John Wasik

By John Wasik

(Reuters) – If the president and Congress are serious about income equality and cutting huge breaks for the wealthy, they should raise the capital gains rate.

While the president didn’t mention it by name in his State of the Union speech on January 24, it’s one of the many gorillas in the tax reform room.

There’s no question that the 15 percent rate on capital gains and dividends largely favors super-wealthy taxpayers over wage earners. Just look at Mitt Romney’s tax return. As former Labor Secretary and economist Robert Reich once noted: “It’s a loophole large enough for the super-rich to drive their Ferraris through. About 80 percent of the income of America’s richest 400 comes in the form of capital gains.” (link.reuters.com/gen36s)

According to economist Jared Bernstein, who analyzed Congressional Research Service figures, capital gains and dividends were “the largest single contributor to the growth of inequality from 1996-2006.” (link.reuters.com/hen36s)

Why should those who primarily make money from private equity, financial, business and real estate appreciation and dividends pay more than 50 percent less than wage workers who are subject to the top rate in federal, state, Medicare and Social Security taxes?

If you’re from the supply-side camp, it’s because the lower rate may encourage wealthy taxpayers to invest in capital, business and job formation while raising more tax revenues. More fundamentally, at least according to the conservative group Americans for Tax Reform, “when you tax something more, you get less of it.”

When taxpayers know that the capital gains rate is going up, the “fire sale” effect comes into play: They sell assets to get taxed at the lower rate before the higher levy kicks in, hence the higher cash flow to the Treasury before the lower tax expires.

But there’s no consistent evidence that shows that a lower capital gains rate does much for the economy long term. The rate of new business formations actually climbed from 1983-1987, when the maximum capital gains rate was 20 percent, according to the Kauffman Foundation, a think tank that specializes in entrepreneurism. (link.reuters.com/jen36s)

When the gains rate hit a maximum 29 percent from the middle of 1993 into 1997, there was another spurt of new business growth. Since 2006, though, small-business creation has generally fallen – even with the lower capital gains rate. The recession and housing meltdown are the likely malefactors.

Of course, recessions or periods of double-digit interest rates – which hurt small businesses the hardest – are the worst times for small-firm growth anyway, so the capital gains rate would not necessarily have been a primary hindrance during times like 1979 through 1983.

When do capital gains proceeds fill up the national Treasury the most? The data is inconclusive. In 1988, realized gains as a percentage of gross domestic product were more than 7 percent – the highest amount in almost a quarter century, and that was when gains rate was 20 percent.

Tax rates are often like porridge. Sometimes they may be too high; at other times just right. It could be that 20 percent is a sweet spot for gains. In contrast, the lowest capital gains/GDP percentage was 1.57 percent in 1977, when the maximum rate was nearly 40 percent.

What can barely be debated is that the capital gains rate is one of the multi-millionaire’s best fiscal friends. Those who made $10 million or more, according to IRS statistics from 2009, reaped a total of nearly $70 billion in long-term capital gains. That’s 10 times the amount of gains taken by those making from $75,000 to $100,000.

While cutting the capital gains rate generates more revenue overall due to the fire-sale effect, it’s not in the best interest of the country to keep it at 15 percent. Raising it would also reduce the burgeoning federal deficit. If it’s not an efficient way of creating jobs or businesses, why keep it so low?

“Arguments that the capital gains rate affects economic growth are even more tenuous,” says the non-partisan Tax Policy Center. The group saw no correlation between rates and GDP growth “during the last 50 years.”

Of course, the gains rate is but one item among thousands of special breaks in the tax code. You have to put everything on the table, from mortgage deductions to offshore corporate income if you want to ferret out wasteful tax handouts, which is highly unlikely in this election year.

Yet if one believed that Congress was earnestly tackling deficit reform in the interest of fairness and fiscal sanity – or did nothing this year – I would tell my tax preparer to take every possible break in 2012. That’s because the special rate on capital gains will expire after December 31 – a deadline that will seem pretty urgent right around election time in November.

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Editing by Beth Pinsker Gladstone and Dan Grebler)

By John Wasik

(Reuters) – While Americans might get a little break in their payroll taxes through the end of this year, greater financial relief for workers will be elusive. After the State of the Union speech by President Obama on Tuesday night, it’s clear that the wizard will still be hiding behind the curtain.

The best evidence of this was when President Obama invoked the progressive intent of the proposed Buffett rule to tax millionaires at a minimum 30 percent rate marginal rate – about twice the effective rate that Mitt Romney, the GOP presidential candidate, has paid in recent years.

It was obvious from the antarctic glare of House Majority leader Eric Cantor and the twitchiness of Speaker John Boehner that President Obama had a better chance of launching a mission to Mars in this caustic election year than gaining any ground on progressive tax reforms.

It’s not that President Obama didn’t hit grace notes for bolstering his platform. Next to job creation, income inequality and tax fairness were near the top of his agenda.

“We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.”

Despite his bully pulpitting, the most likely outcome for the next year is that most of the president’s proposals mentioned in the State of the Union speech will be benched in the Congressional bullpen. Since House leaders wouldn’t even touch his jobs bill last year – which offered some minor paring of write-offs for the ultra-wealthy – populist tax reforms will likely be shelved until 2013 and beyond.

A do-nothing Congress will actually have a great impact. Unless both houses act by the end of the year, all of the Bush-era tax cuts and interim lower rates on estate taxes will automatically expire. Here’s what might happen if Congress is deadlocked:

* On January 1, 2013, the top marginal federal income tax rate will rise more than 13 percent – from 35 percent to 39.6 percent.

* The top tax rate on long-term capital gains will go from 15 percent to 20 percent – a 33 percent increase.

* The maximum tax rate on dividend income, now capped at 15 percent, will rise to 39.6 percent – a 164 percent hike. That means dividends will be taxed like ordinary income.

* The marriage penalty would return in 2013. The standard deduction for married taxpayers would no longer be calculated as 200 percent of the amount for unmarried filers; it would return to about 167 percent of the unmarried rate.

* The estate-tax exemption is scheduled to fall from $5 million back to $1 million, while the maximum estate-tax rate is scheduled to rise to 55 percent.

Depending on your point of view, a congressional logjam would either be a restoration of the tax code’s progressiveness and a partial antidote to the government’s budget deficit problems – or the mother of all tax increases. Neither the president nor his opponents have addressed this outcome in public.

For college students and parents, there was a hint of relief if Congress can extend or expand a tuition tax credit and link federal research dollar allocations to curbing tuition increases. And “doubling the number of work-study jobs in the next five years” wouldn’t hurt either, as the president proposed, although it’s small beer compared to the current crippling cost of college, which no politician seems to be able to remedy.

One intriguing idea, offered without any details, was a plan to allow homeowners to refinance at low rates. “I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates,” Obama said with no elaboration.

Does this mean loosening the standards by which mortgage giants Freddie Mac and Fannie Mae buy loans? By “responsible homeowners,” did he mean those who don’t qualify for mortgages because their credit scores are not high enough or the one in five distressed homeowners whose mortgage balances now exceed the value of their homes?

Since the Freddie and Fannie are wards of the state due to their 2008 takeover by the government, this might be doable. Or the administration could expand its homeowner aid and foreclosure prevention programs, which have been huge disappointments in stopping mortgage defaults.

No matter which scenario you buy, you’ll need to have a solid conversation with your tax planner well in advance of the election. The yellow-brick road that leads to the November plebiscite is full of perils.

(Editing by Beth Pinsker Gladstone)

By John Wasik

(Reuters) – I’ve never thought that laziness could be a virtue, but when it comes to investing, it’s often advantageous. You can trade too much and become too pre-occupied with the headlines and business TV shows. It can drive you crazy and you’ll lose lots of money making bad decisions.

Or you can set up a lazy Nano portfolio, which I proposed years ago – and forget about it. Based on my initial plan at MyPlanIQ (link.reuters.com/qus26s), a web-based application to help manage retirement accounts, my hypothetical Nano portfolio returned 7.4 percent in their tactical asset allocation model in 2011.

In contrast, the S&P 500 posted a tiny loss for the year.

I paid so little attention to my Nano last year that I only knew what it returned when MyPlanIQ sent me its independent year-end tally last week. I have no relationship with the site, nor did I ever ask them to monitor the portfolio. They calculated the returns and tweaked the allocations using their own tactical asset algorithm to get better results with fewer funds. While I hold some of the funds in my family’s portfolio, I don’t manage other people’s money. I’m skittish enough managing my own.

I called it Nano because it’s small in composition – only five exchange-traded/mutual funds – and modest in its aspirations. It was my humble contribution to the world of investing – a free exercise in benign neglect and diversification.

Here’s how lazy I am: I don’t try to predict the market, world events, Federal Reserve movements or the next hot sector. In fact, I make no predictions at all – including how my portfolio will perform this year. I have no special skill. My Nano set-up is a middle-of-the road core growth portfolio for someone in their accumulation phase with at least 15 years to go until retirement.

Here’s what’s in it:

* 20 percent Vanguard Total Stock Market ETF

* 20 percent Total International Stock Index Fund

* 20 percent Vanguard REIT ETF

* 20 percent iShares Barclays TIPS Bond

* 20 percent iShares Barclays Aggregate Bond

IT’S ALL IN THE ASSET ALLOCATION

As you can see, I cover five different asset classes for various reasons. I want to cover most stocks across the globe and some commercial real estate companies. On the bond side, I like the Treasury Inflation-Protected Securities fund and the iShares broad-based U.S. bond fund.

Ideally, not all of these funds will move in the same direction, and up to 60 percent of the holdings are not directly correlated with common stocks. If inflation ticks up, I have some protection in the TIPS fund. All are among the lowest-cost passive funds in their class.

But don’t take my portfolio, or any mix of funds for that matter, as a cookie-cutter template that you don’t adjust. You can customize any portfolio to fit your age and risk tolerance. Those just starting out in a career can amp up the stock portion. If you’re over 50, consider putting more than half of your money into the iShares funds.

Of course, my portfolio is not without risk.

If a major downturn clobbers Europe or the United States, it will be hurting. While I recommend my Nano portfolio to nearly anyone interested in growth, it’s not suitable for everyone.

If you’re close to retirement, you should have at least 60 percent in bonds and TIPS. Right now, my personal mix is roughly 50 percent income investments and the rest in stocks, REITs and the PIMCO Commodity Real Return Strategy fund, a combination of commodities contracts and TIPS – my inflation hedge.

If you’re extremely risk averse, you should consider the ultra-conservative Permanent Portfolio(link.reuters.com/sus26s),

which posted an 8.3 percent return last year, according to MyPlanIQ. It holds 25 percent in gold, silver and Swiss Francs and the remainder in Treasury securities (35 percent) and growth stocks.

In any case, the allocation is the key, not what you or I think the market will do this year. Focus on what you need to do and set your plan in place like a heavy piece of furniture you don’t plan to move for a while – like that La-Z-Boy recliner.

(The author is a Reuters columnist. The opinions expressed are

his own.)

(Editing by Beth Pinsker Gladstone and Jan Paschal)

By John Wasik

(Reuters) – You’re underwater on your mortgage and falling behind on payments. You may lose your home. Can you negotiate with your lender to reduce your principal?

Increasingly, the answer is yes, although still only in rare cases.

In what could become a national policy to stem foreclosures, principal reduction is a strategy you should pursue if your lender is open to the idea. It could also give a boost to the U.S. home market, which saw a spurt in existing home sales in December. (link.reuters.com/xap26s)

The potential number of homeowners who could be helped by this strategy is huge: About one in five mortgages are currently underwater, representing about $700 billion in negative equity, the Federal Reserve estimates. Many of those homeowners go into “strategic default” and foreclosure because it makes little or no economic sense to pay on a mortgage that’s worth more than their home. Up to 1 million of these homeowners may be allowed to do principal writedowns if state attorneys general reach a settlement with banks over questionable foreclosure practices, said Shaun Donovan, U.S. Housing and Urban Development secretary. (link.reuters.com/vun26s)

The idea of principal reduction to save homeowners from foreclosure is rapidly gaining traction across the country. Bank of America has entered into a pilot program with the Boston non-profit Boston Community Capital to reduce the amount borrowers owe. Trial programs are also under way in Arizona, California and Nevada.

Even the Federal Reserve is endorsing the idea.(link.reuters.com/fak85s)

A CUSHION AND COMMON SENSE

When some $7 trillion in household wealth evaporated in the housing bust, the general economy went down with it – and will stay depressed until Americans have more of a home ownership cushion.

Writedowns, which are common in corporate accounting, could buoy communities and the larger economy. Homeowners who have lost their homes in foreclosures or are saddled with negative equity are spending less in their communities on products and services. They don’t remodel, buy furniture or appliances. They have no economic incentive to invest in anything connected with their house.

The policies in place now don’t seem to be doing enough. As home values have plummeted – more than 50 percent in some of the most bubble-impacted states – homeowners have lost the ability to refinance because their equity stakes fell “underwater” as their mortgage balances exceeded the value of their homes so they no longer met lending standards. Job loss exacerbated the problem.

The federal government stepped in with a number of loan-modification programs to ease the crunch of foreclosures after the market crashed in 2008. But those programs have largely focused on cutting mortgage rates, which was little help to homeowners, who still largely defaulted on their loans.

One of the largest programs, which goes by the acronym HAMP, offered lower interest rates to 98 percent of its participants, according to a recent Federal Reserve report to the House Financial Services Committee. Yet only 32,000 of those loans were modified with principal reduction – out of some 12 million that are underwater.

“Principal reduction may reduce the incidence of default both by improving a household’s financial position, and thus increasing its resilience to economic shocks,” the Fed report stated (link.reuters.com/fak85s).

Under the current HAMP program, those underwater homeowners whose mortgage payments exceed 31 percent of gross monthly income and got their loans before January 1, 2009, may qualify for a principal reduction. The one huge catch is that loans owned by Freddie Mac or Fannie Mae, which own about half of U.S. loans, don’t qualify.

Unless HAMP or similar programs with Fannie or Freddie are enhanced to promote more principal reductions, you’re on your own with your lender. You’ll have to ask them directly if they will write down the balance on your mortgage. In most cases, the answer will probably be no, although if more people press their lenders, it may become a more popular option.

Nevertheless, while most bankers would rather send you packing than reduce a loan balance, it may be in their best interest. Foreclosure is costly and they are not in the real estate business. With housing prices expected to be flat this year and foreclosures still climbing, it could be a saving grace for an economy that’s still largely house poor.

(Editing by Beth Pinsker Gladstone and Jan Paschal)

By John Wasik

(Reuters) – If you want to be optimistic about investing this year – and there are plenty of reasons to be – you need to understand the tale of two economies.

One narrative is the recovering U.S. economy: Robust corporate profits, increased manufacturing, slightly more hiring and continued global demand. The other story tells of a hobbled euro zone, a possible slowdown in China and the prolonged misery of the U.S. housing market.

Which tale do you choose to believe? I’m loath to forecast which scenario will dominate because both will play out in varying degrees. The euro zone downgrades last week(link.reuters.com/pyw95s) are certainly going to reverberate in the markets, so if you’re over-exposed to European debt and stocks, pare back. In any case, you should be upgrading your portfolio to grab growth and income while reducing risk.

Keep in mind that my observations are not predictions and based on my Totally Oscillating Algorithmic Sentiment Trends (TOAST) strategy. That is, things change quickly and you need to figure out how much money you can afford to lose in an ever-volatile market. Here are some trends worth noting:

1. HOUSING

Housing will still be hurting, but could be jump-started. While Ingo Winzer’s National Economic Outlook (www.localmarketmonitor.com/) is generally optimistic, he doesn’t see a U.S. housing rebound. “The evidence is now pretty clear that a sustained economic recovery is underway, although housing markets won’t feel much benefit until next year,” Winzer writes.

He sees rough patches where there’s poor local economic health in Atlanta, North New Jersey, Fresno, Indianapolis, Kansas City and Philadelphia. This could change if the White House, the Fed and banks allow widespread refinancings or principal writedowns for underwater homeowners or those in foreclosure. Mortgage rates are still at generational lows.

2. STOCKS SHOWING A BUY SIGNAL.

The Leuthold Group’s (www.leutholdfunds.com/) reading of the Dow Theory indicators shows a “new bullish reading on their major trend index,” according to the firm’s latest newsletter. But don’t buy stocks from the leading sectors of last year. In what Leuthold calls the “Bridesmaid” strategy, buy stocks from the second-best performing sector of 2011: Consumer staples.

That makes sense if the U.S. stays in rebound mode. From 1991 through 2011, Leuthold claims their strategy produced a 13.4 percent annualized return, compared to 8.8 percent for holding the S&P 500 Index. Some ETFs to consider include Vanguard Consumer Staples and SPDR Consumer Staples Select.

3. RETURN OF LARGE-COMPANY STOCKS.

If the rebound scenario is valid, you’ll want to be in dividend-paying blue chips. Reports Standard & Poor’s Marketscope, “within the growth sector, we think stocks categorized as large-cap growth are more likely to benefit from an improving global economy with less volatility than smaller or mid-cap stocks.” The SPDR S&P 500 Growth ETF is a good place to start.

4. SOME INFLATION IS HELPFUL.

Money manager Michael Gayed of Pension Partners, LLC, says he’s optimistic “because the initial start to the year is signaling inflation expectations are returning, which is a favorable environment for stocks.” While a little inflation helps stocks, keep an eye on the larger inflation picture, which hurts bonds.

5. WATCH ENERGY AND COMMODITIES PRICES.

If you want to adopt an ambitious global view, then the return of growth will trigger more buying of energy, agricultural commodities and metals. Dennis Gartman, a trader who publishes the Gartman Letter (cloud.thegartmanletter.com/), says the turnaround scenario favors grains, soybeans, cotton and oil. Speaking at the Executive Club of Chicago on January 12, he says he’s bearish on the Euro and insisted “the U.S. dollar will remain the world’s reserve currency.” The Powershares DB Commodity Index Tracking Fund gives you broad exposure and provides an inflation hedge.

No yearly outlook, however, would be complete without some wildcard scenarios. There’s still a U.S. election coming up, Congress has yet to resolve its debt ceiling/deficit cutting debate and it’s unclear how, or if, a European slowdown will impact the U.S. and China. The Iranian government is also threatening to shut down the vital Strait of Hormuz, a major conduit for Middle-East oil.

If you can ignore the headlines – that’s my advice – focus on risk-budgeting in your portfolio. Look carefully at your exposure to Europe, U.S. stocks, bonds and commodities. Are you insulated from another meltdown? That way, forecasts won’t matter because you won’t need to monitor the markets daily. Predictions are not the same thing as preparation.

—

The author is a Reuters columnist. The opinions expressed are his own.

(Editing by Lauren Young and Beth Pinsker Gladstone)

By John Wasik

(Reuters) – Can those celebrity-linked prepaid cards really help the unbanked?

Lately there have been a spate of them, from Kim Kardashian’s to Lil Wayne’s. When it comes to that newest one, the Approved Prepaid MasterCard issued by the Bancorp Bank and endorsed by personal finance personality Suze Orman, who is also an investor in the product, less is not necessarily more. There are better alternatives.

First, a disclosure. I knew Orman well before she became brand-name famous (we’re both from Chicago) and she even wrote a blurb for my book, “Late-Start Investor,” in 1998. She’s generally done some good things for financial consumers.

Yet there’s something troubling about an avowed consumer advocate who plugs a product that charges $3 “maintenance” fees (the first month’s fee is waived) and even restricts deposits.

There are countless other products that don’t charge monthly fees and provide incentives for you to open accounts (bankrate.com). I use several myself. Check out your local credit union or community bank. Some institutions also offer “second chance” accounts for those who have regularly bounced checks.

Greg McBride, senior financial analyst with Bankrate, says, “the majority of consumers would be better off with a traditional banking relationship instead of a prepaid card. Some 75 percent of consumers never overdraw their accounts.” He notes that one reason banks favor these products is that they’re exempt from the Durbin Amendment, which limited “swipe fees.”

Pre-paid cards can charge twice the transaction fees of regular debit cards and are geared toward the 25 percent of U.S. households that are unbanked. So they represent a profitable new market for financial services companies, McBride has found.

Still, the restrictions on the Approved card are odd when compared to plain-vanilla banking products. For Orman’s Approved Card, you must use direct deposit and they won’t allow you to deposit personal, cashier’s checks or money orders to load your account. So it’s conceivable that someone who’s unbanked would have to pay an onerous check-cashing fee to a third party if they’re not doing direct deposit with a paycheck.

There’s more. You get one free monthly call to their customer service department and thereafter it’s $2 per call. Want a paper statement? It’s $2. This is all in the fine print of the card’s cardholder agreement (here).

You can only spend $2,000 on this card in a 24-hour period. As long as you have enough money on deposit, why the limits? And you can’t use it at gas pumps or for making hotel or car reservations. If you haven’t made a direct deposit, you’ll be charged for a balance inquiry. Why can’t you check this online for free as many banks offer?

If Orman “hates extra fees,” as she says in the advertising, then why promote a card that’s loaded with them? I can understand how the fees work as economic levers to keep account expenses down, but these fees often generate profit for the bank at the expense of the consumer. Far too many people don’t read the fine print and pay dearly. (Another personal disclosure: I once had a health savings account with Bancorp and they charged me a $2.50 monthly service fee, which I abhorred. I stop using that account years ago.)

Worse yet, Orman’s card will work with the credit reporting agency Transunion, which will provide access to their Transunion credit score, analysis and regular updates for free to users, but which will also collect information about them. While it’s useful to have access to credit information on a regular basis, this is no substitute for a FICO score, which most lenders use to evaluate your credit-worthiness. Keep in mind this is not a conventional credit card that can be employed to qualify for more credit.

Orman has said her participation in this card is part of a two-year experiment to help the unbanked eventually get credit, but it’s unclear how the information that Transunion is collecting will be used.

“People without banks may have irregular income or live paycheck to paycheck,” says Lauren Saunders, managing attorney with the National Consumer Law Center, who has talked with Orman about the product. “Small, late payments may go into credit reports, so it’s not clear if this will build or hurt credit.”

Although she says that the Approved card is a “relatively good product for the unbanked,” Saunders notes “a full-featured bank account is a better option for most people.”

Adds Liz Pulliam Weston, a consumer credit expert and author of “Your Credit Score” (asklizweston.com/): “It’s not that hard to find free or at least low-cost checking at a credit union. I’m also concerned because people may get the idea that using this card will improve their credit. It won’t.” (In fact, we recently listed 10, which you can see here: link.reuters.com/wep95s.)

John Barbella, senior vice president for Bancorp, says the information wouldn’t be shared with credit bureaus and may help users “build a bridge” to apply for credit at a later date. He says while the bank has no plans to reduce fees or directly link to a savings account now, it may make changes later. Many of the restrictions on deposits and withdrawals, he noted, are to deter fraud.

“The program is extremely competitive if not beating the market” for similar cards, Barbella adds. The Bancorp fee structure compares favorably with other prepaid cards such as Wal-Mart’s, although the retailer allows you to waive the monthly fee with a minimum $1,000 deposit.

I know Orman has done myriad things to help consumers and her advice is usually pretty sound, but why not promote a free checking account linked to a savings vehicle for the unbanked? She’s always been a strong advocate for financial disclosure, so why isn’t she saying how much she stands to gain from this product’s success? She didn’t respond to my request for comment and Bancorp’s Barbella wouldn’t disclose her specific financial arrangement.

Orman’s card doesn’t promote savings first over transactions, which is a show-stopper for me. It’s a flawed product paved with good intentions that doesn’t do the right thing for the most vulnerable financial consumers.

—

The author is a Reuters columnist. The opinions expressed are his own.

(Editing by Linda Stern and Beth Pinsker Gladstone)

By John F. Wasik

(Reuters) – For years, one of the more bankable phenomena in finance has been the January effect.

The premise is simple: Institutions and traders sell off stocks the end of the year for tax reasons and portfolio dressing. Then they start buying again in January, often favoring small companies, also known as “small caps.”

With myriad signs that the U.S. economy is in recovery, this may be another good year for the January effect. Even if it isn’t – and I refuse to make predictions for short-term traders – it would be a good idea to add bargain-priced small caps to your core portfolio through index mutual funds or exchange-traded funds (ETFs).

While there’s certainly some controversy about whether the January effect is legitimate since its “discovery” in 1942, there are behavioral reasons why it may exist. Many investors like to clear out their deadwood by the end of the year and start afresh in January.

Instead of adopting new resolutions, they buy stocks. That’s one theory, anyway. Since 1991, the average January return on the S&P 500 Index has been 6.7 percent.

Another view is that after a holiday respite, investors are looking for new, profitable ideas. Since last year’s stock market, as measured by the S&P 500, was virtually flat, it’s understandable that investors are hoping for a change of pace and a robust January may set the tone for the rest of the year.

JANUARY EFFECT HARBINGER

Since institutions, which dominate the market, migrate from category to category like sheep in a field, they may shift from once-favored stocks – such as large companies – and move into small caps. Is this happening now?

In just one ETF – the iShares Trust Russell 3000 – we get a snapshot of what may be happening. In just the first day of trading this year, the fund shot up 2 percent.

Is this a harbinger of things to come? It’s impossible to say, but it’s plausible to think that small-caps may be the leading edge of winning category this year.

Similar results were posted by the Schwab Small-Cap ETF . For the week, the stock market was up about 1 percent, tugged at both ends by upbeat employment and continuing euro zone angst.

Overall, there’s a hint of optimism in economic news in 2012 that was reflected in widespread market gains. U.S. manufacturing and homebuilding have perked up and job creation is on the rise.

PLAYING THE EFFECT

If there’s a prolonged economic and sustained rebound afoot that favors most stocks, here are some ETFs to consider as long-term holdings:

* Vanguard Small Cap Growth ETF. Following a basket of more than 1,000 small companies, this is a good, low-cost way to sample this category.

* SPDR S&P 600 Small-Cap Value. Like the Vanguard fund, this ETF tracks an index of small companies, only with an emphasis on bargain-priced stocks.

Don’t make the mistake of getting into these funds and bailing at the first sign of trouble. The last few years have not been kind to small caps in general and we’re certainly not free and clear of any potential economic potholes. And one week doesn’t foretell what will happen the rest of the year. That trap ensnares a lot of investors. Past returns don’t guarantee future profits.

You should plan for the kind of future you can control. Hew to an investment policy statement – draw one up that states your personal financial goals – instead of trading based on short-term moves. If you make only one resolution this year, that’s a solid one.

—

The author is a Reuters columnist. The opinions expressed are his own.

(Editing by Chelsea Emery)

Jan 6 (Reuters) – No matter what theme you adopt in a
market forecast, predictability has always been a bugaboo. Just
ask Bill Gross, the legendary manager of the PIMCO Total Return
bond fund.

Gross’s $244 billion baby saw at least $5 billion in assets
flee in 2011, more than $1.4 billion in the fourth quarter
alone. Relative to the size of his fund, this is a notable vote
of no confidence ().

Investors voted with their money because of Gross’s bet
against U.S. Treasuries last year. Like many of us, he digested
the headlines and became dyspeptic over the Congress defaulting
on its debt, sluggish economy, the S&P credit downgrade and
euro zone debt woes. Yet what actually happened didn’t follow
Gross’s “new normal” script. Instead we got the “old abnormal”
of unpredictability.

While none of those perils can be dismissed – nobody is out
of the woods – something odd happened. U.S. debt remained a
safe haven and even more money flowed into Treasuries, which
became the best-performing bond class and returned 17 percent
last year.

In the second half of last year, U.S. Treasury prices
climbed, while hot money fled European paper. It wasn’t too
long ago that the euro was seen as a respectable currency while
the buck was being battered. Gold, that ultimate nervous Nellie
insurance policy, also went south for a while.

“The ‘new normal’ thesis at PIMCO was predicated on a low
interest rate environment dragging safe bonds down as investors
sought higher-yielding opportunities elsewhere,” said Jeff
Tjornehoj, director of research at Lipper, a Thomson Reuters
company. “That was reasonable in 2009, but started to fade in
2010 and was completely undone in 2011 as credit conditions in
European banks deteriorated and investors rushed to safety.”

So it’s time to question whether Bill Gross is on target
with his new “paranormal” theory and more importantly, if
active managers can consistently predict market movements and
protect your wealth.

Is Gross still on track? Here’s what he said in his most
recent “Investment Outlook”
():

“For 2012, in the face of a delivering zero-bound interest
rate world, investors must lower return expectations. 2-5
percent for stocks, bonds and commodities are expected long
term returns for global financial markets that have been pushed
to the zero bound, a world where substantial real price
appreciation is getting close to mathematically improbable.”

Of course, Gross has forgotten more about bond trading than
I’ll ever know, so his long-term record is worth respecting.
His cautions are still valid. But actively managing money
becomes nettlesome because the future is as slippery as a
politician’s promise. What’s predicted doesn’t always
transpire; if you make big bets, you can suffer big losses.

The larger question for investors is should you even bother
with an active manager making periodic wagers based on theories
that may not hold water?

Would you be better off in passive bond-index funds like
the Vanguard Total Bond Market ETF or the iShares
Barclays Aggregate Bond fund, which I hold as a U.S.
broad-market bond proxy in my 401(k) portfolio?

Passive investing usually makes more sense since you avoid
the high costs and frequent missteps of active managers. As of
the last Lipper research report, Gross’s PIMCO Total Return fund finished in the bottom 12 percent of its
category, posting a 4.15 percent return. That’s compared to a 6
percent average performance for its peers.

That’s why a passive strategy still makes sense. The
Vanguard fund, for example, samples a fairly static basket of
U.S. government-based mortgage bonds, Treasuries, corporates,
utilities and a touch of non-U.S. paper. It charges 0.11
percent annually for management. The PIMCO fund has an expense
ratio of 1.15 percent annually with a costly 430 percent
turnover rate, indicating high trading costs that are passed
along to investors.

As for predicting the market going forward? Be cautious and
hedge any large position in bonds (European or American),
stocks and metals. The only guarantee is that big financial
events often follow an abnormal course.

—

The author is a Reuters columnist. The opinions expressed
are his own.

Jan 3 (Reuters) – Despite gloomy headlines from Europe over
the past year, a new technology mash-up is emerging that could
spark some exciting ideas for investors.

There is long-term growth in convergent technologies that
integrate the Internet, green transportation, building-based
micro-power plants and power distribution into a collaborative
worldwide grid, according to author and consultant Jeremy
Rifkin, founder of the Foundation on Economic Trends.

It is a development trend that stretches into the next
decade and is worth investing in right now, said Rifkin.

Rifkin calls this synergistic movement the “Third
Industrial Revolution,” which is also the title of his latest
book ().

Under Rifkin’s “five pillars” plan, energy would be widely
distributed in much the same way information is sent through
the Internet. This system would be intelligent, sending power
where it needs to go. If it’s designed efficiently, it will
lower the cost of electricity for everyone, create jobs, reduce
our reliance upon fossil fuels and aid development.

“The Third Industrial Revolution is an economic game plan,”
Rifkin, who has advised the European Union and German
Chancellor Angela Merkel on this concept, told Reuters. “We
have the science and technology to do it, but it will mean
nothing unless there’s a change in will.”

In Rifkin’s master plan, anyone can produce energy through
solar, wind, geothermal or biomass and it could be distributed
widely along a collaborative Internet — like super-grid.

Commercial building owners could sell the power they
produce. Homeowners would do the same — much as they do in
Europe and Japan today — only on much larger scale.

To date, Rifkin says the European Union and several African
countries have committed to the plan. The EU has already
mandated that 20 percent of its energy come from renewable
sources by 2020. In the United States, which is still without a
comprehensive energy policy, the plan has not gained widespread
political traction.

How does Rifkin suggest the power from the renewable
energies be stored? He proposes developing hydrogen-based
storage systems, which don’t exist yet on any large scale. He
estimates that the European Union alone will need to spend
about $1 trillion euros to build this green grid.

COMPELLING INVESTMENT

No matter how this system comes together — and it will
take decades if it happens at all — it presents some
compelling growth and investment opportunities, particularly in
developing countries.

In Africa, for example, more than two-thirds of the people
do not have access to electricity, according to the World Bank.

Global investment in power production and transmission
alone is expected to total almost $9 trillion over the next
quarter century, estimates the International Energy Agency.

While it’s difficult to pinpoint where the investment
dollars will come from — especially as Europe and the United
States struggle under mammoth debt burdens — the benefits
could be enormous. Certainly, providing power to more than 7
billion people needs to incorporate sustainability if we’re to
survive on this planet.

You can invest long-term in these trends through some key
exchange-traded funds:

* iShares S&P Global Clean Energy Index , a
worldwide basket of stocks that specialize in renewable
energy.

* PowerShares WilderHillClean Energy Portfolio , an
established fund that targets green energy companies.

* iShares S&P Global Infrastructure Index Fund ,
although about 40 percent of the fund is in electricity stocks,
the managers also buy companies that provide water and other
infrastructure services.

* First Trust NASDAQ Clean Edge Smart Grid Infrastructure , the fund that’s probably closest to Rifkin’s concept,
targeting companies building smart grids.

None of these funds are suitable for day traders or
investors unwilling to hold them for years. It will take some
time for the investment capital to materialize to build the
Third Industrial Revolution. Like all epic transformations, it
won’t happen overnight.

—

The author is a Reuters contributor. The opinions expressed
are his own.

29 (Reuters) – You won’t get too many arguments at
holiday parties if you say that 2011 has been one of the most
challenging years for investors.

With the European crisis unresolved and major bi-polar
dysfunction in Washington, it’s never been more difficult to
plan ahead. Yet there are always core wealth management
concerns that you need to address.

Here are some that I think are key.

DO YOU TRUST YOUR ADVISER?

Under pressure from the brokerage and insurance industry,
the Securities and Exchange Commission is reconsidering a
proposal to make all advisers fiduciaries.

A new standard will be released next year, although it may
be highly diluted. In the interim, seek out an adviser such as
a fee-only certified financial planner, certified public
accountant or chartered financial analyst who acts as a
fiduciary.

That means they have to put your interests above their own.
They should not make a commission on what they recommend, and
they should put your needs first. Read their ADV Forms (Part
II) to see how they make their money. They should clearly
disclose any conflicts.

HAVE YOU PREPARED FOR “SYSTEMIC” RISK?

What happens to your portfolio if the European debt crisis
isn’t solved? What happens if a worldwide slowdown affects
countries like China, Brazil, India and most of the developing
world? Have you prepared for that?

The good news is that there are numerous ways you can work
with your adviser to hedge your most vulnerable positions.

You can “short” any index, whether it’s a basket of U.S.
Treasury bonds – if you think rates are climbing – or specific
stock sectors. You can even find funds that offer triple the
inverse return of an index.

Of course, I don’t recommend these funds unless you
understand their risks. You could lose a lot of money if you
don’t know what you’re doing. The important task here is to
identify where your greatest exposures lie and hedge against
them.

Do you have a lot of your employer’s stock? You may want to
protect yourself with options. Do you have a huge position in
bond funds? Then inverse Treasury ETFs or Treasury Inflation
Protected securities might help.

FINE-TUNING THAT ESTATE PLAN

At the end of 2012, the $5 million exemption (per person)
on estate and gift taxes could disappear – if Congress does
nothing.

You need to huddle with your estate planner to see if you
need to reduce the size of your estate for tax purposes. Don’t
wait for Congress to act. Work on a long-term plan that
includes charitable intentions.

EXAMINING TAX LIABILITIES

Along with the estate and gift tax exemptions, the low
Bush-era income, dividend and capital-gains rates are set to
expire at the end of 2012. While I doubt that Congress will
enact any major tax reform next year, you need to be prepared
if the lowest tax rates in a generation rise. Consult with
your tax professional to see what kind of deductions you should
take in 2012. You also might want to push more income into 2012
- if rates indeed rise in 2013.

IS YOUR FINANCIAL HOUSE IN ORDER?

This is something you should do every year. What’s your
debt/income ratio? Are you saving enough for retirement and
college? Are your out-of-pocket medical expenses rising? Have
you put enough in an emergency savings fund? Do you have enough
health, life, homeowner’s and disability insurance? All of
these items need to be reviewed and updated this time of year.

Aren’t you glad I gave you all these additional things to
worry about when you were hoping to relax as the new year
dawns?

Fortunately you can delegate most of these items to trusted
advisers. And if you have reason not to trust them, you need to
do more than make a New Year’s resolution; you need to make
some changes.

The writer is a Reuters columnist. The views expressed are
his own.