Forget about resting easy.
Target-date funds, billed as confidence-building vehicles that gradually shift your holdings into more conservative fixed-rate instruments as their date nears, have caused some sleepless nights.
Investors stashed money in these one-stop retirement plans so they didn’t have to worry about making their own allocation decisions. But it has become clear they need to better understand the basic concept of target-date funds and carefully scrutinize any fund under consideration.
The 2010 target-date funds designed for people who turn 65 years old next year lost an average of 25 percent of their value in 2008. Because many target-date funds are also the automatic default investment for enrollees in company 401(k) retirement accounts, the devastation was compounded.
As funds were drawing close to that target date, encouraged by a vibrant stock market, they kept a lot of stock in their portfolios. They were also competing for the best performance in order to attract new assets. But then the bull turned into a bear, and they paid a high price.
The average 2010 target-date fund had a 45 percent stock allocation at year-end 2008, according to Target Date Analytics LLC in Marina del Rey, Calif.
"The fund companies had expanded their investment strategy past the target date, using the rationale that people live 15 or 20 years past retirement, so they should keep a strong equity position," said Joseph Nagengast, principal with Target Date Analytics. "Target-date fund managers weren’t managing to the year 2010, as some investors assumed, but to some point well beyond it."
Investors must determine whether a target fund they’re considering is a "to" fund that manages the money to the target date or a "through" fund that manages it past the target date and into retirement, he said.
"Ask the fund company when the fund will reach its most conservative position," advised Nagengast. "If it’s a 2030 fund and they tell you 2029, you know they’re managing to the target date, but if they say 10 years after that date, you’ll know they’re managing well into retirement."
That means more responsibility than most target-date investors expected.
"You as the investor must define the target date and whether it represents when you plan to retire or some date beyond that," said Jack VanDerhei, research director for the Employee Benefits Research Institute in Washington. "A lot of people believe that by the target date they should be down to zero equities, which indicates their lack of understanding."
Some fund companies that were low on equities last year are now trumpeting their lack of negative performance, VanDerhei noted, while others are saying a certain percentage of equities must be in your portfolio to fight inflation if you have 20 years or more left in your retirement fast cash without a hassle.
"As the investor, you must know which strategy makes you feel most comfortable," he said, noting that reading the prospectus of the fund remains crucial. "Many people say target funds dated 2010 or close to that have too much equity in them, but this ignores the fact that the investor can look for a fund that holds a smaller percentage of equities."
Surveys have shown that some investors incorrectly believed they were getting a guaranteed payout when the target date was reached, another misconception. But despite all the fallout from poor performance and some murky comprehension, there can be a place for target-date funds in an individual’s planning if he or she clearly understands what the investment is all about.
"It still makes sense to have target-date funds and, like any other investment, there are good and bad ones," said Greg Carlson, fund analyst with Morningstar Inc. in Chicago. "They provide one-stop shopping for investors who don’t want to build their own portfolios, plus broad diversification over most asset classes."
The three biggest competitors in target-date funds are Fidelity Investments, Vanguard Group and T. Rowe Price, though such funds are offered by a host of investment companies.
Carlson especially likes the Vanguard Target Retirement Funds because they’re mostly index funds with broad diversification and low fees. He also likes T. Rowe Price Retirement because it has some excellent funds in its portfolio and "is one of the few companies that does a lot of things really well." Two examples of 2010 target-date funds Carlson finds noteworthy are Vanguard Target Retirement 2010 and T. Rowe Price Retirement 2010.
Other experts have caveats about even those fund groups.
"I think Vanguard and T. Rowe Price do a good job in long-dated funds that have more than 20 years until the target date," said Nagengast. "But in my view, they do a poor job of managing risk in short-dated funds of 15 years or less because they’re making investment decisions based on a date well past the actual target date."
Whatever fund company and fund is chosen, individual investors still bear the ultimate responsibility for the selection made. The buck stops with them.
"All the big fund companies are pretty competitive on fees, so I don’t think that will be the greatest factor making an investor choose one company over another," concluded VanDerhei. "It really comes down to asset allocation and which fund company you feel most comfortable with."
The U.S. central bank must resist popular pressure to keep interest rates too low as the economy recovers, according to a top Federal Reserve official.
Kansas City Federal Reserve President Thomas Hoenig, in remarks at a private meeting last month that were released on Saturday, also said that top U.S. banks were still too highly leveraged, and would evade demands to raise more capital.
“As we become more confident that we are at the bottom of the recession and are moving into recovery, we must become more resolute in systematically reducing our balance sheet and raising interest rates,” Hoenig told the annual meeting of the Kansas Bankers Association on August 6.
The Fed has cut interest rates to almost zero and doubled its balance sheet to around $2 trillion to keep credit markets from seizing in panic after investment bank Lehman Brothers failed last September amid massive losses on mortgage debt.
“Moving from zero to one percent, for example, is not a tight policy. I don’t know what the neutral rate is, but I am certain it isn’t zero,” Hoenig said.
“Neutral” refers to a level of interest rates that neither stimulates nor hinders growth. The Fed reiterated at its August 12 policy meeting that the weak economy would warrant exceptionally low interest rates for an extended period.
Hoenig, who is regarded as one of the Fed’s most hawkish, or anti-inflation officials, will be a voting member of its policy-setting committee next year auto loan.
“We are carrying more debt than we have carried in most of our history, and the pressure to keep rates low is only going to increase as the economy begins to recover,” he said.
Hoenig said mixed signals from the economy indicate that the bottom of the recession had been reached, but predicted only a gradual recovery as businesses and households work off the consequences of the collapse of the U.S. housing market.
“In this environment, one of the Federal Reserve’s major challenges will be how to pull back its highly accommodative monetary policy without undermining the recovery and without igniting inflationary expectations,” he said.
Hoenig’s speech was on the implications of leverage and debt. He said that the country’s 20 largest banks had far less equity capital than their smaller rivals, controlling $12 trillion in assets but supported by just 3.5 percent of equity capital versus 6 percent for the next 20 largest firms.
“Some proposals being offered would require large institutions to hold more than this level of capital,” he said, referring to the 6 percent threshold. “I would suggest such proposals are wishful thinking and will not be achieved.”
(Reporting by Alister Bull, editing by Vicki Allen)
Although the recession isn’t officially over yet, there is a growing sense that the economy is now in a recovery. But there is also a growing debate about who deserves the credit.
The question of who should receive praise for helping to get the economy back on track may seem trivial. But knowing what policies worked, and which ones need to stay in place, could keep the recovery from stalling out.
Many in Washington have gone to extraordinary lengths to try and turn around the economy over the past year or so
Last year, Congress signed a blank check to Treasury to cover losses at mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and created the $700 billion Troubled Asset Relief Program for banks. Earlier this year, lawmakers passed a $787 billion stimulus package.
Meanwhile the Federal Reserve slashed interest rates to nearly 0% and pumped more than $1 trillion into the economy with its bailout of AIG (AIG, Fortune 500), its support for mortgage-backed securities and various lending programs.
Federal Reserve chairman Ben Bernanke said in a speech last month that the Fed and Congress, as well as other governments and central banks around the world, deserve credit for stopping the global economy from falling into a depression.
"Without these speedy and forceful actions, last October’s panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk," he said.
A number of economists agree that the Fed, Congress and both the Bush and Obama administrations all deserve credit for steps taken to end of the recession.
"The actions of the Fed and Treasury starting last October actually worked, regardless of how unpopular they were," said Bill Hampel, chief economist of the Credit Union National Association. "It was messy. It was dirty. It required a lot of money. But they were successful in preventing the implosion of a lot of institutions."
Of course, it is easy to find fault with any particular program though.
"They tried an awful lot of things, some worked, some didn’t," said Kurt Karl, chief U.S. economist for Swiss Re. "Mistakes were made. It was an ad hoc solution. It would have been surprising if they made no mistakes."
Turnaround or sugar rush?
To be sure, some economists worry that all the efforts taken will lead to greater problems down the road. For example, the Fed may be risking a bout of inflation in the future if the money that has been pumped into the economy isn’t withdrawn at just the right time.
There are also concerns about how the looming deficits from stimulus and other Congressional spending can only be repaid through higher taxes — which will be a drag on the economy in the future.
"The economy needed a jolt and it got a jolt," said David Rosenberg, chief economist and strategist for asset manager Gluskin Sheff. "It gave us a sugar high, but there was no follow through Business Card Holders. So it’s going to come at the expense of future quarters."
But most economists still support the Fed’s actions. The National Association of Business Economists (NABE) released a survey Monday that showed broad agreement about current monetary and fiscal policies.
And even though few economists believe that the stimulus package has been an unmitigated success, there is widespread agreement that government spending is providing a necessary boost to the economy right now.
"I don’t think it’s any accident that the recession ended when the stimulus was providing its greatest impact," said Mark Zandi, chief economist with Moody’s Economy.com.
Too soon to declare a winner
Still, it’s reasonable to wonder if the current signs of recovery have more to do with how economic cycles work. In other words, the markets, and not the government, solved the crisis.
Worries about job losses and tight credit caused consumers to cut back spending, resulting in some pent-up demand. In addition, businesses slashed production, leaving inventories at very low levels.
"Now that everyone has figured out the bottom is not falling out, businesses will have to replenish the inventories," said Karl
As such, many experts think it will be important for the Fed and Congress to not go overboard in its attempts to stimulate the economy. The NABE survey found 76% of economists don’t think another round of stimulus is needed at this point.
"It’s very difficult to appropriately assess the true state of the economy, given how much medication it is on," said Rosenberg.
Others argue that the Congress and the Fed shouldn’t stop trying to jump start the economy. Despite signs of progress, additional help will be required.
"I think the recovery is very fragile and we could lose it," said Zandi. "It’s far from evolving into a self-sustaining economic expansion. Stimulus is temporary. It very likely will need more help from policymakers."
With that in mind, it’s highly unlikely that any elected officials will rush to take credit for a turnaround just yet.
"As long as unemployment is near 10%, and we’re still losing jobs, it doesn’t feel like a recovery to anyone but economists," said Zandi. "They don’t want to hang up a ‘Mission Accomplished’ banner."
Have you recently been laid off? Lost most of your retirement or college savings in the stock market? Dealt with the loss of the family breadwinner with no life insurance? If you’ve been confronted with some challenge during this recession and would like to have an expert review your situation, send an email to realstories@cnnmoney.com and you could be profiled in an upcoming segment on CNN. For the CNNMoney.com Comment Policy, click here.
The popular Cash for Clunkers program gave a strong boost to auto sales in August, resulting in the industry posting its best month this year by far. But sales dropped sharply in the last week of August — after Cash for Clunkers ended.
A preliminary reading from sales tracker Autodata shows that industrywide sales rose 1% compared to a year ago, to 1.2 million vehicles. That’s the first annual sales gain since October 2007, and sales were about 26% above July’s levels.
Ford (F, Fortune 500) reported the best results among the nation’s six largest automakers. Its sales rose 17% compared to August 2008, its biggest jump in sales in four years. Still, Ford sales’ gain was short of the 22% increase forecast by sales tracker Edmunds.com. Ford shares were down more than 4% following the release of the report.
The situation wasn’t as good at the other two major U.S.-based automakers. General Motors posted a 20% drop in sales from a year ago, while Chrysler Group reported a 15% decrease from last August. But the news was not all bad. The declines were not as large as the forecasts from Edmunds.com.
And both GM and Chrysler, which went through bankruptcy reorganizations earlier this summer, reported sales gains from July. GM’s sales were up 30% from a month ago, while Chrysler’s sales climbed 5%.
Looking at the Asian automakers, Toyota Motor (TM), which had more Clunker sales than any other automaker, reported a 6% rise in sales, its first year-over-year gain since April 2008, and its best gain in two years. Honda Motor (HMC) reported a 10% rise in sales, ending a 14-month string of declining U.S. sales.
Among the other Asian automakers, Korean automaker Hyundai, which is now the No. 7 automaker in terms of U.S. sales, posted a 47 spike in sales compared to a year ago. And Kia, the other major Korean automaker Kia posted a 60% jump in sales.
Nissan was the one Asian car company to not post a sales increase — its sales fell 3%.
Better times ahead or just a Clunkers boost?
Ford director of sales analysis George Pipas said in a conference call Tuesday that industrywide sales probably increased by about 400,000 vehicles during the month from the program. Pipas added that a significant percentage of sales would have taken place even without the program.
Still, sharp declines in sales during the last week of August have raised doubts about the outlook for sales for the remainder of the year, said Edmunds.com senior analyst Jessica Caldwell.
Cash for Clunkers left dealers with limited inventory of new vehicles once the program ended and also with fewer buyers interested in buying cars now that they are no longer eligible for $4,500 in rebates.
Caldwell said that the pace of sales went from a seasonally-adjusted annual rate of 15 million vehicles while the program was in effect in August to only about 8 million currently.
"Cash for Clunkers sent the sales rate on a wild roller coaster ride," she said.
But auto executives said that they believe that signs of improvement in the economy should leave the industry in good shape going into this fall, a time when companies will start to roll out new models.
"The Cash for Clunkers program was certainly a success, but our momentum continues to build on the strength of our new cars and crossovers," said GM sales vice president Mark LaNeve in a statement.
Pipas pointed out that sales of smaller cars are now higher than they were when gas hit a record of more than $4 a gallon last year.
Ford said in its release that sales were also lifted by signs of recovery in the U.S. economy overall. Sales of trucks and vans, for example, rose 12%. In a statement, Ford vice president of U.S. sales Ken Czubay said the company was hopeful that "small business owners are seeing signs of recovery and gaining confidence in the outlook for stronger business conditions."
Chrysler said its sales were limited by low inventory of some of its vehicles. It said it essentially sold out of many models by the end of the month. Chrysler has joined Ford and General Motors in announcing additional production of vehicles this fall in order to replenish dealers’ supplies.
GM said Tuesday it now plans to build 655,000 vehicles in the fourth quarter, up 20% from its third quarter production target. GM had previously announced it was adding 60,000 vehicles to its production plans during the rest of the year to restock depleted inventories.
Still, the low inventories mean that some GM dealerships that had originally been set to close in January will now be closing early rather than trying to restock, LaNeve said.
GM announced plans to cut about 1,100 dealerships as part of its bankruptcy reorganization, but many of those dealerships are due to stay in business for another 12 months.
Talkback: Do you think that auto sales will continue to improve or did Cash for Clunkers just provide a short-term boost? Share your comments below.
On the face of it, a reverse mortgage sounds like a no-lose deal for older homeowners. A lender gives you what amounts to a cash advance on your home equity — no minimum income or credit score required. And you don’t have to pay it back until you move or die, when the proceeds from the house sale typically will be used to close out the loan. But in fact, reverse mortgages have some serious drawbacks. Here’s what you need to know.
You may not be able to borrow that much. A provision in the economic stimulus package raised the maximum home value that could be counted for reverse mortgages from $417,000 to $625,500. But you won’t be able to tap your home up to its full price. The formula for determining loan amounts takes into account your age (the older you are, the more you can borrow) and current interest rates, as well as your home’s value. Anything you owe on your home is subtracted from that amount, as are the loan fees you’ll pay. To see how much you might qualify for, use the calculator at revmort.com/nrmla.
Expect to pay some pretty hefty fees. A reverse mortgage is an expensive loan. In addition to regular closing costs, you’ll pay an origination fee of 2% on the first $200,000 of the loan balance and 1% thereafter, plus a mortgage insurance premium of about 2% and a monthly service charge as well. Though recent legislation has capped the origination fees at $6,000, by the time you add all the other fees you’ll have to pay, the total generally reaches $10,000 to $15,000. So a reverse mortgage doesn’t make sense if you expect to move anytime soon, says Dallas financial planner Michael Anderson.
There’s more risk than you think. Reverse mortgages are particularly appealing to retirees looking to supplement dwindling income from a battered investment portfolio — that’s one reason these loans are up nearly 50% over the past two years. The big risk, especially for younger borrowers (you have to be at least 62 to get the loan): You’ll live longer than you anticipate, run out of money, and won’t have any home equity that you can fall back on. Over the past decade the average age of reverse-mortgage borrowers has fallen from 76 to 72. "One of the first questions to ask yourself is whether you can make the money last," says reverse-mortgage counselor Brenda Grauer.
Other options may suit you better. Before you can get a reverse mortgage, you’ll be required to attend a session with a counselor who is not affiliated with a lender. This person is supposed to clearly explain the loan’s terms and its drawbacks. But a recent study by the Government Accountability Office found that counseling sessions often fail to warn seniors of all the risks. So before you or your folks sign up, make sure you’ve looked into all the alternatives, such as cutting expenses, taking out a home-equity line of credit, or downsizing your home. Says Grauer: "It’s best to put off taking this loan for as long as you can, so that when you really need it, the money is there."
Chinese stocks sank 6% to a three-month low on Monday, weighing on Asian stocks and sapping investor willingness to put money at risk.
Meanwhile the yen rose sharply after Japanese voters swept the opposition into power.
The election results, while widely anticipated, sparked some short-term buying of yen on hopes that new policies will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook, though domestic stocks slipped on exporter weakness.
Major European stock futures fell 0.9%, following commodity prices lower, in trade thinned by a holiday in London. U.S. stock futures fell 0.6% and U.S. Treasury futures were up 0.2%.
Outside of Japan, volatility in Shanghai, a market largely closed to foreigners, has curbed risk taking and has been weighing on the Australian dollar, which is a common target for investors searching for bigger returns because of its relatively high yields.
Shanghai-listed shares dropped 6.2% on the day, on track to post losses of 21 percent in August, only the second month that the composite index has fallen more than 20% in the last 15 years.
The index also crucially dropped below the 125-day moving average, what is viewed by many domestic investors as the threshold for bear and bull markets.
Fears that banks will rein in their lending after a torrid first six months of the year and an abundant supply of expected new shares have been knocking Chinese shares lower for the last month, often weighing on global investor sentiment about holding riskier assets.
Shares of Bank of China, the country’s biggest foreign exchange lender, were down 3.9% in Shanghai and the top drag on the market. Hong Kong’s Hang Seng dropped 1.8% to a one-month low in sympathy with Shanghai.
Tokyo’s Nikkei share average fell 0.4%. Large exporters Canon Inc (CAJ) and Honda Motor Corp (HMC) were among the biggest drags on the Nikkei, losing around 3.3% and 1.8%, respectively, on the stronger yen.
Australian stocks also performed relatively well, falling only 0.2%. Shares of Australia and New Zealand Banking Group Ltd jumped 4.1% after the country’s fourth-largest lender said it was starting to see bad debt provisions bottom out.
The MSCI index of Asia Pacific stocks traded outside Japan slid 1 best payday loan.3%. The selling was widespread, hitting the consumer discretionary, energy, telecommunications and materials sectors.
Stock valuations questioned
Asian stocks are trading at a price-to-book valuation of 1.1 times, above the 30-year average of 0.7 times and around the same level at the peak of the last bull market.
Investors since March had been justifying the premium based on the region’s growth prospects and its expected speedy recovery from the global downturn. Yet in August developed markets, such as the United States and Europe, have attracted investors away from emerging markets thanks to better economic data.
The Asian stock rally sputtered in July and August for two reasons, according to Mark Matthews, Asia Pacific strategist with Fox-Pitt Kelton in Hong Kong.
"The first is that the U.S. in particular and the developed world in general are experiencing economic recoveries that are more robust than previously expected. The second is that there is policy shift in China, and even the doves there are happy that asset prices are no longer rising quickly," he said in a note.
Yen for yen
In the currency market, the yen got an early boost on the clear-as-day election result, which eliminated any uncertainty about Japan’s political leadership. The sharp selloff in Shanghai equities also supported the yen as dealers sought a safe haven.
The U.S. dollar fell 0.7% to ¥92.75, the lowest since July 13, and the euro dropped 1% to ¥132.28.
The sharp decline in Chinese stocks "has muddied the picture as well as to whether it’s a reaction to the election victory or risk aversion. It’s probably a bit of a combination of both," said a dealer at a European bank in Hong Kong about the yen strength.
The Australian dollar was off 0.6% to $0.8373, though was largely unchanged in August.
The yield on the benchmark 10-year U.S. Treasury note slipped to 3.43%, down sharply since hitting 4 percent on June 10.
The creeping rise of risk aversion in markets pushed down oil prices, with U.S. crude for October delivery down 0.7% to $72.22 a barrel.
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