John Wasik

Do a portfolio risk profile to prepare for fiscal cliff

Nov 12, 2012 22:59 UTC

CHICAGO (Reuters) – If the fiscal cliff triggers an economic slowdown, you need to prepare your portfolio by lowering its risk profile. Even if you think you’re prepared, it’s good to take a detailed look at what you own.

Classic modern portfolio theory holds that diversification among stocks, bonds, real estate and other asset classes will balance the tenuous relationship between risk and return.

When the stock market tumbles 2 percent in a single day – as it did on November 7 – many pundits say that’s a sign of things to come if Congress doesn’t resolve the mother of all tax hikes by the end of the year.

The idea of tax increases and spending cuts amounting to $600 billion on January 1 is enough to instill markets with uncertainty, one of the greatest enemies of investors. Yet you can lose money if you react to every sell-off by jumping out of the market, so it makes sense to do a portfolio risk profile at least once a year. This will help buffer your portfolio against uncertainty risk.

A portfolio profile examines how asset classes react to volatility over time. What a portfolio profile is not is a knee-jerk reaction that allows you to time the market. To use it efficiently, you need a better understanding of risk.

Hope for unloved U.S. financial services stocks

Nov 9, 2012 17:20 UTC

CHICAGO, Nov 9 (Reuters) – U.S. financial services stocks
may be the most unloved sector in recent memory, but they may
end up prospering in the coming year.

Individual investors have had solid reasons to be sour on
financials since 2008. Earlier this year, JPMorgan Chase & Co
disclosed a $6.2 billion loss in trading as part of its
“London Whale” scandal. Bank of America Corp and
Citigroup Inc continue to struggle, and all of the
megabanks were involved in a legal settlement over the troubling
“robo-signing” of mortgage documents.

The balance sheets of the megabanks are still bruised and
hiding untold woes of bad debts; their share prices have largely
reflected uncertainty since 2008.

Running the numbers on your college education ROI

Nov 5, 2012 22:42 UTC

CHICAGO, Nov 5 (Reuters) – Despite the sourness of the
recent job market, a college degree is still a good investment.
But picking your major is akin to assembling the right portfolio
– you have to be selective to maximize your returns.

Recent studies back this up: the Hamilton Project of the
Brookings Institution shows that a college degree can yield a
more than 15-percent return. That’s better than double the
average annual return of stocks over the last 60 years (6.8
percent), and five times the return of corporate bonds through
2010 (2.9 percent).

Even a hot investment like gold has only managed a 2 percent
average return over that period.

Why you need a climate change portfolio

Nov 2, 2012 17:09 UTC

CHICAGO (Reuters) – Whether you believe in man-made global warming or not, it’s undeniable that trillions of dollars will be spent on technologies to address the collateral damage of climate change.

Superstorm Sandy has just provided a tragic and devastating exclamation mark to the ongoing discussion of climate change and its link to extreme weather.

There are a number of ways to invest in industries that are seeking solutions to climate-caused problems. Several global companies, insurers and institutional investors accepted the idea some time ago and are investing for the future. Even investors who haven’t signed on to the idea of man-made global warning may find some sectors or companies to like.

Five ways to disaster-proof your finances

Oct 31, 2012 20:16 UTC

CHICAGO (Reuters) – While we can’t control nature or the ravages of climate change, there are things you can do to safeguard your financial future. True catastrophic coverage is comprehensive and protects more than your assets; it protects your well being in the future. In addition to reviewing all of your insurance policies to see what they cover and how much your out-of-pocket expenses will be, you need to do more to prepare for the future.

There may not be an optimal time to review your catastrophic coverage, but the worst time is when something bad happens. You may want to huddle with your trusted advisers before the end of the year. Here’s what you need to know and do:

1) Review all of your estate planning before the end of the year. This is particularly essential, because Congress may be raising estate taxes when the current rates expire at the end of the year. You will need to have a plan if that happens, which may involve a shift of assets and gifts to children and relatives. Estate plans also include a will, a living trust or a living will. All three give specific directions to survivors on what you want done in the event of your passing. A living will gives medical directives if you are permanently incapacitated and on life support.

Happy-ish thoughts about investing in housing

Oct 26, 2012 14:57 UTC

By John Wasik

CHICAGO, Oct 26(Reuters) – While most of the recent news on
housing seems to indicate a modest turnaround – like yesterday’s
report that pending home sales rose but at a slower than
expected rate – you still have to be selective in how you
invest. A resurgence may not be a sustainable, nor will every
area benefit.

It would be too easy to say that the housing market has
bottomed out or that the general economy is pushing housing
along. Still some demographic trends are acting as catalysts.

Most indicators appear to be showing green when it comes to
U.S. housing in recent months. Housing starts, which have been
dismally low in the wake of the 2008 meltdown, rose 15 percent
in September – the quickest pace in more than four years -
according to the U.S. Commerce Department. Building permits grew
almost 12 percent. Construction of town homes and condos was up
25 percent for the period.

The tale of two gold funds

Oct 22, 2012 17:53 UTC

CHICAGO (Reuters) – Short of stockpiling bullion in your basement, an ETF is the most cost-effective vehicle for owning gold. But you cannot just pick any fund out of the available list of seven bullion-based funds and expect it to perfectly track the price of gold and offer the lowest expense ratio.9

First of all, no exchange-traded fund will track the price of gold perfectly because returns are offset by costs — management fees and brokerage costs to buy them. Gold ETFs vary in fees, with the average annual expense ratio for the category at 0.54 percent, although you can find a fund charging as low as 0.25 percent. You need to weigh carefully what’s important to you: The size and liquidity of the fund or annual expenses. Which fund you buy depends upon how you plan to own it.

As I have mentioned in the past, gold is not a perfect investment. Many pundits legitimately claim gold is a shadow currency because major banks, traders and governments buy it to hedge against currency devaluations. When the dollar gains against other currencies or consumer confidence comes back in the United States or Europe, though, gold will not shine. Rising U.S. interest rates in the U.S. will also hurt the metal’s price.

Four ways to squeeze inflation risk from your portfolio

Oct 19, 2012 16:15 UTC

CHICAGO, Oct 19 (Reuters) – While inflation has been tame in
recent years, there are few forecasters who believe it will
remain so in the future.

But when inflation bites again is a moot question.
Predictions of its imminent return have been wrong for years.
The key is having portfolio protection in place now so that it
won’t devastate your fixed-income holdings and reduce your
future quality of life.

Because even having been forewarned, it’s not so easy to
protect your portfolio against inflation, which will erode your
purchasing power over time. The difficulty is that there’s no
perfect hedge against it. Treasury Inflation-Protected
Securities (TIPS), are the natural choice, but they are linked
to the flawed Consumer Price Index (CPI).

Why you need to join an investment club

Oct 15, 2012 17:00 UTC

CHICAGO (Reuters) – At a time of high-frequency robotic trading, market volatility and elephantine economic uncertainty, joining forces with your family and neighbors for an investment club might sound like a sucker’s game.

The truth is that most investors won’t beat the market once they subtract transactions costs, timing errors and holding onto losers. So perhaps it’s no surprise that when finance professors Brad Barber and Terrance Odean of the University of California researched returns in the 1990s at the height of the investment club boom they found that about 60 percent of the clubs failed to beat a market index.

But there’s more value to pooling your resources than just comparing your returns to the S&P 500. Investment clubs still make sense because they bootstrap fundamentals. You focus on how to analyze a company for its sales, earnings and future direction. You scrutinize management for its ability to increase profits and earnings per share.

Master Limited Partnerships worth a look for high-yield seekers

Oct 12, 2012 12:30 UTC

CHICAGO, Oct 12 (Reuters) – There aren’t too many places
left to look for higher yields these days. The usual go-to
baskets of high-yield and foreign bonds, REITs and high-dividend
stocks are pretty well picked over.

One little-known vehicle to Main Street investors is Master
Limited Partnerships (MLPs), publicly traded entities that own
assets such as pipelines. Because of their unique structure,
partnerships – which can be focused on energy holdings but may
also invest in alternatives such as timber and real estate -
generate a lot of cash that is distributed to limited partners.
Spurred by global and domestic demand for oil, refined petroleum
products and natural gas, for example, energy partnerships are
constantly expanding. In the last few years, the oil and gas
boom in North America has triggered robust growth.

Sparked by a combination of increased exploration and
recovery, indexes that track energy MLPs have outperformed
individual benchmarks representing utility companies, real
estate investment trusts and the S&P 500 index over the past 10
years, according to the Alerian MLP Index. In the decade ending
June 29, the MLP index returned 16.7 percent, compared to 5.3
percent for the S&P 500 Index and 10.7 percent for utility