Series I Savings Bonds pay nothing

Well, not quite nothing. But for the first time since these inflation-adjusted savings bonds were introduced in 1998, Series I bonds bought from now through October won't pay any fixed-rate interest. You'll still keep up with the inflation, but only just.

The earnings rate of Series I Savings bonds is a combination of the fixed rate, as set by the U.S. Treasury, plus a rate that tracks the rate of inflation, as measured by the Consumer Price Index. As of May 1, the fixed-rate portion was set at zero percent; the inflation component was set at an annual rate of 4.84 percent. So, based on the current reading, I bonds will pay a 4.84 percent annual percentage yield through the end of October. Every six months thereafter, the payout readjusts to conform with newer CPI readings, but the fixed rate will remain at zero.

On the one hand, not paying anything above and beyond the "official" rate of inflation seems a bit miserly.  However, the interest you earn is exempt from local and state taxes, as long as you don't touch the principal, and finding a commercial instrument yielding as much is a tall order these days.  —Chris Horymski

Safety nets offer financial protection in turbulent times

Many financial institutions are feeling the pinch of the credit crunch brought on by the subprime mortgage mess. If worry over the safety of your savings and investments is keeping you up at night, take heart. There are several government safety nets that can help if your money is threatened by a financial institution's insolvency. Here are some of those programs, along with their benefits and limitations.

Banks and thrifts. The Federal Deposit Insurance Corp. provides individuals at least $100,000 in basic coverage per institution. For many retirement accounts, including all IRAs and self-directed defined contribution plan accounts, the coverage is $250,000. Coverage limits for joint and trust accounts are a bit more complicated. FDIC insurance does not apply to safety deposit box contents or to mutual funds and other securities and insurance sold by banks.

Federal and some state-chartered credit unions. Insurance from the National Credit Union Administration generally is the same as for banks and thrifts, though there are some differences. Some NCUA-insured credit unions buy excess share insurance from American Share Insurance that covers every account for an additional $250,000. That coverage is not government-backed.

Non-NCUA-insured state-chartered credit unions. Some states allow state-chartered credit unions to forego government-backed insurance and opt instead for primary share coverage from American Share Insurance.The insurance provides $250,000 protection for every account. About 5 percent of state-chartered credit unions take this coverage.

Broker-dealers. The Securities Investor Protection Corp. provides each investor with $500,000 protection to recover missing assets, of which $100,000 may be based upon a claim for cash, if a brokerage firm closes or becomes insolvent. In most cases, the SIPC replaces existing securities. It doesn't cover market-related losses or losses due to investment fraud; nor does it cover non-members, even if they are affiliates of SIPC members. Click here for more information.

Defined-benefit pension plans. The federal Pension Benefit Guaranty Corp. covers workers with traditional defined-benefit retirement plans, the kind that provides a set income stream or a lump-sum benefit in retirement. Coverage limits are set yearly and vary by circumstances, such as a worker’s age on the date the retirement plan was terminated or went into bankruptcy. The fund does not cover plans created by the government, church groups, or small professional service employers such as doctors and lawyers.

Defined-contribution plans.  There’s no guaranty fund to cover 401(k)s and other defined-contribution plans, although retirement money invested in banks, thrifts, credit unions, and brokerage firms may be protected by the programs that apply to those institutions.

Insurance. Many insurance products, including fixed-rate annuities and life policies, are protected by a variety of state guaranty associations funded by the insurance industry. Coverage varies by state. The National Organization of Life and Health Insurance Guaranty Associations offers information about your state’s life and health guaranty programs.  Similarly, the National Conference of Insurance Guaranty Funds provides details about guaranty programs for property and casualty coverage.—Anthony Giorgianni

SEC charges two with fraud in get-rich-quick investment scheme

Reading warnings about the tactics scam artists use to perpetrate investment fraud is one thing; seeing those alleged tactics in action can be real eye-opener.

In connection with civil fraud charges it filed recently against two Utah residents, the U.S. Securities and Exchange Commission has posted portions of TV infomercials it said the two used to dupe the elderly and others into believing they could “make extraordinary stock market profits" by buying an expensive securities trading system.

The SEC filed a complaint against Linda Woolf and David Gengler in U.S. District Court in Virginia, alleging that they falsely claimed that they became successful investors using the "Teach Me To Trade" classes, mentoring, and computer software. The two promoted the system through infomercials, print ads, direct mail, and free “investor’s workshops” typically held in hotels, the complaint says.

Separately, the two were indicted March 6 by a federal grand jury on charges of wire fraud and conspiring to commit wire and mail fraud in connection with their marketing practices.

In one of the infomercials on the SEC Web site, Woolf says she was a former teacher who was able to replace her entire income in less than nine weeks using the Teach Me To Trade system. In another infomercial, Gengler talks about how he turned $10,000 into $20,000 in one week. The SEC complaint says that Gengler claimed that he was able to pay back the $50,000 he spent on his "education" just three months after he began trading. It said he also claimed that he made $100,000 trading securities during the following year and nearly $800,000 about four years later.

Yet, according to the complaint, “during the period Gengler claims to have been a successful professional trader using the option and short-term trading strategies,” his tax returns “typically reflected no short-term capital gains.” It says that Woolf never declared a securities trading profit on her federal income tax returns.

Instead, the complaint alleges that together the two made more than $6 million in commissions selling the investment system, charging customers as much as $40,000. It says the two encouraged prospective customers to pay for the system by borrowing on their credit cards, providing a script for them to use when requesting a credit line increase.

"The allegations depict a cold-hearted scheme that preyed on the elderly, the desperate, and even the unemployed by promising financial security while instead robbing victims blind," SEC Chairman Christopher Cox said in a prepared statement. "The commission's charges should send a warning to all those who would masquerade as successful traders on TV while prowling the country for victims."

FINRA, the largest private regulator of the securities industry, has been warning investors about investment scams aimed at elderly people, and has urged the public to be especially cautious about attending free investment seminars.

The SEC is asking the court to order Woolf and Gengler to return all “ill-gotten gains” and to pay civil penalties. If found guilty in the federal indictment, the two could face 30 years in prison, a $250,000 fine, and five years of supervised release.

The complaint describes both as independent contractors for entities affiliated with Teach Me To Trade, which is owned by EduTrades, a subsidiary of Cape Coral, Fla.-based Whitney Information Network. In January, Whitney reached a settlement with the Florida attorney general, which investigated several of its stock market and real estate investment programs, including Teach Me To Trade. Although it did not admit wrongdoing, the company agreed to provide $450,000 in consumer restitution in addition to some $580,000 it had already refunded to consumers, set aside $150,000 to cover any additional claims, contribute $150,000 to the attorney general's "Seniors vs. Crime" program, and pay $150,000 to cover the cost of the agency’s investigation. It also agreed to change some practices and to make certain disclosures and disclaimers to consumers regarding its seminars and training courses.

For the 12 months ending Dec. 31, 2006, the complaint says, the company received $112.6 million in cash from sales of its securities workshops. —Anthony Giorgianni

Investment moves for a slow economy

The subprime mortgage meltdown, record oil prices, and a tumbling housing market have raised the specter of a recession. And the wild stock market volatility of recent weeks has put many investors in a defensive stance.

Investors shouldn't panic, but it's worth knowing how to build an all-weather portfolio to help you through such economic storms. The difficulty facing individual investors is that if you reshuffle your portfolio now, you might sell stocks or mutual funds after they’ve taken a beating, and buy defensive investments after their prices have been inflated by investors looking for a safe harbor. At the same time, if you try to hide out the recession in cash, reduce your exposure to stocks, or stop making regular contributions to your portfolio you may miss out on some good opportunities to buy.

“Investors should stay the course and keep investing,” says Alec Young, equity strategist at Standard & Poor’s. “Nothing outperforms stocks over 10-year periods, and investors who continue to buy when prices are low tend to do best.”

So unless you need cash immediately, you may be better staying put and weathering the storm. Still, there are some tweaks you may want to make to your portfolio. Here are some recommendations for the different market segments:

• U.S. large-cap stocks are relatively inexpensive and attractive at the moment, especially ones with lots of overseas business. You can play this trend by increasing your portfolio’s large-cap exposure, such as in an S&P 500 index fund or ETF.
• International stocks are still attractive. With growth in Europe and Japan slowing, emerging markets have the best long-term growth prospects and are less affected by some of the economic ailments in the U.S. Yet emerging markets are volatile, so your decision here should depend on your investing horizon and tolerance for a bumpy ride.
• Cash is king in a down market and will leave you ready to snatch up good deals. Short-term CDs and high-yield money market accounts are a good option. Avoid Treasury bills, which have depressed yields after investors poured into them as a safe harbor amid the recent instability.
• Buy a municipal bond fund. Treasuries have anemic yields right now. Munis are looking very appealing and many are yielding more than Treasuries, even before factoring in the tax exemption.

Take trading costs into consideration before shuffling your portfolio, and stay diversified. Also consider how hard it would be to buy back investments you sell now at a good price later on. If you buy, dollar-cost average, or buy in chunks, instead of all at once to help limit your risk.

—Chris Fichera

Smart investments for inflationary times

As if all the recent talk about recession wasn’t bad enough, now it’s inflation—the result of a higher than expected rise in the Consumer Price Index during January. There’s even talk of stagflation, a slow-growth high-inflation combo that many of us remember unfondly from the 1970s. If you weren’t around in the ‘70s, let’s just say that stagflation was even worse than disco.

What should investors be doing with their money? Here are a few ideas from a recent issue of Consumer Reports Money Adviser newsletter.

• Stocks. Traditionally, stocks have been seen as the best inflation hedge over the long haul, although some experts are beginning to question that wisdom. Rather than speaking of a pie chart split between just stocks and bonds (say 60 percent one, 40 percent the other), they’re likely to recommend a much more diversified portfolio, including the following items.
• Real estate. Investment real estate is one option, but that ties up your cash in a relatively non-liquid asset. And if you become a landlord, you will have to collect rent and fix furnaces. A more leisurely and liquid approach is to invest in real-estate mutual funds, exchange-traded funds, or a real-estate investment trust. Bear in mind, of course, that real estate has its own woes at the moment.
• Commodities. A generation or two ago, we’d have been referring to gold bars; in more recent times, mining stocks. Now financial planners often recommend having a small slice of mutual funds or ETFs that invest in a range of commodities—everything from platinum to pork bellies. The reason is twofold: In times of serious inflation, these kinds of assets often rise in value. Plus, their price movements tend to have little correlation with the stock market, making them a good diversifier in general.
• TIPS. Known formally as Treasury Inflation-Protected Securities, these bonds have two components: a fixed rate of interest rate plus an adjustment pegged to the Consumer Price Index. They’re sold in $1,000 increments and come in 5-, 10-, and 20-year maturities. For more about TIPS and how they work, go to Treasury Direct.
  

Recession’s bright side? Bargains for brave consumers

Let’s say you have some cash on hand, your job (or other source of income) is secure, and you love a good bargain. What opportunities might a recession bring?

First a disclaimer: Nobody, including us, knows what’s ahead for this economy or, indeed, precisely what’s happening now. (Recessions are officially determined after the fact by the National Bureau of Economic Research.)

However, the battle-scarred veterans of our Money team have seen our share of recessions, and some of us even took notes. Based on our collective judgment, here are some of the possible buying opportunities that consumers with cash—and the guts to spend it—may find:

Homes. Home prices are already down in many parts of the U.S. Where they go from here is anybody’s guess, but few of us would expect them to rise at a steep pace anytime soon. So if you’re in the market for a home, now could be a good time to start looking and get a baseline feel for the market—even if you decide to hold off buying for a while.

Mortgages. Interest rates are already relatively low, averaging 5.42 percent for a 30-year fixed-rate mortgage as we write this. Credit standards have been tightening, though, so expect higher hurdles in getting the very best rates.

Stocks. Some are sure to become bargains, but unless you’re a stellar stock picker, consider a no-load stock index fund and hope to benefit from an overall rise in the market. Keep in mind that stock prices will often start upward well before a recession ends, as investors look ahead to better times.

Credit cards. Our resident credit expert thinks people with good credit scores should have a golden opportunity to negotiate for lower rates. Issuers will want to hold onto creditworthy customers more than ever.

Cars. If demand continues to drop (sales for 2007 were down compared to 2006), carmakers and dealers will have to do something to move their wares.

Appliances and electronics. Ditto.

Luxury goods. Sales are already slowing, we hear, so high-end goods may carry less-high prices.

EBay stuff. People eager to raise cash may be auctioning off knickknacks and whatnots in record numbers. So that Pee-wee Herman doll or first edition of Proust you’ve long wanted could be yours for the clicking.

Home remodeling. Lower demand should mean more room to bargain and, possibly, less wait to get the work started. If you need to finance your home improvement, you might also find favorable borrowing terms if your credit score is high.   

Travel. Our travel expert says to expect fare cuts from the airlines, but beware of the carrier going bankrupt before you can use your ticket. Hotels and rental cars should see cuts too.

Other services. If it’s something consumers can put off until the economic clouds clear (cosmetic dentistry vs. an aching tooth, for example), demand should drop and prices along with it. And it rarely hurts to haggle—even in the best of times.

Recession ahead? Already here? Neither?

Nobody knows the answer to those questions or will for a while. But the dreaded R word is certainly in the air and the news at the moment.

What might a recession mean to you—and what should you be doing now just in case?

We dipped back into the CR archives to see what we had to say during the memorable recession of 1990-‘91. Our advice today would be much the same:

1. Get a grip on your cash flow. When you have a spare moment, make a list of your typical household expenses. Divide it into two columns: items you don’t have much immediate control over (mortgage or rent, for example) and those where you have more discretion (groceries, eating out, clothes, vacation travel, etc.).If you need to slow your cash flow in the months ahead, plan to attack the discretionary items first. You may also discover cash leaks you can plug right away—and should anyhow, recession or no.
2. Stash more cash. If you don’t already have an emergency fund, now would be a good time to create one. The conventional advice is to keep three to six months of living expenses in a reasonably liquid account, such as a bank or money-market fund. If you have a lot of assets, few debts, or rich relatives, you may be able to get away with less, but this is a good starting point.
3. Reduce your debts. You’ll waste less money on interest payments and reduce your overall monthly expenses. As a general rule, we noted in 1991, it’s best to keep monthly debt payments (apart from your mortgage) at no more than 15 to 20 percent of your take-home pay.
4. Consider your job. How well you’ll fare in a recession will depend in large measure on whether you can keep your customary income coming in. So try to be realistic about your job security as well as your employer’s prospects. It might be time to revise the old resume, just in case.

Remember, too, that recessions aren’t forever. The 1990-‘91 one ran for eight months, economists later determined. In fact, it was already half over by the time most articles like this started appearing.

Consumer Reports Money Adviser offers some additional tips on recession-proofing your finances.

Fidelity reopens a revamped Magellan Fund

After 10 years, Fidelity has re-opened its flagship fund Magellan (FMAGX) to new investors this month. The fund, made famous in the 1980s by manager Peter Lynch, had difficulty outperforming the market in the 1990s and was considered an “index-hugger” by many—in other words, the fund’s portfolio and performance was similar to that of the Standard and Poor’s 500 index. But you paid management fees of close to 1 percent a year for the privilege of owning Magellan, as opposed to 0.1 percent for Fidelity's Spartan 500 index fund. 

In a sense, Magellan became a victim of its own success. As its assets grew to over $70 billion, the fund had more money than its management could invest effectively. Today, at $42 billion, it has more room to maneuver.  And star fund manager Harry Lange, in just two years at the fund, has transformed Magellan into a lean large-cap growth fund with interesting characteristics—the top holdings include Google, Corning, and Nokia—and a handsome 19 percent return in 2007. It remains to be seen how it will perform in what will likely be an economic downturn in 2008, but it’s clear that Magellan is no longer vanilla. —Chris Horymski

Time to plug in the shredder and tame the clutter

If your list of 2008 New Year’s resolutions includes a vow to tackle the mounds of financial paper you’ve been collecting, here’s some advice from Rosanne Grande, a financial planner with R.W. Rogé & Co., in Bohemia, N.Y., on what to keep and what to shred:

• Bank records. Keep deposit and withdrawal slips until you get your bank statement each month. Retain monthly statements for at least seven years, in case the IRS audits you. Ditch CD records after the accounts mature and you collect the interest you’re due. The same advice applies to loan documents after you’ve paid back all the money that you borrowed, with one exception. Don’t burn your mortgage after you’ve paid it off. Keep it as proof of how much you paid for your house so you can calculate the tax, if any, on your gain when you sell it.
• Investment account documents. Shred the statements you receive each month or quarter as new ones arrive, but keep annual statements for seven years. If you still hold stock in certificate form, ask your broker to hold them for you electronically. You can also convert U.S. Savings Bonds from paper to electronic using the U.S. Treasury’s SmartExchange program at TreasuryDirect.
• Retirement-plan records. Retain your annual 401(k), IRA, and Keogh statements. If you’ve made nondeductible IRA contributions, keep Form 8606, which you must file with your tax return. It proves that you’ve already paid taxes on money in those IRAs.
• Credit-card receipts and bills. After you pay your bills each month, staple receipts for credit-card purchases to your statements and keep them for one year. They’ll come in handy if you need to return defective goods that you bought with a credit card. After one year, shred the receipts. You can do the same with your credit-card bills unless you need them to support tax deductions. In that case, hold them for seven years.—Denise Topolnicki
  

Year-end investment moves can trim your taxes

Whether you’re a risk-taking day trader or a buy-and-hold traditionalist, making some savvy moves with your investment portfolio before the year is over can cut your 2007 tax bill. Here are some strategies to consider:

• Take losses. If you own stocks, bonds, or mutual funds that are underwater, consider selling them before Dec. 31. You’ll generate capital losses that can be used to offset any capital gains you realized in 2007. If you accumulate more net losses than gains, you can deduct up to $3,000 of them from your ordinary income each year. If you’re in the 28 percent bracket, a $3,000 loss will trim your Federal tax bill by $840. Excess net losses can be carried forward indefinitely to offset capital gains or ordinary income in future years. Note that the gains you can offset aren’t limited to profits you’ve made by selling securities. Long-term capital-gains distributions from mutual funds can also count.
• Reinvest with care. When taking capital losses, be aware of the “wash sale” rules, which might invalidate your loss if you replace your holdings within 30 days of the sale. Say you take a loss on a real-estate fund you bought at the sector’s peak. If you think the fund will rebound and you buy it back within 30 days, your loss won’t count. But you can buy it back after 31 days or invest in a different real-estate fund at any time. As long as the funds are not substantially identical, you won’t have a wash sale, but you’ll stay invested in that sector.
• Mind your mutual-fund trades. If you’re going to buy fund shares in December, wait until after the fund makes its capital-gains distribution for the year. If you buy before the distribution date, you’ll simply get some of your own money back as a distribution—and you’ll owe tax on that return of your own capital. If you’re selling a fund for a long-term gain in December, do so before its ex-dividend date, the day on which the capital-gains distribution is deducted from the fund’s net-asset value per share. If you wait, some of the distribution you receive may be a short-term capital gain, taxed at higher rates. By selling before, most or all of your profit will be a favorably taxed long-term capital gain.—Donald Jay Korn