Category: Riding Out the Storm

Back in November I had a post on the pros and cons of exchange-traded funds versus mutual funds. The news hook: Charles Schwab, the brokerage, had eliminated commissions for customers who bought or sold its house-brand ETFs. Now Fidelity Investments has followed suit, with commission-free trades on 25 ETFs. On top of that, discount brokers have begun a commission price war. Schwab now charges 8.95, Fidelity $7.95 and E*Trade $9.99. That would make it more economical to invest in any of the other 900 or so ETFs that still require a commission.

How does all this change the ETF-vs.-mutual fund landscape? Commission-free trading certainly can make ETFs more competitive for ordinary investors who like to put aside small sums frequently. But even rock-bottom commissions can do damage. If you invest, say, $100 a week, a $9.99 commission is nearly 10 percent - big enough to wipe out investment gains for a year or two. And, remember, you'd have to pay a commission to take money out, too.

The portion of households that own their homes rather than rent has been slipping. Thanks to the Great Recession, about 67.2 percent of households own, down from 69.2 percent in 2004.

These Census Bureau figures are worrisome to the extent that people have been driven out of their homes, or that first-time buyers have been kept out. But I've long felt the value of home ownership has been exaggerated. Over a lifetime, on balance, owning makes financial sense, but renting is a better option for many -- for part of our lives, anyway.

The tax season is just starting, but the tax year ended Dec. 31, and there's not much you can do now to affect your 2009 tax bill - other than put money into an IRA. For that, we have until April 15. But is an IRA really a good way to save for retirement? If it is, what's best - a traditional IRA or Roth?

Individual retirement accounts are big business, no doubt about it. They have about $3.7 trillion in assets, according to the Investment Company Institute, the trade group for the mutual fund industry. About four in 10 U.S. households have at least one IRA.

But the ICI says only 15 percent of U.S. households put fresh money into an IRA in 2008, the latest for which full-year figures are available. So, are they popular or not?

If you're like me, your little "tax documents" folder is getting fatter by the day. In another week or so, we'll enter the guilt-trip part of the season, when we know we really ought to buckle down to the return, but just can't.

I've been filling out returns for decades, and have written about taxes for nearly 20 years. So I've been wondering: Can all I know boil down to a few tax truths - tips for wealthy and not-so-wealthy, homeowners and renters, singles and couples, young and old?

Let me take a stab at it, getting the most obvious out of the way first: do the return early. The leading cause of audits and other problems is simple math errors, far more likely if you're in a rush and find you're short a form or statement.

These are grim times for fixed-income investors. Yields are in the sub-sub-basement, with cash holdings paying next to nothing - about 0.36 percent for the average money-market account, for example. Make a long-term commitment to a 10-year U.S. Treasury bond and you'll earn a measly 3.6 percent.

To complicate things, there's the very likely prospect that interest rates will rise over the next year, slashing the value of any long-term bond you buy today. If new 10-year Treasuries were to pay 5 percent a year from now, a 3.6 percent bond bought for $1,000 today would be worth only about $900, since investors would obviously prefer the newer, more generous bond.

So what do you do if you want to follow the standard strategy of keeping a sizable portion of your investment portfolio in bonds?

If you have a mortgage, consider making extra principal payments, or "prepayments," to reduce your debt faster than required. Knocking $1,000 off your debt would save you $60 a year in interest charges, assuming a 6 percent mortgage. That's the same as earning 6 percent on a bond. Whatever your mortgage rate is, that's what you'll "earn" on a prepayment. If you're paying 5, 6 or 7 percent on your mortgage, you'll earn much more on a prepay than you can in any equally safe bond.

Google "Haiti charity" or "giving to Haiti" and you'll get a mountain of hits, from charities that are household names to new-sounding outfits apparently set up after last week's earthquake.

How do you choose?

Charitable givers wrestle with three issues: avoiding scams, finding organizations with low administrative costs, keeping records for tax deductions.

For anyone shopping for a mortgage these days the choice is pretty simple: the straightforward, old-fashioned 30-year, fixed-rate deal is the best. A quick look shows the 15-year, fixed loan isn't quite cheap enough. And the various adjustable-rate loans..... Well, don't waste your time.

Now, if you already have an adjustable loan, or ARM, you may be thrilled with the way things are turning out, with resets setting rates at just over 3 percent. Still, it could make sense to trade it in on a fixed loan, even if that means swallowing bigger payments.

If all this seems a bit confusing, it is. So let's take a tour of the mortgage market.

Why do people own stocks?

Well, duh! - to make money, of course! But how do you make money?

These days, most investors focus on stock prices rather than dividends -- they hope share prices will rise over time. But if you look a little deeper, stocks are really about corporate earnings. Owning a stock gives you the right to a share of the company's profits. It is profits - or earnings, as Wall Street prefers to call them - that drive prices up or down. That means profits earned today, as well as profits you and other investors expect to earn in the future.

I bring this up because we're at the start of the reporting period for corporate profits earned in the fourth quarter of 2009, and some of the signs are quite encouraging. Market gauges like the price-to-earnings ratio show that stocks aren't as risky today as at many other times.

There's beginner's luck, the luck of the Irish, dumb luck....

Then there's skill - the kind that comes from natural talent and the kind earned through training, practice and perseverance.

And then there's a problem: how to you know the difference between luck and skill?

For investors, especially those selecting one mutual fund or financial adviser over another, it's a critical question, especially at this time of year, when we're looking at year-end statements and considering changes. Just because a money manager beat her peers last year, how do you know she's skilled enough to do it again...and again and again?

It stinks to lose a job you'd like to keep, no matter how you look at it. But for lots of people, the worst damage isn't the lost income, as bad as that is, it's a huge medical bill that hits after the former employer's coverage ends.

Maybe this will change someday, but until then laid-off employees have to scramble to plug this enormous hole. Otherwise, one bad illness or accident could wipe out a lifetime's savings. Medical bills are one of the chief causes of bankruptcy.

Fortunately, there is a bit of help - temporary help - in recent revisions of the COBRA rules. For many workers who lose jobs involuntarily, the government will pay 65 percent of the cost of continuing health-care coverage through the former employer for as long as 15 months.