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Kiplinger's Personal Finance - June 2018

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UPDATE ON OUR
25 FAVORITE FUNDS
p 44
SHOULD YOU INVEST
LIKE BUFFETT?
p 54
How to Get the
FINANCIAL
ADVICE
That’s Right for You
Where to find an adviser you can count on,
no matter what your stage of life. p 26
PLUS
Early warning
systems for ID theft p 36
Get smart about
your student loans p 40
MAY 2018
A.I. is making quite an impression.
Revenue from artificial intelligence is expected to grow
by 50% year over year.1 Invest in the potential of A.I.
In 2016, tech giants invested $20 billion in A.I.2 and
worldwide revenues from this technology are on track
to reach $46B by 2020.1 Fidelity’s tech sector fund
and ETF have the ability to take advantage of the
opportunities presented by A.I.
Learn more about our
tech sector mutual fund and tech sector ETF
FSPTX
Fidelity® Select Technology Portfolio
FTEC
Fidelity® MSCI Information Technology Index ETF
Lowest expense ratio in the industry 3,4
Fidelity.com/tech
800.Fidelity or call your advisor
Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives,
risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary
prospectus containing this information. Read it carefully.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to
management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price,
which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Sectors are defined by the Global Industry Classification Standard (GICS).
Source for A.I. Revenue Forecast: IDC
2
Source: McKinsey Global Institute, “Artificial Intelligence: The Next Digital Frontier”
3
Expense ratio data as of 8/22/2017. Based on a comparison of total expense ratios for U.S. technology sector-level ETFs with similar holdings and
investment objectives, within the universe of 46 U.S. ETFs in the Morningstar technology category.
4
FTEC expense ratio, .084%. Expense ratio is the total annual fund operating expense ratio from the fund’s most recent prospectus.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2018 FMR LLC. All rights reserved. 812469.3.0
1
CONTENTS
KIPLINGER’S PERSONAL FINANCE
FOUNDED 1947
VOL. 72 NO. 5
■ PUTTING A LEASH
ON PET CARE COSTS.
PAGE 62
AHEAD
11
TOPIC A: Long-term-care insurance
dilemma . . . Investors get CEO pay details.
40 SMART WAYS TO MANAGE YOUR
STUDENT LOANS Refinancing can lower payments, but first consider the pros and cons.
61
FUND SPOTLIGHT Keep your balance.
LIVING
39
18 OPENING SHOT Why you should stick
ASK KIM Making the call on phone
insurance, by KIMBERLY LANKFORD.
with stocks, by JAMES K. GLASSMAN.
43
22
MILLENNIAL MONEY The risks of paying
peer to peer, by RIVAN STINSON.
24 MONEY SMART WOMEN A guide to
marital money bliss, by JANET BODNAR.
MONEY
MORE ABOUT YOUR MONEY Juicier
yields on money funds (43).
62
TRIM THE COST OF PET CARE Spending
on pets has skyrocketed, so it’s smart to budget
for vet bills, grooming and other expenses.
68
INVESTING
DRIVE TIME The best way to buy a used
car, by DAVID MUHLBAUM.
44 THE KIPLINGER 25 FUNDS: ON TRACK
70 TRAVEL Get more punch from your points,
by MIRIAM CROSS.
Our annual update of our favorite actively
managed funds reveals a year of mixed results.
But these funds are in it for the long haul.
IN EVERY ISSUE
54 WHAT WOULD WARREN DO? Berkshire
6 LETTERS Our no-politics promise.
Hathaway’s leader still has lessons to teach us.
But we offer our take on his latest trades.
8 FROM THE EDITOR ISO a financial adviser.
26 COVER STORY
HOLLENDERX2
THE RIGHT ADVICE AT THE RIGHT PRICE
Sorting through the alphabet soup of financial
adviser credentials and opaque fee structures
can be daunting. So we shopped around to see
how you can find the best fit for you.
bonds to put higher interest rates to work for you.
72 TAKEAWAY When it’s safe to shred your
tax records.
60 PRACTICAL INVESTING Why I paid a
premium for Costco, by KATHY KRISTOF
ON THE COVER: Photograph by Bonnie Holland
58 BUILD AN INCOME LADDER Use CDs and
36
EARLY ALERT SYSTEMS FOR IDENTITY
THEFT Credit monitoring services sound the
alarm if they spot fraud. But are they worth it?
05/2018
KIPLINGER’S PERSONAL FINANCE
1
KARLAN TUCKER*,
AMERICA’S
RETIREMENT
EXPERTS
The most critical
stretch of your
investment
lifetime is
retirement.
That’s why,
when you
want to begin
planning for
this phase of
your life, you
turn to the
experts.
Maximize
your savings,
minimize
your risks in
retirement:
Meet America’s
Retirement
Experts.
COLORADO
It has been Karlan Tucker’s privilege to serve more
than 5,000 retirees over the past 31 years. Many were
not financially positioned for a retirement of 30-plus
years, but he helped them design plans that secured
their income. Karlan is co-author with Brian Tracy of
Tracy’s new book, “Success in the New Economy.” He
is the founder/CEO of five firms in the Tucker Financial Group with more than $3 billion in assets under
advisement.
D A R R E N P E T T Y * , R I C P ©,
COLORADO
Darren’s mission is helping people retire happy. His
turnkey client process ensures lifelong income, provides
ongoing wealth management and incorporates smart
tax planning throughout retirement. Darren has
earned the designation of Retirement Income Certified
Professional (RICP ®) and is an Investment Advisor
Representative with Tucker Asset Management.
D AV E LO S K I L L ,
ARIZONA
Dave Loskill has owned and operated several successful
businesses and, with help from his wife GayLynn, has
built his practice into what is now a nationally ranked
advisory firm. He is recognized as a subject-matter
expert on Social Security benefits planning, and has
assisted hundreds of families with their retirement
income planning goals. He also assists other advisors
around the country in improving their practices.
G AY LY N N LO S K I L L * ,
ARIZONA
GayLynn Loskill obtained her C.P.A. license and
worked in the public accounting field for 10 years
before getting her securities and life insurance licensing. She is an expert on Medicare benefits and helping
Arizonans manage money into their retirements. With
a B.S. Degree in Business Administration/Accounting
from Arizona State University, GayLynn has helped
her husband Dave build their practice into a top-producing firm.
www.AmericasRetirementExperts.com
Not endorsed by or affiliated with any governmental entity. Guarantees are based on the claims-paying ability of the issuing insurance company.
JOHN O’CONNOR,
ILLINOIS
President of O’Connor & Associates in Illinois, John
O’Connor has been assisting seniors, business professionals and self-employed people for over 25 years to
protect their assets and invest wisely. John has also
trained numerous colleagues on insurance products and
retirement investing throughout Illinois.
DEIRDRE HAFEN*,
WA S H I N G T O N
Deirdre Hafen offers more than 20 years of experience
in personal retirement and wealth asset planning. She
has counseled thousands of clients through changing
markets and economic challenges. She holds securities,
life insurance and long-term health care insurance
licenses. As a perennial top-producing advisor, Deirdre
also conducts classes in Washington on annuities, longterm care, life insurance and wealth planning.
PA U L I VA N O F F,
CALIFORNIA
It has been Paul Ivanoff ’s privilege to visit with more
than 5,000 families on his path to becoming renowned
as a retirement industry mentor. With more than
36 years of experience in retirement planning for
his clients, Paul has protected thousands of his clients
from the nursing home, government taxation, market
volatility and low yields from their banks. Paul enjoys
finding and eliminating hidden fees in his cleints’
retirememt portfolios.
T R AV I S I VA N O F F * ,
CALIFORNIA
Travis grew up in the retirement planning business,
following in the footsteps of Paul Ivanoff and studying his father’s best practices. He also has a Series 65
license and finds it fulfilling working in the financial services industry. He is passionate in helping
his clients implement safe and secure retirement and
legacy strategies. Travis obtained his Bachelor’s degree
in Communications from the University of Cal State,
Fullerton.
AMERICA’S
RETIREMENT
EXPERTS
You can’t save
and invest
for your nonworking years
the same way
you did when
you were 25.
America’s
Retirement
Experts provide
the skills and
experience
to design the
correct strategies
for you to get the
most f rom your
later years.
Maximize
your savings,
minimize
your risks in
retirement:
Meet America’s
Retirement
Experts.
www.AmericasRetirementExperts.com
Agents are licensed for the products they sell. *Investment advisory services provided through Tucker Asset Management LLC, a registered investment adviser.
GET MORE ADVICE FROM KIPLINGER
Get on the path
to a financially
secure retirement
.com
STOCKS VULNERABLE
TO A GLOBAL TRADE WAR
Beware the potential impact of dueling tariffs
on these publicly traded companies.
kiplinger.com/links/tradewar
NET WORTH CALCULATOR
Our new tool helps you quickly add up assets and
subtract liabilities to determine your net worth.
kiplinger.com/links/networth
12 FEATURES THAT HOME
BUYERS HATE MOST
Updated and expanded for 2018, our list of buyer
turnoffs can be tackled without spending a lot of
money. You can even fix some of them yourself.
kiplinger.com/links/buyershate
NEW
for 2018
Take the first step today. Visit
www.kiplinger.com/go/retirekip
to see the table of contents and to order.
Today
HOW TO REACH US: Subscriptions. For inquiries about ordering, billing or renewing a subscription, or to report address changes,
please have your mailing label handy to reference your account number and visit us online at kiplinger.com/customer-service
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4
KIPLINGER’S PERSONAL FINANCE
05/2018
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LETTERS
PAT L.
HOUSTON
I’ve been reading Kiplinger
publications since the 1980s
and believe that you have
maintained a nonpartisan
standard, but I was surprised to read that Mark
Solheim was “flabbergasted” that readers could
take issue with recommending Hamilton. Perhaps you
forgot the cast’s inappropriate and undeniably partisan
lecture to then Vice President-elect Mike Pence during a 2016 performance.
That’s when I decided not
to attend.
J.M.
DELAFIELD, WIS.
Retirement goals for those
who serve. As a retired mili-
Our No-Politics Promise
Q
I don’t plan to see the musical Hamilton, but I don’t
think that your recommendation promoted any bias
(“From the Editor,” March).
You provided honesty when
admitting that most of your
writing staff is likely liberal-leaning. You emphasized the need for unbiased
writing. You highlighted
that the Kiplinger code of
ethics prevents writers
from expressing a public
political viewpoint. This is
a commendable policy and
one that other companies
could benefit from. I will
take you up on your offer to
write to you if I see political
bias, and I will continue to
subscribe to Kiplinger’s as
6
KIPLINGER’S PERSONAL FINANCE
05/2018
READER
POLL
Why do you use a
financial adviser?
For help
managing
investments
For a
comprehensive
financial
plan
31%
38%
9%
22%
To make sure
I’m on track
To
answer
questions
about a
specific issue
To learn more about how to get the
financial advice that’s right for you,
turn to page 26.
tary veteran now receiving
Veterans Affairs benefits, I
found your article “Retirement Reality Check: Are
You on Track?” (March) insightful but irrelevant to my
situation. Many veterans
such as myself are working
on a second retirement (or
receiving a VA stipend). We
use Kiplinger’s to figure out
retirement goals but often
become confused. We already get fixed income, yet
most of our 401(k) numbers
are well short of the goals.
I propose that you write a
veteran-focused retirement
reality check story, including information on the military blended retirement
system.
GREG PITTMAN
COLORADO SPRINGS
EDITOR’S NOTE: We wrote about
the new retirement plan rules in
our January issue. You can see our
take on that and other financial
issues in the Financial Field Manual: A Personal Finance Guide for
Military Families (kiplinger.com/
links/fieldmanual).
A case for index funds. I have
had the bulk of my investments in stock and bond
index funds for the past 30
years, and I found nothing
in “The Perils of Indexing”
(March) to change my mind.
The argument the writer
makes that index funds are
riskier than active funds in
a bear market only holds
true if the investor does not
have a diversified portfolio
of stocks, bonds and cash.
I suspect that most index
investors would disagree
with your suggestion that
many investors believe that
index funds are categorically less risky than actively
managed funds.
F.L.
FAIRVIEW, N.C.
CORRECTIONS
Moneyball was nominated
for Best Picture at the 2012
Academy Awards (“Takeaway,” March).
The address for Christopher
Elliott’s consumer dispute
resolution website is www
.elliott.org (“Ahead,” April).
LETTERS TO
THE EDITOR
Letters to the editor may be
edited for clarity and space,
and initials will be used on
request only if you include
your name. Mail to Letters
Editor, Kiplinger’s Personal
Finance, 1100 13th St., N.W.,
Washington, DC 20005, fax
to 202-778-8976 or e-mail
to feedback@kiplinger.com.
Please include your name,
address and daytime telephone number.
SOURCE: POLL SURVEYED 105 KIPLINGER’S READERS.
long as it provides unbiased
financial information.
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FROM THE EDITOR
Mark Solheim
M
y wife and I live in a 1,000have pushed high-fee products. Kipsquare-foot house in Washlinger’s prefers fee-only planners, and
ington, D.C. That’s no typo.
among the many designations they
The house is tiny. We’ve thought
may hold, the certified financial planabout buying a bigger place, but we
ner credential is the gold standard.
love our neighbors, the Metro is a
CFPs must act as fiduciaries, putting
10-minute walk away, and we are
their clients’ interests above their
across the street from a park. So a
own. But even searching for a CFP
few years ago we started thinking
means jumping into a rabbit hole of
about building an addition. We talked
client-adviser relationships and fees.
about it … and talked … and talked
My own search was one impetus
some more. I was in favor of financing
for our cover story, “The Right Advice
it with a fat home-equity loan; the
at the Right Price,” by senior editor
thought of taking on that debt made
Sandy Block and contributing editor
my wife cringe.
Lisa Gerstner (see page 26). My wife
We decided to consult a financial
and I interviewed three advisers
planner to help us sort through our
with three different business models.
options. We had other reasons for
The first was an independent money
seeking help. We wondered what
management firm that would invest
would happen to our retirement
our money and offer comprehensive
accounts after the
bull market skidded
THE ADVICE
to a halt. We were
looking for taxINDUSTRY IS A
planning strategies.
LABYRINTH OF
We needed a push
CREDENTIALS
to update our wills.
AND OPAQUE FEE
And, frankly, we
wanted someone
STRUCTURES.
to help us budget
better and set realistic
savings goals for things such as family
vacations (and the home renovation).
A frustrating search. The advice industry is a labyrinth of credentials and
opaque fee structures. Some planners’
compensation is based on commissions from selling mutual funds and
insurance products, some charge a fee
based on a percentage of assets, and
some charge fixed fees. Commissionbased advice can work fine, but it gets
a bad rap because some planners
8
KIPLINGER’S PERSONAL FINANCE
05/2018
MARK SOLHEIM, EDITOR
MSOLHEIM@KIPLINGER.COM
TWITTER:
@MARKSOLHEIM
POON WATCHARA-AMPHAIWAN
ISO a Financial Adviser
planning for an annual fee of 1% of
our assets. We spent a couple of hours
at the firm’s plush offices answering
questions about our finances and
goals, then returned for a personalized
presentation—which was when we realized we didn’t want to pay thousands
of dollars a year to invest in the firm’s
model portfolios.
The next stop was a firm that would
draw up a comprehensive plan for
$5,000. My wife and I would have to
complete a long questionnaire about
our finances and our money styles,
then sit through a series of interviews
with the planner. About three months
later, we’d get a road map to financial
nirvana. The fee may have been worth
every penny, but we weren’t prepared
to make such a deep commitment.
The third time was the charm. Lori
Atwood, a CFP, charges by the hour,
with no minimum time or financial
commitment. Her overhead is low—
she will come to you or meet at a
downtown office building where
she rents space by the hour. “I want
people to have access to unconflicted
advice not based on assets under
management,” she says. “The demand
is huge.” Atwood also just launched
a personal finance platform and app
($6.99 a month) based on the system
she uses with clients. Check it out at
FearlessFinance.com.
We met with Atwood three or four
times to track our income and outgo
and come up with a budget to help
us save for our goals. We put the plan
in place and, a year later, we’re going
back for a checkup—and finalizing
the blueprints for our addition. Active Matters:
Life isn’t a passive
activity. Investing
shouldn’t be either.
Whether you’re planning on retiring in the not-too-distant future or years from now,
being actively involved matters in achieving results.
When it comes to managing our funds, we share the same active philosophy. Our investment
teams seek to navigate down markets, find opportunities, and manage risk so you can stay on track
toward reaching your retirement goals.
Over 90% of T. Rowe Price Retirement Funds beat their 10-year Lipper average as of 12/31/17.*
Put our active investment approach to work for your retirement.
We offer IRAs, Rollover IRAs, and retirement planning.
Call our retirement specialists at
877-872-5475 or go to troweprice.com/retirement
Consider the investment objectives, risks, and charges and expenses carefully before investing. For a prospectus
or, if available, a summary prospectus containing this and other information, call us. Read it carefully.
*36 of our 39 Retirement Funds (Investor, Advisor, and R class) had a 10 -year track record as of 12/31/17 (includes
all share classes). 34 of these 36 funds beat their Lipper average for the 10 -year period. 38 of 39, 39 of 39, and 35
of 36 of the Retirement Funds outper formed their Lipper average for the 1-, 3 -, and 5 -year periods ended 12/31/17,
respectively. Calculations are based on cumulative total return. Not all funds outper formed for all periods. (Source
for data: Lipper Inc.)
Past performance cannot guarantee future results. All funds are subject to market risk, including possible loss of principal.
T. Rowe Price Investment Services, Inc., Distributor.
Peggy's Cove
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Cabot Trail
Knight A. Kiplinger
Mark K. Solheim
EXECUTIVE EDITOR Anne Kates Smith
MANAGING EDITOR Frederic Fane Wolfer
SENIOR EDITORS Eileen Ambrose, Sandra Block, Jeffrey R. Kosnett
EDITOR AT LARGE Janet Bodnar
SENIOR ASSOCIATE EDITORS Nellie S. Huang, Marc A. Wojno (research)
ASSOCIATE EDITOR Patricia Mertz Esswein
STAFF WRITERS Miriam Cross, Ryan Ermey, Kaitlin Pitsker
CONTRIBUTING EDITORS Lisa Gerstner, James K. Glassman, Kathy Kristof, Kimberly Lankford
OFFICE MANAGER Glen Mayers
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AHEAD
TOPIC A
THE LONG-TERM-CARE
INSURANCE DILEMMA
Premiums keep rising, but you may need a
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ONE OF THE MOST EFFECTIVE
ways to protect your retirement savings from the high
price of assisted living, inhome care or a stay in a
nursing home is a longterm-care insurance policy.
But recent premium hikes
have many baby boomers
worried that coverage is
no longer affordable.
The median cost of one
year in a private room in a
nursing home was $97,500
in 2017, according to GenILLUSTRATION BY JOE ANDERSON
worth’s Cost of Care Study
(www.genworth.com/
costofcare). A year of assisted living was $45,000,
and 44 hours per week
of home care—which most
people prefer—came to
$49,000. Care costs have
been going up by 3% to
4% per year over the past
five years.
Those rising costs have
put pressure on long-termcare insurers. Rates have
spiked by at least 50% for
most policies purchased
between the mid 1970s and
2005, with some price hikes
topping 100%. Almost every
long-term-care insurer has
raised rates at least once,
and more rate increases are
on the horizon, depending
on the insurer and the state.
Policies with lifetime
benefits and 5% inflation
protection have been hit the
hardest. For example, Mike
Ashley of Prairie Village,
Kan., purchased a Genworth policy 19 years ago,
when he was 52 years old.
He paid $879 per year for
a policy with a $70 daily
benefit, 5% inflation protection and lifetime benefits.
After two rounds of rate increases, his premiums had
climbed to $1,547 per year.
Insurers admit they made
major mistakes when pricing
these policies. They expected more people to drop
coverage, overestimated
the interest rates they’d
earn on their investments,
and underestimated the
size and length of claims.
What to do. Fortunately,
there are ways to make
long-term-care insurance
more affordable.
Don’t drop your policy
if you’re faced with an increase; new coverage will
cost a lot more. Although
Ashley’s annual premiums
increased by more than
75%, he’s 19 years older and
his daily benefit has grown
by 5% a year. A new policy
for a 71-year-old with similar features and coverage
would cost at least $9,000
a year. If you can’t afford
the higher premiums, your
05/2018
KIPLINGER’S PERSONAL FINANCE
11
AHEAD
insurer will generally give
you several options. For example, you may be able to
minimize the rate increase
if you cut future inflation
protection from 5% to 2.5%
or 3%, says Claude Thau,
an insurance consultant
in Overland Park, Kan.
If you haven’t bought a
policy yet, you can still find
coverage that protects a big
portion of your retirement
savings while keeping the
premiums affordable. One
option is to figure out how
much long-term care your
retirement savings and
income will cover and use
insurance to fill the gap.
You can trim the premiums not only by buying a
policy with less inflation
protection but also by selecting a shorter benefit
period. For example, Ashley
cut his premiums to $1,384
by reducing his lifetime
benefit period to a six-year
period. A 55-year-old couple
could pay less than $3,500
per year (combined) to buy
a new pair of policies that
provide each spouse with
a $150 daily benefit, 3%
inflation protection and
a three-year benefit period
(couples buying together get
a significant discount).
Insurers have learned
from their pricing mistakes
and shouldn’t have to increase premiums on new
policies as much in the
future. Still, you should
factor in potential increases when calculating
how much insurance you
can afford. John Ryan, of
Ryan Insurance Strategy
Consultants in Greenwood
Village, Colo., recommends
planning for a 20% increase
every 10 years.
12
KIPLINGER’S PERSONAL FINANCE
05/2018
INTERVIEW
BOYCOTTS DON’T
DERAIL MOST STOCKS
If history is a guide, gun control advocates
and opponents will cancel each other out.
Maurice Schweitzer is professor of operations, information and decisions at the
University of Pennsylvania’s
Wharton School.
Some consumers are boycotting businesses with ties
to the National Rifle Association. What impact do you
expect it to have on those
companies’ earnings? The
school tragedy in Florida
galvanized and energized
a very activated group
of protestors, but history
suggests their coordination and energy is unlikely to persist. That’s
especially true of the
calls to boycott
companies that are
indirectly associated with gun
regulation.
Roku, for example, doesn’t sell or
make firearms but
streams an NRA TV
channel. Vista Outdoor
is one of the more vulnerable targets, with 54%
of its revenue coming
from shooting sports.
Nonetheless, I don’t
expect the company to
experience any meaningful drop in sales or
a fundamental threat
to its business.
How does this boycott
against businesses that
support the NRA com-
pare with other boycotts in
the past? Boycotts are either
one-sided or two-sided. The
boycott against BP following
its 2010 Deepwater Horizon
oil spill was one-sided because no groups rushed to
BP’s defense. The NRA boycott is two-sided, with impassioned groups rallying on
both sides of the debate. We
saw a comparable scenario
play out during the 2012
Chick-fil-A boycott, when
protestors looked to punish
the fast-food chain after
its CEO spoke out against
same-sex marriage. Their
efforts were hampered by
groups on the other side of
the issue, who went out and
bought chicken sandwiches.
This year, we’ll see the
NRA’s 5 million members
similarly boost their support
for targeted businesses.
What should investors do
if they own shares in one of
these companies? Some
of these companies’ share
prices might swing a bit,
creating potential bargains, but they should
stabilize once the
movement starts
losing steam. Investors should sit
tight, hold on to
their shares and
ride this out.
How much
influence can
a typical shareholder expect
to have with the
company? A shareholder
who wants to voice an
opinion can send the
company a letter, but
his or her vote in shareholder elections will be
diluted by the votes of institutional shareholders.
To take a stand, individual investors can invest
in mutual funds that avoid
or invest in stocks related
to issues they care about.
THOMAS H. BLANTON
PHOTOGRAPH BY LISA GODFREY
THE WAGE GAP
INVESTORS GET NEW
DETAILS ON CEO PAY
Companies must disclose how much CEOs
earn versus the rank and file.
MICHAEL AUSTIN
IT’S NO SECRET CORPORATE
executives rake in vastly
higher pay than the people
who work for them. But
now investors will learn
exactly what the pay gulf
is when they get companies’
proxy statements, which
are filed in advance of companies’ annual meetings.
New rules from the Securities and Exchange Commission require publicly traded
companies to disclose the
ratio of CEO pay to that of
the firm’s median salary.
The change is required by
the 2010 Dodd-Frank legislation, which was enacted
in the wake of the 2008
financial crisis.
As results pour in, companies whose CEOs command
astronomical pay packages
are likely to make headlines,
particularly because wages
for average workers have
been stagnant since the
economic downturn ended
in 2009. But critics of the
rule say it’s difficult to make
apples-to-apples comparisons because some indus-
tries outsource low-wage
work, boosting the in-house
median salary, and others
have a large number of
part-time or foreign-based
workers who receive less
compensation, driving the
ratio higher.
Del Monte, for instance,
reported paying its CEO
$8.5 million last year—more
than 1,400 times the median
salary among a mostly foreign-based workforce. The
average ratio, according to
a survey by research firm
Equilar, is 140 to 1.
Investors may also question whether high executive
pay translates into longterm performance. There’s
little evidence that it does.
Investment analytics firm
MSCI added up cumulative
pay between 2007 and 2016
and found that the companies with lower CEO pay
over the period outperformed companies with
higher pay by nearly 39%,
on average. RYAN ERMEY
CEO Pay Hits the Stratosphere
Pay for the average large-company CEO has risen 46% since
2009, versus 2.2% for the average worker.
CEO Compensation
(in millions)
$12.8
$13.0
2010
2011
$15.2
$15.6
2012
2013
$16.6
$16.3
2014
2015
$15.6
$10.7
2009
2016
SOURCE: Economic Policy Institute analysis of publicly available economic data.
OFFICE SPACE
MORE
CHOICES
FOR SOLO
WORKERS
As more people go into business for themselves or take
on side gigs to generate extra
income, co-working spaces
are expanding their services
to appeal to workers in all
stages of their careers.
Workers typically pay a
monthly membership fee to
use shared office space, as
well as get access to meeting
rooms, Wi-Fi, coffee and other
amenities. Unlimited monthly
access usually ranges from
about $300 for an unassigned
“hot desk” to about $500 for
an assigned desk. Many coworking spaces are targeting
specific groups of people,
such as parents, veterans or
women. They’re also adding
everything from child care to
dry cleaning and ramping up
their calendar of networking
and social events.
Big names such as Industrious and WeWork dominate
the industry, but smaller, local
options are popping up outside of business locales, from
residential neighborhoods in
the city to suburban spots.
To find a co-working space
that fits your needs, you may
want to try a few on for size.
Most co-working spaces offer
a free workday. Or try Deskpass, which sells flexible
memberships, starting at $49
a month for four visits (after a
$25 introductory month), that
allow users in six cities to use
any of the 175 work spaces in
its network. KAITLIN PITSKER
05/2018
KIPLINGER’S PERSONAL FINANCE
13
AHEAD
HELOC SHOCK
SIDESTEP HOME
EQUITY RATE CREEP
You may be able to rein in your loan
payments before they go up.
RISING INTEREST RATES
have boosted the cost of
borrowing against your
home, and rates are likely to
go higher. The average rate
on a home-equity line of
credit (HELOC) recently
was 5.77%, a percentage
point higher than when
the Federal Reserve started
raising rates in December
2015. With at least two more
rate hikes expected in 2018,
the average HELOC rate
could hit 6.5% by year-end.
During the initial draw
period, usually 10 years, your
lender may allow you to avoid
future rate hikes by locking
in the current rate on all or a
portion of your outstanding
balance. For example, Wells
Fargo allows its HELOC
borrowers to convert a minimum of $10,000 to a fixed
rate twice a year. If your
budget allows, choose a fully
amortizing payment that
won’t leave a balance at the
end of the repayment period
to which a higher, variable
rate would apply.
Another option for
homeowners who don’t
have a supercheap mortgage: Roll your mortgage
and home-equity debt into
a single mortgage. If you
used the home-equity debt
to buy, build or improve your
home, you’ll qualify for a
lower rate than you’d get
if you refinanced your first
mortgage for more than
the current balance and
took the difference as
cash, says Josh Moffitt,
president of Silverton
Mortgage, in Atlanta.
PATRICIA MERTZ ESSWEIN
MONEY & ETHICS // KNIGHT KIPLINGER
Should nondisclosure agreements
be banned in sexual harassment
settlements?
A
No, not banned, but the settlement process can be improved.
It’s not clear to me that banning NDAs altogether is always
in the best interest of either the accuser or the accused, for the following reasons.
Some accusers choose to settle out of court, with an NDA, expressly
to protect their privacy, avoiding the unwanted publicity, possible
trauma and uncertain outcome of a civil or criminal trial. And some
accusers like the certainty of a large monetary settlement offer, which
would undoubtedly be much smaller without an NDA.
As for the accused, there is the issue of false accusation—probably
much less common than unreported harassment, but not unheard
of. People who believe themselves to be falsely accused may choose
not to fight an unfounded charge in a public trial if they can instead
pay a modest monetary settlement, with an NDA to protect their
reputation.
Besides proposals to ban NDAs in all workplace harassment
settlements—pending in the legislatures of New York, Pennsylvania,
14
KIPLINGER’S PERSONAL FINANCE
05/2018
California and other states—some worthwhile “middle ground” fixes
have been proposed, too.
Women’s rights litigator Noreen Farrell, for example, suggests that
employers be required to disclose in any new sexual harassment settlement negotiation whether the same employee has been involved in
prior settlements or complaints. That would strengthen the accuser’s
financial hand in a settlement discussion, or it could embolden her—
now knowing she is not the only victim—to bring public charges and/or
demand that the repeat offender be fired.
And an idea of mine to help deter bad behavior: Companies should
add to their employment contracts with managers and executives a
clause stating that anyone accused of sexual harassment will be required to share with his employer the financial burden of any settlement, out of his own pocket and/or by forfeiting future bonuses and
stock options.
HAVE A MONEY-AND-ETHICS QUESTION YOU’D LIKE ANSWERED IN THIS COLUMN? WRITE
TO EDITOR IN CHIEF KNIGHT KIPLINGER AT ETHICS@KIPLINGER.COM.
POON WATCHARA-AMPHAIWAN
Q
Do you think nondisclosure agreements (NDAs) should
be prohibited in sexual harassment settlements so that
repeat offenders can be identified and stopped?
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AHEAD
CALENDAR
05/2018
LUXURY FOR LESS
HOME SHARING
GOES UPSCALE
Travelers who want more than a
couch to sleep on have new options.
THE LINE BETWEEN HOME RENTALS AND
16
KIPLINGER’S PERSONAL FINANCE
05/2018
TUESDAY, MAY 1
FRIDAY, MAY 25
Get fit during National Physical
Fitness and Sports Month. See our
guide to staying in shape after 40
at kiplinger.com/links/fitafter40.
It’s National Wine Day. If you want
to try new vintages (and possibly
save some money), consider joining
a wine club, such as Wine of the
Month Club (www.wineofthe
monthclub.com) or California
Wine Club (www.cawineclub.com).
Educators: Look for deals on everything from food to technology this
National Teachers’ Day. Retailers
and restaurants in past years have
offered discounts of up to 25% on a
number of items, including breakfast
sandwiches, laptops and school
supplies. For details about discounts
year-round, go to www.teacher.org/
best-teacher-discounts.
MONDAY, MAY 14
May is National Military Appreciation Month. Visit kiplinger.com/
links/militarybenefits to see some
of the financial perks available to
military families.
▲ FRIDAY, MAY 18
Lower the cost of your commute
on Bike to Work Day. See how much
you’ll save with our calculator at
kiplinger.com/links/biketowork.
TUESDAY, MAY 29
On 529 Day, investigate collegesavings plans at www.savingfor
college.com. More than 30 states
offer tax breaks for residents who
invest in their own state’s plans,
so check out your state plan first.
You can find a list of our favorite 529
plans at kiplinger.com/links/529.
THOMAS H. BLANTON
* DEAL OF THE MONTH
May is the best month to buy
mattresses, with discounts
of up to 50% on a variety of
models, according to DealNews
.com. If the brand you’ve been
eyeing isn’t among them, you
can still likely find coupons that
will cut its price by 10% to 15%.
ISTOCKPHOTO.COM
TUESDAY, MAY 8
COURTESY AIRBNB
hotels is blurring, and that’s good news
for travelers who like the idea of staying
in a home away from home but are skittish
about relying on artfully cropped photos
of a stranger’s bedroom.
Airbnb’s new tier of lodging, Airbnb
Plus, features stylish homes that have
been verified by inspectors to include
everything from fast Wi-Fi to strong water
pressure. Plus homes cost an average of
$250 per night. Another service, Oasis,
holds its rentals to similar standards. Oasis
guests get access to additional services
(for an extra cost), such as private drivers.
Plus accommodations still aren’t on
par with regular hotels, says Deanna
Ting, of Skift, a travel industry news site.
Plus includes private rooms in shared
homes in its tier. And Airbnb does not
yet vet homes on an ongoing basis after
the initial inspection.
You can take your
home rental up
another notch
by choosing a
luxury villa
or estate
through
companies
such as
HomeAway’s
Luxury
Rentals
(average
price: about
$1,500 per night).
Luxury rentals often
cost less than a high-end
hotel on a per-room basis, especially when
you split the cost among a group, according
to data from Tripping.com. MIRIAM CROSS
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Investing involves risk, including the risk of loss.
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Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2017 FMR LLC. All rights reserved. 812682.1.0
AHEAD Commentary
OPENING SHOT
James K. Glassman
Why You Should Stick With Stocks
Be disciplined. Benjamin Graham, the
late financier and scholar who was
Warren Buffett’s mentor, once wrote,
“The investor’s chief problem—and
even his worst enemy—is likely to be
himself.” It is the “excitement and the
temptations of the stock market,” said
Graham, that get investors in trouble.
His answer was the discipline of value
investing—that is, buying stocks that
are so cheap in relation to corporate
profits and other yardsticks that their
low price provides a “margin of
safety” even if the worst happens.
You don’t have to be a value-only
investor to profit from financial discipline, but you do have to understand
the dangers of human emotion when
it comes to buying and selling stocks.
When a sweater goes on sale, it attracts buyers. But with stocks, the
18
KIPLINGER’S PERSONAL FINANCE
05/2018
buying urge works the opposite way.
A falling price can throw investors
into a selling panic. Similarly, investors
are drawn to shares whose prices
are rising. The logic goes: Hey, that
stock must be a good one if everyone
is buying it.
Invest regularly. The best way to tame
Dollar-cost averaging helps you
think about stocks the right way. “Do
not think of yourself as merely owning
a piece of paper whose price wiggles
around daily and that is a candidate
for sale when some economic or political event makes you nervous,” Buffett
wrote in 1996 in an “owner’s manual”
for shareholders of the company he
those emotions is to take them out
of the picture entirely by making the
purchase of stocks mechanical. Rather
than guessing when to buy shares, set
up a program with a broker or within
your company’s retirement plan to invest the same amount regularly—every
month, every quarter or every year.
The process is called “dollar-cost averaging,” and you can do it with individual stocks or funds.
INVESTORS ARE JUST
REALIZING THAT YOU DON’T
EARN AN AVERAGE OF
10% ANNUALLY WITHOUT
TAKING SOME RISK AND
SUFFERING SOME PAIN.
Say, for example, that your entire
portfolio consists of shares in VANGUARD 500 INDEX (SYMBOL VFINX), a mutual
fund with an expense ratio of 0.14%
that tracks the S&P 500. Every three
months, you buy $2,500 worth of
shares in the fund. For simplicity, let’s
assume that one share costs $250, so
your $2,500 will purchase 10 shares.
Now assume that over the course of
three months, stocks tumble. The S&P
falls by 30%, and a share in the Vanguard fund trades for $175. Your next
quarter’s $2,500 purchases not 10
shares but about 14 shares.
chairs, BERKSHIRE HATHAWAY (BRK-B).
(For more on Berkshire and Buffett,
see “What Would Warren Do?” on
page 54.) “Instead visualize yourself
as a part-owner of a business that you
expect to stay with indefinitely, much
as you might if you owned a farm or
apartment house in partnership with
members of your family.”
Automatic purchases allow you to
accumulate a growing interest in the
business over time. If you love the
company, you want to own as much of
it as you can, and when the price goes
down, dollar-cost averaging lets you
POON WATCHARA-AMPHAIWAN
L
ike fishing in a well-stocked pond,
investing has been pretty easy in
recent years. Imagine that at the
end of October 2007, the month the
bull market peaked, you put all of the
money you had to invest into a fund
that tracks Standard & Poor’s 500-stock
index. Even with such terrible timing,
you would have more than doubled
your money as the market produced
positive returns in every year from
2009 to 2017.
In late January and early February,
the stock market reverted to a pattern
of extreme volatility, with the Dow
Jones industrial average losing 1,175
points one day and rising 567 points
the next. It was a vivid reminder that,
as an investor, you don’t earn an average of 10% annually without taking
some risk and suffering some pain.
But there are ways to mitigate that
pain. Here is some advice for investors
who are just realizing (or may have forgotten) that stocks don’t always go up.
Simply a
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AHEAD
buy even more shares. The price doesn’t
matter until you sell, sometime far in
the future.
Sell rarely. When should you sell? The
simple answer: almost never. As my
example of the investor with lousy
timing illustrates, the best investing
strategy is to buy and hold. Period.
Certainly, sell if you need the money—
for retirement, college or a house, for
example. But don’t sell because a stock
(or a market) has gone up or down by
what you believe to be too much. No
one can time the market with any consistency, so don’t try to time it at all.
Other than cashing in to fund your
goals, the only times you should consider selling relate not to price or economic environment but to the nature
of individual companies themselves.
Again, let’s turn to a master investor—
in this case, the late Philip Fisher, best
known as the author of the investing
guide Common Stocks and Uncommon
Lost Decades
Limited Pain for
Long-Term Investors
Starting in 1926 and looking at successive 10-year periods (that is, 1926-1935,
1927-1936 and so on), there have been
only four in which investors lost money
in large-company stocks, and losses
averaged just –0.8%.
19291938
19301939
19992008
20002009
–0.05%
–0.89%
–0.95%
–1.38%
SOURCE: Ibbotson Associates, a Morningstar Inc. company.
20
KIPLINGER’S PERSONAL FINANCE
05/2018
PUT YOUR EGGS IN MANY BASKETS AND PAY AS LITTLE
ATTENTION AS POSSIBLE. IN OTHER WORDS, DIVERSIFY,
INVEST AUTOMATICALLY AND SELL RELUCTANTLY.
Profits. You should sell, he wrote,
when a company’s business has developed trouble: “When companies deteriorate, they usually do so for one of
two reasons. Either there has been a
deterioration of management, or the
company no longer has the prospect of
increasing the markets for its product
in the way it formerly did.”
Keep your eye on the CEO. Jeffrey
Immelt, who took over General Electric in 2000, was not as able as his
predecessor, Jack Welch. If you have
doubts about a new chief, the right
move is to sell. As for deteriorating
markets, just look at what has happened to brick-and-mortar retail
chains as shopping has moved online.
Other good reasons to sell include
mergers, the failure of a major product or a lack of integrity in management. The latter was the reason I
withdrew my recommendation of
Wells Fargo in 2016. A higher or
lower price, or a prediction about
the growth of the economy, is not
a good reason to sell.
Rebalance your holdings. There is one
more reason to sell: as a means of
maintaining your target asset allocation—that is, the proportion of your
portfolio devoted to different asset
categories and subcategories, such
as stocks and bonds or domestic and
foreign shares.
Determine your allocation according to your age, your impending needs
and your aversion to risk. Say you are
in your fifties, intend to retire within
20 years and have moderate worries
about volatility. A simple allocation
might be 60% stocks and 40% bonds.
Now imagine that over the course of
five years, stocks double in value and
bonds hold steady. An initial $100,000
portfolio, with $60,000 in stocks and
$40,000 in bonds, will become a
$160,000 portfolio, with $120,000
(or 75%) in stocks. To get back to 6040, you should buy more bonds or sell
stocks in your portfolio.
Rebalancing does not have to be
an annual event, but you should check
your allocation each year and, if it has
drifted out of whack, make purchases
and sales.
Diversify. When you construct your
stock portfolio, and as you rebalance,
be sure to diversify your holdings.
A good strategy is to put at least half
of your money into one or two broad
mutual funds—an S&P index fund or
a low-fee large-company fund, such as
DODGE & COX STOCK (DODGX), for example—
or exchange-traded funds. Put the rest
into at least 10 stocks in a range of
businesses, such as technology, energy
and consumer goods. Although there
is debate about how many stocks you
need to own in order to achieve the
protection of diversification, the
minimum seems to be 10. I also recommend owning foreign stocks and
small companies, either in funds or
as individual shares.
Andrew Carnegie, the famously rich
industrialist and philanthropist, once
said, “Put all your eggs in one basket
and watch the basket.” That may have
worked for him, but most investors
should do the opposite: Put your eggs
in many baskets (diversify) and pay
as little attention as possible (invest
automatically and sell reluctantly).
As Buffett said, “We continue to
make more money when snoring
than when active.” JAMES K. GLASSMAN CHAIRS GLASSMAN ADVISORY, A
PUBLIC-AFFAIRS CONSULTING FIRM. HE DOES NOT WRITE
ABOUT HIS CLIENTS AND DOES NOT OWN ANY OF THE
SECURITIES MENTIONED IN THIS COLUMN. HIS MOST RECENT
BOOK IS SAFETY NET: THE STRATEGY FOR DE-RISKING YOUR
INVESTMENTS IN A TIME OF TURBULENCE. REACH HIM AT
JGLASSMAN@KIPLINGER.COM.
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AHEAD Commentary
MILLENNIAL MONEY
Rivan Stinson
The Risks of Paying Peer to Peer
F
inding a good hairstylist is hard,
but finding a traveling hairstylist
is even harder. As a splurge, I
looked for someone who would come
to my apartment to spend four or more
hours braiding my hair. Thanks to social media, I succeeded.
My text exchanges with the stylist
went smoothly. I described what I
wanted, and she told me to send a nonrefundable $150 deposit—half of the
cost—via PayPal’s peer-to peer (P2P)
payment function. The alarm bells
didn’t go off until I couldn’t reach
her on the day of the appointment.
Was this stranger going to show up
as promised, or did I just lose $150?
Fortunately, she did show up that
day. I hadn’t been able to reach her because her cell phone battery had died.
In hindsight, I realized she could have
catfished me—created an elaborate
fake profile and passed off someone
else’s work as her own—and then not
shown up. I would have been scammed,
with no recourse from PayPal.
Growth of P2P. Members of my genera-
tion are big users of P2P apps, such as
Cash, PayPal, Venmo and Zelle. The
apps are fast, and often all it takes to
transfer money to another’s bank account is an e-mail address or phone
number. In fact, 62% of millennials used
these apps to send or receive money in
2017, reports Bank of America.
But as the use of P2P apps grows,
so do complaints about scams. The
Federal Trade Commission added online payment systems to its complaint
database last year, and I’ve noticed
more scam complaints posted on social media sites. The schemes are similar: Someone pretends to be selling,
say, concert tickets, dupes victims into
sending money and then disappears.
As consumers, we have come to
22
KIPLINGER’S PERSONAL FINANCE
05/2018
expect some form of protection when
we link our bank accounts or debit
cards to these apps. But when you’re
using electronic forms of payment to
make a purchase from another individual—instead of a traditional merchant—the rules are different and
there’s less protection against fraud,
says Sarah Grotta, of Mercator Advisory Group. If anyone ever took the
time to read the fine print, they’d
know this. For instance, according to
PayPal’s purchase protection guidelines, when you send money through
its friends-and-family P2P system,
you’re not covered for any losses because you authorized the transaction.
If someone hacks
into your PayPal
account to make
FRAUDSTERS
an unauthorized
transaction,
ARE USING
however, you’re
PAYMENT APPS
protected.
SUCH AS ZELLE
Venmo, owned
TO TRICK YOU
by PayPal, states
in its user agreeOUT OF YOUR
ment that perMONEY.
sonal accounts
are meant to
be used only
between family and friends. Its definition of what’s considered an unauthorized transaction is similar to
PayPal’s. The same goes for Cash.
Zelle, another P2P app, looks like
a safer bet because it’s backed by big
banks, such as Chase, Citi and Wells
Fargo. But banks that have integrated Zelle into their systems
stress that the app is for sending
money to someone you know. If
you do business with strangers and
get scammed, you’re likely out of luck.
Grotta’s advice is never to send
money to people you don’t know. If
you’ve been hacked and money has
been transferred from your account
without your consent, contact your
bank and the P2P service by e-mail
or phone as soon as possible. The P2P
service will investigate your claim
and determine if a full refund is due.
Ultimately, treat your P2P payments
as you would cash. If you wouldn’t
feel comfortable giving a stranger cash
before receiving a product or service,
don’t send that person money by
Venmo, either. Once the money is
gone, it’s gone. I’ll be sure not to take
the flight risk with my money again. ■
TO SHARE THIS COLUMN, PLEASE GO TO KIPLINGER.COM/LINKS/
MILLENNIALS. YOU CAN CONTACT THE AUTHOR AT RSTINSON@
KIPLINGER.COM.
You can wish for
retirement.
Or you can plan
for retirement.
Let’s get started. Call 1-866-954-4321, or visit mutualofamerica.com
Mutual of America® and Mutual of America Your Retirement Company® are registered service marks of Mutual of America Life Insurance Company,
a registered Broker/Dealer. 320 Park Avenue, New York, NY 10022-6839.
AHEAD Commentary
MONEY SMART WOMEN
Janet Bodnar
A Guide to Marital Money Bliss
24
KIPLINGER’S PERSONAL FINANCE
05/2018
commingled,” says Springer. “Yours is
yours and mine is mine.”
Credit expert John Ulzheimer goes
a step further. “There’s no reason to
acquire any kind of joint debt unless
you need two incomes to qualify—for
a mortgage, for example,” he says. And
because your credit score is tied to
your Social Security number, changing
your name is a personal preference
that doesn’t affect your score.
In addition to your credit, any assets
you bring to the marriage should remain in your own name (and under
your control), says Alyssa Rower, a
matrimonial lawyer in New York City.
That could mean a business, an inheritance or even a significant savings account. Although prenuptial agreements are more common in second
marriages or among older couples,
Rower often draws up prenups for first
marriages among people in their late
you fund your account with pretax
contributions and the other with
after-tax contributions to a Roth IRA
or Roth 401(k). “That gives you a portfolio of assets that can be used effectively in retirement based on your tax
status,” says Doebler.
It’s normal to delegate certain responsibilities to each spouse, but stay on
top of things. Judy Rubin, a partner
with Plaza Advisory Group, in St. Louis,
says that in her experience it’s still
IN ADDITION TO YOUR CREDIT,
ANY ASSETS YOU BRING TO THE
MARRIAGE SHOULD REMAIN IN
YOUR OWN NAME.
twenties or early thirties. “It’s an
uncertain world,” she says. “What
if this doesn’t work out?”
A safety net. Make sure your spouse’s
insurance policies, IRAs and other retirement accounts list you as the primary beneficiary—not your spouse’s
ex-wife or children from a former
marriage (unless you’ve agreed to
such an arrangement).
If you both have access to retirement accounts, Dawn Doebler, senior
wealth adviser with The Colony Group
in Bethesda, Md., suggests that one of
common for women to manage day-today finances while men make investment decisions. But women have savvy
instincts as investors—they tend to do
their homework and stick with their
decisions—so speak up.
Men and women each have
strengths that complement each other,
and they make a winning team. The
best financial outcome is that you
maximize your resources to enjoy a
comfortable retirement—together. ■
JANET BODNAR IS EDITOR AT LARGE OF KIPLINGER’S PERSONAL
FINANCE MAGAZINE. YOU CAN CONTACT HER AT JBODNAR@
KIPLINGER.COM.
POON WATCHARA-AMPHAIWAN
T
he average cost of a wedding
ranges from $25,000 to $35,000,
plus another $5,000 for the honeymoon. Yet in the excitement of planning it all, it’s easy for women to lose
sight of an even bigger money challenge:
maintaining their independence—
“thinking single”—while facing a
lifetime of financial togetherness.
You may have said “for better or
for worse” in your marriage vows.
For better, a successful marriage can
mean the two of you working—and
saving—toward common goals. For
worse, your union could end in divorce
or the death of your spouse. So it’s
critical for women to go in with their
eyes wide open. Unfortunately, sometimes they’re focused on the wrong
thing. “A lot of women are more likely
to know their fiancé’s neck size and
zodiac sign than his credit score,”
says Julie Springer, of TransUnion,
the credit bureau.
That single piece of information
can speak volumes about your future
spouse’s money-management skills.
And while you’re at it, you might also
have a heart-to-heart about your financial goals. You may be surprised to
find that your partner wants to travel
while you want to buy a house, or that
you want to travel while he has his
eye on a new sports car. Better to
know up front so you can make some
compromises (see “Financially Happy
Ever After,” Feb.).
Don’t shy away from addressing
nitty-gritty details for fear of making
the marriage seem more like a business relationship than a love match.
For example, when you marry, you
should maintain credit in your own
name (presuming you have a good
credit history). “Credit scores are
associated with your Social Security
number, so those scores are never
Go to: FisherCalcu lator.com
MONEY
THE RIGHT ADVICE
AT THE RIGHT PRICE
We took a deep dive
into the financial advice
marketplace to find the
best adviser for you.
BY SANDRA BLOCK
and LISA GERSTNER
26
KIPLINGER’S PERSONAL FINANCE
05/2018
THANKS TO TECHNOLOGY AND REGULATORY REFORMS,
the financial advice industry is undergoing a tectonic shift.
You now have more options if you’re seeking advice from a
planner who is committed to looking out for your best interests. And if you shop hard enough, you can find that advice
for a lower cost. If you don’t require a lot of hand-holding, you
can get guidance on how to invest your retirement savings for
less than the cost of a Broadway show. Need a real live planner to help you manage your student loans or talk you off
the ledge every time the market hiccups? You may be able
to find one for less than you pay for your monthly cable bill.
You’ll still need to put some time into the search because
finding the right fit isn’t easy, says Michael Kitces, a partner
at the Pinnacle Advisory Group. Kitces is also co-founder of
XY Planning Network, an organization of financial planners
who target millennial and Generation X clients and accept
no compensation from selling financial products (see page
28 for more on XY). The financial advice business can make
it “painfully difficult to find and select an adviser,” he says.
ILLUSTRATIONS BY GIOVANNI DA RE
Stephen Elliott, 37, hired a fee-only planner on an hourly
basis after doubting whether his previous financial adviser’s incentives were aligned with his own. “My adviser was
pushing products but couldn’t explain why he was pushing
them,” says Elliott. As he explored his options, one firm told
Elliott that he could pay by the hour—but he got the impression that the firm focused primarily on wealthier clients,
charging many of them a percentage of assets under management. Ultimately, he found Lisa Weil, the principal and
owner of Clarity Northwest Wealth Management, in Seattle.
Weil is also a member of the Garrett Planning Network,
whose advisers charge by the hour and don’t require a longterm commitment. At a rate of $200 an hour, she spent 16
hours last year creating a financial plan for Elliott and his
family, for a total of $3,200. If Elliott wants ongoing guidance, he can continue working with Weil and pay by the hour.
FINDING THE RIGHT FIT
Just looking for a check-up to make sure you’re on the right
track? You may be able to get a free consultation from your
financial services provider. Schwab, for example, offers clients one-time planning consultations on a range of topics,
including overall financial planning, retirement planning,
college savings and debt analysis. There is no minimum
investment required for this service.
05/2018
KIPLINGER’S PERSONAL FINANCE
27
MONEY
Financial services firms have also
introduced a host of offerings that
combine portfolios with in-house
advisers—but you’ll never meet the
adviser face-to-face. For example, for
an annual fee of 0.30% of assets, Vanguard’s Personal Advisor Services offers unlimited help, via phone, video
or e-mail, from its stable of certified
financial planners (for an explanation
of credentials, see the box at right).
The minimum investment is $50,000.
When developing a customized portfolio, the advisers will include nonVanguard holdings, such as stock you
inherited, and they will provide advice
on all aspects of your financial life.
If you’re digitally savvy and primarily want help with investments, robo
advisers such as Betterment and
Wealthfront will put together a portfolio of low-cost funds, based on your
time horizon and risk tolerance, for
about 0.25% of the amount invested.
Suppose you want a dedicated adviser you can call when you experience a major life change or you need
to be talked out of investing your retirement savings in bitcoin. One option
for people with deep pockets is a
money management firm that manages your portfolio. You may need $1
million in investable assets, and you’ll
typically pay an annual fee of at least
1% of assets under management. A
money manager may also include free
financial planning.
Another option is a brokerage firm
that sells products on commission.
Ameriprise Financial, with 10,000
advisers across the U.S., has no minimum investment requirement for
brokerage accounts, but clients who
purchase mutual funds offered by
Ameriprise pay a front-end sales
charge of up to 5.75%. Ameriprise advisers are also compensated for selling
529 college-savings plans, variable annuities and other products. Edward
Jones, with more than 15,000 advisers
around the country, also charges commissions on its brokerage accounts,
and many of its funds also carry up
to a 5.75% front-end load.
28
KIPLINGER’S PERSONAL FINANCE
05/2018
Where We Shopped
The Range
of Advisers
Financial advisers come with a wide
array of designations, and some play
multiple roles. These are the advisers
and services we shopped for three hypothetical clients.
A certified financial planner (CFP)
may address a range of planning needs,
such as budgeting; saving for retirement
and other goals; estate and tax planning; and allocating or managing investments. CFPs may be paid by the hour, by
the project, on a subscription or retainer
basis, as a percentage of investment assets under management, or some combination. CFPs must act as fiduciaries, putting their clients’ best interests above
their own. Among other requirements,
a CFP must pass an exam on personal financial planning and have 4,000 hours
of apprenticeship with a CFP or 6,000
hours of professional experience.
In the realm of investment advice, a
registered investment adviser (RIA) is
registered with the Securities and Exchange Commission or state securities
regulators, has passed examinations,
and must act as a fiduciary. Such advisers, also called money managers, often
charge a percentage of the assets they
manage for you.
A broker-dealer sells securities, such
as stocks and mutual funds. Brokers typically earn commissions on investment
transactions. Larger brokerage firms often have an advice division, in which representatives may act as brokers, RIAs
and planners.
We also took a look at robo advisers,
which rely on computer algorithms to
formulate and manage a portfolio based
on your financial situation and goals. Robos typically cost less than traditional
money managers. Some robo advisers
offer hybrid services, incorporating, say,
phone access to an investment adviser
or CFP to answer questions.
A major drawback of this type of
arrangement is that the adviser is rewarded for selling investments that
generate the highest commissions and
fees, even if they’re not the best choice
for you. The Securities and Exchange
Commission recently charged Ameriprise with selling retirement-account
customers high-cost mutual fund
share classes when less-expensive
share classes were available. In a settlement with the SEC, Ameriprise
refunded payments, plus interest, to
the affected customers and switched
them to the lowest-cost share class
for which they were eligible. Concern
about potential conflicts of interest,
particularly among advisers who receive commissions, was the impetus
for the Department of Labor’s fiduciary rule (see the box on page 33).
CONFLICT-FREE ADVICE
You can avoid conflicts by working
with a certified financial planner.
CFPs must put your interests first, and
they may charge by the hour or base
fees on a percentage of your assets.
In the past, these planners were often
unaffordable for people who didn’t
have a lot of money to invest, but that’s
changing, too. For example, advisers
with the Garrett Planning Network
(www.garrettplanningnetwork.com)
typically charge from $180 to $300
an hour. Some regions of the country
have no Garrett planners, but interest
among advisers is growing. “We’re
seeing a huge escalation in new members this year,” says Sheryl Garrett,
founder of the network. “The public is
pushing the industry in the right way.”
Similarly, XY Planning Network
(www.xyplanningnetwork.com),
founded by Kitces and fellow CFP
Alan Moore, focuses on providing feeonly advice to Generation X and Y clients. There are no minimums; clients
have the option of paying a monthly
fee, ranging from about $75 to $200.
Other planners are looking for new
ways to structure their fees. Jonathan
McQuade, a fee-only CFP in Austin,
Texas, charges separately for financial
MONEY
planning and investment management. For planning, he charges a fixed
fee that ranges from $150 to $500 a
month. For investment management,
he charges 0.75% of assets. McQuade
says his system emphasizes the value
of overall financial planning, which he
says is often treated as an afterthought
to portfolio management.
Some fee-only advisers base their
fees on clients’ net worth rather than
the amount of money they have invested. Justin Harvey, a CFP and president of Quantifi Planning, in Philadelphia, charges an annual fee of 1% of
his clients’ income and 0.5% of their
net worth, which covers both investment management and financial planning. He says the model allows him to
work with clients—many of whom are
physicians—who have high earnings
but not a lot of savings. “I can get fairly
compensated, and they can get the nuanced, detail-oriented planning help
that they need,” he says. Look for a
fee-only planner at the website of the
National Association of Personal Financial Advisors, www.napfa.org.
As hybrid financial services
proliferate, advisers who fail to offer
comprehensive financial advice at a
competitive price risk losing business.
After working with a traditional adviser for more than a decade, Ken
Chin-Purcell, 57, decided to move his
money to Personal Capital, a hybrid
service that combines digital financial
tools with human advisers. Personal
Capital matches investors with one of
about a dozen portfolio strategies,
which may include a mix of individual
U.S. stocks plus exchange-traded
funds for fixed-income and alternative
investments. Chin-Purcell pays Personal Capital less than 1% of assets
managed, compared with 1.3% for his
previous adviser, and he has access
to a dedicated CFP. They talk on the
phone every two weeks or so.
To help you decide what kind of
financial advice is best for you, we’ve
come up with options for three hypothetical clients at three different
stages of life.
30
KIPLINGER’S PERSONAL FINANCE
05/2018
SCENARIO 1
SINGLE AND SAVING
A single, 34-year-old woman (let’s call her Kelly) has $100,000 in her 401(k) plan. She
just received a $50,000 inheritance from her grandmother. Her goals include budgeting,
saving for retirement, paying off student loans and building an emergency fund.
A
t this stage, a robo adviser with a
low minimum asset requirement
may be sufficient. For extra help with
broader planning, Kelly could consult
with a financial planner who charges
a flat fee or by the hour.
Robo adviser. Betterment, which requires no minimum account balance
and charges a low annual fee of 0.25%
of assets managed in its Digital plan,
could be a great choice for any portion
of the inheritance to be invested in
taxable accounts or in a traditional
or Roth IRA. Based on clients’ input
about their financial situation and
goals, Betterment designs a portfolio
of inexpensive exchange-traded funds.
The service includes tax-efficient investing strategies and automatic rebalancing, plus access to advisers who
can answer broad financial questions
through Betterment’s mobile app.
With a $100,000 minimum, you can
use the Premium service, which
charges a 0.4% annual fee and includes
unlimited access to CFPs via phone,
e-mail or Betterment’s mobile app.
Another option is Wealthfront,
which offers taxable brokerage accounts, traditional and Roth IRAs,
and 529 college-savings accounts,
invested in low-cost index funds.
Like Betterment, Wealthfront considers your financial situation and goals
to formulate a portfolio and includes
automatic rebalancing and tax optimization. Wealthfront requires a $500
minimum balance, and it charges
0.25% of assets managed.
401(k) help. Depending on where her
401(k) is invested, Kelly may be able
to get a free checkup. With employers
that offer 401(k)s from Vanguard and
elect to include the free Personal Online Advisor service, for example, plan
participants can take advantage of
custom recommendations on contributions, asset allocation and investments. Plus, clients can get analysis
of their entire investment portfolio,
including how other income sources,
such as a pension or Social Security
income, play into their overall retirement plan. Kelly could enter information about her inheritance to get
advice on how to handle it.
Employers can also opt to include
Vanguard’s Managed Account Program, which takes the extra step
of managing your 401(k) portfolio,
including regular rebalancing and
quarterly progress reports. The fee
is tiered, starting at 0.4% annually for
the first $100,000 of assets and dropping to 0.1% for the portion of the
balance higher than $500,000. Both
Personal Online Advisor and the Managed Account Program are powered
by Financial Engines, which also has
relationships with Fidelity and T.
Rowe Price, as well as many Fortune
500 companies that include its advisory services in their employee benefits packages.
Fee-only financial planner. A certified
financial planner can cover all the
bases, helping Kelly manage her cash
flow and decide what to do with her
inheritance. Because she has student
loans and still needs to build an emergency fund, for example, a planner can
help her weigh how best to allocate
her extra cash. A planner can also
alert her to any other needs; as a single
person relying on only her own income and without large assets to fall
back on, she may want to have disability insurance, for example. A planner
may review her 401(k) allocation and
advise whether and how she should
invest in an IRA or brokerage account.
A one-time consultation with a
planner who charges by the hour or
with a flat fee may be enough to set
Kelly on course; she could search for
a CFP through the Garrett Planning
Network, whose planners require no
asset minimums for hourly services.
Or she could turn to the XY Planning
Network, whose planners require no
asset minimums and include the
option of a monthly subscription
fee (many also offer hourly options).
XY planners may offer a basic review
and initial plan for as little as $500
to $1,000.
XY planners will also meet with
clients over the phone or through a
video chat. The virtual option could
be especially beneficial for people who
live in remote areas or who want a
planner who fills a certain niche. For
example, Jane Yoo, a fee-only CFP and
XY Planning Network member in
Oakland, Calif., focuses on high-earning professional women who don’t yet
meet big portfolio minimums.
KipTip
How to Vet an Adviser
Interview a few advisers before you settle on one. Having conversations with the advisers
will also give you a feel for how your personalities mesh. Ask questions, and check out
their credentials and disciplinary history, too.
The interview. Make sure you understand the basics. What are the adviser’s certifications,
and what services does she offer? Is she a fiduciary? Find out more about her specialties.
Does she focus on areas where you need help (say, estate planning and retirementaccount withdrawal strategies), and does she work with other clients like you? What’s
her overall philosophy on financial planning and investing? Also ask how many years she
has been in practice.
Dig into the numbers, too. What is the adviser’s minimum investable asset requirement? How will he charge you—as a percentage of assets under management, by the
hour, or some other model? Get an estimate of how much you’ll pay for advisory services,
and ask about fees on underlying investment holdings if he manages your portfolio. Find
out whether the adviser is paid commissions—and if so, on what types of products.
Background check. At www.letsmakeaplan.org, you can verify a planner’s certification as
a CFP (click on “Verify a CFP Professional’s Status”). You’ll also see any information on the
planner’s disciplinary history with the CFP Board and on bankruptcy filings in the past 10
years.
To vet a registered investment adviser, visit the database at www.investor.gov. You can
search an individual’s name and click on “Detailed Report” to see information on qualifications, employment history, disciplinary actions by regulators, criminal convictions and
other details. You can also search a firm’s name to view its Form ADV and Part 2 brochures, which have information on the types of business the firm conducts, its clientele,
disciplinary actions, fee schedules, conflicts of interest and other items.
The Investor.gov database also lists whether an adviser or firm is registered as a broker.
For more on a broker, visit https://brokercheck.finra.org, where you can search an individual’s or firm’s name to get such details as years of experience, licensing, exams passed and
regulatory actions.
05/2018
KIPLINGER’S PERSONAL FINANCE
31
MONEY
SCENARIO 2
THE TUG OF COMPETING PRIORITIES
The Petersons are both 50, with two boys: one a junior in high school and one a freshman in college. They have $500,000 in 401(k)
and taxable investment accounts. Their goals include saving and paying for college and saving for retirement. They would also like to
pay off several thousands of dollars in credit card debt.
A
s they send their kids through
college and save and plan in earnest
for retirement, the Petersons would
benefit from more-comprehensive
services. Depending on how much
hand-holding and in-person consultation they want, their best options
range from a hybrid robo adviser that
incorporates advice from a human to
a certified financial planner or fullservice brokerage firm.
Fee-only financial planner. To get a
broad financial plan and form a oneon-one relationship with an adviser,
the couple should look for a CFP who
32
KIPLINGER’S PERSONAL FINANCE
05/2018
has expertise in saving and investing
strategies for retirement and college,
estate planning, and ensuring appropriate insurance coverage.
Bobbie Munroe, a fee-only CFP near
Tallahassee, Fla., says she would start
the couple with an hourly planning engagement ($250 an hour for five to six
hours) to create a road map, which
may include funding goals such as
health care and travel in retirement,
balancing retirement savings with
paying for college, reviewing their investments for appropriate allocation
and tax management, and assessing
their need for life, disability and long-
term-care insurance. If they wanted to
extend the relationship with Munroe,
they could continue on an hourly basis
or for a yearly retainer of about $3,000
to $3,500. Other planners may offer a
free (though likely less detailed) initial
consultation followed by ongoing advice charged on retainer or as a percentage of assets under management.
A planner may also refer the couple
to other specialists, as needed—for
example, a lawyer to draft a will or a
certified public accountant (CPA) to
prepare a tax return and offer specialized tax-planning strategies. CPAs
who also have the personal financial
specialist (PFS) credential have passed
a test on broader financial planning
and may offer comprehensive services.
Broker or investment adviser. The
Petersons may have enough investable
assets to be eligible to work with a
money manager at a brokerage firm
and get advisory services. With at
least $250,000 in investable assets,
for example, the couple would qualify
for the services of Merrill Lynch
Wealth Management, which offers a
one-on-one relationship with an adviser whom clients meet face-to-face.
Adviser fees with the Merrill Lynch
service vary, but they are usually
based on assets under management—
typically between 1% and 2%. (Clients
with at least $1 million will have an
easier time finding bank wealth managers and registered investment adviser firms that will work with them,
and they usually pay a lower percentage of assets; see scenario 3.)
Representatives at a full-service
brokerage may be both brokers who
sell financial products on commission
and registered investment advisers.
Keep in mind that when acting as a
broker, a representative generally must
meet only a suitability standard rather
than the fiduciary standard, meaning
that she must believe that the recommendation is suitable for you (but not
necessarily in your best interest). For
more on the fiduciary standard, see
the box at right.
Hybrid robo adviser. If the couple
want investment-centric advice and
don’t mind working with an adviser
(or group of advisers) remotely, a service that combines automated portfolio assessment and rebalancing with
access to a human adviser may provide
enough assistance at a lower cost. For
an asset level between $50,000 and
$500,000, Vanguard Personal Advisor
Services (0.3% annual fee for assets of
up to $5 million) provides an advisory
team, which may consist of CFPs or
advisers who are working toward becoming CFPs.
Certain types of accounts, including
401(k), 403(b), 529 and UGMA/
UTMA accounts, can’t be managed
under the service and don’t count toward the $50,000 asset minimum,
even if they’re held with Vanguard
(but can be considered in your overall
plan). The adviser relationship centers
around the investment portfolio, but
planners can also help with collegesavings strategies, estate planning,
and other financial-planning tasks.
For an annual fee of 0.28% and
with a $25,000 minimum investment,
Schwab Intelligent Advisory offers
online planning tools and access to
CFPs—but you may not talk to the
same planner every time. After you fill
out information about your finances
and goals through an online tool, a
planner will do an initial consultation
to discuss your situation and create a
financial plan. Planners are available
thereafter for unlimited consultation.
The Fiduciary Rule
Looking Out for Your Best Interest
The Department of Labor’s fiduciary rule sounds straightforward enough: It requires financial professionals who give advice about retirement accounts to put their clients’ interests
ahead of their own. But critics of the rule say it would make it more difficult for investors
who don’t have a lot of money to get advice. The Trump administration has delayed enforcement of key provisions of the Obama-era rule until mid 2019, and a U.S. circuit court
recently ruled that the Labor Department doesn’t have authority to enforce it. The issue
is likely to end up in the Supreme Court.
The rule was designed to deter brokers from encouraging investors to roll their 401(k)
plans and other employer-based plans into retirement accounts stuffed with high-cost
investments. Brokers adhere to a less stringent standard than the fiduciary rule. Investments they recommend must be “suitable,” given a client’s age and risk tolerance, but
they don’t have to be the lowest-cost options.
Some states are enforcing their own version of the fiduciary rule, and the Securities
and Exchange Commission is considering a fiduciary rule that would apply to all brokerage
accounts, not just retirement plans. Meanwhile, the proposals may have already dampened sales of some high-fee products in retirement accounts. Overall sales of annuities
within IRAs dropped 13% in 2017, according to the LIMRA Secure Retirement Institute.
Sales of variable annuities—which typically have higher fees than other types of annuities—within IRAs fell 16%.
There are still plenty of people peddling pricey products along with their financial advice. They often sweeten the deal by providing a free lunch or dinner, complete with colorful PowerPoint presentations. Mary and Len Bach of Murrysville, Pa., have enjoyed more
than 30 free meals as volunteer consumer advocates for AARP, and they often agree to
schedule a follow-up meeting with the adviser who gives the presentation.
Len, 76, says the investments they offer are usually legal, but they typically come with
high commissions. Worse, the advisers rarely spend time determining whether the products they’re selling are appropriate for a potential client’s individual circumstances, he
says. The Bachs have even seen advisers try to sell annuities with a 12-year holding period
to people in their nineties. On the plus side, the food is usually pretty good. “They wouldn’t
give you a bad meal and try to sell you something,” Len says.
You can protect yourself by making sure that any planner you hire is a registered investment adviser or certified financial planner. RIAs, who are licensed to give investment advice, are required to act in their clients’ best interests. Likewise, the Certified Financial
Planner Board of Standards requires all CFPs who provide financial-planning services to
act in their clients’ best interests, and that’s not limited to retirement accounts.
05/2018
KIPLINGER’S PERSONAL FINANCE
33
president and CEO of Excel Tax &
Wealth Group, near Orlando, Fla.,
specializes in retirement, estate and
tax planning along with investment
management. He requires no asset
minimum and customizes fees for
clients based on the amount of assets
managed and how extensive their
needs are. Clients with more than
$1 million pay less than 1%.
Another option is a fee-only planner
who charges a fee based on a percentage of assets. Typically, the fee is
about 1%; some planners charge 1.5%.
SCENARIO 3
READY FOR RETIREMENT
The Garcias are a 65-year-old couple who plan to retire in a year. They have more than
$1 million in 401(k)s and taxable and retirement accounts. Goals include investing their
savings, which will supplement pensions and Social Security, so they will stay ahead of
inflation without running out of money. They’d also like to pay off the remaining
$75,000 balance on their mortgage.
W
ith more than $1 million in assets,
this couple can afford to pay for
personal advice, and they may need it.
They’re facing a host of complex decisions, and they don’t have time to recover from financial mistakes before
they retire.
Among the issues an adviser can
address: how to invest their nest egg
so it will stay ahead of inflation without exposing them to too much risk;
when to file for Social Security; and
the most cost-effective way to pay for
health care, including long-term care.
A robo adviser probably won’t provide everything the Garcias need because managing their investments is
just one of the many tasks they face
going forward. They’ll want to work
with a planner who has expertise
in a wide range of areas, from estate
planning to minimizing taxes on their
retirement income.
“Comprehensive financial advice
is so critical; it’s more important than
investment advice,” says Ed Gjertsen,
34
KIPLINGER’S PERSONAL FINANCE
05/2018
vice president of Mack Investment
Securities and former president of the
Financial Planning Association. “If I
don’t look at whether you have a will
and power of attorney and something
happens to you, whatever we’ve made
in the markets could be obliterated.”
Paying a percentage of assets. One
option is a registered investment adviser, often called a money manager.
RIAs offer ongoing management of
your portfolio and may also provide
access to more-sophisticated investments, such as real estate and hedge
funds. Some RIAs include broader
financial-planning services, too, usually for no additional fee. The couple
could check out the advisory units of
regional banks, such as SunTrust or
First Republic. Or they could investigate independent RIA firms. With
more than $1 million, they would
have no trouble finding an RIA to
work with them. For example, Carlos
Dias Jr., an investment adviser and
Fee-for-service adviser. A CFP who
charges a retainer or by the hour
could be a good choice if the Garcias
are comfortable managing their investments. If they are interested in
buying long-term-care or other types
of insurance, they may want to consider a fee-based planner. These planners are typically compensated by a
combination of fees and commissions.
Gjertsen, who is a CFP, charges $250
an hour, and the cost of a comprehensive financial plan starts at about
$2,000. If his clients decide to purchase an insurance policy that pays
him a commission, he’ll use the commission to offset their fees.
Premium-level service from a financial firm. The Garcias are also eligible
for premium-level advice from their
financial services firm. For example,
clients of Fidelity Investments’ Private
Client Group receive a dedicated financial adviser who will help them
with their investments and provide
an annual review. There is no fee for
this service, but to qualify, clients
must have at least $250,000 invested
in Fidelity accounts and at least $1 million in investable assets.
Vanguard provides a dedicated CFP
to clients with more than $500,000 in
assets. The $500,000 asset threshold
also qualifies you for Schwab Private
Client, which provides access to a dedicated advisory team. FOR QUESTIONS OR COMMENTS, CONTACT FEEDBACK@
KIPLINGER.COM.
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MONEY
ID PROTECTION
Early Alert Systems
for Identity Theft
A number of services promise to notify you if you are a victim
of credit fraud. But you’ll pay a hefty fee. BY MIRIAM CROSS
THE PROBLEM WITH IDENTITY THEFT IS
that you probably won’t know when
your personal data has been stolen—
or even whether you’ve been a victim.
A recent study by Javelin Strategy &
Research found that the number of
identity-fraud victims in the U.S. totaled 16.7 million in 2017. But that’s
only the tip of the iceberg, because the
data of many millions more Americans
has been exposed and may be used in
the future to open fraudulent accounts.
Last year’s Equifax breach alone exposed addresses, birth dates, Social
Security numbers and other sensitive
data for nearly 146 million people,
launching them into ID fraud limbo.
Enter ID theft protection services.
For $10 to $30 a month, they will alert
you via text, e-mail or mobile app if
they detect (or suspect) misuse of your
data or accounts—perhaps sooner than
you’d notice on your own—and to walk
you through repairs.
Do you need an ID theft protection
service? That depends on how much
you’re willing and able to do by yourself. Most paid plans offer at least one
tier that watches over all three credit
bureaus at once and can flag changes
to your reports—such as the appearance of a new credit account—more
quickly than you might detect by ordering your once-a-year freebies from
www.annualcreditreport.com. Moreover, a good service will sweep online
36
KIPLINGER’S PERSONAL FINANCE
05/2018
databases to see if your personal details pop up in court records, payday
loans, sex offender registries or applications for new financial accounts.
The service will also keep an eye out
for address changes that could suggest
a criminal is trying to reroute your
mail, and it might look out for unfamiliar names or addresses linked to
your SSN, too.
ID theft protection services often
scour the secret chat rooms and blackmarket websites of the “dark web”
for evidence that your SSN, e-mail
address, driver’s license number, passport number, mother’s maiden name
and other identifying info are up for
grabs. “Some of this monitoring is
challenging or dangerous to do on
your own without the technical knowhow,” says Eva Velasquez, president
of the Identity Theft Resource Center.
And although freezing your accounts
is an important preventive step, it
won’t stop a crook from fiddling with
your existing accounts.
Monitor to the max. A comprehensive
package includes four main services:
monitoring your credit report, monitoring other data tied to your identity,
dealing with the aftermath of ID theft,
and covering certain costs to restore
your identity. (The box on page 38 lists
plans from six popular services.)
If your information is compromised,
“restoration” or “resolution” specialists can help you through the recovery
process, which might feel overwhelming if you try to tackle it alone. For
example, a dedicated case manager
(equipped with a limited power of attorney, if necessary) may notify federal
agencies, complete paperwork and
correspond with creditors on your
behalf. Or a specialist can talk you
through the hassle of canceling and
replacing credit cards, insurance cards
and more if you lose your wallet.
Insurance policies, a staple of most
plans, are less useful. Many providers
tout $1 million policies because “it’s
an easy insurance policy to give a
big headline number to,” says Nick
Clements, cofounder of MagnifyMoney
.com. But the toll is mostly measured
in the hours you spend and the stress
you feel when you try to repair the
damage that ID theft can cause. Most
policies are limited to small payouts—
for example, reimbursing out-of-pocket
expenses that come with restoring
Budget Option
DIY Solutions
With some legwork, you can piece together many of the same features yourself, either free or at low cost.
Freeze your credit reports. This step
prevents new lenders from viewing your
reports, and it should block thieves from
opening new credit accounts in your name.
Until recently, placing or lifting a freeze
generally cost $5 to $10, depending
on your state. But a bill making its
way through Congress requires creditreporting agencies to let consumers do
it free. Equifax and TransUnion both also
allow free “locks,” which is a simpler way
to block access to your report, but freezes
have stronger legal protections.
Monitor your reports. Credit Karma will
show you your Equifax and TransUnion
reports on a weekly basis and alert you
to changes in those reports. Discover and
Mastercard cardholders can sign up for
free monitoring of their Social Security
numbers on the dark web.
your identity, such as postage and
notary fees, or replacing documents
such as passports, according to a 2017
report by the Government Accountability Office. They may also reimburse
you for lost wages or legal fees.
ID theft services can’t do much to
get ahead of medical fraud, aside from
scanning the dark web for health care
identification numbers. Don’t expect
help detecting tax fraud, either.
Before you buy. Most services offer sev-
eral plan tiers; the plans we list in the
table on page 38 are the ones we consider the best values. But check out a
service’s other plans and decide which
features you want, in case you are willing to trade certain features for a lower
price. For example, a less-expensive
tier of service may mean phone assistance and form letters to help restore
your identity instead of unloading part
of the burden onto a case manager.
Some services offer plans that include monitoring of your children or
ILLUSTRATION BY JOE ANDERSON
a parent. For example, LifeLock Senior
($19.99 per month) sends alerts to both
you and your parent and monitors for
changes in investment accounts, home
titles and more. Child plans can look
out for credit reports in your child’s
name and some public records. Some
providers throw in a few preventive
measures, such as antivirus and antiphishing software; a junk mail opt-out;
password managers; or the removal
of personal information from peoplefinding websites.
To avoid committing for the long
term, see whether the service offers
a free trial or a money-back guarantee
(most of the services we name offer
free trials, although not necessarily
for the tier we list). Or start with a
monthly subscription rather than
paying for the whole year. If you
decide you don’t need it, you’ll have
to remember to cancel before it automatically renews.
Set up alerts. A credit freeze or lock
won’t stop a crook from fiddling with your
existing credit card or financial accounts.
But you can often easily set up alerts to
spot unusual activity in your accounts,
such as large withdrawals or payments.
Get free help. If you become a victim
of identity fraud, you can browse recovery
steps at the Federal Trade Commission’s
IdentityTheft.gov site, generate a tailored
remediation plan and print sample dispute letters. The Identity Theft Resource
Center (www.idtheftcenter.org) posts
guides to recovering from identity theft
(including fixing problems that result
from lost wallets and correcting misinformation on medical records), as well as
links to state resources; you can also
ask questions by phone, e-mail or online
chat. Credit Sesame offers its members
(signing up is free) access to restoration
specialists. Also check with your employer,
bank or credit card issuers to see if they
offer resolution assistance.
YOU CAN CONTACT THE AUTHOR AT MCROSS@KIPLINGER.COM.
SEE ID THEFT PROTECTION PLANS ON THE NEXT PAGE
05/2018
KIPLINGER’S PERSONAL FINANCE
37
MONEY
Thwarting ID Thieves
6 ID THEFT PROTECTION PLANS: WHAT YOU GET
Every provider listed below (except IDShield) offers a choice of plans; we list the plan with the best combination of comprehensive service
and price. For example, each plan here (except IDShield) offers three-bureau monitoring, identity monitoring (including “dark web” monitoring) and restoration assistance. Prices are for monthly subscriptions, but you may get a discount if you buy a full year up front. Family
subscriptions generally cover two adults and all children younger than age 18.
Name
Experian
IdentityWorks
Premium
Identity Force
UltraSecure+
Credit
Identity Guard
Total
Monthly
price
Equifax, Experian and TransUnion,
plus daily FICO score from
Experian, quarterly FICO scores
from Equifax and TransUnion,
industry-specific FICO scores,
and credit reports from all three
bureaus (an Experian report daily;
Equifax and TransUnion
reports every 90 days)
Insurance
Court records, change of
address, account takeover,
Social Security number,
payday loans, social media
and identity validation
for institutions that
use Experian data
Placing a
fraud alert,
contacting
creditors and
lost-wallet
assistance
Up to
$1 million
Equifax, Experian and TransUnion,
plus quarterly credit scores and
reports from all three bureaus.
(Note: The standard UltraSecure
plan without credit monitoring
costs $17.95 per month and includes all other features.)
Court records, change of
address, Social Security
number, bank and credit
card activity, payday loans,
social media
Making calls and
completing
paperwork, as
well as lost-wallet
assistance
Up to
$1 million
Equifax, Experian and
TransUnion, plus monthly
credit score from TransUnion
New account applications,
change of address, account
takeover, payday loans, tax
returns filed using software
Placing a
fraud alert and
expert advice
Up to
$1 million
Experian only, plus monthly
credit score from Experian
Court records, change of
address, Social Security
number, payday loans,
social media
Placing a fraud alert,
notifying relevant agencies and creditors, lostwallet assistance and
initiating disputes
No
$29.99
(additional
$5.99 per
child)
Equifax, Experian and
TransUnion, plus monthly
credit score from Equifax
and annual reports
from all three bureaus
Checking and savings
account applications, court
records, change of address,
account takeover, Social
Security number, bank,
credit card and investment
account activity
Making calls, expert
advice and lostwallet assistance
Up to
$2 million
$29.95
Equifax, Experian and TransUnion,
plus 28 FICO scores (from different
industries) and credit reports from
all three bureaus on a quarterly
basis ($39.95 for Ultimate 3B
with monthly credit reports)
Social Security number
Expert advice and lostwallet assistance
Up to
$1 million
$19.99
(single)
$29.99
(family)
$23.95
(additional
$2.75 per
child with
ChildWatch)
$14.99
(single)
$25.99
(family)
IDShield
$24.95
(family)
MyFICO
Ultimate 3B
38
Other
monitoring
Resolution
$9.95
(single)
LifeLock
Ultimate Plus
Credit
monitoring
KIPLINGER’S PERSONAL FINANCE
05/2018
ASK KIM
Kimberly Lankford
Making the Call on Phone Insurance
Now that new cell phones are more expensive, should I consider getting cell phone
insurance? What are the best options?
POON WATCHARA-AMPHAIWAN
M.S., SAN DIEGO
Cell phone insurance isn’t worth the
cost if you rarely lose or break your
phone. Plus, the manufacturer’s warranty usually covers malfunctions in
the first year. Logan Abbott, president
of Wirefly.com, a website that analyzes phone plans, says you’re better
off buying a sturdy case, such as an
OtterBox ($18 to $40).
But if you tend to be hard on your
phone (or have a teenager who is), you
may want some extra coverage. You
have several options, with different
prices, deductibles and exclusions.
For iPhones, AppleCare+ provides
the best coverage. For $149 for most
iPhones (or $199 for the iPhone X), it
provides two years of tech support and
hardware repair. It also covers two incidents of accidental damage, with a
$29 “service fee” for a cracked screen
and a $99 charge for other damage.
If Apple decides to replace rather than
repair your phone, you may get a replacement the next day.
AppleCare doesn’t cover lost or
stolen phones, but the insurance sold
by most wireless providers does.
Sprint charges $13 per month for Total
Equipment Protection Plus, which
now includes tech support from
AppleCare. Sprint’s plan charges a
$29 fee for cracked screens and a
$99 replacement fee for most broken
iPhones. Sprint-authorized technicians repair non-iPhones, though with
higher repair and replacement fees.
The plan also covers lost or stolen
phones (after a deductible). Verizon
charges $13 a month for similar coverage, with an $89 fee to replace most
broken phones.
Best Buy’s Geek Squad covers
non-iPhones for $7.99 per month
for repairs or $10.99 to add theft
and loss coverage. You’d pay about
$60 to fix a cracked screen at a repair
facility (available for Samsung phones
in 11 states). Otherwise, you ship
your phone to be repaired or replaced,
and the replacement fee runs $149
to $199.
Roth anymore. But what if I contribute to a
Roth and then discover my income is too high?
J.C., EAST LANSING, MICH.
Even though the new tax law prohibits
people from undoing a conversion they
Deducting interest on home-equity loans.
The new tax law changed the rules about
deducting home-equity loan interest. Can I
still deduct interest I pay, and what documentation do I need?
M.H., PITTSBURGH
IF YOU (OR YOUR TEENAGER)
OFTEN DROP OR MISPLACE
YOUR CELL PHONE, IT MAY BE
WORTH IT TO BUY COVERAGE
ALONG WITH THE PHONE.
You can no longer deduct interest on
a home-equity loan or line of credit
unless the money is used to buy, build
or substantially improve the home
that secures the loan. Plus, you can
now deduct interest only on the first
$750,000 of home loans—including a
primary mortgage, home-equity loan
and line of credit—taken out after
December 14, 2017. (The limit is $1
million on earlier loans.)
Keep records, such as contractor
bills, that show the money was used
for home improvements, says Phyllis
Jo Kubey, an enrolled agent in New
York who is authorized to represent
taxpayers in front of the IRS.
made from a traditional IRA to a Roth
after December 31, 2017 (called recharacterizing), you can still recharacterize a Roth contribution and move
the money to a traditional IRA.
You can contribute to a Roth IRA if
your modified adjusted gross income
in 2018 is less than $135,000 if you’re
single or $199,000 if you file jointly.
If you contribute to a Roth but your
income is too high, you can ask your
IRA administrator to move your Roth
contribution (and any earnings on it,
which your administrator will calculate) into a traditional IRA before the
deadline to file your tax return for
the year of your contribution. Undoing Roth contributions. I know I can’t
undo conversions from a traditional IRA to a
GOT A QUESTION? ASK KIM AT ASKKIM@KIPLINGER.COM.
KIMBERLY LANKFORD ANSWERS MORE QUESTIONS EACH WEEK
AT KIPLINGER.COM/ASKKIM.
05/2018
KIPLINGER’S PERSONAL FINANCE
39
MONEY
DEBT STRATEGIES
SMART WAYS TO MANAGE
YOUR STUDENT LOANS
You could consolidate or refinance to lower your payments, but some options will increase
your overall costs or eliminate federal loan safeguards. BY KAITLIN PITSKER
BLAIR GREEN THIELEMIER GRADUATED
in 2011 from the University of Arkansas
for Medical Sciences with a doctorate
of pharmacy and $65,000 in federal
student loans. She diligently paid more
than her required payments every
month, but after four years her balance
still stood at $35,000—primarily because a large portion of her payments
went toward interest. Thielemier, 31,
wanted to pay off her loans faster, so
she decided to refinance with CommonBond, a private lender, which
offered to reduce her 6.3% fixed rate
to a roughly 2% variable rate. With
more of her payments going toward
principal, she was able to pay off the
balance in less than two years.
Refinancing your student loans has
advantages, but it also poses risks. You
can streamline the repayment process
by combining your loans into a single
monthly payment. You may be able
to lower your monthly payments by
extending the repayment schedule.
And some options, such as the one
Thielemier chose, can lower your overall interest rate. But plans that make
your payments more affordable typically increase the total amount you
pay over the life of the loan. Plus, refinancing federal loans with a private
loan, as Thielemier did, means giving
up some protections that only federal
loans have. Those protections include
40
KIPLINGER’S PERSONAL FINANCE
05/2018
deferment and forbearance, which
allow borrowers to postpone or reduce
payments if they’re unemployed or
experience other types of economic
hardship, as well as loan forgiveness.
If you’re interested in refinancing,
start by identifying which of your
loans are federally sponsored and
which, if any, were issued by private
lenders. Review the interest rate on
each loan, as well as your monthly
payments and how they fit into your
budget. From there, consider whether
your primary goal is convenience, a
more affordable monthly payment or
a lower interest rate. If you’re simply
looking for a way to streamline your
federal student loan payments, you
may want to consolidate rather than
refinance them. Consolidating your
federal loans will allow you to select
a repayment plan that works best for
your budget.
PROS AND CONS OF CONSOLIDATION
If you have several federal student
loans, consolidating them through
the federal government can make
payments more convenient. Most
federal student loans, including direct loans, Stafford loans and Perkins
loans, can be consolidated into a
single loan through the Department
of Education’s Direct Consolidation
Loan program. You can’t include
PHOTOGRAPH BY SÉLAVIE PHOTOGRAPHY
loans from private lenders.
Consolidating won’t lower your
interest rate or save you money over
the life of your loan. The interest rate
of your new loan will be the weighted
average of the interest rates of the
loans that you combine, rounded up to
the nearest one-eighth of a percentage
point. Federal student loan interest
rates vary annually and by loan type,
but direct subsidized and unsubsidized loans for undergraduates have
carried fixed interest rates of between
3.76% and 4.66% in recent years. To
see what your new interest rate would
be, use the loan-consolidation calculator at www.finaid.org/calculators.
Once your loans have been com-
bined into a direct consolidation
loan, the change can’t be undone. If
you’re a public-service worker, the
payments you’ve already made will
no longer count toward the 120 payments required to qualify for federal
loan forgiveness (see the box on page
42). If you have Perkins loans, which
are granted to low-income borrowers,
you may qualify for loan cancellation
if you are employed in certain fields
or volunteer with AmeriCorps or the
Peace Corps. However, that benefit
disappears in a consolidation, so you
may not want to include those loans.
Borrowers may choose to exclude
other loans from a consolidation,
too. For example, some may decide
■ BLAIR GREEN THIELEMIER PAID
OFF THE BALANCE OF HER FEDERAL
STUDENT LOANS IN LESS THAN
TWO YEARS AFTER REFINANCING
TO A LOWER-COST PRIVATE LOAN.
to keep the highest-interest loan
and funnel any extra cash toward
early repayment.
REPAYMENT OPTIONS
In addition to converting several
payments into a single monthly payment, consolidating your federal
loans will allow you to pick a new repayment plan. Most borrowers with
federal student loans are put on a 10year plan, in which you pay the same
amount each month until the loan is
paid off. If that’s unaffordable, look
for another option.
There are three main types of repayment plans: ones that stretch repayment over a longer period, ones that
gradually increase the amount of your
monthly payments, and ones that base
the amount of your payments on your
income.
Borrowers with more than $30,000
in federal debt who want to lower
their monthly payments can choose
the extended repayment plan, which
increases the loan term to 25 years.
The graduated repayment plan requires lower monthly payments at
first, then increases them, usually
every two years, as your income presumably rises.
The government also offers several
income-driven repayment plans. With
these, you’ll be expected to dedicate
10% to 20% of your discretionary
monthly income toward your loans
for 20 to 25 years, after which any
remaining amount is forgiven. (For
public-service workers, the remaining
balance will be forgiven after 10 years.)
Another option, the income-sensitive
repayment plan, calculates payments
based on your annual income, with a
repayment period of up to 15 years.
To see what your monthly payment
and loan terms would look like under
different repayment plans, go to
StudentLoans.gov and use the Repayment Estimator. The longer the repayment period, the more you will
ultimately pay in interest, so pick
the plan with the highest monthly
payment you can afford.
05/2018
KIPLINGER’S PERSONAL FINANCE
41
MONEY
PRIVATE LOAN TRADE-OFFS
Unlike the federal government,
private lenders will refinance both
private and federal student loans into
one loan. Assuming you’ve established
a good credit history, you’ll likely be
able to score a lower interest rate on
a private loan than you did during college, and borrowers with stellar credit
profiles may be able to get a reduced
rate for their federal loans, too.
If you refinance your federal loans
with a private lender, you’ll typically
lose such benefits as deferment and
forbearance. Still, borrowers with
high-paying jobs in the private sector
may conclude it’s worth giving up
those safeguards in exchange for a
lower interest rate, says Miranda
Marquit, of StudentLoanHero.com,
a website that offers student loan
management and repayment tools.
Start by contacting your current
loan servicer and bank, as well as a
few other lenders, such as Citizens
Bank, Discover and Laurel Road.
Borrowers who are eligible for private-loan refinancing may also want
to consider nontraditional lenders,
such as CommonBond and SoFi. The
stronger your overall credit profile,
the lower the interest rate you’ll receive. Fixed interest rates currently
range from about 3% to 10%, and
variable rates range from 2.5% to 8%.
Get several quotes so you can
compare interest rates and terms,
and ask about other benefits that
the lender offers. For example, CommonBond and SoFi allow borrowers
to postpone payments under certain
circumstances—if you lose your
job, say, or you return to school.
To compare lenders and see additional options, visit StudentLoanHero
.com, Credible.com or StudentLoan
Consolidator.com.
Most lenders let you choose to pay
off the loan over five to 20 years. A
longer repayment term will lower your
The Fine Print
Don’t Count on Loan Forgiveness
If you’re employed by the government or a nonprofit organization, Uncle Sam may forgive
your federal loans. To qualify for the Public Service Loan Forgiveness program, you must
work full-time for the federal or a state or local government, a tax-exempt 501(c)(3) nonprofit organization, or a private not-for-profit organization that provides a qualifying service, such as emergency management, law enforcement or early childhood education. The
Consumer Financial Protection Bureau estimates that about one-fourth of U.S. workers—
including teachers, social workers, nurses, police officers and employees at nonprofit
organizations—are in a public-service job that may qualify them to have the balance of
their federal loans forgiven after 10 years under an income-based repayment plan.
The requirements sound straightforward, but some borrowers who thought they were
making qualified monthly payments are learning otherwise or facing major delays getting
their loans forgiven. If you want to qualify, make sure your loans, your employer and your
payments are eligible for the program, and keep records of loan consolidation, payments
and other communications. Borrowers seeking loan forgiveness should submit an Employment Certification Form to the Department of Education each year to confirm eligibility
and the number of qualified payments they’ve made.
Ten years after the public-service loan forgiveness program launched, its future is
uncertain, which is important to keep in mind if you’re planning a career in public service.
The first group of participants were eligible to have their loans forgiven last fall, but it’s
still unclear how many borrowers from that group had the balance of their loans wiped
out. Meanwhile, legislation pending in Congress includes a Trump administration proposal
to end the program for new borrowers.
monthly payment (and increase the
amount of interest you pay overall),
whereas shorter terms generally come
with a lower rate. Most private lenders
don’t offer flexible repayment options,
such as ones that base your monthly
payment on your income.
Some lenders charge an origination
fee, typically up to 2% of the amount
of the loan, but many roll the fee into
the loan. Most lenders offer both fixedrate and variable-rate loans. The
Federal Reserve is expected to raise
interest rates at least two more times
this year, which would make a variable-rate loan more expensive. Still,
a variable-rate loan could be a smart
strategy if you think you’ll be able to
pay off a large portion of the debt
while the rate is still low, or if the loan
has a cap that will keep your interest
rate from increasing by more than a
few percentage points.
Be prepared to clear a high bar to
qualify. Last year, nearly 60% of borrowers who applied to refinance student loans with a private lender were
turned away, according to a survey
from LendEDU, a loan-comparison
website. The average credit score
among those who qualified was 764,
and about one-third of borrowers who
refinanced had a co-signer. Only about
43% of those who were approved ultimately refinanced, suggesting that the
interest rate many were offered wasn’t
low enough to seal the deal.
For those who qualify for a lower rate,
though, the savings can be substantial.
Say you have $40,000 in loans with
an average interest rate of 6% and a 10year repayment period. If you qualified
for a 4% fixed-rate loan, you would pay
roughly $40 less each month and save
about $4,700 over the 10-year repayment period.
To see how much you would save
by refinancing at a lower rate or
shortening your repayment term,
visit StudentLoanHero.com and
use the site’s student loan refinancing
calculator. YOU CAN CONTACT THE AUTHOR AT KPITSKER@KIPLINGER.COM.
42
KIPLINGER’S PERSONAL FINANCE
05/2018
TOP-YIELDING DEPOSIT ACCOUNTS
No-Fee Interest Checking
Minimum balance may be required
Annual
yield as
of Mar. 20
Balance
range†
Website
(www.)
1.21%
0–$250,000
everbank.com
EverBank (Fla.)*
SAVINGS
Langley Federal Credit Union (Va.)# 1.21
Juicier Yields on
Money Funds
Nationwide Bank (Ohio)*
FOR YEARS, MONEY MARKET
mutual funds have paid
practically nothing. But
each time the Federal Reserve lifts short-term interest rates, yields on money
market funds tend to rise in
tandem. “That’s one of their
most attractive qualities,”
says Peter Crane, president
of Crane Data, a money fund
research company. Many
money funds yield more
than 1%, and Crane expects
yields on some funds to sur-
RATE UPDATES
For the latest savings yields
and loan rates, please visit
kiplinger.com/links/rates.
pass 2% this summer. Rates
on savings accounts from
banks have also been increasing but have not kept
pace with Fed rate hikes.
Money market funds invest in high-quality, shortterm securities, such as
Treasury bills, commercial
paper and certificates of deposit. Although they carry
little risk, they are not protected from losses by the
Federal Deposit Insurance
Corp., as are all the acYIELD BENCHMARKS
2.58
expense ratio of 0.16%. Taxable money funds generally
offer higher yields than
tax-free municipal money
funds. But if you’re in one of
the top federal income tax
brackets and live in a state
with high income taxes, you
may come out ahead with
a tax-free fund. Look at the
taxable-equivalent yield—
the yield you’d need to earn
on a comparable taxable
fund after paying taxes to
match the yield of the taxfree fund. For example, VAN-
10,000–plus
nationwidebank.com
McGraw-Hill FCU (N.J.)#
1.05
25,000–plus
mcgrawhillfcu.org
NATIONAL AVERAGE
0.15%
High-Yield Checking
Must meet activity requirements‡
Annual
yield as Balance
of Mar. 20 range†
Website
(www.)
America’s Credit Union (Wash.)#
5.00%
$0–$1,000
First Financial Credit Union (Ill.)#
5.00
0–2,500
firstfcu.org
Consumers Credit Union (Ill.)#
4.59
0–20,000
myconsumers.org
First Advantage Bank (Tenn.)
4.50
0–10,000 firstadvantagebanking.com
NATIONAL AVERAGE
1.92%
youracu.org
Annual
yield as
of Mar. 20
Minimum
amount
Bank7 (Okla.)
1.80%
$100
bank7.com
Dollar Savings Direct (N.Y.)*
1.80
none
dollarsavingsdirect.com
Incredible Bank (Wis.)*
1.76
25,000
incrediblebank.com
AbleBanking (Maine)*
1.70
250
ablebanking.com
NATIONAL AVERAGE
0.21%
Savings
Website
(www.)
†Portion of the balance higher than the listed range earns a lower rate or no interest. *Internet
only. #Must be a member; to become a member, see website. ‡To earn the maximum rate, you
must meet requirements such as using your debit card several times monthly and receiving
electronic statements. SOURCES: Bankrate, DepositAccounts.
TOP-YIELDING CERTIFICATES OF DEPOSIT
Annual
yield as Minimum
of Mar. 20 amount
1-Year
Website
(www.)
Live Oak Bank (N.C.)*
2.15%
$2,500
liveoakbank.com
M.Y. Safra Bank (N.Y.)*
2.12
5,000
mysafra.com
Colorado Fed. Savings Bank (Colo.)*
2.11
5,000 coloradofederalbank.com
KS StateBank (Kan.)‡
2.10
NATIONAL AVERAGE
0.75%
500
ksstate.bank
Annual
yield as Minimum
of Mar. 20 amount
5-Year
Utah First Federal Credit Union (Utah)# 3.00%
$500
United States Senate FCU (D.C.)#
2.95
20,000
KS StateBank (Kan.)
2.85
500
DollarSavingsDirect (N.Y.)*
2.80
NATIONAL AVERAGE
1.69%
Website
(www.)
utahfirst.com
ussfcu.org
ksstate.bank
1,000 dollarsavingsdirect.com
*Internet only. ‡Crestmark Bank, First Internet Bank of Indiana and Limelight Bank offer a
similar yield. #Must be a member; to become a member, see website. SOURCES: Bankrate,
DepositAccounts.
GUARD MUNICIPAL MONEY MARKET
FUND (VMSXX) yields 1.10%,
which is a taxable-equivalent yield of 1.75% for an
investor in the 37% federal
tax bracket. LISA GERSTNER
lgerstner@kiplinger.com
0.10%
2.58
1.87
0.10%
2.76
Six-month Treasury bills
1.97
Five-year Treasury notes
2.69
2.65
2.00
Ten-year Treasury notes
2.89
2.88
2.47
SOURCE FOR TREASURIES: U.S. Treasury
langleyfcu.org
1.15
MONEY MARKET FUND (SYMBOL
VMMXX), yielding 1.6%, has an
Month- YearYield ago
ago
U.S. Series EE savings bonds 0.10%
U.S. Series I savings bonds
counts listed in our table.
Cash that must be in a safe
place, such as an emergency fund, is best stashed
in an FDIC-insured bank
account. Money funds provide a convenient holding
place for cash in, say, a
linked brokerage account.
You are more likely to get
a higher payout if you invest
in a money fund with low
expenses. VANGUARD PRIME
0–1,000
0.89
As of March 20, 2018.
● EE savings bonds purchased
after May 1, 2005, have a
fi xed rate of interest.
● Bonds bought between
May 1, 1995, and May 1, 2005,
earn a market-based rate
from date of purchase.
● Bonds purchased before
May 1, 1995, earn a minimum
of 4% or a market-based rate
from date of purchase.
TOP CREDIT CARDS
Low-Rate Cards
Rate
as of Annual Late
Mar. 20* fee
fee
Lake Mich Credit Union Prime (P)# 7.50%
Website
(www.)
none
$25
lmcu.org
First Command Bank Visa (P)
9.50
none
15
firstcommandbank.com
Simmons Bank Visa (P)
9.50
none
25
simmonsbank.com
Cash-Rebate Cards
Rate
Rebate
as of Annual
earned
Mar. 20* fee Category/Other
Website
(www.)
$95
6%/1% ‡
americanexpress.com
Discover It
13.24
none
5/1^
discover.com
Citi Double Cash
14.74
none
2&
citi.com
Amex Blue Cash Preferred 14.24%
Rates are adjustable. *If you do not qualify for this interest rate, the issuer will offer a higherrate card. (P) Platinum. #Must be a member. ‡6% on groceries up to $6,000 per calendar
year (1% thereafter); 3% gas/retail; 1% other purchases. ^Categories change quarterly on up
to $1,500 of spending. &Earn 1% when you buy and an additional 1% when you pay for a purchase. SOURCE: Bankrate. Banks may offer lower introductory rates.
05/2018
KIPLINGER’S PERSONAL FINANCE
43
INVESTING
The Kiplinger 25 Funds
ON TRACK
Our actively managed funds turned in mixed
results over the past year. But they are
in the race for the long haul.
BY NELLIE S. HUANG
ILLUSTRATIONS BY JOEY GUIDONE
A RACE, ESPECIALLY A
marathon, requires planning and
preparation. Runners set time
goals, and they have a plan for how
to tackle rough stretches of the
course. Investors aren’t much different. They set performance goals
and build a diversified portfolio
that can get them there, in good
times or bad. // When markets are
in a groove, as stocks were over the
past year, it’s easy to forget about
pacing yourself by maintaining a
diversified portfolio that’s in sync
with your goals and your risk tolerance. And then a market dip comes
along to remind you in a nasty way.
That’s what happened earlier this
year: After 22 months of relatively
smooth climbing, Standard &
Poor’s 500-stock index dipped
more than 10% over less than two
weeks in late January and early
February. // For the market, it was
44
KIPLINGER’S PERSONAL FINANCE
05/2018
45
INVESTING
a much-needed breather. As investors,
we should take one, too. Now is the
time to review your portfolio to make
sure it can get you to the finish line
while still letting you sleep at night.
With stomach-churning volatility
back on the scene, investors’ nerves
can “begin to fray,” says Daniel
Wiener, head of an advisory firm
in Newton, Mass., and editor of the
Independent Adviser for Vanguard
Investors newsletter. That’s when investors make mistakes. Even so, if you
need to tweak your investments, it will
be easier today than in the middle of a
full-fledged bear market, says Wiener.
With that in mind, we reviewed the
Kiplinger 25, the list of our favorite
actively managed no-load funds. It is
a diversified collection of stock and
bond funds with a mix of investment
styles. Precisely because it is a diversified mix, over the course of the past
year some funds zigged while others
zagged. Several stock portfolios were
big winners, and some lagged the market. But there were no dogs and no
surprises. The laggards almost always
underperformed for reasons that have
to do with investment style, not poor
stock or bond choices.
For more on Kip 25 highlights and
lowlights over the past year, see the box
at left. We made two changes to the
roster this year. To learn more about
our new funds—and why two got the
boot—see the box on page 49. We’ve
put some of our Kip 25 funds together
in three portfolios on page 50. Finally,
for more on the incumbent funds, read
on. Returns are through March 16.
LARGE-COMPANY
U.S. STOCK FUNDS
Update
How Our Funds Performed
The past year was a big win for stock investors. Both U.S. and foreign stocks posted
huge gains. Over the past 12 months, Standard & Poor’s 500-stock index returned
17.9%. The MSCI EAFE index, which tracks foreign stocks in developed countries,
gained 16.8%. Emerging-markets stocks climbed 28.8%. Bonds were hot, then
cold. As a result, the Bloomberg Barclays U.S. Aggregate Bond index was up an
underwhelming 1.4% over the past year. (Returns are through March 16.)
For the Kiplinger 25, the year was mixed. Foreign stock funds led the pack.
T. Rowe Price International Discovery, which invests in small foreign firms, beat
its index by 8.5 percentage points. Fidelity International Growth beat its bogey.
So did Oakmark International, which replaced FMI International midyear after
it closed to new investors.
The 12 U.S. diversified stock funds had varied results. T. Rowe Price Blue Chip, Primecap Odyssey Growth and T. Rowe Price QM US Small-Cap Growth Equity posted some
of the best returns in their category for the period. A handful of stragglers, including
Mairs & Power Growth and Homestead Small-Company Stock, dampened the wins.
Highlights of the Kip 25’s fixed-income funds include Pimco Income, a multisector bond fund, and intermediate-term debt fund DoubleLine Total Return Bond.
Both beat the majority of their peers over the past year. Lowlights: MetWest Total
Return Bond, an intermediate-term bond fund that has taken a defensive stance,
and Vanguard High-Yield Corporate, a conservative junk bond fund, lagged their
benchmarks over the past 12 months.
46
KIPLINGER’S PERSONAL FINANCE
05/2018
DODGE & COX STOCK
The focus: Undervalued, wellestablished midsize and large firms.
The process: A nine-member team
picks stocks on a company-by-company basis with a three- to five-year
time frame in mind. The managers
like high-quality businesses that can
increase earnings and cash flow over
the long term, as well as executives
who put profits to work wisely.
The track record: Value-focused stock
funds had a tough go of it over the
past year, compared with their
growth-oriented peers. The fund’s
14.4% gain lagged the S&P 500’s 17.9%
return, but it beat 80% of other funds
that bet on large, cheap stocks. A low,
0.52% expense ratio helped.
FIDELITY NEW MILLENNIUM
The focus: Out-of-favor, growing firms
of all sizes that benefit from trends in
technology and demographics.
The process: Manager John Roth describes himself as “opportunistic,” but
his penchant for cheap prices makes
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him a bit of a contrarian. He bought
energy stocks in late 2014 and 2015 as
oil prices fell, and he sold tech stocks
in 2017 as share prices soared.
The track record: Roth’s against-thegrain style means the fund’s shortterm results differ at times from its
peers (funds that invest in large, growing firms). The fund’s 16.3% return
over the past year lagged 93% of largegrowth funds. Over the long haul,
however, Roth carries the day. Since
he took over in mid 2006, New Millennium’s 9.5% annualized return beat its
peers and the S&P 500. The fund has
outpaced the index in five of the past
10 full calendar years.
The process: Larry Puglia holds 125
stocks in firms with above-average
earnings, sustainable profit growth,
strong free cash flow (cash profits
after capital outlays), and executives
who reinvest in the company wisely.
The track record: Morningstar nominated Puglia for U.S. stock fund manager of the year in 2017, the second
time in five years. Blue Chip Growth
was the best-performing Kip 25 fund
over the past 12 months. The fund’s
gangbuster 38.3% return beat the S&P
500 by 20.4 percentage points. Don’t
expect a repeat this year, says Puglia.
But, he adds, “I’m not sure this bull
market is over or close to being over.”
MAIRS & POWER GROWTH
T. ROWE PRICE DIVIDEND GROWTH
The focus: Fast-growing firms of any
The focus: Big firms with the propen-
size trading at reasonable prices.
The process: The fund’s two managers
favor firms headquartered in the upper Midwest, where the fund company
is based, on the theory that proximity
gives them an edge. They like companies with durable competitive advantages, and they wait for the right price.
The track record: The fund tends to lead
in down markets and trail in up markets. In 2017, the S&P 500 was driven
by the type of stocks the managers
tend to avoid: high-priced tech shares.
Over the past 12 months, the fund’s
9.3% return trailed the S&P 500 by
8.6 percentage points.
sity and capability to raise dividends
over time.
The process: Firms that dominate their
industries and throw off cash get the
nod from manager Tom Huber, who
also looks for experienced executives
who are shareholder-focused. The
portfolio has increased payouts at an
average of 9% per year and currently
yields 1.4%. Stock dividends overall
may get a boost this year, says Huber,
in light of new corporate tax laws.
The track record: The fund tends to beat
the broad market in bad times and lag
in good times. Over the past 12
months, Dividend Growth trailed the
S&P 500. Over the long haul, however,
Huber’s focus on quality and increasing payouts wins handily.
PRIMECAP ODYSSEY GROWTH
The focus: Stocks in fast-growing com-
panies of all sizes that trade at temporarily low prices.
The process: Five managers pick firms
that are under pressure but have a catalyst—a new product, a new CEO, a restructuring—that could spur growth.
The track record: Over the past 12
months, the fund trounced the S&P
500 by 19.6 percentage points, thanks
to a 32% stake in technology stocks.
T. ROWE PRICE BLUE CHIP GROWTH
The focus: High-quality, giant firms
that are growing fast and trade at fair
share prices.
48
KIPLINGER’S PERSONAL FINANCE
05/2018
T. ROWE PRICE VALUE
The focus: Bargain-priced shares of
midsize to giant companies.
The process: When the shares of highquality firms trade at a discount to their
historical averages, their sector or the
market, it typically means a problem is
afoot. That’s when Mark Finn moves
in. Recently, he bought stock in Priceline, a firm pressured by competition
in the online travel market.
The track record: Since Finn took over
in early 2010, the fund has returned
13.2% annualized, which beats its
benchmark, the Russell 1000 Value
index. Share prices in relation to earnings and other yardsticks are “not
great” these days, says Finn, so he’s
focusing on quality over cheapness.
VANGUARD EQUITY-INCOME
The focus: Dividend stocks.
The process: Two shops run this fund.
Wellington Management’s Michael
Reckmeyer controls two-thirds of the
assets, picking firms that can sustain
their dividend or raise it over time.
Vanguard’s quantitative stock team
screens for dividend stocks that meet
four characteristics, including consistent earnings growth and relatively
low prices. The fund yields 2.0%.
The track record: Reckmeyer and Vanguard’s quant team joined forces in
2007. Since then, the fund has returned 8.7% annualized, which beats
96% of its peers (funds that invest in
value-priced stocks).
SMALL AND MIDSIZE
U.S. STOCK FUNDS
HOMESTEAD
SMALL-COMPANY STOCK
The focus: Little-known small companies that are out of favor but primed
for a turnaround.
The process: The fund takes a riskaverse approach to a typically volatile
corner of the market. Prabha Carpenter and Mark Ashton look for firms
that generate a lot of cash and are run
by shareholder-friendly execs.
The track record: Small-Company Stock
has a decent, 10.9% five-year annualized return, but it lags the small-cap
Russell 2000 index. A portfolio light
on tech and health care has hurt results, as those sectors fueled the index
over the past five years. Though the
fund has trailed the index, the managers haven’t changed their process,
which we view as a good thing. But
we have the fund on watch for now.
PARNASSUS MID CAP
The focus: Midsize firms that meet
environmental, social and governance
standards. For instance, the fund
avoids companies that pull in hefty
revenues from tobacco or guns.
The process: Matt Gershuny and Lori
Keith focus on fast-growing firms that
offer a product or service that’s in demand. Price matters, too. The stock
must trade at a discount to what the
managers deem the firm to be worth.
The track record: Since Gershuny and
Keith took over in 2008, Mid Cap
has outpaced the S&P 500. But it has
lagged its benchmark, the Russell
Mid Cap index, by an average of
0.3 percentage points per year.
T. ROWE PRICE QM
US SMALL-CAP GROWTH EQUITY
The focus: Profitable, growing small
firms with reasonably priced stocks.
The process: Computer models find
stocks in small firms that trade at a
discount to free cash flow, are highly
profitable and use cash in shareholderfriendly ways. The portfolio tends to
hold up well during market dips.
The track record: QM US Small-Cap
Growth Equity has a standout 10-year
record. In 2017, the market favored
“the opposite of what we look for” as
expensively priced stocks continued to
rack up gains, says Sudhir Nanda, the
fund’s manager. But the fund still
managed to beat its peers and its
benchmark, the MSCI US Small Cap
Growth index.
T. ROWE PRICE SMALL CAP VALUE
The focus: Small businesses with good
long-term growth prospects and
stocks trading at cheap prices.
The process: The hunt for discount
stocks starts with troubled companies
that have stumbled temporarily but
have a catalyst to turn things around.
The strategy requires patience: Shares
in Green Dot, best known for its prepaid debit cards, took three years to
rebound (from 2014 to 2017).
The track record: Since manager David
Wagner took over in July 2014, his
respectable 8.9% annualized return
just misses the 9.5% return of the Russell 2000 index.
Joining the Race
Betting on Two New Entrants
This year, operational shifts forced us to cut two funds. T. Rowe Price International
Discovery closed to new investors in early April. We believe Kip 25 funds should be
available to all comers, so when a fund shuts, we replace it. But we still like International Discovery, so hold on to shares if you currently own them. We also like Pimco Income, and we advise holding if you own shares. But it is no longer a true no-load fund
(that is, available without a sales charge), and thus it no longer qualifies for the Kip
25. In a surprising move, Pimco, the investment management firm, eliminated the
no-load Class D shares of its funds and merged them with assets in the corresponding
Class A shares in March. Many brokers sell the A shares without a load or transaction
fee. But officially, the A shares are a load share class. So Pimco Income is out.
We pass International Discovery’s baton to AMG TimesSquare International Small
Cap Fund. Magnus Larsson and Robert Madsen run the fund with three analysts. Although headquartered in New York, the group is truly international. Larsson is Swedish, Madsen is Danish, one analyst hails from Taiwan, another is from Turkey and a
third is French. “We have lived and worked in the markets we invest in,” says Larsson.
The team focuses on firms with market values of $5 billion or less, but the fund can
invest in businesses valued between $16 million and $8.3 billion. The managers favor
best-in-class companies with sustainable competitive advantages. And they won’t
overpay; they scrutinize share price in relation to the cash a company generates. “Cash
flow is real because it can be used to innovate and to improve products,” says Larsson.
The fund’s record is impressive: Since the start of 2014, TimesSquare International
Small Cap has beaten its peers (funds that invest in small, fast-growing foreign firms)
in each full calendar year. The fund’s five-year return beats its bogey, the MSCI EAFE
Small Cap index, as well as 91% of similar funds. The kicker: Over the past five years,
the fund held up better in down markets than all but a handful of its peers.
Fidelity Strategic Income takes the place of Pimco Income. Ford O’Neil and Adam
Kramer make the big-picture decisions and leave the bond picking to experts—other
solid portfolio managers at Fidelity—in each bond subsector. Mark Notkin is Strategic
Income’s high-yield guru, for instance, Eric Mollenhauer selects floating-rate bank
loans and Franco Castagliuolo specializes in government debt.
The idea: Balance higher quality, investment-grade bonds with junkier, higheryielding bonds to deliver protection in down markets and more income than the bonds
in the Bloomberg Barclays U.S. Aggregate Bond index. The fund has a solid long-term
record. Over the past 10 years, its 5.9% annualized return beats the Agg’s 3.7% return. The fund also holds up better in rough bond markets. In 2013, the Agg index lost
2.0%; Strategic Income gained 0.4%. The fund yields 3.1%. (The Agg yields 3.2%.)
05/2018
KIPLINGER’S PERSONAL FINANCE
49
INVESTING
The track record: Over the past five
FOREIGN STOCK FUNDS
BARON EMERGING MARKETS
The focus: Growth companies of
all sizes in emerging economies.
The process: Michael Kass favors fastgrowing businesses with sustainable
competitive advantages and a high return on invested capital (a measure of
profitability). Lately, he’s found opportunities in Indian money-management
firms and Chinese tech firms.
years, the fund has outperformed 96%
of its peers and the MSCI Emerging
Markets index.
FIDELITY INTERNATIONAL GROWTH
The focus: Reasonably priced foreign
firms with good growth prospects
that dominate their industries.
The process: Growth and price matter
to manager Jed Weiss. But he’s most
attracted to firms that can maintain
or raise prices even when the economy
is in a slump. “The truth serum,” that
can reveal a good firm, says Weiss, “is
what happens when demand is lousy.”
He likes to buy when shares trade at
a relative discount to earnings growth.
The track record: Over the past year, International Growth beat the MSCI
EAFE index, which tracks foreign
firms in developed countries, by 4.4
percentage points. Over the past decade, the fund beat 91% of its peers.
BUILDING PORTFOLIOS WITH THE KIPLINGER 25
The Best Mix to Reach Your Goals
Use these portfolios as a starting point to build a diversified mix
of funds. If you feel nervous about the market, cut the stock exposure down a bit. If you can tolerate short-term bumpiness, kick
the stock allocation up a notch. Just remember, in a truly diversi-
For Retirement
For College
For Income
TIME HORIZON: 11 years or more
STRATEGY: A portfolio of 85% stocks
and 15% bonds for investors who have
long runways to their goals.
TIME HORIZON: Six to 10 years
STRATEGY: A more temperate blend
of 65% in stocks and 35% in bonds
suits a medium-term goal.
TIME HORIZON: Five years or less
STRATEGY: Short time frames require
more caution. This package holds 70%
in bond funds. It yields 3.1%.
MODERATE PORTFOLIO
AGGRESSIVE PORTFOLIO
% of
portfolio
MUTUAL FUND
50
fied portfolio, some parts will be on the upswing while other
parts are falling behind. For the record, last year’s aggressive
portfolio gained 16.7%; the moderate package, 12.1%; and
the conservative model, 6.5%.
MUTUAL FUND
CONSERVATIVE PORTFOLIO
% of
portfolio
MUTUAL FUND
% of
portfolio
Dodge & Cox Stock
20%
Vanguard Equity-Income
20%
DoubleLine Total Return Bond
Primecap Odyssey Growth
20
DoubleLine Total Return Bond
15
Fidelity Strategic Income
15
Parnassus Mid Cap
15
Met West Total Return Bond
15
T. Rowe Price Dividend Growth
15
T. Rowe Price QM US Sm-Cp Gro Eqty
15
Oakmark International
15
Vanguard Equity-Income
15
Baron Emerging Markets
10
Primecap Odyssey Growth
15
Vanguard Short-Term Inv Grade
15
Fidelity International Growth
10
T. Rowe Price QM US Sm-Cp Gro Eqty
15
Fidelity New Markets Income
10
Oakmark International
10
Vanguard High-Yield Corporate
KIPLINGER’S PERSONAL FINANCE
05/2018
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INVESTING
OAKMARK INTERNATIONAL
The focus: Large foreign companies
with shares that trade at a discount.
The process: The managers are classic
bargain hunters. They seek firms that
generate a lot of cash and are run by
executives who reinvest profits wisely.
Oakmark managers only buy stocks
that trade at least 30% below their assessment of the firm’s intrinsic value.
The track record: Outstanding results
make this core foreign-stock fund
worth buying, even though it might
be a bother to do so: The fund recently
announced that new investors can
only buy shares directly from Oakmark (current shareholders can add to
their holdings through their brokers).
Over the past decade, International
outperformed 99% of its peers, with
an 8.6% annualized return.
SPECIALTY FUNDS
VANGUARD HEALTH CARE
The focus: Health care firms of all sizes
that will benefit from medical innovation and growth in spending as the
world’s population ages.
The process: Jean Hynes balances innovative young drug companies in her
portfolio of 87 health care stocks with
more-established firms that are quick
to adapt to changing times.
The track record: A double-digit gain
over the past 12 months wasn’t enough
to beat the fund’s peer group. Hynes
owns fewer biotech stocks than other
health care funds, and that crimped
relative returns. Stock selection also
hurt: Allergan, Merck and Mylan,
three big holdings in the fund, all
lost ground over the past year.
five and 10 years, this fund stands
among the top 15% of its class. New
investors to the fund must buy shares
directly through Vanguard.
BOND FUNDS
DOUBLELINE TOTAL RETURN BOND
The focus: Mortgage-backed securities
with intermediate-term maturities.
The process: Bond gurus Jeffrey Gundlach and Philip Barach pair complementary types of mortgage-backed
securities. Government-guaranteed
bonds, which are high in credit quality
but sensitive to swings in interest
rates, are balanced with non-agency
mortgage securities, which bear a
higher risk of default but less interestrate risk. (Bond prices typically fall
when rates rise, and vice versa.)
The track record: Since its inception
in April 2010, Total Return Bond has
returned 5.8% annualized, trouncing
Bloomberg Barclays U.S. Aggregate
Bond index (with a tad less volatility,
too). The fund yields 3.4%.
FIDELITY INTERMEDIATE
MUNICIPAL INCOME
The focus: Bonds that pay tax-free
interest income.
The process: Reasonably priced muni
bonds with stable finances draw Mark
Sommer and his two comanagers. The
trio monitor safety with a proprietary
tool that analyzes risk in the portfolio.
The track record: The fund isn’t a chart
topper, but it offers a smooth ride that
pays off long term. Over the past decade, its risk-adjusted return bests all
but a few in its category. Its 2.1% yield
translates to a 3.6% yield for investors
in the highest tax bracket.
VANGUARD WELLINGTON
FIDELITY NEW MARKETS INCOME
growth through an all-in-one portfolio of 60% dividend-paying stocks and
40% high-quality bonds.
The process: Wellington Management’s
Ed Bousa does the stock picking. A
trio of fixed-income managers run
the bond side. The fund yields 2.3%.
The track record: Over the past three,
The focus: Emerging-markets govern-
KIPLINGER’S PERSONAL FINANCE
05/2018
over in mid 1995, the fund has returned an annualized 11.7%. That
beats the JPMorgan Emerging Market
Bond index by an average of 1.1 percentage points per year.
METROPOLITAN WEST
TOTAL RETURN BOND
The focus: Discount-priced, highquality intermediate-term bonds.
The process: The four bond pickers
at this fund have been playing defense
for the past year by loading up on
investment-grade corporate debt,
government mortgage bonds and
Treasuries. “The longer and more extreme the party gets,” says comanager
Tad Rivelle, referring to what he views
as an economic cycle at its peak, “the
more cautious you should be.”
The track record: The fund’s safety-first
position has dulled results. “We were
early,” says Rivelle, of the fund’s defensive stance. The fund yields 2.2%.
VANGUARD HIGH-YIELD CORPORATE
The focus: Income generated from cor-
The focus: Income generation and
52
The track record: Since Carlson took
ment bonds issued in U.S. dollars.
The process: John Carlson blends bigpicture economics with securityspecific analysis to find bargain bonds
in developing countries. At last report,
Mexico, Turkey and Argentina are big
country bets. The fund yields 4.5%.
porate debt rated double-B or lower.
The process: Manager Michael Hong
tilts conservatively toward the betterrated end of high-yield “junk” bonds;
he sticks with companies with strong
balance sheets and stable free cash
flow. The fund yields 5.4%.
The track record: Over the past five
years, the fund’s 4.5% annualized return puts it ahead of its typical peer.
VANGUARD SHORT-TERM
INVESTMENT GRADE
The focus: High-quality bonds maturing in one to five years.
The process: Gregory Nassour delivers
a 2.8% yield by playing around with
the mix of short-term corporate debt,
government bonds, and mortgageand asset-backed securities.
The track record: Over the past five
years, Short-Term Investment Grade
has returned 1.5% annualized—better
than 80% of its peers. YOU CAN CONTACT THE AUTHOR AT NHUANG@KIPLINGER.COM.
Vital Statistics
EVERYTHING YOU NEED TO KNOW ABOUT THE KIP 25
We favor a buy-and-hold strategy for fund investing. Don’t be put off by a lackluster one-year return. Focus on the long-term performance
and fees. Most of the Kiplinger 25 funds have below-average expense ratios.
Annualized total return
1 yr.
3 yrs. 5 yrs. 10 yrs.
Yield
Expense
ratio
0.9%
0.52%
10.9
0.9
0.54
Bank of America, Qualcomm, Williams Cos.
12.1
0.2
0.89
Dycom, Knight-Swift Transportation, Encore Capital Group
11.2
10.2
1.4
0.66
Ecolab, U.S. Bancorp, Honeywell International
12.0
11.2
1.5
0.99
Fiserv, Motorola Solutions, Verisk Analytics
U.S. Stock Funds
Symbol
Dodge & Cox Stock
DODGX
14.4%
12.1%
14.4%
Fidelity New Millennium
FMILX
16.3
10.4
12.5
Homestead Small-Company Stock
HSCSX
12.0
7.6
10.9
Mairs & Power Growth
MPGFX
9.3
8.8
Parnassus Mid Cap
PARMX
10.6
9.4
9.7%
Biggest holdings
Charles Schwab, Capital One, Bank of America, Wells Fargo
T. Rowe Price Blue Chip Growth
TRBCX
38.3
17.3
19.7
13.6
0.1
0.72
Amazon.com, Alphabet, Facebook
T. Rowe Price Dividend Growth
PRDGX
15.1
10.8
13.2
10.0
1.4
0.64
Microsoft, JPMorgan Chase, UnitedHealth Group
T. Rowe Price QM US Sm-Cap Growth Eq
PRDSX
20.6
10.8
14.9
13.6
0.0
0.81
Coherent, Teledyne Tech., Take-Two Interactive Software
T. Rowe Price Small-Cap Value
PRSVX
13.3
12.1
11.0
10.4
0.4
0.93
Western Alliance Bancorp, Home Bancshares, Belden
T. Rowe Price Value
TRVLX
13.0
9.0
12.6
9.8
1.3
0.82
JPMorgan Chase, Tyson Foods, Microsoft
Primecap Odyssey Growth
POGRX
37.5
18.3
19.3
14.1
0.3
0.67
Nektar Therapeutics, Alkermes, Abiomed
Vanguard Equity-Income
VEIPX
12.3
11.1
12.4
10.0
2.0
0.26
Microsoft, JPMorgan Chase, Cisco Systems
Foreign Stock Funds
Symbol
Yield
Expense
ratio
Annualized total return
1 yr.
3 yrs. 5 yrs. 10 yrs.
Biggest holdings
TCMPX
34.0%
16.1%
14.5%
—
0.3%
1.30%
Samsonite Intl., Melrose Industries, Modern Times Group
Baron Emerging Markets
BEXFX
27.8
10.9
8.9
—
0.4
1.38
Tencent, Alibaba Group, Sberbank of Russia, Baidu
Fidelity International Growth
FIGFX
21.2
8.0
8.1
5.9%
0.6
1.03
Nestlé, SAP, CSL
Oakmark International‡
OAKIX
18.8
8.3
8.7
8.6
1.3
0.95
Lloyds Banking Group, Daimler, Glencore
Specialized/Go-Anywhere Funds
Symbol
Yield
Expense
ratio
Vanguard Health Care
VGHCX
10.9%
4.8%
15.8%
13.4%
1.0%
0.37%
Bristol-Myers Squibb, UnitedHealth Group, AstraZeneca
Vanguard Wellington‡
VWELX
10.2
8.0
9.4
8.1
2.3
0.25
Microsoft, JPMorgan Chase, Bank of America
Bond Funds
Symbol
Annualized total return
1 yr.
3 yrs. 5 yrs. 10 yrs.
Yield
Expense
ratio
DoubleLine Total Return Bond
DLTNX
2.1%
1.8%
2.3%
—
3.4%
Fidelity Intermediate Municipal Income
FLTMX
2.8
1.7
2.1
3.5%
Fidelity New Markets Income
FNMIX
4.9
8.3
4.3
FSICX
5.9
4.6
3.7
Metropolitan West Total Return Bond
MWTRX
1.0
1.0
Vanguard High-Yield Corporate
VWEHX
4.1
Vanguard Short-Term Investment-Grade VFSTX
0.9
Indexes
Annualized total return
1 yr.
3 yrs.
5 yrs. 10 yrs.
NEW AMG TimesSquare Intl Small Cap
NEW Fidelity Strategic Income
Annualized total return
1 yr.
3 yrs. 5 yrs. 10 yrs.
Biggest holdings
Avg. credit
quality§
Avg. duration
(years)
Biggest sector
weighting
0.73%
A
4.1
Mortgage-backed securities (53%)
2.1
0.36
A
4.9
Revenue bonds (55%)
7.6
4.5
0.82
BB
6.4
Foreign government bonds (68%)
5.9
3.1
0.69
BBB
4.4
High-yield debt (40%)
1.7
5.1
2.2
0.67
AA
6.1
Mortgage-backed securities (39%)
4.5
4.5
7.0
5.4
0.23
BB
4.4
Corporate bonds (98%)
1.5
1.5
2.6
2.8
0.20
A
2.6
Corporate bonds (62%)
Yield
Biggest holdings
S&P 500-STOCK INDEX
17.9%
12.1%
14.4%
10.2%
1.9%
Apple, Alphabet, Amazon.com
RUSSELL 2000 INDEX*
15.9
10.1
12.3
10.7
1.3
Nektar Therapeutics, Bluebird Bio, GrubHub
MSCI EAFE INDEX†
16.8
6.5
6.4
3.1
3.1
Nestlé, HSBC Holdings, Novartis
MSCI EMERGING MARKETS INDEX
28.8
11.4
5.6
3.5
2.3
Tencent Holdings, Samsung Electronics, Alibaba Group
1.4
1.3
1.8
3.7
3.2
U.S. Treasuries, Fannie Maes, Ginnie Maes
BLOOMBERG BARCLAYS U.S. AGGREGATE BOND INDEX#
As of March 16. ‡New investors must purchase directly from the fund company. *Small-company U.S. stocks. †Foreign stocks. #High-grade U.S. bonds. § Kiplinger research based on Morningstar data.
—Fund not in existence for the entire period. SOURCES: Bloomberg, FTSE Russell, Fund companies, Morningstar, MSCI.
05/2018
KIPLINGER’S PERSONAL FINANCE
53
INVESTING
MASTER CLASS
What Would
Warren Do?
We analyzed the Oracle of Omaha’s latest
buys and sells. Here’s our take.
Buffett’s moves—his record
is unrivaled. His rock star
status in the investing world
is reinforced each May as
shareholder-disciples flock
to Omaha, Neb., for the
annual meeting of Buffett’s
holding company, BERKSHIRE
HATHAWAY (SYMBOL BRK-B, $207).
And why not? Berkshire
Hathaway’s market value
has jumped 2,404,748%
since the company started
keeping records. That works
out to an average annual
compound rate of return
of 20.9% from 1965 through
year-end 2017, which is
more than double the 9.9%
average annual return of
Standard & Poor’s 500stock index.
A common theme has
been consistent the entire
time: Buffett likes companies with “moats.” A
moat, in Buffett’s own
colorful language, describes firms encircled
by an unassailable position
against competitors—like
a castle surrounded by an
alligator-filled trench. A
company with a moat can
repel the tyrannies of com54
KIPLINGER’S PERSONAL FINANCE
05/2018
petition, avoid the pressure
to lower prices and protect
princely profit margins.
You don’t have to pay millions to win Buffett’s annual
lunch auction just to find
out which stocks he likes.
Berkshire Hathaway reveals
its portfolio four times a
year—free. We took Berkshire’s most recent corporate filings and analyzed
Buffett’s latest noteworthy
moves. Read on to see what
they can teach you about investing and whether you
should buy what he’s buying
(or sell what he’s selling).
Berkshire trades are from
the fourth quarter of 2017;
prices and other data, unless otherwise noted, are as
of March 16.
BUFFETT’S BUYS
THE CURRENT FAVORITE.
Berkshire boosted its stake
in APPLE (AAPL, $178) by 23%,
to more than 165 million
shares, or $28 billion. That
makes it Berkshire’s biggest
position, topping the $27.8
billion stake in his longtime
favorite, Wells Fargo.
Buffett famously avoided
technology stocks for many
years. He made an exception in 2011 with IBM, and
that didn’t work out. Apple,
therefore, must be compelling enough for Buffett to
break his own rule.
Apple is the new quintessential Berkshire stock, says
Robert Johnson, CEO of the
American College of Financial Services. Its moat is a
golden brand name that allows it to charge $1,000 for
a smartphone.
Our take: Buy. Wall Street
analysts, on average, expect
Apple to earn $11.55 a share
in the fiscal year ending
in September, up 25% from
fiscal 2017 and more than
double that year’s 10.8%
earnings growth rate, says
research firm S&P Global
Market Intelligence. If the
average of analysts’ price
targets is right, Apple
shares could reach $191 by
mid 2019.
BANKING ON BANKS. Buffett’s
love of the financial sector
is long-standing and only
strengthening. Berkshire
boosted its stake in BANK
OF NEW YORK MELLON (BK, $55)
by 21%, adding 10.5 million
more shares to bring its
total stake to $3.3 billion.
Berkshire’s investment in
U.S. BANCORP (USB, $53) increased by 2.3% to $4.7 billion. Two other banks are
among Berkshire’s top 15
holdings: Wells Fargo (see
page 57) and BANK OF AMERICA
(BAC, $32).
The economic climate
is good for financials. The
Federal Reserve raised
short-term interest rates
three times in 2017, which
helps banks generate a bet-
PAUL MORIGI/GETTY IMAGES
IT PAYS TO WATCH WARREN
Monsanto’s shares aren’t
cheap; they trade for 20
times expected per-share
earnings for this calendar
year. But it’s not a large position for Berkshire.
Our take: Hold. Buffett isn’t
betting the farm on Monsanto, nor should you. A
merger with Germany’s
Bayer is in the works, but
the final details–including
U.S. regulatory approval–
are still pending. For now,
Monsanto’s valuation isn’t
all that compelling.
ter return on their cash reserves. This tailwind could
strengthen if the Fed hikes
rates three times in total
this year, as we expect.
Our take: Buy. If you don’t
own banks, it’s time to consider them. Even with a positive trend in interest rates,
bank stocks remain how Buffett likes them: cheap. Bank
of New York Mellon trades
at 14 times expected 2018
earnings; U.S. Bancorp and
Bank of America, at 13 times
earnings—all bargains compared with the S&P 500.
PLANTING THE SEED. Seed
and pesticide company MONSANTO (MON, $118) has been a
fast-growing holding for
Berkshire. After establishing a stake in 2016, Berkshire boosted holdings by
32%, to 11.7 million shares.
BUFFETT’S NEW BUY. Buffett
doesn’t buy new stocks often, so investors pay attention when he does. Shares
of TEVA PHARMACEUTICAL (TEVA,
$18), a generic drug maker
based in Israel, jumped
more than 7% after Berkshire revealed a $358 million stake in February. It’s
not a large position for
Berkshire—it doesn’t even
rank in the top 15.
Teva, which makes a wide
range of drugs from hormones to respiratory treatments, needed some good
news. The stock lost nearly
half of its value in 2017 as
analysts warned that revenue would fall in 2018 because of pricing pressure in
the U.S. Shares trade at just
eight times estimated 2018
earnings, less than half the
S&P 500’s price-earnings
ratio of 17.
Still, at its current price,
Teva would not be the bargain for you that it was for
Buffett. Teva’s average price
was roughly $14.50 a share
during the fourth quarter,
says David Kass, University
of Maryland finance professor and longtime Buffett
watcher. If you bought now,
you’d pay more than 30%
more than Buffett did.
Our take: Hold. Consider buying if the stock dips below
$15 a share.
BUFFETT’S SALES
STILL ON BOARD. Berkshire
unloaded 1 million shares of
AMERICAN AIRLINES (AAL, $55).
It’s a minor repositioning,
not a thumbs down on the
airline or the industry,
Johnson says. Berkshire
sold just 2% of its American
holdings and still owns
shares of SOUTHWEST AIRLINES (LUV, $61), DELTA AIR LINES
(DAL, $57) and UNITED CONTINENTAL HOLDINGS (UAL, $71).
Buffett wasn’t a fan of airlines in the 1990s, but bargain share prices have likely
“changed his mind,” Johnson says.
Words of Wisdom
BUFFETT SPEAKS
The following quotes from Warren Buffett are gleaned mostly
from past Berkshire Hathaway shareholder letters. You can find
them at www.berkshirehathaway.com/letters/letters.html.
ON KEEPING COSTS LOW: “Performance comes, performance
goes. Fees never falter.”
ON STOCKS VERSUS BONDS: “It is a terrible mistake for
investors with long-term horizons to measure investment ‘risk’
by their portfolio’s ratio of bonds to stocks. Often, high-grade
bonds in an investment portfolio increase its risk.”
ON BUY-AND-HOLD INVESTING: “If you aren’t willing to own
a stock for ten years, don’t even think about owning it for ten
minutes.”
ON INVESTING STRATEGIES: “The ‘know-nothing’ investor
who both diversifies and keeps his costs minimal is virtually
certain to get satisfactory results.”
ON SEIZING OPPORTUNITIES: “Every decade or so, dark
clouds will fill the economic skies, and they will briefly rain gold.
When downpours of that sort occur, it’s imperative that we rush
outdoors carrying washtubs, not teaspoons.”
ON WEALTH: “I will tell you how to become rich. Be fearful
when others are greedy. Be greedy when others are fearful.”
ON HIS WEALTH: “My wealth has come from a combination
of living in America, some lucky genes, and compound interest.”
ON STOCK ADVICE: “We’ve long felt that the only value of
stock forecasters is to make fortune-tellers look good.”
05/2018
KIPLINGER’S PERSONAL FINANCE
55
INVESTING
Berkshire vs the S&P
A DISAPPOINTING DECADE
Since 1965, returns in Berkshire Hathaway stock have trounced just about everything else. But a bet on
Berkshire ten years ago would have paid off less than one on the broader market. Here’s how a $10,000
investment in Berkshire’s B shares has grown compared with the Standard & Poor’s 500-stock index.
$25,000
Berkshire Hathaway
$20,000
S&P 500-stock index
$15,000
$10,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
As of March 16. SOURCES: Morningstar Inc., Yahoo Finance.
Our take: Buy. It’s a good time
to take a flier. Several of
Buffett’s airline stocks sport
P/Es that are less than 10,
including American, Delta
and United, all at about 9.
GOING IN A NEW DIRECTION.
With a low P/E of 6 and a
plump dividend yield of
4.0%, GENERAL MOTORS (GM,
$38) seems to fit Buffett’s
wish list. But GM is on
his sell list instead. Berkshire Hathaway cut its
stake in the automaker by
16%, to $2.1 billion. The
position now represents
a minuscule 1% of Berkshire’s portfolio.
Our take: Sell. Fierce compe-
tition, the challenging new
technologies of self-driving
and electric cars, and looming tariffs on steel have
soured investors on GM. Although the stock’s valuation
is tempting, the company’s
growth prospects are dim.
Revenue has been flat or
down in three of the past five
years. And analysts are calling for earnings per share to
decline in each of the next
three years, including 2018.
FINALLY GIVING UP. IBM
stands for INTERNATIONAL
BUSINESS MACHINES (IBM, $160),
but you could say it stands
for “It’s Buffett’s Mistake.”
Shares of IBM have gone
nowhere since Berkshire
started accumulating them
in early 2011. The rest of the
market doubled in value.
“Buffett’s foray into IBM
shows that even the world’s
greatest investor is not infallible,” Johnson says. Buffett
unloaded 95% of his position in IBM by selling 35
million shares in the latest
quarter. That gets Berkshire
practically out of Big Blue
by taking its stake down to
just 2 million shares, worth
about 0.16% of the portfolio.
Our take: Sell. IBM’s turn-
ory has worn thin
thin.
around story
MORE HIGHS THAN LOWS
Buffett has been the face of Berkshire for 53 years and counting.
Buffett takes
control of New
England textiles
firm Berkshire
Hathaway.
Berkshire
Hathaway pays
a dividend of
10 cents.
It is the first
and only dividend
the company
ever pays.
From March 1973
through January
1975, Berkshire
surrenders 59%.
1964-1965
1967
1973
1976
1988
8
That compared
with a 32% dip
in the S&P 500.
Buffett buys 1 million
shares in insurance
company Geico at about
$2 per share. The stock
had traded as high as $61
per share in 1972.
Today’s 9.4%
stake is worth
north of $18
billion.
$100 invested in
the firm at the start
of 1965 would have
grown to nearly
$2.4 million by
year-end 2017.
56
KIPLINGER’S PERSONAL FINANCE
05/2018
Berkshire begins
buying Coca-Cola,
purchasing a
7% stake in the
company for just
over $1 billion.
ISTOCKPHOTO (2), COURTESY GEICO, COCA-COLA, DEXTER SHOE CO., BNSF RAILWAY CO.
The company’s revenue
has fallen in each of the
past six years, as Big Blue
is seemingly never in the
right place at the right time.
IBM isn’t a top player in
mobile computing or corporate cloud computing, two
of the explosive sources of
tech growth. IBM’s revenue
ticked higher in the fourth
quarter of 2017, but Buffett
is apparently tired of waiting. “It appears that the
world’s most patient investor has simply lost patience
with IBM,” Johnson says.
NOT BAILING OUT. Don’t
read too much into Berkshire’s sale of shares in
WELLS FARGO (WFC, $56). Until
Apple came along, Wells
Fargo was Buffett’s favorite
stock. So investors were
curious when Berkshire
trimmed its position by
about 1%, to $27.8 billion.
Serious controversies, including revelations that
employe opened millions
employees
of accounts without consumers’ consent, have
rocked the bank, and the
Fed is limiting its growth
until it has cleaned house.
Buffett isn’t panicking,
and neither should you, says
Christopher Marinac, director of research and banking
analyst at FIG Partners.
“If Berkshire was truly unhappy, managers would be
selling the stock with both
fists. This does not appear
to be the case,” he says.
Analysts aren’t bailing on
Wells Fargo, either, calling
for the company to earn
$4.73 a share in 2018, up
17% from 2017. The stock
could trade at $64 in 18
months, based on analyst
projections gathered by S&P
Global Market Intelligence.
Our take: Hold. If you’re
worried that another shoe
might drop, consider other
bank stocks. Succession Plan
Berkshire After Buffett
There’s only one Warren Buffett, and no one is calling for his retirement—including Warren Buffett. But he is now 87 years old,
the oldest acting CEO of any company in Standard & Poor’s
500-stock index. Investors want to know who’s next.
After more than five decades of leadership under Buffett, it’s
hard to imagine Berkshire Hathaway without him. The company
hasn’t named a successor, but two Berkshire veterans are presumed to be in the running. Earlier this year, Ajit Jain, 66, was
effectively put in charge of Berkshire’s insurance operations
while Greg Abel, 55, took the helm of non-insurance operations.
Jain has been with Berkshire since 1986, and Abel joined Berkshire in 2000 as part of an acquisition of MidAmerican Energy
Holdings, a utility based in Iowa.
The next generation of stock pickers is already known. Todd
Combs, 47, joined Berkshire in 2010, after co-founding investment
firm Castle Point Capital Management. He’s expected to share
the job of chief investment officer with Ted Weschler, 56.
Weschler joined Berkshire in 2012 after founding investment
firm Peninsula Capital Advisors—and after making winning bids
of $2.6 million in charity auctions in 2010 and 2011 to win lunch
with Buffett. Combs and Weschler are already
leaving their mark on Berkshire’s portfolio.
“Each, independently of me, manages more
than $12 billion,” Buffett wrote in his most
recent shareholder letter.
FOR QUESTIONS OR COMMENTS, CONTACT
FEEDBACK@KIPLINGER.COM.
In what Buffett now
considerss one of his
b
blunders, he
biggest
b
Shoe
acquires Dexter
D
$ 4 million in
for $434
k hire stock.
Berkshi
h fir
f m folds.
The
Berkshire issues
Class B shares,
initially priced at
$23.20, or 1/30th
of the value of
Class A shares.
Aversion to tech
stocks leaves
Berkshire out of the
dot-com boom,
while shares in top
holding Coca-Cola
plummet. From June
1998 to March 2000,
Berkshire loses 49%,
compared with a
30% gain in the
S&P 500.
19
993
1996
1998-2002
h shares
The
h
he parted with
ld be
would
b worth
moree than
$ billion today.
$6
Priced at $207
today, the shares
have returned
10.5% annualized,
compared with 6.8%
for the S&P 500.
Buffett is
vindicated in the
ensuing bear market
as Berkshire gains
24% while the
S&P 500 loses 47%.
As the financial
crisis threatens the
market and the economy,
Buffet bolsters confidence in two icons. He
first invests $5 billion
in financial giant
Goldman Sachs.
Berkshire makes
the largest business
acquisition in
company history,
acquiring Burlington
Northern Santa
Fe Railway for
$44 billion, calling
the deal an “all-in
wager on the economic future of the
United States.”
A drought
of deals has
left choosey
Berkshire
with $116
billion in cash
on the books.
2008
2010
2018
A week later, Berkshire
invests $3 billion in
General Electric, which
Buffett calls “the
symbol of American
business.”
Buffett says
he is on the
hunt for
“one or
more huge
acquisitions.”
05/2018
KIPLINGER’S PERSONAL FINANCE
57
INVESTING
CASH FLOW
Build an Income Ladder
Use these four portfolios as a guide to harness higher interest rates.
BY JEFFREY R. KOSNETT
interest rates have settled
into a higher range and are
poised to rise further. But
don’t let that scare you away
from bonds (when rates are
rising, bond prices tend to
fall, and vice versa) or from
certificates of deposit. If
anything, the volatile stock
market should be nudging
you toward more bonds
and CDs, not fewer.
Still, the rate outlook
demands some caution in
your fixed-income strategy.
The market value of longterm Treasuries and other
bonds is apt to shrink more,
especially if inflation rises
enough to shock bond traders into demanding higher
yields on new investments.
But it’s worth remembering that when a bond matures, the issuer returns
the entire face amount. So
a bond whose price falls to
95 cents on the dollar will
eventually pay you back
100 cents, unless the borrower defaults or you sell
in the interim. Incomeseeking investors can stick
to a simple plan to protect
bond principal from getting nicked by rising rates,
while collecting a decent
income and reinvesting returned capital for a higher
yield as rates continue to
climb. You can accomplish
this with an old-school
58
KIPLINGER’S PERSONAL FINANCE
05/2018
technique called laddering.
It works well with certificates of deposit and with
individual bonds.
Bond funds don’t work
for ladders because the
bonds in them are rarely
held to maturity. But some
exchange-traded funds
have found a work-around,
holding portfolios of bonds
that all mature in a target
year, and such ETFs can be
a low-cost way to build a
laddered income stream.
The analogy to a ladder
is straightforward. You
own a series of bonds that
represent the rungs, with
the bottom ones paying the
lowest interest rates and
maturing soonest, and the
yields and terms climbing as
you go higher. Recently, a
six-month Treasury bill
paid 1.96%, a one-year note
paid 2.08%, a two-year issue
paid 2.31% and so on, until
you hit 2.85% for a 10-year
bond and 3.08% for a 30year. (Rates and prices are
as of March 16.)
A survey of corporate
bonds rated A to AAA shows
coupon rates starting at
1.97% for six months and
rising to 2.12% for one year,
2.38% for two, 2.88% for
five and then to 3.54% for
10 years and 4.11% for 30.
An ideal government-bond
ladder might start at six
Treasury Ladder
Invest With Uncle Sam
Treasuries are backed by the full faith and credit of the U.S. government. If you buy newly issued bonds, your return, or yield to maturity, is the same as the coupon rate at the time of purchase. You
can buy directly from the government at www.treasurydirect.gov.
Title
Maturity
date
Yield to
maturity
6-month U.S. Treasury Bill
9/15/18
1- year U.S. Treasury Note
3/15/19
2.08
2-year U.S. Treasury Note
3/15/20
2.31
3-year U.S. Treasury Note
3/15/21
2.44
4- year U.S. Treasury Note
3/31/22
2.57
5-year U.S. Treasury Note
3/31/23
2.65
6-year U.S. Treasury Note
3/31/24
2.73
7-year U.S. Treasury Note
3/31/25
2.80
As of March 16. SOURCES: Dow Jones, U.S. Department of the Treasury.
1.96%
ISTOCKPHOTO.COM
IT’S A SURE BET THAT
months and step up to a oneyear note, then one rung at a
time to seven-year T-notes,
each yielding a little more
than the previous one. If you
invest the same amount at
each maturity, the average
yield currently is 2.35%.
That’s reasonable, considering you get the full faith and
credit of the U.S. Treasury.
When the six-month bill
matures, simply buy a new
one. As the note on the
next-lowest rung on the
ladder matures each year,
reinvest the proceeds in
the longest maturity on the
ladder, in this case a sevenyear note. (With other
bonds, yields on the ladder
might not always rise rungby-rung, but in a rising-rate
environment, you will be
replacing maturing bonds
with higher-yielding ones.)
How much you’ll need. The
amount of money you need
to build a ladder of individual bonds varies. Treasury
Direct (www.treasury
direct.gov) fills orders as
small as $100. Consider
any dollar amount in government bonds safe, in the
sense that there’s virtually
no risk of default.
With corporates and municipals, advisers typically
recommend that you invest
at least $100,000 to adequately diversify and protect against defaults or
bond downgrades from
rating agencies that weigh
in on companies’ creditworthiness. But most
tax-exempt issuers and investment-grade corporate
borrowers are healthy and
as likely to win higher
credit ratings as to be
downgraded to so-called
junk status. So $50,000 to
set up a 10-rung muni or
corporate ladder is probably
enough. Even $25,000 may
be adequate if a broker fills
small-enough orders across
a wide spectrum of issuers.
Assemble a CD ladder
by splitting your money
among certificates with
one- to five-year terms,
rolling the one that matures
each year into a new fiveyear CD. Nationwide,
current rates range from
0.75% on a one-year CD to
1.69% on a five-year (find
the top-yielding CDs on
page 43). Bank or credit
union CDs are insured, up
to $250,000 per depositor,
at each institution.
For a bond ladder, consider the following portfolios as a guide. You may not
be able to replicate them exactly, but you should be able
to get close. CONTACT THE AUTHOR AT JKOSNETT@
KIPLINGER.COM.
Municipal Bond Ladder
Stick With State and Local Issues
This ladder is a guide: You may earn more after taxes buying munis
from your state. Your broker may not have these exact issues but
should have similar bonds available. Be sure to diversify by type of
borrower. These bonds are rated AA- or better.
Coupon
Maturity
date
Yield to
maturity
California, Genl. Obligation (Calif.)
5.00%
3/15/20
2.99%
Madison, Wis., School District (Wis.)
2.25
3/1/22
2.08
Los Angeles Airport, Sr. Revenue (Calif.)
5.00
5/15/23
3.36
Seattle Municipal Light & Power (Wash.)
5.00
2/1/24
3.75
New York City, Genl. Obligation (N.Y.)
5.25
4/1/26
4.59
Houston Public Improvements (Tex.)
5.00
3/1/28
3.80
Penn State Univ., Revenue Bonds (Pa.)
5.00
3/1/30
4.25
Miami-Dade, County Schools (Fla.)
5.00
3/15/33
3.89
Title (state)
As of March 16. SOURCE: Municipal Securities Rulemaking Board
Corporate Bond Ladder
Exchange-Traded Fund Ladder
Bankroll Companies You Believe In
Let a Pro Pick the Bonds
These investment-grade bonds are rated BBB- or better by
Standard & Poor’s. The yield to maturity (your return if you hold
the bond until it matures) will differ from the coupon rate depending on whether you buy at a premium or discount to par (face) value.
The Guggenheim BulletShares are designed as yearly rungs, with
bonds due each calendar year. If a bond comes due before December 31, the fund deposits the returned principal in a money market
until the fund terminates at year-end.
Coupon
Maturity
date
Yield to
maturity
2.425%
6/12/20
3.32%
Guggenheim BulletShares 2020 Corp Bd
BSCK
3.00%
0.24%
Best Buy
5.50
3/15/21
3.33
Guggenheim BulletShares 2021 Corp Bd
BSCL
3.21
0.24
Xerox
4.07
3/17/22
3.85
Guggenheim BulletShares 2022 Corp Bd
BSCM
3.40
0.24
Healthcare Realty Trust
3.75
4/15/23
3.84
Guggenheim BulletShares 2023 Corp Bd
BSCN
3.53
0.24
AT&T
4.45
4/1/24
3.89
Guggenheim BulletShares 2024 Corp Bd
BSCO
3.74
0.24
Title
Ford Motor Credit
Yield to Expense
Symbol maturity ratio
Fund
General Motors Financial
5.25
3/1/26
4.41
Guggenheim BulletShares 2025 Corp Bd
BSCP
3.86
0.24
Anthem
4.10
3/1/28
4.19
Guggenheim BulletShares 2026 Corp Bd
BSCQ
3.93
0.24
Goldman Sachs Group
5.00
11/15/30
4.36
Guggenheim BulletShares 2027 Corp Bd
BSCR
3.95
0.24
As of March 16. SOURCE: Finra
As of March 16. SOURCE: Guggenheim Investments
05/2018
KIPLINGER’S PERSONAL FINANCE
59
INVESTING Commentary
PRACTICAL INVESTING
Kathy Kristof
I
owned shares in COSTCO (SYMBOL COST,
more—and more expensive—products
$186) in the early 1990s thanks to its
from the retailer every year.
merger with Price Co., a San Diego,
Calif., warehouse store in which I held More than paper towels. I still fill my
pantry at Costco warehouses, of
shares. At a time when the rest of the
course. But because of Costco’s liberal
stock market was going gangbusters,
return policies, I find myself buying
my investment in Costco went nobig-ticket items online that I would
where. After two whole years, my
never buy sight unseen from another
patience was exhausted. I sold.
company. I tested big-ticket purchases
Naturally, that was the catalyst
when I moved to a new house that had
needed to break the stock out of its
a game room. Costco.com was adverfunk. I’ve wanted to repurchase
tising a billiards-table package that
Costco shares practically ever since,
appeared to be $500 to $1,000 cheaper
but I’ve been deterred by the math.
than anything comparable. But it was
Based on my favorite formula—buy
still expensive. I wanted to see and
a stock when the price-earnings ratio
touch it before spending so much
is less than the sum of the earningsmoney. I called customer service to
growth rate and the dividend yield—
ask whether I could find it in a wareCostco shares were perpetually too
house. The representative said no but,
expensive. Even in the midst of the
sensing my concern, reminded me that
2008 financial crisis, when shares
I could return it for any reason. “I can’t
of other companies could be had for
a song, Costco was
a touch above my
target price.
IT ISN’T JUST THE
So I waited. And
waited. Finally,
SHOPPING THAT
when the stock
HAS SOLD ME
market swooned
ON THE STOCK.
in early February,
I ALSO LOVE HOW
I bought. Costco
shares were still
COSTCO RUNS
too expensive
ITS BUSINESS.
based on my formula. But because
that seems to be
the norm, I decided it wouldn’t
dissuade me from buying a company
I really wanted to own.
Everything about its business impresses me. Let’s start with the fact
that I have been a Costco shopper for
28 years (it says so on my membership
card). I’ve always been a fan of Costco
quality, selection and prices, and part
of what sold me on Costco as an investment is that I find myself buying
60
KIPLINGER’S PERSONAL FINANCE
05/2018
put a billiard table in my car and drive
it back to the warehouse,” I objected.
“We’ll pick it up at no charge,” the rep
said. Two weeks later, Costco delivery
agents were setting up the table in my
game room. It’s not going back.
Next was a leather living room set.
Then outdoor furniture. Soon, I was
buying cars through Costco’s autobuying program and using the company’s affiliates to insure my house and
put solar panels on the roof. I went to
Hawaii through Costco travel.
But it isn’t just the shopping that
has sold me on the stock. I also love
how Costco runs its business, starting
with the fact that the company promotes from within. Current chief
executive W. Craig Jelinek rose
through the ranks, spending 20 years
in various positions in the company’s
warehouses before joining senior
management. Perhaps because top
officers know what it’s like to work in
the warehouses, warehouse employees
are paid well and garner generous
benefits. Being a good employer allows
the company to hire and retain exceptional employees, which makes the
business run more smoothly.
Still, even though I’m a Costco fan,
the cheapskate in me flinches a bit at
its stock price. At $183 a share, I paid
almost 25 times estimated earnings for
a company that’s expected to increase
profits at an annual pace of 17% in
the fiscal year that ends in September
and pays a paltry dividend (the stock
yields 1.1%). According to my formula,
I shouldn’t have paid more than 17 times
earnings. But the stock is already up
about $3 per share since I bought in.
It may prove to be as big a bargain as
everything else I buy at Costco. KATHY KRISTOF IS A CONTRIBUTING EDITOR AND AUTHOR
OF THE BOOK INVESTING 101. YOU CAN CONTACT HER AT
KKRISTOF@KIPLINGER.COM.
POON WATCHARA-AMPHAIWAN
Why I Paid a Premium for Costco
SPOTLIGHT: BALANCED FUNDS
A Way to Keep Your Balance
Funds with a big stake in bonds can help you weather stormy markets.
IF THE PROSPECT OF A
decline in the stock market
keeps you up at night,
owning a “balanced” mutual fund that splits assets
between stocks and bonds
may help you get more shuteye. These funds can’t keep
up with stocks in a bull
market, but they tend to
lose less when stocks decline. In 2008, when Standard & Poor’s 500-stock
index surrendered 37%,
funds that allocate 50% to
70% of assets to stocks, with
the remainder in bonds, lost
just 28% on average.
Because these funds
rebalance assets to a set allocation, they can help take
emotion out of investing.
For investment minimalists,
these funds can serve as
all-in-one portfolios.
Investors looking to take
some of the edge off a stockheavy portfolio as well as
BALANCED FUNDS
Ranked by one-year return
Annualized
total return
Rank/Name
1 yr.
1. Plumb Balanced@
PLBBX
20.6% 11.2%
none
1.00%
2. Virtus Strategic Allocation A
PHBLX
19.3
7.1%
5.75%
1.15
3. Virtus Tactical Allocation A
NAINX
19.2
7.4
5.75
1.38
4. Fidelity Global Strategies**
FDYSX
15.4
6.8
none 1.10
Max. 1.26
5.75
sales
charge 0.55
none
5. 1919 Socially Responsive Balanced A SSIAX
15.3
8.5
6. Fidelity Puritan
FPURX
15.1
10.4
7. Sit Balanced@
SIBAX
15.0
9.6
none
1.00
8. Vanguard Star
VGSTX
14.9
9.1
none
0.32
9. Columbia Cap Alloc Mod Aggrsv A
NBIAX
14.8
8.6
5.75
1.16
FASGX
14.7
9.1
none
0.73
10. Fidelity Asset Manager 70%
9.9%
CATEGORY AVERAGE
add some diversification
should consider VANGUARD
STAR FUND, which invests in
11 low-cost, actively managed Vanguard mutual
funds. The fund typically
invests about 60% of assets
in stocks, with the rest in
bonds. The three-fund bond
portfolio focuses on investment-grade bonds with both
20 LARGEST STOCK AND BOND MUTUAL FUNDS
STOCK MUTUAL FUNDS
Assets†
Annualized
total return
Rank/Name
Symbol (billions) 1 yr.
1. Vanguard Total Stock Market Idx Inv
2. Vanguard Total Intl Stock Idx Inv
VTSMX $587.7
VGTSX
327.0
17.6% 13.9% none
19.0
6.4 none
3. Vanguard 500 Index Inv
VFINX
321.0
17.7
14.2
none
AGTHX
AEPGX
FUSEX
189.1
170.5
147.4
25.1
24.1
17.8
16.0
8.6
14.3
5.75%
5.75
none
7. Fidelity Contrafund
8. American Balanced A
9. American Income Fund of America A
10. American Capital Income Builder A
S&P 500-STOCK INDEX
FCNTX
ABALX
AMECX
CAIBX
129.6
126.1
109.5
107.5
30.5 16.7
11.2
9.7
8.6
8.2
7.9
6.5
17.9% 14.4%
16.8%
6.4%
none
5.75
5.75
5.75
7.2%
short- and long-term maturities, as well as governmentissued mortgage-backed
securities. Star’s eight stock
funds invest in firms of
different sizes and include
growth-oriented and
bargain-priced stocks both
in the U.S. (about 66% of
the stock portfolio) and
abroad (about 33%).
RYAN ERMEY
rermey@kiplinger.com
Ranked by size. Returns for thousands of funds are at kiplinger.com/tools/fundfinder.
Max.
sales
5 yrs. charge
4. American Growth Fund of America A
5. American EuroPacific Growth A
6. Fidelity 500 Index Inv
MSCI EAFE INDEX
Max.
sales Exp.
5 yrs. charge ratio
Symbol
The fund rebalances to
its 60-40 allocation on an
ongoing basis, and the 11
funds have held the same
weighting in the portfolio
since 2010, when Vanguard
upped the fund’s international stock exposure from
15% to 20%. With the exception of the Vanguard
Short-Term Investment
Grade fund, all of Star’s underlying funds are run by
at least one manager from
outside Vanguard. Last year,
two of the firms managing
the small-cap Vanguard Explorer fund were jettisoned
in favor of a team from
ClearBridge Investments.
Unlike many funds that
invest in other mutual
funds, Star charges investors only the expenses of
its underlying holdings.
At 0.32%, the fund’s expense ratio falls well below
the 0.89% charged by the
average balanced fund.
Including 2018 (through
mid March), Star has
beaten the return of its
average peer in eight of the
past nine calendar years.
BOND MUTUAL FUNDS
Rank/Name
1-year
Max.
Assets† total Current sales
Symbol (billions) return yield charge
1. Vanguard Total Bond Market Index Inv VBMFX $158.2
2. Pimco Income A
PONAX 110.2
3. Vanguard Total Intl Bd Idx Inv
VTIBX
92.8
4. Metropolitan West Total Return Bd M MWTRX 78.2
5. Pimco Total Return A
PTTAX
71.9
6. Vanguard Short-Term Inv-Grade Inv VFSTX
62.7
7. Vanguard Interm-Term Tax-Ex Inv
VWITX
57.2
8. Dodge & Cox Income@
DODIX
55.2
9. DoubleLine Total Return Bond N
DLTNX
51.6
10. Lord Abbett Short Duration Income A LALDX
40.3
BLOOMBERG BARCLAYS US AGGREGATE BOND INDEX
B OF A MERRILL LYNCH MUNICIPAL MASTER INDEX
1.4%
5.0
3.5
1.0
2.2
0.9
2.6
2.5
2.1
1.6
1.4%
3.4%
2.9%
3.7
0.8
2.2
1.9
2.8
2.3
2.6
3.4
2.5
3.2%
2.6%
none
3.75%
none
none
3.75
none
none
none
none
2.25
As of March 16. @ Only share class. Unless otherwise indicated, funds come in multiple share classes; we list the share class that is best suited for individual investors. **Closed to new investors.
†For all share classes combined. MSCI EAFE tracks stocks in developed foreign markets. SOURCES: Bank of America Merrill Lynch, Morningstar Inc., Vanguard.
05/2018
KIPLINGER’S PERSONAL FINANCE
61
LIVING
■ DAN AND JAMIE
PERLOWITZ ADOPTED
GRACIE, A LABRADOR
RETRIEVER MIX, FROM A
RESCUE ORGANIZATION
FOR A $350 FEE.
62
KIPLINGER’S PERSONAL FINANCE
05/2018
TRIM THE COST OF
PET CARE
Your furry friends can run up a big tab over their lifetime,
but we’ll show you how to keep expenses in check.
BY PATRICIA MERTZ ESSWEIN and KAITLIN PITSKER
PHOTOGRAPH BY HOLLENDERX2
IT HAPPENED IN A FLASH. ONE MINUTE DAN PERLOWITZ OF WEST ORANGE, N.J., HAD HIS DOG GRACIE’S
leash in hand, and the next she had broken away and run onto a nearby highway. She was hit by one car
and rolled over by another, but, thankfully, she suffered only a broken rib and a concussion and healed
with no complications.
The bill for Gracie’s hospital stay and veterinary care—$4,063—could have been painful, too. But Dan
and his wife, Jamie, had purchased pet insurance after adopting Gracie in 2014. “Because we didn’t know
much about her past or what medical issues she might have, we wanted to have the insurance just in
case,” says Dan. The policy from Healthy Paws, which costs $48 a month, paid for all but $659 of the
tab, after excluding certain charges, applying a $100 deductible and a 10% co-payment.
In 2016, U.S. pet owners spent $66.8 billion on their pets, compared with $38.5 billion in 2006, according to the American Pet Products Association. Almost half of that was for food, almost one-fourth
for vet care, and just over one-fifth was for supplies and over-the-counter medicine (see the table
on the next page). But there are smart ways to save while providing the best care.
63
LIVING
MUTT OR PUREBRED?
The Perlowitzes found Gracie, a Labrador retriever
mix, at an adoption event
held by a rescue group at
a local pet store. The fee
was $350, and Gracie was
spayed and up to date on
her shots.
The assumption has
long been that mixed-breed
pets are healthier and thus
less expensive to own than
purebred ones, which often
suffer from inherited disorders. But a study published
in the Journal of the American Veterinary Medical
Association found no difference between purebred
dogs and mixed-breed dogs
in more than half of the 24
genetic disorders that the
study considered, although
purebred dogs showed a
higher incidence of some
disorders. Bottom line, says
the AVMA: Both mixed
breeds and purebreds may
have an inherited disorder.
(For advice about choosing
dogs, cats and other types of
pets, search for “selecting”
at www.avma.org.)
If you have your heart set
on, say, a Lab or a French
bulldog, you’ll most likely
buy one from a breeder at a
cost of thousands of dollars.
Ask the breeder whether
tests have been performed
on the dog’s parents or offspring to ensure they aren’t
carrying genetic diseases
common to the breed. To
find registered breeders,
use the search tool of the
American Kennel Club
(www.akc.org/tools/dogbreed-selector) or the Cat
Fancier Association (http://
secure.cfa.org/Search.aspx).
Buying from a pet store
is rarely a good idea. The
animals often come from
puppy mills or kitten factories, and many jurisdictions
in nearly half of the states
have banned their retail
sale. Shelters receive animals from owners, animalcontrol authorities and
people who have found lost
or abandoned pets. Rescue
organizations often take pets
from shelters where the animals may be euthanized, or
from owners who can’t keep
them but want to ensure
they’re not put down.
Adopting a pet from a
shelter typically runs from
$20 to $350. Most shelter
dogs end up there because
their owners had to move,
had landlord difficulties
or couldn’t afford to keep
them. Adopting an animal
from a rescue organization
typically costs somewhat
more—from $150 to $400—
because of the time and
resources that volunteers
invest before the animal
is placed in a home. (If
you want to adopt a purebred from a rescue, visit
www.akc.org/akc-rescuenetwork or, for cats, http://
cfabreedersassist-rescue
.org/rescue.html.)
Whether you’re buying
Sticker Shock
THE HIGH COST OF OWNING A PET
Small
dog
Medium
dog
Large
dog
Cat
Rabbit
Guinea
pig
Small
bird
Fish
$190
$200
$220
$145
$160
—
—
—
Other initial medical*
70
70
70
130
—
—
—
—
Collar/leash/litter box/scratching post
25
30
35
50
25
—
—
—
Crate/carrier bag/cage/aquarium†
75
155
125
40
140
$70
$70
$200
110
110
110
—
—
—
—
—
$470
$565
$560
$365
$325
$70
$70
$200
One-time costs
Spay/neuter
Training classes
TOTAL
Annual costs
Small
dog
Medium
dog
Large
dog
Cat
Rabbit
Guinea
pig
Small
bird
Fish
Food#
$212
$319
$400
$224
$145
$45
$192
$12
210
235
260
160
70
70
85
—
—
—
—
165
208
144
—
—
40
55
75
25
40
30
25
—
License
15
15
15
—
—
—
—
—
TOTAL
$477
$624
$750
$574
$463
$289
$302
$12
Recurring medical‡
Litter
Toys/treats
*Deworming, basic blood tests and microchip. †Basic 20-gallon setup with light/hood, outside filter, undergravel filters, air pump and gravel. #Premium-brand dry kibble. ‡Exam, vaccines,
heartworm preventative and topical flea-and-tick preventative. SOURCE: ASPCA
64
KIPLINGER’S PERSONAL FINANCE
05/2018
from a breeder or adopting
from a shelter or rescue
organization, the fee often
includes the first round
of vaccinations and microchipping (a method of identification). The animal may
come spayed or neutered.
There are some 10,000
rescue groups in the U.S.,
and they are underregulated and mostly unsupervised. The risk is that you
don’t know exactly what
you’re getting, says Nancy
Halpern, a vet and lawyer
in Princeton, N.J. To ensure
that you’re getting a pet
from a reputable shelter
or rescue, ask your vet for
a referral, or look for a wellestablished shelter that
shares its policies with the
public and documents the
completion of vaccinations
and neutering or spaying.
In the 22 states with pet
purchase protection laws—
sometimes called puppy
lemon laws—you may have
legal recourse if you must
return an animal with a disease or defect to a pet store
or a breeder within a certain time after you get it.
In New Jersey, for example,
pet owners have 14 days
to return an animal if it
becomes sick or dies from
a non-congenital condition,
and six months if it has
congenital or hereditary
defects. The owner typically
gets a refund of the purchase
price or a replacement as
well as the cost of vet fees.
ISTOCKPHOTO.COM
THE COST OF
HEALTH CARE
As more and more pet
owners consider their fourlegged friends to be part
of the family, spending on
health care continues to
KipTip
Tricks for Saving
Look for free adoption days. Shelters sometimes schedule these
events to find homes for less-popular animals, such as black dogs
and cats.
Adopt an adult. It will be housebroken, less destructive than a
juvenile and may already be trained. Shelters may discount the
adoption fee because adults are less popular than adorable
puppies and kittens.
Avoid thick- or long-haired animals. They will require morefrequent trips to the groomer.
Comparison shop for supplies. If your pet needs a special diet—
say, for diabetes—start shopping at your vet, which may sell food
at cost.
Ask for discounts for multiple pets or days of service. Pet care
providers may offer a discount for two or more animals or allow a
longer boarding stay for the same price.
rise. Advances in veterinary
medicine are also fueling
the increase. Most treatments available to humans—
from chemotherapy and radiation to organ transplants
and prosthetic limbs—are
also available for pets.
Even relatively common
pet mishaps and maladies
can be costly. Taking your
dog to the vet for an ear infection generally costs $100
to $250, while care for a
dog’s urinary tract infection
rings in at about $300. If
your dog eats something he
shouldn’t, you’ll be looking
at a vet bill of about $1,550,
on average. If your cat is
yowling in pain from bladder stones, the cost to treat
it averages about $1,900.
Caring for a pet with, say, a
torn ligament or a shattered
bone will set you back several thousand dollars—or
more, if regular follow-up
visits are required.
You can also expect to
spend several hundred
dollars a year on routine
medical expenses, such
as vaccinations and heartworm, flea and tick prevention. And other preventive
treatments, such as dental
cleanings and annual
checkups, can add up fast.
If the cost of a vet’s treat-
ment plan exceeds your
ability to pay, don’t hesitate
to ask for alternatives that
will fit your budget. “A vet’s
job is to present you with
the most comprehensive
treatment plan for your
pet,” says Ocean Isle Beach,
N.C., veterinarian Ernie
Ward. “But vets can usually
be creative when it comes
to making concessions—say,
holding off on a test or offering affordable alternatives,” he says.
The insurance safety net.
A small but growing group
of pet owners are buying
health policies for their
pets. Today, about 1.6 million pets in the U.S. have
coverage, according to the
North American Pet Health
Insurance Association—and
pet owners have more options for coverage than in
years past, with about two
dozen brands offering policies. (Most cover only cats
and dogs, but Nationwide
also sells policies for birds
and exotic pets.)
The cost of a policy varies
based on the age of your pet,
its breed, where you live
and the type of coverage
you select. But a policy with
broad coverage typically
costs about $30 to $150 a
month for a dog and $10
to $50 a month for a cat.
Most plans cover both
accidents and illnesses but
usually don’t cover routine
exams and care, such as annual checkups, dental cleanings and vaccinations. (You
can generally add wellness
coverage for an additional
premium or buy a separate
policy.) The policies won’t
cover preexisting conditions, and some exclude
05/2018
KIPLINGER’S PERSONAL FINANCE
65
LIVING
G
66
KIPLINGER’S PERSONAL FINANCE
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ciety for Human Resource
Management, 10% of employers offered pet insurance as a benefit in 2017.
When you’re comparison
shopping, among the first
things you’ll want to check
is how much of the vet’s tab
your insurer will pick up.
Reimbursement rates typically range from 60% to
90%, with pricier premiums
for the best coverage. Make
sure you understand the deductibles and maximums.
Deductibles can be annual
or per incident, and plans
may have maximums that
they’ll pay for each incident,
per year or over the pet’s
lifetime.
After you enroll, you’ll
usually have a waiting period of 10 to 30 days before
coverage kicks in. Unlike
most human health insurance, pet insurers don’t
have a network of providers,
so you can visit any licensed
veterinarian. But you’ll generally need to pay the vet
for the cost of care up front,
then submit your claim for
reimbursement.
Save on meds. There’s one
more line item to tack on
to your pet budget: medications. Most pet health insurance policies cover the
cost of many prescription
drugs, and other insurers
sell prescription coverage
as an optional add-on to the
standard policy. If you don’t
have health insurance for
your pet, or your plan
doesn’t cover medications,
shop around for medications instead of buying them
directly from the vet. If you
need meds for less-urgent
problems, such as heartworm or flea and tick preventatives or medications
used to manage chronic
conditions, you can employ
many of the same strategies
that you use to save on your
own medications.
Start by asking your vet
about less-expensive equivalents. Many pet medications have a brand-name option and a generic one. And
pricey pet meds, including
some that are commonly
used to treat infections, may
have a human-drug equivalent. If the prescribed medication has a human version,
call around to local pharmacies for a price or check
www.goodrx.com to compare costs at local and online pharmacies. To buy the
medication from anyplace
besides your vet’s office,
your veterinarian will need
to write a prescription or
send the order to the pharmacy on your behalf.
Pharmacies at some drug
stores and big-box stores,
such as Hy-Vee, Target and
Costco, have also started
stocking flea, tick and heartworm preventatives. But
you’ll likely find the best
price at Walmart or at pet
supply stores Chewy.com
and PetSmart, which were
among the cheapest options in our
recent cost comparison. For other
medications, shop at
online pet-med retailers,
including PetCareRX and
1-800-PetMeds. If you
see a deal on an unfamiliar
site, check that the company is accredited by the
Veterinary-Verified Internet Pharmacy Practice Site.
Vet-VIPPS-accredited sites
meet certain quality standards and comply with
federal and state licensing
requirements.
BUDGETING FOR
OTHER COSTS
The Perlowitzes budgeted
for food and pet insurance,
but they soon discovered
they had overlooked costs
such as training, boarding
and replacing the “excessive number of toys Gracie
tears through,” says Dan.
Before you bring Fido
home, check with your
home insurer to see what
impact the dog may have
on your coverage. Dog bites
and other dog-related injuries to people accounted
for more than one-third of
all homeowners-liability
claims paid out in 2016, and
the average dog-bite claim
was $33,230, according to
the Insurance Information
Institute and State Farm.
To manage the risk (and
depending on state law),
some insurers exclude
ISTOCKPHOTO.COM (2)
exams or
hereditary and congenital
conditions, such as hip dysplasia, often seen in some
large dog breeds. As with
your own health insurance,
if your pet is healthy
throughout the year, you
may not recoup the cost of
your premiums. But if your
pet suffers from an ongoing
health condition or has an
accident, the coverage may
pay for itself.
When shopping for a policy, carefully review what’s
covered and what’s not. The
insurer should clearly spell
out the details, including
any limitations or exclusions. “To increase the
value of your policy, enroll
your pets while they’re
young and before they’ve
been diagnosed with any
medical conditions,” says
Rob Jackson, co-founder
of Healthy Paws Pet Insurance and Foundation. Then
you are less likely to be denied coverage based on an
exclusion for a preexisting
condition.
As with other types of
insurance, it pays to shop
around. Start by asking for
recommendations from
friends who have coverage
or from a local vet, or visit
www.petinsurancereview
.com or www.petinsurance
quotes.com for an overview
of offerings. And you may
be able to buy discounted
coverage through your employer. According to the So-
liability coverage for dogs
or require owners to sign
waivers of liability for
dog bites. Other insurers
categorize certain breeds
as dangerous and charge
their owners higher premiums. According to the
Insurance Journal, pit bulls
and rottweilers lead the
pack in terms of dog-bite
fatalities.
Some insurers, including
State Farm and Allstate,
don’t ask the breed of a dog
when writing or renewing
homeowners policies and
don’t track the breed involved in bite incidents. But
if a dog bites someone and
poses an increased risk, the
insurer may charge a higher
premium or choose not to
renew the policy.
Training. Group classes
for socialization or basic
manners and skills may
be taught at a community
center, a dog day care or
a pet store and cost from
$40 to $125 or more for
four to eight weekly, onehour sessions, according to
Costhelper.com. The AKC’s
Canine Good Citizen training program costs about
$100 for six weeks of training, a 10-point test and
a certificate (look for
a local program at
www.akc.org). Some rental
agencies, homeowners associations, and condo and
co-op boards also require
the certificate for doggy
residency.
Private classes with a
trainer cost from $30 to
$100 for each hour-long session, or about $240 to $600
for six sessions. Search for
certified trainers and behavioral consultants at the
Certification Council for
Professional Dog Trainers
(www.ccpdt.org/dogowners/certified-dogtrainer-directory).
Boarding. To find a pet
sitter or boarding facility,
ask friends, family members and your vet for a
referral, or visit Rover.com.
Cats generally do best at
home, as do nervous or
aggressive dogs, but a confident and sociable dog may
be well suited to boarding
with other dogs.
Pet-sitting in your home
typically costs $10 to $65
per day. An overnight
stay could run $50 to $75.
Boarding runs the gamut
from spartan, at $12 to $26
per day, to spa-like, for $22
to $55 or more per day. Pets on a Plane
Flying With Fluffy
Airlines publish guidelines and rules on their websites for traveling
with or transporting pets. The rules differ for domestic and international travel, as well as for service animals. Here are some highlights for domestic travel.
Space for pets carried on or checked as cargo is limited and
offered on a first-come, first-served basis (excluding service animals), and traveling with pets isn’t allowed on all types of aircraft.
Call ahead to check your itinerary and book your pet. Service animals and emotional or psychiatric support animals fly free. They
must fit in your lap, at your feet or under the seat, and they can’t
block the aisle or an emergency exit. Owners are generally required
to notify the airline at least 48 hours before travel and submit a
note from a doctor or licensed medical professional confirming
the passenger’s disability and need. United and Delta also require
owners to submit a signed health certificate or immunization record for the animal, plus a signed confirmation of animal training.
Airlines prohibit puppies or kittens younger than 8 weeks from
traveling. They have varying requirements for proof of vaccination
and health certificates from a licensed vet. Carriers and crates
must be sized and constructed to certain standards to ensure the
animal’s comfort and safety. Even if a carrier or crate from a retailer
is labeled “airline approved,” check the specific airline’s requirements. If you can, acclimate pets to their carrier or crate two to
three weeks before departure.
Carry on. You can carry on a dog or cat if it fits in a carrier small
enough to fit under the seat in front of you. The “kennel” counts as
one piece of carry-on luggage. Airlines will charge a flat, one-way
fee of $95 to $125 at check-in for each segment of your flight. Pets
traveling with TrueBlue members on JetBlue will earn an additional
300 TrueBlue points for each pet fee paid.
Cargo. American and Delta charge $200 per crate. United charges
by weight, from $201 for 10 pounds or less to $630 for 150 to 200
pounds (and $60 more to go to or return from Hawaii).
Many airlines prohibit the transportation of brachycephalic breeds—short-nosed dogs and cats, such as
pugs, boxers and Himalayans, that are prone to respiratory problems that may be exacerbated by
stress and changes in air quality and temperature
in a cargo hold. Overweight animals and those
with preexisting health conditions may not fare
well in cargo, either.
The good news is that pet injury or death
during air travel is rare. In 2016, 40 out of 506,994
animals transported as cargo on major passenger
airlines died or were injured during the trip, according
to the U.S. Department of Transportation.
05/2018
KIPLINGER’S PERSONAL FINANCE
67
LIVING Commentary
DRIVE TIME
David Muhlbaum
The Best Way to Buy a Used Car
Missing generation. In 2011, when vehicle
sales were just starting to recover after
the Great Recession, dealers sold only
about 13 million new cars, compared
with 17.2 million in 2017. “That hole in
the market continues to have an effect,”
says Smoke. “Today, we have 20 million fewer vehicles that are five to
eight years old.”
We’ve seen the effects of this “missing generation” before. Around 2012,
the shortage of lightly used cars was so
acute that in some cases, it made more
sense to buy a new car—especially with
manufacturers offering big discounts.
No more, though. Even with generous incentives available on new
cars, smart shoppers are going to
find the best values among twoto three-year-old used vehicles
because they’ve already lost the
lion’s share of their initial value.
That said, if you’ve been out of
the market for a while, you might be
taken aback when you peruse the used
68
KIPLINGER’S PERSONAL FINANCE
05/2018
car listings. The average transaction
price of a new car has been rising
steadily (and faster than inflation),
and what people are paying for used
cars has gone up as well. What’s more,
leases that sharply restrict mileage
(often to as little as 10,000 miles per
year) are also driving up the prices
of late-model used cars, as cars with
low miles command a premium.
If those prices make you flinch, how
about a vehicle that has more miles yet
is newer than an off-lease option? We’re
talking about vehicles that have likely
been in fleet service, such as used
rental cars. Yes, we know
such cars come with a
stigma, but we think it’s
overdone (they’re carefully maintained
by the agencies), and it translates into
lower prices. Plus, your choices aren’t
just white Chevy Impalas and red
Chrysler 200s anymore. Rental agencies are thinking more about resale
when they populate their fleets. When
you rent these days, you’re more likely
to find yourself in something like a
well-optioned Toyota RAV-4, and
those are the vehicles heading to the
used car lots. The best way to get a
high-quality fleet car is to buy it directly from the rental company, rather
than buying one that has gone to auction and into the used
car world at large.
Still, most of those
LOOK FOR TWO- TO
vehicles are going to
cost five figures. If
THREE-YEAR-OLD
you’re looking for
USED VEHICLES
more-basic wheels,
BECAUSE THEY’VE
the current dearth
ALREADY LOST
of older models is
going to be an issue.
THE LION’S SHARE
One suggestion: Skip
OF THEIR INITIAL
the used car lot (and
VALUE.
its potentially perilous subprime credit
offers) and scour
Craigslist and other websites for a car
10 years old or older, but with relatively low mileage.
Ivan Drury, a senior analyst for
Edmunds.com, says such cars are rare
but worthy. “If someone kept it up and
it has low miles on it, you have a diamond in the rough. It could go forever.”
Be sure to have an independent mechanic look over the car. Although these
older models may have plenty of miles
ahead of them, lack of use can pose
some problems of its own (dried-out
seals or rotted rubber, for example)
that a trained inspector can spot. YOU CAN REACH THE AUTHOR AT DMUHLBAUM@KIPLINGER.COM.
POON WATCHARA-AMPHAIWAN
M
ost used car shoppers will find
plenty of bargains in 2018. A
record number of vehicles are
coming off lease, increasing dealer
supply and lowering prices—or at least
keeping them flat. Plus, the vehicles
finding their way to dealers’ lots better
reflect what today’s customers want:
crossovers, SUVs and trucks. But if
you’re looking for an older used car, you
are going to have a harder time finding
what you want, and you might have to
pay more than you were expecting.
What’s going on here? It boils down
to supply and demand. As Jonathan
Smoke, chief economist for Cox Automotive (whose properties include KBB
.com and Autotrader), points out, “New
vehicles are the source of tomorrow’s
used vehicles.” And in the early part of
this decade, there was less supply.
YOUR YOUTH WAS NO TIME TO BE
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“US Municipal Bond Defaults and Recoveries, 1970–2015. Past performance is not a guarantee of future results.
Ultimate Rewards travel
portal for 1.25 cents apiece—
meaning you’d need to
spend only 40,000 points to
buy that same $500 ticket.
3. Check with partner airlines.
Get More Punch
From Your Points
Use these strategies to unlock more value when
you book award tickets.
POINTS-AND-MILES BLOGS
are awash with strategies
on how to snag free flights
by racking up rewards
points, often through everyday spending on credit
cards. But when you’re
earning and redeeming
points, a few lesser-known
tricks can save you money
and squeeze more value
from your travel rewards.
1. Compare paying cash with
using points. When you book
an award ticket, points
cover only the base fare.
Taxes, fees and surcharges
can add anywhere from a
few bucks to a few hundred
dollars. Depending on how
much those fees add, “it
may be better to pay for the
ticket yourself instead of
blowing 100,000 miles and
paying a fuel surcharge,”
says Chris Lopinto, presi70
KIPLINGER’S PERSONAL FINANCE
05/2018
dent of ExpertFlyer.com,
a subscription service for
air travel information.
Fuel surcharges (sometimes referred to as carrierimposed surcharges) can
add, say, $800 to the cost of
a round-trip business-class
flight to Europe or $300 to
the cost of an economyclass flight, says Gary Leff,
author of travel blog ViewFromTheWing.com. United
doesn’t charge these fees,
but American Airlines and
Delta do when you redeem
their miles for flights with
certain partner airlines.
Some fees are avoidable,
such as the “close-in fee”
(typically $75) some airlines
charge for booking award
travel less than 21 days before departure. Others are
minimal, such as the September 11 security fee
($5.60 one-way or $11.20
round-trip) for any flight
originating in the U.S.
2. Tap the power of the portal.
The best way to stay flexible
and jump on the best deal
is to use a credit card that
racks up “transferable”
points. For example, the
Chase Ultimate Rewards
and American Express
Membership Rewards programs let you transfer your
points from participating
Chase or Amex cards to
a number of airline (and
hotel) partners. They also
let you use your points to
purchase flights reserved
through their travel portals.
To figure out which redemption is better for a
particular flight, you first
need to calculate the value
of your points by dividing
the cash price of the plane
ticket by the number of
points you need for the
fare. Say you have racked
up 50,000 points with the
Chase Sapphire Preferred
card and a flight that costs
$500 in cash requires those
50,000 points to book it. If
you were to transfer your
stash to buy that ticket, each
point would be worth one
cent. But Preferred cardholders can also redeem
their points through the
4. But beware of nonexistent
seats. An airline may release
more seats to its own frequent fliers than to members of partner programs.
If seats appear to be available on a partner airline but
you have problems booking,
check with the program
where you earned the miles
to be sure you’re eligible for
the seats, says Lopinto.
Also, airline search tools
sometimes show “phantom
award space”—seats that
appear to be available but
that you cannot actually reserve—when you try to book
on partner airlines. Before
you transfer your points,
make sure the seat exists by
initiating the booking process or confirming with an
airline agent. MIRIAM CROSS
mcross@kiplinger.com
ISTOCKPHOTO.COM
TRAVEL
Sometimes an airline’s partner requires fewer miles
to book the same trip than
the airline’s own program—
even for a domestic flight.
For example, flying roundtrip from the continental
U.S. to Hawaii on Delta
recently cost 52,000 miles
using Delta’s award program
but only 30,000 miles if you
booked through Flying Blue,
the frequent-flier program
of partners Air France and
KLM, says Emily McNutt,
of ThePointsGuy.com. To
book with a partner airline
using points you earned
with your rewards card, you
will need a card that allows
you to transfer your points.
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TAKEAWAY
When It’s Safe to Shred Your Tax Records
In most cases, the IRS has three years after the due date of your return (or the date you file it) to do an audit. You should keep
some records even longer than that, and it’s a good idea to hold on to your tax returns indefinitely. Here’s a guide to what you
can toss and when.
SPECIAL SITUATIONS
AFTER THREE YEARS
Form W-2s (you can shred pay stubs
after you’ve checked them against
your W-2s)
Form 1099s (capital gains, dividends,
interest on investments)
Form 1098s (if you deducted
mortgage interest)
Canceled checks and
receipts for charitable
contributions
Records relating to:
● Eligible expenses for
withdrawals from health
savings accounts and 529
college-savings plans
● Contributions to a tax-deductible
retirement-savings plan, such as a traditional IRA
Records of contributions
to a nondeductible IRA:
three years after the
account is depleted
Investing records showing
purchases in a taxable account:
three years after you’ve
sold the investments
Home-purchase documents
and receipts for home
improvements: three years
after you’ve sold the home
Records relating to:
Loss from worthless securities:
three years after you’ve claimed
the loss on your return
● Loss from bad debt: three
years after you’ve claimed it
●
AFTER SIX YEARS
Receipts for business income and
expenses, if you’re self-employed
72
KIPLINGER’S PERSONAL FINANCE
05/2018
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