May 24, 2017

Your Money: One Crucial Investing Question: Are Your Goals Different Now?


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Traders on the floor of the New York Stock Exchange on Wednesday. American investors tend to have at least half of their stock investments in United States companies. Credit Justin Lane/European Pressphoto Agency

In the coming days and weeks, any tumult in the markets will probably be about a lot more than the companies we invest in.

We can never know for sure why the stock markets move as they do. But we can probably attribute any decline as these weeks of transition unfold as much to worries about how Donald J. Trump will conduct himself on the world stage as to concerns about how his economic policies will affect the profits of the corporations that make up those markets.

If a majority of your retirement savings is in stocks, however, you don’t care what the reason is. For many people, the temptation is to get out of the markets. And among some people whom Mr. Trump targeted with barbs and insults, there is palpable concern about much more than investments.

So stop. Breathe. People often regret big financial decisions they make in haste. And consider the following:

1. The S.P. 500 index of large American stocks is about where it was two years ago and nowhere near the depths it reached in 2009.

At this level, it’s still pretty far above the historical median for one crucial ratio of stock prices to earnings that the Nobel laureate Robert J. Shiller has developed.

So we may be due for a fall, one way or another, though a research note from Goldman Sachs on Wednesday noted that some valuations similar to today’s have previously led to 5 percent annualized returns in the next five years. Markets will do what they will do. But if you have been invested in stocks for a while now, you are most likely still a winner.

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2. Consider the statement you are making to yourself if you move all of your money to some kind of cash savings account, just to be safe.

Once upon a time — like, say, last week — you had an investing plan that was based on goals that may come years or decades from now. Perhaps you’re hoping to buy your first home. Maybe you’re trying to save enough to send a couple of children to college. You hope to retire by age 67.

Has any of that changed? If it hasn’t yet, then it’s not clear why your investments should.

3. But of course things have changed, and it’s about so much more than just the markets.

The man who is about to become president has bragged about abusing women, threatened to keep Muslims from immigrating and questioned whether Mexican-Americans can be impartial judges. If you don’t know someone who is worried sick about some or all of this, you’re not asking enough questions.

Still, a bet on stocks has always been a bet on capitalism. American investors tend to have at least half of their stock investments in United States companies, and many global companies sell plenty of goods and services to people in the United States.

So if you sell now and stay out of the markets for the foreseeable future, you’re doing one of two things. You’re either assuming that the election of Mr. Trump and all that he stands for means that investing in capitalism is now a sucker’s bet. Or you’re claiming that you will know exactly when the coast is clear and it’s safe to get back into your stock investments.

I can’t and won’t time the markets, and most professionals who try will fail if they make those bets repeatedly over long periods of time. My long-term bet remains on America and global stocks for now, with a healthy portion in international and emerging markets.

A Republican president with the House of Representatives and the Senate behind him can make a lot of change very quickly, and the stock market may fall a fair bit and be volatile for some time. Still, whatever Mr. Trump actually does will happen slowly, over many months. Given his history with the truth, he may not have meant everything that he promised, nor will he get his way on everything that he tries. But I expect to be happy that I stuck with stocks when I try to retire a couple of decades from now.

Retirees have a particular challenge here. Recent ones who are healthy, however, probably ought to plan on another 20 to 30 years of life, especially if there are two people in the household. That time horizon suggests the need for at least some stocks. Older retirees need to consider just how much their budgets could suffer if, say, a trade war sends stocks down 10 or 20 percent in a year or two. Perhaps it makes sense to park a couple of years’ worth of basic expense money in cash just to be safe.

4. If you simply cannot take the gyrations in the stock market anymore, you can make other choices.

You can buy bonds of various sorts, including municipal bonds that benefit citizens in cities and states that match your political leanings if you want to bet on only part of America.

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But history suggests that you will earn less in bonds than you would if you had invested in stocks. If that’s the result, then you’ll need to save even more money, work longer or live on less in retirement (or some combination of the three). That may be palatable if you’ve reached the limit of the anxiety you can tolerate.

Or you can invest in a business of your own, which is a big, concentrated bet and a risky one, too. Owning rental real estate is another possibility, since whoever does get to live here will need a place to reside.

5. There are many things in life that matter more than the stock market.

Family. The freedom to form a family, or not, in all of the ways that are legal now and bring financial privileges with them. Health and access to medical care that will not bankrupt you.

In the cloud of strong feelings that forms when we feel threatened, it is tempting to turn our backs on the system that allowed these perils to emerge. Doing just that is a real option for the small number of people who are able to emigrate or live mostly off the land.

But most people will not do that, last night’s Twitter chatter aside. They will stay and muddle through and raise their voices, too, and it will probably be easier if they haven’t locked in losses, moved their savings to the sidelines or sold out at the bottom of any further market declines.

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Article source: http://www.nytimes.com/2016/11/10/your-money/stocks-and-bonds/donald-trump-your-money.html?partner=rss&emc=rss

Public Sacrifice: How to Fix a Retirement Plan at a School or Nonprofit

I don’t have a 403(b) plan, but I want one. How do I learn enough to get started?

For public schoolteachers, the first stop should be 403bwise.com, which has basic educational materials and a forum where others may be able to help you. Dave Grant, a financial planner in the Chicago area who works with educators, has good advice on his website, too.

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Mark Eichenlaub, left, sprinting against a student. A teacher in Flossmoor, Ill., he put together packets of materials to educate his colleagues on why they needed to lobby administrators for a better retirement plan.

Credit Alyssa Schukar for The New York Times

A few teachers have created their own resources as well. We have linked to informative packets from Mark Eichenlaub, a language arts teacher in Flossmoor, Ill., who used the materials to educate his colleagues on why they needed to lobby administrators for a better plan.

For more general 403(b) advice, turn to the Bogleheads forums and search for related discussions. There, followers of the cheap-and-simple investing philosophy of the Vanguard founder John C. Bogle can help you plot a course to starting a plan or fixing one already in place.

I’m going to need to talk to my boss. How should I handle that delicate conversation?

It is fraught. Nonprofit administrators may be excellent at running programs for the needy and keeping old church buildings functioning — but they are not retirement experts. Also, conversations about money often make people nervous, especially if they have a hunch that they themselves may be heading for an uncomfortable retirement.

When Lisa Kenney moved from the business world to a job running Gender Spectrum in Oakland, Calif., she started quizzing fellow executive directors about retirement plans. “It didn’t take more than a couple of questions until someone was clearly uncomfortable,” she said.

Any question to a boss could sound like a challenge. So be careful with the phrasing. Everyone in your organization wins if you have a decent, low-cost plan, including your boss. People who teach, preach and help others for a living should understand that innately.

Can’t we just get a company like Vanguard or Fidelity to set a plan up for us, the way it happens at for-profit employers?

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It isn’t so easy. One reason insurance companies are so entrenched in the 403(b) industry is that they have so many local sales representatives standing by to help employers (and collect commissions). Fidelity and Vanguard do not focus on smaller 403(b) plans as much.

The 403(b) Story

The higher education and health care sectors make up 70 percent of the assets held in 403(b) plans.

403(b) assets and market share

by sector, 2014

in billions

Higher education

Large universities, both public

and private

$399.6

(45.9%)

Health care

Large hospital systems

and organizations

$209.9

(24.1%)

Other

Includes nonprofits, churches and

other religious organizations

$137.8

(15.8%)

K-12 education

Large, mostly public, school districts

$123.7

(14.2%)

403(b) assets and market share by sector, 2014

Other

in billions

Includes

nonprofits,

churches and

other religious

organizations

Health care

K-12 education

Higher education

Large hospital

systems and

organizations

Large, mostly

public, school

districts

Large universities,

both public and private

$123.7

$399.6

$209.9

$137.8

(14.2%)

(45.9%)

(24.1%)

(15.8%)

By The New York Times

School districts often want plan providers to pay the cost of administering the programs, something Vanguard refuses to do but insurance companies are happy to take on. Some districts, counties and states, however, have managed to create low-cost plans, so it is not impossible.

Consider North Carolina. After a laborious five-year process led by Janet Cowell, the state treasurer, the state created a central 403(b) plan run by TIAA for its public schools, adding community colleges in October 2015. Total costs are 0.78 percent annually, the state said, a figure it considers competitive, considering other providers were charging upward of 2 percent.

Can I retain a financial adviser to help my employer start a plan?

Sure, but advisers do not work free. Try to pay by the hour for advice or pay the adviser later, either a flat fee per year for helping run the plan or a percentage of the money you and your colleagues have invested as an annual fee. Even with the fees, an adviser’s solutions could easily cost a lot less than an insurance company’s 403(b) plan would.

Be wary of any adviser who takes commissions of any sort from investment or insurance companies. Ask whether any adviser your organization hires will be on call for one-on-one advice, too.

Finding advisers with the right expertise isn’t easy. Start at the websites of the National Association of Personal Financial Advisors and the Garrett Planning Network. Both organizations allow you to search for people with expertise in workplace retirement and employee benefit plans.

John Sparks, who teaches Japanese and world geography in Chesterton, Ind., played a big role in persuading his school district to adopt a single plan — run through a third-party platform called Aspire — which is managed by a certified financial planner.

His school system joined forces with seven others; together, employees pay 0.49 percent of their balances annually for the adviser and other administrative fees. They have access to, among many other investment options, target-date funds that cost 0.16 to 0.18 percent of assets annually. Another $35 a participant annually goes to Aspire.

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What kind of plan will be easiest to set up and cost my employer the least?

Probably a 401(k). While 403(b) plans have been the traditional choice for nonprofits (and may be necessary for public school employees and religious leaders, because of various laws and regulations), there are no rules that keep nonprofits from adopting 401(k)’s instead. Our colleague Stacy Cowley wrote last year about a number of services that can set up a cheap, simple plan. Ron also featured some of the providers in a 2011 column, and Tara wrote about Betterment and others last year.

The truly determined can just start their own plan. Jeremy Hockenstein, the husband of a rabbi, and Rabbi Van Lanckton did this in 2012. Their Rabbis and Cantors Retirement Plan serves two purposes: It is a model for those who are unhappy with the fees and investment choices in their current plan, and it allows others to get a plan where they previously had none.

Mr. Hockenstein said the process probably took a few hundred hours over several years, but the pair have not had to spend much money on their nonprofit operation.

I’ve already got a plan, and I’m worried that it’s bad. How can I sort it out?

Start with the company that runs it. If it’s an insurance company, your plan may include annuities. Annuities have their place. But it is a rare one, inside a retirement plan that is both low cost and offers a payout that would beat a basket of simple index mutual funds over long periods of time.

Gather any documents you can. If a representative is available, start asking questions.

Here are some good ones: Can you please tell me every single fee I’m paying, regularly or irregularly? What are each mutual fund’s expenses? Are they higher than what I would pay in a normal brokerage account? If so, why? Is there a wrap fee or any other account management fee on top of the fund fees? Any mortality charges? Surrender charges? Sales charges? Loads? Distribution fees? 12-b1 fees? Shareholder service fees? What about any other fees that go to intermediaries?

If you pay a total of more than about 1 percent annually in fees — so that a $50,000 balance costs you more than $500 — then you probably could be doing better.

Document

Retirement Tips for Teachers From a Teacher

Retirement strategy advice from Mark Eichenlaub, a language arts teacher in Flossmoor, Ill.

This is confusing. Can an adviser help here, too?

Yes, though again, finding a specialist isn’t easy. Still, if you are inclined to pay for a second opinion for important things in your life, this is a pretty good place to follow through with that instinct.

“Even if you move forward, you have someone other than the Ford dealership telling you to get the Ford,” said Mark Cortazzo, a financial planner in Parsippany, N.J., who reviews annuities for clients.

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If you have like-minded colleagues, perhaps they could split the cost with you. Your boss, too, may be willing to spend a bit from your organization’s budget.

How am I going to get my school district’s administrators to add better 403(b) choices without being labeled a malcontent?

It can be done. Mr. Eichenlaub, the teacher in Illinois, knew from his investment research that many of the people who retired early did so through steady contributions to index funds. Also, the state is a fiscal basket case, which puts the long-term health of its pensions at risk.

While some school districts give teachers the runaround, many are willing to add new investment options to their 403(b) plans, though the procedures will vary. In Mr. Eichenlaub’s case, he needed to find 10 like-minded colleagues to move their money to a new provider, Fidelity. He eventually did this, in part through an education campaign on just how much money the district’s other offerings were costing them.

“This has been very stressful and very time-consuming,” he said. But he was determined to do it, in part because he knew this was a way to help others without having to ask taxpayers for additional matching funds or pension contributions.

Some public school employees may find that their district handed over the task of administering their plan to third-party administrators like Omni. In some cases, these firms may serve as gatekeepers, determining which investments employees have access to. Sometimes, they may only accept 403(b) providers that will absorb administrative fees; not surprisingly, the higher-cost purveyors are the most willing to cover them.

If you find yourself in this situation, ask the administrative firm or your school’s business administrator if it is possible to add lower-cost vendors like Aspire to the lineup. In other instances, you may have to enlist some co-workers, as Mr. Eichenlaub did.

Don’t teachers have options other than these 403(b) plans?

Maybe. In some states, including New York and California, they may be able to set money aside in a 457(b) plan, which is like a 401(k) for state and local government workers. The Los Angeles Unified School District offers one as well. Ask the business office of your school district about this and lobby for it if you cannot get access now and the plan is a good one.

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Kristen Gartman Rogers, a lawyer at a nonprofit law firm in Mobile, Ala., spent years trying to fix her employer’s 403(b). Now, her boss signs a check each quarter to pay for its expenses. Credit Jeff Haller for The New York Times

What about my TIAA plan?

Many employees of private schools and universities have a 403(b) through TIAA. Often, the plans have a good lineup of reasonably priced mutual funds. Some people, however, have complained to us about the complexity and rigidity of the TIAA Traditional annuity. Be sure to ask plenty of questions about how the payout will work and how easy it will be to have access to your money once you retire.

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I’m convinced I have a problem. But what will it take to move money from my old 403(b) to my new plan?

If it’s an annuity-based plan, you may be in for trouble. Often, the contracts entitle the insurance company to charge something called a surrender fee. As a result, anyone moving money from one account to another may have to do so in dribs and drabs over many years to avoid paying some or all of the fees.

This is another area where an adviser can help smooth things over. Good ones can sometimes talk higher-ups at the insurance company into waiving some or all of the fees.

Shouldn’t there be a law against putting low-paid, public-minded workers like me through all of this? What gives?

Kristen Gartman Rogers, a lawyer at a nonprofit law firm in Mobile, Ala., spent years trying to fix her employer’s 403(b). Now, her boss signs a check each quarter to pay for its expenses, which has the tendency to focus attention on such things.

But to her mind, it just shouldn’t be that hard. Her proposal? Something like the truth-in-lending statement a borrower gets when taking out a mortgage. Homeowners have had access to such statements for years, and we all ought to demand the very same disclosure from the companies that manage our retirement accounts, whether there’s a law or not.

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Article source: http://www.nytimes.com/2016/11/05/your-money/403-b-retirement-plan-tips.html?partner=rss&emc=rss

Public Sacrifice: Nonprofit Employees, Already Underpaid, Face Special Challenges in Retirement

For an organization that has no retirement plan but wants to add one, moreover, the diverted staff time and cost can affect whether, say, more clients learn to read. “Every dollar we spend towards administration, we don’t spend on programs,” said Meg Poag, executive director of the Literacy Coalition of Central Texas in Austin.

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Given the difficulties, many smaller organizations simply throw up their hands and let their employees fend for themselves with individual retirement accounts at whatever brokerage firm they can find. But nonprofit workers, who are already underpaid, may put themselves at severe financial risk by not saving for retirement at all if they don’t have an easy option to do so at work.

“Other directors and I have had the conversation where we talk about the irony that some of our own employees may need our services,” said Ms. Poag, who did manage to add a 403(b) plan recently. “It’s an irony that is painful.”

Not all nonprofits face this challenge. Universities and hospitals have full-time human resources staff to select and monitor 403(b) plans. Public schoolteachers have 403(b)’s too, even if many of them are of questionable quality and unquestionable complexity.

Employees and leaders of smaller nonprofits, however, are left to fend for themselves, and they muddle through in a variety of ways.

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Mary Brunson, left, attending Mass at the Christ Cathedral Tower of Hope in Garden Grove, Calif., last month. Credit Jenna Schoenefeld for The New York Times

Some of them are fortunate to happen across investment advisers like Ms. Brunson. About a decade ago, she was a stay-at-home mom with a side job ghostwriting financial newsletters for investment advisers.

Unlike advisers promising to deliver outsize results by chasing one hot stock after another, she was so convinced by the cheaper, more measured approach that Dimensional Fund Advisors uses that she went to work full time for an adviser who used those funds. There, she vowed to spread the gospel of rational, low-cost investing to as many Catholic dioceses and their 403(b) plans as she could.

What she found when she started smiling and dialing, and eventually offering up advice in her book, “Tending the Flock,” was a real hodgepodge. Every diocese around the country was making its own decisions about what sort of retirement plans to offer. Some of the insurance companies providing the plans were locking people’s money away for years before allowing them to switch. A few of the plans she saw had remained unchanged for decades, with money parked in mutual funds that had been hot for a moment in the 1990s.

“There was not a lot of effort, not a lot of energy and not a lot of oversight,” said Tom Burnham, director of human resources for the Orange County diocese in California, a former pharmaceutical executive who came out of retirement to help it straighten things out. “There were way too many choices, the costs were too high and the investment choices were not aligned around any Catholic values.”

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He worked with Ms. Brunson, becoming one of 11 dioceses so far that have done so. She had helped persuade Dimensional to expand its offering of funds to satisfy those like Mr. Burnham who wanted their dollars aligned with their religious principles. In practice, this meant avoiding investments in the manufacturers of military weapons, companies in the pornography business and others that have anything to do with abortion or contraceptives.

The Orange County diocese moved to its new plan in September, lowering its costs from about $1.30 for every $100 in the plan to about 60 cents.

Kristen Gartman Rogers, a lawyer with a nonprofit law firm, took more of a blunt force approach, though it took her half a decade to ultimately succeed. A frequent reader of the Bogleheads online forum, where fans of index funds and low-cost investing hang out, she realized that she had no idea what she and her colleagues were paying for their 403(b) plan. “I could not see what our fees were,” she said. “It was completely impenetrable.”

A colleague had made the same observation, and their boss supported their efforts to try to make a change. But they spend their days representing low-income clients for the Southern District of Alabama Federal Defenders, work that can eat every available hour and still leave lawyers feeling guilty for not doing more. Nevertheless, Ms. Gartman Rogers said she spent hundreds of hours, sporadically, over about five years, mining Google for fresh ideas and reading 403bwise.com, which helps demystify the plans.

The turning point came when her board realized that they might have personal liability for maintaining a subpar plan. The organization turned to Bert Carmody, an Atlanta accountant and investment adviser who has developed a specialty in extracting nonprofits from problematic 403(b) plans and the insurance companies that maintain them.

Eventually, Ms. Gartman Rogers and her colleagues were able to switch to a plan with a lineup of basic index funds; they pay Mr. Carmody a flat fee to handle a variety of administrative tasks. “This is what’s supposed to be going on,” Mr. Carmody said. “I go down there now and we’re having a party.”

While many nonprofits never consider starting a 401(k) plan or switching to one from a 403(b), a growing number are beginning to do so. One reason for the move is a desire among growing nonprofits to attract workers from the for-profit sector, where 401(k) plans reign.

Lisa Kenney, the executive director of Gender Spectrum, an education and research organization, had a more basic reason for starting a 401(k) plan: It seemed obvious to her that insurance companies and other big 403(b) providers couldn’t be bothered with the likes of her small operation.

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“If you’re a small nonprofit with very few assets, nobody really cares,” she said. “You can often tell by their websites if they have any interest in you, and it was clear they weren’t looking at brand-new plans.”

Instead, she turned to ForUsAll, one of a handful of start-up firms pitching 401(k) plans that involve little trouble and upkeep, dead-simple index fund menus and modest administrative fees.

In Austin, Texas, 22 nonprofits have spent the last few years banding together to create the kind of negotiating leverage they lacked on their own. They originally came together in search of a better health insurance plan. But insurers wanted them tied together in other ways, too, so that it would be harder for the coalition to break up later, which could cause the insurance companies to lose business.

So the group decided to shop for a joint 403(b) plan, too, a task that fell to Aaron Pottichen, president of retirement services for CLS Partners in Austin. His requests for proposals for the multiemployer coalition’s plan caused many providers to scratch their heads and turn the business away because it seemed too complex or they did not have the right systems set up to service them.

It got messier before it got easier. A lawyer working on plan documents for the group disappeared with some of its money, which led Mr. Pottichen to show up at her home to try to get it back. “It was one of the houses where you can’t tell if anyone lives there at all, with all the shades down,” he said.

He also reviewed the 403(b) plans of the nonprofits that had them. People who worked there were not sure how they had ended up with their incumbent providers, some of whom had sold them high-cost annuities. But he was pretty sure he knew why the insurance companies were interested in their business in the first place.

“They’re only selling to the nonprofits to get to the board members and get their money,” he said. “The salesmen use the retirement plans as a prospecting tool.”

The new joint plan will be mostly index and similar funds, and overall costs will have dropped by over one-third, with Mr. Pottichen’s firm collecting a continuing fee for its work. Newly emboldened, he now hopes that others will be inspired to dig deep on the details and move their 403(b) plans from the likes of Mutual of America, Axa and other insurance companies if necessary.

“I can only imagine,” he said, “how many annuity professionals would be at my door waiting to burn my house down.”

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Article source: http://www.nytimes.com/2016/11/03/your-money/spreading-the-gospel-of-better-retirement-plans.html?partner=rss&emc=rss

Public Sacrifice: Even Math Teachers Are at a Loss to Understand Annuities

Ms. Lindert was following the lead of her sister, a fellow teacher. Her sister trusted the agent, who appears on the 68-page list of brokers working in the Los Angeles Unified School District. The recommendation seemed like a logical option to Ms. Lindert, who has a master’s degree in dance but considers the world of finance entirely alien.

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She took the agent’s word over the years, including in 2015, when he told her to transfer her money from one so-called fixed indexed annuity, purchased in 2007 through the Life Insurance Company of the Southwest, to another, from the same insurer, to qualify for a bonus.

It “seemed like a good way to make more money,” said Ms. Lindert, who started teaching when she was 53 and said she hoped to retire next year. For now, she teaches five classes a day, three days a week, to elementary schoolchildren at three schools. She brings her own speakers, drums, scarves and an iPod with 400 hours of music, along with a light lunch.

Ms. Lindert later found out that her purchase was also a good way for brokers to make more money. The first contract she was sold yielded an 11 percent commission, while the most recent pays another 7 percent to the broker, according to 2016 data from Wink AnnuitySpecs, an annuity analysis tool.

Certain types of annuities can serve as a useful retirement tool for some savers seeking a stream of guaranteed income. But many teachers already receive pensions providing a steady income base.

The type of annuity in Ms. Lindert’s account, a so-called fixed index annuity, is particularly complex. In theory, these are appealing: They provide a guaranteed minimum interest rate; they let investors participate in the market’s gains up to a certain ceiling; and they promise that buyers will not lose money when the market dives.

Ms. Lindert could have asked her fellow teachers in the math department for advice, though she probably would not have received any solid answers. When Patty Hill, an algebra teacher in Austin, looked over Ms. Lindert’s latest contract from the Life Insurance Company of the Southwest for The New York Times, she was just as befuddled. And downright angry.

“The document is filled with jargon, but at the same time, it is mathematically ambiguous,” said Ms. Hill, who recently received the Presidential Award for Excellence in Mathematics and Science Teaching, a prestigious award bestowed by the White House in August. “It is not being transparent there that is infuriating to me as a mathematician.”

Susan Jennings, senior counsel at the National Life Group, the annuity issuer’s parent company, defended its materials, saying she believed the interest rate methodology was laid out clearly. The insurer provided a copy of another disclosure — which she said agents give to all customers when they apply for the product — that is shorter and simpler, and together with the other documents, provides a more complete picture.

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Still, how do investors know whether the product is appropriate for them?

Craig McCann, a former economist for the Securities and Exchange Commission, has built a computer model that is intended to make those calculations. He has employed close to a dozen people with Ph.D.s in math to dissect indexed annuity products as part of his firm’s work, which provides analyses for regulators and litigators representing investors. He said it took years for his team to master them.

“No agent selling these or investors buying these has the foggiest idea of how these work,” said Mr. McCann, who reviewed Ms. Lindert’s contracts.

But indexed annuities have to make sense for at least some investors, right? Perhaps for the incredibly risk averse? “No,” he said, without hesitation. “Never.”

Though it appears that investors have some exposure to the stock market, he says many are left with a return they could have achieved with a supersafe bond portfolio, without paying an obscured 2.5 to 3 percent annual fee charged by the annuity provider. “They are all Rube Goldberg machines,” he said.

In her case, Ms. Lindert was advised to annuitize her first contract — which paid a minimum interest rate of 3 percent — and direct the stream of income into the new annuity, which paid a minimum of 1 percent. The other investment options provided were also far less generous — shockingly so, Mr. McCann added. “This switch is really awful,” he said. “It’s really good for the insurance company. But it’s really bad for the investor.”

The new policy did include a so-called guaranteed lifetime withdrawal benefit — for an additional fee of 0.7 percent annually — which promises a certain level of lifetime income. But Mr. McCann said his analysis found that the new policy was still less valuable than the first.

Photo
Patty Hill, who teaches algebra at Kealing Middle School in Austin, Tex., became angry after reviewing a colleague’s annuity contract. “It is not being transparent there that is infuriating to me as a mathematician,” she said. Credit Ilana Panich-Linsman for The New York Times

Then, there’s the matter of surrender charges. Ms. Lindert would have owed a penalty for 15 years after signing her original contract — set on a sliding scale starting at 14 percent — if she wanted to withdraw more than 10 percent of her account’s “accumulation” value. The policy she bought last year, also issued by Life Insurance Company of the Southwest, has a nine-year surrender period, with a penalty fee starting at 8.25 percent.

Ms. Jennings of the National Life Group — who also serves on the National Tax-Deferred Savings Association’s government affairs committee — said that less expensive alternatives recommended by many financial planners did not meet the needs of risk-averse investors as well as annuities did. “Bond funds and portfolios do not guarantee principal,” she said, “and in a rising interest rate market can lose money.”

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The American Council of Life Insurers, a trade group that represents annuity issuers and life insurers, echoed that point, noting that guarantees come at a cost so insurers can make good on their promises.

“Annuities are among the most highly regulated products,” Jack Dolan, a spokesman for the group, said, “with disclosure being a key consumer protection.”

The proliferation of annuities in 403(b) plans is largely a matter of history. When Congress introduced them in 1958, they were viewed as supplemental pensions for teachers, and the only permissible investments were annuities, according to tax experts and consultants. The plans themselves, named for a section of the tax code, were called “tax-sheltered annuity arrangements.” Mutual funds were not available in 403(b) plans until 1974.

Slightly more than half of all 403(b) assets, approaching $900 billion, have been invested in fixed annuities — which promise either a minimum rate of annual growth or interest based on changes in a market index. Another 25 percent were in variable annuities that invest in mutual funds, according to Investment Company Institute data as of March. The remaining 23 percent were invested in traditional mutual funds.

In contrast, about 60 percent of 401(k) assets, which totaled $4.75 trillion, were invested in mutual funds, with only a small share in variable annuities. Despite the risks from short-term market declines, a diversified mix of stock and bond funds is generally less costly and provides a significantly greater return over time.

Ms. Lindert ultimately opted for mutual funds, after severing ties with her broker last year and meeting Steve Schullo, a retired teacher and 403(b) advocate. He told her about her district’s 457(b) plan, another type of tax-deferred account available to those who work for public schools and local governments.

Under that plan, run by TIAA, she has access to low-cost Vanguard funds. She chose to redirect her new contributions into one that invests up to 65 percent in bonds, with the remainder in stocks.

But most of her money is still tied up in four annuities that she does not understand.

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Article source: http://www.nytimes.com/2016/10/29/your-money/403b-teachers-annuities.html?partner=rss&emc=rss

Public Sacrifice: An Annuity for the Teacher — and the Broker

Brokers still find ways to win face time with teachers, however. Many schools allow them to make presentations for their 401(k)-style counterparts — known as 403(b) plans — at the end of faculty meetings. Or they might hang out in break rooms and provide free meals on professional development days.

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“Teachers are still being preyed upon by salespeople,” said Dan Otter, founder of the advocacy and educational site 403bwise.com, and a longtime teacher now working at the University of New Mexico. “The problem is their first experience with a 403(b) is in a sales environment.”

At Axa — which has about $16.3 billion in 403(b) assets held for employees of elementary, middle or high schools — sales representatives often start the conversation with prospective clients using a so-called yellow pad presentation, several former brokers said, even if they don’t always have it written down on the yellow pads all teachers are familiar with.

Brokers are trained to start by explaining how a teacher’s state pension works, how the tax-advantaged 403(b) operates and what sort of gap might have to be filled with savings to help maintain the teacher’s standard of living in retirement. Many — even those who later became disenchanted with their jobs — said they believed they were helping teachers save and realize their long-term goals.

Only after setting the stage does the broker introduce the main performer. For Axa’s brokers, that role is usually assigned to Axa’s Equi-Vest variable deferred annuity. It isn’t simple: To get the full rundown on how it works, people must sift through a document that is 460 pages long.

And it doesn’t come cheap. The most popular version of the Equi-Vest annuity has a total annual cost that can range from 1.81 to 2.63 percent, according to an analysis from Morningstar.

In contrast, large 401(k) plans usually charge an annual fee of less than half a percent of assets, according to a May report by BrightScope using 2013 data. Large, federally regulated 403(b) plans charge a bit more.

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“Teachers are still being preyed upon by salespeople,” said Dan Otter, who founded the website 403bwise.com and teaches at the University of New Mexico. Credit Steven St. John for The New York Times

Then there is the surrender fee. An Equi-Vest annuity owner who wants to transfer savings into another 403(b) product or roll it over into an I.R.A., for example, would pay 5 percent to Axa on any of the withdrawal that was contributed in the previous six years.

Axa said that annuity owners can withdraw up to 10 percent of their money without penalty annually, as long as it is permitted under the tax code, and that the fee can be waived for hardships and other reasons.

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Beyond Axa, other large players in this market include Voya, Valic, Lincoln Financial Group and MetLife (whose retail adviser force was recently acquired by MassMutual), according to the retirement industry publication PlanSponsor. Last year, Axa sold roughly $2.2 billion worth of Equi-Vest annuities within retirement plans, according to Morningstar, which include different versions of the product.

The charges for such complex annuities are intended to provide plenty of incentive for sales representatives and their managers. At Axa, for example, a broker can earn roughly 5 to 7 percent of the total amount teachers deposit in their 403(b)’s for the first year (though some pocket only half that amount, a former broker said, depending on their pay structure).

In a statement, Axa said that it offered a range of approaches and products to meet each individual client’s needs, and that the company appropriately disclosed all benefits, risks, fees and restrictions. “The variable annuity product we make available in the 403(b) space offers guarantees not available in mutual funds or index funds,” an Axa spokesman said, “which can significantly reduce our clients’ exposure to market loss.”

Selling annuities also creates a continuing income stream for the brokers. Axa pays a commission of 1.5 percent to 2 percent on every future dollar an employee contributed to a 403(b) annuity. The annuity sold to the teacher, in a sense, becomes an annuity for the sales rep and the company’s managers.

While that translates into a healthy living for some brokers, many others are poorly compensated, dependent largely on commissions. This is particularly true for those fresh out of college.

Many of these practices are plainly stated on Axa’s website, including the fact that brokers are paid more to sell annuities than to sell mutual funds. Axa said that reflected the complexity of selling annuities.

To qualify for Axa’s health insurance plan and retirement benefits, moreover, brokers must sell a certain amount of proprietary insurance-related products, including annuities.

Justin Victor, a certified financial planner who left Axa in 2008 after three years, recalls the intensity of that pressure. “I am not going to lie,” he said. “When you have your health insurance on the line in the commission-based financial advisory world, you will do whatever you can to get a commission.”

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Axa said certain tax rules required its insurance sales representatives to solicit and sell mostly insurance products, including annuities, so they could receive employer-provided benefits.

Axa managers take a healthy cut from the younger recruits they oversee, according to a former broker who spoke on the condition of anonymity because he feared repercussions from the firm. Figures can vary widely, but managers might earn, he said, up to 36 percent of a new broker’s commissions on proprietary products sold during the first three years of service.

“It is really designed for the experienced advisers to take advantage of the younger advisers’ enthusiasm,” said Mr. Bergeron, who left Axa in 2014 after a year and a half. He later held two short-lived jobs in the industry, but struggled financially. He has since decided to leave the field altogether.

“It was a mental drain working as an adviser,” he added. “I became a little depressed at the end of it and wanted nothing to do with it.”

Mr. Bergeron’s testimony is echoed by others. Several former brokers said they left Axa — and the 403(b) business over all — because they decided this was not the type of product they would sell to their own family members.

Despite their misgivings, several sales representatives said they understood how some of their former colleagues justified selling high-fee products: If it weren’t for us, they reason, many teachers would not be saving for retirement, beyond their pensions, at all.

Brian Jenkins, now a consultant for firms that raise money for start-up companies, shared that mind-set. He worked for more than 30 years in the media industry before joining Axa, where he covered the Barrington school district, in an affluent Illinois suburb where his children attended school, among others.

“Many school employees would have never taken the initiative to open a retirement account if I had not been there,” said Mr. Jenkins, who left Axa in 2014. “The fees that were built into the annuity product paid for a field staff of agents to go into the schools and reach out to people. I feel good about what I was able to do for them.”

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He said he was always encouraged by his managers to be upfront about the various charges, which he fully disclosed to his customers, many of whom did not know what 403(b) options they had.

Still, those fees erode workers’ balances over time, leaving retirees with significantly smaller nest eggs.

Take an employee with a starting salary of $40,000 who saved 6 percent of her salary over a 40-year career. She would retire with about $175,000 when paying annual fees of 2 percent, assuming a 4 percent return after inflation, according to an analysis conducted by Vanguard. (The analysis also assumes that her salary rises 1 percent annually, also adjusted for inflation.)

But she would have 25 percent more, or a total of nearly $218,000, if fees had been 1 percent, and almost $260,000 if she paid 0.25 percent in fees.

Mat Burridge, a sixth-grade teacher in Hannibal, N.Y., said he had trouble untangling exactly how much he paid for his variable annuity from Voya (which invests in a collection of subaccounts similar to mutual funds). After several phone calls, he learned that he paid at least 1.2 percent for the annuity, in addition to the various fees for 15 underlying funds his broker chose.

After reading about how much that will cost him over time, he decided to stop contributing and redirect his savings into an I.R.A. at Vanguard, known for its rock-bottom costs.

“It really hit home because we just refinanced our mortgage,” Mr. Burridge, 30, said. “You are talking a significant amount of money.”

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Article source: http://www.nytimes.com/2016/10/27/your-money/403-b-retirement-plans-teachers-brokers-fees.html?partner=rss&emc=rss

Your Money: How Taking a Gap Year Can Shape Your Life

This summer, after news of Ms. Obama’s choice, I tracked down everyone from the book to see what had become of them. Was their gap year ultimately incidental to their lives, or did it help them grow into the person they were meant to become? And for those who now had children, how would they react if their offspring wanted to take a gap year?

Families seeking data on gap years won’t find much. Part of the problem is that federal data on college delay and completion don’t measure all the reasons people started college late. While some people make a deliberate choice to delay college to serve in the military or work or travel, others meander for a few years before deciding to try college after all.

A number of researchers have shown a connection between a deliberate choice to take some time off and getting better grades upon return to the classroom. Devin G. Pope, a professor of behavioral science at the University of Chicago’s Booth School of Business, saw the link among people who had served at a Mormon mission. Bob Clagett, the former dean of admissions at Middlebury College, saw similar results when he helped inspire number-crunching among students there and at the University of North Carolina.

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Once college is over, however, we enter the realm of anecdotal evidence when it comes to first jobs. Parents worry that if their children take a gap year, they will appear wayward to employers, which may have more to do with the term than how that year was spent. “It suggests a hole,” said Abigail Falik, founder of Global Citizen Year, which has 115 people working in four countries. She prefers the term bridge year, with its implication of a deliberate connection between one stage of life and the next.

In fact, logic would suggest that many people who take a gap year get better jobs after college than people who don’t. If you were hiring entry-level employees, wouldn’t you rather employ the risk-taking 23-year-olds who found their way in the world for a while than the 22-year-olds who have not done much besides going to school?

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There is no way to know for sure except by asking some of the people who have had the experience. Susie Steele took time off from the University of Vermont to teach disabled people to ski and eventually landed a plum full-time job at the Keystone Science School in Keystone, Colo. Now a middle-school biology teacher in Louisville, Colo., Ms. Steele, 44, figures her odds would have been quite long without the gap year.

Akiima Price took a break from the University of Maryland Eastern Shore to work with the Student Conservation Association in Nevada. The organization eventually hired her full time, and she has forged a career in and around environmental education and community work.

“Now, looking back on my résumé, all of the dots ended up connecting,” said Ms. Price, 44, who lives in Washington. “I would tell younger Akiima to trust the process.”

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Parents would be wise to adopt that mantra, too, and not just because tens of thousands of tuition dollars may go to waste if a college student has a burning desire to be elsewhere. Even if a gap year does not lead to a job offer and an obvious career track, it can light a spark that ends up burning in a different way many years later.

Cory Mason spent his gap year as a project manager for Habitat for Humanity in Savannah, Ga. Today, he’s a Wisconsin state representative who calls on his experience quite often, even if he doesn’t pick up a hammer much these days. “It wasn’t just about housing but more about poverty and how hard it is for working people who still make poverty wages to move into the middle class,” he said. “It gave me as much of a lesson on that as it did on how to frame a house or put shingles on a roof.”

Mr. Mason earned room, board and a tiny stipend during his gap year. And plenty of revenue-neutral or moneymaking gap year experiences are available, despite the phenomenon’s reputation as a sort of rich kid’s layabout. Still, some educators question whether there isn’t some class privilege at work here.

Chad Hammett, who took three semesters off from the University of Texas, now teaches English at Texas State University. He figures that maybe a quarter of the students he encounters would have been better served by a gap year, but he worries about the momentum of the students he sees who are the first in their families to go to college. “This may be their one chance, and any kind of delay would be admitting that they’re not ready and don’t belong,” he said.

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For others, however, a year in between was just the thing they needed. Celia Quezada was a first-generation college student and spent a year in Belgium in a Rotary program before beginning her freshman year at Williams College. “Had I not done the exchange program, I would have dropped out just from the culture shock,” she said.

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Ms. Quezada, 44, lives in Greenfield, Calif., and is now a first-grade teacher. Her students are too young for any advice from her about possible college paths.

But even the people who took the biggest risks during their gap year wouldn’t hesitate to recommend the experience to their own children.

Eric Van Dusen traveled over land from Argentina to California during his time off, while his wife, Kara Nelson, taught in a migrant camp in Zimbabwe. They have two children, ages 8 and 12, who will be making their own educational choices soon, or will try to convince their parents that an alternative path is a swell idea. “The idea of knowing that my kids would be out there being autonomous and feeling self-directed and empowered by making decisions themselves makes me really happy,” Ms. Nelson said.

Any risk may well be part of the point. Ted Conover took plenty of risks when he rode freight trains with hobos during his time off from Amherst College, and eventually wrote about the experience in his book, “Rolling Nowhere.” “You get to define the terms of the risk,” he said. “Could I hop a train? Handle police? Defend myself? Deal with a blizzard in October or a rainstorm while out in the open? All kinds of things had never been asked of me, and I thought that the time was right to ask myself, to test myself.”

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But even if you or your children have no stomach for riding the rails or hitchhiking in Central America, allowing for the possibility of something outside the norm just seems like good parenting. Tracy Johnston Zager took time off to work on Bill Clinton’s presidential campaign in 1992, later studied as a Rhodes Scholar at Oxford and is the author of a coming book called “Becoming the Math Teacher You Wish You’d Had.”

Recently, however, she found herself in a teaching moment in her own home in Portland, Me. Her two young daughters found her examining artifacts from her days of political adventuring. “They didn’t know about any of it,” she said. “They looked at me in a picture with the president and said, ‘Who’s that?’ Maybe it’s time they know this story.”

Colin Hall contributed reporting.

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Article source: http://www.nytimes.com/2016/10/22/your-money/reflections-on-a-gap-year-decades-after-taking-one.html?partner=rss&emc=rss

Sketch Guy: Big Adventures Will Be Hard. Did You Expect Something Else?


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A few weeks ago, my daughter Lindsey called from the Salt Lake City, Utah, airport. She was on her way to serve a mission in Italy for the Mormon Church and had a chance to call us before she boarded her plane. Since the rest of the Richards family recently moved to New Zealand for a year, we’re all on what feel like crazy adventures.

While we talked, I told Lindsey that we loved New Zealand, but it was turning out to be harder than I expected. Wiser than I am, Lindsey, who is 19, laughed and said, “Dad, I think it’s funny that you are surprised by that. What did you expect? An awesome adventure with no challenges?”

Well, kind of.

I’m not complaining, but it has been hard in ways I didn’t anticipate. We all have this romantic vision of travel to faraway places with beautiful sunsets, gorgeous beaches and interesting people. That’s how it works for everyone on Instagram, right? Travel bloggers and what seems to be a growing cult of smiling, nomadic families seem to do just fine too.

And guess what? All those things have been true in New Zealand. The people are amazing, and the sunsets and beaches are gorgeous.

But what no one seems to tell you about is the hard stuff. Turns out that getting a family of five with all the stuff we needed around the world was hard. The mental energy it takes to drive on the other side of narrow, curvy roads has been hard. Basic things like finding a grocery store you like, an affordable place to eat out and stores that are open past 9 are all hard.

It’s Worth Investing in Adventure

The Sketch Guy has moved to New Zealand for a year, and it’s not easy…

Running out of gas in a roundabout because the gas gauge isn’t the same as the one in your car back home is hard. Moving in and out of short-term rentals while you figure out where to live is hard. And don’t even get me started on rebooting our cellphone situation.

The entire process is one giant trip outside your comfort zone. And my daughter was right. I shouldn’t have been surprised that adventure is hard.

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Because here’s the thing: The hard parts are why we sign up for the journey. After all, if it were easy, it wouldn’t be an adventure, and we consider adventure a basic family value of ours.

Our short time in New Zealand has already confirmed that it’s worth investing in adventure, even if the cost includes the hard stuff we have to figure out. Once we look past the beautiful sunsets, gorgeous beaches and interesting people, we begin to see why it’s worth it.

I’ve spent more time with my family. I’ve watched my children push themselves to try new things and seen their happiness when they succeed. And perhaps most valuable of all, I have a greater appreciation for the lives we lived in Utah.

So don’t be fooled by the beautiful people smiling in the photos. Adventure is hard. There will be challenges. But done with the right perspective, investing in adventure is still one of the best investments you’ll ever make.

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Article source: http://www.nytimes.com/2016/10/19/your-money/big-adventures-will-be-hard-did-you-expect-something-else.html?partner=rss&emc=rss

How Three Strong-Performing Funds Pick Stocks


Matthews China Fund

Hood River Small-Cap Growth

Fidelity OTC

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20

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20

%

+

20

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15

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15

+

15

+

10

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10

+

10

+

5

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5

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5

0

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MSCI ACWI

(ex. U.S.) TOTAL RET.

S. P. 500 TOTAL RET.

S. P. 500 TOTAL RET.

5

5

5

J

A

S

J

A

S

J

A

S

THIRD-QUARTER RETURNS

Hood River Small-Cap Growth

Fidelity OTC

Matthews China Fund

+15.0%

+11.9%

+15.0%

Small-cap growth

Large-cap growth

China region

+7.8%

+5.9%

+12.4%

Hood River Small-Cap Growth

+

20

%

+

15

+

10

+

5

0

S. P. 500 TOTAL RET.

5

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Hood River Small-Cap Growth

+15.0%

Small-cap growth

+7.8%

Fidelity OTC

+

20

%

+

15

+

10

+

5

0

S. P. 500 TOTAL RET.

5

J

A

S

THIRD-QUARTER RETURNS

Fidelity OTC

+11.9%

Large-cap growth

+5.9%

Matthews China Fund

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20

%

+

15

+

10

+

5

0

MSCI ACWI (ex. U.S.) TOTAL RET.

5

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THIRD-QUARTER RETURNS

Matthews China Fund

+15.0%

China region

+12.4%

Ahead of the Market

How three of the better performers of the 3rd quarter of 2016 fared against the market — and against their peer groups of funds.

By The New York Times

Many stock-picking styles have sizzled lately, with growth and value and domestic and international investing all toting up gains. Three of the better-performing mutual funds of recent months found their winners among small- and large-cap growth stocks and Chinese shares.

Hood River Small-Cap Growth Fund

The managers of the Hood River Small-Cap Growth Fund — Robert C. Marvin, Brian P. Smoluch and David G. Swank — say they prefer to sleuth among small caps because they are monitored less widely than giants like Apple and Amazon.

“Our typical company might have only six analysts following it, compared to maybe 50 for Apple,” Mr. Smoluch said. The Hood River managers say there is a “research gap” that they can fill, thanks to their 20 years of work with small caps.

The three met in the 1990s while working at what was then Columbia Management in Portland, Ore. In the early 2000s, Mr. Smoluch and Mr. Marvin created a predecessor to their fund at Roxbury Capital Management. A few years later, they recruited Mr. Swank, and, in 2013, the three started Hood River Capital Management, also in Portland.

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Brian P. Smoluch, a manager of the Hood River Small-Cap Growth Fund, said, “Our typical company might have only six analysts following it, compared to maybe 50 for Apple.” Credit Toni Greaves for The New York Times

As stock pickers, they’re generalists, surveying all parts of the market. They will scoop up several companies in a field if they see growing companies benefiting from a broader trend. They have done that in fiber optics, with holdings like Oclaro, Fabrinet and Finisar, all recent double-digit gainers.

“For a while, there was a huge overcapacity of components for fiber networks,” Mr. Smoluch said. “But you’ve had a major industry consolidation combined with accelerating demand,” as networks upgrade to meet the bandwidth needs of smartphones, cloud computing and video streaming.

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In researching a promising company, they talk with its competitors, customers and suppliers. They estimate they make about 1,000 calls a year. Talks with pharmaceutical and biotech executives led them to a holding in PRA Health Sciences.

“It’s a contract research organization that manages clinical trials,” Mr. Swank said. “Based on our conversations, we believe it’s gaining market share, and the entire industry is being helped along by the high level of biotech financing that happened in 2015.”

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Robert C. Marvin, one of three managers of the Hood River Small-Cap Growth Fund. They favor small caps because they are monitored less widely than large companies like Apple and Amazon. Credit Toni Greaves for The New York Times

The institutional shares of the Hood River fund, with an expense ratio of 1.09 percent, returned 15.01 percent in the third quarter, compared with 3.85 percent for the Standard Poor’s 500-stock index.

Fidelity OTC Portfolio

Gavin S. Baker, manager of the Fidelity OTC Portfolio, invests in growth companies, too. But to fill his fund, which contains 174 stocks and $13.6 billion in assets, he leans to large caps. The biggest components of the index are tech stalwarts like Apple, Alphabet, Microsoft and Amazon.

Mr. Baker builds his portfolio around themes that he sees shaping technology and the economy, like the emergence of artificial intelligence, and seeks stocks with strategies that will play out over three to seven years. Market attention tends to be short-term, creating opportunities for people who can be more patient, he said.

He has long held Amazon shares, for example, even as other investors have said they are overvalued, based on the price-earnings ratio.

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David G. Swank, a manager of the Hood River Small-Cap Growth Fund, which researches promising company by talking with their competitors, customers and suppliers. Credit Toni Greaves for The New York Times

“Amazon has gone, over the last 15 years, from $5 to $840,” he said. “At some point, you’d think people would wear down and realize that looking at it on current-period earnings isn’t the right way to think about it.”

As for artificial intelligence, the theme enters his portfolio through stocks like Alphabet and Tesla. Mr. Baker says he sees self-driving cars as an eventual safety boon, despite current problems.

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“More than a million people die every year driving,” he said. “Self-driving cars will never drive drunk or high or distracted. They won’t be texting and driving.”

Artificial intelligence favors the biggest tech companies, he said, because it demands lots of data and cheap, powerful computing, both of which they have in abundance.

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Mr. Baker has managed his fund since 2009, and over the last five years, it has been one of the top performers among large-cap growth funds, returning an annualized average of 18.53 percent. In the third quarter, it returned 11.89 percent. The fund has an expense ratio of 0.91 percent.

Matthews China Fund

Andrew V. Mattock, lead portfolio manager of the Matthews China Fund, also invests in companies aiming to grow at faster than average rates — but his stocks all do business in China. Mr. Mattock took the job a little more than a year ago. He had previously worked as an Asia manager, based in Singapore, for Henderson Global Investors.

The fund holds only 36 stocks, a deliberately focused selection, he said. “You have to choose between the last two to get down to the one you really like,” he said.

For several years, worrisome economic news has streamed from China — reports of a slowing economy, overheated real estate markets and banks fat with problem loans. Mr. Mattock said such macro scares have buffeted China portfolios, on and off, for the roughly 15 years he has been investing in the country.

But the “obsession with macro,” he said, has overshadowed a continued maturation of Chinese companies that offers opportunities for committed investors. “We have a lot of the big industry leaders in the portfolio, and these macro stories meant I could pick them up at a very good price,” he said.

In insurance, for example, the fund owns Ping An and China Life, two of the country’s biggest insurers. In e-commerce, it holds Alibaba and Vipshop Holdings. Alibaba and Vipshop are leading e-commerce companies.

The Matthews fund, with an expense ratio of 1.14 percent, returned 14.95 percent in the third quarter.

Correction: October 15, 2016

An earlier version of this article misstated the expense ratio for the institutional shares of the Hood River Small-Cap Growth Fund. It was 1.09 percent, a net figure that accounts for fee waivers and expense reimbursements by the fund company, not 1.49 percent, which is the gross expense ratio.

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Article source: http://www.nytimes.com/2016/10/16/business/mutfund/how-three-strong-performing-funds-pick-stocks.html?partner=rss&emc=rss

Fundamentally: Higher Prices Dim the Appeal of Dividend-Paying Stocks


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Traders monitored prices in the Standard Poor’s 500-stock index options pit at the Chicago Board Options Exchange last month. Credit Scott Olson/Getty Images

Dividend-paying stocks have had a terrific run for the last five years and already have double-digit gains in the first three quarters of 2016.

But as money has been moving out of bonds and into these equities in search of income — dividend stocks are yielding 2.5 percent, nearly a point higher than 10-year Treasury notes — investors find themselves in a quandary.

For one thing, traditional high-yielding areas of the market are trading at frothier levels than in recent memory.

The price-to-earnings ratio for utility shares in the Standard Poor’s 500-stock index, for example, is now 17, based on projected profits over the next 12 months. That represents a 20 percent premium to the sector’s historical average.

“The parts of the dividend market that feel most at risk are stocks that are perceived to be more stable and bondlike, like regulated utilities and consumer staples stocks,” said Ben Kirby, a manager of the Thornburg Investment Income Builder Fund.

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Mr. Kirby said his fund, which beat more than 70 percent of its peers in the third quarter and more than 90 percent in the last decade, has been reducing its exposure to these areas this year.

At the same time, an alternative approach known as dividend growth — which focuses not on high yielders, but on modest payers that are likely to increase their dividends consistently over time — is also running into problems.

The earnings growth rate among companies in the S.P. 500 has been declining for five consecutive quarters, according to Standard Poor’s Global Market Intelligence, and dividends represent that portion of profits that is returned to shareholders.

“It’s hard to believe that there’s a lot of room for dividends to grow in the absence of earnings growth,” said Floyd Tyler, president and chief investment officer at the asset management firm Preserver Partners. “That’s a real headwind.”

Moreover, corporations have just been through an extended stretch in which dividends have grown much faster than their historical average.

Josh Peters, senior portfolio manager for Morningstar Investment Management, pointed out that over the last 12 years, the growth rate for dividends on an inflation-adjusted basis has been 5.9 percent. That is significantly faster than the historical real dividend growth rate of about 2 percent for stocks in the S.P. 500.

Payout ratios — which measure the percentage of a company’s earnings being used for dividends — have been rising. This combination of slowing earnings growth and rising payout ratios is why Mr. Peters said “the golden age of dividend growth is over.”

This leaves investors with few options.

Melda Mergen, head of North American equities for Columbia Threadneedle Investments, said it makes sense to “be as diversified as possible.” She added, “You have to try to balance the growers with the current payers.”

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That involves embracing economic sectors that have not historically been associated with dividends.

Take technology. Though the sector has a below-average current yield of 1.6 percent, tech companies are now the second-largest contributor to S.P. 500 dividends, behind the financial sector, based on total dollars returned to shareholders.

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“There are pockets of tech with good cash flow and strong balance sheets,” Ms. Mergen said. “And companies are starting to hear more shareholder demand to have more profits returned through dividends.”

The key, she said, is to look at high-quality companies with strong balance sheets and reliable earnings that — in the event of an economic downturn — will be likely to maintain payouts.

Mr. Kirby also prefers high-quality companies, but he notes that these stocks have been in big demand in recent years. So to find quality businesses that trade at decent prices, investors must be willing to consider economically cyclical companies, which may not be popular with dividend investors this late in the economic recovery.

Take the CME Group, which runs several financial exchanges in the United States, including the Chicago Mercantile Exchange and the Chicago Board of Trade.

“This is a high-quality business with high market share in each of the contracts it trades, so there’s pricing power,” Mr. Kirby said. “And what’s interesting about the stock is that it’s a bit countercyclical.” He pointed out that volatility and fear were usually detrimental to financial businesses. But “whenever investor concerns rise, they hedge that risk with futures and options contracts, so CME’s trading volume can increase in those times,” he said.

In addition to the stock’s 2.2 percent dividend yield, the company often issues a special dividend at year-end, which sometimes can effectively double the yield, he said.

John D. Linehan, manager of the T. Rowe Price Equity Income Fund, said, “In order to be a value-conscious dividend investor, you have to make some sacrifice today, whether that means compromising on valuations, stability of earnings, or the regions where you invest.”

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When Mr. Linehan took over management of the fund nearly a year ago, he began broadening the universe of potential holdings. “There can be more attractive opportunities outside the United States without sacrificing on quality,” he said, noting that foreign stocks now make up about 7 percent of the fund’s assets.

As an example, “we were having problems finding opportunities in consumer staples companies in the U.S. where valuations look stretched,” he said. Yet overseas, he found cheaper stocks like Diageo, the London-based multinational maker of spirits such as Guinness and Johnnie Walker.

Robert Hordon, a manager of the First Eagle Global Income Builder Fund, said he had similar experiences with real estate stocks. In the United States, real estate stocks have shot up since March 2009, raising questions about the sector’s valuations.

“That being said, we are owners of real estate securities outside the U.S., in Asia, where high-quality real estate stocks are trading at more reasonable valuations,” he said. One example, he said, is Mandarin Oriental International, which is based in Hong Kong and owns and operates hotels and residences there, elsewhere in Asia and in other parts of the world.

Mr. Hordon added that the United States market “is a relatively low-yielding stock market anyway.”

What is more, American stocks have outperformed foreign shares for several years, a traditional sign to value-minded investors that better opportunities may exist elsewhere.

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Article source: http://www.nytimes.com/2016/10/16/business/mutfund/higher-prices-dim-the-appeal-of-dividend-paying-stocks.html?partner=rss&emc=rss

Off the Shelf: Three Excellent Books on Long-Term Investing


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Credit Sonny Figueroa/The New York Times

It is easy to forget personal investing fundamentals when stock prices hit new highs one week, fall sharply the next and then rise again in no reliable pattern, as they have been doing this year. So now is an ideal time to reread — or perhaps pick up for the first time — three excellent books by people who are particularly good at explaining the building blocks of a solid portfolio.

In the first of these, Andrew Tobias promises in his title that he is offering “The Only Investment Guide You’ll Ever Need” ($15.95, Mariner Books). And in the book, which has been continually updated since it was published in 1978, he covers a great deal of important territory, although some of the advice by now may sound familiar. He includes nostrums like this: Buy only investments you understand. If the projected return sounds too good to be true, stay away. You’re going to have to take some risk and buy stocks to stay ahead of inflation. Never forget the impact taxes can have on returns.

Solid counsel, but it is not why the book is worth reading. Mr. Tobias’s ideas about saving money — you can’t build a portfolio without savings — are his real gems. And the reason for that is his approach. He combines humor — it starts with the dedication, “to my broker — even if he has, from time to time, made me just that” — with common sense presented in an uncommon way.

For example, you may already know that you shouldn’t carry credit card debt, because the interest rates can drain what you are able to sock away; you can lower your insurance premiums by increasing deductibles (allowing you to save more) and buy in bulk when items you consume frequently are on sale.

But when Mr. Tobias explains it, doing things like this seem as if they would be financial brilliance on your part instead of drudgery.

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“Why put $1,000 into the stock of some utility and earn $40 in annual taxable dividends if you can put the same money into insulation and save $350 — tax-free — on your utility bill?” he asks.

But what should you do if you actually save money by following Mr. Tobias’s suggestions? John C. Bogle has some good ideas in “The Little Book of Common Sense Investing” (Wiley, $24.95).

Let’s get the negatives out of the way first. Mr. Bogle can be hectoring. (“You ignore these rules at your peril.”) And, perhaps because it was published a decade ago, the idea of owning international stocks or bonds gets little attention.

That said, in clear, convincing fashion he lays out a solid strategy for getting “your fair share of stock market returns.” That isn’t difficult, he writes. “Successful investing is all about common sense.”

Among his common-sense ideas:

■ Since timing the market is virtually impossible, you should buy and hold stocks.

■ Being diversified minimizes risk.

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■ Because transaction costs and brokerage fees can eat up a significant portion of your returns, invest heavily through low-cost index funds.

That last isn’t surprising since Mr. Bogle is founder and former chief executive of Vanguard, the mutual fund company known for its index funds. But he argues everyone should be a fan of the funds.

“Simple arithmetic suggests, and history confirms, the winning strategy is to own all the nation’s publicly held businesses at very low cost,” he writes. “By doing so you are guaranteed to capture almost the entire return they generate in the form of dividends and earnings growth. The best way to implement this strategy is indeed simple: buying a fund that holds this market portfolio. Such a fund is called an index fund.”

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Of course, one reason most of us try to create a solid portfolio is so we can live the kind of life we want when we get older. The final book grabs me partly because of my age. And as I wrote two years ago, I found two things appealing about “The Charles Schwab Guide to Finances After Fifty”(Crown Business, $26), written by Carrie Schwab-Pomerantz.

First, Ms. Schwab-Pomerantz thoroughly answers her target market’s most common questions. For example, if you are 50 and older, don’t have much money stashed for retirement and wonder what you should do, she says start saving at least 40 percent of your income immediately.

Conversely, if you are in good financial shape as retirement looms, you may wonder whether you should pay off your mortgage. Ms. Schwab-Pomerantz, a certified financial planner, shows you how to do the arithmetic to decide. You multiply your current mortgage interest rate — say 4 percent — by your tax bracket. Let’s assume 30 percent. That means your mortgage is only costing you 2.8 percent (since you get to deduct the interest you pay).

So, paying it off is equivalent to a 2.8 percent risk-free return. If you are pleased with that, especially since you know you will own your house free and clear, pay off your mortgage. If you think you can earn more elsewhere, keep paying the loan and invest the money you would have used to pay off the mortgage.

The other nice thing is that Ms. Schwab-Pomerantz — the daughter of Charles Schwab, the founder of the mutual fund company that bears his name — treats her readers like adults who know the personal finance basics.

For example, she says, when it comes to retirement planning, you need to answer only three questions: What do you expect to spend each year in retirement? How much money will you need in savings/investments to support that spending? And how much more do you need to save to get from here (where you are now) to there (the point where you can fund the retirement you want)?

If your projections show you coming up short, she says, you should postpone retirement. That “would allow you to build a bigger retirement portfolio and shorten the time you’ll rely on savings,” she says, and it could also increase your Social Security benefits.

These three books are at the top of my list. If I expanded it, I would include “The Intelligent Investor” by Benjamin Graham (Collins Business Essentials, $8); “Stocks for the Long Run” by Jeremy J. Siegel (McGraw-Hill, $40) and “Making the Most of Your Money Now” by Jane Bryant Quinn (Simon Schuster, $35).

They, too, are worth a second read, or a first if you haven’t had the pleasure.

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Article source: http://www.nytimes.com/2016/10/16/business/mutfund/three-excellent-books-on-long-term-investing.html?partner=rss&emc=rss