News Archive
A handful of students crouched over their computers at the Online Trading Academy one morning last week, studying stock prices and exchanging buzz words: “ideal entry points,” “maximize profits,” “who's hot?”
Their instructor, Robert Dunn, a seasoned trader with a Chicago accent and thick gold necklace, pointed to the peak of a graph on a projection screen.
“Some sucker was over here buying at this price,” he said. “We don't want to be that sucker.”
Interest in day trading, or buying and selling stocks within the same trading day to reap quick profits, has climbed 20 to 30 percent at the academy the past few weeks, staffers say – part of a growing number of amateur investors who are actively managing their own portfolios. Financial planners, however, say day trading is a high-risk strategy. They emphasize a far different approach: holding stocks for the long term, even when the market falls.
The stock market's recent drop – 19 percent this month – has heightened many investors' fears. But people who actively trade stocks see the recent roller-coaster swings in the market as an opportunity to salvage retirement accounts or even make a living.
“As a trader, it doesn't matter whether the market goes up or down,” said Dunn, who's spent 25 years on the trading floor in Chicago. “You can make money either way.”
Day trading was once dominated by financial firms and professionals but has become more popular among amateurs because of the Internet. Traders, who often buy and sell dozens of times a day, usually buy stocks on borrowed money, studying charts and indicators to determine when a stock is ready to move in price.
They look at prices, technical patterns and market trends. Their goal: ride a stock's momentum and get out before it changes course. Many see it as a safer alternative, these days, to investors' buy-and-hold mentality.
“I've made so much money and lost it because I was an investor,” said Charles McNeilly, 62, a mechanical inspector from Cleveland County and student in the weeklong trading class. “I figured there had to be a better way to capture profits.”
McNeilly has been watching his retirement fund from Duke Energy, a previous employer, since he left in 2001. He's been content until recently, when the market began to slide. Now, he hopes to learn about risk management, he said.
“When people get really scared, they look for ways to protect themselves,” McNeilly said. “I trust me with my money better than I trust anybody.”
Day trading is far riskier than leaving your 401(k) alone, financial advisors say.
“I learned a long time ago that you can be right on so many counts and have the wrong timing and lose a boatload of money,” said John Gugle, a financial planner with Alpha Financial Advisors in Ballantyne.
As little as 1 percent of a portfolio's performance is related to timing, according to a 1986 study by Brinson, Hood and Beebower, Gugle said. More than 93 percent is related to asset allocation, or how investors distribute their money, the study found.
“It's about having a strategy,” Gugle said, “and sticking to it.”
That's what most investors have done, even in these uncertain times. An Ipsos/McClatchy poll conducted this month found that just 5 percent of investors said they'd sold stocks, and just 8 percent said they'd stopped making contributions to a plan such as a 401(k).
Advisers say sticking with such a plan, even amid hard times, makes sense. If you pull out your money in response to a drop in the market, they say, you will have locked in your losses and will likely miss the market's inevitable rebound.
Many Americans have a stake in the market. According to an Investment Company Institute study, 76 percent of full-time workers ages 21 to 64 who earn $40,000 or more a year have access to retirement plans, and nearly half of all U.S. households own mutual funds.
Over time, long-term investors can expect an average return rate of 10 percent a year on their stocks, up to 6 percent for bonds and up to 3 percent on cash, experts say. It can be hard to keep that perspective when the market has fallen 38 percent in the last year.
Traders say their strategy makes larger windfalls possible. Dunn, the trading instructor, said he likes to make 5 percent on all his trades. Jamie Ray, a trader who moved to University City from Maryland recently, said he usually doubles his money.
“One-hundred percent sounds like, ‘Oh, yeah right,' but it's not as crazy as you think,” he said from his home office, which includes three computer screens and a speaker that spits out a commentary from market-watchers.
Ray, a contractor who also sells real estate, got into trading six years ago after a speaker at a free seminar brought it up. He forked over $1,000 for a trading class and read books on the subject.
Now, he focuses on a dozen or so stocks at a time to get a feel for how they trade, though he's been out of the market recently because of his move. He likes exchange-traded funds, or chunks of stocks, and knows commodities have done well lately.
Ray also buys options. For instance, he'll study a stock until it peaks and then buy “puts,” which bet on the stock to drop, he said.
“You don't really need a background in finance,” he said. “What you need is common sense and a strong stomach.”
That was the message at the Online Trading Academy recently, too, with Dunn declaring that “you don't need to be a rocket scientist” to be successful.
When he pulled up a series of charts on the stocks CDNS and SYMC, a woman in the class interrupted to ask what they did. Dunn shrugged.
“I don't care what they do,” he said. “What are we in this business to do? Make money.”
(CDNS is Cadence Design Systems, and SYMC is Symantec Corp. Both are mid-sized software companies based in California's Silicon Valley and trade on the Nasdaq stock exchange.)
The would-be traders, most of them men who were retired or nearing retirement, listened intently. They each paid about $5,000 for the class. Many said they enrolled to learn how to protect their retirement accounts.
Linda Schabow, 50, who lives near Raleigh, said her 401(k) dropped 30 percent in the last month. The administrative assistant still hopes to retire at 62, so she and her husband, Mike, used vacation time to take the class.
“We could have avoided a lot of that (loss) if we'd have known how to manage it properly,” Mike Schabow, 43, said. He said he hopes to make a 5 percent return every month.
Tom Wilhoit, 54, also wants to cushion his retirement, but he eventually hopes to earn $300 to $500 a week to quit his job in the trucking industry. Wilhoit, who lives in Albemarle, said the long night shifts are not the lifestyle he wants – and that trading “could be a golden opportunity.”
Trading Academy workers, who sat outside the classroom as lunchtime neared, talking trading and golf, agreed that now is the time.
“Financial advisors are saying, ‘Oh, it's going to come back up,'” academy staffer Charles Brooks said. “Yeah, but you're going to be dead by the time it does.”
CHARLOTTE OBSERVER
by Lauren Berry
CHARLOTTE - Wachovia's move to nearly eliminate its dividend means a big change for its
stock.Although it's bound to be less attractive to investors looking for reliable and lucrative
payouts, the moves the Charlotte bank announced Tuesday provided encouragement to
some local investors and financial experts."I could see yield-conscious investors walking
away or looking for something else," said John Gugle, a certified financial planner with Alpha
Financial Advisors in Charlotte. "But these are good moves if I'm an investor that's looking
for confidence in the long term."Wachovia's stock soared 27 percent on Tuesday's news,
which included layoffs and a shakeup of its mortgage unit.Along with a huge quarterly loss
and layoffs, Wachovia announced it will cut its quarterly dividend to 5 cents a share from
37.5 cents, its second dividend cut this year. At the beginning of the year, the bank paid 64
cents a share.Slashing the dividend will be a blow to older, retired stockholders for whom
dividends are a source of income, but it is a sign of necessary change for long-term
investors, Gugle said."I think what it signals to investors is, 'Wow, they're really serious
about this,' " Gugle said. "But some yield-focused investors are definitely going to get
hurt."Although financial planners said bank stocks are normally a safe bet for short-term
yield, banks have been hit by a tough market. According to SNL Financial, 109 banks have
cut their dividend since January 2007, 28 of which made cuts since early June.Bill Baynard,
managing director for Charlotte-based Novare Capital Management, said stockholders now
have to determine the likelihood of Wachovia's return to success."If I believe that Wachovia
is going to turn the situation around, I'm going to hold the stock," Baynard said. "No
company wants to cut their dividend, so this is about preserving capital and proving that
they can do better in the future."
WWW.BUSINESSWEEK.COM
by Ellen Hoffman
Do you speak Retirement? Every field, whether it's sports or information technology, has its own lexicon. The language of Retirement has been around for years, mostly spoken by academics or people in financial services. But now that millions of boomers are starting to confront decisions about their future, the jargon of retirement and financial planning seems to be surfacing all around us, in everything from the Social Security statement we receive annually to TV commercials hawking financial products.
Understanding these terms can be crucial to your future. In the worst case, making a financial decision based on misunderstanding some of the jargon could detract from both your retirement income and the lifestyle you've dreamed about.
A competent financial adviser will explain retirement planning terms to a client. But if you don't have a financial adviser, or if your eyes glaze over after encountering three or four of these unfamiliar, technical-sounding terms, take the time to look them up. (You can find explanations, as well as definitions, of most of them by surfing the Internet.) Or find another adviser who will make sure you understand not just the dictionary meaning, but also the implications of some of these important retirement terms.
Different Scenarios
Here are some examples. Currently, my favorite retirement-related word is "decumulation." Don't let this one stump you. Simply the opposite of "accumulation," it has been in economic textbooks for a while but is making the leap into common parlance as pre-retirees search for ways to spend down—that is, decumulate—the savings they've amassed in retirement accounts during their working years. Most people will need to use these savings for living expenses, and they'll have to come up with a decumulation rate that assures the money will last for as many years as they'll need it.
The shift in focus from saving money to spending has also raised the profile of the jaunty term "Monte Carlo simulation." In the context of retirement, this refers to a computer model that allows you to create hundreds or even thousands of financial scenarios, based on various estimates of your potential income and expenditures. When your adviser runs the simulation, he or she can tell you, for example, that under one set of assumptions, there's a 10% chance your retirement nestegg will last 10 years. And under another set, there's a 99% chance it will last 30 years.
A Monte Carlo simulation, or any other tool for planning to live off your retirement savings, may incorporate another increasingly visible retirement process—"annuitizing." To annuitize means to create a regular income stream for a fixed period or for the rest of your life. You can do this by actually purchasing an annuity, which is an insurance contract, or by arranging to withdraw a certain amount of your assets—say, 4% of your IRA—each year, to pay your retirement living expenses.
Avoid the Tax Bite
If you have a 401(k), there's a good chance you'll want to annuitize some of the money in the account when you stop working. But first, although some plans allow you to buy annuities within the account, you'll probably want to remove the funds from the 401(k) and put them into another account where you have more control and broader investment choice.
That leads us to another linguistic challenge—"qualified rollover." John Gugle, a financial planner in Charlotte, N.C., warns of the following pitfall: If you ask your plan administrator for a rollover, you may simply receive a check to deposit in an IRA or other account. If you do this, you will immediately owe income tax on all the money taken from the 401(k). But if you ask for a "qualified rollover" or "trustee-to-trustee transfer," the money will flow—untaxed—into a traditional IRA. Taxes will not come due until you withdraw it—presumably not all at once—from the IRA.
Also, if your 401(k) account contains employer stock, make sure you learn about a tax advantage known as NUA, or "Net Unrealized Appreciation." Jeremy Portnoff, a financial planner in Westfield, New Jersey, explains that NUA is "the difference between the purchase price of the share and the current value." Here's how you can make the most of the stock's appreciation.
Let's say you're retiring and want to roll your 401(k) account into an IRA (probably when you change jobs or retire). You bought the employer stock at one dollar per share and it's now worth ten. If you transfer the employer stock shares in-kind to a taxable brokerage account, the only tax you'll have to pay at that time will be on the original purchase price. You won't have to pay the capital gains tax on the appreciation until you actually sell the sharesa point when you'll probably be paying at long-term rates. However, if you make the transfer, cautions Portnoff, make sure you do it in the same year you roll the rest of the 401(k) into an IRA. If you wait and take the shares out of the IRA, he explains, "the tax break is lost forever."
Along with a 401(k) or similar savings account, Social Security has its own set of special terms. Consider NRA, or "Normal Retirement Age," the point when a retiree becomes eligible for a benefit of a particular size. It's really an arbitrary term. There is no one NRA for everyone. Eligibility can vary from age 65 to 67, depending on the year you were born. See this chart to figure out your own. There's nothing you can do to change this age or the formula for your benefit.
What If You Work?
But the NRA takes on importance for anyone who considers working, at least part-time, after starting to collect Social Security. This brings us to another key phrase: "Retirement Earnings Test." If you go on Social Security and continue to receive some type of salary, your benefit will be reduced by a certain amount each year if you meet the "earnings test."
Let's say you are 63 and want to go on Social Security this year. If you earn more than $13,560, your benefit will be reduced by one dollar for every two dollars you earn over that limit. Alternatively, if you were 65 now and went on Social Security later this year, your benefit would be reduced by one dollar for every three dollars you earned over $36,120 during the months before you turned 66, your normal retirement age.
The list could go on and on, with terms from the health-care field (original Medicare, Part D, etc.), from retirement living (continuing care community, etc.), pensions (QPSA), and more, but space won't allow. If you haven't yet come up with your own list, and in case you missed them, you can start your homework by reading two of my other recent columns: "Don't Let the Rules Overtax Your Retirement", which tries to demystify the term Required Minimum Distributions; and "A New Way to Manage Your Retirement Funds"), a discussion of the new 401(k) investment option known as a QDIA, or Qualified Default Investment Alternative.
Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. Her Your Retirement column may be found at businessweek.com/investing. You can contact her through her Web site, retirementcatchup.com.
WWW.INDEXUNIVERSE.COM
by Murray Coleman
If there's a group of financial advisors who are bigger fans of exchange-traded funds than the 550-plus field meeting this week in southern California, John Ritter says he'd be very surprised.
The co-chair of this week's National Association of Personal Financial Advisors convention figures most of the attendees use passive strategies to manage client portfolios.
"I'd be shocked if less than 50% aren't using ETFs, DFA [Dimensional Fund Advisors] or Vanguard funds," said Ritter during a break Thursday at the NAPFA event in Long Beach, Calif. "The concentration of advisors using passive strategies here has to be higher than any other professional organization in the country."
Ritter, a Cincinnati-based advisor, says that's because NAPFA—unlike other trade groups—only allows fee-paid members. Those selling financial services on a commission basis must go elsewhere.
"We feel that operating on a fee-only basis eliminates most of the conflicts of interest that commission brokers face," Ritter added. "We like to ask a lot of questions about fees and expenses when dealing with mutual funds and ETFs. That demands a certain amount of objectivity."
Transparency Is King
Full disclosure is the key, says John Gugle, a Charlotte, N.C.-based advisor. "ETFs can be very misleading if you don't understand what you're buying," he said. "The people here are analysts as well as financial planners."
Working with clients on a fee-only basis forces advisors to keep up with ETFs and best practices for implementing those financial vehicles, added the Alpha Financial Advisors partner.
Part of the program on the conference's second day included a report on trends in the industry. Those showed that while older investors are most inclined to continue to use commission brokerages, younger people are increasingly turning to fee-based advisors.
"As a result, fee-only advisors have to be acutely aware of cutting-edge investments like ETFs," Gugle said. "And we're finding more people becoming concerned with expenses as investors become better-educated about their choices."
The three-day convention, which ends on Friday, marks NAPFA's 25th anniversary. It's featuring discussions on everything from alternative investments to artificial intelligence. Some 145 exhibitors also showed up to hawk their funds and educational materials.
But while many of the advisors taking part say they mix some sort of active strategy with index funds and ETFs, most of those use some form of core-and-explore approach, says Jeffrey Daniher. He's also co-chairing the conference and is a partner in Ritter Daniher Financial Advisory.
Passive Funds As Core
"They may use active management to some extent on the edges," he said. "But most at least understand the value of passive funds serving as the core of building a diversified portfolio."
Still, the NAPFA group heard pitches about the value of shorting stocks and hedging tactics. One of those came from Robert Twitchell of JPMorgan's institutional advisor business. He talked about the advantages of so-called 130/30 hedge funds. Those short 30% of a portfolio's value and then take those funds to go long with the rest.
Twitchell described one process that uses a quantitative-based system that adjusts when computers discover changes in fundamental factors. Those include things like "headline shocks" when news threatens to move markets.
"This system is designed so that it can trade every five minutes," he said.
But one of the most popular sessions was presented by bond advisor Stan Richelson. Along with his wife, Hildy, he has authored five books on fixed-income investing.
In a closing presentation on Thursday, Richelson argued that investors shouldn't consider high-yield, emerging markets and foreign currencies as normal bonds.
"We believe junk bonds will have substantial defaults this year," Richelson said.
With emerging markets bonds, "When you convert these into dollars from foreign currencies, you get eaten up by transaction costs," he added.
If you want to take risk, Richelson says, "just buy equities."
He added: "The No. 1 myth leading professional advisors is that historical returns on stocks are around 10% over longer periods. But John Bogle tells us that hiring active management costs between 2% to 8% from soft money ... and other hidden expenses."
Richelson asserts that true returns for stocks over time when all costs are taken into account fall between 5% to 6%.
"It's uncertain that stocks will outperform bonds in the future," he said. "And it's not even clear that stocks outperformed bonds in the past."
CHARLOTTE OBSERVER
by Nancy Stancill
When Jim McGehee went straight from college to graduate school in 1991, his parents said they would loan - but not give him - the money. His folks feared he was hiding from the real world.
So he borrowed $45,000 for grad school at Stetson University in Florida. Now a Certified Financial Planner in Charlotte, McGehee was able to pay back his parents in four years.
Most parents McGehee counsels at his firm, Alpha Financial Advisors, plan to cover their children's undergraduate college education. But grad school? For a variety of reasons, he says, that's where many parents draw the line.
Should parents finance grad school for adult offspring? Or should young people learn to fend for themselves? Should parents instead hold their money for retirement?
These are questions hitting home for my family. Our only child is going to grad school this fall. For the next four or five years, he plans to work on advanced degrees in microbial ecology at Virginia Tech, his alma mater.
Jeff, 25, has worked for two years as a lab tech at a biotechnology firm in southwest Virginia. He earns a modest salary. But he found his passion in the microscopic "bugs" he grows for his company's antibacterial products. He's hoping for a career in microbiology research and college teaching.
We thought he'd go to grad school after he saved more money. But on his salary, saving came at a snail's pace. In November, he told us he was taking the GRE (Graduate Record Exam). Four months later, he was admitted to Virginia Tech.
He got a graduate assistantship that will pay his yearly tuition and fees (about $10,000) and give him $20,000 a year for helping professors with research and teaching. As long as he makes progress toward his doctorate, Tech will likely continue that support each year.
Can he make it on $20,000 a year?
Supporting adult children
Across the country, grad school enrollment has grown to 2.5 million, rising about 2 percent a year over the past decade. Female, minority and international students are driving enrollment gains, says Stuart Heiser, a spokesman for the Washington-based Council of Graduate Schools.
No one tracks how many parents help students with grad school, Heiser notes. That's because grad students are considered independent for financial aid purposes. About 74 percent nationally get financial aid. Those who pay their way don't disclose the source of their money.
In contrast with previous generations, more parents are supporting children well into adulthood, researchers say.
Johnna Watson, an associate dean, says UNC Charlotte's graduate school provided $36 million in financial aid last year to grad students. About 43 percent of those 4,790 students got grants, loans, assistantships and other financial aid.
Because graduate education usually helps boost income, she says most families want to help "any way they can".
Family finances
But that doesn't always make financial sense for families.
Alpha's McGehee says, he doesn't advise parents to take on grad school costs, especially if those clients are struggling to save enough for retirement. He says some parents, like his own, worry that children are using grad school to put off becoming financially independent.
McGehee says his parents tapped a home equity line for his grad school loan. He paid back interest of between 6 and 8 percent. It was a fair arrangement for all, he says.
Larry Carroll, president of Carroll Financial in Charlotte, says he sees more willingness to pay if their children have a concrete career goal.
"If you're paying for a 28-year-old to get a master's in romance languages, you might want to ask 'What are you going to do with that?" Carroll says.
His son Kris, 32, also a certified financial planner with the firm, got two master's degrees, one in science mathematics, and another in business administration.
The younger Carroll says his Dad paid for the first master's degree, which was "very nice of him." But Kris says Larry Carroll made it clear he wouldn't finance second advanced degree.
Kris says he got grants from UNC Chapel Hill to pay his MBA tuition. He also borrowed about $15,000 from the federal Stafford loan program for living expenses. He advises parents and children to explore the many sources of financial aid for grad students.
The Carrolls see other trends. Younger parents are more often putting away money in 529 savings plans to cover six to eight years of higher education instead of four. And parents who went to grad school are more apt to save for it for their children as a matter of course.
John Gugle, also a certified financial planner with Alpha, says he sees parents hedging their bets. They're putting aside enough for private tuition at a Duke or a Vanderbilt. But they're thinking they might be able to stretch it for grad school if their sons or daughters go to N.C. State or another public university.
Relieved, as retirement nears
Jeff thinks he can make it on Virginia Tech's $20,000 a year. Our son lives fairly frugally, has no debt and drives a 9-year-old Toyota. He's already lined up an inexpensive apartment. He hasn't asked us for money.
My husband is relieved. He points out that we'll be retiring hopefully in a few years, and really need to step up ou8r saving. Providing for ourselves means we won't burden Jeff in the future.
But if I know my husband, Jeff and his cat and turtle will never go hungry.
