Entries for May 2008

Here's a question I often ask financial planners when conducting interviews: How do you know if you're on track with your retirement savings, particularly at a (relatively) young age? Are there any guidelines, or savings thresholds you should be crossing at certain points in your life? Usually, the answer is something along the lines of "everyone's risk tolerance, timeline, and goals are different," so there is no magic benchmark.

A quick Internet search for retirement guidelines led me to Charles Schwab's "Strategies for Saving," which says that in your 20s, you should be saving between 10 percent and 15 percent of your income for retirement; in your 30s, you should shoot for from 15 percent to 25 percent; and in your early 40s, between 25 percent and 35 percent.

Competition for your business is heating up among brokers—including the traditionally higher-end ones. According to SmartMoney's 2008 broker survey, the average commission charged by discount brokers (like Charles Schwab and Firstrade) is about 15 percent less than that of premium brokers like Fidelity. The gap was nearly 50 percent four years ago. Unfortunately, it's tougher to decipher and compare commissions these days, because they vary by frequency of trades, number of shares, and sometimes price of shares. Here are a few highlights from the survey:

• Some brokers, like TradeKing, charge a set amount no matter how often you trade, while others use a tier system that offers discounts for frequent trades. Read the fine print, though: Although TradeKing charges a flat $4.95 per trade, it also charges a penny a share for stocks priced under $2.

Yesterday, money manager and author Steven T. Goldberg shared his tips on picking mutual funds. Today, Goldberg highlights a handful of funds he'd trust with his own long-term money. Here are six picks, with descriptions in his words:

Selected American Shares. Chris Davis and Ken Feinberg have beaten their benchmark by an average of more than 2 percent a year for a pretty long time now. By far, the Davis family makes up the biggest shareholders of the fund. That tells you a lot. During the financial meltdown, I was worried because they had such a huge percentage of assets in financial stocks, but Davis turned out to be right in saying that there's a tremendous amount of diversity and that the companies he owns will be OK. They charge 0.57 percent annually for the fund's D shares, which you can buy directly.

Selecting a mutual fund may seem like a daunting task, with thousands on the market to choose from. Recently, I talked with Steven T. Goldberg, a former Kiplinger's Personal Finance writer (and a former colleague of mine), about how to pick funds. I figured he'd have some good tips, now that he's in the money management business. Goldberg also writes a weekly column for Kiplinger's—I particularly like this week's post on Five Great Green Funds—and he's the author of the book But Which Mutual Funds?: How to Pick the Right Ones to Achieve Your Financial Dreams. Here's what he had to say about choosing funds (tomorrow, I'll highlight a handful of his favorites):

Any new insights into the fund industry, now that you've crossed over into money management?
It's really satisfying to help people on an individual basis—I'm finding it a little more difficult than expected, mostly because of the psychology of it. Investors' portfolios are kind of like garages: places where they put all the stuff they don't know what to do with. There will be one fund someone's brother-in-law told them to buy, another stock they heard about at the water cooler, and a fund some broker sold them with horrible fees, none of which work together at all. Often, people just want to forget about it. It's also been made very, very complicated by fund-industry people telling you so many different things; it's easy not to do anything.

During a powwow of investing heavyweights earlier this month—the Investment Company Institute's general meeting—a panel of mutual-fund bigwigs was asked this question: What is the No. 1 innovation for mutual-fund investors over the past 50 years? Two of the four panelists said global funds.

Beginning investors are often told that they should pick a U.S. stock fund and then a separate international stock fund for some overseas exposure. Recommended international allocations are all over the board (I've heard everything from zero to 50 percent, though most financial pros say somewhere in the neighborhood of 25 percent.)

When Paul Sutherland was 17, a family friend gave him $2,000 to test his investing legs with the instruction that he could keep any profits over 11.2 percent. It was the 1970s, and stocks were in the midst of a long bear market, but Sutherland made out by trading gold, silver, U.S. and foreign coins, and paper currency. Today, he's the chief investment officer of the globally focused Utopia Funds, based in Traverse City, Mich. Recently, I asked him about global investing, hot sectors, and which funds he likes. Here's his advice for investors starting out (followed by a Q&A):

• First, you learn the basics. Read Security Analysis by Benjamin Graham and David Dodd. If you don't have time to read it, just look at the pictures!

Index funds may be boring, but therein lies their beauty. Says fund tracker Morningstar, "Unlike [with] actively managed funds, investors don't need to worry too much about their manager departing or their strategy veering off course."

Finding the best index fund takes a lot less legwork than finding the best actively managed fund. For index funds, Morningstar offers the following advice: