Reuters Money

How to avoid a China stock shock

Despite inflation worries, corporate accounting irregularities and drab stock market returns, China’s growth story continues to attract love from Wall Street.

More than 600 mutual funds and exchange-traded funds and nearly 300 companies listed on U.S. exchanges use “China” in their names, writes emerging markets investment specialist Carl Delfeld for Investment U, an investment advisory website. Many of the latter are China-based companies listed as American Depository Receipts.

But beneath the Chinamania is a laundry list of problems. While China’s GDP growth has galloped ahead of the rest of the world in recent years and is projected to continue doing so for the foreseeable future, most of its stock market indices have been considerably less buoyant. Over the last two years, a time when U.S. GDP growth trailed China’s by a wide margin, iShares FTSE/Xinua China 25 Index Fund rose 11 percent, compared to 43 percent for SPDR S&P 500.

Investors remain concerned on a number of fronts. At the top of the list: persistent inflation and the Chinese government’s efforts to control it. At the end of June, China’s consumer price index was poised to edge over six percent, something that hasn’t happened since 2008. That increases the likelihood of even tighter monetary restrictions for banks and higher interest rates in the months ahead as the government tries to rein in economic growth.

Opaque financial statements and accounting irregularities among public offerings conducted through a controversial technique called a “reverse merger” are the latest clouds hanging over a growing crop of small-company China stocks that have found their way to U.S. exchanges. Stocks of such companies, which merge with a publicly-traded shell company to gain back-door access to the U.S. markets,  have been under investigation by the SEC for alleged manipulation by short sellers.

None of this, of course, means that the China growth story isn’t real. But for most people, tapping into the long-term expansion of the region’s burgeoning consumer mindset and infrastructure needs through investments that cast a net beyond its shock-prone stock markets is a better bet.

Companies that satisfy the growing Chinese appetite for consumer goods appeal to David Winters, manager of the Wintergreen Fund, whose portfolio has stakes in Swiss watch and timepiece makers Swatch Group and Richemont, the company behind the Cartier brand. “These companies derive about one-third of their sales from the greater China market and are capitalizing on the region’s increasing demand for luxury items,” he says. “Their presence in the region has also helped offset weaker sales in other parts of the word.” They also have strong balance sheets and high levels of management ownership.

Luxury real estate: How to snag a deal on a foreclosure or short sale

Opportunities to buy foreclosed — or soon-to-be foreclosed — luxury homes are on the rise. But watch out for the pitfalls that could sour what seems like a sweet deal.

“We’re certainly seeing more of those properties coming to market and more of those properties foreclosed on,” says Rick Sharga, senior vice president of RealtyTrac Inc., publisher of the largest database of foreclosure and bank-owned property records.

Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future.

“There are bargains to be had,” Sharga says. But “unless you’re absolutely in love with the property,” hold off until you know you’re getting a great deal, he notes. Foreclosures sold at prices an average 27 percent below non-foreclosed property in the first quarter of 2011, he says.

James Reid, a businessman from Anchorage, Alaska, was looking to pick up a house in the Seattle area to avoid staying in hotels on his regular trips there. He and his wife found a property on Puget Sound that had sold for $1 million-plus and was on its way to foreclosure. While the price to get the two-bedroom, two-bathroom waterfront home was discounted in a short sale to about $750,000, Reid said he made a cash offer of $650,000.

“We were reluctant to purchase a short sale home because of the horror stories we’ve heard about closing, negotiations, time,” he said. The Reids were also building a vacation home and didn’t want any more hassles.

They learned that while the seller might be okay with their offer, it was still up to the mortgage holder to agree to the price, since a short sale is an agreement to accept less money than is owed to avoid the more cumbersome and lengthy foreclosure process. The first mortgage holder agreed. But a second mortgage holder that did not. After a lot of negotiating, the deal was sweetened to $730,000 and closed in about three months, Reid said.

Financial independence day: 5 ways to get there

No fireworks will explode if you can pull off financial independence, but it sure beats working for the man. How do you do it? Do you have to live like a monk? Give up chocolate? Move to a tent? Stop watching the Cartoon Network?

While it helps if you were an investment banker, CEO, professional athlete, movie star or inherited a ton of money, there are other ways to get there. Here are some favorite, little-heralded ways.

Debt is the Devil The biggest impediment to financial independence is unbridled debt. If you spend more than you make and get into debt, you’re working for the banks. That’s pretty standard advice, although most folks don’t know how to systematically avoid this trap. Like a demon, debt needs to be exorcised. First, get to the point where a bank is paying you to use credit. Use reward cards (they give you cash awards, airline miles or other dividends) and pay them off by their due date. Don’t carry over any balances. If you can’t pay for something when the bill comes due, don’t buy it. Don’t take out home-equity or installment loans. They are not worth it. I have nothing against carrying a mortgage balance — it’s always been called “good” debt. But the sooner you can pay it off, the better. The benefit of getting a tax deduction is overblown. A long-term debt impairs your freedom as much as a short-term one.

What can you live without? Unfortunately, most consumer societies are predicated on having it all now thanks to readily available credit. Save up to pay cash for the things you really want. Get rid of the things that provide marginal pleasure. Can you live without cable or satellite TV? Dump it and save the difference. How about that health-club membership? Did you know you could exercise at home for nothing (remember calisthenics)? Most libraries allow you to check out movies, music and books for free. Go without that morning cup of coffee or that daily lunch. Bank the savings. Make it your motto to “save first, spend later.” Fill up your short-term money market account with savings that can take care of emergencies and rainy days. Check your health, home or auto insurance. Make sure you have enough money to cover out-of-pocket expenses. As for life insurance, unless you have dependents who would be financially hurt if you pass, don’t buy it. Disability insurance is a good idea. You have a greater chance of being disabled than dying during your working career.

Save like a demon You’ve probably seen suggestions that saving 10 percent to 15 percent of your annual income will lead to a comfortable retirement. Forget it. On most retirement withdrawals — including annuity income — you’ll need more to pay Uncle Sam and then cover higher medical expenses in coming years. Start with a goal of saving one-third of your income. Open up a Roth IRA or 401(k). You pay taxes on the contributions, but not on the withdrawals. Use every opportunity you can to save with tax-deferred accounts. No amount is too small.  Don’t forget to save enough to cover taxes.

Small fees take big hits I’m a raging evangelist on this issue. Being nickel and dimed by brokerage fees, commissions and middlemen expenses eats up your wealth in a big way. Some 70 percent of employees don’t even know that their employer or 401(k) fund provider is charging them fees to invest in their retirement funds, according to an AARP survey. What looks like a small amount on your statements can eat up your kitty over time. And forget about brand names, advertising and the supposed prowess of fund managers. All that matters is cost and diversification. Let’s say you have the American Funds Growth Fund of America, a popular stock fund for retirement. Then compare it to the ultra-diversified, passive Vanguard Total Stock Market Index . While I can’t predict what future returns will be in either fund, if you invested $10,000 in each fund, earned a modest five-percent annual return, you’d have saved $1,152.97 in fees and sales charges (on the “A” shares in the American fund) in the Vanguard fund after a decade. This is not a patent endorsement of Vanguard, although I have most of my retirement funds invested with them. It’s basic math. Costs matter. The less you have to pay — whether it’s in fund fees, banking charges, commissions or interest — the better. Avoid any broker-sold product. Buy direct. Run your own numbers to compare funds with the FINRA Mutual Fund Cost Analyzer, which is what I used in the above example.  You can’t beat Wall Street. They beat you with the small stuff every day.

It’s not about numbers, it’s about your life I’m sick of self-serving surveys of how poorly people are saving for retirement. They are usually published by the same companies who want to gouge you to invest in their “retirement” products. Find out how much it would take for you to live comfortably and put away enough money to get there. Develop a dynamic lifetime financial plan that changes with each phase of life. Get a ballpark estimate to see if you’re on track. Financial independence is possible if you can live below your means. Although that sounds unpatriotic in a consumer economy, what you save is what you keep. You’ll have plenty of reasons to celebrate if you can reach that goal.

Retirement solvency “a growing challenge” says GAO

The risk that retirees will outlive their assets is a growing challenge, the federal Government Accountability Office said in a not-so-newsy report released on Friday. To meet that challenge, experts advise retirees to delay the start of their Social Security benefits, avoid spending down their nest eggs too fast and consider using annuities in some situations, says the study.

The report could be used to nudge forward policy initiatives already under consideration that would encourage companies to offer annuity choices to their retiring workers. The report was requested by Senator Herb Kohl, chairman of the Senate Special Committee on Aging. He has cosponsored a bill, called the Lifetime Income Disclosure Act, that would require 401(k) statements to include an annuity equivalent number — the amount of monthly income that the savings accumulated would support.

The Treasury Department has asked for public comment on the idea that employers, given some safe harbor against lawsuits, could encourage workers with 401(k) accounts to annuitize their savings. Mark Iwry, the Treasury Department official who has been looking at these retirement issues, commented in a letter to the GAO. “We will take the information and analysis in the report into account as we consider guidance to issue.”

To conduct the study, the GAO created sample retiree profiles at varying income levels, with and without defined benefit pension plans. It then asked a host of experts within the financial services industry, academia and a “retiree interest group” (I’m going to guess that it was AARP) how they would advise retirees with those profiles to protect their income for the long haul.

The experts generally recommended familiar strategies: (1) leave your money in your defined benefit plan and take an annuity instead of a lump sum; (2) make systematic (and not unreasonably high) regular withdrawals from your savings; (3) delay the start of your Social Security benefits; and (4) consider buying an income annuity to cover some basic expenses for the rest of life.

The GAO also surveyed retirees to see if they were following that advice and found, in general, that they were not. Roughly half of retirees take their Social Security benefits before their 63rd birthday, according to data cited in the report.

The experts surveyed by the GAO suggested that middle-net worth households that did not already have a defined benefit plan could gain the biggest advantage from buying income annuities, in which a sum of money buys a guaranteed lifetime monthly stream of income. “They should consider using a portion, such as half of their $191,000 in financial assets to purchase an inflation-adjusted annuity,” the report says, noting that it would provide an additional $355 per month until the death of the last surviving spouse, and grow in subsequent years with the Consumer Price Index.

CORRECTED: Hobbies that pay: How the wealthy make money on fun

If you’ve seen “The Antiques Roadshow,” you know dusty paintings or funny-looking nightstands can fetch mega dollars. Or not. It’s a crapshoot, and no one knows that better than the hopefuls getting their attic bric-a-brac appraised.

The wealthy amass their tchotchkes, too, but with a big difference: Financially successful folks bring their money smarts to hobbies and collectibles. So while they indulge that ages-old impulse to stash stuff, they also find ways to write it off and make it pay.

Reuters Wealth surveyed estate planners and experts to sample non-traditional areas where the rich sink their dough. These categories may reek of conspicuous consumption, but beneath the surface you’ll find a calculus worthy of a stock portfolio.

Vintage guitars How it works: American-made electrics from Gibson, Fender and Rickenbacker from the 1950s and ‘60s are prized. Guitars played by rock stars fetch big bucks, as do limited-edition models.

The bottom line: 1960s guitars that retailed for under $1000 (2011 dollars) often command five-digit sums today. Guitars purchases may be tax deductible if you claim a Schedule C as a musician and/or own a for-profit recording studio.

Quotable: Beware of buying guitars on eBay, says Wayne Sefton of Chicago’s Midwest Buy and Sell. “There’s a lot of shill bidding going on,” says Sefton, whose clientele includes Wilco, Franz Ferdinand and Death Cab for Cutie.

Kickstart it: George Gruhn in Nashville is the world’s foremost appraiser of guitars, charging a modest $50 per instrument. Visit his website at gruhn.com.

Real estate: How to buy a luxury home with cash

Cash is king in high-end real estate this year, serving to stabilize the market as tight credit conditions and depreciated home values continue to plague the embattled real estate sector.

At least 30 percent of all purchases were financed with cash between mid-April and mid-May, according to the May 2011 Realtors Confidence Index by the National Realtors Association, and the numbers are even more robust for the luxury property market.

In the Fort Lauderdale, Florida area, 57 percent of all single-family homes purchased and priced over $1 million were cash buys between Jan.1 and May 31 of this year, says Vickie Arcuri, an agent with EWM Realtors. In the million-dollar plus condo market, 42 out of the 47 units sold during the same time period were cash purchases.

The south Florida market is particularly hot for out-of-state and foreign investors, who often find it more difficult to secure financing.

“Tight credit and lending criteria are some of the reasons why cash is so popular and it significantly affects the upper-end of the market,” says Arcuri.  Jumbo loans — those too big for underwriting by Fannie Mae and Freddie Mac — typically have higher interest rates than government-backed mortgages. The loan amount that falls into jumbo loan territory varies from one local real estate market to

another. In the Fort Lauderdale area, a jumbo loan is anything above $620,000.

Active investors bullish on stocks, worry about inflation

Do active investors know something the rest of us don’t? Despite the recent barrage of humbling economic data and a substantial stock slide, investors making three or more trades a month are bullish on the market, predicting the Standard & Poor’s 500 Index will finish above the threshold of 1,400 by the end of 2011.

Fifty-one percent of the nearly 700 retail investors surveyed believe the S&P will rise more than 100 points, according to a new survey by Fidelity Investments. More than half (51 percent) say they beat the market in the past 12 months, while another 27 percent say they matched it. The S&P 500 Index rose more than 19 percent during this time period.

Not all investors are so confident. Among those with $500,000 or more in investable assets, excluding their primary residence, confidence fell 11 points in June representing the largest monthly decline in more than three years, according to the Affluent Investor Confidence Index released by Spectrum Group.

And according to State Street, global institutional investor confidence also fell in June, led by a decline in optimism among North American investors.

What’s driving the pessimism among the wealthy crowd? “Their specific attitude or outlook is concern about household income, concern about the health of where they work — their corporations, their employers or their own company — that’s all related to the economy and their concerns about the economy as a whole,” says George Walper, president of Chicago-based Spectrum Group.

Franklin Gold, senior vice president of research and education at Fidelity, says that active investor optimism is tempered by a general concern over economic conditions as well.

“They clearly are concerned and are watching out for inflation. They’re watching what goes on Europe, but overall they’re just maintaining a general positive overview. Even though their confidence may be down from an investing perspective, they’re still mildly positive in terms of direction,” Gold says.

Investing: A little inflation isn’t such a bad thing

We’re in a three-headed hydra economy now. There’s the threat of burgeoning inflation, joblessness and a rotten housing market.

Yet the idea that rampant inflation will trigger an investment debacle is perhaps overblown. A touch of inflation can be a good thing and it depends on how you invest.

I’m not discounting the possibility of a bond bubble bursting, so be sure to shorten your maturities on high-quality bonds because they will get hardest hit by any interest-rate increases. Beyond that, the news may not be all that bad based on historical results for stocks.

Consumer inflation is running at a nearly four percent clip, according to the latest government report, which shows the annual rate at its highest since June, 2008. The bulk of the increase was in energy (fuel prices — up 21 percent) and food.

A little inflation isn’t that toxic to stock returns. According to research from the Leuthold Group, stocks often gain in periods of mild inflation. The last time inflation was climbing at least three percent, stocks did just fine. Leuthold found that in September, 2000; September, 1996; and June, 1995, the subsequent one-year performance of stocks was 13 percent, 20 percent and 26 percent, respectively.

Although there are exceptions to these trends — December, 2002 had a one-year trailing decline of 22 percent (recession-induced) — the overall conclusion is that “in those periods of mild inflation 45 of 53 periods (going back to 1926) had positive [stock] returns.”

What happens if inflation creeps substantially over the three percent threshold? Only four of those periods in the Leuthold study showed gains. One thing is fairly certain: Stocks generally don’t do well during high-inflation times. In the 1970s, when inflation averaged 7.4 percent — it was double that toward the end of the decade — stocks only rose about five percent, according to Ibbotson Associates. That compares to an 18 percent average stock performance for the 1990s, a decade in which inflation averaged less than three percent.

How investors can use Twitter

The following is a guest post by Brad Allen. The opinions expressed are his own.

Twitter is not just for staying in touch with friends and colleagues. It’s becoming a great way for keeping up with the stocks you care about as well. And companies themselves are increasingly using the social media tool to communicate directly with investors.

Ever since the $TICKER tag was introduced on Twitter two years ago, active traders and investors have used the 140 character message stream to share tips, ideas and news. As the number of participants discussing specific stocks has grown, so has the volume of tweets touting penny stocks, newsletters — and the occasional bogus “news release” trying to move a stock.

Most companies whose stocks were the subject of those tweets ignored the chatter the same way they ignore online chat rooms. Worried about inadvertent selective disclosures, corporate spokespeople kept their own Twitter conversation focused on routine PR matters, and steered away from financial and investor information.

That is changing fast as companies figure out how to tweet without crossing the foul line. A recent study of more than 600 public companies using social media found that two-thirds of them employ Twitter to communicate directly with investors, up dramatically from two years ago when just a handful were starting to tweet.

The study, conducted by Q4 Web Systems, a Toronto-based consulting firm that advises corporations on using the web, reported that natural resources and tech companies represent the greatest number investor-tweeting companies, followed by services, industrials, basic materials, and retail companies.

The survey cited emerging “best practices” these companies use when tweeting investors, including:

5 beachfront resort areas with hot real estate deals

The following is a guest post by Lou Carlozo. The opinions expressed are his own.

Pass the suntan lotion and the cashier’s check: As summer sends Americans flocking to beaches on both coasts, it’s also high time to plunk down cash on a vacation property.

All statistics show a still-depressed real estate market. The Standard & Poor’s/Case-Shiller Home Price Index shows housing costs down 4.2 percent in the first quarter of 2011 — and at their lowest since mid-2002. And the Federal Reserve isn’t raising interest rates anytime soon; on Tuesday it voted unanimously to leave its benchmark rate between zero and 0.25 percent, where it’s been parked since December 2008.

Translation: Next time you hit the beach, scope those “For Sale” signs.

“In our lifetime, we won’t see these prices again,” says Jeffrey Rogers, President and COO of Integra Realty Resources, a New York-based independent commercial real estate valuation and consulting firm. “Despite the economic downturn, we still have positive GDP growth and interest rates are at historical lows, too. This is just an excellent time to buy.”

Rogers and a host of real estate experts weighed in on the best resort towns to buy in, based on factors from large percentage price drops to community infrastructure, and prospects for long-term value gains. Overbuilding also indicates a potential bargain, though prospective buyers should temper enthusiasm with caution. “If there are an abundance of foreclosures, avoid the area until you can see some signs of recovery,” says Dolores Conway, a professor of real estate economics and statistics at the University of Rochester. ”You have to wait for the bottom; it’s like catching a falling knife.”

What’s more, ideal conditions don’t mean the toniest resorts are giving property away. You’ll still pay close-to-peak prices in eternal hot spots such as Martha’s Vineyard, for example.