates aren’t going down at the same pace,” McBride says.

Mortgage rates tend to mirror long-term U.S. Treasury rates, which have declined in recent weeks. The benchmark 10-year Treasury note hovered around 2.12 percent late Wednesday and set a record low auction yield of 2.14 percent the same day.

If you’re convinced now is a good time to refinance your existing mortgage, or buy a new home, here are some ways that traditional advice is playing out in today’s market:

1. Shop around for your lender

Cast a wide net when looking for a lender. Do your research and look for alternatives. Check with your local credit union to see if you’re eligible for a membership rather than getting lured by major institutions advertising low rates. The Internet offers an array of sites devised to help you find the best lender and rate for you. Bankrate.com’s refinance section is a great place to start.

“You want to apply, ideally, with two to three different lenders on the same day. Rates change all the time and you want to facilitate an apples-to-apples comparison. If you apply on the same day, when you look at the good-faith estimates you can make a good comparison of not just the rate but also the fees that will be charged,” McBride says.

Sometimes you need to play hardball. Ken McDonnell, director of the American Savings Education Council with the Employee Benefit Research Institute, refinanced his mortgage last week. After researching online, he contacted a number of lenders in his area and approached his mortgage holder with the best offer he found. “I contacted Bank of America, who was my mortgage banker for the past 13 years, and told them the rate I’m getting from Aurora Financial – 3.6 percent and $3,000 in closing costs – and asked could they match it or do better and they didn’t,” he says.

By switching lenders, McDonnell reduced his rate from 4.5 percent to 3.6 percent, which saves him $291 on his monthly mortgage payment.

2. Do your research on costs

Will the costs associated with refinancing justify the reduced monthly payment? The typical rule-of-thumb is a homeowner should refinance if they can save a full percentage point on their rate.

Bob Davis, executive vice president of the American Banker’s Association, cautions against applying the broad-blanket, one-percent rule. Consumers need to consider individual costs to modify versus change lenders, annual savings on the reduced rate, how long you’ll likely remain in the home, the change in an interest rate tax deduction, title insurance, escrow waiver fees and other charges.

“The cost of those variables may be different … there is a break-even point there. It may take you three years to get back your out-of-pocket expenses. If you’re planning on staying in your home seven years, than that’s a good thing to do but if you’re only staying in the home two years, it will cost you more to refinance,” he says.

For McDonnell, the cost to change lenders was minimal. Two-thousand dollars of the $3,000 in costs were rolled into his mortgage, and after closing his escrow account with BofA, he received a $1,700 refund. “It’s going to be a very small amount that’s coming out of my pocket,” he says.

In the unwritten rules of refinancing, your monthly mortgage payment savings should equal your closing costs within 12 to 18 months. In McDonnell’s case, he’ll break even in 11 months.

3. Request a copy of your credit report

While there may be an incredible incentive to refinance due to low rates, be sure your credit history is in order before approaching a lender.

To lock in the lowest rates, consumers will need a FICO score of at least 760 to even be a contender for refinancing, Nigro says. “These are very tight credit underwriting regulations and when you combine that with the fact that 25 percent of Americans have a loan-to-value that exceeds 125 percent of the value of their home, it means that a large amount of people are eligible to refinance but less than 20 percent of all of those who have the rate incentive can refinance because of their credit score and/or the equity they have in their home.”

Everyone is entitled to a free annual credit report from each of the three nationwide credit agencies: Experian, Equifax and TransUnion. Log on to www.annualcreditreport.com for your quarterly update.

You never know, you may be pleasantly surprised by your credit score, says Sass. “Both of our kids are out of college, we have no credit card debt so I knew the (credit) score was going to be high. It makes life a lot easier and there are a lot less questions to answer.”

(Editing by Beth Gladstone)

“I knew the Fed statement was coming out and rates had
dropped to historically low levels, and it just seemed like an
opportune time. I hadn’t even thought about it until then,”
says Sass, who owns his own marketing research company.

Their original mortgage had a 20-year amortization period -
at a 4.875 percent rate – with 12 years remaining. They are
rolling it over into a 10-year mortgage with a 3.5 percent
rate. “I was able to knock a couple of years off the term with
a very modest increase in the monthly payment,” Sass says. “It
seemed like a no-brainer to me.”

Sass and his wife are both 55, so retirement is on the
horizon. “The opportunity to look 10 years out and know that -
unless things change – we won’t have a mortgage when we retire
looked like a smart decision,” Sass says, adding the overall
savings on interest by reducing his term will be in the
neighborhood of $20,000.

Sass is one of many jumping on the refinance bandwagon in
the wake of the current financial crisis. Mortgage applications
shot up 21.7 percent for the week ending Aug.5, according to
the Mortgage Bankers Association Market Composite Index. The
spike was largely driven by a 30.4 percent jump in the group’s
refinancing index.

“In a few years, these rates will be a memory that people
talk about at cocktail parties. Just like when our parents
talked about how low interest rates were when they bought their
homes,” says Dan Nigro, principal at Warfield Consultants in
Montclair, New Jersey. “These are the kind of levels that
people should lock in for the long term and it certainly is
what the government has in mind.”

But the question remains: With the average rate on a
30-year fixed mortgage hovering just below 4.5 percent – the
lowest levels for 2011 according to LendingTree.com – should
consumers jump to refinance or buy a new home? Or should they
wait for a new bottom?

Now is the time to act, says Alex Stenback, who writes at
the blog “Behind the Mortgage” and is a mortgage banker with
Residential Mortgage Group, a division of Alerus Financial
(ALRS.PK: Quote, Profile, Research). “Don’t get lulled into a sense of complacency over
what the Fed says about interest rates. They can move up, and
this window can shut much faster than people imagine,” he
cautions.

Greg McBride, senior financial analyst at Bankrate.com,
agrees. Since Standard & Poor’s downgrade of the U.S. credit
rating from AAA to AA on August 5, Treasury yields have fallen.
“But mortgage rates aren’t going down at the same pace,”
McBride says.

Mortgage rates tend to mirror long-term U.S. Treasury
rates, which have declined in recent weeks. The benchmark
10-year Treasury note hovered around 2.12 percent late
Wednesday and set a record low auction yield of 2.14 percent
the same day.

If you’re convinced now is a good time to refinance your
existing mortgage, or buy a new home, here are some ways that
traditional advice is playing out in today’s market:

1. Shop around for your lender

Cast a wide net when looking for a lender. Do your research
and look for alternatives. Check with your local credit union
to see if you’re eligible for a membership rather than getting
lured by major institutions advertising low rates. The Internet
offers an array of sites devised to help you find the best
lender and rate for you. Bankrate.com’s refinance section is a
great place to start.

“You want to apply, ideally, with two to three different
lenders on the same day. Rates change all the time and you want
to facilitate an apples-to-apples comparison. If you apply on
the same day, when you look at the good-faith estimates you can
make a good comparison of not just the rate but also the fees
that will be charged,” McBride says.

Sometimes you need to play hardball. Ken McDonnell,
director of the American Savings Education Council with the
Employee Benefit Research Institute, refinanced his mortgage
last week. After researching online, he contacted a number of
lenders in his area and approached his mortgage holder with the
best offer he found. “I contacted Bank of America (BAC.N: Quote, Profile, Research), who
was my mortgage banker for the past 13 years, and told them the
rate I’m getting from Aurora Financial – 3.6 percent and $3,000
in closing costs – and asked could they match it or do better
and they didn’t,” he says.

By switching lenders, McDonnell reduced his rate from 4.5
percent to 3.6 percent, which saves him $291 on his monthly
mortgage payment.

2. Do your research on costs

Will the costs associated with refinancing justify the
reduced monthly payment? The typical rule-of-thumb is a
homeowner should refinance if they can save a full percentage
point on their rate.

Bob Davis, executive vice president of the American
Banker’s Association, cautions against applying the
broad-blanket, one-percent rule. Consumers need to consider
individual costs to modify versus change lenders, annual
savings on the reduced rate, how long you’ll likely remain in
the home, the change in an interest rate tax deduction, title
insurance, escrow waiver fees and other charges.

“The cost of those variables may be different there is a
break-even point there. It may take you three years to get back
your out-of-pocket expenses. If you’re planning on staying in
your home seven years, than that’s a good thing to do but if
you’re only staying in the home two years, it will cost you
more to refinance,” he says.

For McDonnell, the cost to change lenders was minimal.
Two-thousand dollars of the $3,000 in costs were rolled into
his mortgage, and after closing his escrow account with BofA,
he received a $1,700 refund. “It’s going to be a very small
amount that’s coming out of my pocket,” he says.

In the unwritten rules of refinancing, your monthly
mortgage payment savings should equal your closing costs within
12 to 18 months. In McDonnell’s case, he’ll break even in 11
months.

3. Request a copy of your credit report

While there may be an incredible incentive to refinance due
to low rates, be sure your credit history is in order before
approaching a lender.

To lock in the lowest rates, consumers will need a FICO
score of at least 760 to even be a contender for refinancing,
Nigro says. “These are very tight credit underwriting
regulations and when you combine that with the fact that 25
percent of Americans have a loan-to-value that exceeds 125
percent of the value of their home, it means that a large
amount of people are eligible to refinance but less than 20
percent of all of those who have the rate incentive can
refinance because of their credit score and/or the equity they
have in their home.”

Everyone is entitled to a free annual credit report from
each of the three nationwide credit agencies: Experian, Equifax
and TransUnion. Log on to www.annualcreditreport.com for
your quarterly update.

You never know, you may be pleasantly surprised by your
credit score, says Sass. “Both of our kids are out of college,
we have no credit card debt so I knew the (credit) score was
going to be high. It makes life a lot easier and there are a
lot less questions to answer.”

(Editing by Beth Gladstone)

((beth.gladstone@thomsonreuters.com; 1 646 223 7289))
Keywords: US INTERESTRATES/MORTGAGES

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