John Wasik

By John Wasik

(Reuters) – Is it time for investors to bail big time on what Donald Rumsfeld called “Old Europe?”

With the right combination of funds, it’s possible to build a portfolio that sidesteps most of Western Europe. In the process, you’ll gain valuable pieces of the emerging stock and bond markets and small companies in the U.S.

Given the steady stream of bad news, it doesn’t look like there will be major relief any time soon from the debt migraines from Greece, Italy, Spain and Portugal. The contagion now has spread to push borrowing costs higher for France and Spain (see link.reuters.com/jas25s for the latest news).

To sidestep the problems, or diversify your portfolio away from the chaos, you can build an “Anything But Europe” investment strategy. Here are some suggestions for that approach:

– THINK EMERGING MARKETS

Developing countries that fit into this definition have tangential connections to Europe and are still growing. They should be a staple of your portfolio anyway because of the global opportunities they present. A good all-around vehicle is the iShares MSCI Emerging Markets ETF. Although it concentrates more than half of its portfolio in just four countries — China, Brazil, South Korea and Taiwan — it’s a good way to sample developing countries.

– THE BRIC STRATEGY

Investing in just Brazil, Russia, India and China has always seemed like more of a gimmick to me than a widespread attempt to diversify in a greater array of emerging markets. Yet, if you want to make a focused bet on these goliaths, this is the way to go. The iShares MSCI BRIC Index Fund is one approach, although it invests about two-thirds of its holdings in China and Brazil. China and Brazil, both targeted to grow in coming years, have a symbiotic relationship. Both will do well under a steady-growth scenario. China needs Brazil’s agriculture output and other resources for its increasing population. The South American country is relying upon China as a key export market for commodities such as soybeans.

–EMERGING MARKETS DEBT

Since the European bond market is mostly in turmoil over sovereign debt, you can avoid most of the fray by investing in emerging-market bonds. The PowerShares Emerging Markets Sovereign Debt Portfolio invests in bonds from countries like Indonesia, Colombia, Qatar and Turkey.

– U.S. SMALL COMPANIES

While they are especially sensitive to economic conditions, small-cap companies may be good holdings to have long term since bigger, multinational companies tend to have larger European exposure. A broad-basket index fund such as the Vanguard Small-Cap ETF is worth considering.

I make no claim as to how any of these funds will perform if the European contagion triggers a global recession; few countries are immune to downturns outside of their borders. No matter where they are based, companies are still dependent upon growing earnings and the economies of the countries in which they operate. Bonds are still sensitive to interest rates, which, if they rise, will depress prices. And smaller countries tend to have more volatile stock and bond markets.

Many of the funds I’ve recommended have declined in value this year, so I’m definitely thinking long-term and only recommend them for investors with a horizon of several decades. None of my picks are free from risk and will be volatile as the Europeans — and Americans — sort out their debt dilemmas.

It’s not that I don’t believe Europe will figure out how to avoid a U.S.-style meltdown like in 2008. They may bring back ancient currencies like the drachma or lira. Or, France and Germany may just lead the way to craft a reformed euro zone. And the European Central Bank might play a larger role.

There’s no harm in being cautious, though. A debacle is still possible. If you’re pessimistic and regard the euro zone as a dangerous play, you should stay away from the major players. Long-term, I think Europeans will sort things out. Collectively they still comprise the largest single developed market in the world. If you include the former Eastern bloc countries and Russia, you have a colossus that can’t be ignored.

—

The author is a Reuters columnist. The opinions expressed are his own.

(Editing by Jilian Mincer and Beth Gladstone)

Nov 18 (Reuters) – Attention nervous municipal bond
investors: You’ll be pleased to know that most U.S. issuers are
not like Harrisburg, Pennsylvania or Jefferson County, Alabama.
Nor are they in the same tailspin as Greece, Italy or Spain.

And there’s little chance that the latest Italian crisis
will have any impact on the highest-rated U.S. muni bonds. That
doesn’t mean you shouldn’t be careful. You still need to do
some due diligence before plunging into these tax-free bonds
and related funds.

Unlike Europe, U.S. states and municipalities appear to be
on the slow road to recovery. According to the National Council
of State Legislatures, “state lawmakers have faced and
largely addressed budget gaps totaling $510.5 billion. And
though additional budget gaps loom, the magnitude and number of
states projecting them has fallen considerably.”

A recent report by the Kroll Bond Rating Agency is also
optimistic. The agency doesn’t expect a “sharp increase in
defaults over the foreseeable future.”

Of course, there are still fiscal basket cases like
Illinois and California, and some municipalities stung by the
housing bust may still file for bankruptcy in the months ahead.
But they are mostly outliers. The default rate for highly-rated
munis is still extremely low.

How do you stay away from trouble? Here are some
guidelines:

–Avoid special-purpose bonds for private facilities. These
include issues for stadiums and hospitals. Also steer clear of
nonrated bonds for real estate developments, known in the trade
as “dirt” bonds. They are among the riskiest.

–Avoid badly managed agencies that got into debt troubles.
The bankruptcies in Harrisburg and Alabama were easy to spot a
long time before they happened and are aberrations, says Stan
Richelson, a financial planner with Scarsdale Investment Group
in Blue Bell, Pennsylvania. “They were caused by major fraud,
political inaction and stupidity which was obvious to all who
cared to look,” he says.

–Look at how the bond is backed. General obligation bonds
are supported by the full faith and credit of a government
agency while revenue bonds are tied into an income stream such
as user fees or lease payments. If a revenue bond issuer
defaults — such as private institution going bankrupt — a
local government may be under no obligation to make investors
whole. Always look at the fiscal condition of the issuer.

–Credit ratings are still meaningful. Despite the scandal
involving mortgage-backed bonds during the housing boom, most
professional investors still take bond ratings seriously. The
highest-rated bonds are either AAA or Aaa. When you get into
the “Bs,” you’re into speculative territory. The lower the
letter grade, the higher the default risk

OTHER CAUTIONS

If you are buying individual bonds, make sure you are
diversified across areas and agencies. Certified financial
planners and registered investment advisers could help you
avoid potential trouble spots.

You can also check background information and bond ratings
on individual issues from Standard & Poor’s and Fitch Ratings
at the EMMA site () starting Nov. 21.

Keep an eye on your tax situation as well. Consult your tax
planner to see if the bonds you are buying pose any alternative
minimum tax liability. It’s possible to buy bonds and bond
funds that sidestep this problem.

Just want to grab some tax-free income and don’t want to
deal with an adviser or broker? Then consider the TIAA-CREF
Tax-Exempt Bond Fund . If you’re looking to boost your
yield — and can take on more risk — look at the T Rowe Price
Tax-Free High-Yield fund .

Generally, any bond fund with “high yield” in its title
implies a greater chance of default risk, although mutual fund
managers constantly monitor their holdings.

Keep in mind that all bonds, in addition to default risk,
are subject to interest-rate risk. When rates climb, most bond
prices fall as investors dump lower-yield bonds in favor of
higher coupons.

While you can easily keep away from the issuers most likely
to default, it will take more focused management to diversify
and avoid losses when rates head north again.

—

The author is a Reuters columnist. The opinions expressed
are his own.

By John Wasik

(Reuters) – Watching the U.S. home market struggle to rebound is like listening to children in the back of a car. No, we’re not there yet.

The National Association of Realtors reported that ten real estate markets are “leading the nation toward a general recovery and stability of the housing sector,” but myriad problems are going to weigh down the housing market for months to come.

The lingering malaise in the economy has triggered a new wave of defaults and foreclosures. After five straight quarterly drops, foreclosures nationwide shot up 14 percent from the second to third quarter this year, according to data released by Realtytrac, the foreclosure information service (see link.reuters.com/kaw94s), in October.

While RealtyTrac doesn’t foresee that the latest foreclosure wave will equal the severity of the 2007-2010 pattern — in which three million borrowers lost their homes — it’s going to slam on the brakes where areas are getting hit the hardest.

In theory, it should be a good time to buy a home. In the worst-hit areas, properties have lost more than half their value.

Yet as the average 30-year mortgage rate has slipped below 4 percent, the combination of employment insecurity and unusually tight standards for lending are discouraging buyers en masse. Lenders are asking for extensive income verification and tax returns. One lender I contacted for refinancing even wanted me to get an accountant to certify that I wasn’t lying to the IRS.

Here are some of the biggest roadblocks:

–Even in bruised cities where price appreciation is evident, unemployment is still too high. Six out of 10 of the “top turnaround towns” listed by Realtor.com (see link.reuters.com/maw94s) for the third quarter had jobless rates above 10 percent. People can’t buy homes if they’re not working or soon to lose their jobs. Those cities, which include four of the largest cities in Florida, still have a long way to go to recover from the housing bust.

–Although at a record low, the home mortgage rate may still be high relative to home prices. This may sound counterintuitive, but research from the Leuthold Group in their November newsletter shows that a “real” mortgage rate — which factors in the falling market value of the home prices — is 8 percent. Leuthold says that real cost of buying must include the 4 percent interest rate and the 3.9 percent average home prices decline over the past 12 months. That cost is still scaring away buyers.

–The combination of unemployment, high housing inventory and foreclosures is hurting places where there wasn’t an excessive price run-up. Realtor.com found that the largest year-over year median listing price decreases through October were in cities like Chicago, Detroit and Atlanta. This three-punch combination will continue to ravage markets where there’s a sluggish economy

Possible solutions to the housing blockage range from the radical to the necessary. A group called Remortgage America (www.remortgageamerica.com/) is calling for the government to loan Americans mortgages at 1 percent to finance a new or existing residence.

Others would like to see Fannie Mae and Freddie Mac take the foreclosed homes they own and either auction them off or offer them in a huge fire sale.

The seized mortgage agencies account for up to one-third of foreclosed homes — about 250,000. American taxpayers are pouring tens of billions into propping up these two wards of the state, which were taken over by the U.S. Treasury in late 2008. The Obama Administration has yet to announce what it wants to do with the companies. Will they be restructured, liquidated or privatized?

A third option, which may have the least impact on a battered market, is to offer foreclosed homes in rent-to-own deals. Prospective homeowners get a place to live under reasonable leases and can build equity toward a purchase.

It’s estimated that some 3.4 million foreclosed homes will be on the books of banks and mortgage companies by the end of this year. As regulators, banks, mortgage companies and state attorneys general move sheepishly to unblock mortgage modifications, refinancings and resales, only one certainty prevails: The open market will not be able to properly price every property until all government restrictions are lifted on their sales and re-financing.

–

The author is a Reuters columnist. The opinions expressed are his own.

(Editing by Lauren Young and Beth Gladstone)

Nov 15 (Reuters) – Where there’s muck, there’s money, the
old expression goes.

With 7 billion people now needing food on this planet,
putting your money into soil and agriculture might be a
long-term investment to consider. You’d certainly be in good
company: In recent years, high-profile investors such as Jim
Rogers and George Soros have made investments in farmland (see).

What makes farm property attractive? It has a finite supply
and may become even scarcer with global warming,
desertification and development. And with a rising population,
more tillable land will be needed.

Moreover, it could be a way to diversify your portfolio
away from financial markets wracked by global debt fears. Gold
has been one alternative, but farmland could be a better
long-term bet. Unlike precious metals, you can rent it out and
use it to grow crops or feed livestock.

Although depressed somewhat by the economy’s recent
weakness, U.S. agricultural real estate prices have climbed 40
percent since 2004, according to the U.S. Department of
Agriculture (see).

Recent spikes in commodity prices have given a new lift to
farm prices. Interest rates have also been relatively low,
which tends to boost most commodity prices. And when there are
weather-linked problems in major agricultural zones such as the
American Midwest or Russia’s grain belt, supply-related price
increases often follow.

Buying individual parcels of prime agricultural land is
difficult for most people. You have to know how productive that
land has been, the cost per acre and the equivalent cost to
rent it out. History offers a plethora of boom and bust cycles,
and land owners need to be long-term investors to hang on
through the dips.

For most investors, funds that invest in agricultural
commodities and the farm business funds are a good way to get
limited exposure and liquid enough to sell easily. They do not
give a perfect correlation to land prices, but they do tend to
shadow farmland prices. These exchange-traded funds (ETFs) can
help you make targeted investments in agriculture and related
industries, and with a relatively small investment.

The funds do not invest directly in farmland, but they
offer a way to put some agri-dollars into a diversified
portfolios. Here are a few:

– Market Vectors Agribusiness ETF . This
exchange-traded fund invests in a basket of companies that
derive at least 50 percent of their business from agriculture.

– PowerShares DB Agriculture ETF . By investing in
an index that reflects the performance of agricultural
commodities — and futures contracts that represent them — you
can diversify your portfolio with this fund. The farm economy,
of course, directly tracks the prices of key commodities.

– Global X Farming ETF .This fund follows the
price and yield of a farming index. It is based on performance
of a diverse list of global companies in farming and farm
products.

There’s always a solid reason to be cautious with these
sector-oriented ETFs. They are subject to stock, interest-rate,
commodity, country and now climate-change risk. If interest
rates rise, commodities can move in the opposite direction.
Land prices can easily crash without any warning and sometimes
for reasons related more to finance and cash availability than
crop prices.

You also need to be aware that the more investors who buy
into agriculture, the greater likelihood that a price bubble
will form. Midwestern cropland values soared some 20 percent in
the fourth quarter of 2010 alone, reports the Kansas City
Federal Reserve Bank (see). Lofty returns
tend to attract more investors hoping to reap similar
performance. In a short period of time, these badly kept
secrets feed speculative buying.

Even though farmland is becoming more valuable, you
shouldn’t confuse investing in it with owning a government
bond. The only thing guaranteed in agriculture is uncertainty
and volatility.

—

The author is a Reuters contributor. The opinions expressed
are his own.

Nov 11 (Reuters) – The financial troubles of Europe and the
U.S. have become fiscal soap operas on a grand scale. If you’re
an individual investor, where can you escape the endlessly
singing fat lady?

There are just a handful of countries that are reasonably
solid long-term investments. They are not without risk, yet
their leaders have managed their economies better than most
industrialized nations and they are thriving. The healthiest
economies also managed to invest in their countries while
avoiding the banking cyclones that are ravaging the U.S. and
Europe.

Here are four places with a positive story: gross domestic
product growth (GDP), top sovereign debt ratings, low or no
budget deficits (relative to larger industrialized nations) and
healthy domestic investment.

SINGAPORE

Anchored at the crossroads of Asia, this island nation is
hardly blessed with abundant natural resources. It’s dependent
upon its neighbors for nearly everything — except human
capital. In this regard, it’s leveraged its resources well.
It’s picked its niches carefully, excelling in financial
services, pharmaceuticals and information technology.

As a result, its economy grew almost 15 percent last year.
The government has embarked on a long-term program to turn the
country into Southeast Asia’s major trading and technology
nexus. As one of the wealthiest nations in Asia, it has a low
jobless rate and small budget surplus; its per-capita GDP ranks
it among the highest in the developed world. You can invest in
a basket of Singapore stocks through the iShares MSCI
SingaporeIndex ETF .

AUSTRALIA

The smallest continent is home to some of the world’s
largest mining operations and has plenty of customers from
China and India. Its economy enjoys about 3-percent annual
growth, it has a trade surplus, and a small budget deficit that
may vanish in four years. The country only suffered one quarter
of negative economic growth after the 2008 meltdown.

Prior to that, the Aussies experienced 17 straight years of
expansion. It’s negotiating free-trade deals with China, Japan
and Korea and has everything from coal to uranium to sell to
Asian markets. One of the best ways to sample Australian stocks
is through the iShares MSCI Australia Index ETF . Like
most ETFs, it reflects the lion’s share of public companies in
the country.

CANADA

Canada not only largely avoided the 2008 meltdown, it’s
benefiting from being the largest U.S. energy trading partner.
Thanks to conservative bank-lending practices, Canada’s banks
emerged stronger than other North American megabanks after the
crisis. A major exporter of oil, gas and uranium, the country
is seeking to build a pipeline to route even more oil from its
Western fields — the controversial Keystone XL project.

Canada will continue to benefit from the voracious appetite
in the developing world for commodities. Since its entire labor
force is only 18 million — there are more people living in the
Northeastern U.S. — Canada has plenty of resources to spare.
Consider the iShares MSCI Canada ETF as a way to invest
in the country’s largest companies.

NORWAY

This Scandinavian nation isn’t on most investors’ radar
screens, even though it has plenty of hydropower, oil and a
small population to support. While its GDP growth is minuscule,
it has low unemployment and a budget surplus.

As the world’s second-largest natural gas exporter, the
country shares the wealth with its people through various
social safety-net programs, and saves for the future with a
half-trillion-dollar sovereign wealth fund, which ranks among
the largest in the world. Norwegians are among the most
prosperous people on earth. You can invest through the Global X
FTSE Norway 30 Index ETF .

If you bundle up your savings and invest in all of these
ETFs, you’d be still subject to global market risk. If the
European debt contagion somehow infects North American or Asian
economies, then that could trigger downturns in emerging
markets.

For big commodity and energy producers, contagion could be
toxic — even my favored countries are certainly not completely
immune. So think long-term and keep on diversifying risk away
from countries with the worst balance sheets. Walk away from
the noise to countries with poise.

Nov 8 (Reuters) – Not all target date funds are created
equal.

While these prepackaged, risk-reducing portfolios make a
lot of sense for retirement saving, you don’t know if the funds
within them are good choices unless you open them up and peel
them apart.

The lowest-cost among them contain index funds that track
baskets of securities. While neither a perfect nor risk-free
solution, these funds offer an efficient way to invest in the
entire stock or bond market without engaging costly active
management.

The products are designed to ratchet down stock exposure –
and then hold more bonds — the closer you get to a planned
retirement age or “target date.”

Generally, all-index funds are the best place to start when
considering target date portfolios because of their lower cost
and better diversification. There are only seven fund groups
that offer an all-index line-up within their target date
offerings, according to Brightscope.com President Ryan Alfred,
whose firm tracks and rates 401(k) plans. Here they are:

* Fidelity Freedom Index group, which has funds like the
Fidelity Freedom Index 2010 W Fund

* ING Index Solution Portfolios, with funds like the ING
Index Solution 2015 Portfolio ADV

* iShares S&P Target Date, with funds like iShares S&P
Target Date Retirement Income Index

* JHFunds2 Retirement Portfolio, with funds like JHFunds2
Retirement 2015 Portfolio 1

* Nationwide Destination, with funds like the Nationwide
Destination 2015 Fund

* TIAA-CREF Lifecycle Index, with funds like the TIAA-CREF
Lifecycle Index 2010

* Vanguard Target Retirement, with funds like the Vanguard
Target Retirement Income Fund

If cost was all there was to be concerned about, this list
could serve as a benchmark for all target date products and we
could stop here.

Yet the whole is greater than the parts when evaluating
lifestyle funds. To further sort them out, you need to
calculate the costs, see how they perform against peers and
market averages and assess their “glidepath,” which is the
gradual reduction of stocks and an increase to income
investments as you get closer to your target date. And after
you do all that, only one all-index portfolio gets an overall
grade of “A” from Brightscope. The winner: Vanguard.

Of the others, they fell short in some of the rated
categories, especially lowest costs, risks and most prudent
strategies. The JHFunds2 group, for example, only rated a “C”
(“A” being the highest) in Brightscope’s company evaluation.
TIAA-CREF got “Cs” in both strategy and company ratings.
Fidelity got “Ds” in those categories.

What do these letter grades mean? According to the
Brightscope methodology, it has to do with how the fund
managers reduce risk over time. The iShares group, for example,
received a “C” from Brightscope because “the funds extend their
glidepath an unspecified number of years beyond the target date
with 45 percent stock exposure and eventually come down to 33
percent.”

Do you want to have nearly half of your money in stocks
when you hit retirement age? If not, then choose a glidepath
that reduces your stock allocation to less than 40 percent by
your target date and beyond. Keep in mind that since these
products are on autopilot — they reallocate every year
according to built-in formula — you can’t change how they
work.

Also be aware that you’re being charged for the service of
yearly automatic allocation. The iShares products, for example,
are ultra-low cost exchange traded funds (ETFs) that could be
individually bought for about 0.18 percent annually. But an
“overlay fee” common to target date funds boosts the annual
fees to 0.29 percent annually, Brightscope reports (see).

Still, that’s a relative bargain compared to the average
fund expense ratio of 0.75 percent, the company found in
surveying 400 individual target date funds. You could do very
well expense-wise if you stick with an all-ETF portfolio since
the average for stock funds is 0.76 percent and 0.50 percent
for bonds.

Keep in mind that individual fund expenses can vary widely
– from an outrageous 2.3 percent to a rock-bottom 0.16 percent
– according to Lipper, a Thomson Reuters company. To save
money, you can assemble your own target date portfolio using
ETFs.

What if you discover that the target date fund you’ve
already chosen for your 401(k) is overpriced? Lobby your
employer to get a lower-cost vendor. There’s nothing worse than
being locked into an overpriced product that just eats away at
your wealth.

Since there are plenty of alternatives, if you’re not
getting institutional pricing at the lowest-possible rates, ask
why and demand action.

When it comes down to evaluating all of these criteria,
that group of seven gets whittled down to three. So to save
money, you can assemble your own target date portfolio and
allocations, or just stick with the top-rated Vanguard, or
runners up TIAA-CREF or ING offerings.

–The author is a Reuters columnist and author of The
Cul-de-Sac Syndrome. The opinions expressed are his own.

Nov 4 (Reuters) – Buying stocks shouldn’t make sense
now.

Yet despite all of the growling in Europe, there are still
reasons why you should invest in U.S. stocks.

This is a contrarian view, to be sure. The last quarter was
the worst for stocks since 2008, with the S&P 500 index
suffering a 14 percent loss. For those keeping score at home,
that wiped out some $2 trillion in wealth.

Adding salt to that wound is the Federal Reserve’s slashing
of its growth forecast for next year and anemic U.S. job
growth.

So what cave am I living in? Am I optimistic the Greeks
won’t Zorba all over their debt-reduction agreements with the
rest of Europe? Will there be contagion from Italy, Portugal or
Spain? I can’t answer those questions, but I do see attractive
opportunities behind the headlines. Here are five good reasons
to be investing now:

–Hedge funds may belly up to the bar. Like most individual
investors, hedge funds had a dour third quarter, losing an
average 5 percent. While they beat the S&P 500, that’s little
consolation to their investors, who are paying hefty fees for
hedgies to show some positive results. When the going gets
tough, hedge fund managers start buying.

Many of them will go out of business if they don’t produce
decent returns. Watch for them to scoop up underpriced stocks
in beaten-up sectors like financial services. That may trigger
an overall market rally.

–Most U.S. companies are profitable, some are bargains.
During the recession, many companies cut their payrolls to the
bone. Of more than 300 companies that have reported earnings
thus far, some seven out of 10 have beaten profit estimates.
Instead of staffing up, quality companies have invested in more
technology to lower their operating costs. Most multinationals
have pieces of emerging markets, so their sales are
diversified.

“Stocks look unequivocally attractive, particularly versus
bonds — as attractive as they have been since the 1950s,” says
Chris Alderson, leader of T Rowe Price’s international
investing team, in the company’s latest newsletter (see). You don’t have to pick the
stocks yourself, though. The iShares Russell 3000 Value Index exchange-traded fund, is a broad-based index of
bargain-priced companies.

–You can be defensive and profit. Even if the rebound
theory falls flat, you can play it safe. Look at sectors that
will do well long term and won’t be directly bruised by more
global economic perils. For example, this winter people will
still need to heat their homes, so that favors natural-gas and
utilities funds like the FBR Gas Index or the
Fidelity Select Utilities fund.

–Positive economic news may trickle in. No one quite knows
how the economy will move, but employment and manufacturing
have perked up in recent months. If those are reliable leading
economic indicators, you have another catalyst for stocks.

“If the next couple of months are as good, we’ll see much
better GDP figures in 2012,” notes Ingo Winzer, president of
the Local Market Monitor. “After all, without inventory cuts
the economy would have grown at a 3.5 percent rate in the third
quarter. And with the inventory/sales ratio at an historic low,
sales will quickly translate into new orders.”

–U.S. and European leaders might get their act together.
I’m not ready to say that peace, love and understanding has
taken over, but I surmise that the Congressional debt
negotiators will find some middle ground and European
negotiators may advance a major debt restructuring plan at the
G-20 summit. If they do, that’s bullish for stocks.

Since I’m a skeptic at heart, I know that any number of
gremlins can emerge. No matter what happens, forget about
forecasts and mind your own goals and financial needs. You
can’t let the headlines dictate your risk tolerance and cash
flow. Animal spirits, as Keynes characterized the market, are
notoriously unpredictable.

–The author is a Reuters columnist. The opinions expressed
are his own.

Do you have zombie index funds within your portfolio?

Instead of eating up your brains, they devour your nest egg with high expenses and walking dead performance. They may be lurking within your 401(k)-type plan or individual retirement account.

I like index funds because they generally can track nearly any kind of asset class. As such, they are the white bread of investing and should cost about the same from fund to fund. The cheaper the better. Why pay Nieman-Marcus prices for the same thing you can get at Costco or Sam’s Club for less?

You can vanquish these funds without overtly violent acts, but first you have to identify them. Unfortunately, mandated fee disclosure is still pending, so you have to take the initiative.

So how do you identify a zombie fund? First you need a reliable benchmark for comparison purposes. The easiest way is to look at the index that the fund is supposed to be tracking. A good proxy for the U.S. bond market, for example, is the Barclays Capital Aggregate Bond Index. It’s a basket of listed bonds. If a fund tracks the index return within 0.20 percentage points or less, then that’s pretty good and not expensive.

A low-cost bond index fund would look like the Fidelity Spartan Intermediate Term Bond Index investor class fund, with a 0.20 percent expense ratio. You’d need at least $10,000 to get into this fund, though.

You want to pay a manager more to get less return on bonds? The ING US Bond Index portfolio charges a hefty 0.95 percent annually, meaning it will lag the index by nearly a full percentage point every year.

What about garden-variety stock index funds? Suppose you were stuck in a fund like the Principal Large Cap S&P 500 Index fund (C Shares). The managers charge you 1.3 percent annually to hold a basket of the largest U.S. stocks. You could reap huge savings by replacing it with the Fidelity Spartan S&P 500 Index Advantage fund, with an expense ratio of 0.07 percent.

Here’s where “less is more” refers to more than architecture. The Principal fund lagged the S&P index by roughly a percentage point over the past year through Oct. 28.

The Fidelity index fund, in contrast, slightly beat the index over the same period. By lowering your expense ratio, you got back that percentage point you would’ve lost in the more expensive fund.

Over time, the numbers add up. Let’s say you had $100,000 in the Principal fund earning 5 percent over 30 years. At the end of that period, you’d have lost more than $140,000 to fees and foregone earnings. The Fidelity fund would have only cost you about $9,000. So one decision can save you roughly $131,000. Run your own numbers on the free SEC Mutual Fund Expense Analyzer. It will take about two minutes.

If you have a zombie fund in your portfolio, run away from it and consider offerings in the DFA, Fidelity, iShares, Schwab, TIAA-CREF or Vanguard groups.

Have a nest-egg eater in your 401(k)? Suggest alternatives to your employer or plan administrator. By law, they must provide the most prudent, low-cost choices. You can sue them if they’ve loaded your plan with zombies. Several employee groups have done so in recent years — and won.

Should we be facing a “new normal” era of single-digit returns in stocks and bonds, fund expenses will make the difference between a robust retirement or falling short. Costs matter, but don’t be among the walking dead who never bother to look at fund expenses.

By John Wasik

(Reuters) – As if on cue for an Occupy Wall Street commercial, the latest Congressional Budget Office report highlighted the large crevasse between the upper 1 percent of U.S. households and the rest of us.

When it comes to income inequality, this is what U.S. politicians should be digesting now. While it’s hardly a major revelation that for the top 1 percent of earners real after-tax income rose 275 percent between 1979 and 2007, the top 20 percent made more in after-tax income than the remaining 80 percent. That’s quite a difference since the lowest-income group’s median income only rose 18 percent.

Income inequality couldn’t be more of a mainstream issue as some 70 percent of Americans surveyed want wealth shared more equally.

The reasons for the growing disparity, which the CBO, without irony, measured by an increasing “Gini coefficient,” were buried deep in the report. It’s how income was taxed that allowed the ultra-wealthy to keep more of what they earned compared to middle- or lower-class Americans.

INVESTMENT INCOME EARNERS ARE TAXED LESS

Most lower- and middle-class earners make their money from wages, which are subject to Social Security, Medicare, federal and state taxes. But income from businesses, capital gains and dividends may be taxed at lower rates. In the CBO study period, the share from capital gains and business income increased, meaning upper-income families reaped greater after-tax benefits just from the kinds of non-wage income they reported.

When you’re on salary, you get taxed regularly through your paycheck. If you hold stocks, bonds, business equity and property, your capital gains — if any — can be delayed for years. Holding securities in tax-deferred retirement accounts can put off taxes for decades.

EXECUTIVES AND FINANCIAL PROFESSIONALS DID BEST

Again, no surprise here. But when you can structure your compensation so that it’s tax-deferred, paid in stock options or paid as capital gains, dividends or carried interest, you can pay much less to Uncle Sam and keep more of your income. Long-term capital gains, dividends and carried interest are taxed at a maximum 15 percent rate.

When the bulk of your income comes in those forms, you avoid taxes at the maximum 35-percent marginal federal rate. So those at the top of the compensation pyramid not only made more in gross income, their overall tax rates were lower because of how their pay was received. Billionaire Warren Buffett is a good example. His average rate was 17.4 percent.

LOWER-INCOME HOUSEHOLDS PAY MORE IN PAYROLL TAXES

Since the highest earners were paying less in overall taxes because they were paid in non-wage income, their payroll tax rate was also lower. The CBO found that the lowest fifth of families paid an average 8 percent in payroll taxes while the highest-income group paid under 2 percent.

Why are the poor paying quadruple the amount of payroll taxes than the rich?

They are unlikely to report investment or business income at the lowest rates. Attention tax reformers: You could make a case that the wealthiest Americans are not paying their fair share for Social Security, Medicare, state and federal programs. But since the tax code allows them to avoid paying any more, it’s perfectly legal now.

CONVERSION TO S CORPS ALSO HELPED WEALTHY

Those who ran their income through corporations (even small ones) reaped even more breaks by converting from a standard “C” to an “S” corporation. The S corporation essentially taxes business earnings at your personal rate in the year that you make the money. That opens up a number of ways to legally pare tax liability and gave many high-income households yet another loophole. I know, because I had an S Corp for years. “The observed growth in the conversion of C corporation income into S corporation income has contributed to the rapid growth in income for the highest-income households,” the CBO reported.

THOSE WHO HAVE MOST LOOPHOLES BENEFITS MOST

It’s a cumulative giveaway: The more deductions you can take at the most-favorable rates, the lower your after-tax income. Who did the best? No surprises here. “Employees in the financial and legal professions made up a larger share of the highest earners than any other group.” Hello Wall Street and K Street.

In addition to these plums, if you were in the elite class that benefited from low rates and a bevy of write-offs, you had more money to spare to hire lobbyists to keep your after-tax income higher than wage earners. You and your affiliated special-interest groups were also able to donate copious amounts of money to Congressional candidates who want to keep the tax code working in favor of the well-heeled.

Unless you can find a way of living off of an investment portfolio, create an S corporation and avoid payroll taxes, you’re going to pay more than your fair share of taxes. Has the Congressional debt reduction supercommittee considered this low-hanging fruit? There’s no way to tell since their proceedings or minutes have not been made public. Lobbyists have had better access than other citizens.

Only one thing is certain. If the status quo prevails, the tax code will continue to serve as a wealth enhancer for the ultra-wealthy and corporations. Without meaningful tax reform, the gap between the 99 percent and the top 1 percent will widen from a chasm — to a canyon.

Are you a money maniac? While finishing up Michael Lewis’s “Boomerang,” his latest book on the financial meltdown, I was intrigued by a few of his observations on a cultural and psychological malady.

Since some of my academic training is in psychology, I’ll take a stab at what I think is going on. We spend (and eat) too much because the culture encourages it at every turn, but we have the ability to resist temptation. We’re hardwired to do the wrong thing, yet can still make rational decisions.

There’s also a part of the brain that Lewis didn’t really explore in much depth. I’m not sure what it’s called, but it involves conflating risk with the likelihood of financial success. Behavioral economists have many descriptions of these miscues. One might call it intentional and persistent denial.

Invest in the stock market through your 401(k) and forget about the risk to your long-term wealth! Use those multiple credit-card offers you get in the mail every week to borrow to the hilt! Get an extra 10-percent off at the department store if you sign up with their onerous credit plan!

We just can’t escape what I call “the buffet effect.” All of these financial goodies are laid out all the time for one seemingly low price. So we gorge on this table of plenty, only to later find out how empty financial calories can hurt us. Many of us just can’t help ourselves. That’s our culture. We’re not only in the land of plenty, we’re in the never-never land of too much.

When I eventually waded through Lewis’s perversely scatological insights on Germans and wondered if Icelandic men were really that overconfident that they could morph from fishermen to currency traders in a matter of weeks, I found a real nugget in the research of Peter Whybow a psychiatrist and neuroscientist.

Dr. Whybow, author of the more useful American Mania: Why More Is Not Enough, says it’s our “lizard brain” that is driving our overconsumption. After all, when we were living in caves (and much earlier), we hoarded food and firewood and worried about saber-tooth tigers. Now we substitute debt-driven obsessions for those primal concerns. Maybe we squirrel away credit cards because of a misperception of scarcity.

Did those Wall Street bankers and Main Street borrowers put their lizard brains in overdrive during the bubble years and ignore the more-evolved parts of the neocortex that engaged self-regulation? While that can’t be measured in any meaningful way, it’s as good a theory as any. Maybe the buffet effect was such a cultural imperative that it got the better of those who couldn’t say no.

“What is it about the way our brains are wired that makes the risk and competition of the market place so compelling?” Dr. Whybow asks on his website.

That leaves us with a dilemma as a species. How do we squelch the lizard brain and move on?  I thought I might find some insights by taking the mania quiz Whybow offers online. When my results came up, the text was a question: “do you live in a monastery?” Not much help there. I’m certainly no saint.

Does that mean that I’m more ascetic than most Americans because I tend to favor saving over spending? If so, then I hope that’s a partial answer.

For years, my mantra has been to save at least 10 percent of my pre-tax income; more if I can. I place savings above spending when I pay my monthly bills. If I know I can’t cover an item that I put on my credit-card bill that month, I don’t buy it. This is pretty standard stuff for living within one’s means.

Yet what I’m describing is a forced behavior and not any personality trait. I don’t think we’re born savers or spenders. We can largely choose what we want to do and be.

Of course, I think there’s lots of research that shows you’ll likely have money problems if you have a substance abuse issue, relationship problems or mood disorders. If that’s the case, see a doctor or therapist.

We need to embrace a different, more realistic and less emotional narrative if we’re to ensure our financial survival.

Home investments are not risk-free. Stocks do not get less risky over time. Bonds can go down in value. Inflation never really goes away. We can’t out-trade machines that use high-speed algorithms moving at the speed of light. We can never know more than a market of professionals with a world of information at their fingertips. Greed is always good — for Wall Street.

If none of these realities boomerang to change our mass financial behavior, then perhaps one thing will: Only self-discipline will work in prioritizing saving over the mania of unbridled debt. We have to start with ourselves.