Category: Riding Out the Storm

Charles Schwab, the discount brokerage, made a bit of news this week by offering eight new exchange-traded funds, or ETFs. That wasn't such a big deal in itself, since the ETF business is booming with new offerings from just about every mutual fund firm and brokerage. But Schwab has upped the ante by allowing its customers to trade the house-brand ETFs for free - without paying the $12.95 brokerage commission for trading other types of stocks.

Now that's interesting. Commissions have been one of the few drawbacks to ETFs, because they can chew up accounts of investors who want to add modest sums frequently. That $12.95 is 6.5 percent of a $200 purchase, for example. You wouldn't want to pay that every month. With an ordinary mutual fund, as opposed to an ETF, you can buy and sell with no fee if you deal directly with the fund company.

You don't mind paying 1 or 2 percent in annual mutual fund fees? Okay, how would you feel about 10, 15 or 20 percent? Maybe even 30 percent?

Numbers like that would get most investors' attention - if they were real. In fact, they are. I'll get back to that in a moment.

What brings this up is news of a U.S. Supreme Court case involving investors' complaints about high fees. They are unhappy that the Oakmark family of mutual funds charges individuals twice what it does institutions like insurance companies and pension funds.

If someone made me America's personal-finance dictator, I'd scrap the 401(k). These workplace retirement plans are inequitable, as some companies offer good ones, some bad ones and others none at all. Fees are often too high. And even the better plans often don't provide enough investment options.

Instead, I'd like to see the Roth IRA opened up to allow 401(k)-sized contributions - $16,500 a year instead of $5,000. (Or $22,000 and $6,000 for people 50 and over.) And I'd like to see the Roth's income limits lifted, so anyone could have one.

Roth's don't offer tax deductions on contributions, as 401(k)s do, but Roth withdrawals are tax free, while money taken out of 401(k)s is taxed as income, at rates as high as 35 percent. Most importantly, with a Roth you can invest in just about anything you want, not just a set of funds picked by the boss.

But since I'm not running things, the best I can do is suggest ways to make the traditional 401(k) work best.

Life, as we all know, is unfair. You can shun cigarettes all your life and still get cancer, while your chain-smoking uncle lives to 100.

It's the same with investing. What's one to say to the stock-market investor who did everything right - diversified, used indexed funds, stuck with it for the long term - and got hammered anyway?

A disturbing story in The New York Times, relying on research by Morningstar Inc, the market-data firm, points out that people who invested in a Standard & Poor's index fund 10 years ago have lost money, while folks who bought diversified portfolios of government bonds made 8.1 percent a year. In fact, the S&P 500 has underperformed long-term government and corporate bond categories over the past 20 years, largely because stocks did so poorly over the past 10.

My post on Tuesday dealt with selling money-losing investments by the year's end for tax reasons. It's a good idea, but doing so presents investors with a new dilemma: what to do with the proceeds?

That's easy: reinvest them - as soon as possible.

The hard part is choosing the new investment, and if you don't watch out you can get stuck with an unwelcome - but avoidable -- tax bill when you buy mutual fund shares late in the year - around now.

Today's topic: taxes.

Hey, don't click away so fast. Taxes -- for most people -- don't have to be as mystifying as they seem. And year-end tax moves can really save you money come April. Honestly. There are just a few basic things to keep in mind.

Don't get me wrong: tax issues can be very complex for the well-to-do, and for people who own businesses. But for most people - those of us whose tax bills come from ordinary income and a few investments - tax matters play only a small role in most financial decisions. The main concern is to be sure not to pay more -- or less -- than we owe when the day of reckoning comes. For the most part, tax issues influence when you will do things you're going to do anyway, like selling a money-losing investment or billing a customer for a freelance job.

Talk about getting stellar investment returns and people's mouths water. Mention household budgeting and their eyes roll.

And yet, budgeting is much more likely to be the key to meeting your long-term goals like paying for college and preparing for a comfortable retirement. Most importantly: anyone can do it. You don't have to be a stock-picking wiz.

Here's an example: Let's say you want to build a $1 million fund over the next 20 years, starting from scratch. You could do it by investing about $11,500 over the next year, and increasing future contributions by 3 percent every year as your income grew. But you'd need an investment return of 12 percent every year, and it would be foolish to count on that.

My father told this joke when I was a kid:

A man hires a plumber to clear a clogged drain. The plumber taps the pipe with a wrench. He moves along and taps again, and then he taps in another spot. Then he rears back, pounds the pipe with all his might and the drain clears.

"That will be $100," he tells the man.

"A hundred dollars!" the man objects. "All you did was hit the pipe!"

"You're not paying me to hit the pipe" the plumber replies. "You're paying me to know where to hit the pipe.

I'm standing at my office bookshelf rummaging in a small box of junk... I mean, treasures. There's a transistor radio I carried on my paper route at 14, a broken watch, some old photos...

Ah, here's what I'm looking for -- my high school ring, class of '69. I don't remember what I paid for it - around $100, I think. But this clunky heirloom that I wore for only a few months is worth its weight in gold. At half an ounce, according to the kitchen scale, that's around $500.

Look at it any way you want, the conclusion is pretty much the same: the latest quarter was awfully good to stock-market investors. The average mutual fund containing a diversified mix of U.S. stocks gained a little over 15 percent, according to Lipper, the fund-tracking firm. Investors should be thrilled to get that in an entire year, let alone three months.

Of course, we're still way, way below were we were at the market peak a couple of years ago. The Standard & Poor's 500, the barometer of big-company stocks, is about 30 percent shy of that record.