John Wasik

CHICAGO (Reuters) – A friend recently asked me to vet several financial advisers he was considering to manage his retirement portfolio. As one who hates to see people getting fleeced, I’m cautious of Madoff-like malefactors, the latest of which cropped up in the case of the PFGBest brokerage in Cedar Falls, Iowa. So I curbed his enthusiasm a bit about money managers who had impressed him with their initial pitch.

Despite two years under the Dodd-Frank financial reform law, millions of investors are still highly vulnerable when it comes to advisers. Buffeted by relentless lobbying by the financial services industry, the strongest pieces of Dodd-Frank have yet to be implemented. Here are key questions you need to ask a prospective financial adviser before you sign up:

1. How are you compensated?

I have no problem with paying advisers what they’re worth, but often they are overcompensated at your expense. Most of them can’t beat the market after fees and inflation in risk-adjusted terms. Generally, advisers who hold broker-dealer licenses are paid by commission. The more transactions or products they sell, the more money they make.

While there are plenty of honest brokers out there, this has been, for me, the greatest conflict-of-interest for investors. The temptation to churn accounts to generate commissions is always there. How do you remove the temptation? Compensation by flat fees, hourly rates or a combination.

If they manage money directly, they will charge you a sliding percentage scale based on assets under management. Generally, 1 percent annually is a starting point and should drop the more money you have to manage. In any case, ask them all of the ways they will get paid. They may layer on fees within mutual funds and insurance products or receive “revenue sharing” from those funds. All registered investment advisers must provide you a “Form ADV” that spells out their compensation schedules and possible conflicts (see Part II of the filing). If they dodge full disclosure, move on.

2. How are you licensed?

If they sell securities, insurance, mutual funds, futures or options, they must pass several tests and be a registered representative. I prefer advisers who are certified financial planners (CFP), which requires several years of education and experience. Certified public accountants (CPA) and chartered financial analysts (CFA) are also worth considering – if they have specific experience in preparing financial plans. Avoid advisers who place “senior specialist” in front of their title. They have come under scrutiny from regulators for various abuses.

For money management, registered investment advisers (RIAs) and CFAs generally have the most experience, but CFAs have the most rigorous training and have to pass one of the toughest tests in the business before they receive their designation. Check the backgrounds of any registered investment advisers or brokers through your state securities agency (www.nasaa.org).

3. What products do you sell?

If they start pitching you before asking you detailed questions about your life and financial goals, turn around and leave. The best advisers just sell their time and expertise. They can recommend lower-cost products, such as mutual and exchange-traded funds they don’t manage. Ideally they don’t receive a commission from recommending them. If you do your own investment research, use online deep-discount brokers to fill your orders.

4. Can you prepare a comprehensive financial plan?

You may not need this service, but you should consider it if you have to integrate portfolio, tax, college, estate, insurance and life planning needs. Brokers and insurance agents who are not certified financial planners may not have the training.

If your needs are specialized, find a CFP who has done the kind of plan you need. The Certified Financial Planner Board of Standards provides a free search service (see link.reuters.com/hyc49s). Take your time if this is the route you choose. A workable financial plan may take several months to a year to customize, so don’t get snookered by the idea that a few mutual funds or stocks will fit the bill after a brief meeting.

5. Are you a fiduciary?

A fiduciary firm takes full legal responsibility for their services. By law, they must put your interests first and you can sue them if they wrong you. Brokers, in contrast, are regulated by less-stringent “suitability” standards. In the event of a dispute, you usually have to go through their arbitration forum and sign away your ability to sue.

If you’re dealing with a broker, keep in mind that their suitability guidelines were tightened last week by FINRA, the industry’s self regulator. Brokers “must perform reasonable diligence to understand the nature of a recommended security or investment strategy…as well as the potential risks and rewards” while considering your “age, investment experience, time horizon, liquidity needs and risk tolerance.”

While this is a big step forward, it’s no substitute for the black-and-white language of fiduciaries. The SEC is considering making all brokers fiduciaries, but has dithered on completing the rule and putting it into force. Nevertheless, every adviser should also be crystal clear on how they plan to manage your money, employ risk management/hedging techniques, disclose conflicts and use of derivatives. Of course, having a fiduciary designation is no guarantee. They still have to account for how your money is being invested and any unusually high returns should be suspect.

More importantly, forget their sales pitch and glossy literature and focus on what you need before you even approach them. Do you need them to preserve principal? Can you afford to take market risk? Based on their management style, what’s the worst-case scenario?

And don’t hesitate to keep asking hard questions, especially in light of the fraud stories hitting headlines. How will your money be held? Who has access to it? If it’s in an independent custodial account with a brand-name brokerage that has protection from the Securities Investor Protection Corportation (SIPC), that’s a good sign. If they’re earning above-market returns, be skeptical. How are they doing it?

The right questions should keep you out of trouble. (The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Andrew Hay)

CHICAGO, July 9 (Reuters) – A recent New York Times story
quoting a former JP Morgan broker who said the company urged its
financial advisers to sell its own commissioned funds over
less-expensive outside products should not have surprised any
educated investors. It has been well-known in academic finance
circles for years that when you add up the fees that brokers
layer on, the value proposition often evaporates.

I have yet to find independent evidence that shows that
broker-sold products outperform noncommissioned index funds over
time on a regular basis. There are, of course, exceptions from
year to year. And of course, some brokers may provide a useful
service if the funds they recommend can equal or top market
returns and meet investors’ needs and goals. But generally the
opposite is true over the long haul.

A comprehensive study conducted by researchers Daniel
Bergstresser, John Chalmers and Peter Tufano, published in 2007,
examined broker- and direct-sold (when no broker was involved in
the transaction) funds from 1996 through 2004. The broker-sold
funds delivered lower risk-adjusted returns – even before
“distribution” costs were subtracted. The results were
consistent across different fund objectives, with the exception
of foreign-stock funds (see).

Investors pay far too much for these underperforming
broker-recommended funds – more than 4.5 percentage points over
direct-sold funds, the researchers found. They even offered a
less-charitable interpretation that brokers “put clients’
interests behind their own interests and the interests of the
fund companies that pay them.”

Building upon this research, one of the largest studies on
this topic ever conducted examined 524 mutual fund families for
the National Bureau of Economic Research, which was published in
2010 (see). The researchers
found that broker-sold funds not only needed to charge higher
fees to cover compensation, they invested less in portfolio
management and earned lower before-fee returns. Could it be that
brokers pitch these funds because they are paid more to sell
them than off-the-shelf, commission-free index funds?

MORE EVIDENCE

To pour even more salt on investors’ wounds, high-fee,
broker-sold funds may diminish total returns over time. Say you
invested $10,000 in a fund charging 1.5 percent in annual
expenses. If that fund returned 10 percent, you would have
roughly $50,000 after 20 years. Cut the fees down to 0.50
percent, which is easily doable with an exchange-traded or index
mutual fund? You would have about $10,000 more in the same
period. But don’t take my word for it. Run a comparison with the
SEC’s online mutual fund cost calculator ().

If it’s a badly kept secret that broker-sold funds are
unlikely to outperform their direct-sold cousins, why do
investors still buy them? In the July 2 New York Times story
quoting the former JP Morgan broker (see),
the bank defended its strategy, stating it has “an in-house
expertise.”

But in reality, the reason likely has more to do with the
handholding and perceived peace of mind in a broker/adviser
relationship. Our need for a human connection and assurance
overrides our rationality. Trusted advisers can form an
invaluable buffer between our financial goals and the madness of
markets, but we can place too much trust in them.

Jason Hsu, a finance professor at the University of
California, Los Angeles, who also oversees investment management
for Research Affiliates in Pasadena, California, put it nicely
in the company’s June newsletter: “We nonetheless sleep easier
knowing we have employed a high priest. And for sure, the high
priest will charge, and charge dearly.”

GO YOUR OWN WAY

There are so many alternatives to the high-priest syndrome
that there is no need to be snookered by broker-sold funds.
Consider a host of direct-sold fund families that charge no
commissions. There are hundreds of funds that fit this bill from
the Fidelity, Schwab, T. Rowe Price and Vanguard Groups.

For self-directed investors, it would be worthwhile to spend
the time to create ready-made portfolios from direct-sold funds.
You can build a portfolio with investment-ready funds suggested
by Folioinvesting.com, MyPlanIQ.com and 7Twelveportfolio.com.
You not only eliminate conflicts of interest – you build the
lowest-cost portfolio that is right for you – there are no
commissions involved.

Don’t want to fly solo on fund selection? If you choose to
work with an adviser, ensure that they operate as a fiduciary
and place your interests above those of their firm. Until
brokers are forced to abide by these principles – the U.S.
Securities and Exchange Commission is currently sitting on a
rule that would force them to do this – you will be subject to
endless broker conflicts of interest.

CHICAGO, July 5 (Reuters) – Bill Bernstein is both a
neurologist and a money manager, which gives him a unique
perspective on the human impulses that he says typically
short-circuit people’s portfolio decisions. Author of six books,
including “The Four Pillars of Investing,” he says we need to
rewire our brains to do the right things at the right times.

Long a rare voice of wisdom in an increasingly bi-polar
market environment, Bernstein says the trick to smart investing
is “learning how to behave. You have to fight your worst
instincts.”

Here are some behavioral guidelines he suggests:

1. Be careful with advisers.

It’s perfectly understandable if you don’t want to go it
alone in investing because there’s a lot to know and only a few
people are experts. If you choose an adviser, make sure that
they are a fiduciary; they must put your interests above that of
their firm. They also shouldn’t overcharge you, meaning annual
fees of less than 1 percent.

And if they aggressively push loaded (sales commissions
charged), hedge funds, alternatives or actively managed funds?
“Make a 180-degree turn and run,” says Bernstein.

2. Buy and hold is okay – then rebalance.

With market volatility soaring in this young century, you
have to evaluate how much risk you can take. You need an
investment policy statement, which is a roadmap to what kind of
stocks/bonds/alternatives allocation is best for your time of
life, vocation and personal goals.

Yet you also need flexibility. Maybe a 60 percent stocks, 40
percent bonds allocation is too risky for you. If your plan is
working, keep it and rebalance every year to stick to your
allocation goals. At the very least, be flexible if your plan
isn’t working.

“Anyone who says buy and hold is dead should have a neon
sign on their head that says `I don’t know what I’m talking
about,” Bernstein says. “It’s not buy and hold, it’s buy, hold
and rebalance. Anyone who’s done that over the past 20 years has
been mightily pleased with the results, since that person did a
lot of buying in the early 1990s, early and late 2000s; and
selling in the late 1990s and before the recent crisis.”

3. Keep educating yourself.

History is important to Bernstein as he advises his clients.
His book “The Birth of Plenty,” for example, provides an ample
history of capitalism and prosperity. He also posts a reading
list on his website. One of his favorites is Fred Schwed’s
“Where are the Customers’ Yachts?”

You should also sample basic online portfolios that employ a
handful of mutual or exchange-traded funds. One of the most
boiled-down portfolios, which Bernstein recommends, is Scott
Burns’s “couch potato portfolio,” which consists of one-half
Vanguard Inflation-Protected Securities and one-half
Vanguard Total Stock Market Index fund. There are
several other iterations at Assetbuilder.com, which are
combinations of low-cost index funds from the Vanguard group.

4. Avoid hot new stocks.

As the recent Facebook initial public offering
demonstrated, millions of investors got singed on the notion
that they could do a “quick flip” of the stock for easy gains.
“How many investors do you think have exerted the considerable
effort of estimating Facebook’s future advertising revenues?
Using the word `investor’ to describe these folks is akin to
calling Tony Soprano a ‘Catholic,’” Bernstein wrote earlier this
year on his Efficient Frontier Web site. He figured that
Facebook would have to grow its per-share earnings of at least a
factor of eight to justify a triple-digit price-earnings ratio.
It pays to listen to analysts who sound warnings about stocks
and have done sober analyses.

“If neighbors are talking about a stock, stay away from it.
If everybody owns it, sell,” he says. Bernstein has noticed that
the worst investors are empathetic – they feed off of other
people’s emotions. Investing should be more analytical. Look at
the numbers: What’s the stock’s dividend growth rate? What’s its
cash flow? What are its business prospects?

5. Admit your ignorance.

Perhaps the best emotional insight you can make is to admit
that there’s a lot you don’t know about investing. It’s okay to
say this to yourself because you can avoid much stomach-knotting
financial anxiety. Make the time to learn what’s best for you
and your family. Turn off the TV and try to ignore the
headlines. You can’t be an expert at something that baffles even
the most seasoned professionals.

“We don’t expect people to fly their own airplanes or take
out their kids’ appendixes, and yet we expect them to manage
their retirement portfolios. In my careers I’ve done all three,
and investing is by far the hardest,” he says.

CHICAGO (Reuters) – I turn 55 today. As a member of the baby boom generation who hopes he’s aging like a fine wine and not turning into vinegar, I abhor the idea of losing money again in a 2008-style meltdown.

If I’ve learned anything, it’s that I’m a lousy psychic, so I don’t try to guess what any market will be doing in the future. Having speculated in precious metals, tech stocks and bought and sold at the wrong moments, I’ve made plenty of mistakes and run off the cliff with the flock far too many times. Here are some lessons I learned along the way.

1. Being liquid is golden

Hewing to Ben Franklin’s advice, savings is my top priority. When we hit a family health crisis in 2009-2010, I was glad we had cash reserves and an investment club portfolio of established dividend-paying stocks that I could liquidate.

We were able to cover huge out-of-pocket expenses, which were more than double our out-of-pocket health-insurance deductible of $6,000. Now, I’m gradually rebuilding our cash in a federally insured money-market account and a short-term bond fund. At the same time, we are also saving for our two daughters’ college educations in a low-cost 529 college savings plan and funding our retirement savings.

2. Healthcare concerns need even more savings.

I’m 10 years away from qualifying for Medicare – maybe. I’ve seen proposals in Washington that range from privatizing the popular program to raising the eligibility age to 67. In nearly every scenario I’ve seen from some of the best minds on the subject, if the program is to remain solvent, it will have to cut benefits, raise taxes and demand higher out-of-pocket contributions from beneficiaries. According to the 2012 Medicare Trustee’s Report, the hospital insurance fund will be exhausted in a dozen years if nothing is done to reduce costs. Translation: That means I – and all future retirees – need to save even more to cover healthcare costs in the future.

3. The details of downside risk are critical.

I’ve already lived through 10 bear markets, which normally occur only about once every decade. This young century has seen two bubble-bursting downturns so far. The average duration, as calculated by Strategas Partners, has been 21 months, with an average decline in value of investments of about 40 percent.

I never again want to be in the situation where I’m looking at having lost that much of our portfolio, as was the case in 2008 (it’s mostly recovered, but we rebalanced to more than 50 percent fixed-income). I’m working to rebuild a lower “beta” portfolio, that is, one that isn’t as closely correlated to the S&P 500 large-stock index.

4. Human capital is my best investment.

As I strive to learn more about risk, I’m learning as much as I can about emerging areas of growth: healthcare, alternative/non-U.S. investments, derivatives and global resource allocation. So I look at opportunities with a vigilant eye on downside risk measures, like Sortino Ratios and correlation, focusing on the likelihood that different asset classes will head south at the same time (as they did in 2008).

Yet I’m still interested in risking some capital on the future: Alternative energy, international development and climate change strategies are on my radar screen. Knowledge is the commodity I want to keep investing in as I get older. Is there an index fund for that?

5. Back to the future

In my birth year at the peak of the baby boom, the yearly inflation rate was 3.34 percent and a gallon of gas cost 24 cents. Who would’ve thought that inflation and mortgage interest rates now would be less (on a nominal annualized basis) than at the end of the Eisenhower era?

I see opportunities that present themselves as I watch the world spin faster and faster. The earth’s population has more than doubled in my lifetime, a rate of growth unprecedented in human history. All of those new souls will need food, water, places to live and the amenities of daily living. We’ll need new tools to meet the demands of population growth so that we don’t wreck our planet. That’s why it’s still a good time to buy global stocks and reduce debt on the personal – and national – levels.

And it’s never a bad time to learn something new. I want to know how the global supply chain works, the latest technology/media and the evolving political situation in Washington, China, India and the Middle East. Travel, reading, cooking, making music and taking long walks or bike rides are much more important to me going forward.

My goal? To get to the point that I don’t have to worry about investing at all and spend more time with my family. The only inevitable truth about history is that change is a river that never runs dry. I’m just trying to avoid getting tossed on the rocks while navigating the rapids.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Kenneth Barry)

CHICAGO, June 29 (Reuters) – Portfolio volatility is your
sworn enemy if you’re nearing retirement or market downturns
make you nauseous. But if you’re a buy-and-hold investor – and
believe that stock market risk diminishes over time – you still
need a new course of action.

With high-frequency robotic trading, exchange traded funds
and global news hitting markets at the speed of light, there’s
no reason to believe volatility is going away.

Recent research by Lubos Pastor of the University of Chicago
and Robert Stambaugh of the University of Pennsylvania confirms
this view. In a forthcoming piece in the Journal of Finance,
they examined 206 years of stocks returns and confronted the
conventional wisdom that stock risk declines over time.

“We find that stocks are actually more volatile from an
investor’s perspective,” they concluded, citing “uncertainty
about future expected returns” as a major factor. The
Lubos-Stambaugh paper seeks to refute earlier research by
luminaries such as Jeremy Siegel, also of the University of
Pennsylvania, who claimed that stock market risk is reduced over
long holding periods. His book “Stocks for the Long Run” was a
bestseller before the dot-com crash.

In the wake of the 2008 meltdown, there’s ample evidence
that volatility has been increasing. You need only look at the
calamity of the past few years to know that conventional
investing has been a gut-wrenching roller-coaster ride.

The CBOE volatility index (VIX), which measures short-term
volatility of S&P stock index options, has hit its highest level
in the last 20 years three times since 1998, and has closed
above 25 – a notable high point linked to market declines – five
times during that period.

One way to reduce market risk is to lower the overall
allocation of stocks in a portfolio. If that doesn’t appeal to
you, add specialized exchange traded funds to the mix. You can
buy inverse ETFs from the PowerShares, Direxion or FactorShares
groups, for example, that gain when stocks lose. Have a large
position in single stocks, particularly those of your employer?
Buy put options on them to protect against downside risk.

Also keep in mind that asset classes that typically don’t
move together can fall off the cliff at the same time during an
extreme market crisis. That was the case in 2008 with U.S.
stocks, emerging market stocks, commodities and real estate
stocks, or REITs. This unexpected correlation blew the
traditional thinking of Modern Portfolio Theory diversification
out of the water.

WARNING SIGNS

Many portfolio managers have developed an early-warning
system that tells them when an asset class is due for a fall.
Under a “tactical asset allocation” model, they will rebalance
into less volatile investments when they see a market storm
brewing. Another approach is “Adaptive Market Hypothesis,” which
combines behavioral investing, derivatives and active management
to target and reduce volatility.

One fund, the Natixis ASG Global Alternatives,
managed by AlphaSimplex in Cambridge, Massachusetts, employs
hedge fund-like strategies to “maintain a targeted level of
volatility.” Jerry Chafkin, a fund manager and president of
AlphaSimplex, says his firm uses algorithms to monitor market
activity daily – and makes adjustments automatically to stay
within a preset volatility range.

Chafkin’s fund held up during the market tsunami in late
2008 – it was launched Sept. 30 of that year – and early 2009.
It posted only a 0.62 percent loss in the first quarter of 2009,
compared with a negative 11 percent for the S&P 500.
Year-to-date, though, it is down 3.80 percent, in contrast to a
7.04 percent total return for the S&P.

“Volatility was unprecedented in the most recent financial
crisis,” Chafkin told me. “And we expect the volatility of
volatility to continue. But now instead of knowing how much risk
to expect, investors have uncertainty.”

Managing volatility isn’t free, though. The more involved a
hedging strategy – especially those involving “absolute return”
funds that seek positive returns in any market – the more you’ll
pay a fund manager. These specialized funds also can lag when
the market is flat or rising, and can be costly. The expense
ratio for the ASG fund (A class) is 1.60 percent annually with a
5.75 percent sales charge, for example, compared with 0.55
percent for the average exchange traded fund. While that’s a
relative bargain for most hedge funds, it’s quite pricey for an
ETF.

If you don’t want to buy an off-the-shelf fund, you’ll need
to find an advisor who understands derivatives. Any
sophisticated hedging strategy should be done with a trained
registered investment adviser, certified financial planner or
chartered financial analyst, since you can still lose money with
these strategies.

You can also find pre-allocated portfolios at sites like
MyPlanIQ.com and Folioinvesting.com. But if you come from the
ultra-risk-averse camp, you may not even need them if you can
reduce your stock holdings and replace them with single U.S.
Treasury, municipal or inflation-protected bonds. They are among
the simplest answers to market volatility and are generally the
most effective if you don’t want an active strategy to fully
replace your buy-and-hold objective.

CHICAGO, June 25 (Reuters) – If there was such a thing
as a global financial uncertainty index, it would be soaring to
a stratospheric level.

The euro zone crisis still festers, 15 major banks were
recently downgraded by Moody’s and the U.S. faces a boatload of
political risk through its year-end of fiscal cliff tax
increases.

Markets are being roiled by volatility, and so bonds have
become like caves – refuges from widespread fear.

Welcome to the golden – or rather leaden – age of
uncertainty.

“It’s a groundhog day effect – it’s as if the news is
replaying and the European Union goes around in a tortuous
circle,” says Jeremy Grantham, chairman of GMO LLC, speaking at
the Morningstar Investment Conference in Chicago on June 22.

The positive news that’s often being obscured by darker
headlines is that earnings for large U.S. companies are fairly
robust, although Grantham, whose firm manages more than $105
billion and is known for being a top value investor, sees them
as “abnormally high” and U.S. stock valuations as “not cheap”.

While Grantham may not be optimistic about short-term market
conditions, he’s long advocated high-quality stocks and a focus
on long-term resource shortage issues. Even in a skittish time,
for the largest corporations, profits usually translate into
steady dividend payments. His firm’s GMO Quality III fund
, for example, invests in mostly giant companies like
Microsoft Corp, Johnson & Johnson and Apple Inc
. The fund’s dividend yield is 2.7 percent.

Like many market observers, Grantham sees slow-to-moderate
economic growth over the next seven years. He forecasts that
U.S. “high-quality” stocks will grow about 5 percent over the
next years, overshadowed by emerging markets at nearly 7 percent
and international large companies at 6 percent.

Running a parallel path with his outlook for stocks is a
growing reality that natural resources aren’t keeping pace with
the population growth of the 7 billion souls already on the
planet. That forces a long-term focus on resource allocation and
commodities. To feed everyone, more land, fertilizer and
agricultural productivity is needed.

Grantham has created a chart of a commodity index that
starts in 1900 and shows that there have been “rolling crises of
availability” only broken by a “great paradigm shift” in recent
years in which demand has soared.

“Never has there been such a crushing of an asset class
(commodities) and a rebound to an all-time high,” he added at
the conference.

How will the world produce more natural fertilizers and
arable land when the supply is finite and food production may be
hitting an “agricultural glass ceiling?” That answer isn’t
known, but in the interim, Grantham suggested “thinking
favorably about farms, resources, fertilizer and timber.”

OPPORTUNITIES

In this bleak scenario, what should a long-term investor
keep in mind? That the euro crisis and U.S. political logjams
will eventually pass, although not without a heavy dose of sturm
und drang or “storm and stress”.

There will be opportunities to buy stocks that have what
analysts call wide “moats,” that is, they can generate cash and
dividends in even the most trying global situations. Grantham’s
Quality fund, for example, is heavily weighted in consumer
defensive and healthcare stocks.

A more long-term approach is to buy funds that track an
index of commodities such as the PowerShares DB Agriculture
exchange-traded fund that holds futures contracts in
everything from coffee to wheat.

If you want even more specialization in this sector,
consider the Global X Fertilizers/Potash ETF, which
concentrates on fertilizer companies; or the Market Vectors
Agribusiness ETF, which has a broader mix of companies
in this sector.

Other considerations include ETFs like the Consumer Staples
Select SPDR fund, Vanguard Consumer Staples ETF
or the iShares Consumer Staples Index fund.

Aside from tweaking your holdings, there’s always an
opportunity in the age of uncertainty to lower portfolio risk.
Make sure you adjust your allocations to the human capital
opportunity you have. Are you nearing retirement and heading
into a fixed-income lifestyle? Then your main concern should be
cash flow, limiting your expenses and hedging against inflation
with inflation-protected securities and annuities.

If you’re younger, evaluating your human capital risk also
involves an honest view of how your income will be impacted in
coming years. Are you in an industry or profession that’s prone
to downsizing or outsourcing? In recent years, even once-secure
government jobs have been disappearing.

Ultimately, it’s your ability to generate a sustainable
income and save it that will be the most demanding test in these
anxious times. Remember the best forecast has nothing to do with
stocks or bonds; it’s the one that most accurately predicts your
ability to weather the many storms ahead.

CHICAGO (Reuters) – The one thing the Supreme Court will have no impact on as it decides the constitutionality of the Affordable Care Act is the immutable trend in U.S. healthcare: the growing cost of caring for an aging population.

A handful of industries will remain profitable despite the thorny politics of healthcare policy, and the best way to view this volatile situation through the lens of stocks is in the long term.

The annual growth rate in healthcare spending is expected to remain around 4 percent from now until 2014, then ratchet up to 6 percent, according to recent forecasts by the Centers for Medicare and Medicaid Services. In comparison, general consumer prices are rising just under 2 percent on an annualized basis.

Other than burgeoning costs, there’s demographics. Some 10,000 baby boomers are turning 65 every day – a trend that will continue until 2030, when boomers will comprise almost one of every five Americans, according to the Pew Research Center. Naturally, their healthcare needs will be increasingly costly and complex. They will still demand specialized care for chronic conditions, pharmaceuticals and acute care.

With those likely developments in mind, here are two sectors I think will prosper.

PHARMACEUTICALS

It’s an undeniable trend that pharmaceuticals will continue to be utilized as a way to lower overall healthcare costs. From 1999 to 2009 alone, according to the Kaiser Family Foundation, prescription sales rose 39 percent, compared to general population growth of 9 percent.

Only a large-scale government purchasing plan will pare profits in this sector – a good idea for lowering costs, but unlikely politically, at least in the next year or so. Yet as pharmaceuticals and biotech drugs assume an even greater role in managing chronic conditions and preventing surgery, look for growth in this industry.

For a focus on pharmaceuticals, consider the SPDR S&P Pharmaceuticals fund, which holds large manufacturers like Eli Lilly & Co, Pfizer Inc and Abbott Laboratories Inc and lesser-known biotech firms. A more international portfolio can be found in the iShares S&P Global Healthcare Sector fund.

MEDICAID AND MEDICARE MANAGED CARE PROVIDERS

Once the pariah of health consumers, managed care has quietly been assuming a growing role in reducing healthcare costs in public programs. Cash-strapped Medicaid programs, which cater to the poor, have been accelerating the push to get more patients into these plans and out of costly fee-for-service. At present, there are more than 26 million Americans in Medicaid managed care programs, according to the Kaiser Family Foundation.

The only wild card preventing growth in this sector is whether Congress will restrict or reduce funding for Medicaid, although managed care is seen as a viable way of managing or reducing costs.

If you just want to focus on healthcare providers, then an ETF like the iShares Dow Jones US Healthcare Provider fund is a diverse mix of companies such as UnitedHealth Group, the largest U.S. insurer; Quest Diagnostics, a testing company; and Medco Health Solutions, a pharmacy benefit manager.

Medicare managed care coverage also continues to grow robustly, with 8.4 million enrollees in Medicare Advantage as of April 2011. That’s up 6 percent from the previous year, according to the Government Accountability Office. All told, there are more than 12 million beneficiaries in related Medicare managed care programs. Since the program is in fiscal trouble without tax increases or benefit cuts, policymakers may favor moving more patients into managed care.

Although I try to take a global view that discounts short-term market movements, there’s still a high dose of uncertainty in my overview.

Congress still needs to work on Medicare reform and find sustainable ways of funding Medicaid programs. The biggest unknown remains political risk and the composition and direction of Congress in 2013. Will it move to contract public programs and shift even more patients into managed care? Or will it shift in the opposite direction to lower costs even more with a single-payer model – probably the least likely scenario. The answer will shape the future of entire industries, so keep monitoring this fickle patient.

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and John Wallace)

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

CHICAGO, June 22 (Reuters) – The one thing the Supreme Court
will have no impact on as it decides the constitutionality of
the Affordable Care Act is the immutable trend in U.S.
healthcare: the growing cost of caring for an aging population.

A handful of industries will remain profitable despite the
thorny politics of healthcare policy, and the best way to view
this volatile situation through the lens of stocks is in the
long term.

The annual growth rate in healthcare spending is expected to
remain around 4 percent from now until 2014, then ratchet up to
6 percent, according to recent forecasts by the Centers for
Medicare and Medicaid Services. In comparison, general consumer
prices are rising just under 2 percent on an annualized basis.

Other than burgeoning costs, there’s demographics. Some
10,000 baby boomers are turning 65 every day – a trend that will
continue until 2030, when boomers will comprise almost one of
every five Americans, according to the Pew Research Center.
Naturally, their healthcare needs will be increasingly costly
and complex. They will still demand specialized care for chronic
conditions, pharmaceuticals and acute care.

With those likely developments in mind, here are two sectors
I think will prosper.

PHARMACEUTICALS

It’s an undeniable trend that pharmaceuticals will continue
to be utilized as a way to lower overall healthcare costs. From
1999 to 2009 alone, according to the Kaiser Family Foundation,
prescription sales rose 39 percent, compared to general
population growth of 9 percent.

Only a large-scale government purchasing plan will pare
profits in this sector – a good idea for lowering costs, but
unlikely politically, at least in the next year or so. Yet as
pharmaceuticals and biotech drugs assume an even greater role in
managing chronic conditions and preventing surgery, look for
growth in this industry.

For a focus on pharmaceuticals, consider the SPDR S&P
Pharmaceuticals fund, which holds large manufacturers
like Eli Lilly & Co, Pfizer Inc and Abbott
Laboratories Inc and lesser-known biotech firms. A more
international portfolio can be found in the iShares S&P Global
Healthcare Sector fund.

MEDICAID AND MEDICARE MANAGED CARE PROVIDERS

Once the pariah of health consumers, managed care has
quietly been assuming a growing role in reducing healthcare
costs in public programs. Cash-strapped Medicaid programs, which
cater to the poor, have been accelerating the push to get more
patients into these plans and out of costly fee-for-service. At
present, there are more than 26 million Americans in Medicaid
managed care programs, according to the Kaiser Family
Foundation.

The only wild card preventing growth in this sector is
whether Congress will restrict or reduce funding for Medicaid,
although managed care is seen as a viable way of managing or
reducing costs.

If you just want to focus on healthcare providers, then an
ETF like the iShares Dow Jones US Healthcare Provider fund
is a diverse mix of companies such as UnitedHealth Group
, the largest U.S. insurer; Quest Diagnostics, a
testing company; and Medco Health Solutions, a pharmacy
benefit manager.

Medicare managed care coverage also continues to grow
robustly, with 8.4 million enrollees in Medicare Advantage as of
April 2011. That’s up 6 percent from the previous year,
according to the Government Accountability Office. All told,
there are more than 12 million beneficiaries in related Medicare
managed care programs. Since the program is in fiscal trouble
without tax increases or benefit cuts, policymakers may favor
moving more patients into managed care.

Although I try to take a global view that discounts
short-term market movements, there’s still a high dose of
uncertainty in my overview.

Congress still needs to work on Medicare reform and find
sustainable ways of funding Medicaid programs. The biggest
unknown remains political risk and the composition and direction
of Congress in 2013. Will it move to contract public programs
and shift even more patients into managed care? Or will it shift
in the opposite direction to lower costs even more with a
single-payer model – probably the least likely scenario. The
answer will shape the future of entire industries, so keep
monitoring this fickle patient.

CHICAGO, June 18 (Reuters) – Developing a currency strategy
for your portfolio is like playing a chess game in which the
pieces are the futures of entire countries. Will Greece be able
to form a government and get its act together to keep the euro?
What about Spain and Italy? With the embattled euro and dollar
under a perennial cloud, does it make sense to have currency
strategy for your portfolio at all?

If you’re heavily invested in the securities of one
denomination, adopting a currency hedge may make some sense,
although the direction of currencies is notoriously difficult to
predict. All denominations are subject to political risk, the
economic health of the countries backing it, inflation and
interest rates. And currencies don’t pay a quarterly dividend
like a stock can or have a fixed coupon like a bond. Their
values are determined relative to other currencies and vary
depending upon a number of economic measures. It’s a complex and
volatile brew.

Then, there’s always a concern about currency debasement, or
the fear that countries are printing too much money, which in
turn stokes inflation. While that’s not an immediate concern in
the U.S. or Europe now, it could be if those economies heat up
again. And it could be that conventional wisdom about a
currency’s decline will be wrong long term.

“I see a happy outcome for the euro,” says James Rickards, a
senior managing director with Tangent Capital in New York and
author of “Currency Wars.” “The Greeks want the euro. It will
come in for a soft landing.”

There are a number of ways to invest in currency movements,
although it’s unlikely that you can beat large institutions or
sophisticated trading programs in this $4 trillion daily market.
While it’s highly risky, there are some indirect ways of
benefiting from currency gains. The best way to adopt a currency
strategy depends upon how much risk you want to take and what
you need to accomplish. Here are four approaches:

1. Go long on a single currency.

This is where you wager that one currency will do better
than another. You’re subject to timing and selection risk and
past performance means very little and has no predictive value.
What currencies do you pick?

Let’s say you liked the Australian dollar – there’s a lot to
like about the Aussie buck since the country is rich in natural
resources relative to its population and has a thriving export
economy. You could invest in the CurrencyShares Australian
Dollar Trust ETF, which is up 12 percent for three years
through June 15. But its annualized standard deviation – a
measure of volatility – is 16.5. In comparison, a broad-based
U.S. bond fund like the iShares Barclays Aggregate Bond fund
has an annualized standard deviation of 2.7 with a
three-year return of 7.3 percent. Unless you want to concentrate
risk in a single currency, if you want less volatility with your
income, a plain-vanilla bond fund might be better.

2. Hedge or short.

If you have a large percentage of your holdings in a single
currency, you can buy an ETF to blunt that risk. Are you
extremely pessimistic about the euro? The ProShares Ultrashort
Euro provides a return two times the negative
performance of the daily currency movement. That means this
inverse fund will gain twice as much in value if the currency
declines against the dollar. This is the riskiest strategy. You
could lose all of your principal if you don’t know what you’re
doing.

3. Have currency baskets.

This is essentially a hedge against a single currency, using
several currencies to offset the overall risk. The Merk Hard
Currency fund, for example, invests is several
denominations to protect against the depreciation of the U.S.
dollar. You spread out your risk a little more than the
single-currency plays, but you’re still only investing in a
handful of major currencies.

4. Invest in non-U.S. stock and bond funds.

Unless your portfolio manager hedges for currency
fluctuations, when you invest in the securities or bonds of
other countries, your portfolio will be subject to currency
gains and losses. For most mainstream investors, global stock
and bond funds are probably the best approach since they offer
diversified portfolios that offer some income in the form of
dividends or yield. You also have the potential for capital
appreciation. Besides, you need to diversify out of your
home-country securities to reduce country risk. Two worthy
candidates include the PowerShares Emerging Markets Sovereign
Debt Portfolio and the Vanguard Total World Stock ETF
.

If you decide to invest in currency ETFs, keep in mind that
they are not only highly volatile, but more expensive relative
to diversified bond or stock funds. While you may think that
you’re investing in the next safe-haven currency, you may be
losing money along the way timing your decision and paying for
transactions and management expenses.

CHICAGO, June 15 (Reuters) – These days, lenders are
incredibly picky when it comes to customers. When I looked into
refinancing a few months ago, a mortgage broker asked for two
years of tax filings, and wanted my accountant to certify them.
Since the savings on a new loan would’ve been minor, I passed.

That’s not the advice you hear most, though, when it comes
to refinancing in today’s rate market. With 30-year loan rates
still under 4 percent, if you know you’re going to stay in your
home for a while – or need to cut payments on other properties
you own – don’t wait.

Unless the U.S. economy goes on life support again, it’s
hard to believe that rates will go any lower – in the June 14
Freddie Mac mortgage survey rates were 3.71 percent for 30-year
loans and 2.98 percent for 15-year notes. Until this week, those
averages showed a quiet six-week streak of record-low rates.

To put those rock-bottom rates in perspective, last year at
this time, 30-year loans averaged 4.5 percent. During the
meltdown year of 2008, they were 6.3 percent. In June of 2002,
they were 6.6 percent; 8.5 percent in 1992; 16.7 percent in
1982; and 7.4 percent in 1972. So there’s little argument that
we’re still experiencing the lowest mortgage rates in two
generations.

Yet it’s not always a good time to refinance. Here are some
key considerations:

1. What if your decision to refinance extends beyond
lowering the annual percentage rate and monthly payments?

Maybe your focus is still on equity appreciation down the
road. In one sense, refinancing affirms that you believe that
your home is still a worthy investment. That may not be the case
if the housing market takes a decade or more to heal or the U.S.
economy and job market in general are headed for meager growth
in the years ahead.

Recent history is not encouraging. When it comes to the
investment of homeownership, Americans got walloped between 2007
to 2010 as the housing market melted down. According to the
Federal Reserve, the median family’s net worth declined about 40
percent during that period, mostly due to home-equity
depreciation. That was the biggest free fall in net worth since
1989. How is your local market doing? Bouncing back or still
being hit by foreclosures, which depress prices?

2. Do you want to get into more debt?

By itself, refinancing typically involves closing costs that
are from 2 percent to 4 percent of the loan value. Many
homeowners don’t pay those costs upfront and add them to the
loan balance. Lower monthly payments aside, why add to your
mortgage debt if you’ve lost equity? Keep in mind that as you’re
refinancing, you won’t be able to write down the lost principal
- unless you’re on the brink of foreclosure and qualify for a
special government program such as HAMP or your bank approves
it.

3. Do you need to cut your losses?

Nearly every market poses a different argument for
refinancing. Again, if you think of your home as an investment,
you may not see any equity appreciation for years, although
prices may be on the rebound in the markets worst hit when the
bubble popped. According to a Realtor.com May survey, median
list prices have recovered 14 percent year-over-year in places
like West Palm Beach and up to 33 percent in Phoenix. Even Miami
is up 15 percent.

Other places are not so fortunate. Areas in Eastern
Pennsylvania such as Reading and Allentown are down 5 percent
during the same period. Chicago’s prices dropped nearly 2.5
percent. And Stockton, California, after suffering dramatic
price declines after the bubble burst, is still down more than 5
percent. Is the money you spend on refinancing costs sending
good money after bad?

4. Are you realistic about your ability to qualify for a
refi?

In the worst markets, refinancing may not even be possible
if your equity loss is too great or you’re underwater, that is,
your mortgage balance exceeds the market value of your home.
Most lenders won’t even take your application if this is the
case.

Those with less-than-stellar FICO credit scores or spotty
income won’t be offered the lowest rates. And you may even have
to pay points – a percentage of the loan value – to “buy down”
the rate even more. The low Freddie Mac rates quoted above, for
example, assume payment of 0.7 of a point. Clean up your credit
record if you can before you apply to boost your FICO score.

5. Will you even get a rate that’s worthwhile?

You won’t get the best rate if you fall into a number of
borrower categories. You have to watch out for surcharges in
loan rates called “loan level price adjustments.” For example,
say your FICO score is under 620 and you only have a five to
10-percent equity stake.

Loans underwritten by Fannie Mae, for example, will impose
an “adverse delivery charge” of 3.25 percentage points. You also
may be penalized for cash-outs, adjustable-rate loans,
manufactured homes, condos and investment or multi-unit
properties. So unless your credit score is above 700, your
income steady and you’re not buying properties subject to
surcharges, those bargain rates may be an illusion.