Eccentric New York real estate mogul Leona Helmsley died leaving her little Maltese $12 million. Two of the hotel magnate’s grandkids, left with nothing but memories, took the matter to court. After months of legal wrangling, the grandkids were awarded $6 million combined, while the dog’s inheritance was reduced to $2 million.

More often, jilted heirs don’t hound the dog, but instead go after relatives who got the longer end of the stick. In the case of the estate of billionaire J. Howard Marshall, who died at age 89, only shortly after marrying Playboy model Anna Nicole Smith, it was a battle between widow Smith and her (much older) stepson. Family feuds also erupted over the estates of Hyatt hotel founder Jay Pritzker, socialite Brooke Astor, singers James Brown and Whitney Houston, and comedian Lucille Ball, to name just a few. And the Michael Jackson mess is just getting started. “Throw a dart at any list of deceased celebrities and chances are that you’ll hit upon someone whose family members fought over the inheritance,” says Adam Schucher, a Fort Lauderdale, Florida, attorney specializing in estate planning and administration.

Of course, it’s not just celebrities who die without making proper arrangements. Fewer than half of all adults have a will. And you can bet that those same people do not have an advance healthcare directive, either. Yet these are among several documents that you, as a responsible adult, need in place—for your own well-being and for the harmonious future of your family.

• A will. OK, you know what this is—the basic who-gets-what document. But, do you have one? Without a will, whatever you leave behind will be distributed per the laws of your state, which might mean that someday one of your least favorite relatives may be comfortably sleeping in your bed and eating off your fine china. If you have young children, the will names their guardians. The will also names an executor, who will handle the nitty-gritty details and usually gets compensated for the hassle, which can be considerable.

• An advance healthcare directive or living will. It lets you make end-of-life decisions in advance. If you were in a coma, for example, would you want to be kept alive by artificial means even if there was little hope of regaining consciousness? [For more on the horrors of failing to have a living will, see “How Doctors Die”]

• A healthcare surrogate designation. The living will can’t foresee every possibility. You also need a surrogate to make day-to-day medical decisions for you, should you no longer be able.

• A durable power of attorney. This gives power to another to handle essential matters beyond healthcare, such as managing your bank accounts, should you become unable to do so.

The bottom line: Every adult, and especially those with minor children, should have these documents completed, signed, and saved. Simple wills may be drawn up for as little as $150. Complete estate plans—which might include various trusts to allow for the smoother transition of assets and possible tax breaks—could run to $3,000 or more.

If you wish to save a few dollars, and don’t mind putting in some legwork, most state government websites offer some forms, including the advance healthcare directive form, for do-it-yourselfers. Need guidance? State bar associations often have an attorney referral service. You can also contact your county courthouse, and ask for a list of local pros who handle estate law. “The most important thing is that you don’t succumb to decision paralysis,” says Connie Fontaine, who teaches graduate-level estate planning at The American College in Bryn Mawr, Pennsylvania.

And finally, even if you have an estate plan, you need to update it regularly. “Refreshing is often a simple matter,” says Fontaine, who suggests casting an eyeball on your estate plan at least once every two years, or whenever you experience a major life change, such as a move or a death in the family. Had Leona Helmsley reviewed her plan in a calmer moment, who knows? She might have thought twice about her rather unusual pooch bequest and saved her heirs a major headache.

Are Your Vital Financial Documents in Order? The Saturday Evening Post

Indeed, in one recent study from Duke University, it was estimated that heavy portfolio-tweakers underperform light portfolio-tweakers by 1.25 percentage points a year. And that’s before taxes. But that doesn’t mean you should leave your portfolio forever on autopilot. Here are four occasions when tweaking is well warranted:

Your portfolio is out of whack
A year ago, you crafted a moderately aggressive portfolio of 60 percent stocks and 40 percent bonds. Now’s the time to check your allocations. If stocks have been good to you and your ratio has risen to 65/35, it’s time to rebalance. That means selling off some stocks and buying bonds. You do this to keep your risk in check. The other reason is to force yourself to continually sell high and buy low. Over the long run, experts say, regular annual rebalancing could juice your returns by more than half a percentage point a year.

You are close to retirement
A major exception to the buy-and-hold guideline is when your life circumstances change dramatically. As you get closer to retirement, the common wisdom is to lower your risk by moving more savings into bonds, less into stocks. The reason is that once you retire, you will be pulling money from the portfolio, rather than putting money in. Should markets crash, an older person has fewer years to recoup the loss. A very general rule of thumb is to invest your age in bonds. “As rough rules go, this isn’t a bad one,” says Brosious.

Your funds have become obsolete
There’s been a revolution in both stock and bond funds over the past decade or so, and management fees have come down considerably. But not all funds have followed suit. According to Morningstar Principia, dozens of index funds simply track the performance of Standard & Poor’s 500 index (500 of America’s largest company stocks), but with vastly different fees. You can spend 0.05 percent a year in management fees for the Vanguard S&P 500 ETF (ticker VOO), for example, or you can spend 10 times as much (0.50 percent a year in fees) for the virtually identical Dreyfus S&P 500 Index fund (PEOPX). There’s rarely a reason not to switch when the price difference is this dramatic.

Your investments are too popular
Investors have a bad habit of making trendy investments. Trouble is, by the time they’re trendy, they’ve very often peaked (think tech stocks in 1999 or real estate in 2006). Buying a stock when it’s hot often means needing to dump it when it’s cold. “Not a profitable strategy,” says Neil Stoloff of SweetSpot Investments in Bloomfield, Michigan. Instead of buying high and selling low, you want to do the opposite, he asserts. Rebalancing (see No. 1) will help you to buy low and sell high as a matter of routine. But if you wish, you can go a step further; be a contrarian and purposely buy what others have been fervently selling, says Stoloff. “That’s what we do—at the beginning of each year, we buy whatever kinds of investments saw the greatest outflow of investor dollars in the previous year.” You needn’t work through the complex number-crunching that Stoloff does to take advantage of a contrarian strategy. Simply look to see what’s hot and what’s cold in the world of investments. What is your brother-in-law selling? What have all the chattering heads on TV and radio been advising you to dump? Move opposite the crowd. For example, if European stocks are unloved by the masses (as they have been of late), you might put five to 10 percent more in European stocks than you otherwise would.

Portfolio tweaks, by definition, are done in moderation. “Tweak, yes,” says Brosious. “Overhaul? … Only with very good cause and … the blessing of your tax advisor.”

New Year, New Investments The Saturday Evening Post

Illustration by James Yang.

Attempting to regulate large companies is like trying to dam a large river. You may change the way the water flows, but you’re not going to stop that water from running. When banks were hit with new government regulations in 2010 limiting or eliminating fees they could charge their customers, they hit back. They complied with the rules, sure enough, but they shifted the fees to different transactions. At stake were billions of dollars per year—money the banks were counting on to keep them in the black.

The banks assumed consumers would not notice the new, tiny fees tucked away under vague, misleading headings in monthly statements. Or, if people did notice, banks counted on them to quietly suffer with the new fees, as they usually do.

Boy, were they wrong! The surprising (to them!) breaking point came last fall in the form of a proposal by Bank of America and others to charge $5 per month for the privilege of using their bank-provided debit cards. That fee was shelved after igniting a massive public outcry, the Occupy Wall Street movement, and a well-publicized exodus of big bank customers to the fee-friendlier waters of credit unions and smaller community banks.

But other fees quickly and more quietly took its place—and then some.

Now, lose that debit card and Bank of America charges $5 for a replacement (or $20 if you want rush delivery). Need a teller? Its eBanking enrollees have to pay $8.95 each month they use one to make a transaction. And most recently, the behemoth bank has been testing a menu of new checking account fees as high as $25 a month.

Bank of America is not alone. In 2009, before the Credit Card Accountability Responsibility and Disclosure (CARD) Act ended sudden interest-rate hikes and other money-making “gotchas” on credit card accounts (whose plastic is often issued by big banks), nearly all of the major players offered free checking.

Today, Citibank charges $20 a month unless you keep at least $15,000 in deposits—up from a $6,000 minimum balance in December. At Wells Fargo, expect a $15 monthly charge unless you have at least three accounts, maintain a $7,500 balance, or carry a Wells Fargo mortgage. No matter where you bank, it costs an average of nearly $8 a month in fees for basic (and longtime “free”) checking and ATM use, a 21 percent increase from six years ago. And a checking account isn’t the only service where fee has replaced “free.” Want a paper statement at month’s end or a photocopy of a past transaction? Making a deposit with your mobile phone or receiving one sent by wire transfer? Don’t have, in your bank’s view, enough account “activity” in a given month or need to cash in too many coins? There’s a fee for each at some banks, from 50 cents to a few bucks per use. Meanwhile, fees for longtime services have also increased: Cashier’s checks that used to cost $3 now cost up to four times as much, while money orders have doubled.

Outraged by it all? You’re in good company. In the 90 days following last November 5, the so-called Bank Transfer Day ignited by a 27-year-old art dealer’s Facebook post urging consumers to flee the ever-growing fees of big banks, nearly six million heeded the call—and moved their money to credit unions, which have lower or no fees for many of the same services. (As nonprofits, their tax-exempt status is one reason.) Guess what? There’s a fee for closing a recently opened account: $25 at CitiBank, PNC, U.S. Bank, and Sovereign, and some smaller financial institutions demand up to $50. All told, this nickel-and-diming amounts to some serious coin. Last year, $41 billion in fees alone was generated for America’s financial institutions—including $9.5 billion for “everyday” (and sometimes previously no-cost) services on customers who never overdraw their accounts.

Bigger banks, with higher operating costs, tend to be the biggest offenders. They have an average of 49 different fees, according to a study by Pew Charitable Trusts—ranging from $1.50 for a Xerox page to $175 to drill open a safe deposit box if keys are lost. Many are buried deep in government-mandated “disclosures” statements that now typically run 111 pages long, and are “full of legalese” not easily digested by many customers, says Pew’s Ardie Hollifield.

Overall, fees are fewer and less expensive at smaller banks and credit unions. “You’ll pay roughly one-third fewer fees at a credit union or smaller regional or community as opposed to a mega bank,” says Michael Moebs, CEO of Moebs Services Inc., which conducts independent research about banking services and fees for the financial industry’s federal regulators. “Bigger banks charge higher fees because they have to. There’s a huge cost in having 10,000 braches scattered across the U.S.”

Attack of the Killer Fees The Saturday Evening Post

Bill Dyszel, a communications executive in Manhattan, plunked his 401(k) savings into a single mutual fund. Hannah and Mike Resig of Falls Church, Virginia, did the same. Dyszel, 57, chose the Fidelity Freedom 2025 Fund, and the Resigs, both 25, opted for the American Funds Target Date Retirement 2050 Fund—both known as a “target-date” or “life-cycle” fund. (The years —2025, 2050—stand for retirement dates.)

According to Morningstar, contributions to this type of funds have soared in recent years to $420 billion—double what it was five years ago.

The basic strategy behind a target-date fund is to provide a well-diversified portfolio that starts off aggressively and then, as time rolls on, shifts to a more conservative strategy. Thus younger investors, like the Resigs, wind up with mostly stocks and few bonds. Older investors, like Dyszel, who are closer to retirement, carry more bonds and fewer stocks. The ratio of stocks to bonds shifts automatically each year. Estimate your retirement date and a formula does the rest. One reason for these funds’ popularity is that in 2007 the Department of Labor passed a regulation that led many employers to use life-cycle funds as the defaults in 401(k) plans. If workers fail to make another choice, contributions to 401(k) go directly into a life-cycle fund. But the rise in assets is attributable to more than this ruling.

Dyszel chose the life-cycle option for its simplicity. “I didn’t want to spend time figuring out what to invest in and when to invest it,” says Dyszel. For the Resigs, just starting to build wealth, the life-cycle option seemed too sensible to resist. “These funds take into account that when you’re younger, you can afford to take more risk,” says Hannah.

Jerome Clark, portfolio manager of T. Rowe Price’s line-up of retirement funds, says that 90 percent of his savings is in his employer’s life-cycle option. “These funds are a great core holding for almost everyone,” says Clark. “Many younger people invest too conservatively, while many older investors invest too aggressively. With life-cycle funds, the allocations for investors vastly improve.”

Interested in life-cycle funds? “These funds are the easiest investments you can make, but you still need to do research to make the best decision,” says Clark. Some key considerations:

1. Study the strategy.
While all life-cycle funds start off aggressively and then grow more conservative, the rate of progression varies widely. The Fidelity Freedom 2025 Fund is currently 60 percent in stocks, while American Funds Target Date Retirement 2025 Fund and T. Rowe Price Retirement 2025 Fund are both 75 percent in stocks. If you like a fund company but find their mix too aggressive, simply choose a target date closer to home—for example go with the 2015 fund, rather than the 2025 fund.

2. Look carefully at fees.
Life-cycle funds charge fees that can vary considerably. According to Morningstar, the average life-cycle fund charges 1.08 percent a year in management fees. Other options in your 401(k) plan may be much less expensive. If that’s the case, “ask yourself how much the simplicity is worth to you,” says Everette Orr, a fee-only financial planner in Virginia.

3. Consider the mix.
Look at the fund’s diversification (does the stock portfolio have U.S. and international exposure?), the strength of management (how long has it been around?), and historical performance.

Easy-As-Pie Investing The Saturday Evening Post

In hindsight that was a clever move because not only are bonds less volatile than stocks but their value has risen steadily with the decline in interest rates. But with interest rates at historic lows, those gains won’t—in fact, almost can’t—continue, says Dirk Hofschire, senior vice president of asset allocation research for Fidelity Investments. He predicts that the safest bonds—U.S. Treasuries—are likely to pay just enough in the next decade to keep up with inflation.

Time to get out of bonds? Not so fast, says Hofschire: “The situation argues for realistic expectations not for the abandonment of bonds, and perhaps a portfolio with a good mix of bonds still has much to offer.”

The key word here is “mix.” If Treasuries are paying a paltry two percent, the strategy calls for diversifying. Bonds come in all flavors, just like stocks do.

“Complementing high-quality bonds with a variety of other sectors can help you increase your yield and return potential while protecting against risks such as potentially higher inflation,” says Hofschire.

Treasury bonds are available in both conventional form (with steady coupon payments) and inflation-adjusted (lower, fixed coupon payments but regular adjustments for inflation). Include both in your portfolio. In addition, consider the following:

• High-quality, “investment-grade” corporate bonds. These typically yield about 1 percent a year more than Treasuries.

• Municipal bonds. Historically, bond issues by cities and state governments haven’t paid as much as Treasuries. But right now they are about on a par—and, of course, the difference is that interest on municipal bonds is generally tax-free, making their effective return greater than Treasuries.

• Corporate high-yield bonds. Issued by less-than-financial-powerhouse companies, these bonds are riskier than the others mentioned above but are now paying about 3 percentage points a year more than Treasuries.

• Emerging-market bonds. Issued by countries such as Brazil, Russia, and Turkey, the bonds are now yielding a rate similar to corporate high-yield. These, too, carry risks, but offer good diversification power.

Within each bond sector you can further diversify by choosing a mutual fund or exchange-traded fund that allows you instant ownership of hundreds or more of individual bond issues. The strategy is crucial when investing in options like high-yield (aka “junk”) bonds, where the default of any one bond is more than a remote possibility.

Finally, it may be time for even the most conservative investor to venture cautiously into other areas. Consider lowering your bond exposure by investigating vehicles that pay higher interest rates, says David Lambert, founding partner and wealth advisor with Artisan Wealth Management of Lebanon, New Jersey. “For many of our clients we have lowered the overall allocation of bonds and replaced them with other income-producing holdings such as real-estate investment trusts and dividend-paying stocks.”

But sound money management will always dictate holding some bonds. As Lambert points out, even the largest and most stable stocks tend to be more volatile than bonds.

Taking Stock of Bonds The Saturday Evening Post

A rash of media stories called for abandoning the diversified portfolio, rejecting buy-and-hold investment, or adopting new tactics, such as market timing (jumping in and out of the stock market in the hopes of buying low and selling high) and cherry-picking (banking on one or possibly a handful of investments that you think will do better than all the others out there). Other stories have advocated just keeping your money under the proverbial mattress.

Investors are listening. According to the investment resource Morningstar, $573 billion in cash flowed into low-yielding but secure money-market funds in 2008 when the stock and bond markets (other than Treasury bonds) were suffering the most. As soon as the stock and bond markets started to come back in 2009, so did the investment money.

We’re here to tell you that you might want to think twice before following the pack and abandoning the tried and true—the well-diversified, broad portfolio of stocks and bonds and cash that you pretty much buy and hold—and jumping onto any bandwagon that promises to do better. Here’s why:

1. Cash is costly. Keeping your money in cash (money-market funds, savings accounts) may spare you from market volatility, but in the long run, the return on a diversified portfolio of 60 percent stocks and 40 percent bonds still clobbered cash. According to Morningstar, the respective 30-year returns on the diversified portfolio, after accounting for inflation, were three to four times that of a portfolio held in cash.

2. Markets are unpredictable in the short run. If you’re thinking that you’re going to keep your money in cash and pop into the markets at just the right time, think again. Pro investors often can’t even time the markets, says Cathy Pareto, MBA, CFP, president of Cathy Pareto & Associates, a wealth management firm based in Coral Gables, Florida. “Studies show that investors who buy and hold a diversified portfolio, rather than try to rush in and out of investments, tend to do much better.”

3. Specific winners and losers are unpredictable, too. If, instead of diversifying your portfolio, you try to zero in on individual securities or small segments of the market, you may be adding to your risk, but not your return. “People are often overconfident in thinking they can pick one stock or perhaps one industry that is going to do well,” says Don Bennyhoff, CFA, a senior investment analyst at Vanguard Investments. “Professional investors often do a very poor job when they attempt such picks—the average investor won’t even do that well.”

4. Costs are bigger than you think. When you buy and sell (whether popping in and out of the market, or gambling on individual stocks or market sectors) there are substantial costs involved, says Bennyhoff. The “spread” (the middleman’s cut) on stocks can be as high as several percentage points. There is often a commission or markup to pay the broker on any trade of a stock or bond, and fees on fund swaps are not uncommon. You may also pay higher taxes on a shifting portfolio than on a buy-and-hold one.

5. Look at the bottom line. The downturn of 2008–2009 was unusual in the manner in which so many investments, and entire classes of investments, turned sour at the same time. Still, diversification paid off, assures Bennyhoff. Bonds overall didn’t do quite so bad; some bonds, namely Treasuries, did very well. Certain segments of the stock market even shot off like rockets in the second half of 2009. Overall, if you had a highly diversified portfolio of 40 percent bonds, 30 percent U.S. stock, 20 percent foreign stock, and 10 percent cash, your portfolio on September 30, 2009, would have earned you 4.25 percent annually, or 51.63 percent cumulatively, over the prior decade. “Despite what you may have read, diversification and patience hasn’t entirely let us down,” says Bennyhoff.

Russell Wild, MBA, is a NAPFA-registered financial advisor who has written nearly two dozen books, including Index Investing for Dummies and Bond Investing for Dummies.

Why It Pays to Diversify The Saturday Evening Post

Ruth,
OH

Wants Vs. Needs The Saturday Evening Post

“Most people simply don’t want to do tax planning, often fearing that it is too complicated. But tax-loss harvesting isn’t very difficult, and some people — especially with most investments beaten down — could truly save a bundle.”

Tax-loss harvesting refers to selling investments you’ve lost money on and asking Uncle Sam to essentially share the pain. Here are five easy steps to make that happen. Be aware, however, that you must act by December 31 to take a deduction for 2009.

Step 1: Peruse your portfolio
Chances are that you lost value on your investments in the past couple of years, but to tax-loss harvest, you must have lost value in a taxable (non tax-deferred) account. IRAs and 401(k) plan losses don’t count. What you’re looking for, in most cases, is either a stock or a stock fund that has fallen in price since you purchased it.

“Since the markets have dropped dramatically, many of your holdings will likely fit the bill,” says Kazan. In investment-speak, the price you paid for a security is known as the “cost basis.” So you are looking for a cost basis greater than today’s market price. If your investment papers do not list cost basis, you’ll need to contact a representative at your brokerage firm or mutual fund.

Step 2: Sell your losers
Selling the securities — after finding the cost basis — is where many people freeze. “It’s often hard for people to sell securities that have lost value. They feel like they are locking in their losses,” says Kazan. That’s true, in a sense, that you would be locking in your losses. But (as you’re about to see in Step 3) losses aren’t always such a bad thing.

Step 3: Seal your nest egg
Simply having sold a loser, you have experienced what’s known in the tax business as a capital loss, and capital losses are generally tax-deductible. So far, so good! Now you have just two main things to be careful of. First, the “wash-rule”: Don’t ask why, but the IRS will disallow any tax deduction if you repurchase the same security within 31 days … so don’t. But being out of the market for a month presents you with a second potential problem: The market will heat up, and you’ll be left out in the cold. The solution is to “seal” your portfolio by buying a similar (but not identical) security. You can then keep your proxy, or, if you prefer, sell it after 31 days and repurchase your “old” security. And here’s where selling your depressed security should not be seen as anything horrible: Your proxy is going to be similarly depressed and poised for a like price pop if the market starts to boil.

Step 4: Garner your profits
Suppose you bought a stock or a stock fund for $10,000 several years ago, and the market value has since swooned
to $6,000. If you sell, you will have a capital loss of $4,000. You can use that $4,000 in one of two ways, explains Will Holt, CPA, with Financial Symmetry, Inc., a financial planning firm in Raleigh, North Carolina. First, you can apply the entire amount to offset any capital gains (gains from selling a security at more than you bought it for).

But even if you have no capital gains this year, you can still deduct up to $3,000 from your regular income when calculating your taxes owed. “That’s a substantial saving for minimal effort,” says Holt. The remaining $1,000 of your capital loss can be written off next year’s (2010) taxes. And if you pay state income taxes, you likely can write off some of those, too. Invest your total savings, and it will grow with compound interest over time. “Your simple tax-loss harvesting, which took you perhaps a few minutes, could wind up adding significantly to your wealth,” says Holt.

Step 5: Fine-tune the process
If you are unfamiliar with tax-loss harvesting, you might want to bring in the assistance of a financial professional, at least until you feel comfortable with the process.

“There aren’t too many potential snags, but there are some,” says Holt. Be careful when buying and selling mutual funds if there’s a load or short-term redemption fee. Be aware of the commissions you pay for trading individual stocks or exchange-traded funds. And finally, know that the IRS rules can be a bit tricky regarding what constitutes a “similar, but not identical,” security. “There’s a bit of a learning curve with tax-loss harvesting, but the potential savings are great enough that it is well worth putting in the effort,” says Holt.

Russel Wild, MBA, is a NAPFA-registered financial adviser who has written nearly two dozen books, including Index Investing for Dummies and Bond Investing for Dummies

Taking the Sting Out of Investment Losses The Saturday Evening Post