Friday, February 26, 2010

NLY, a Dividend Paying Trust Worth A Look.

With chatter about a bubble in bonds building, it may be a good time to look for alternative sources of investment income. One such source has long been dividend paying stocks, trusts and partnerships. Here are two such dividend plays - one is a Real Estate Investment Trust, and the other is an energy partnership.

Annaly Capital Management, Inc. (NLY)

Annaly Capital Management is a mortgage REIT (real estate investment trust), and as such the company is not subject to federal corporate income tax, provided it distributes at least 90% of its taxable income to its stockholders in the form of dividends. NOTE: The income generated by a REIT may be taxable at your income tax rate, and not at the capital gains rate. So check with your tax advisor if this is a point of concern.

What makes NLY attractive.

One of the things that makes Annaly Capital attractive is its low debt level compared to other REITs and owners of Mortgage Backed Securities (MBS). For example, Commercial banks are typically leveraged 30:1; thrifts - 25:1; hedge funds - 20-30:1; and Annaly - 8-12:1, or less than half that of a typical thrift.

Another thing is that the MBS that Annaly Capital invests in are backed by agencies of the U.S. government like Ginnie Mae, Fannie Mae and Freddie Mac. While these agencies are essentially bankrupt, the government is not likely to let them fail so they have a de-facto credit rating of AAA.

NLY dividend history.

NLY has increased its dividend from about $2.20 per share in 2008 to $2.4 in 2009, while the yield has declined from 16.6% to 13.4% as the price has risen. At the time of this post, NLY was yielding 16.80%, or $3 per share annually.

How safe is NLY dividend?

At first glance, there's a lot of scary stuff to be seen in the summary of Annaly. After all, it was imploding Mortgage Backed Securities that began the current recession and market crash of 2008-2009. And Annaly is using leverage to purchase these securities, leverage which magnifies gains AND losses alike.

But upon further inspection, the credit risk for Annaly seems low because the MBS that it invests in are backed by the U.S. government and, as mentioned above, their leverage rate is lower than the industry average.

What can affect its performance (and dividend) is a major swing in interest rates. This is largely because of its use of leverage, or borrowing, to magnify its returns. But if management can keep ahead of rate trends it can limit the squeeze that variable interest rate MBS put on Annaly's profits.

Thursday, February 25, 2010

Another Market Crash Coming for 2010? (VIDEO).

Stock market analyst Robert Prechter is seeing what he calls "the Biggest Bubble in History", and that's not a good thing for investors.

According to The Wall Street Journal, Prechter told the Society of Technical Analysts in London that we are in the midst of a "grand, super-cycle top" and that all the signs are pointing toward a big market correction.

He's got some street cred, given that he called the recent rally back in February of 2009. In fact, he said it would be "sharp and scary" for anyone shorting the market at that time.

According to Prechter, the most recent recovery gave all the text book signs and now he seeing text book signs again, but they foretell a big correction on the horizon. He points to the near record low levels of cash at mutual funds. He sees those levels approaching levels seen near major tops in 1973, 2000 and 2007.

As for the "Biggest Bubble in History", he says that's debt. Specifically, Corporate debt, municipal debt, mortgages and consumer loans which he speculates will get hammered by the deflationary period that began with 2005's turnaround in home prices.

Time will tell if he's right, but it may be time to put your stops in place and watch this video to see Prechter in his own words.

Wednesday, February 17, 2010

8 Ways to Rock Your Roth Conversion.

When the calendar passed from December to January, we bid a not so fond adieu to 2009 as well as the rollover income limitation associated with transitioning a traditional IRA to a Roth IRA. This is a good thing if  converting to a Roth IRA makes sense for you.girl with guitar

The Roth IRA is one of the best retirement and estate planning tools available, and with the recent change in restrictions and tax payment scheduling, 2010 is the year of the Roth. Quite simply, if the Roth makes sense for you then 2010 is likely the year to make it happen.

Here are 8 ways not to screw it up.

1. Just Do it.

As many experts look at the mounting federal deficits and growing number of states in danger of bankrupting themselves, they see no choice but for taxes to skyrocket. Maybe, and maybe not. I'm not going to get on a political riff on the subject of reckless spending and taxes. I just want you to be aware that the chances are slim that tax rates will stay at their current rates, which are historically low.

So, the question for long term investors is not whether to fund a Roth, but how to fund a Roth IRA. Regarding a rollover from a traditional IRA, your choices are essentially:

  1. Convert your IRA all at once.

  2. Convert your IRA in stages, or segments.

Either way, if you don't at least start to convert now, and you wait to do it later it may cost you dearly in terms of taxes. If you've decided that a Roth isn't for you, then... why are you reading this article? Besides, since January 2010, all income limitations have been removed.

2. Understand the tax consequences.

Deciding to wait and do a conversion after taxes rise is a costly mistake, but so is jumping into a conversion without understanding the full tax implications.

For example, if you're in a 15% income tax bracket today and you rollover a $250,000 IRA you will not pay 15% in taxes. You will end up paying quite a bit more because that $250,000 distribution can be counted as income, according to Barry Picker (who recently served as the technical editor of "100+ Roth IRA Examples and Flowcharts," by Robert Keebler) and that will most likely bump you into a higher income tax bracket.

3. Know the direction of your tax bracket.

If you are the sole breadwinner today, but your spouse is likely to re-enter the workforce in a year or two, then you're better off converted at today's lower tax rate. On the other hand, if your spouse is considering staying at home with the baby that's due in a few months, you're better off waiting until she leaves the workforce and your combined income drops. Likewise if you file solo, but you're thinking of tacking a pay cut to switch careers. Time your conversion when your tax rate is likely to be on the low side.

4. Don't pay taxes with money from your transaction.

Paying the taxes with money you have withheld from the rollover transaction is a bad idea for a number of reasons, including:

Every penny you take out of the transaction is less that goes to work for you in the Roth.

The amount withheld goes to the IRS as an advance payment, and also reduces the total conversion amount. Hence, the amount withheld is considered a distribution and not part of the conversion and can impart further tax liabilities. For example, if you have a $100,000 IRA that you convert to a Roth IRA and withhold $20,000 (20%) for taxes, then the $20,000 is treated as a distribution and may be taxable in itself.

If you need to reverse the conversion (called a re-characterization - more on that below), then you can only reverse the amount actually converted. In the example above, you could reverse the $80,000 conversion, but you'd be out that $20,000 permanently - and you would still owe taxes on the $20,000.

The amount withheld for taxes is also subject to the 10% early distribution penalty, unless you are 59 1/2 when the conversion occurred.

5. Be a good judge of re-characterization.

If not converting is a mistake, not paying attention to your Roth after you've converted is a huge mistake. Here's why - and incidentally, here's one of the greatest aspects of the Roth IRA conversion. It's called "re-characterization" and here's how it works.

Re-characterization allows you to undo a conversion if the market value falls below your conversion amount. It's the mulligan of the Roth world. Here's an example:

You have $100,000 in your traditional IRA when you convert it to a Roth IRA. After a while, the your Roth is worth only $50,000. If you left your Roth alone, you'd owe taxes on the full amount at the time of conversion - $100,000. But, if you re-characterize your Roth (i.e. undo the conversion, you get your $100,000 back in a traditional IRA and you would owe taxes on the $50,000 re-characterization amount.

Of course, you have to do it before the next tax filing deadline after your initial conversion and if there are fees involved, you might want to makes sure you've lost enough value to make it worth your trouble.

6. Divide and conquer.

Besides the income limitations being dropped, you also get an extension on when you have to pay the taxes if you convert in 2010. For this one year only, you can spread your payment of the taxes you owe on the amount converted over the 2011 and 2012 tax periods; meaning you don't have to actually pay them until 2012 and 2013!

7. Catch the early bird special.

If you convert early in 2010 and the market resumes its bull run, as some analysts think may happen, then you would have more time to catch those tax-free gains, while splitting the payment of the taxes owed over two year's.

8. Hedge your bets.

You can split your conversions up into multiple conversions, by asset class for example. That way if your stocks perform well, but your bonds tank, you can re-characterize your bond conversion back into a traditional IRA and lessen the tax hit. In fact, many experts recommend slicing your IRA up into as many Roth IRA accounts as possible to gain maximum control over your taxes. This is probably only beneficial for very large accounts however.

Friday, February 12, 2010

Free Trades From ShareBuilder For All Of 2010 !

ING is offering commission-free trades through its ShareBuilder service for the entire year, when you open an IRA with this promo code.

Here are the details:

  • All IRA plans are no-fee plans; no fees for a low balance, no fee for inactive accounts, no annual fee for being a member.

  • Open your IRA account before April 15th, 2010 and set up an Automatic Investment Plan (AIP) and all automatic investment trades are commission free for 2010.

  • Select over 7,000 stocks and ETFs.

  • Schedule (AIP) investments on a weekly or monthly basis.

  • Invest any dollar amount on Tuesdays exclusively online.

Some caveats to the offer:

  • Real time trade commissions still apply to all sales.

  • You can only make commission free trades on Tuesdays, and online. If you aren't comfortable using the web site then this isn't for you, but ING's web sites are very easy to use.

These limitations aren't ridiculous when you consider that you probably should keep trading to a minimum in an IRA plan anyway, and you should also make contributions in it regularly so the Automatic Investment Plan is ideal for dollar cost averaging into your IRA over the long term. Why not save a few extra dollars on each contribution?

Open an IRA today at

Thursday, February 11, 2010

Are Target Date Funds good, bad or just plain ugly?

Target date funds have been in the news quite a lot over the past few years, though the nature of the news seems to have gone from great to bad over that time. Consider that when target date funds were first introduced they were heralded as the pinnacle in the evolution of investment vehicles. They were the ultimate in "set it and forget" investing!

These funds were so universally praised by the investment community and politicians alike that when congress passed the Pension Protection Act (PPA) allowing companies to automatically enroll employees in 401(k) accounts, it was target date funds that were chosen most often as the default fund, or "qualified default investment alternative" (QDIA) in the lingo of the PPA.

Then the crash of 2008-2009 happened.

2010 Target date funds performed horribly in that crash. This gave target date funds a lot of bad publicity. After all, the idea of a 2010 target date fund was that it would be invested in less risky assets as 2010 got closer, right?


See, the problem isn't really that these funds lost as much as the average stock fund, or even that they were tilted too heavily in the direction of stocks. There are really two problems at the root of all this:

  1. The crash of 2008 was not a garden variety stock market crash.

  2. People's perspectives on retirement savings is skewed.

Problem One: The crash of 2008.

The crash of 2008 was a once in a lifetime kind of phenomenon, one in which almost every investment asset lost value. The problem for target date funds regarding this kind of crash is: where should the majority of assets held in a 2010 target date fund be allocated?

In a garden variety stock market crash, or correction of say 10-15% or even 20% loss in stocks, a hefty bond allocation is usually enough to provide proper ballast to limit the total losses for the fund. But in 2008, just about the only safe place was cash, or gold and in any normal investment environment a majority of holdings in cash or gold would be a money loser.

Problem Two: Investor perspective.

This problem affected target date funds because investors simply did not expect a 2010 fund to lose 35% -40% of its value so close to the target date. But I think this is really the result of an underlying mistake in expectation on the part of the investor.

Too many investors have it in their mind that they will be taking all their money out of the stock market when they retire.

Maybe it's the way these funds are marketed, but I know a lot of investors think that the clock stops when they retire and that what they have in their investment account is what they have for the rest of their lives. This is simply not true. The average retiree today can expect to live another 15-20 years. The fact is that they will still need to be invested in stocks in order for their savings to last as long as they do.


I think just about the only solution one can have for the first problem (the unusual market crash) is to have a sizeable sum of cash saved up for immediate access if you have just retired or are about to retire when such a crash hits. Something along the 9-12 month of expenses range, maybe more if you tend to panic about finances. This ought to allow the investor to weather the crash and not have to deplete his investment account while it is suffering heavy losses.

The solution to the problem of investor perception is also covered by the huge sum of cash savings fix to the first problem, but there is also a long term mental shift that needs to happen. Investors and retirees need to consider post-retirement investing. Far too many people think about investing or saving for retirement as the end game, when in reality it's just an inflection point where the nature of investing changes but the need continues; the only true end point is the end of life, after which you get into estate planning.

Tuesday, February 9, 2010

Investing Term Tuesday - Tax Selling.

This week's investing term is all about investment decisions motivated by tax implications. It's called tax selling and as the name suggests, it's when an investor sells an asset at a loss, in order to pay less taxes when he sells an asset at a profit. The way this works is that the U.S. tax code allows individuals to use an investment loss to offset capital gains taxes on profit making asset sales.

The process is also commonly called "harvesting capital losses", because it often involves the purposeful selling of a losing investment for the explicit reason to gain a tax advantage.

Tax selling is perfectly legal, but there are a few restrictions:

  • Any assets sold for a loss must have been owned by the investor for at least 30 days prior to being sold.

  • The investor cannot purchase assets of a same type within 30 days of the assets being sold.

So, you can't buy shares in a small cap fund, sell them 29 days later at a loss to harvest the capital gain tax offset, and then buy shares in the small cap fund 15 days after you sold them. Violation of either of these restrictions is called a wash sale, and that is illegal. This 30 day limitation is often referred to as the 30-day wash sale rule.

Tax selling usually occurs in December, but keep an eye on the market as some are speculating there will be an increase in tax selling as the Bush tax cuts expire at the end of this year, and tax rates rise again.

Monday, February 8, 2010

Mutual Fund Monday - Blogosphere Feb 2010 Edition.

It's Mutual Fund Monday again, and I thought that I'd do something a little different this week. Rather than focus on a single fund or concept about funds, I'm focusing on a topic and sharing some of the interesting posts I've found on other blogs recently about that topic. The topic: ETFs.

ETFs, or exchange traded funds, first became available to investors in 1993 and have since evolved from being simple index trackers to being full blown portfolios or hedge funds of their own. There's much mistaken knowledge about ETFs and much confusion. Hopefully these posts will help set you straight on ETFs. Even if you think you know all about them, there is probably a thing or two you didn't know. ;-)

How to Choose ETFs for Your Portfolio from Oblivious Investor is a great place to start when beginning to add ETFs to your portfolio. He examines the usual suspects in regards to the important factors of an ETF, like expense ratio and which index it tracks; but he also covers some lesser known or often overlooked factors like the Bid/Ask Spread of the fund.

Not sure about ETFs, or too sure about them? Be sure to check out Ten Myths About ETF Investing from ETFdb before you make another decision about ETFs

Do you think Charles Schwab Might be the Best Choice for Passive Investors? Steadfast Finances does, and he explains why as well as why you should care. Very interesting post..

Lastly in our ETF posts this week is a post by Dividend Tree in which he reminds us of one of the single most important details about Investing in ETFs - Know What You are Investing In. Some of this is related I think to the 10 myths of ETFs from ETFdb above. Many investors think all ETFs are created the same and they invest in what the name suggests, but Dividend Tree shows that this is not always true.

Thursday, February 4, 2010

Life Settlements - Wall Street's Next Bubble?

[caption id="attachment_589" align="alignright" width="250" caption="Would you sell your life insurance to a stranger? Millions would, and Wall Street wants a piece of the action."]Life Settlements -cash offer[/caption]

A life settlement is the process by which an individual, usually of senior status or declining health, sells his life insurance policy to a settlement company in exchange for a lump sum. The settlement company then sells the policy or shares of the policy to investors, who then become the beneficiary when the insured senior passes away.

It's marketed as a win-win because the senior receives an immediate settlement for a life insurance policy he would otherwise never benefit from, and the investor receives the potential for very high returns on his money.

Regardless of what your moral view may be on such a transaction, it is big money and that means Wall Street wants a piece of the action.

Investment banks plan to purchase these life insurance policies, and package them up for resale as bonds to institutional investors - pension plans, hedge funds, etc..

This is very similar to the securitization of sub-prime mortgages in the last decade. The thinking is that the risk of loss (i.e. the original elderly policy holder outlives his policy, and the investors lose money) is spread out among many investors.

As I said, the potential market for this is apparently pretty big. Industry predictions are that the market for these bonds could be a large as $500 billion, and firms like Credit Suisse Group (CS) have been entering the life settlement arena.

Also, Goldman Sachs Group Inc. (GS) has been developing an index of life settlements for trade, effectively allowing investors to bet on whether the insured senior will out live his policy or die sooner than expected.

While the potential for systemic collapse, like that caused by defaults in the sub-prime mortgage business, seems limited there are risks and repercussions involved with life settlement bonds.

For example, the trend of average life span is moving upward suggesting that the odds of the insured outliving the policy rises year after year. Additionally, the fact that the policies are now held by institutions and trusts that have no limit of mortality means that insurance companies will likely being paying out more claims than they would if the policy holder remained the insured. This will likely cause a rise in life insurance rates.


Wednesday, February 3, 2010

100 Free Trades From Ameritrade.

Listen up, investors!

If you're looking for free stock trades online, and don't mind opening an account with discount broker Ameritrade, then this could be the deal you've been looking for.

  • Open an account using this link, with an initial deposit of $2,000 and get 100 commision-free Internet equity trades for 60 days.


  • Open an account using this link,with an initial deposit of $25,000 and get 100 commission-free Internet equity trades for 60 days PLUS $100 cash bonus.

It's that simple.

Here are the details:

  • Accounts must be opened and funded from the link above, or by phone using the offer code 154 by 03/15/10.

  • Initial deposit must be received within 30-days of account opening.

  • Commission-free Internet stock trades begin within 24 hours, and the $100 bonus will appear in your account within 2-3 weeks. (if funding with $25,000).

  • If the account you open is a TD AMERITRADE retirement account, cash awards are valid within your IRA only and non-transferable to another existing TD AMERITRADE account.

  • Commission-free Internet equity orders must execute within 60 days of meeting minimum funding requirements.

Those unfamiliar with TD AMERITRADE can take comfort in the fact that they are a member of FINRA/SIPC, so deposits and equities are as safe as they can be (meaning that value/return on investments is NOT guaranteed, but you would not lose those investments in the event that the broker went out of business.)

Accounts must be opened either online using this link, or by phone at (866)834-2539 using offer code 154.

Thanks for stopping by, and happy investing!

Tuesday, February 2, 2010

Investing Term Tuesday - January Effect.

In honor of just closing the books on January, I thought it might be nice to examine the January Effect.

The January Effect is an investing term that refers to a general increase in the stock market during the month of January. This effect is typically attributed to an increase in buying caused by the addition of employees yearly bonuses being contributed to their 401(k) plans, and also due to investors getting back into the market after having sold in the previous December for tax purposes.

It is said that the January Effect affects small caps more than mid or large cap stocks, though this has been less pronounced in recent years as investors learn about and anticipate the January Effect.

It is also considered less important as there is less cause to sell laggard stocks for tax purposes, but that may change as taxes increase on investments and investment income.

Let's hope it's not a hard fast rule when we look at the S&P's performance for this past January:

S&P 500 Jan 2010

... and there IS hope: Check out this MarketWatch article on why January's loss doesn't automatically doom the rest of the year.

Monday, February 1, 2010

Mutual Fund Monday - Tips For Mutual Fund Investment.

With thousands of mutual funds to choose from, picking the "right one" can be a daunting task. Most investors know not to fall for a short term hot streak - one or two years isn't a long enough track record to show superior skill of the management team over sheer luck - but where should you start?

Step 1.  Figure out what you really need.

To be a successful investor, be it in mutual funds, hedge funds or whatever, you need to determine what your objectives really are and what asset allocation you'll need to meet those objectives. And sorry to tell you this, but "to get rich" is not an objective. ;-)


For your objective to be meaningful and achievable, it needs to be specific. If you can determine exact numbers, then you're off to a great start. But even if the numbers are not exact or may even be unknowable, you can still use that as an objective.

For example, if your objective is to have $25,000 in 5 - 7 years for a new car, then you have a defined timeframe, and target amount. From that you can then figure out how much you can invest over that time  frame and see how much return on your money you'll need to get there. (There are calculators for this kind of thing).

Even if your objective is a bit less knowable, say saving for retirement, you can use ballpark figures for determine the "best guess" for what you'll need 15, 20, even 30 years out from today. The key is knowing that this is just a guess, based on current trends. In the case of retirement planning you reevaluate your goals and assumptions on a regular basis, every 5 -10 years for example.

The Takeaway. The point to take away from all of this is that your objective (amount and time frame) will be a key component in determining your risk level and asset allocation. You can (and should) invest more heavily in stocks for retirement which is decades away than for the objective that's 5-7 years away.

Asset Allocation.

Put simply, an asset allocation is which types of investments you choose to put your money in, and in what proportions.

Different types, or classes of investments carry with them different levels of risk and average return. Bonds, for instance, are typically less risky than stocks, though that is a generalization since there are subclasses of stocks and bonds that can be very similar in terms of risk and reward.

Key points of concern are correlation (how much one investment be behaves like another), volatility, and risk.

The Takeaway. Some studies have shown that asset allocation alone is responsible for up to 90% of your total return, so be sure to study up on this stage and know what you're doing.

Step 2. Picking mutual funds.

Since this article is about mutual funds, I will focus on that aspect of an asset allocation. But remember - if your investment goals are short term, then mutual funds may not be right for you.

Searching for a mutual fund.

If you have an idea of what type of fund you're looking for, say a small cap stock fund, and you'd like to see what mutual funds fit that category, you can use Kiplinger's Fund Finder. This tool allows you to select broad categories (like small cap stock funds) and narrow the results by a host of criteria, including:

  • 1,3 or 5 year return.

  • Morningstar rating.

  • Return in a down market (i.e. worst loss).

  • Expense ratio.

  • Turnover ratio.

  • Length of time the current management team has been in place.

And much more. It's very handy for gathering a list of mutual funds to choose from, but you still need to do some comparison work, but more on that in a minute.

Gathering information on a specific fund.

Once you have a list of funds, or maybe you're looking for details about a specific fund in your 401(k), you can use FINRA's Fund Analyzer to get the specifics about a fund.

These results include average return of a given investment amount over a specified period of time, and the total expenses. It also provides a breakdown of the allocation within the fund, investment style of the fund (i.e. growth, vs value, etc..) the Morningstar rating and much more.

Some thoughts on past performance not guaranteeing future results...

By now I'm sure you've heard that familiar phrase of investment marketing: "Past performance is not a guarantee of future return", or something similar. It's usually uttered as a means of protecting themselves from costly liability in court situations, but it is also a significant thing to bear in mind when picking a fund.

The thing to remember is that just because a fund had a rip-roaring 3 years does not mean it's going to continue to rip and roar its way up the charts for the next 3 years. Maybe it was a small cap stock fund and the economy has just come out of a recession. If that's the case, then you can expect those returns to level off a bit as the economic cycle matures and investors seek blue chip companies over small cap.

But long term performance can be a good indicator of a fund's quality. Look for good for funds with good performance over a 5-10 year period.

Some thoughts on volatility...

Volatility is simple a measure of how much the fund's price jumps around; it's a measure of how much of a roller coaster ride the fund is. The lower the volatility, the smoother the ride, but not necessarily the higher return. The thing to keep in mind with volatility is that it doesn't matter how bumpy the ride is if you don't need the money for another 20 years. In other words, volatility is less important for long term investments.

Some thoughts on Managers...

Things you'll want to know about the fund's manager include:

  • Does the manager admit mistakes?

  • Does the manager respect the investors?

  • Does the manager sound too greedy?

  • Does the manager know what he’s talking about?

  • Is the manager personally invested in the fund? (that's a good thing)

  • Does the manager stick to his stated strategy?

One last thought about fees...

Not all funds are created equal, and one of the biggest defining characteristics of a fund may be its fees. All other things being equally, higher fee funds will perform worse than lower fee funds. But things are rarely equally and the thing you need to find out is whether the higher fee fund significantly outperforms its peers over an extended period. In other words, is it worth the extra money? If it's just doing the same as an index fund, it's not worth the money.