Where to Invest in 2011

Last week I offered my prognosis of things to come in 2011. This week I’ll discuss where to invest now to take advantage of opportunities or avoid pitfalls in the year ahead.

Stocks. The stars appear to be aligned for double-digit returns in the stock market over the next twelve months. Retirees seeking cash flow and more conservative investors should consider investments in blue chip dividend-paying stocks. Companies such as AT&T, Southern Company, McDonalds, Con Edison, Royal Dutch Shell, Kimberly Clark and Paychex offer robust dividends while you wait for stock prices to move up. Make sure that you have a minimum of twenty different companies that are spread between a minimum of six different industry sectors.

An approach requiring less effort would be to invest in a basket of dividend-paying stocks using an Exchange Traded Fund (ETF). Two to consider are iShares Dow Jones Select Dividend Fund (symbol DVY) or Vanguard Dividend ETF (symbol VIG).

U.S. small cap stocks should also excel as America bounces out of the recession. Because these smaller companies are also more volatile, buy big baskets of stocks through mutual funds or ETFs. For low fees, consider Vanguard Small Cap Index Fund (NAESX) and iShares Russell 2000 Index ETF (IWM).

Emerging market stocks are another category that I expect to perform well this year. Many of these countries managed to side-step the financial crisis that hit the U.S. and Europe. Your best bet is to invest using mutual funds or ETFs. Two to consider are Vanguard Emerging Index Fund (VEIEX) and iShares MSCI Emerging Index ETF (EEM).

Bonds. The bull market in bonds appears to have run its course. Now’s the time to become more cautious. I expect short-term interest rates to remain relatively flat this year while longer term rates move up. To protect yourself from falling bond prices, consider shortening your maturities to five years or less. One excellent choice is Vanguard Short-Term Investment Grade (VFSTX). It has low fees, average maturity of its holdings of less than three years and currently yields just over three percent.

There is a lot of concern about the tax free bond market. Some states like Illinois and California and many municipalities are in deep financial trouble where their financial obligations (pension funding, etc) far outpace their revenues. Solutions include federal or state bailouts, extreme cost cutting measures or bankruptcy. Review any municipal bonds or bond funds you own and make sure they are of very high quality. One fund to consider is Vanguard Limited Term Tax Free (VMLTX).

Inflation. Inflation has been benign for years. In fact, for the past two years Social Security recipients have not received a cost-of-living increase. That should begin to change this year although I do not expect for inflation to significantly ramp up for eighteen to twenty-four months. Conservative investors who want to build some inflation protection into their portfolio should consider TIPS bonds. As inflation rises, the principal value of these bonds rises also. You can learn more or buy them directly from the U.S. Treasury at You could also buy a basket of TIPs bonds using an ETF such as the iShares TIPs (TIP).

Next week, I’ll discuss investments in real estate, gold, and commodities. Be sure to seek advice from your own professional advisor before acting on these suggestions.

Financial Strategies for Divorcing Couples

I’m happy to report that my wife and I will soon celebrate our 30th anniversary of marriage. Unfortunately, about one-half of marriages do not stand the test of time. Now you’d think that divorcees would have learned the lessons from a failed marriage and ‘get it right’ the second time around…but this is not the case. According to research, 67% of second marriages and 74% of third marriages fail. The emotional and financial trauma associated with divorce is often substantial. If you or someone you know is facing the prospects of a divorce, here are suggestions that can soften the impact:

Seek mediation. I was working with a couple who decided to end their marriage. In this case both people worked in well-paying jobs and they had minor children so there would be custody issues in addition to property division, child support and perhaps alimony issues. I suggested they consider divorce mediation rather than the traditional ‘you hire your attorney, I’ll hire mine’. There were lots of assets involved so the stakes were high including potential legal expenses. These clients approached their divorce with civility, a sense of fairness and a focus on doing what was in the children’s best interest. The result was a smooth transition and legal fees of under $3,000. Contrast this to a recent couple’s divorce that chose to each hire their own attorney to fight out both the financial and custody issues. This couple, whose wealth was but a fraction of the couple in my first example, spent more than $70,000 in legal fees. This is money that could have been split between the couple rather than the attorneys or used to set up college funds for the children.
Get professional help regarding division of financial assets. Which would you rather receive in a divorce, $100,000 personal investment account or $100,000 retirement account? Well, it depends. Clearly there are very different tax issues involved. A Certified Financial Planner or CPA can help you work through the various tax issues according to each person’s individual goals. In addition, there will be income tax issues that will need to be resolved. You’ll also want to decide how attorney fees will be handled.
Protect your credit. The divorce process can easily take many months and ‘disruption’ is a common byword. This disruption of the normal handling of your finances can result in things falling through the cracks such as bills not getting paid on time. The last thing you want is to be newly divorced and have bad credit. Pull a current credit report from each of Transunion, Experian, and Equifax; resolve any current credit inaccuracies together; and be diligent regarding paying all bills in a timely manner. It’s often much easier to repair credit before rather than after a divorce.
Change beneficiary designations. You’ll want to re-write your will. However, the laws of most states automatically exclude an ex-spouse from receiving assets under your will if you forget to change it after your divorce. This is not the case with life insurance beneficiary designations, designations for retirement plan beneficiaries, co-ownership of bank accounts, etc. We had one case where an ex-spouse was left on a bank account for more than 20 years…and was therefore entitled to the bank account proceeds when the owner died.