Post by Bozur on Oct 12, 2008 18:12:57 GMT -5
9 tips to tough out the times
Feeling frustrated? Here's some help for the toughening times that'll keep paying off long after the crisis has passed.
By Money Magazine staff
Last Updated: October 9, 2008: 6:48 PM ET
(Money Magazine) -- It's hard to find any good news about your money these days. The stock market is tumbling. Banks are failing. Home values are cratering. And you're watching your retirement disappear.
Before you panic though - pause - and take a deep breath. No one expects the economy to fix itself overnight, but there are many ways you can protect yourself now.
Here are nine simple How-to's:
1. How to earn a yield of nearly 5%
If you're retired (or will be soon), chances are you're obsessed with exactly one thing: getting a predictable income stream that's as safe as possible while still delivering a decent return, whether the market is gyrating or not. Here's a sensible way to build such a portfolio.
Start with a conservative fund that holds a broad assortment of stocks paying generous dividends. An ETF (exchange-traded fund) is the cheapest way to go. Vanguard High Dividend Yield (VYM), which currently pays 3.4%, is a good choice because it isn't overloaded with financial stocks.
Boost your take by putting some money into a higher-yielding stock ETF such as iShares Dow Jones Select Dividend Index (DVY), currently paying 4.4%, or SPDR S&P Dividend ETF (SDY), paying 4.2%.
Put the rest into low-cost bond funds and perhaps a REIT to add diversity and boost your yield. Because of their low expenses, I like the intermediate-term Vanguard Total Bond Market ETF (BND) (4.6%), Vanguard High-Yield Corporate Bond (8.1%) and Vanguard REIT Index (4.9%).
Allocate your money according to the suggestions below for a yield of 4.9% (you'll want to dial back on the stocks as the years go by:
* 30% Vanguard High Dividend Yield ETF
* 30% iShares Dow Jones Select Dividend Index ETF
* 20% Vanguard High-Yield Corporate Bond Fund
* 10% Vanguard Total Bond Market ETF
* 10% Vanguard REIT Index Fund --Michael Sivy
2. How to "ladder" CDs for safety and income
Instead of dumping a lump sum into one certificate of deposit, it's smarter to divide it across CDs of various maturities - a concept called laddering.
Why bother? Two reasons: You'll hedge interest-rate risk and keep cash flowing back into your hands periodically (handy if the idea of locking up the money for years bothers you).
"If rates go up, you can reinvest mature short-term CDs into higher-yielding ones," explains Sheryl Garrett, a financial adviser in Shawnee Mission, Kans. "And if interest rates go down, your longer-term CDs help insulate you from that drop."
Let's say you have $50,000 to park in CDs (keep no more than $250,000 at any one bank to make sure it's FDIC-insured). Split the money into $10,000 increments and buy five CDs: one with a one-year maturity, one with a two-year maturity and so on up to five years.
As each CD comes due, roll the money into a new five-year CD (assuming you don't need to spend the cash). Do this every year and you'll maintain a balanced ladder of CDs ranging from one to five years. --Ellen Florian Kratz
3. How to know when a stock is really a bargain
When the market plunges 5% in one day, lots of stocks might look like they're on sale. But are they? Here's how to ID the true values. (Get the data below at morningstar.com.)
* Step 1 Look at a stock's forward P/E. This is the price investors are willing to pay for every dollar of expected earnings. Compare this ratio with that of the company's peers and industry benchmark. The S&P 500's forward P/E is 13.8. What you want to see: ratio lower than average but not too low (Matthew Sauer, a senior vice president at value-oriented Ariel Investments, is cautious about P/Es below 8).
* Step 2 Look at the trailing P/E, which is based on a company's past earnings. It will show whether a stock was cheap before the market's recent free-fall. What you want to see: ratio lower than industry average.
* Step 3 Check the price-to-cash-flow ratio. This shows how much cash a company generates per share. It's sometimes a more reliable measure of value than P/E because cash, unlike earnings, cannot be manipulated easily by accountants. Again, compare the ratio with the industry benchmark and peers. What you want to see: ratio lower than average.
* Step 4 Look for stability. A company that isn't highly leveraged (laden with debt) has a better chance of riding out the economic downturn. To find out if that's the case, see the company's balance sheet at The SEC's Web site. Divide total assets by total equity. What you want to see: ratio of 2 or lower (10 or lower for financial firms).
* Step 5 Read the news. No matter what the numbers say, a stock could be a rotten choice if, say, the company is embroiled in a potentially costly lawsuit. Not every stock that appears cheap is a good deal. What you want to see: no obvious problems. Bottom Line: If a stock passes all these tests, you could be onto a good buy. --Carolyn Bigda
4. How to rebalance your portfolio
Thanks to the recent stock market pounding, your carefully calibrated asset allocation may now be drastically out of whack. To get back to your best balance, follow these steps.
* Step 1 Gather all your financial statements - for 401(k)s, IRAs, brokerage accounts and anywhere else you keep savings or investments.
* Step 2 Lump their contents together. "People often make the mistake of thinking that they have to rebalance individual accounts," says Gary Schatsky, president of ObjectiveAdvice.com. "What has to be balanced are your overall assets."
* Step 3 Break down the assets into three major categories: stocks, bonds and cash. That can be harder than it sounds when it comes to certain mutual funds, so enter your holdings into Morningstar's free Instant X-Ray tool. It does the work for you, displaying the asset breakdown in a pie chart.
* Step 4 Compare this pie chart with your target. Say you've decided on an allocation of 60% stocks and 40% bonds. The market may have shifted your actual ratio to 50/50.
* Step 5 Sell investments you're overweighted in and put the money into those you're underweighted in. In the example above, if your overall portfolio worth $400,000, you'll move $40,000 (10%) from fixed-income to equity investments.
* Step 6 Repeat every year - and whatever happens in the short run, take solace in knowing that you're capturing returns on your winners and buying stragglers on the cheap. --E.F.K.
5. How to raise your credit score
To borrow as cheaply as possible, it helps to nudge your score from good to fabulous. Hoisting your number from 650 to 770 can save $3,100 a year on a 30-year, $300,000 mortgage.
Here's how your score is sliced and diced - and how to kick it up a notch. Remember: The bigger the slice, the more it affects your score.
* 35% Your payment history Pay your bills on time. Automating payments online can help.
* 30% How much you owe Keep balances on credit cards and other revolving accounts below 50% of your credit limit (lower is better).
* 15% Length of your credit history Rather than let old cards go dormant, charge a latte a month (then pay it off). No activity lowers your score.
* 10% Your new credit Don't open unnecessary new accounts. And if you're rate shopping for a mortgage or an auto loan, do it within two weeks; multiple requests could ding your score.
* 10% Your mix of loans You can't do much to change this (except get a credit card if you don't have one).
* Bonus Request a free copy from each of the three major credit-reporting agencies at annualcreditreport.com. Then tell them about any mistakes you find that are not in your favor. --George Mannes
6. How to buy treasurys without paying a commission
When you're buying supersafe T-bills, notes and bonds, why fork over fees that will eat away at already slim returns? Go to treasurydirect.gov and follow the directions for opening an account. You'll need to let the Treasury link to your bank account, so keep your bank info handy.
Once you're authenticated (usually a few minutes later), you'll be able to bid in auctions for Treasury bills, notes, bonds and TIPS (Treasury Inflation- Protected Securities). Sound intimidating? It's not.
"The big players end up setting the price," explains Stephen Meyerhardt of the Bureau of the Public Debt, an agency within the U.S. Treasury. All you do is submit what's known as a noncompetitive bid, and you'll get the same price that banks and brokers do.
Let's say you want to buy $10,000 worth of a 26-week T-bill. You'll see at the Web site that these bills are auctioned every Monday (except holidays).
Before the auction, place a bid online. After the auction, your bid will be accepted, and the Treasury will draw the money from your bank account. (It will draw less than $10,000; the exact amount depends on what the auction price is.)
And when the bill matures 182 days later? The Treasury returns the full face value of $10,000 (which includes the interest you earned) to your account automatically. --E.F.K.
7. How to get a great deal on a mortgage
Think a mortgage broker will find you the best deal? Ha! A recent study by the Department of Housing and Urban Development found that a broker adds 27%, on average, to a loan's fees. Here's how to cut out the middleman.
* Step 1 Go to the mortgage section at bankrate.com. Plug in where you live and the size and type of mortgage you're looking for. You'll get a table listing the lenders in your area and the terms they're offering.
* Step 2 Sort the list by APR (annual percentage rate), not by listed rate or estimated monthly payment. You won't get a realistic picture of a loan's full cost otherwise.
* Step 3 Print out the list and start narrowing it down. Eliminate loans that have higher than usual up-front fees. If you're looking at adjustable-rate mortgages, compare their rate caps, since that will tell you how much - and how quickly - your rate could rise in the future.
* Step 4 Pick three finalists for your mortgage beauty contest, then apply to those three lenders on the same day (it's usually free). That way you'll get an apples-to-apples comparison.
* Step 5 A few days later, when you've received a good-faith estimate from each lender, do a side-by-side comparison to find the lowest-cost loan. Focus on the fees charged directly by the lender - for stuff like loan origination, underwriting and document preparation - not by third parties (like title insurance or appraisal), which you may be able to find on your own. Pick your winner, and sleep well knowing you got the best deal anyone could. --G.M.
8. How to maximize your take if you get laid off
To find the upside when you get downsized, follow these four steps, suggests Lancaster, Pa. employment lawyer Christina Hausner.
* Step 1 Chill. The meeting in which your boss breaks the news will be traumatic - but don't burn bridges (thereby losing your chance to negotiate) by voicing any bitterness or anger. The only two questions you should ask are "Who do I call about benefits?" and "Who do I contact about getting a letter of reference?" Never sign a severance agreement that day.
* Step 2 File for unemployment. The sooner you apply, the sooner you will be able to receive benefits - generally about half your salary, up to a few hundred dollars a week, for at least six months (longer at times of high unemployment). Get details from your state's unemployment office.
* Step 3 Begin horse-trading. To get more than the typical week or two of pay per year of service, your best strategy is to offer to give back something of value to your old employer - for example, by volunteering to sign a noncompete agreement. If you're being offered outplacement services you're not interested in, ask if you can get more money instead.
* Step 4 Consider getting legal - gingerly. If you think you need a lawyer to get what's due you, by all means consult one. But don't rush to send her into battle on your behalf, because your employer may turn quite hostile when confronted by legal threats. "Sometimes I'll say to a client, 'You write the letter - see how far you get with that,' " says Hausner. --G.M.
9. How to estimate your true return
Sure, it's easy enough to click on our portfolio tracker and figure out the annual return of the various funds you own. But did your entire portfolio beat the market? To find out, complete this easy worksheet, suggests Colorado Springs financial planner Allan Roth.
A. The dollar value of your portfolio at the beginning of the period: __________
B. The portfolio value at the end of the period: _________
C. The net amount you added to or withdrew from your portfolio over the period (if it's a net withdrawal, the number will be negative): __________
D. Your portfolio's gain or loss (B minus C minus A): __________
E. Average amount in your portfolio during the period (A plus half of C): __________
F. Your estimated percent return (D divided by E times 100): __________
This worksheet isn't perfect. It assumes that all investments or withdrawals you made over the period in question happened in the middle of the period. But unless you made a huge withdrawal or investment at the very beginning or end, the results come pretty close. --Elizabeth Fenner
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