What Doomsayers1'O Are Buying Now p..

58

Things National Parks Won'! Tell You p.84

3 Hiqh-Payinq Bonds To Boost Your Portfolio, ..0 3

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To Our 5 Part Test
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to the riSKSof different areas of the market.

Request a prospectus. which includes investment objectives, 'risks,f'ees, expenses, and other information that yot! should read and consider carefully beforeinvlil.sting. The Retirement Funds invest in many underlying funds and' are exposed Gut~rlQrmedlhcll U~~et llVcragelor tha 1:-,3-. 6-, and III-year petlollsended. J/31109,respecUvely.
'Based on cumulati~a total !eturn~ 101 01 163 (65%), 106 ul13S, 102 0112,9, and 52 of 72 lilowe Prite luod$ (inclulfi~G8J1 ShJlfe ~~iaes8nd excluding funds !!Sed illinsu!an&e ~rcduGhi) rilll all lunds o~tDcrrormed for all periods. (Source lor data: U~W rno,)

'.r. Rowe Price Sll.lIlngs Sanlc Is a member al the FDIC andoHefll. CD ,prodUDiS. DIherT. RDW€Pm:e affiliates, Inoludlng T. Rowe Pme Inn~tmenl Sen-lees, Inc., are separate enUUel. While lIIe Sllvlogs II:!nk's CDs are FDIC-Insured, all other products oNerell by T. RowePrlo8 atmlales are not fDlC-lhsuredand are not deposits 01 or guaranteed by Ille S:a~[ngs Bank. Such produuts are subject to InnSlmtlll risk, Including possible 10" of thB prinol[ll11 amount Invested. T. RawePrlCB Invastmerrt SeMoos, InD. OIs1ri!JulDr. lAP M OW77838

"Unlike CDs or other bank products, an investment ina money market fund is not insured or Buarameedby the FDIC or·aI'!Yother aovemment Cl8ency. Althooah it seeks to preserve the 1I(l/ue of your investment «su» per .share, it is possible to lose money I¥ investi'l9 in a I'I1Ol16)' marl<er fund.

SmartMoney
VOL. XVIII-NO. VI

Dissent pays off for veteran money manager Jeremy

Grantham.
-"I Told You Sol' page 58

CONTENTS JUNE 2009
Brokers 2009 Frustrated Americans are thinking about dumping their
broker, How firms are trying to keep old clients-s-and woo new ones. by Neil Parmar and Roya Wolverson

Finding the Best Fit Sorting the good brokers &om the bad has never been more important, or more difficult. Our 17th annual survey pr cks winners and losers in six disco un t ca tegories. Plus: rankings of seven full-service brokers. by Roya Wolverson and Neil Parmar
"I Told You So" People have been questioning Jeremy Grantham's judgment for the bulk of his 40-year investing career. And yer the often bearish Boston money manager is usually right. Now he's going against the grain again ....and buyi.ng stocks. by Russell Pearlman and Jonathan Dah!

The Reemerging Markets As stock markets tanked i.nmany developing
nations, the countries' economies continued to grow. That's why some pros see compelling investments in places like China. by Elizabeth O'Brien

7

The New Prospe.ctors A new breed of real estate optimists are finding a silver lining in the hall sing meltdown by buying dirt-cheap homes in hardhit neighborhoods, often for less than the price of a used car. SMARTMoNEY looks at how, where and why they're investing. by Anne Kadet

Ten Things National Parks Won't Tell You Yellowstone or the Grand
Canyon this summer could be a cheap and easy alternative to more-lavish vacation plans-but only if you do your homework first. by Jason Kephart
(continued on page 4) JUNE
1009 SMARTMONEY 3

Technology can bring you closer to growing a great garden.
"Green-lhumbGadgets:' page

so

CONTENTS
streetsmart
15 Portfolio Play

Columnists
34 Comrncn Sense

Smart Spending
Health Care in a Hurry
Mini medical clinics are cropping up in drugstores and supermarkets nationwide, expanding tenfold in the past two years alone. Consumers like the evening and weekend hours, but what about having sutures removed JUSt up rhe aisle from the mouthwash?

Firms that corner the rna I: ker in their industry area good bet, especially in rocky times ..
17 Sector

Why the Great Depression wasn't so depressing for stock market investors. by James B. Stewart

as

Smart Ideas

Should you invest in the firms thar manage your mon ey?
18 The Corner Office

Controversial crops are hel ping Monsan to grow.
21 ETf: Watch

Family bus inesses can ch rive in bad tirues=-as long as they don't get caught up in fa III il y feuds. by Dyan Mach!!in
42 The New Retirement

Green-Thumb Gadgets
Gardening today requires a lot less din tinder the fingemails-e-thar is, assuming you've got textmessaging plants, digital soil moni tors and robotic lawn mowers. We spotlight [he latest high-tech tools for your backyard "sraycarion."

Preferred stocks may be the best road into bank stocks.
28 F'l.Indlnsider

End-of-life care is still stuck where it was a dozen years ago. by Peter Keating
44 Stock Screen

Smart Consumer
The best and worst credit card rewards programs; beating the car-i nsurance rate hike; saving money throug]: Twitter and Facebook.

Fund managers are sitting on tons of cash. We ask why.
30 Bond Watch

It's one thing to keep a little extra cash bandy, but some companies are hoarding way too much. by Jack Hough
90 Tough Customer

Fewer top-rated corporate bonds means it's time for a new investment strategy.
31 Buy/Sell/Hold

In every Issue
6 SmartMoney.tom S Investments in This lssue 10 Editor'sPage 12 Letters COVER: Photograph by Evan K db.; gruomi'ng by Nancy Sprague; Hugo Boss suit courtesy of Saks Fifth Avenue

.

.

Grief counselors are treating people who are in mourning for their 401(k). Really.

Tackling technology
$MARTMONEYVolullle

stocks.

by
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Altfle

Kader

Cathleen P. Black, Presidcnr, George J, Creen, Execunvc vice President. JOll11 P,.Loughlin. Executive Vier President: John A. Rohan c. Vice President and Group Controller. Dow .10nL's & Company, Inc.: Rupert Murdoch, Cll.itirm"-f1Ij l .eslle HrliWJ1, CEO: Robert ThUll1;SOl'!" Publisher; The tVaU Street ]ottrna'. Cupyriglu © 1009 by SnlilrtMu!lCY. Al:ll"ignrs reserved. &Jirol~.ilofll,,Cj: 1;755 arQ~HI\\'.i.ly, New York, NY 1'00 19~212.-g30-9:WO. Subscription prices: Unired Stares ;:md poSs.eSS.iOrlStS24,QO for 11 issues; Canada and all ocher countries, S39.00 for 12 iSSI.lI.:!:i.(Canada BNNIlR 101.3~ 094.3. RT.) Periodicals postage paid at New York, NY, and .addinoncl offices ..Canada Pear lnccrnarional Publications Mail Product (Ca[l3clian Disrribucion] Snles Agrccmcnr IlO. 4110J 1499~For customer service, cha i':lges o~ ad dress and su bscri PCL~}i1orders, tog on W service .srua rtmorreyccm Qr wei rc 1[(1Cuseome I'$I.:!rvice Depa LDl1.efl~) S rna I1:M (mer, P.O. BQ:l(Tl 86, Red Oek, 1A 51591--0 J 86_ Previ I,)U::.li ~'U es a vai Jab le fOI' $4,75 postpaid from Depr. HSc.. P.O, Box ;1 05:57 Des. Moines! LL\.50340, Posunasrcr-Picasc scnd address ehangt'...§.,[,o Sm,;]J'\t.Mon'l..'Y, P.O. Box 7186, REd O~ lA 515~1. Printed in U.5.A.
j.

Xvlll-Nnmber VI rrSSN J 06i:]1~285] published mQIl!;_!"lr~ a emtiemark -of Sm;1J'd\AQlll'!~'~;l is [cnnr publi:!'ihirtgventure ot Hearst SM Parrnershlp (H~~I'Si[ Ccnnnunicarioes, lnc., ::111d; Hearst Busutcss COITlmUnTGl.r[OllsJ Inc., general partners], Si59 Eighth Ave.t New York NY IOO.L~,L'Incl . Dow JOI1t:::i &: Compenv, Inc. lOa Liberty Sr., New York, NY 10281. HCOIF-st Comrnunicatiom .• lnc.. Frank A, Beonack Jr" VLiX" Cb.,jjrrnill.l :l.HLl C..E(\ G&f.}I'seR,. Hearst jc, Cha1rL1l;,.1J1, Carhcrlne A_ BDS.lti...H!~ Sccrerary; R.;)rJ;tld'1- DfiWlet Seracr Vlce President and CFO. H~1'Sr M"ag:a7.ines Divtsion:
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JUNE 2009

'lhemost

phon

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In the mG51tountries.

COverage 'MliMlilable In all.aJNS. .see· OlWraije map al Stoms wr dali!1lS. ActMItioo 01 AJ& I W119[Qss M'a and WGrI~ ConlIOO. mqu~oo. Rale applies to Wireless aUS placed toa Cl1lna Iar.dIl!\e.C2009 HTCeorp, Int All rights S resEM!tl. The lilt logD. HTt fUll and anyClh€r ~emark5 used herein are nadKnarks owned I7t mc Corporntlonaoo are llSeIl·under IIoonse. e~ AT&ill1tellK1ual P.l'Ilpe/ly. Selvice pl'll'lided. by AT&I Mobility All rignts ~ AT!IiJ.the AT&T logo, aJ'idoU other malts oonIiIim\l helWl' are !riIdemOlksol AT&T In!elledual Property aOO1orAn Tolfilialed companies. All oIhEr marks amtained herein ore lhe propeflY or tIlei r respective oYIrIeIS.

SMARTMONEY.COM
JUNE 2009

Get You r Questions Answered at Our Helpline
SMARTMONEY Editor at Lar'ge James B. Stewart is now answering selected reader questions online at our Financial Helpline. Stewart, a Pulitzer Prize-winningrournalist, writes the "Common Sense" column. Submit your questions and watch his response in our video series at

www.sma.rtmoney.comlheJpllne.

1,001 Things They

Won't Tell You
Check out our new book, 1 00 t Things They Won'tTelf You, from Workman Publishing. This compilation of our most popular "1 0 Things" columns is a Book-ofthe-Month Club featured selection. Details-and more "1 0 Things~-at
j

www.smartmoney.com/10thIngs.

FROM THIS ISSU E
• MAR KET TALK FROMTHE RROS After reading our annual Broker Survey in this issue, g0 online to find oul what financial; professionals are sayiJigin SmartMoney.com's Broker Talk column. www;smartmoney.oom/brokerlalk :1-"""":': "tl:!I:.:.:- .~ • M UST·READ INVESTING LEITERS Money manager Jeremy Grantham's letters 10 clients are legendary lor their no-nonsense tone and often prescient observations. Read a sampling at www.smarlmoney.com/mag. • ArrACK OF THE ROBOT MOWERS See what's in store as robot technology takes over oneol America's most traditional home-chores: mowing the lawn. www .. martmoney.com/mag s

6 SlvfARTMoNEY

JUNE

2009

Hew Accol!llls claim based 00 internal PTRADE FIIl.ANCIAI.Corp. melricsfor ll'Iernge dally gross. new iE·fRA:IIE Ban~. and .E"lIWlE Secll£ities accounts between 3fl1D8-2I:2.atD9. Hel new acc.ounts were IOl!xcess 01 !50;000 over lite same p.frlod. 1. To qualify for ,PowerE"lRADE,)'Ou must exei:ul! at least 30 stock orcplions trBdflS dUrlllg 8talendar qlJarter. To.qualify lor.$7.99 commissions!or stock and options snd a 15~ II!:!! per oplionsCIJ ntract, you must execute 5tl-499 stock or ~ption5 trades ~ iJlI)flt~.To qua Iify for $9.99 cnmm issTOIlSIOf slock ud option u nd' 1j 75. fee per opt lens contracl, you must exeeute I(1....49 stock. or optinrtS trades per mo nlll or mainm in a $50,000 balance ill com bined E:"TRA!JE!:eeu rifies a ndE"TRADE Bank areaunls. To continue receiving thesaca mmission fates)'ll.U must ,re-quaJify by the: end of thefollowillg calendar quarlE:t:. 2.Annual PercMlBge Yield is e1Jeclive 41U09, and ls subjecl to chanie. A$l minimum deposit is requiroo to open 8 new I!C®!l nt, Withdlaw~llimits applY. Online statements tequi.reII. The Annual Percentage Yield (API') oUILe Com plele Savings Aooount as al 4/1109 is more th an 5 times Ita nation aI avera8~ APYIIl!" savings areaonls wit bb.9 lances Qf$25,OOO.Sou~, .1 fllrma n Researth Seniices, Inc", Ca labasas, Ck. Wl\WJnform aIS.CjJm. Altlmugh Ille irlf:Cfmatioo 'has been o.btalne:dfrom the various institutioos themselves, the accurncy ca nnot be guamnleed Seeurllies p.rcduelS-a nd services ofl.eretl .oy E*TRAD.ESectlrltles ltC, Member FlNIWStPC. ore DDt !!\Surell by the FDIC, are not guaranteed depcsits or obligetlo as 01 E"lRAllE Bank and are subject 10 investment risk, including PDSsfbleloss of the principal invested. Ban~ing products and services areafleredby E"TRADE Bank,a Federal savings bank, Member FDIC,or ijssubsidiaries. Bank depcsits are FDIC-insured. On October 3,2008, FDICdeposil Insurance tempera rily increased from $1 00,000111 $250,000 per depositlll'1hmugh December 31, 2009. E~ADE ,Se(oriUes Lie and E'TRADE Bank '1Il! s.eparate but affillal!d companies. System .resPGnS~and account aeeess limes may vary due 10 a variety of filctllrs.incltlcling trading valumes. marflet conditiol1s. system performance and atllerlaetors. rmOO9: E"TRAD E fl NANCIA!. Corp, All rights r;e!;ewed.

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Editor's Page

Attention Must Be Paid
___ HE AVERAGE INVESTOR talks
ttl Iio [0 his broker

about his port-

twice a year-and goes to the movies six times a yea r. Sounds like we need to get our priorities in order. But those: numbers reflect rhe simple fact tha t most of us are generally okay with our brokers, L1 p to a point. We thi nk they' re gen iuses in good times. AJ1d in bad? We're wondering what in the heck they're doing, There was a lot of wondering righ r after last fall's debacle. Buras bad as those da ys were, most of us have come away with an important
lesson: No rna rrer how good yow· broker may seem, you can't leave him on autopilot. Indeed, Americans are giving advisers as dose a look as they ever have, com bing
WI cements,

questioning fees and holding of

more meetings with them. Not all this scrutiny has been flattering for the industry. One recen [ survey round that fewer than a quarrer investors completely trust their brokers and [hat many are consider-

ing swi rching, ru a rule the good firms welcome extra a ttentiou fro m careful clients ..The weaker ones wi II tty to put them 0 fE. And who exactly are the best-and worst-SIms? Since 1993, our magazine's first full yea r, we've conducted an ex ha 1.1 sri ve an n ual look into the operations of the major brokerage firms. How long do they take to answer the phones? Wh ich ones have the lowest fees, the best stock-picking records? Webecome their customer for you. And this year, more tha 11 any other; we knew people needed our best detective work, We think we deli vered. Our coverage begins on page 47. Tl"iE BROKER SURVEY ISN'T the only thing we've been running si nee day Ol1€. Each month, in our "10 Thi ngs" feature, we've uncovered 10 secrets about businesses or government agencies that [he f:olks runn ing them would certainly prefer you didn 'r hear. 111is rnon rh, for example, in "10 Things National Parks Won't Tell You," we warn readers that hiking iJ1 the Grear Smoky Moun rains isn't as healthy as you might chink (since the park is in such a polluted area) and that $500-a -11 ight lodges i11 these parks rna y not offer Wi- Fi. N ow comes a new book, 7,001 Things They Won 't Tel! You, from Wo rk 1Tl2 n Publishing Co., that puts 100 of our best columns under one covel'. Each has been carefully updated, and for this, I am indebted to assistant managing editor Kim Bernstein, fowler staff reporter Renee Defranco, and a small army of researchers and writers who have con trihuted to the column since the early '90s. It is, ill all modesty, au essential rome fOJ the savvy Consumer and the mindful investor,
It carries the very DNA of this magazine.

JONATHAN DAHL,

Editor in Chief idahJ@smart!1loney.col11

10 SL\llARTMONEY

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433459,B.O

Letters

Innovate. Inspect Homes. Ignore Advisers ..
wishes are. It will go a long way in keeping the peace and your sani ty.
EDWARD

W.

GJERTSEN

II, CFP

Glenview, Ttl.
Hire an Inspector. Save Some Money.

As a New York real estate arrornev, I enj oyed "Hornebuy ing ... Wi thout a Bank" (April), and lappreciared the wisdom of seller financing as a way [0 facilirare.credit. However, no article should be written without advising a buyer home inspector
limes Are Tough, but They'll Get Better
011
[0

the subject obtain a

or engineer. One really

The April "Protect Your Money" issue was right on target. At times like these, itis easy to become discouraged and disheartened. We must not do so. Exactly beca use of the economic dilemma in which we find ourselves, we call expect the next few years to produce more daring, innovative enterprises than we've seen in the past 30 to 50 years. This is not the time for the fainthearted; it is the time for the daring, the innovator, the inventor and the risk taker. We are entering a most exciting period!
STUARTMcDONALD

does not know the cost of a home un til the inspector determines a ny repair problems. In addition, [his inspection

of ten allows for a reduction
price when defects are found.

in purchase
BAlLEY

ADAM LEHMAN

New York
I Could Have Done as Well on M.y Own

"Retirement

Retooled"

(May) suggests

Newburgh, Ind.
You Say "I Do!' Your Kid Will Say, "I Won't!'

that having a financial adviser would keep you from ha ving such large losses during severe downturns. Having used two financialadviser companies over the past 10 years, I can tell you that is definitely not the case. Not only are our losses dose to 50 percent, but we also had to pay for the advice.
KENT ST. JOHN

I would like to commend Brad Reagan
bringing into discussion the sticky issues fa cing b Iend ed fa mili es (" Befo re Your Parents Say 'I Do' Again," April).
Oil

Longmont, Colo.
Correction

Ihave practiced financial planning

WYNDHAM HOTELS A D
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The dividend at Exelon Corp. represents 26 percent of operating earnings. The figure was misstated in May's "Dividends for tbe Long Run."
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HOWTO INVEST

PORTFOLIO

PLAY

When There's o Competit· on
Finns that dominate their market are a good bet in rocky times. By Daren Fonda
UNLESS YOU'RE AREPO MAN, it's rough to find uplifting news in the economy these days. Sure, the market's seen a few rallies this year, but unemployment is rising and house prices are falling. And most analysts' outlooks for cotporate profits this year areu 'r exactly rosy. "There isn't a lot of faith in earnings right now," says Alec Young, an equity market strategist for Standard & Poor's. But not every stock will limp out of this recession as Wall Street's walking wounded. Companies wi rhstrong" defensible businesses may actually be able to grow during these rough times, says Morningstar equities strategist Paul Larson. Such firms tend to have a "wide moat" around their business, which keeps their profits up and rivals out. TIley may operate in industries with high barriers to entry-think defense contractors and biotechnology. Alld as weaker competitors falter or go ou t of business, they can pick lip market share and thrive as the economy rebounds. "These are stocks that may bend with the headwinds but not break, " says Larson. There's some evidence that these companies consistently beat the

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-------------------------------~
Apollo Group
(APOL)
PRICE: $66 MARKET VALUE: $10.6 billion 2008 SALES: $3.1 billion' 2009 PIE: 17 Apollo owns and operates the University of Phoenlx, B for-prom education gia rotwith nearly 400,000 students nationwide. Enrollment is up this year, as more talks rake courses to sharper their Job skills, says analysl Juslyn Putnam of PORTFOLIO PLAY Gabelli & Co. The stock looks pncey based on 65GB! 2009 earnings, but analysts expect proilts market, too. Morningsrar [racks a few 10 grow 20 percent, to $4.75 a share in fiscal dozen stocks it considers to have wide 2010, maklnp Ihe stock more reasonably priced. --------------------------------from 2004 through 2008 4 moats, and

Companies with solid, defensible businesses have strengths. that should give them an edge when the economy rebounds.

Capart

(CPRT)

PRICE: $31 MARKET VALUE: $2.6 billion 2008 SALES: $785 million' 2009 PIE: 18 Junkyard dogs may be familiar with Copan, aile of the country's la,rgest auctioneers of old and salvage vehicles. Low prices for used cars are pressu ring earnings, but the company has a solid balance shee I. Analysts expect profits to 9 row as it gains market share !rom smaller, independent rivals and its lnternet auction system reaches more buyers outside the U.S.

-----------------._
VCAAntech
(WOOF)
PRICE: $23 MARKET VALUE: $1.9 billion 2008 SALES: $1 .3 bnlron 2009 PIE: 14 Pet health care can be pricey, but that's what rings the register (or VCA, a large national operator of animal hospitafsand diagnostic labs. Analysts expect the firm to acquire 40 to 50 hospitals this year. And while some consumers have cut back on pet care, the company managed to boost revenue and profits in Ihe iourLh quarter 012008. The business has "tremendous cash flaw," says Ryan Daniels, an analyst wilh William Blair & Co" who th inks the stock has room to grow.
$iockdaid. as D14J20j(lfi.

-----------------4
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the group gained 13.2 percent, versus a loss of 10.5 percelJt for the S&P 500. Such stocks tend to have high returns on capital, a measure of' profitability thar Wall Street loves. And they tend to benefit from "economies of scale"-beillg so large, they call keep their costs down and beat the competition on pricing. Of course, wide-moat stocks don't always shine. This year they were down 4.1 percent thro ugh the first three months, still better than the S&P but behind stocks with DO moats, like retailers. Severallarge financial firms are on Morningstar's wide-moat list, and their stocks have been hammered. And some companies" moats erode over timejust ask anyone who invested in General Motors thinking its size would protect its market share indefin itely, Yet with the downturn in full swing, many p FOS are emph asixing wide-moat companies for their ability to ride out the recession and even boost their bottom line. justyn Putnam of Gabelli & Co., for nne, likes Apollo Group, one of the nation's largest for-profit eclncation companies. The company can

charge tuition rates similar to those of state schools and community colleges but still mallages to operate very profitably. Enrollment has been rising as more folks head back to school. And the stock looks cheap, trading at 14 times estimated 65c>112010earnings, below its historical average. They ha ve "tremendous cash .flow,"Putnam adds, and the flexibility to raise prices.
Some experts also see opportu-

nity ill smaller firms tha t have strong niche businesses ..Eric Ende, cornanager of the PPA Perennial fund, likes Co part, one of the largest auctioneers of crashed, or salvage, vehicles. Copart's business isn't easy to crack, he says, since it operates salvage yards across the country and has developed a sophisticated Internet auction system. Profits have come down a bit as prices Ier used cars and scrap metal have fallen. But the fum is expanding into the U.K., and Its virtual auctions reach buyers in. Eastern Europe and other parts of the world where demand is stronger. Analysts also like the compan y's bal ance sheet, with no debt and a growing cash hoard-which should help keep it chugging long after the recession ends.@'
}lJNE2009

16

SL'vlARTMot\\EY

sfre et smart

Right Fund F-rm
Schwab or Black Rock> Buying stock in firms that invest your money can be tricky.
NVESTORS MAY BE FED UP with the performance of their individual funds, but shares in the fund companies themselves have been doing exceedingly well lately, thank you very much. In fact, these companies' stocks rose three times as much as the broader ill arket duri ng the much-heralded bounce this spring. These money-management finns-which include brokerage firms like Char les Schwab, institutional managers like BlackRock and mutual fund families like Janus-get a double boost wben the market rises, The amount of money they manage increases, of course, and so does their fee revenue, since fees are generally a percentage of assets. Plus, good performance-even if it's due to an overall run-up-e-rends to attract more assets, leading to even more fee revenue. Of course, the reverse can happen in a down market. The average asset-management firm lost 23 percent of its assets in the l4 months from just after the market's peak in October 2007 through Dec. 31, 2008, according to fund-tracking company Lipper.

How to Pick the

trends. BlackRock, which had ,$1.3 trillion in assets under management at the end of 200 S. for instance, could benefit from the government's plan to buy devalued mortgages from some banks, The government is looking for priva re investa rs to partner in. this endea vor, and BlackRock is one of the few firms with the expertise to crea te rnu mal funds from the assets that it buys, Lee says. Another big trend: cash. Money-market assets are up $318 billion, or 9 percent, in the past year. These funds tend to ha ve very low fees, but Federated Investors, which has $407 billion in assets, offers a wide array of moneymarket funds and [las the scale to make the business profitable. What's more, when investors move their cash into the marker, they tend to keep their money within the same fund family, says Peter Crane, president of money-market research firm Crane Da ta. So Federa ted could gain even more ifcustomers opt for its higher-fee stock or bond funds. Charles Schwab is poised to capture much of the money that's in motion this yea r as burned-out investors seek better options, says Jeffrey Hopson, equity analyst with Stifel Nicolaus. Indeed, Schwab attracted $25 billion in net new assets in the first quarter, as some customers moved their business away from full-service brokers.
-Elizabeth O'Brien

Z.

~

All of th is ca n easi ly leave investors with whiplash. ] USt weeks before the spring rally, many asset managers were trading Ii ke they were going out of business, says Rob Lee, managing director of equity research for Keefe, Bruyerte & Woods. Now many analysts say they're overvalued. "These are volatile stocks to begin with, but in my 18 years of doi ng this, I've never seen irl ike th is," Lee says.
Unusual. times call for unusual measures. Sure, it's tempting to look solely at how a firm's products are performing, but analysts advise looking at today's bigger

JUNE

1009

SMARTMONEY17

THE CORNER --

-

OFFICE --

Hugh Grant
MONSANTO IT ALMOST SOU NDSlike Amid the furious retailers, science fiction: among on

discounting

one firm has been able to Its stock has mana.ged a volatile

raise prices as much as 25 percent some products. market to climb this year, despite has supporters world hunger endangering

What's more, the company claim ing it can cure and critics accusing it of the global food supply but profitable, and its CEO who was with was

and environment Controversial through the firm is Monsanto, a plainspoken

all this has been Hugll Grant, 51·year·old

raised in a coal and steel town in central Scotland. Grant started the firm in 1981 and took over the top office in 2003, when Monsanto u..S. and European its genetica'ily biotech focused protests facing some fierce and well-publlclzed against modified crops. He

took on critics by explaining. that crops were heavily regulated, the company on crops more store

for animal feed than fhe grocery and proceeded resources Monsanto in revenue) to seed development. spends $2.6 million

to devote, even more a day

(more than 8 percent of its $11.4 billion primarily on seed research. herbicide of is research com, crops campus Monsanto started as a chemical

Future Growth
18 SMARTMoNEY

The Seeds of
By Reshma Ka.padia

firm, and its Roundup still brings its profits. focused engineering But today's

in about 30 percent

on how bre.eding! and genetic could develop seeds that yield bugs and weeds. sprawling

ootton and soybean more bountiful. and prated against

and nutritious

Though controversial. Monsanto's high-tech crops are helping the company weather the recession.

Indeed, Monsanto's. researchers

in St. Louis is fi lied with lab·ooat·clad monitoring an array of

JUNE

2009

stree t smart

test tubes, not to mention pieces of seeds to identify generated

the robots

(yes, robots)

busy chipping

off minuscule

But our seeds-and-traits

busirress will

genetic markers,

The spending

has paid off: Monsanto

$2 billion in profit last year,. more than twice its take from the year before.
crop y!elds by 2030 while using That means Monsanto's

continue to grow throughthar period. Our growth comes from continuing
to deliver for

G:rant"s current goal-doubling and energy-has to increase countries. Chrlspeel.s, California, technology facing analysts skeptical.

a third

less water need

crop yields

fanners. The equation is that simple, When we launch a drought-

5 percent a year; historically,
"That's probably director

they have grown 1 percentin under any circumstances, Agriculture

developed says Maarten of

not achievable"

toleran t seed r drinks less wa rer and Yields more corn, the grower will he ha ppy [() pa y for that.
• You've said biotech crops are a demand for

rna

of the Center for Molecular

at the University

San Diego. Even if it is aohievable,

Bill Freese,. science policy analyst at
He says the is also and a the effects in plants, like increasing, prices down sharply on track. 80rlau9, hungry. honoring Norman way to ease-the growing demand ,eaching

the Center for Food Safety" Is among those calling for more testing. is still new and can cause unintended economic natural toxins or creating broader

new ones that have yet to be fully studied. Monsanto headwinds: with commodity question if Monsanto with mementos sure either-read can keep growth

food. Do you see globallood crisis proportions?

price war brewing,. analysts Grant's modern Nobel Prize-winning Inspiring? scientist

office is cluttered We weren't

Cra in st-ocks are sirring ar 20- ro 25 -year lows in part because of a droughtin

heralded for his work on feeding

the world's

Presumptuous?

on for your own assessment

Australia, global warming and changing diets. Demand for ethanol is also pa rt 0 fit. We w ill need twice as rn uch
food-as much produced in the past 10,000 years-over. the next 30 to 40. There are arguments on the slope of the curve, not [he trend.
• You can't talk about the food crisis wilhout ta;tking about Africa.

• Monsanto growth

has had phenomenal the recession'?

• RIvals like DuPontare-deeply discounting their seeds to take market

in recent years, but can you

keep it up through

share.

How do you compete?

I'm very optimistic. By 2012 We think we can expand profits 1.25 times our 2007 base by doub1.i I1g crop yields and the con riaued increase in demand. • But won't demand faU given the
global downturn?

Fanners are I ral Iy harvesting profits ire on every squat'e foor. So the conversarion around the kitchen rable is lessabout cost of seed and more about its performance.
• Prices for glyphosate. RounduD herbicide, your popular

I was in Mala wi a couple of years ago, and a 70-year-old grandmother, raising [our grandsons, was eager to show me her com. She was benefiting f!'Om "new" technology-technology that farmers in the U.S. used in the 19405. African farmers arc jL!S1 using old tools, thi ngs ella t would be familiar if you stepped out of the Bible. It's going [0

It contin ues to rise, but noise around it flucruares, Poultry production in India bas risen to the point it's exporting it.
Recession norwithsranding, the Chinese

are falling after a

steady run-up in recent years. Doesn't tl'1atcut into profitability?

are eating more wheat and Jess rice .. That romantic first date now is more likely an Italian meal than Chinese.
• But Chinese workers off as growth are gettil'lg laid date?

When we WAlde our 2012 profit target, we anticipa ted [hat business decreasing,

FOOD IS RECESSilON PROOF
slaws •.Are they still going out for Italian (In their second

Time will tell, bur J think yes. We talk about China as One country, bur you

have

dissect it. It's urban China, not rural China. And within urban China. there is an emergence of fast food and the western ization of diets, It might slow clown, but r don't think we are goi,ng backward. When dietary habits shift, it's hard to change back.
to jlJNE 2009

EST. 20DS'SALES: $12.9 billion EST_200S' NET.INCOM£: $2.6 billion EST.200S"EPS: $4.65 2009 PIE: 17 MAHKETIIAL;UE: $42.8 billion COMMENTS: Monsanto shares
have climbed 372 percent over the past five years. as farmers around the world bought its biotech crops. This year ·it'sup 16 percent, far better than the S&;P 500'5 3 percent loss.
'Ho5Oo"t1 ,Ye6r ends Au82;

$150 120

Monsanto (MON)

'04

'05

'06

'07

'08

'09

I,

SMARTMON"EY

19

streetsmart

PayDay
Which CEOs are earning their

pay and which, well, aren't? We
weigh in on pay packages that stand out-for better or worse.

OV'ERPAID
RAY IRANI CEO, OCCIDENTAL PETROLEUM PAY; $60.5 MILLION

THE CORNER

OFFICE • Some crop scientists can't perform research on biotech can with conventional about complain they

take tune. But if there IS a way to get technology down to this local level, you make a big difference. And it's the germ of a future business.
• Some scientists Monsanto's fertilizer. are skeptical

the comprehensive seeds ·thatthey seeds,

Indudes $1.3 miJlion salary, $3.6 million bonus package and $53.7 million in stock and options.
Sure, the oil-and-chemical behemoth had a good year, increasing both revenue and profit in 2008. But shares fell 22 percenl, and Irani's payout, coming on the heels of his $77.6 million in compensation in 2007, seems staggeringly excessive in a recesslenary era A spokesperson says 91 percent of Irani's 2008 compensation was related to his "superior performance"

2030 targets of doubling

yield while using a third less water and Isn't thai a, bit ambitious?

We're sharing lots of data. We donated all of om biotech and know-how for white corn to Mexico and sub-Saharan Africa. L) the next decade, for compafiles dri ving yields as significantly as we are, rha r becomes a prereq uisi teo If you are involved in something as basic as food production, the argument "you can't afford this; you have to wait" is not acceptable.
• Are you worried

Ambitious is good. I'd be worried if you'd said it's humdrum. This is not a moon shot. hi December our researchers aroun d the world spent a wee k laying out milestones. Our product cycle is seven to 10 years, so everything we do is long term. But the key is describing, step by step, the milestones. • What do "lIou say to those concerned
about fhe safety of biotech crops?

UNDERPAID
WIl.lIAM CRENSHAW CEO, PUBUX SUPER MARKETS, INC. PAY: $795,466

about piracy? It's in the places you would expect. We

You have to took at what's happened historically; Over the past 13 years,

have some copying of our technology in India but still have a great business there. If you farm an acre, you want the best possi ble yield, and people who are copying are generally behind. .Is
Monsanto rec:essionproof?

Includes $754,000 sala ry and
$41,466 from retirement-plan an lneentlveand contributions.

more than 2 billion acres i.n.25 countries ha ve been growing th ese crops. There's been more scientific evalua tion of bi 0tech crops than any other food technology. Each country has an independent regu Iatory agency gri nd ing through the data. Wesupply the data, burthe regulators evalua te it-and they've vouched

Food is one of the last things to suffer in a recession. Plus, we're in good financial shape with a spotless bala nee sheer. The cash we genera te means we don't ha ve to compromise our pipe[i ne, A nd the pip elin e is at th e hea rt of whmwedo.0

for the sa fery,
20 SMARTMol\1EY

Even though Publix's senior executives are paid less than other grocers in the industry, Crenshaw took the extraordinary step of asking the company's board not to increase his pay, due to the sour economy. Even so, last year's dramatic downturn didn't stop Publix from posting $23,9 billion in 2006 sales, an impressive 4 percent increase in a difficult climate. The firm is privateshares are owned by employees. -Dyan Machan

"'
c

." o"

3-

o

J

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"

JUNE 2009

streetsmart

Easing Into Bank Stocks
Savvy investors are testing the financial
sector by buying preferred shares .
••• HIS MAY BE the best news since learning chocolate and red wine are good for you: Financial stocks are making something of a comeback. As with chocolate and red wine, of course, the key is choosing top-quality picks and enjoying them in moderation. Preferred shares, with their fat dividends and steadier share prices, are the most appeali ng, and owning several 0 f them through all excha nge-traded fund With so much uncertainty in the sector, investing ill bank stocks is still a bit dicey. But the three preferred ETFs

em the rnarket=-rwo from Powerxhares
and one from iShares~look deeply discoun ted. Each holds more than 8 0 pa~ cent of assets in financial stocks, which trade for 60 to 80 cents on the dollar, says Scott Burns, director of ETF analysis with Morningsrar, As banks shore up their finances, preferred stocks could rally. In the meantime, preferreds pay dividends upwards of 10 pe.rcent. TIle iShares S&P U.S. Preferred Stock Index fund (PFF) has 68 securities, including the mining firm FreeportMcMoRan Copper & Gold and drugmaker Schering-Plough, About half the portfolio is in "trust" preferred stocks, which are a little safer, says Mariela Jobson, an iShares portfolio manager. You may not see capital gains right away, but with its 12.6 percent yield, you'll get paid to wait. -Daren Fonda

(whi.ch bundles stocks together so they trade as one) helps reduce the risk. Preferred shares yield much more than common stocks and trade like bonds, with fewer big price swings (both downarJd up). And while companies in, distress often cut their commonstock dividends, they usually leave their preferred dividends intact, providing an extra measure of securiry, Tha t said, preferred shareholders call get wiped out if the company fails.

h: Normalized Earnings
... THERE1S NO 'BETTERS1GN OF I NVESTORS' HUNGER
than the increased attention they're giving to normalized earnings. for a reb,lTn to normalcy The figure is the average of a

company's earnings over the last business cycle, typically five years. This. of course, minimizes any recent aberrations. The idea is that normellzed earnings can provide a truer ouHook for very oyclical companies, like U.S. Steel or Southwest Airlines. Such firms are often profitable over a
five-year portfolio period but may see earnings rise and fall along With the business cycle. says Bob Auer, manager of Auer Growth fund. One drawback: With the economy in disarray, the quest.ion can assume the future will look like the past -Jason Kephart

is how much investors

22

SMARTMol\\EY

JUNE 2009

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streetsmart

hand, then the la tter has to sell fund assets to meet the redemption. for the manager, that might mean taking a loss that's larger than necessary, so its better to hold cash. But not all managers are convinced it's time to buy, especially not witb cash outperforming stocks anyway. "I'm not sure it's SQ far away, but I don't think we've seen the bottom yet, ,; says Nick Kaiser, who is keeping about 30 percent of the Amana funds in cash. When housing prices start tel stahilize, he plans to playa falling dollar through
investments like the Turkish cellul ar- phone.

company Turkcell and add to his Stake in En Carra, the Canadian energy cornpan y. Housing prices are important, agrees David Ellison, rnanagerofFBR's large-and smallcap financial-services funds. But so is time. "This is nor about making [he bottom," be says. "It's about making a fundamental judgment that companies can grow and be profitable again. >J- When Ellison thinks firms have written down the bulk of their toxic assets, he'll reinvest-primarily by adding to many
FUND INSIDER

of the names he already holds, like PNC Financial Services or Bank of America, both of which he says nave made smart acquisitions, Bond managers are also watching the government closely. Tom Atteberry, who comanages FPA New Income, says as long as the Federal Reserve continues. to shape the landscape, the credit markets won't normalize. But when they do, he says, the first opportunities will be in investmenr-grade corporate bonds. -JanetPaskin
TH EY'lL BUY WH EN ••.
---

There's No Time Like the Present
Fund Inanagers are sitting on cash like never before. We asked what they're waiting for.
UNO MANAG ERS OFTEN insist they'll only buy stocks .,on sale." Well,

after losing more than half their val ue in the past year, stocks are trading at going-out-of-business prices. But one in every three fund managers is still sitting on a bigger-than-average pile of cash. Some have more than half their funds' assets on the sidelines. Why? And as Rab hi Hillel sa id more than two millennia ago, "If not now, when?" Some of the reluctance is strictly practical+-the funds need cash to meet redernpri ons, says JeffTjornehoj, Senior analyst at fund cracker Lipper. Mutua I funds lost almost$200 billion to redemptions since the crash began. And if an investor wa n ts to se II his rn Ut1.13 I .ftl nd sha res a nd the ma nager doesn't ha ve a ny cash on
28 SL'vlARTMo}'1EY

When home prices stabilize, Amana Funds' Nick -Kaliserplans to buy foreign stocks to playa falling dollar, Finns need to write down most. of it1eir toxic assets before FBR"s Oavid Ellison pul:s more money in stocks he now owns. When the Fed stops buying UR~oubled assets,FPA's Tom Atteberry plans to take a closer lookat corporate bonds.

}lJNE2009

U.s. GOLD COINS AUTHORIZED FOR IMMEDIATE
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BOND - WATCH -

eNewWay o Play Bonds
The number of top-rated corporate bonds is fal1ing, but investors still have good option ..,
N TH EMU N DAN E bu [ increasi ngly imporran t WOI ld of bond ratings, it sure is lonely at the top, with the ranks of AAA-rated companies quietly dwindling to a handful But bond buyers aren't sitting on the sidelines; in fact, there's a whole new ball game to play. Once the gold standard of safety, the AAA racing told investors that a company was in good health and would almost certainly not defa nit 011 its bonds. But Standard & Poor's, one of the three main ratings agencies along with Fitch and Moody's, has steadily reduced [be ruunber of AAA-rmed public companies to

don't

even issue long-term

debt, Plus, as

compa n ies are under more pressure than ever to deliver strong financial results to shareholders, many firms Me deciding that maybe it's not tbe best s-trategy to "manage to the AAA racing," says Diane Vazza.Iiead of global fixed-income research for S&P. UPS, for example, decided early lasr year that shareholders would he better served If the company increased its debt ttl buy back shares, boosting the earnings per shu re bu t relinq uishing its AAA fa ting. But .from the investors' STandpoint, [he loss in AAA-rier firms is changingtheir bond strategy. Bond yield, ha ve become increasingly atrracn ve~so long as the company has Little risk of defa ulting on the debt. With the top-tier firms nearly nonexistent, the second tier becomes the new hot spot. Cable com parry Comcast and retailer CVS arc both BBB-pllls-rated com panics, for instance, with recessionresistant businesses and bonds that yield 8.1 percent and 5.8 percent, respectively. By contrast, similar AAA-rated Johnson & johnson bonds yield 5 percent. Indeed, while defaults on the whole are expected to rise, analysts say investors who stick with BBB companies in food, cable and utilities don't risk that much in exchange for higher yields. Another good example: Kraft Foods, which yields 6 .. percent. 3 But think twice about going too far down the bono chain. "Never has there been a brighter demarcation between investment grade and junk bonds,"

ilist six, down from 17 a decade ago. (You'll recognize the names: Auroma tic Da ta Processing, Exxon Mobil, Johnson & Johnson, Microsoft, Pfizer and Berkshire Hnrhaway.) Other agencies haven't even been that generous. Fitch and Moody's downgraded Berkshire (ironically, Berkshire owns 20 percent of Moody's). Pfizer, III eanwhile, could get downgraded this year, according to S&P. L1 March, General Electric lost its AAA status, a distinction the company had held since 1956. "It's a dying breed," says Bob Persons, manager of rheMf'S Bond fund. Curiously, this rash of downgrades isn't setting off many alarms incorporate America. In fact, analysts have even stopped looking at AAA firms as a class unto themselves, given that many, such as Microsoft aud ADP,

"Persons says.
MFS IBond (M FBFXj Manager Persons is oppor.timities in BBB-rated defel"lsiveboF'lds.

"Junk" and

high-yield debt carry yields as high as 20 percent, since those films havea higher fisk of defa Lilt. If th at ha P'" pens, an investor could wind up with nothing.
-Elizabeth O'Brien

Van.guan:l L.ong·Term Investment Grad!.! (VWI;:SX) It's hard to beaf its 0.2.3 percent
expense rati:o,or $23 for every $10,000 invested.

Holdings incl~qe utilities and pha!r.maceuticals.

30

SIv-IARTMo"N"'EY

JlJNE2()()9

stre et smart

BUY' SELL- HOLD

Tackrng Tech
Beleaguered investors looking for safety have turned to an unlikely corner of the market-technology, But it's not always easy to separate the good from the bad.
Hewl.ett-Packard
(HPO, $35)

Sohu.com
(SOHU, $46)
-

SELL
tHE AlLUR E IS 5 IM PlE: Many big tech firms si c on loads cash and Iirrle debt and still offer good

or

long-term growth prospects. H -P, for example, still leads in personal computers, printers and servers, and analysts applaud managemenr's laser-like focus on cutting costs. The fact that 11 blue-chip tech name is trading at singledigit valuations and near historic lows at nine times 2009's expected earnings impresses Edward Jones technology analyst Bill Kreher, who calls ir "one of the best bargains available." Al Frank manager John Buckingham likes H-P's growth prospects: "This is a company growing profits ill the worst economic environment. Imagine what happens when the economy rebounds, "

YOU'DtHI NK a Chinese Internet campa ny would have big growth prospects, but analysts are skeptical about Sohu.com now that ir has spun off Changyou .. om, its c gaming unit. Sohu faces a slowing advertising market just as it loses full ownership of the cash-rich division that letit spend aggressi vely, says Tian Hou, a Chinese Internet media and games analyst for Pa!i Research. Analysts expect profits to rise 10 percent this year, after 344 percent growth last year. The way Sohu handled the spinoff also raised concerns; it gave executives equity in the new firm at the expense of existing shareholders and didn't disclose the details for months. "U I were an investor; I'd be furious," says Hall. Sohu declined to comment.

Cisco Systems
(CSCO, $17)

WitH A HEFTY $5 a share in cash, Cisco Systems has the

means to expand its market share and boost profitability to emerge stronger out of the downturn ..Its routers-andswitches business (which connects computers to the Internet and one another] has slowed as corporations worldwide have reduced spending, Analysts expect profits to falllO percent this year; Cisco agrees 2009 will be tough. To offset the slowdown, the firm is expanding into new areas like servers. Its near-term results could be tested, given the recession and the growing pains inherent in moving into a new business, but the move "sen ds a strong message that Cisco is here to be one of the long-term lea ders," Kreher sa ys.

....UNDER THE RADAR Accenture
WHI LE ACCENTURE

firm's other stock going

(ACN, $21) lacks the flash of other tech firms, the consulting and outsourcil"lg stock certainly shines. Shares have risen 94 percent since Ac:centure's 200 1 lnception.es IT stocks fell more than 26 percent Investors used to such performance abandoned the when executives lowered forecasts because clients were freezing their budgets. While ~it's to stay in the penalty box for a bit;" the market leader still mints cash, and its outsourcing

business is already ben.efiting from the recession, says Jeff Markunas, who manages the RidgeWorth Large Cap Core EQUity fund. The stock trades at just 1 0 times 2009 earnings. "You don't get to buy this company on sale all that often; says Markunas. -Reshma Kapadia

JtrNE

2009

SNlARTMONEY

31

Ask SmartMoney Stephanie AuWerter

Rethinking Stock, Home Equity Line of Credit, Annuity Issues .
Q
My husband and J tire at least eight • years away (rom retirement. All our money gqes intoan aggressive portfolio that fell 33 percent in 2008 and 20 percent this year. We're worried. Should [uture contributions
-SUSAN DOCHERTY, West Orange, N.].

go into more stable investments?

Asset allocation is a squ ishy science at best, bur Ye5, it sounds like yours needs an adjustment. Boosting your fixed-income in vestmen rs might ease anxiety and COD ld temper your growth poten rial-s-though not by much. A portfolio rhar was 100 percent invested in rhe S&P 500 over the past 40 years (1969-2008) del ivered average a nn ual returns 0 f 8.98 percent, according to Ibbotson Associates, whereas one that Was 60 percent invested ill the S&P 500 and 40 percent in intermediate g.overnmenr bonds delivered returns of 8.95 percent. Avoid extreme, panicky moves in your portfolio, says financial planner Mari Adam of Boca Raton. Fla. You'll still want a big chunk of your investments in stocks. "Your time horizon is nor the day you rerire-e-ir's the day you die," notes Adam. "That could easily be 30 years away." For more specific advice, find a Iee-o illy planner or, at the very least, a Web asset-allocation tool.

.Q

points for taking on Dew debt. In some cases, the lender can report a home eq uity line in such a wa y that it's treated as revolving debt, in which case the credit Iirnir and a moun t are factored in more significantly. (The less owed, the better.] Ultimarely, it shouldn't.burt much. The bigger worry these days is qualifying for an increase. We haue

• Are they safe?

t:

e annuities

with Allstate . Texas

~ GARY TOWNSEND, McKinney,

Allstate says its balance sheet is in good sha pe, and independen t ra ring.agencies agree. But in general, if an i usurer goes. broke, things can get com pi icared for its annuity customers. With a typical fixed auII ui ty contract, an investor gives an insurer a Iuru p sum and in return gets a steady stream of income. But that assumes the insurer can keep making the payments. Some insurers are struggling, in part, ironically, because of their success selling a differen t kind of annuity. Variable annuities, whose paymeurs are dependent on the markets, can become very costly when the markets go down. Susan Voss, vice president of tbe National Ai;sociarion of Insurance Commissioners, says losing money on an annuity due to au insurer's insolvency is still unlikely. If an Insurer goes belly-up, state regula tors wi U.either find a com pauy to acqu ire the policies or rap a gua rantee fund to pay claims . Historically, most states, including Texas, have guaranteed annuities up to $100,000 per policyholder, but today many states are; ncreasi ng tha t

Q

How will it affect I'ny credit score if r • increase /fly home equity line of credit?
-AUDREY .PEDERSON, Chicago

Theoretically, it shouldn't-a ffect your score much, A borne eq uiry line 0 f credit is labeled" revolving debt" on you r credit report (same as a credi rcard], but it's treated as an "i nstallmenr loan, " essentially the sa rn e as 'iI car loa n, mortgage or other propertybacked loan. That means the maximum limit on the loan isn't factored heavily into your score. Still, 11mhing is simple in the world of credit scores, so there a re paten ria 1 snags. Fi rst, if the increase is treated by the lender as a new loan, you r score wi III ikely be tern porari iy docked a few

relevant

or more. These protections are more holders; the value of a variable annuity is tied to its underlying investments and cannot be sought by creditors during
to fixed-annuity

to $250,000

insolvency. To find state coverage www.aolhga.com. 0

limits, visit

STEPr I A NTEA UWER1T.R is a conrri buting editor, Questions Ior this column should he S~L1t to ask@smarcmoney.com. To be answered, your e-mail musr include your fu II name and address.

32 StvlARTMClNEY

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Common Sense James B. Stewart

_

Big Crash, Big Rebound
This recession continues to invite

rallies. In any event, for this column's I'm assuming the worst is over.

purposes

A her dropping a breathtaking

86 percent be-

comparisons to the

1930S.

But for investors,

the Depression wasn't always so depressing.
1,)TORIANS OFTHE GREAT Depression have been in much demand this year for obvious reasons, given the financial crisis. They tend to focus on the stockmarket crash of 1929, the ensuing years of hardship and suffering, and. the measures [hat did-or didn't-contribure [0 economic recovery, TIley tend to neglect the fact [hat, for at least some people, the Depression years yielded the best investment opportunities of their lives. This has been on my mind of late, since I, too, have been reading avidly about the Depression, comparing it to this downturn (which some have already du bbed the" Great Recession") a ad examining the post-1929 plunge for dues to when tbe marker might bottom this time. But I realized recently that my research hadn't turned up much about what ha ppened to the market after that crash or what that might suggest about strategies for the current euvironmeur, Of course, it may seem prerna ture to be ta lking about what happens after this crash-it's possi hie tha t today's rna rket hasn't yet botcorned. But considering that we've already seen at least two buil-marker runs in the past sixmouths, we may have reached the A oar. There's even a histories I parallel' to ponder. This time around we've had WIll rallies of 20 percent or more in the S&P 500, one in December and january and one in March and April. The If)ng decl ine of 1929 to 1932

tween Oct. 10, 1929, and june 1,1931, wheo the S&P 500 hit alow of4.40, it took until 1.954-22 years-for char inriex to regain the peak it reached in 1929, Peak to peak, it took 25 years, That's a long stretch even for patient investors, bu [ those were also extraordinary ri rues, ern bracing the SO~ called Depression-wi thin-the- Depression of 1937 to '40 and World War If from 1939 to '45. It's bard

to believe we'll go through a nyrhing so dire as the
Axis threa
t

of world domina rion, But

if we assume

the upcoming years will be every bit as bad for markets as the 1930s and '40s, bow would investors [,tce.if they bought stocks today? In February and March, I urged readers of my Smartlvloney.comcolumn to buy stocks, as I did rnyse if, My purchases turned out to be remarkably dose to the Mar, 9 bottom, (Lest readers think I'm boasting, I also bought stocks several rirues after the marker peaked it] October 2.007, all of which proved prema rnre, No oue has perfect timing.) Bur that's water under the bridge. Let's assume YOLl didn 't buy at the bottom, Indeed, you wai ted until theS&P 500 rallied 25 percent, In july 1932, that would ba ve been the equivalent of ha ving bougb t when the S&P 500 was up to 5.50. Just about a uyone who did that made money. By Match of 1937, less than five years later, the S&P 500 was at18,67. That's a gain of 139 percent, which is 30 percent annualized, Thoseare extraordinary returns. Spring of 1937 marked an interim peak. M the economy turned down that yea r, a severe bear market resumed, Exacerbated by the onset of

also was interrupted by

ilt

least two such

Editor at JargejAMES B, STEWART', lares!' book is Disney War (Simon & Schuster),

34

SMARTMm''J''EY

JllNE2()()\I

Common Sense

World War U, stocks continued to decline until Apr. 28,1942, when the Axis war effort reached its zenith and it appeared the wo rid could fa 1] under fascist rule. Bu r even then, at 7.47 (he S&P SOO remained well above j ts 1932 low. Still, that [epre" seats a peak-to-trough drop of 60 percen t, which is worse than the 57 percent decline weve just experienced. As the Allied war effort gained (me" cion, it was pretty much off [Q the faces for the market. By 1946 it hit 19 .. 5. A sharp 2 correction followed, but the market had recovered by 1950, and four years later was above irs. 1929 high of 30.81. So if you had boughta r S .50 and held through thick and thin, your money had gone up 460 percent, or 8 .. percent annualized, 1 Even iI you bad extraordinarily bad tim-

ing and bought at the peaks in 1937 and 1946, YOLl still earned north of 60 percen r, a respectable return. of course, if you were
fortunate enough to avoid the worst of the declines, you did much better. Our bear marker, unlike the 1929 crash, hasn't resulted (and hopefully won'T result) ill a decline of nearly 90 percent. So let's assume our gains going forward are only half as great as those from 1932 to 1954. Investors with a long-term horizon would still see returns of 230 percell [-5.6 percent annualized over 22 yean. Hisrory never repeats itself, and there's no guarantee that if you buy stocks now you'll have similar results to those of investors during the.Depression, Bur I think we can draw SUIue broad conclusions; • Extreme declines are likely to give way to broad recoveries. That's consistent with mean reversion theory, which suggests that after a statistically extreme move, prices tend to return to the norm. • After large and prolonged declines, investors can earn high returns, even if they miss the Erst leg of a recovery. In other words, It'S not too late to get back into stocks.
T. RowePrialnml"ltIll

of good market timing can yield much higher returns. That's one reason my Common Sense sysremcalls for a disci plined approach to buying lower (on market weakness) and selling higher (inro market strength). As I've explained before, I sell into rallies at intervals of 25 percent gains and buy into declines at in tervals of 10 percen t drops. These thresholds are based on historical averages and are also easy to compute. This system wasn't designed for high" II' aberrational periods like the paSt few years, the tech collapse of 2000 to 2002 or rhe Grear Depression. This year the market has been so volatile that I've been buying and selling far me re man usual. After b tly" ing in February and March, J found myself selling into a rally just a few weeks later. I sold several financial stocks (including Bank of America and Wells Fargo) ella r I'd bought when the market was plunging, I sold finaucials because til at was the sector that had fared the best by far in the rally. That decision wound lip looking premature, since bank stocks continued to rally. Should T have modified my system, raising the selling thresholds on the theory that this recovery wiU rake the market much higher than a "normal" bull market? Unfortunately; that's knowledge rharonly come", with hindsight. Given that my Bank of America shares had more than doubled, I'm not going to com plain. Over the years, my system has stood me in good STead. [may have missed out on some profits, but it was nice to realize some. gains. Markets don't move in straightlines, Similar periods in the past, including the Great Depression, have all yielded further buying opportunities, If my system produces gains "that are anyw here near those that investors earned in the 1930s and '405, I'll be content.@ ,., SmartMoney.com James Stewart's "Common Sense" column runs every Tuesday at www.smartmoney.com.

Sevlt:a, IIX:, Ditlfibumr. !RA1l.D17824

• Even in a multiyear rally, there are peaks and troughs, and a modicum

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_

Keep ·t In the Family
Family businesses can have an easier-time riding out recessions. But before you hire relatives, learn to 111311agefa.m tly dynarn lCS"
N A BAD ECONOMY, THERE MAY BE MORE
tern ptation than ever to tUJIl a small business into a family business. Maybe your brotherin-law needs a Job. Or Mom and Dad have cart food in the.cupboard and don't own a cat. Personally, the thought of hiring members of my family.gives me Indigestion .. Bu t a family cOlllpanycan bean all-around wi nner-e-provi ded you learn bow to manage the "family" part. Of the 6 million small businesses that employ 100 ox fewer workers, 20 percem involve two or more family members. It turns our that some of [he traits associated with these family-owned animals put them in better stead to survive and prosp er in these leaner, credit -cri ppled years than conventionally owned firms, For starters, family businesses tend to be patient en pitalists-huilding conservatively over years and turning a deaf ear to the siren song of de bt, sa ys Matthew 'Brady, head of the wealth-advisory group at Barclays, And money isn 'r the only altar at which they worsh ip; they're more likely to focus 011 issues like legacy and commitment to community, and thus be that much more a verse to foolish bets. The offshoot i5 enviable, asset-rich balance sheets. Case in point: Boardroom Inc., a familycompany in Stamford, Conn. Martin Edelsron, 80, started the company in 1972 and now employs hiS wife, three children and-he hopes sorneday---gra ndch iIOTen.Because the company is comfortably profitable on sales in excess of $100 million all d has zero debt, it's III an awesome position to ride our the recession. "1 highly recommend it," Edelston enthuses, On the flip side, working with your kin call be a bite of hell sandwich when it doesn't work. run publishing

Wben octogenarian Viacom founder and chairman Sumner Redstone had a fall ing our a few years ago wi th his elaugh rer, Sha ri, a company executi ve once considered heir apparent, the world learned
ahout it. And even though we're talking a ball t rwc unsympathetically richer-ehan-Cod characters, it isn't jolly for any 011 e to ha ve a circus-like family drama that simul taneously pollueesrhe co mpany, Plus, organizarions [hat are seen as nepotistic can be hamstrung in hiring top talen t, if potential hires see kinfolk blocking the path to the top. Given the nettlesome issues of succession and governance, j t's [10[ surprising tha t few far.t! i Iy-owned bus inesses survive to the next generation-c-only 30 percent, according to the Family firm Insrirure, a trade grmlp and research associa tion. Ultimately, mixing family wi th work req uires certain precautions and constant maintenance. "Use your brain, not your heart" wben thinking about hiring your kin, says Don Schwerzler, tile founder 01 Family Business Institute, in Atlanta, Compassion for someone who bas lost his job is nor a good reason. Make sure there's a real job waiting for him and spell out your expectations for his duties, hours, vacation, com pen sa cion and equity opportunity. Harder still but just as cecessary: Spell out what will happen if he screws up and falls. Those difficult talks can be easier if you involve an advisory board in both hiring and firing, Should yom new employee become your wo rst 11ightrnare, jt's a relief to be able to say, "The

Kin At Work
• set defined roles. Spell out your expectations for a family member's
duties, pay and chances for g'rowth. • Tolerate dissent

board and 1 decided tha r a brick could do better work." The founder's [a om)' doesn't have to march in lockstep with the founder's vi sian. It's actua Ily sm arte r if t he fa mi ly members hold varying points of view, learning to embrace those differences and extract the best ideas without temper tantrums. "Ill great family businesses,

Asking for lockstep
agreElrrient with

the boss will just increase tensions, • Gel help. Outside
consultants and advisers can keep

~
']

disputes from
getting personal.

th ere is a

SUfp rl 5i ng amount of disagreemenr when new ideas

38

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are first being discussed," sa ys Schwerzler; Por Glenn Mutchler of Harrington Park, N.J.'s Mutchler Inc., a specialty chemical corn pa n y with $28 rni Ibon in an nual sales,
horizontal managemen t is wha r works. He tries to create an environment where family members and the other 24 employees feel free to speak up. "'We are allcommitted communicators," sa ys M utchler, who works with his brother, wife and-daughter 10 the firm his father founded. Many family enterprises break down because the putative leader must always be right, observes Mutchler. "I've been able [0 let go of that," he says. "Even Erica, my 26-yearold daughter, will occasionally riot act, and I' ll lisren," read me the

is a teenage know-it-all. The Old Greenwich" Corm.s-based Miss 0 and Friends is a Web-entertainment and retail business armed .at hiptween girls-"t0o uld for Barbie, and too young for Briruey," says the founder, julierte Brindak, Now a sophomore at Washington Universi ry in St. LOll is, Brindak firsr designed characters for the Web site in 2000, when she was 10. As the business grew, her entire Iamily became immersed, Pall] Brindak, 51,

who has a marketing and IT background,
had to learn to tread carefully between his roles as dad and CEO. "Pulling rank just won't work," says Paul, who says it's

useful having a division of church and state when it comes to creative and husiness operations. "If
1 put my dad hat 011 in a creative meet-

Managers t'rying to uphold a family legacy are more likely to steer clear of

heavy debt and rash decisions.
The upshot is that, in a family-owned company, strict lines of a uthori ty and organizational charts-conventional managerneut's best friends-have no teeth. Bur successful family-run companies still need ways to keep the family professionally focused. Boardroom LlC., for example, is a hea vy user of a "family business adviser," who meers with the family members every month. One of the adviser's jobs, says Edelston, "is to look for sou rces of friction-principally with me." In each meeting, Edelsron's kids must report on

ing," he says, "I'm wid: 'Dad, stay out,' which I accept." If, on the other hall d, a family employee like Olivia, 14, acts as though she's calling the

shots, Paul falls back 011 moral suasion rather than dad-autocracy. "I explain that, unless she's willing to crunch numbers and do spreadsheets, she is not running the whole company, " he says. In all the naviga ring o.f family dynamics, there's one key issue to attend tomaking sure the family member you hire doesn't.Ieel taken advantage or. It's tempting to underpay a relative; after all, it's not like YOLI have to compete Ior his loyalty. Jaime Mau rz, of Pacific Ink, in Sa II Diego, recently hired her father for a warehousemanagement job, for a slightly lower salary than she would have had to pay someone else. Because he works fewer hours, says Mautz, the arrangement is fair for her clad. But saving money was-always a bonus, not the point. More important, ultimately, was having au employee she could trust. "We know the an ima I," she so.ys. (§)
Fur muff' {;ove[ag~ of small businesses, startups and entrepreneurs, visit SMARTMoNEy'SsmSmallBiz,com.

their jobs. if someone is found exhibiting less than ideal behavior, he's fined $20. "Not a lot, but it -still stings," says Edelsron, Such family referees are a specialty
unto their own and can be found affilia ted with business schools across the country.

The Family Firm Institute's membership
now includes 1,500 consultants and educators working in this field, all increase of 50 percent over the past six years. With or without an outside observer, the closest of families will have spats-particularly when one of the employees

my

Ch~n~e~
cMet

The New Retirement Peter Keating

Dying W·th Dignity
End-of-life care is still stuck where it was a dozen years ago-with overtreated conditions and untreated physical and emotional stress.
EATI; BE NOT PROUD, TI-lOUGH
some have called thee / Mighty and dreadful, fOf, thou arr not so," wrote Job 0 Donne. The grel),t poet drew strength and solace from his belief in heavenly salva rion, Weeks before he died, in 1631, he delivered his own funeral oration, a sermon entitled "Death's Duel," in which he described life as a never-ending but ultimately hopeful struggle aga inst sutfering and dea tb. So here's this month's question: 378 years later, why aren't we dying any better? Obviously, we are living longer-e-huniau Iife expects ncy has dou bled since Donne's time-and, even ami d this recession, better tha II ever. But as modern, optimistic, rechnology-loving, forwardlooking Americans, we not only hate to talk about death; we love to spend our time and money as though we willlive forever. As a tesujt, we tend to handle the end of life pretty terribly-financially as well as physically and emotionally. Here's what we want as we approach death, according to a wide variety of research conducted over many years: the chance to plan our final days in advance, doctors arid nurses who manage our illnesses so that we're not in terrible pain or out of our minds, and spiritual peace, however each of us might define it. Here's What wt: often gee aggressive.arnazmg-

and protracted death and to dread the prospect of abandon men r a nd untreated physica I and ernotional distress." We also get huge bills. One in 10 Medicare recipients dies every year; but about 30 percent all Medicare expenses are devoted ro beneficiaries ill the last year oftheir lives.

or

The fundamental problem with the w"y our health care system treats people at the end of their lives is thar medical and long- term care are not integrated with palliative care, services chat ameliorate suffering and focus on quali ry of life for elders and their families. There is a model for delivering palliation: hospice, which was developed in the 1960s by Cicely Sa unders, a Brrtish !lUISe, social worker and doctor who treated terminally ill cancer patients, and which emerged in [he U.S. about a decade later. Hospice is explicitly designed to ease [be final days=caregivers manage die IUS' pain, offer them ongoing spiritual support and involve their familjes in rrea rmenr decisions. And it's usually administered at home, which is where most people want [Q die. More [11 an 3,000 hospices around the country provide end-of-life care, and Medicare-and, in 47 states, Medicaid-covers -a wide range of hospice services. But millions of Americans who need palliative care don't get it beca use of hurea una tic and legal roadblocks. For one thing, the federal governrnent has sta ndards for measu ring how well nursing homes perform, but those measures do nor focus on the prevention or relief of pa in. Most peoplefind this alit the hardiest way: They arrange for a par-

Hospice Tips

Tall!, with your family. Explicitly. Detail what you're willinl,'l to undergo and for how long. Research now.
Deciding where you

ent to receive the best care they can afford, only to Jearn the facility doesn't address the parent's aetna \ su ffcri ng.

Tha r's partly because these institurions' ability
to accept Medicare

want to end lip will
ease the transition fat both you ;'l.nd

Medicaid

doesn't

anti hinge

Iy life-extending

rreatrnent-e-but also uncontrolled symptoms and persistent pain, depressive isola rio 11 and existential confusion. End-of-life care is still sruc k where it Was a dozen yea rs ago, when a U.S. Institute of Medicine report sta ted: "People ha ve come both to fear <l technologically over-treated

your family. Stay healthy. Take care of yourself now and you'll likely have an easier life~afld
dea!h_.

on meeting that goal. For another, to qualify for Medicare's or Medicaid's hospice benefit, a pa tient must ha ve

~

a

doctor's certifies don that he or she has a li'~e

t.

2

t;,

42 SMARTMo~<EY

jlJNE2(}(}\I

This is personal.

expectancy ofsix months or less and.rnust agree to stop "curative treatment." But .li fe expectancies are hard flJr physicians to estimate and even harder for families to talk about. And pitting "curative" against qualiry-of-life care presents pa tients with a false choice of prolonged life versus quick death. Research shows rha I, on average, aggressive treatment (more doctor visits, hospital stays and invasive procedures) doesn't extend patients' lives, Overall, roo many people who need palliative treatment can't get hospice care, and those who do can 'r afford to live [00 long. Finally, Medicare pays hospices a flat, daily per-patient tate. But hospice care isn't routine; 1['.'0 often very costly, And state governments, Which administer Medicaid, continually put hospice payments on the chopping block when they face budget crises. (People near dea th don 't forrua power fullobby.) As a result, many hospices are short Oil cash, which can lead them to cur back on treatmen ts all d shun poten tiaLly expensive patients. It's not even dear tnar these regula[ions are saving the federal government any money. As a 2003 report by AcademyHealth, a health care think rank, stated; "The rela rive cost of caring for pa tients at the end of life through hospice versus traditional care has not been calculated definitively." Palliative care has its price tag, but connecting more people to it could weJl avoid many of the huge costs run up by the extreme treatments many pa tients recei ve in tile very last days 0 f. their lives. We don't know what rhe final net tally would look like if we encouraged more nursing homes and assisted-care facilities to develop endof-life pi arts, boosted reimbursement rates and got more people mto hospice. But ar leasr tbe right power players are starting The Health Care Financing Adruinistrarion and the Of nee of Ma nagernen t and Budget a (e look ing at how to use the federal government'S purchasing powers more rationally. In the meantime, there are a few steps
to ask these questions.

you can ra ke to protect your fa In 11 fiy's nantes as you plan end-of-life care for your loved ones and yourself. Fi rst, stay heal th y. Avoiding chronic disease makes it more likely [hat you will live longer and less likely mat you will experiencea prolonged illness leading to pai n a od den th, Second, talk explicitly with
YOlI!:

family and doctors about how you want
your life to end=-wha r kind of trea tments

you're willing to undergo, for bow long and where . .Lf you don't, it will cost you. Terminally ill cancer patients who didn't
have end-of-life conversations with their physicians had health care expenses 55 percent higher in the final week of their Jives than those who did, according to a study released in March by the DanaFarber Cancer Institute. Third, lind a caregiving institution tha t rna tches your v iews and val ues, Thanks
to a free, easy-w-use online tool called the Hospital Care In tensity Report, you can get an idea which hospitals near you are aggressive in treating chronically ill patients and which are conservative.The differencescan be staggering. For instance, at East

"My mother died of
colon cancer when h 1· S e was OD.y 56.
fl

Orange General Hospital in New Jersey, patients spend a 11 average of 30 days iII the hospital and have an average of 9 6 physician visits in the final six months of their lives, and only 8 percent die in hospice. In contrast, at Ogden Regional Medical Center in Utah, patients spend just eight days, on average, of their last six. months in the hospital a nd get 18 doctor visi ts, 47 percent die in hospice. Obviously, you also need to weigh other quality indicators mid the ad vice of doctors you trust, bur the hospital intensity report is <Inexcellent way to gauge how much inrervenrion a hospital

Colorectal cancer is the 2nd leading cancer killer in the U.S., but it's largely preventable.

rryou're 50 or older,
please get screened,
}·aOO-CDC-lNFU (1-800-232-4636)
www.odc.gov/sc.re.enl.orlife

win undertake after you check in.
When it comes
to

end-of-life care, the

medical establishmenr aud the gave rn rnent have their work cut ou t for them. But dear conversation and good planning can make death a little less proud. €) Conrribu cing, Editor PEJ1!R KEAT(}..lGcan be
reached at newreriremenreshearst.com. k.lto"~!
[

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n.fill';-ri~.,.

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ALL!ANCE:

.....

Stock Screen Jack Hough

The Money, Hand It Over!
Companies that hoard cash don't always end up spending it wisely, so find finns that give die dough to shareholders th rough dividends.
MERICA'S BIG COMPANIES I-lAVE growo roo rich, Don't worry; I haven't sprouted dreadlocks, learned to juggle and joined the anticapitalism protest circuit. It's for the sake of stock investors rha t I think corn pan ies whose s-hares trade 00 Wall Street ought to s tart tak ing vows 0 f, if 11.0[ poverty, a t least extreme-wealth 11 voidance. Between 1980 and 2006 cash held by the average U.S. company swelled from lOS percent of the val ue of assets to 23.2 perce I] r, according to 11

with other companies. below thei r October

what all that cash can bllY, starting Now seems a nne time fur takeovers, with share prices some 40 percent Consider

2007 peak. But companies aren't bu ying low. U.S. deal volume fell 44 percent in the first quarter. Perhaps that's far the best. A 1~99 study found that cash-rich companies are more likely rhan others to attempt takeovers, to stray from their core businesses in doing so and to pay too much. On average., they destroyed seven cents of shareholder wealth for each dollar they held in excess cash. Flush companies can a150 spend in-house on new plants and equipmen r. That doesn't hel p their shares much either, Three long-teem studies published in 2003, 2006 andl008 found that shares of CO lnp an ies rha t increase ca pi ra I spend ing the least do much better than the firms that increase ir the most. The smallest performance gap 'NaS two percentage points a year. and the largest was eight. Perhaps that's because (as the young bachelor with fat pockets on Friday risks spending roo much by M ouday] rich com pauies tend [0 overpay. Researchers who looked at four decades of bids for drilling rights by oil firms found chat companies paid higher prices when they had more cash.

nal of Finance.

new study scheduled for publication r asked S&P Campus-tat, the study's data

ill The Jour-

source, to run fresh numbers. They've changed little, at 22 percent of assets. (Banks and utilities are excluded, since

Companies are meant to be conduits of profit to their owners. Dividends gave birth to stocks, not the other way around.
Another spending oprion-e-perbaps the best of the bunch-is research. Increased spending on product development leads pretty consistently to increased profits, which lead to better stock returns, I don't dou bt that Ap pie's new SmartDia per or RoboDog (already iL1 the works, trust me) wi II sell well, and a cash cushion elJSU nos development won't stall even if sales du. But let's not overstate the case. III its most recent fiscal year, Apple spent 1 percent of its stock market value on resea rch, lt could triple funding and still send stockholders that 20 percent dividend. A large cash balance doesn't always foretell a si.nking stock price. Much depends 1)11 manage-

their cash requirements are set by regu lators.) For examples of hoarding, consider our technology wunderkind: Apple sits on enough cash to afford a onetime dividen d of 20 percent of market value. The same goes for eBay,counting its short-term investments. DtH could pay more than 40 percent. (AppJe and eBay declined to comment; Dell says ir stopped repurchasing shares to conserve cash.) 1 realize my complaint seems petty, or at least ill-timed. Banks have crumbled oflate for want of funds, so why fault companies with plenty, especially when their riches are an outcome of past success? The problem is that companies' riches offer little benefit to shareho lders at best an d IIIake them poorer at worst.

~ "]

J." CK HOUGH
and
Call

be reached ar i hougia@smarrmolley.com.

is the author of Your Next Great Stock

men r, r n recent deca des cornpa n ies with risi Ilg cash balances a nd good corporate governance (as mea sured bya 14-chal:acteristic index based 0[1 things
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like voting rights and bonrd independence) matched the marker's performance, while
those with swelling cash and po(jr gover,,investors carr hope for with that money is a j ust okay result, it should be distributed. Mostly, I .suspecr managers. grip cash ()U r I~f pomposity more than greed or malice. For some.sending out dividends might seem like an ad mission that growth prospects have slowed or that they're no wiser than shareholders when it comes to investing cash. But cornpan ies aren 'r mean t to be mutual funds. They shouldn't boit on new WU [8 W] til they look like Franken-srocks,

nance fell well behind. But if the best

up the difference. Recent events show-they can't be counted on. First-quarter profits were 4?l percent lower than two ye:vs ago, but dividend payments were down only 9 percent. Repurchase spending plunged hy two-thirds. Better to fa vor companies. tha r pay our a healthy portion of p rofir.Higher pa y( 1I.li"S predict faster earnings growth, according to hedge fund managers Ro bert Amott and

that S&:P is considering

easing the require-

rnentto 20 year$, Pity: Arisnccrars have returned 9.1 pe.rcem a year since 1989, versus 6.6 percent fO!: the ell tire 500 index, But 3Mis an Aristocratin good standing. Two-thirds of company sales come from outside the U.S., which oughe to a ppeal to investors who eJl..-peCt dollar ro weaken. the
Another Aristocra r, Abbott Laboratories, upped sales and profits last year by 14 percent and 17 percent, respectively, and should increase them about hall as fast this year-not bad. It enjoys a more diverse product mix than most drug companies, which lessens the threat of expiring patents. Buyers pay 12 rimes earnings and get a 3.6 percent yield. Finally, Diamond Offshore Drifling is one of a handful of companies that own plenty of floa ring 0 il rigs capable of drilling down a mile or more. A recent rise in oil prices makes more deepwater projects profitable and puts such equipment in greater demand. Even without rising prices, Diamond has a business backlog equal [0 more than rwo years' worth of sales. The company owes nesct to nothing, shares go fOJ" seven ti mes earn ings, a nd while the regulardividend yield might look skimpy at less than 1 percent, shareholders know to watch for special dividends manageruen t sends nut as profits warran t. Total dividends from the past year calculated on today's price, make for a yield of over 10 percent. 0 SmartMoney.com

Clifford Asness, who published a study of
the matter in pj)wncial Analysts [oumal in

2003. Below are five companies that pay ou t more than half of pro 6r bur not more
than 80 percent, that don't sit on heaps of cash but don't owe much either, and that have modest stock valuations. Unilever sells Vaseline, Dove soap, SI im-Fast dier shakes, Lipton tea and

such as General Elecrric, which can't rightly be called a lighting, health care, a viation Of finance specialist but instead goes by that least tasteful of-com pany deseripto rs: conglomerate. No, companies are meant t{J be conduits of profit [Q their owners. As I've written here be fore, dividen cis ga ve birth to stocks, Dot the other way around. Co-owners of early merchant ships used
to meet them at the docks

plenty of other well-known brands. It's far from a fast grower. Sales are flat, hut
returns on in ves te d capita I a re imp ressive, Shares cast around 12 rimes earnings, and the dividend Yield is a meaty 6.1 percent. Kimberly-Clark will have to make profitsapping contributions to its pens Ion fund for at least three years, a rnarkerwide condition I warned about here a few months ago. This year it expects to add $530 mil-

upon [ern

[0,

split the profits and dissolve rhe venture. When the likes of Dutch East India Company started paying dividends, it stayed in business for more than just one score, which meant markets had to be created for trading its shares. Tcday's Iow stock prices give the illusion that dividends are back, only beta use yields have fa rtened, But paymen rs averaged about half of profits from 1946 co 200"1. If Standard & POfJI"S ff)recasts hold for 2009, companies in it::;. 500 index will payout <onIy 35 percent of profits. Forget abour share repurchases making

lion, up from $13D million last year. The STock might be a good deal. nonetheless, at -I :2 times th is yea r's reduced ea I'll ings rotecast. Sales are stable, and falli ng commodity prices are helping profits. Standa rd & Poor's index of Dividend A eisrocrars=-compa nies [hat ha ve in-

creased dividends for .at least 25 straight years=-will lose Pfizer, General Electric and others th is yea f. So few are its rnern bers

To run your own stock screens, go to www.smartmoney.com/stocksereener.
SMARTMoNH 45

I1JNE 2009

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SMARTMONEY SPECIAL REPORT

Frustrated Americans are thinking about dumping their broker How firlTIS are trying to keep old chentsand woo new ones.
By Neil Parmar and Roya Wolverson
LIKE SO MANY OTH ER INVESTORS, KATH RYN KORBON

has been trying to ride out a rough and confusing srock market. Amid the turmoil, the 55-year·old psychotherapist says, her brokerage firm simply urged her to "hang in [here," without much explanation. When she went to sell some stocks, she was surprised at the sky-high commissions. The final straw came when the firm tried to sell her an investment product she didn't want. Her response? She dumped her full-service broker and moved to a discounter, both to save on commissions and make her own decisions. "1 stemmed the losses," Karbon says proudly. Across the country, shell-shocked investors are asking tough new questions abour their brokerage fi1l11S~ and they're ready to bolt if they don't like the answers. About 40 percent of brokerage

customers say they either switched brokerage firms last year or are considering it, according to a survey SMARTMONEY conducted with the help of research firm Synovate ..Mews from the front Iines of the financial crisis=-from the collapse of Lehman Brothers to some messy broker ruergers-e-hasu't exactly shored up consumer confidence. But something else has been damaging the bond between custom-

SMARTMONEY SPECIAL REPORT

I BROKERS

ers and their brokers: a nagging feeling that both the pai n of last fall's crash and a slow response to recent rna rket swings have made things worse than they had to be. Many investors think full-service advisers" failed them in tryi ng times," says researcher Matthew Bienfang of Tower Group. At the same arne, discount brokers are waging their own battle to placate disgruntled customers. A recent survey from the University of.Michigan shows discount brokers suffered the steepest decline in customer sa tisfaction amonge-commerce businesses. "We're never happy when our portfolios are

dropping

like a stone," says Larry Freed,

lane,

of Will iam Blair, big brokers will
rn .;; -o
c;

CEO of research firm ForeSee Results, which worked on the survey. Not everyone is fi ring his or her broker, of course. But the shi ft, along with the upheaval caused by the financial crisis, suggests tha [ no m atter where
the market goes from here, .<1 shake-up is at hand in the $100 billion industry after years of relative calm. Consolidation has already started, with Bank of America's acquisition of Merrill Lynch and the planned Ioint venture of Morgan Stanley and Cirigroups Smith Barney. Now, says brokerage analyst Mark

try to become more efficient by stepping up efforts to weed out underperforrning advisers. Experts say that as more cu stome rs with sm a ller acco un ts are shunted aside, discount brokers will try to entice them with new rechnologies to put more research th eir fingertips. and advice tools at

"

t
" J
~

HIS ISN'T THE FIRST TIME THE brokerage industry bas been under pressure. When the stock market crashed III 1987, and again after the tech bubble burst earlier this de-

·PA_
The market's recent swings have many investors raising a crucial question; Does their broker have what it takes to help them get through perilous times, whether .it's the quality of the advi.ce or the clarity of their account statements? We asked analysts and consuttants who foUow the industry for the best ways to teU if you r broker is rig ht

for you.

Keeping In Touch
Ills nol enough that top sxecutlvesat big brokerage I1mlS have been reaching out to investors with "Dear Client" letters. Some customers are demanding to hear direclly lrcm their broker-with good news or bad-at least once a month arid even weekly during painful periods like last fall. Wilen your broker does 0011, says David

Lo 01 J.D. Power, he or she
should spend enough time

48 SMARJ"MONEY

cade, nervous investors pUT the brakes trading-and many brokerage firms saw commission revenue plurrrmet. While in vestors sti II sought advice an d guidance, it took yeats before they reon

that meant a loss of billions at dollars in client assets in recent quarters. Brokerage firmscan hardly beblamed

agreed earlier this year to pay $69 million to senle allegations that they cheated

gained the confidence to trade at the same levels again, But analysts say that turmoil may be peanuts compared to the back lash the in dustry is sta rring tel face now. To many Investors it wasn't Just that the market spiraled OUt of control and hammered their portfolios; their confidence plunged as some of the industry's giants collapsed, got swallowed up by otherfirms or wrestled with rumors that they might be the next to fall. ALready, many have voted with thei r feet. For some full-service firms,

for the. wurst bear market since the Oepression, or even tor failing to predict that i[was coming. But an alysrs sa;}'they made other mistakes, such as pushing
complicated debt instruments like auction-rare securities as a safe alternative to money-market funds. Full-service and discoun r firms alike had egg on their face

customers by unfairly makingmoney by trading a head of their customers' orders. A Ith ough the fi rms didn't admit gui It, the case contributed EO a loss of confidence chat experts say could take yeats for Wall Street to earn hack. According to a seudy
from Forrester Research, only 45 percent of investors bel ieve their brokerage firm does what's best for its customers and

as the market for those securities froze up and angry customers couldn't get their money. Some promoted so-called
rarger-dare murual funds as a "set it and

forget it" retirement vehicle, only to see many of them crash with the market.
And more than a dozen trading !inns

nor iust its own bottoru line-crhe lowest level in four years. But for many clients the biggest disa ppointmen r has been how brokers si mply haven't kept drem in the loop, both when their accounts went into free fall last Winter and when they ricocheted

addressing three crucial points: your portfolio's recent performance. its current asset allocation and a future investment strategy that works r or yo u, Fa r many in vestors, hearing from lheir broker dLlrll'lg lough 11(\18S is Jarmore Important than getting the easy call when everything IS gOing right. Stat.e ot the Statement II you think your account statements are confusing. loin Ihe club. More than one-filth of investors say their brokerage

marks Ir1 two recent studies comparing account statements, Sound AdVice Some custcmers say lhat when lhey wanted to pare back their stock holdings amid last fall's market crash EO they could move to less-risky investments. their brokers dragged their feel or even refused 10 shilt strategies. While experts say a good broker is supposed to push back when he o-r she thinks a client IS bemg rash. brokers ulhmately need to know when 10back dOwn and ~ollow directions from the person whose assets are al slake, Brokers may not like it, but these days many clients are more risk-averse than ever 11 your broker seems keen on using a particular strategy, bu I you're on the lence, try asking what he's doing with hU':own Investments. Pushing' Products When SMARTMol<!EYreC1lntiy
sorveye

list-even above reasonable commissions and fees. 01 course, good brokers eneure Ihat their Investors know IlKac.lly how a product works by ,ISing pla'nlanguage and clarify,ng wnhout any jargol1. Bullhey should also be able to mvest their clients' money In any number of products, "and nol justine house brand," says Bill Doyle, an induslryarralys! at Forrester Research, Sometimes that house brand comes With hetty sales charges,

statements are dlflicull to
understand-even more challengmg than cell phone gUides, according toa recent survey by oonsultants Sieg el & Gale, Analysts say the best account statements mchrde a simple summary with II snapshot of how the investor lared during the statement period, plus the. total value of the account. The bigger and bolder the type, lhe better, according to Oalbar. a firm that analyzes brokerage statements, Raymond James added larger lonls and easier-te-read eharts and graphs ius1 over a year ago. and that helped the brokerage nail hlgb

Paying the Price
Will your broker help you save a buck? When it comes 10 so-called managed accounts, it pays to negotiate. The diHetence between l percent and 1,25 percent may o(}1 seem like much, but culling ihe annual fee by just a quarter of a percentage pcmt can lead to big savings: $12,500 over lhe course of a deoade on a $500,000 account. And while pily,ng a set fee is typica1i.ya, better choice in an account with frequent stock trading, buyand-hold Investors Inlt'Jhl seve more money by rayjnga commission lor each trade,

d fu ll-serv

ICB

cha nts

1.0 see what they valued most about Ih eir firm, they ranked pro~essiunal guidance about investmenls at t he top oJ their

5MARTMONEY

49

SMARTMONEY SPECIAL REPORT

I BROKERS

tins year. William Lamberty, a watersupply technician in Romeoville, TIL, says he called and e-rnailed his broke, a n umber of times last fal L But the 52-ye<u-old mvesror says ir was only after increasingly frantic follow" up calls that his broker scheduled a face-to-face meeting after the initial crash. By then Lamberty had lost more than $56,000 and decided to transfer his account to a discount :firm, where be could manage his investments on his own. "I g<H disillusioned," he says. (His broker says he follows a schedule to contact clients ouce every quarter and that Lamberty "was pretty well covered in terms of

conversations back and forth. ") The discontent with expensive advicehasn't been lost on discount brokers, whose commissions are typica lly a small fraction of those of fun-service brokers. Analysts say there's been a surprising jump in trading at discount broken" as some investors try to make up for losses and take advantage of the marker's volatility, Even amid the worst bear market since the Depression.the num ber of new online accounts jumped 14 percent last. year, to 1.7 million, according to Tower Group. The research firm expects another 4.5 percent increase this year. Tradeking CEO Don Montanaro says

his firm hal';seen a "surge" ofcustomers moving from the big full-service brokers,
contributing to a 42 percent jump in new

aCCOUllts in th is year's first qua rte r. But not -a II the movement is from full-service firms to discounters; restless customers are also switching from one discounter to another. At the same time, some full-service firms, particularly
regional outfits, are picking up business.

James Weddle, rna ringing partner of Ed" ward Jones, boasts that Ius regional fum has snatched accounts from the industry's biggest players-and that these new customers brought in more money than the firm lost from defecrious,
HE SWEEPING CHANGES

could spell new opportunities for savvy investors. Indeed, as firms of all types try [0 drum up new business, consumers are discovering [bat there's never been a better time to ask, What can you do for me? When Karbon, of Charlottesville, Va., opened an account at discounter E "Trade, she was awarded IIp to 100 free trades .. 0 rher investors shopping around for [he right fit have been inundated with all sons of free offers, including airline miles, all iPod Nano and even a new Blackberry
smartphone. But once you get past the freebies, going solo isn't as easy as it looks ..for

Korbon, switching her accounts to a discount broker required a whole new level attention to detail. With the stock market going haywire, she soon found herself doing everything she could to keep up: reading financial blogs, listening to online seminars on investment

or

RORYCOHE.N
AND DAUGHTER SHAN E CLARK

The business coach from Wyncote, Pa., decided to move some assets to a

discount broker, bu kept college savings with aful . servlce broker,
JUNE 2009

50 SM.ARTMm'J"'EY

WILLIAM LAM.BERTY

Now that he's managing his own money, the Illinois Investor spends up to six hours a week on research. "I'm trying
to catch up on everything,

because 11m a little rusty. to
than $1 million in assets. Full-service brokers argue [hat means clients want more hand-holding, not less, in these turbulent times. At UBS, clients can dial iuroa weekly conference call to hear [he firm's research team discuss the current market and investment opportuJuries. Smith Barney says it has gone into "communica tion overload "--doubling contact with j rs clients and offering more educational seminars. As clients grow more comfortable with on line tools, full-service brokers are also beefing up their Web sites-traditionally all. area of strength for discounters. Raymond James, whose site earns top marks £rom research firm Corporate Insight, has been adding more online videos so clients can hear the firm '8 analysts discuss the latest market moves. "There's an unprecedented thirst for advice," says Chet Heick, chief operating officer of Raymond James. Still, in Wynco re, Pa., Rory Cohen is hedgi ng her bets. Just before her portfolio started to head south with the market last year; the 53-year-old. business coach for entrepreneurs cut the cord with a longtime broker and moved to a discounter. But she didn't give up on advice altogether, preferring to keep her children's college savings with another full-service broker. After all, she says, "when things are good, your adviser looks like a genius." @

subjects like options trading and checking her portfolio three times a day. "This is not supposed to be rny day job," she said on one of the many days the market was in free fall. In Illinois, Lamberty used to spend an hour or so each monthlooking over his full-service account. Now that he's on his own, he says he spends up to six hours a week researching his stock picks. Sometimes he goofs: Earlier this year he bought shares of General Electric, only to see the company cut its dividend for the first time since the Great Depression. "I'm trying to catch Lip on everything, because I'm a little rusty," he sa ys. "0 kay, I'm a lot rusry," Moving to help fill the knowledge ga p, some discount brokers .are rolling out new programs to guide investors ehroug h the rna rket's ups and downs-eand ska tin g cl oser to the turf of the full-

a program of training

that includes on investment

eight weeks topics, fol-

lowed by four weeks of coaching by a TD Ameritrade adviser. At $2 400 for a three-month membership, the extra help doesn't come chea p, tb ough it.can still be less expensive than shelling out $150 to ,$300 a n hour fo r a fee-only financial planner. Discount brokers have been racing to outdo each other on a litany of services, in fact-24-hour phone access, customer-service chats and freshly minted podcasts, to name just a few. When Schwab CEO Chuck Schwab and Chief Investment Strategist Liz Ann Senders conducted an online town hall meeting to discuss the markets, nearly 10,000 people watched it live. And it's nut just the small fry they're after: Schwab recently doubled,

SmartMoney ,co~
What are brokerage and fund firms telling clients about the markets? Check oul our Broker Talk column at www.smartmoney.com/brokertalk.

service giants. TO Arneritrade offers

to nearly 140, the number uf customerservice reps servinginvestors with more

JUNE 1009

SN1ARTMONEY

51

SMARTMONEY SPECIAL

REPORT

I SURVEY

BEST
The monthly
comprehend.

THE
YEAR.•IF
account statement is often a jumble 01 numbers and pie charts you barely And yet Ali Stocks is willing to endure all these hassles, so long as her bro-

IF YOU'RE LUCKY, YOU .sEE YOU~ BROKER ONCE ORiWlCEA

you're sharp, you may even understand what he's saying. (TIPS? Auction-rate securities?)

ker follows one mandate: Call her regularly. The Slate Hill, N.Y.,office manager says she switche d brokers eartier this year just for that reason. "Thai's one of the demands, and mean demands, that I made when we moved everything over to him," Stocks says.

I

Fed up with decimated portfolios, Americans are on a mission to evaluate the firms and people managing their money but are hobbled by an obvious problem: How do you do that? Each year dozens of research firms and news


~
" ,'I'

WINNERS & LOS.E.RS

organizations conduct surveys to evaluate brokers big and small. And each year different names tend to rise to the top-orsink to the bottom. But experts say many of the surveys may be missing the mark, focus· ing on one or two areas at the expense of others, "It's not just the broker's pertormance that matters," says Larry Freed, CEO of research firm ForeSee Results. These days, he says, brokers need to find ways "to put customers al ease," For three months, while the financial, crisis was continuing to ricochet, we were busy digging up de' tails on the most prominent discount and full·service brokers in the U.S., As we have for 17 years now, we relied on our own tests, consultinq-firrn analysis and surveys of the brokerages themselves. We noticed that WellsTrade and Bane 01 America charge $75 service provided lor ftee by some of their competitors.

In tna pDStCfilsh era, the names of the best-and the worstbrokerage firm

UT
COMMISSIONS

ROKER
& FEES

17th onusl sur ey digs deep Into the full·servlce and discount Industries.

ar chang "g. Our

BEST:. JUST;2TRADE WORST: WELLSTRADE

By Roya Wolverson
and Neil Parmar

WHAT A DIFFERENCE a bear market makes. Last year, when we pressed customer-service reps to see what they could do to save us money on commist sions, on I few muttered our favorya ite word: negotiate. Tl~isyear nearly half the fi rrns we contacted said they would try to sui ke a deal 0 f some kin.d. No wonder. Tower Group estimates a reco rd 3.1 ill i Ilio n on line customers switched From one firm to another last year. And in out own Survey, conducted with research f rm Synovate, we found that discou n t customers who are thinkJlJNE2009

g
~ ~

to close a retirement account-a OptionsXpress

~

left us on hold for nearly four minutes when we requested its interest rate

on cash balances. (The company later said it shouldn't have taken that long.) But when we contaoted Rdelity with a query on interest rates, the rep gave us a quick answer and even a compliment: "Good question" The final results are based on categories that matter most to investors, like trading tools and customer service for discou nl brokers, and stock pi'cking and account statements lor ful.. l-servlee firms, 0 ur efforts haven't 90l1e unnoticed. Web site ConsumerSearch rnaqazines and newspapers, has said SMARTMoNEY Our findings: For two years now,lhe has the best broker survey among

= /:,

:g

,Q,...

52 SMARTMot\iEY

ing of switching firms are mainly interested in getting a break on commissions and account fees. The winner in this category, J usrlTrade, is new to our survey this year. Launched in 2007 and geared toward experienced investors, the firm took top honors witb the price of $2.50 for both equity and mutual fund trades. It also boasted ba rgain- basemen t fates on margin interest: 2.75 percent, compared with up to 8.75 percent at its competitors. J ust2T fade edged ou t Zecco, which got its start just a few years ago by pitching 40 free trades each month ro an y C ustomer hoi cii nga $ 2,500 bala nee.

to $25,000. Fall short and the cost is $4.50 a trade. "U this new policy isn't reversed, I'm gone," wrote one customer in an online forum. Others weren't happy to see new fees for paper statements and trade confirmations. "It's a recession," sa ys Gabriel Dalporto, Zecco's chief strategy officer. "Our margins are down." Wells Tracie, the discount- brokerage

INVESTM ENT PRODUCTS & MUTUAL FUNDS
BEST: FIDELITY WORST: SOGOTRADE

WE GIVE }-UGH marks to brokers witb
a wide array of investment products, but sometimes those products can backfire. E "Trade customer Bill Reid Jr. says that when he was told that debt instruments known as auction-rate securities were as safe as a money-rna rket fund, he took the leap. But more than a year after the market for those exotic products froze up, Reid, a 64-yeuf-old retiree hom Greenville, S. sa ys that he still has tens of thousands of dollars locked up in. the securities. "It's destroying my trust in brokers," he says. A spokesperson for E "Trade declined to comment on Reid's situation ..

unit of WelLs Fargo, doles out up to 100 free trades a year. But it rounds out the bottom of th is category beca use customers qualify only if they link their brokerage account to a Wells Fargo bank account. Without that link and $25,000 i[1 com bined assets, commissi ons start at a pricey $19.95 and fun as high as $60 for some broker-assisted trades.

c.,

Zecco has angered some customers by lowering the number of free trades to 10 and increasing the required balance JUNE
1009

SMARTMONEY

53

SMARTMONEY SPECIAL REPORT

I SURVEY

Like thousan ds

()f

investors at other

rual funds, many of which don't transaction fees. had the slimmest

can)'

CUSTOMER SERVICE
BEST:. MURIEL SIEBERT WORST: WAllSTREET"E

firms with money tied up in auction-tate securities, Reid learned the hard way to be skeptical of hard-to-understand
products. That's one reason we rank firms on products we think are more useflll~and cornprehensi ble, This year's race came down to Fidelity, Charles Schwab and TD Ameritrade. Together the trio bas more th<1I1double the number of customers of the rerna ining firms 111 our smvey combined, and 'each has a smorgasbord of offerings, including municipal bonds, certificates of deposit and access to initial public offerings. In theend, Fidelity led the pack with its impressi ve mix nf more than 16,000 rnu-

The firms with the fewest mutual
funds generally pick-

ings when ir carne torhe other investment products. Just2Trade and ShareBuilder,
i{)r example, offered fewer mutual funds than the cotnpetition, and borb lacked corpora lie, m unicipal and U.S. Treasury bonds. Zeccoand Sogo'Trade carried exchange-traded funds but nor much else on om wish list. SCI go Trade scored the lowest ove.ralJ because it was the only firm without a single mutual fund offer~ ing. TIle company says it's focused on active traders wbo come [0 the firm for its low commissions on stock trades.

DISCO UNT-BROKERAGE eustome rs don't typically COunt on thei r firTil for
extra bond-holding, But in today's turbulent market, they want to know that their brokerage will be there to answer questions, whether it's in a phone call, e-rnailor online chat. AJter months of marker swings, 6nanclal crises and industry scandals, experrs say qual" ity customer service is more important than ever. That's. why we were surprised when WaHSrreer*E, for the second year 1.1].a row, didn't reply to OlU e-mail as

a prospective customer,

while Bane of

It's do or die time on Wan Street. Whether they're getting help from the govecrnment,linking up with longtime rivals or fighting over account executives, fuJI-service brokerage firms are battling for survival. But what they may need most is loyal clients, and to entice customers, they're paying special attention to the basics, from spiffedup account statements and flashy Web sites to good stoek picking in a lousy market. Our annual look at the best and worst full-service brokers have to offer. -R.W.
S~IJFi t::ES: LACK'S 1~""E5fMEHJ' iF! E!SeA~C:H ~61ot::k
PI(JKJ.~: J.[)_F'QWER (Cl'ISIOtJl6~SER'JIC,E ,1.,:-11].

1. Raymond J m
WWW.RAVMONDJAMES.COM NUMBER OF BROKERS: 5,000 NUMBER OF BRANCHES: 2.,280 lilGHMARKS: CUSTOMER

WWW.EDWARDJONES.COM NUMBER OF BROKERS: 12.100
NU MBER OF BRANCHES: 10,880 HIGH MARKS: STOCK PICKING lOW MARKS: WEB SITE CallI! a bear-market bounce

2.

r'

I

'at

3.

WWW.UBS,GOM
NUMBER OF BROKERB: 13.900 NUMBER OF BRANCHES: 720 HIGH MARKS: CUSTOMER SATI S FAClI () N LOW MARKS: WEB SITE
What else can go wrr1ng'" The brokerage firm's parent bank has beer) hll by the. k«gesl annual loss ever for a Swiss company. thousands or layolls, oand a U.S. government probe into how it helped wealthy clients cheat on taxes. UBS IS .suffering (rom "concerns about financial sll~ng111;' says Wililarll 61all' analysl Mark Lane. Still, the brokerage firm gol a boos! In our survey trorn high SCOI es
In Gu stern er sati sfactio n

S ATIS FAClIO N lOW MARKS: STOCK PICKI.N.G
./\ re~ea:1 wmner lrom last year, Raymond James knocks out the cornpetitton m two categooes: customer satisfacticn !lMd

brokerage statements, The
St Petersburg, Fla.-based film also earns tha highest marks In our new Web site evaluation, edging out oornpsntor Smith Bamey Tf]e 47-year-old Raymond James. whioh look on mo, 0 Ihan 300 new brokers last year, says it's also scooping up new customers from flill-service 0 LJlfrts w iln rtskie r balance sheets and uncertain futures. 'There are just fewer firms- to compete With." says Chel Helok, the firm's chief operatlng oU,cer One weak spot: Stock picking ranked tlurd-to-tast. "I'd ettribute thai 10 a tough market;' says Heick.

Edward Jones- hlreci mere than 900 new brokers IElSt'year, ma~.lng tl one 01 many reqicnal bro kBrs cap ital i ZH'Ig 011the fI"sfoltunes 01 Wall S lreel giants like Merrill Lynch. The SI. Leursbased firm, with a reputation for at-your-doorstep service, also Inanaged to lead the pack. III slock picking, its picks wei B dClwn, 01 course, but not nearly as much as the cornpetition's. "We don't plGk exCiting names:' says James Weddle, mMaging partner. "We're lust looking ror solid companies- that increase their dividends,' On Ihe down side, Corporale Insighl found the firm's Web Me hard te navieate. The company says tts goal Is 10 educate site visitors
In

an d

STAn,MENTSI. ~~ESiEIil FH.S'E:A-RCI-I (TFilllSTk t,lA1.!!A"R ~STi'JEMEtffS): CQRfl'QRAIE INSIGHl' {,mB: SI"f'BI: SMAA"MolI.I~ h'~S,~R'C1i

clear IMguage and connect

Ihel n wilh a limmClai advisel.

account statements, The linn 5 Web site dldn'l fare as well. Research firm Corporatelnslghl l!:Iund Its pages hard to navigate and the search tool inefficient. A U BS spokesperson sats clien Is ha ve foun d the srte easy 10 us e. and thai more Improvements are on Iheway.

54 SM}'RTMot-..l".Y

JlJNE2(i()\I

America aud WelisTradehad address

no e-mail

ference: Zecco earned three stars, up from last

at all for prospective customers to get in touch. (WallStreet"'E says it mistakenly thought it had answered our e-rnail.) At [be other end of the service spec-

yea r's single star.
WaUSaeet'·E was one of the fastest to the phone, answering our calls in 20 seconds all average and of~ fering bucketfuls of extras: a free "valet account" with

responded to growing by boosting its phone-support time from 17 hours a day to 14 hours a day and adding live char to its Web site. TradeKing CEO Don Montanaro stepped up his efforts TO keep in touch with customers, blogging four to five times a week and e-rnailing clients several times a day. And Zecca, which last year told us it was investing "serious money" to improve customer service, boos-red the n umber of customerservice reps by 6B percent and added live. chat to irs site. The extra stall made a diftrum, E"'Trade

investor nervousness

access to a Visa debit card, check writing and customized -starements. Bur the firm didn't offer 24/7 phone

help, access to our account through a mobile phone, or an online summary abou [ o 11r tax g ains 0 r J os ses
(it says it's working on

the latter two). Muriel Siebert, which inched

WWW.SMITHDARNEV.COM NUMBER OF BROKERS: 13,000 NUMBER OF BRANCH ES: BOO HIGH MARKS: WEB SITE LOW MARKS: CllSTO MER SAJISFACTIIlN
This Citigwup unit-soon to be Morgan Stanley Smith Barney, after rts combination with Morgan Stanley-climbs in our ranklngs from las! place lasl year. The firm earns high marks tor trust, ace ord in 9 10 Ferre ste r Research. James Tracy, Smith Barney's director 01busmess development, says that amid Ihe linancial 0 ris i s. lh e. firm boosted its contact with clients by adding ed ucational sern lnars, research paperscn ilB Web site and more-frequent phone calls from brokers. As for the merger, the firm says it doesn't plan to shed brokers, despite losing billions of dollars more III chen l assets in the fourth quarter than i! brought In. Departing Investors are ·Iookin~ for second opinions;' says Traoy.

4~ m hB

5.

V WWW.WACHOVIA.COM NUMBER OF BROKERS: 14.4011
NUMBER OF BRANCHES: 1.4611 HIGH MARKS: STOC.K PICKI NG

W"WW,MLCOM

6.rtlU

Lyn

WWW.M08GANSTANlEV.COM NUMBER 0 F BROKERS: 8,400 NUMBER UF BRANGHES:500 HIGH MARKS: WEB ,11m LOW MARKS: TRUST

7. Morgan

I

LOW MARKS: WED SI.TE
Clients of this firm mlght be developing a case of whiplash. Wachovia had only just bequn nlerging its back offices With recently acquued AG. Edwards when Wells Fargo snapped up Wachovla.late last year. All those changes make some Investors nervous, but Jim Hays, president 01Wachovia's retail brokerage unit, says brokers like the new link-up with the-San Francisco-based Wells. The firm Is "attracf n9 bro kers in droves," he says. WachovI8 (soon to be renamed Wells Fargo Advisors) Improved III two categories thiS year: statements, which WachoVIIl revamped last year, and stock pickmg. Its Web srte, on the other hand, ranked the lowest in the group. with <I clunky search 1001and dowdy layout. A redesign is in the works.

NUMBER OF BROKERS: 15,7011 IIIU MBER OF BRANCHES: 7911 HIGH MARKS: STATEMENTS LOW MARKS: .TRllST
AnalYsIs are still pondering Ihe lale of Merrill lynch and ils "thun d e ring heI'd" of brn kers, following the. firm's rescue by Banko! America and the departure of top Merrill execs. The. lu JTI1 ad certalilly did n .t he Ip the firm' s ave raj I ran king in th i s year's survey; it fell three notches. from third place last year. Only 34 percent of Merrill's ciiel1ls surveyed by Forrester Research think the firm did what was best fcr them, down from 47 percent in the previous survey. A Mer'nil spokesperson says the company's own surveys show that clients are "very happy" with -their brokers. The film earns kudos from th e researchers at Dalbar 'for account statements, includiFlg an "easytc-cnderstand" chart showing how clients' portlolios are faring.

Is bigger bell er'l lInkIng

wp with Ci\lgro~)P'S Smith
Barney would give the joint venture more brokers than any cernpetuor, even Merrill Lynch. Bul combining. brokerage reams Gomes as Morgan Stanley confronts other big challenges. The firm posted its second straight quarterly loss In the first quarter and slashed Its dividend 10 preserve cash. What's more, Morgan Stanley ranks near the bottom In most categories In our survey Clients are "disappOinted lhat theif wealth is declining;' says head of naj ional sales Andy Saperstein, adding that the compIDly is dolnq its best to help chants navigate the- turmoil. The Web sUe earned better marks, helped by a top-notch design.

JIJNE 2009

SMART.'VlONEY

55

SMARTMONEY SPECIAL REPORT

I SURVEY

pas'c TradeKiog

for the best overall

ClL~~

Willer service, answered our phone calls and e-mails promptly with thorough arid cordial responses.

BAN KING SERVICES BEST: FIDELITY, E*TRAD'E and
WELLSTRADE WORST: SOGOTRADE and SCOTIRADE IT HAS BEEN A TO UG H year for financial companies, just look at the stock prices of firms like E"Trade and Bank of Anlerica~before the spring rally in bank stocks, you could have bought a single share of either company for less than the average ATM fee. E*Trade has been burt by bad debt (rom losses on mortgages and home-eq wry loans, while investors at Ba L1.k of America grew concerned about the acquisition of Merrill Lynch and the headaches associated wi th that ba rrered giant. TIle banking connection may be a better deal for customers .. BaJJC of America (the discoun r-brokerage arm

ing Jor-wirhour

added charges.

That

Includes the ability to pay bins online, rna ke instanr cash transfers and ha ve fees for ATM withdrawals automatically rebated to our account, WeUsTrade also offen; many free bankingservices and even a place [Q store precious metals. This helped the firm gamer its onl)?"five-star category rating in this year's survey. Some competitors beefed L1p their own services and inched higher in this category. ShareBuiJder, taking advanrage of its acquisition by the online bank ING Direct, rook the biggesr leap, adding a debit card, plus a tool to pay bills online .. Scotrrade and SogoTrade tied for last, with the fewest banking services. A spokesperson for Scottrade says the company is plan ni ng to roll QU( new banki Llg prod nets such as cbecking accounts or credit cards. But at SogoTrade, President Dave Whitmore says he's "not looking to attract people for their banking money."

TRADING

TOOLS

BEST: TD AMERITRADE WORST: SHAREBUILDER TO SAY TI-IAT investors have had a rough rime trading lately would be an undersea temenr, Last October the Dow SWlU1g more [han 1,000 po ints wi thin a single day-the6.rst rime rhar had happened io Its I l z-year history. And as we all know, things didn't exactly quiet down after that, III today's fast-moving

market, investors need to be able to place trades wherever they are and as quickly as possible. TO Arnerirrade offered rhe 13 trading tools all our wish list. Prernarket and aftermarket trading? Check News alerts about onr stocks sent directly to our in-box? Yep. And
what abour the technology mar lets us, make trades ov-er am smarrphone? Tl) Arnerirrade was one of 10 firms with this convenience. Of course, Ilifty tools aren't worth much if it takes too long to make a trade. Once again we teamed up with Gomez, a Web sire-monitoring company [hat

of Bank of America) offers many of the services on our wish listand Pideli ry and
E"Tracle earned top scores by providwe were looking virtually everything

timed how long it took
brokerage accounts,

to sign in to fill out -a trade and

prev iew tbe order at differen t points in 2008. TD Arneritrade and E"Trade tied with an average of just-over Eve seconds for the year. Yet they weren't the fast-

est of the bunch. That distinction
went to Scottrade, which clocked in

at a mere four seconds. "WellsTrade
managed to improve from the 21 seconds it too kin last year's survey, but it was still sluggish compared with the rest of the group-17 seconds. Th e only trading tool ShareBuilder offered from OUI Iist was a dividendrei n vestment P rogra rn, landi ng it in last place in this category. Sha re Bu ilder President Dan, Greensh ields says the .firm likes
to

keep things simple.
JlJNE2()09

56 SMARTMo"N'EY

OISCOU NTBROK~RS
SCORES

i~OiER E*Trade vwlW.etrBde,com Fidelity vwlW.ti tIillilii, com Charles Schwab IMYW.schwab,CLlfTI TradeKin!l www.lrm!elcing.Gom TDAmeritrade www.tdameritrnde.l:llm Muriel Siebert www.siEfililf(rleLGom ScoHrade 1M'IW.scmtrade,com Firstrade www.firslrnde.cum

tOMMEln Strength across the bmml n~rches '[np rankin~ lor tllinJ s1rai!lht yes r,
Keeps No.2 spol with .rn~lISl pmduol offeri ngs Bnd big gest mi,x 01funds, New" easy-tlHJse Web site, but tlkes time to ~rep3l'e~n onlin~ trade uroor,

CO!.l1!18KI011 Hlm,\1\JlID1[!l MUrUIlfUROI& (8)" RAn. ONC~ ~ (%) INY!8m [Iff PRijCU GTS
9,99 1,45

fWjl!l~~

3mVIO!S

'HMlI~~

mOl~!

~m~Ron

RU!IflMElI

milC[

****

10,1'15

0,89

12.1'15

2,00

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son, director of online financial services, Fidelity, another i'Iunes regular, bulked BE.ST: CHARLES SCHWAS and up its research with ra rings of how COI11E'"TRADE WORST: ZECCO and parties perform on environmental, social WALLSTREET""E and governance issues. "More customers want help on bow to do it themselves," AS INVESTORS increasingly worry about the sa fety and a ppropria teness of says Jim Burton, president of Fidelity's the financial products "theybuy, they're retail brokerage. looking for much more than standard reCharles Schwab and E"Trade tied. search reports from WaHStreet analysts, for first by adding their own new offerthat might explain why Scottrade's inmgs, Schwa b introd uced a new, easier to vestor educa tion podcasts ha ve ranked in navigate Web site, while E""Trade upped me20 most-popular in vestment-rei a fed its menu of Web-based seminars by 50 pcdcasts oni'Iunes, The St. Louis-based percent. The Web sites of Zecco and hrm, which jumped up a. notch in this Wa.JlStreet"E took the longest to na vicoltego ry, daub led its video podcasts Ja~1: gate, and the firms earned some of the year to meet rhe "tremendous demand lowest marks 011 resea rch, WaJJStreet * E for investor education," says Kevin Dod- says the firm is hoping to correct its "reRESEARCH
J1JNE 2009

search problem" with a planned partnership with Zacks Investment Research, Zecco says it has beefed up in this area by adding Standard & Poor's research reports and a mutual fund center, Of course, not every firm aims to be
the best in each category ..Sogo Trade, for example, wants to be known as a grea t place for active traders seeking low

comrn issions, an d ShareB u i lder TOU rs irs system for automatic investrnenrsin stocks and mutual. funds. Shu reBuilder says its customers don't really want a lot of bells and whistles, and if they did, it would add to the cost of the prod uct. When it comes to investing, says ShareBuilder President Greenshields, "there's
no free lunch."

0

SMARTMONEY

57

58 Srv1ARTMoNEY

JUNE

2009

"
[eremy Grantham has made a good
Iiving going agal nst the investing world's conventional wisdom. Now. while many
VIrant

o

_,_,

to stick to cash. he's buying stocks.

By Russell Pearlman & Jonathan Dahl
rs A RARE
CA.LM: DAY FOR TIffi FINANCIAL MARKETS, BUT JEREMY Grantham, the king of the contrarians, is anything but tranquil. In just 10 mill ures he has skewered Federal Reserve Chairman Ben Bernanke ("a guy who studied the Great Depression and drew all the wrong conclusions") and Treasury Secretary Tim Geithner ("a cheerleader, actually sucking people in to take more risk"], He trashes the government's strategy to resolve the
banking cr isis. Ordinary folk aren't spared ei thee He says most people like to invest when prices are going upr'Tr's like buying sweaters when they are on antisale, Special offer; 30 percent more." If it sounds like the grumpy tirade of a veteran money manager, it is. But if people paid a rten tion to Grantham ill the sp ring of 2007, they might ha ve 'saved themselves some money. While many investors were caught up in bull-market euphoria, Grantham, who oversees $85 billion for Boston-based institutional money-mana gernent firm GMO, told anyone who would listen there was a global bubble; "It's everywhere, In everything." Few people listened to him; some even mocked him. Bu t after the colla pse of stock, housing and commodi ty prices over the past two years, no one can argue he was wrong. The Standard & Poor's 500 has lost about 40 percent since it peaked in October 2007. Many of Grantham's clients have lost only half that, Photograph by Richard Schultz for SmartMoney

JUNE

1009

SMARTMONEY 59

"!ITOLD YOU SO~

and some actually made money. Granth-am's willful, sometimes arrogant disregard for the con ventiona I wisdom has brought him grief at nearly every point of his 40"pllls~year investing career But more ohen than Dot, he's been right over the long term. So perhaps it's nor .5U rpri sing that, while many investors don't want [0 touch stocks, Granrharn, for rhe first time in a long time, is eager to invest in them, at least for now, U.S. stocks, he says, are moderately cheap, and foreign stocks are a little cheaper. Investors need to get over their fears, set a buying target and not worry if the market f'311s, because "you aren't going to get the low." Gran tharn, 70,.rnigh t nor be a household name, but the Englishman is well kn OWll in investing circles. His quarterly letters are prized for his pull-no-punches outlook on the global economy and investing world. (A highlight from his January letter: "In terms of economic pain, 2009 will be the worst year in the lives of the majority of Americans, Brits, and others. So break a leg, everyone!") He attributes his contrarian nature to growing up ill the Yorkshire region of England, where people have a reputation for being sornew hat difficulr, 110t easy to persuade and "bloody-minded. " Wlth the exception of an I8-month stint in Ma uha ttan, he has Iived in Boston since 1966, when he graduated lrom Harvard Business School. But in four decades he has gone to only one Boston Red Sox game. (Who won? "It was so boring, I lost track," Grantham says..) Whatever Grantham invests in \GMO looks at everything from stocks to sugar contracts) , it's decidedi n a cold, calcu In ti ng fashion, relyi ng on histo rical valuations and probabilities. In September 1998, he believed that the U.S. stock market was the most overvalued in irs history and predicted that the annua Iized return of the S&P 500 would be zero over the next decade, aher adj usn ng for
60 SlvIARTMo'N"EY

Ectl nomlst,.

Nouriel Roubini
professor at New York IJ n IVerslty

WHAT HE SAl D TH EN: He'd been
pessimistic on the economy since .2005,

butlrl Februazy 2007 he laiddown the
gaLlntlet-prediclinB an ugly recession with "a credit crunch and a persistent sell-olf in equities.' Sou I'Id familiar?

WHAT HE SAYS NOW: TheelOonomy G(;)uldrecover modesl'ly in 201 C. But the
now jet-setting economist cautions thai the governmerl1 will eventually have to raise taxes and slash spending to pare down the nation's debt,
OJ

.r[Skmajor

inflati.ol'l. His investment 01choice: Gash.

inflation. Back then even his older sister, a retired philoso phy professor whose portfolio Grantham manages, asked if he knew what he was doing. By 2002, however, Grantham looked smart, and GMO investors madea killing when the market tanked. When the market later rebounded, he called it a sucker's rally, which [Q critics sounded like sour grapes, until the meltdown in 2008. The end result? Grantham's 10-year forecast was off by just over 0.1 percen tage points. The iWIlY of all his remarkable forecascing is that few ord ina ry investors ca n invest with him. The funds GMO runs are mostly geared toward institutions, such as pension funds or school endowments, although the Evergreen Asset Allocation fund mvests exclusively in funds managed by GMQ. GMO inves-

tors lost money last year because many funds dictate a substantial degree of stock holdings even when the boss is decrying the market. Still, GMO's U.S. stock funds lost only about half what the 5 &P did during the crash, a nd some other GMO funds did much better. Granthamhas an opinion for everyone abou t the.best invesrmeut stra tegies ill these sullen times. Sitting in his office lined with giant Buddhas and relics of civilizations long gone, Grantham talked to SM.AJnMoNSI' about the stock market and the current financial mess.

or its

lit 2007 you were worried the global financial marhet could fall apart, and you said a market downturn was probably coming. Okay, say it: "I told you SQ. "
SmartMoney:
JUNE 2009

Ravi Batra
Professor, Southern Methodist University

WHAT HE SAl D TH EN: In his 2007
book, The New Golden Age, Batra warned that a recession around 2009 would lead to rising unemployment widespread

and

social upheaval. Stay away

from stocks and real estate, he wrote.

day it h it the recent low of 666. It'sli kel y, but far from certain, that we'll go back and make a new low. You aren't going to get to buy at the absolute low unless you have a time machine.

WHAT HE SAYS NOW: We're a1 the
beginning of a depression, and the government1lOfoous, on banks rather than consumers isn't helping. He still expects social unrest and a brg jump in crime, but predicts the bad times will be followed by an age of pmsperity.

SM: Anything else besides U.S. stocks? JG:. Now everything looks juicy. U.S. stocks were nicely cheap, and frankly,
the rest of the world was even cheaper. In early March, when we bought, we invested only ill stocks we though t woul d have a 10 to 14 percent average ann ua I rerurn after inflation. That's magnificent, We ha ven 't seen anything like that i.n 20 years. It was somewhat disappointing that prices moved up so fast in just a couple of weeks. The odds are a hit more than 50-SO that wewill go back and test that low,

Peter Schiff
Money manager, author of Crash Proof

WHAT HE SAl D TH EN: In 2007,
Schiff called Amerioa's real estate boom a wild party that would end with a "giant hangover" in the form

of ccllapslnq housing prices, tighter lending and a glut of unsold homes. WHAT HE SAYS NOW: 'What has
happened is just the beginning of what

SM: So you've made a quick buck. No.w what? JG: YOIl have a set of possibilities. First,
if the market nosedives, it's easy: You buy. The second is confusing, when the rna rket j list goes sidewa ys, between 700 and 800. The marker is irritatingly cheap then. bur om superchea p, The longer that goes on, the less probability we will set a new low, so. we'll ulranately put money each month into the marker.

I predicted:' While he doesn't think the
situation

is hopeless,

he still expects

rampant ;i"nfiation,-a depression and the deval.uing of the U.s, dollar. His advice: AVOid dollar-based assets-and buy gold.

Jeremy Grantha m: Tha t seems so long ago. I felt like saying that a few months ago, but now onward and upward, and wait for the next unexpected twist.

where. 111en they go to investment COI11mi trees and decide what to do wi th their money. They don't want to do anything that looks eccen tric and costs them their [o bs, It's a miracle tha t any of our advice perks up the pipeline. SM: Why did your own funds lose so

SM: YKlhy were you so certain things were going to get so ugly? JG: There wasn't a whole lot of doubt where Iwas coming from. Ithought the fair value of the S&P was 925; the S&P went to 1500. And by 2006 the housing bubble was at a 1 DO-year peak. This tracked,
was the 321ld asset bubble that we've and all but the Ll.K. housing bubble have popped.

SM: Whati( stocks leeep rallying? JG: Those are the other possibilities. If the market. goes past 900, we freeze. Likewise, if the market goes higher, a bove 950, and then starts moving sideways,
berweenP 5 0 and 1050, we probably do very little. Then the market is moderately overpriced.

much money when you were confident the market would (all apart? JG: Most of our mandates require us to be nearly 100 percent invested. Bu t even
when you had to be at least 45 percent

SM: Oller the long haul, is there. allY particular industry or sector you lilee? JG: The people who move quickly ill this
market can make money. The people who. invest in energy alternarives will make more. Alternative energies and combating climate change are the single most i rnporta nt econorn ic ini ria ti ves over the next 1 0 years-e-rea 11y 0. ver the next 50 yeats. It will be a very exciting next 50 years.

equity, then you couldn't help but
down. There was nowhere

to

to hide.

go Ev-

SM: Why didn't you just P!I t all the money in GMO's funds into cash? JG: Every quarter, we do OU.r best to tell
our clients the truth. Vile were comfortable with telling our clients there was a major bubble in every asset class, every-

erywhere and everything got hit. SM:. Yet now, (or the first time in yeats,

you li:ke U.S. stocks.
JG: We thinka fair price for rheS&r 500 index is 900. By sheer di vine intervention we bough r i nro tile market on MaL~ 6, the

JtrNE

2009

SMARTMONEY

61

Grantham's Outlook
His fi'rm, GMO, predicts long-term returns, adjusted for inflation, for a variety of assets, Here's itS prognosis for the nexrseven year.s.

u.s. stocks:

GOOD

GMO has recenNy warmed to horneqrown stocks, It expects a nearly 9 percent average: annual return, above the historic average. tnternationatstocks: VERY GOOD

GMO was bullish early in the
decade, then turned 'Sour. Now it expects a 1Q. 7 percent averaqe annual relUrrl for large foreign firms and 1 2.. 7 percent for smaller ones.

U.S. government

bonds: BAD will avera.ge a tiny

long-term bonda
TImber: FAIR

return of 0.5 percent a year.

Even thou,gh G MO expects a 6 percent average annual return, it thl[1ks stacks are a better deal now,

S M: That's the future. But why did
marlY

50

supposcdlysmart people miss this disaster over the post two years? JG: The ul rima te vill ain of this is the belief in rational expectations-that the marker tends to be efficient. People who have anything to do with investing either believe it a bit or believe it a lot. There are only a few of us ornery disbelievers who don't believe thar the marker is efficient at all. S M: What's wrong with believing that the market is efficient? JG: If you believe in it, then you don't see asset bubbles. And there's, nothing as dangerous as an asset bubble. If you even slightly believe in it, you believe in [former Federal Reserve Chairman] Alan Greenspan's idea tha t markets can control themselves. You believe that you should buy and hold the market. You believe you should have a fixed asset mix and you should never change it, because why would you? The market is efficient! When you believe in market efficiency, it's like being on the railroad watch ing the locom onve coming rowa rd you. Then you just stand your ground JUSt fur the discipline of not moving ..It's
62 SL'vIARTMol\\EY

ruinously expensive. and underpensioned. Those .co~ SM: Will we get out of will be a real brake on ecothis mess? nomic growrb. This will To read highlights from JG:. The stirn ulus is so great be a pretty long recovery Jeremy Grantham's in the United States, China period, longer than we're recent quarterly leiters and the United Kingdom, it used to, bur hopefully nor to investors, go 10 wilJ kick the economy up. as long as Japan took. It www.srnartrnoney GDP will go back positive will Bot be as long as the .cam/mag. for [INa to three quarters. Depression, but it will be They'll assume everything is settled, that several years, and not just two. Lord throwing money ar ir has worked. But !alO\VS we nave had several far years. SM: Won't our leaders help? the long-term imbalance between over" producers [like China] and overspendJG: President Obama is not doing the ers [like tile U .. . [ will continue. Ir'll be a S right thing. I admired his appointments ill many areas, certainly in the envi ronmultiyear drag on growth. SM: We·'rejust throwing money at mental area. But then he got these tired the problems? old retreads from the financial area tha t JG: If the problem is that we consume notoriously didn't blow a whistle over the last few years. They've. all been R uroo much and borrow too much, does it bin-ized [influenced by former Treasury make sense to borrow more and spend more? IT doesn't l1.l ake sense to solve alSecretary Robert Rubin]. coholism by giving an alcoholic a quart SM: So why are these life-size Buddhas of wh iskey, but everyone believes(hat we and other statues in yoilr office? must stimulate. So that's why we feel this JG: I'm a history freak. Ifind old ci vilizations fascinating, Great empires all rise isa temporary cure. This islike when you revive the drun k, he staggers down a few a nd fall. rt's sad tho t We don't know how blocks, then falls down again. the future w.i 11work Out. A time rnachi ne SM.: That does not sound promising. would be a wonderful device, even if you JG: We're not rich, and we're undersaved couldn't use it for investing. €I'

Smart MOlley

JUNE 2009

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-4

STOCK PRICES IN FAR-FLUNG COUNTRIES MAY HAVE FALLEN

BADLY, BUTTHEIR ECONOMIES
STILL GREW. NOW SOME INVESTING PROS ARE FINDING BARGAINS FROM CHILE TO CHINA.

Re

The

I
BY ELIZABETH O'BRIEN

O

N l-USLAST TRIP TO BEIJING, Rob Lutts noticed something
ll.

was

aissing: There ere n.o construction workers hall.lmering away through the night. The all-night work crew had been a symbol of [he breakneck speed of China's economic growth. But Lutts, who travels worldwide [Q find investing opportunities as president of Cabot Money
w.

Management, didn't lose sleep over the change-he actually slept better, with 110 jackhamruering at night. China's economy, after ail, is still growing. Lutts still sees thousands of workers building office rowers and paving streets during day. "This is where I should i nvesr," he says. the

The headlines and pundits a re doing a great job showing how bad the U.S. eCOflOl11Y is. But that daily del uge of bad news overlooks an important .fact: Some parts of the world still are growing. Indeed, the International Monetary Fund projects that while the world's advanced economies=-like ours-will contract this year, emerging economies will expa nd by as much as 2.5 percent, and some countries will gTOW a lot faster. Even better news: Savvy pros are finding they don 'r ba ve to pa y a Jot to own profits ble foreign stocks. The valuations on foreign stocks have become "very, very attractive," says Uri Landesman, chief equity strategist for asset manager lNG Investment Management Americas. It was only two years ago that investors plowed more than $16 billion into

emerging-market

mutual funds, trying

to find

the next big Chinese Internet starttrends, a lot of

up or R ussian coal mine. Unfortunately,

like many investing

people piled into emerging-market stocks just as they peaked. Growth did slow around the world, and the stocks ta nked ..Even with this spring's market rally, emerging-market stocks, as a group, have lost more than ha If their value since

ILLUSTRATION

BY RYAN ETTER

S"MARTMONEY

65

Octobe [ 2007, worse than the 47 percent decline of the Standard & Poor's 500 index. However, the outlooks for places .like China, India and others are, according to some analysts, pretty good. Many of these nations are nor mired in the h ousiug market disasters that plague weal thier countries, and their banking systems are healthier as a consequence. Meanwhile, millions of people in these nations are moving into their middle class. The fortunes of these conn tries aren't completely beholden to the health of the U.S. economy, eirher, China '5 economy, for example, is expected to grow a r least 5 percent in 2009. Stock valuations in these countries also are compelling, say some pros. For decades, stocks ill China, Chile and other emerging nations traded ata significant discount to their American counterparts. By mid-2007, some were trading at a premium. The market wipeout brought emerging-market valuations closer to their normal discount. 01 course, that return to normal cost some investors a lot 01 money, but the lower prices could give new investors a chance to buy into growing na [ions at a more reasons ble price. To be sure, investing in emerging markets still Involves more risk than investing here. Developing economies tend to be less stable and their stocks, more volatile. An d there are places like Russia and Eastern Europe that are in truly bad shape. But many believe there are attractive stocks in stillgrowing nations that compensate for the risks, Here a re five picks-c-all of which are listed OD U.S. stock exchanges.
66 SlvlARTMONEY

VALE mines iron ore, which is then used as a .prlmary ingredient in steel production.

China Mobile (CHL, $46)
More than 160 million mobile phones were purchased in China in 2008, and analysts expect tha t amount [0 grow another S percent this year. That bodes well for China Mobile, which bas almost 75 percent market share of mobile-p hone service in China, I t has 470 million subscribers-a throng 50 percent larger than the entire U.S. population. Amazingly, analysts estimate there are s till several hundred million Chinese who don't yet have a mobile phone but eventually could. In the short term, if cash-strapped consumers are forced to choose between a landline and a mobile phone, they usually opt to go wireless, says Phil Kendall, director of the global wireless practice at market research fum Strategy Analytics, Naturally, Hong Kong-based China Mobile doesn't ha ve the market to itself. The Chinese government restructured the country's phone industry last year, allowing its biggest landline company, China Telecom, to join a wireless market formerly occupied byjust China Mobile and China Unicom. But even with the competition, China Mobile's dominant market position allows the company to negotiate favorable rates with vendors. In 2007 rhe company launched its own instant-messaging system for its phones) allowing it to keep more revenue.than if it used a system made by Microsoft ora nether firm. China Mobile's stock trades at about 11 rimes 2010's expected profits, well below its lO-year average price/earmngs ratio of more than 24. China
JUNE 2009

THE REEMERGING MARKETS

Foreign .Flavors
Several companies are well positioned to profit from the still growing emerging-market economies.
Pnce
, N. me fIldr~r) 1$) M .,ket V.I ue ($bll) 2009 P«>J.~t~d E PI CQ rnmonl

China Mobile CNOOC(CEO)

(CH L)

45,84 112,65 67,13 30.28 1'4,92

193.9 50.3 9.5 8.0 75.8

11 14

Alrsad

China's largest mobile-

honefinn, wirh chance to

row much larqsr,

Shou Id 9 row as d erna nd lor energy increases,

HDFC Bank (HOB)' SOM(SQMI Vale (RIO
Pncea as of 4120f09.

17 ~2
9

Bank squarely focused on s~rvlcing India's burgeoning middle class.
A resource-rl ch co m pany with a co me r on the- spec i al ty fe rtilizer m arket,

Demand from China

IS

helping this iron me miner weather the recession,

~!lo I'J Ilsca,l ~

Vl!<:i:r end'S ME!lr. :30, 21J11 []I,

Mobile has said the sluggish economy and increased competition will temper its growth this yeru; but it will still grow. Many analysts remain confident the company will co nrinue to increase revenue and profits steadily over the next several years, global recession or not. III the meantime, the stock has a 3.9 percell[ dividend yield, so investors are paid to wait For the economy to improve.

HDFC Bank (HOB, $67)
Many of the senior executives of Murnbai-based HDFC Bank are native Indians who worked for Ciribank and other Western hanks outside India. But when they opened their bank in 1995, when there were very few private hanks in India, they came home to serve Indian customers ..As banks worldwide loaded their balance sheets with exotic, risky mortgages, HDFC stuck with serving India's burgeoning middle class. A bout 70 percent of HDFC's revenue still comes from plain old retail banking, like issuing credit cards and loaning

CHI,NA MOBILE

has 470 million customers, but it also
has huge Ipotentlal
fOJ growth

since

hundreds of millions of Chinese still don't have mobile phones.

money to small businesses. That has kept it from having to take write-downs rhar burdened ma,ny other hanks, says Ferrill Roll, portfolio manager for Harding Loevner; which owns T--IDFC shares .. HDFC's toughest competition is from stateowned banks. While HDFC branches ofIei· more efficient service, according to analysts, state-run banks reach much more of India's 1.1 billion popuiation.In India, govemmem banks carryrhe perception a f increased safety, and consumers worldwide find it annoying [0 switch banks. Despite these challenges, HDFC is well posinoned to attract new customers ..Ove r the next two decades, the country's middle class will grow from abontS percental the population to more than 40 percent, creating the world's fifth-largest consumer market, according to McKinsey & Co. Assuming HDFC keeps up its superior cnsromer service, it srands to caprure a large share of this new market. The bank also beuef ts from being partially owned by HDFC Limited) a large and well-established mortgage lender. With a PIE ratio of 17 times next year's estimated earnings $550 million, HDFC is not the cheapest bank stock. But analysts expect the bank to increase profits 25 percent in its fiscal 201.0 (which started in April) and another 21 percent in fucai201 L "It's one of the best-managed banks in the world," says Cabot Money Management's Lutts, who also OWILS thestock,

or

Vale (RIO, $15)
The booming economies of China, India and other emerging nations gave mining fum Cornpanhia Vale do Rio Dace years of spectacular profit and revenue growtb, solidifying its position as one of Bra1.i I's largest companies and the world's largest producer of [ron ore. The global downturn has certainly forced the Rio de Janeiro-based firm to
J1.INE 2009
SMARTMONEY 67

THE .REEMERGING MARKETS

Reemerging Funds?
Emerging-market funds got clobbered last year, but a few could be poised to rebound in 2009 and beyond. PIONEeR EMERGIN,G MARKET (PEMFX, $17)
ONE-YEAR RETURN: -49.5% FII/~-'I'EAR RETURN: 6.50/0" EXPENSE RATIO; 1.9% In spanning the globe for stocks, fund manager Christopher Smart

AMERICAN

FUNDS NEW

$60. If demand slows more than expected, Vale's share price could go down further. Longer, term, however, many analysts are confidentrhar Vale will benefit from an economic recovery worldwide. IJl the meantime, the stock trades at nine times this year's expected profits of $9.0 billion and pays a hefty dividend,

WORLD (NEWFX. $33)
ONE-YEAR RETURN: -40.9%

saM (SOM, $30)
It certainly helps any company to have a corneron the marker. Half the customers who buy specialty fertilizer from Chile's Soc.iedad Quunica }'Minera de ChiJe (SQM) can 'r easily substitute any-thingelse for [be product, ~aysBrian Ch ase, head of Southern Cone and Andean Equity Research and Strategy for J.P. Morgan. Crops such as tobacco, wine grapes and blueberries need special fertilizers that only SQM can provide in the region, "It's an extremely uniq ue com parry," Chase says. Much of SQM's competitive advantage: comes from irs access to the Atacama Salt desert in Chile, Ian d rich with nitrates, iodi ne, potash and Iirhi urn, all useful in fertilizer production. Besides having a monopoly on fertilizer in Chile, SQM also claims a 30 percent share 0 f the world's market for lithium (used in hybrid-car batteries) and 33 percent market share of iodine (used in X-ray dye and LCD televisions). Asia accounted for 15 percent of SQM's $1.8 billion in revenue last yea r, and Chase expects that share to rise as China increases its fertilizer imports to help feed its people. SQM isnot immune to the global downturn, of course. Many fertilizer stocks, including SQ M 's, fell

RVE-YEAFt RETURN: 6.7%"
EXPENSE RAllO: 1.0%

This fund invests In both ernerqlngmarket.firms, like Russian gas giant Garprom, and developedmarket companies

that conduct

business in emerg.ing economies, such ,as U.S. cosmetics firm AvonProducts, The fund also has 14 percent of its assets in non-Il.S. corporate bonds.
VJ.nl'lu:;dtz,ed.

looks for firms with solid balance sheets and an ability 10 raise prices on their products. Smart is finding opportunities in Latin America a.nd Asia, including, B uenavenlura
Mining Company in Peru and

China l..ite Insurance Company.

scale back projects and cancel some others, but it ppears to nave no intention of reverting back to i[5 preboom days. The company intends to spend $14 billion this year on capital expenditures, primarily on new mines and infrastructure. That's the most aggressive spending plan of any of the world's major iron ore producers, says Tony Robson, cohead of mining research at BMO Capital Markets. Vale's main competitive advantage over rivals BHP Billiron of Australia and Englishfirm Rio Tinto is its top-quality, plentiful iron ore deposits, Robson says, China is the biggest market for Vale's iron ore, accounting for In01"e than 17 percent of the company's revenue. China's steel production (iron ore is a primary component of steel) is expected to decline only slightly this yea r, thanks to the nation's quick imp lementarion of an infrastructure-focused economic stimulus package, says Jorge Beristain, head of Americas metals and mining research for Deutsche Bank Securities, Vale has expanded its client base j n Ch ina, adding small an d III edi urn-size steel mills to compensate for the reduced demand from [he larger mills. Vale CEO Roger Agnelli has said he expects iron are exports to China to hold steady fOI: the rest of 2009. Investors Ita ve pounded down Vale's sha res 61 percen rover the past year as the price of iron ore has fallen from nearly $190 per metric ton to just above
<1

SQM mines earth rich in minerals to create a high-quality fertililer. giving it a lock on sales in Chile and <I, competitive presence wo.tldwlde.

68

SIvIARTMO"N"EY

JUNE 2009

dramatically

in the second hajf of 2008 as fertilizer

prices dropped. Yet demand for the company's allorganic fertilizer should continue to grow. Farmers need to Liseorganic fertilizer to have their fruits and vegetables certified as organic by the U.S. Department of Agricul rure and similar goverrunent bodies in other countries, Demand for high-end fertilizer might actually increase in an economic slowdown, as people eat at home more and seek out highquality ingredients, says Jim O'leary, manager of the T ouchstoue Inrerna tioual fund. Analysts predict a modest bump in SQM's earnings this year over last. In 2008, SQM posted earnings of $501 million, a 179 percent increase over 2007 earnings. Don't expect such a monster gain this year, b lit analysts still predict a 27 percent gain in profits. The stock trades at a bout 22 times estimated ea rnings of $ 63 8 million, a bout its 10year average PiE.

CNOOC teams up with other energy firms to explore fo r oil. If they ca n't find any, the foreign company bears all the costs.

The company can sell anything it brings up from the ocean 1100r.In fact, Hong Kong-based CNOOC sells oil to its major Chinese rivals because the other two can't produce enough 0[1 their own. CNOOC is majority-owned by the Chinese government. It teams up with major oil companies that have the expertise to build and operate offshore drilling platforms. When they find oil, CNOOC shares in the profits. When they don't, the foreign companies bear all the costs. Don't expect its profits to be even dose to the $6.4 billion in made in2008, however, because the price of oil fell to $50 from its $147 peak last July. CNOOC h,1S no refining business, so its profits are tied almost exclusively to the price of crude. Still, it cost the company, all average, only a bout $20 to bring up a barrel of oil from the sea in 2008, Xiao Zongwei, CNOOe's general manager of investor relations, told SMARTMONEY. So even if the price of oil resumes its descent, CNOOC should yield fatter profit margins relative to other oil companies, says Steve Cao, comanager of the Allv1 Developing Markets fund, which also owns: the stock. At nearly 14 times this year's lower profits,

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/v; the global economy

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tanked over the past year, oil companies around the world pulled back on drilling for crude. But that's not the case with China National Offshore Oil Corp., the giant fum that brings Lip oil from, you guessed it, the ocean waters off the coast of China. The fin11, commonly known as CNOOC (pronounced see-nook) is I ncreasing its capital spending by 19 percent In 2009, to $6.8 billion.

is not a stea l. Butsome analysts feel tha t its growth prospects over the long term should COInIIIand a p rem ium, Ch ina's fuel needs wi 1.1n ly rise o as the coun try's growi ng middle cl ass hits the road in its new cars, analysts say, 'The company pays a dividend yielding 4.6 percent.@

CNooe

JUNE 1009

SMARTMONEY

69

THENE PROSPECTORS
A growing number of intrepid investors think they can capitalize on the SmartMoney catches up with America's new real estate pioneers. housing meltdown by buying astoundingly cheap homes in foreclosure.

By Anne Kadet
HOME-SALE CLOSING IS usually a formal. and bm:eau-. craric affair, with 'lawyers, .. brokers and loan officers burrowing through stacks ofpaperwork while anxious clients hover and sweat. Not so when Vclonte Williams is buying. Today, at a small ritle-cornpany office in Detroit, he's thumbing casually

A

through the documents, gracing them with his oversize signature. Then he poP.s the question: "Is it okay if I pay

cash?" He pulls a narrow envelope trorn his leather jacket and fans the air. the closer, an overbleached, harried-looking. woman in a purple swea ter, pa uses, then sea rches for her supervise r, "Just take the money, honey," Williams mutters
lIIustrati.on by Thomas Reis for SniartMoney

under his breath. Soon enough, she returns with an okay, and he counts out a modest wad of $100 bills, which he slides at ross the [arnin ate table. He.'s just bough t a solid, 'three-bedroom house in }; c a nice neighborhoud-in fu 11, in cash-:§:

~$~OO.
It's. one of the stranger side effects of the real estate collapse. the pocket-

~ ~

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o .c n,

g.

change

home pu rchase, Back in 1006

"distressed n propeery=-bank-cwned or sold cheap by the homeowner to avoid foreclosure-accounted for less than 10 percen t of the market. Now, accordi ng
Association of Realtors, thecategory accounts for nearly half of all sales. The result: deeply depressed home values in neighborhoods from [he east side of Buffalo, N.Y., to the suburbs of Orlando and Phoenix. And even as the credit crisis begins [0 abate and some housing numbers Improve, experts expect this ugly underbelly or the market to expand fa r III onrhs, if not years, to come. For many communities, this collapse is a true-life nightmare, as boarded-up homes plague one block after another. But it's also inspiring a new breed of eager real estate prospectors who are snapping up homes at absurdly low prices. While no one knows exactly what percentage of these homes is going to investors rather than owuer-occu pants, brokers across The country say they're doing a brisk business selling to outside speculators. National listing service Homes.com reports increases of 30 to 50 percent year-over-year in searchesfor homes in foreclosure-heavy states like California, Michigan and Florida. And at least some of those searchers are buying; Home sales are way 11pill hard-hit towns like San Diego, Las Vegas and Detroit. In many cities a cottage industry has emerged to serve these out-of-towners, including consultants who help identify promising neighborhoods and flippers offeringall-in-one packages. The curious can even hop on foreclosure bus tours, which sell out weeks in advance. 10 most investors, of course, buylIlg a neglected home in a srruggli ng ciry sounds like far more trouble than it's worth. But for others the crisis represen ts rhe cha nee to start on the pa th to Dunald Trumpdorn with a ridiculously low buy-in. Some see it as their last shot at making back the savings they've lost
[0 the National

in the stock market. Even venture capital firms and hedge funds are j Dining the action. They buy bundles of 100 to 1,000 homes scattered in cities across the country for 20 to 30 cents 011 the dollar, hire locals to rehab and rent out the most prom ising properties, and abandon the rest. Buyers know they are taking a big risk, but the prospect of developing a steady rental income, if not eventually £lipping tbe horne, keeps "them coming. "The return can be astronomical if it's done right," says Scott Galloway, a H untingten Woods, Mieh., property artorney who represents ven tu re finl1S based in

sold for $120,000

in 2006 can now be

had for a tenth that price. Never mind the
headaches from copper thieves, crooked construction crews and notoriously high property taxes. The fire sale has attracted hordes of real estate optimists, who fly in. with wads of cash or play the market from 'Out of town, looking to assemble their own housing empires.

•••
AT FIRST GLANCE, DETROIT CERtainly looks like it deserves its repuradon. as America's bleakest big city. As of December it had 67,000 homes ill foreclosure, and City Hall is predicting a 25 percent vacancy rate. With the median home price inside the dry limits dropping to rust $5,800, property is so cheap tha t there's- a movement afoot to convert parts of Detroit co an agnculrural econo-

Austin, Texas, and San Jose, Calif. That's a huge "if" in a recession as deep as today's, Still, nowhere is this
gold rush more frenzied than in one of the toughest ma rkers, Detroit, where we spent a recent few days, and homes that

72

SL'vlARTMol\1EY

JlINE2009

THE NEW PROSPEClURS

Returns

like

rhuse

are enticing

The Newickis

did enlist help

Oil

a

droves of amateur investors, Tae kwon do instructo r Donna N owick i in ha bits a universe a million psychic miles from the

third property. A local woman has been keeping an eye on 'their $18,900 home nea r Mercy College and even th reatened to shoot a vanda I who tried to steal the air conditioner, "1 love having her mere, '1 sa ys Do nna, But even th e neighbor can't fix the tenant, a single mom with four sons who Donna says lied a bout her job to get the rental. Despi te several u Irima turns, she's slow pa yi ng the $850 renr, Still, the N owickis are far from discouraged; in fact, they're looking to ~coop up a few more bargains before prices starr risi ng.

srreers ofDetroi r. One side uf her Cen ter Ciry, Minn., home faces a GI [de herd; me
kitchen overlooks a cornfield. But she spends many mornings online, touring Detroit's newest foreclosures, searching fora fixer-u pper. An d w bile she has been to the city only once, she has the house-hunting confidence of a native. Last year she and her husband, Jim, pa id a local consultanr to drive them around town and show them the good neighborhoods. Donna, 47, kept a notebook and marked down her favorite intersections. "You can tell the areas where people are fighters," says Donna, a second-degree black belt. So far they've bought three houses, sight unseen. The Nowickis, who devour hooks by investing gurus like Robert Kiyosaki, decided long ago [hat real estate offers their best hope for a comfortable retirement. 'But Detroit Was Jim's idea. A 4H-year-old sprinkler installer, Jim thinks their contrarian bet will payoff when the auto industry rebounds. Already, me Nowickis have had one success. They paid $15,000 for all impeccable brick colonial in an upscale neighborhood After ilist $5,000 in renova [iOIlS, the home quickly rented to a retired fireman for $950 a mouth.

THEY'LL

HAVE TO EXPAND l1-IElR

empire a lot further and get their hands much dirtier to keep up with Volante Williams, a former jazz musician and day trader turned real estate magnate. After success .<1S a landlord on Buffalo's decayed East Side-last year, he says, he ill pped 10 properties for a $100,000 profit and grossed $14,000 a month in rent-Williams turned his attention to Detroit. So far this year he's scooped up five homes, some for less than ~~5,OOO. He'll never forget his firsr visirtothe nation's l Irh-biggesr city. "It spreads out like an atomic bomb," Williams recalls thinkingas he drove through the unending sprawl of boarded-up homes and businesses, "Like a mushroom. ,.,Luckily, Williams bas a field guide in fellow in vestor Shea Woods, a Detroit native, form er forklift opera tor and self-described karaoke star who attracted Williams's attentiOLI with video tours of cheap properties clmthepostedon You'Iube, Now Woods drives Wi lliams house to house, advises him on deals, reminds him. of appointments and makes h is phone ca 11s. Their first stop one cool spring momiug is to supervise the rehabbing of a recent purchase. It's a sunny 19205 home with hardwood flours, leaded glass and a ha ndsorne fi rep Iace. \'(Ii IIiarns, w snapped it up fOI' $5,500, is derermined

my-some

residents are a lready tending

alfalfa fields and herding goats. But there's a case to be made for investing here. A shortage of q ualiry rentals

in safe neighborhoods tively higb. Moreover,

keeps rents relawhile the median horne price in most cities is several times the median annual income, u'te inverse is true ill Detroit, indicating room fa [price hikes once the credit market thaws. Da vid Butler; a real estate veteran and founder of Hotspur Investment Group in Westminster, Colo., says his typical Detroit deal suns with buying; a $15,000 sjnglefamily borne in a nice area and spending another $30,000 on tax liens.and repairs. Ongoing expenses such as insura nee and property taxes cost another $3,000 a year, But the bouse can fetch $9,600 to

A local property manager takes care rna iurenance, tenant screening and rem collection, and the house should pay for irse II in less tha 11 two yea rs.

or

If only every transaction were so smooth. During the rehab of a second home, thieves broke in and stole the water heater. fumace, bathroom vaniry=-eveu
the toilet. Such burglaries are com mon,
says 'Mark Maupin, a Detroit investor who teaches real estate at Wayne County Community College. Among experienced in vestors, standard procedureis to install an alarm system, tune the radio to the tal k station and pay a neigh bor $100 a month to park his car in the driveway.

$1 0~200 a year ill rental income, and he expects to sell it for $80,000.
J1JNE 2009

no
73

SMARTMON"EY

.lIM AND DONNA NOWIc.KI bought three Detroit houses, sight unseen; locals help them. de'al with repalrs and tenants ..

[0

keep his costs down. The three-man

crew plastering. and scraping the interior agreed to do [he job for just $450, and Williams sa ys he ',\1 use even cheaper labor for step two: He can hire another local [0 paint the whole bouse for $75. Next, they pile into Woods's white van to check out the first potential buy of the day, a two-family foreclosure colonial with a rabbit-warren layout, offered for $2,900. It's one of two promising properties they'll see this morning, a rare occurrence; many homes priced this low are beyond hope. The day before, ell e pa if v entu red to all UJ:Jlamili ar n eighborhood to inspect a bungalow for an out-of-towninvestor; They were shocked by the apocalyptic scene. Several homes

This block, however, looks well rended, and while Woods and a friend shoot a video ("It's musty and has a smell to it, but that's okay! "), Williams does a quick inspection. Aside from a hole in the ceiling, the bouse is in good shape, empty but for an old Xauax bottle lingering all the windowsill. "I'd be willing to live here, " says Williams. He tells Woods to call the broker and offer $1,000. Wouds goes to work right away. "La rrinal" he shouts into his cell phone. "We'd like to make an offer on the Tyler property." "A thousand dollars," Williams reminds his friend. "Eight hundred," broker. Woods tells the

pitch. "France is not too far away," he told the caller, "I have investors in

Lithuanial" He talked up his properties' cash-How potential, the care he put into choosing neighborhoods and homes, the convenience of hiring a local property manager. Within 20 minutes the caller was practically begging to see a list of available properties. Burgess, 29, is already a local realty veteran. Along with his wife, jeanna KieWe, a former ballerina with Lady Godiva hair and a business degree, he bought his first Detroit home in [be summer or 2006.
Six months later the couple moved to the Motor City to work the market fullrime. They now own 13 rental properties, but their focus is on thei r rehabbi ng'and-flipping operation, Urban Detroit Wholesalers. WOlrking 16-holll days out of a restored warehouse, they've Hip ped homes to 43 buyers, many of whom have never set: foot in Michigan. Burgess says that compared with folks who lost 40 percen tin th e stock 11111 rket last yea r, he's

on rhe block had been demolished.

Va-

cant lots had reverted to prairie land. The remaining properties were ca ving in, burnt-out shells with smashed windows and missing doors. 'Woods had to can the investor and break the news: The block wasn't fit for human habitation.

ONE RECENT MORNING, JEREMY
Burgess, a rising star on Detroit's homefJi pping scene, was interrupted at his desk by a call from France-eanorher potential investor with the usual qualms. Burgess immediately launched into his

•••

~ ~

§

i~

-0

'~ (]

74 SIYIARTMoNEY

JUNE 2009

TWE.NEWPAospeCIDRS

doinggreat, "I'm up about 100 percent," he.says, '<How about you?" How do you make a profit in a market where prices have been falling 4 percent a month? BUTgesspoints to three small sections outlined in pink on his ciry map-c-areas where [he average income IS high enough to support dece nt ren ts.and residents take ca re of their property. He buys homes in these neighborhoods at bargain prices, submitring hundreds of lowball offers to banks and taking the handful that pan out. He gets a rehab discount through a partnership with Motor City BLight Busters, a nonprofit that trains ex-cons tor new [obs by putting them ttl work Oil Burgess's homes. But Burgess is really selling what
beldescribes as a hassle-free investment for our-of-rowners who want Detroit

propeny without the Detroi r experience. A typical. client is Paul Belt, a former military-systems analyst who lives in a srnal I town in Nevada, east of Lake
Tahoe. Belt, who has never been to the Motor City; spent two years researching the market but coulda 'rtake the plunge. Then last December he stumbled on a promotional video for Urban Detroit Whole~aJers in which Burgess says, "Investing in Derroir is like walking along the street and shoveling up dill. moods." The video explains how his company screens the property, dears TaX liens, oversees the rehab and installs a tellant: "No more sleepless nights!" A few weeks later Belt wired Burgess $30,00D for a 7S0-square-foot bungalow-vplus $7,500 to cover the rehab. "Someday, I'm planning all RYJ:ng out there and taking a look at it," Belt says.

lfBe.lr made the trip, he'dfind a typical Detreit bungalow, neat as a nunnery, with ceramic tile in the kitchen, a fresh coat of tan paine and a postage-stamp front yard. He'd also see several similar homes on the same well-kept block selling for less than $10,000. As ir rums OUI, Burgess paid just ,'b.8,OOOfor Belt's home in foreclosure las; OCtober. While he had to pay $6,000 in liens and dosing costs, he still doubled his investment when he sold the home to Belt, Belt says that's /:ioe with him, if be gets the expected $850 rent, his $37,QOO investment will soon pay for itself. And who knows bow much it lIlay be worth
10 years down [he line? Everybody laughs

when they hear he's bought a house iu Detroit, Bel t sa ys, but he's certain the city will stage a big comeback. After all, ir
can't get any worse. "Detroit," "is too big to fail."

e

be says,

:
g

DEEP-DISCOUNT
Fa"lling prices don't alwa,ys equal a good bu!/, but neighborhoods likely to take off. Wrth help from brokers and Andrew Schiller

DOMICILES
factors are more we looked at four hard-hit cities.

where prices are low relative to rents and demographic

8
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at NeighborhoodScout.com,

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3u-mont!! price drop: I? percent M~dian homepric~: $110,000 Fureclosure rate': 4:5 percent Atlanta's fore closure rate is up 36 percent over last year • .Bul investvrs am II o~king to the sou the~sl burbs, wh ere prices have fail en by half, says RelM ax agent David SGhen ~k. Exh ibit A: easlernslrotc:hes of Detalu r, wherea $3 5,000 IliJ1Je-be droom ran eh hom e can rent 10r $800 a nionth. (SGh n ref likes a pricier area SUmJunding Wash in!flvn MfrlilOrial GardfiJ1S cemetery.j A riskier opoon is AUanta's histori n West .Eod, a genli:ifying a J1J3 wb ~reprices nave fallen 15 peICe nt after a s~ata of mortgage fraud.

30·mollth prine drop: 48 percent Median home price: $118,000 Fureclosure rate: 1 O. B percent Ph oeni~ is the ninlh"~eaviest lore closure market in 1I\e n lttiDn, .and the sirualion is the- mort dire far fmm the ci~ center, where invesrorsare gollblin.g up small hmilfrs. in pop-up town.> like Gueen Greek and Mancopa ~it~. A $100,000 Ihre e-b ed roem heme wnl fetch $900In rent leaving you $200 10 $JOO P Illm after maltgag e payments. .says ag ell!:' Jim Ortman . .But the fhst areas to re gain their v~lu e may be more establ~hed, clo.eHu-dow~tllWn com mu ~ities with ~trong ~i:h Dols, flke Sc~ttsdale and Chandler. FO~~<l$I: Prices stili dl~lng,

.30·mon1hprice drop: 43 percent

Median home price: $145,500 Foreclosure rate: 1-0.4 percent Orlan d D has twi~e as many fore QI sures o I~jsspring than 'Iast a cGQm iTtg to research jirm RealtyTrac: th e shvrlterm au tiockisgrim. Sti Il, Schllier sees promise in .srud~nt-hIlllVY s~bdMsion.'i near the. intersection uf expressways 417 and 408, llive.lors, meanwhile, like Ih~ MBtro WIlS! section,.wflcre twobedroom cond oslhat said fet $200,000 Itt tlm markel's. peak am '>f IHnUfori ess than $50)100 but fetch tents ·of $900 10 $1 ;200 a month, Jusl watch out lor riSing horne IlWIl ~rs.,a.soc iation I~es, Sllys C enttJry 21 agent Vifie ant PatgH.
fu.. ~~~ Near-term look:> bleak.

30-munth price dro.g: 15 percent Median hame price: $104,000 Fareclasure rate: 3.5 P e ro e n t Cleveland never enjoyed th.e h u~sin g boom, se llJe price slide has been g entl e. You can buy a house In the city fDr $5,000,. but broiler David Ba IT SllyS til e bE!tlcr bill Iilianl be in up.'ical e suburbs Shaker Heig hts or LakewQod, wh ere a muMam i Iy hom e GO ul~, bring in $2,000 a m ooth in rent Shake r Heights i.s chea per, wHh homes in the mvm modest sections ·seDingfur IIl.'i.I tIlan $60,000, but ~1e town requires invastorS to put 1 ..3 limfs expected renovallvn costs inl!S[:J1lw: I:.airewood. o\\lllers dent lace that requirement rv'~ml: Relatl~elY stable..

JUNE 1009

SNlA.RTMON"EY 75

smarts
I

76 SMARTMoNEY

JUNE

2009

SMART PATIENT

Health Care In a Hurry
Store-based medical clinics have expanded tenfold in the past two years. Looki ng for a flu shot and sinus relief we visit some of the biggest chains.

u.s.

By Angi.e

c. Marek

I

starts out like any routine doctor visit: A medical assistant greets t us at the reception desk wi th a plastic clipboard. Reading ma terial ranges from the usual well-pawed magazines to brochures for

diabetes management and cancer support. A fellow patient-in-waiting furiously thumbs away all his BI ackBer.ry. The only thing we don't expect as we sit filling out our insurance paperwork? Getting bumped ill the shin by several passing shopping baskets. You may have noticed one at your local drugstore or supermarket, just up the aisle from the mouth wash and Flintstones Vitamins-a retail health clinic, where the doctor (or more likely, the nurse-practitioner) is almost always ill. With the battered economy putting more pressure on people's ability to cover health costs, and the ranks of primary-care physicians dwindling, analysts say these clinics could become a nifty niche for drugstores (CVS pharmacy, Walgreens), supermarkets (Kroger, Cub Foods) and big-box chams (Wal-Mart, Target), which have shoehorned about 1,100 of them into stores. Indeed, while their growth has slowed

u.s.

lately, the number of clinics shot up tenfold between 2006 and 2008 alone, drawing nearly four times as many customers over the same time period. One maj or drawing card, of course, is price: They're cheaper than doctors ..The Deloitte Center for Health Solutions recently found that a typical clinic visit COStSbetween $50 and $75, compared with $55 to $250 for a physician. (One clinic even recently announced that it would waive sick-visit fees through 2009 for anyone who can prove that they are both unemployed and uniosured.) The mam reason people go this route, though, is to save time. With names like Minuref.linic and Curaquick, these facilities promise vaccines, simple screenings and treatment for routine illnesses, like ear infections or pinkeye, with Jiffy Lube speed and couvenience.Jn fact, while most doctors still live by the 9-to-5 credo, retail clinics offer evening and weekend hours that work better with Americans'

JUNE

1009

SMARTMONEY

77

ar

pe di 9
the clinics might lean toward overprescribing meds, a charge the chains deny. CVS pharmacy's MinuteClinics, for One, says its protocol is not to prescribe antibiotics unless a patient meets weeknight around 7 p.m., we

have 'the place to ourselves, so the nurse-practitioner ushers

us fight in for our Ilu shot. The clinic turns out to be roughly the size of a small
kitchen pan try (8 square feet), with few trappings of a doctor's office-no visible exam table and no eye charts. Instead, there are a few plastic chairs, a supply cabinet and a desk, on which sira computer and a borde of h and sanitizer. While this location has a small sink, not every Min uteCIinic does. Donna J eskey, then opera rions mannger for MinureCliJ,1ic's New Jersey locations, says, "Using hand sanitizer between each visit, like our nurses do, is [ust as safe-if not saferfor the pa tien t." Still, the company says it is currently in the process of retrofirting all of irs eli nics with sinh. As our nurse gives the: syringe a preparatory flick, she tells us how busy she's been, administering 50 flu shots alone the day before, Turns out, the majority of the company's fall and winter business comes from Au shots-a service it aggressively promotes in stores with frequent loudspeaker ads and cardboard placards hanging over nearly every aisle, To our delight, she also informs us that our insurance fully covers the $30 vaccine. "Nice insurance," she says. "Do you work for a hedge £W1d?" Then she fl:its over to the pharmacy to chat up customers waiting for prescriptions. "I call take a look a t your cold," sbe offers.

a strict list of preconditions;

for

s

a SIJlUS infection, for instance, you'd need to have been sick with symptoms like "yellow or green draiuage" for seven days and unresponsive to over" thecounter drugs. Clinic champions, however, remain bullish. "Years from now," says Tine Hansen-Turton, head of the Convenien t Ca re Associatlon, an industry trade group, "we'll say the clinics made Americans healthier because they let patien til get care earlier in th e ir illnesses, on til eir schedules." Unsure wha t to expect" we decided to give this new trend a tryou r, shopping our own minor ailments around these minuscule medical facilities.

As we pull into

CVSMINUl£ CliNIC agg:resslveiy promotes its $30 flu shots with in-slore signs and radio announcements.

hectic schedules,

And most take

major insurance. Still, despite promises of shorter waits, some clinics C:Ul ha ve long lines or such strict treatment limitations that patients often leave frustrated. Physicians ha ve raised concerns about whether store clinicians know enough about their patients' medical histories, especially those with multiple chronic conditions, like diabetes and depression. And with only about half of U.S. in-store clinics currently profitableand some drug c hai ns derivi ng nearly 70 percent of (heir revenue from the pharmacy eoun ter-s-critics wonder whether

the strip mall ill Riverside, Conn., we have no rrouble finding the large MinuteClinic sign above the CVS pharmacy entrance. Bur inside is, another story. The clinic is stashed in a far comer of the store; even standing 10 feet away we miss it-until the pharmacist points out a nondescript door and, next to it, a small check-in kiosk. Nearby, a Ilar-screcn TV displays something we've never seen ill a lifetime of doctor visi ts: a price list for the clinic's 30-plus services. There are treatments for routine ailments like strep throat ($77), bladder infections ($67) and swimmer's ear ($62), as well as well ness o ffer.ings like camp physicals ($59) and eholesterol screening ($45). Checking in on a quiet

At Take Care Clinics. tucked inside more than 340 Walgreens drugstores, CEO Peter Miller says the biggest challenge is
JlJNE2009

78 Sr-.1ATrrMoNEY

long lines, sometimes stretching almost two hours at popular
locations. And it turns out he

isn't kidding. Having developed a SOre th roat and fever the da y after a IlJaIOT holiday, when most doctors' offices ate clamped up tight, we drive to the nearest Take Care Clinic, located on a busy commercial strip in suburban Sr. Louis.
When we getthere, the check -in kiosk announces a full two-anda-half-hour wait, Had we known that we could, we'd have called ahead to the company's
[0

roll-free number
pUt

get the wait time and

AT mItE CARE C.UHIC the wail can be .Iong, but there's a toil-free number to callahead to put your name in the queue.

our name in the queue. 111e company says it also staffs some

clinics with a "concierge"

to

manage backups, but on this day there's none in sight-just a nurse pulling double duty. Between patients, she comes to tbe reception desk, takes am cell phone n umber and offers to call 15 minutes before she can see LIS (which she does). At least we don't end up trapped with the usual collection of magazines. Once Inside the clinic, it feels like a doctor's office. We find

ourselves oddly comforted by the front-and-center exam rabie, the standing scale and wall-mounted blood-pressure cuff. After taking a fairly detailed history and examining us, the nurse.asks what antibiotics we usually take, since we ger frequent sinus infections, she then prescribes a different one, explaining that it will keep lIS from developing a drug resistance. Two days

need additional information or a doctor referra I. (The company's nurses get bonuses, in part, based on customer satisfaction ra tings.) Tha t

follow-up is one way that, CEO Miller says, "we're putting the
patient first during every pan of the process." Of cou rse, the company's [lot above a little up-selling. Before we leave the

later, following Take Care protocol, she calls to see how we are feeling and ask if we

office, the nurse suggests we consider a neti pot-one of
Oprah's favorite sinus remedies, she says. "It's in aisle

we."

@

SIZE'560 clinics i,,25 stales LNSUIIA~CE:,98carriers sna S: lDCAll0Nl GVS pharmacy SINUSINfEC.TlDN:_$;:;..6:;c:2'-STREp.rRflOIlT: 77 FLU5H01": 30 COMJ\ilEfj;TS:.AGcredited'~y tile Join! CDmmissiCJ1,w~ich certifies hDSpi1aIs.1Mliilil)' to ~hone tI1eir nurse direoti'/ C1m fruStrale patiB~IJ;;tlle company &aY~ "it's a I~gistical i,,~Ii" and uffurs an BOO number ihSt£!,a . d

S!lE: 341 clinics in 19 states INSURANC~46 carriers !ITA lIS: LOCATIO~:Walgreens

SiZE:96 in nine states I"SIJ~A~EE:·31 carriets STAllS: lOC.lJlnN: Various .grocers SINUSINfEI:TlON: $59 STIIEP"rHiOAT:';::" ';"6""9 ------"FLU'SHOT: 15 tOMMUITS: Prices~re mte~ Illw~r tI1~n ~mpetiturs', but piWacy can ba,lao,klng: Some cliniCS ha\l€ frooted,glass watls tIwt don'trea~h \l1e CB~!ng. A .poke.person say., "[he !Iayout de~BrJ!Is M wllat the fBtailspaoo 1'1111 a~mrt

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tDMMUIS: This Te~s chain beasts unique Dlferi1i!)S like in-depth allB!iJII testing, travel vacdnations and aena ~atment-lIS well as private restnnms, !!&1lJ!lgemenhCKnllWledges long waillimell in its more popular c linies,

JUNE 1009

SMARTMONEY

79

• Rain Bird ET l\IIanager weathermonlfor. $700; www.(ainbIKl.com. • DrllJ":""it SQuirrel seffwatering tool, $'Ull"l'o'WltV .dl'ip-it-sVstilms.rom. • Ea$YBloom planl sensor, $61l; www.pl.antsense.Cljm. • Botanl c.a 115 ):IIant mon,ttot, $100:

www.botanicaJIs<cOm-

Sm r

pending

SmartConsumer

APRs~ 17 and 14 percent, respecti ve] y---o ffset any rewards they receive,
RATING: • Capital One No Hassle • Discover Miles Among credit card users, gift-card rewards are more popular man merchandise, hotel stays and gas rebates combined, according to J.D. Power. Yet most consumers who try [Q redeem rewards poin ts for gilt cards find th ey aren' r ge rtiug a full 1 percent return. Research firm Corporate Insight shows that two of the worst offenders are Capital One's No Hassle card, which gives just 0.74 percent back, and Discover's Miles card, which provides a mere 0.63 percent.. A spokesperson For Capital One says the company believes its card returns 1 percent in rewards, and Discover declined to -Neil Parmar comment.

**

Are Your Credit Card Rewards Rewarding?
The credit crunch might be easing, burcredit card companies are still cutting back-even on those prized rewards. Some cards used to award bonus points a fter the first purchase but don't anymore. Others are imposing stricter rules and fees upon redemption. We singled out SOtHe of the best and worst rewards cards available .. RATING: • American Express BlueCash American back au gas sta rion, drugstore and supermarket purchases. But to boost its rewards from 0.5 to 1.25 percent on aU other purchases, you'll first need to spend at least $6,500. "It's best suited for more aggressive chargers," says Curtis Arnold, author into retirement or brokerage

accounts ..Though neither card has an annual fee, late
payers might find that their

Money Savers on

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of CardRatings.com. RATING:* • Fidelity Retirement Rewards American Express Card • Schwab Bank Invest First Visa S ignatu re Among the newest and most lucrative cards, these two offer 2 percent cash back on retail purchases. But they're both linked to brokerage firms, and rewa rds get swept

Here are two ou tlels yo u probably dldn'L associate with barqsms. Twitter al"d Facebcok.lncreasinqly, corporate Arnertca is using the soclal-n etworking sites to offer exclusive discounte on everything from Amazon to Zappos In exchange for you r tnendslup-Le., the right \0 send you ads. "There's dellmleJy a business advantage to having a presence- there;' says Tim Ross, principal of Seattle-based re-tall-branding firm Kendall Ross. Recently, for example, becoming a Ian 01 Sears on Face-book gave shoppers two coupons for 10 percent off $50 purchases. online and In-store. And fol!owlng sale-tracking site TechBargains .corn on TWItter resulted in a coupon [or 20 percent off

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top marks for its rewards program in a j.D, Power survey last fall, and experts cite th is card as one or the best.It has no annual fee and provides up to 5 percent cash

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82

SMARTMol\1EY

JUNE 2009

Beating the Rate Hike On Car Insurance
Gas prices may be: back down to two

.YOUR MONEY.JS .. WORTH .
l?_rhwl11di_hers:,

1
I

-

-

-

~

:

bucks a galion, but the costs of owning a car may be beading up, courtesy of yow auto insurance. After two years
of staying flat, rates rose an average of

2.5 percent in 200S and could rise
up to 7 percent this year-the biggest increase in more than five years, according [0 brokerage firm Stifel Nicolaus. Some rips to avoid the jump:
• BARGAIN HARD. Insurance companies rna y refuse to budge if you as k for a rate roll back. But" there's always room to bargain,' says Michael McRaitb,

since a lawsuit aver a severe bodily injury could then wipe out your net worth. But opting for a higher collision deductible-from $500 on a typical po licy to $1 ,OOO-wuld knock 5 percent off the premium on [hat line of the policy, analysts sa y. Most consumers file claims only once every eight to 10 years, so you'Il probably come out ahead in the long run, says Jeanne Salvatore, senior vice president at

Worth It
The compact Soleus Air CFM-25E ($1 99) quietly sucks 25 pints -of water from the air each da)(.lt's easy to use and gets going quickly, eliminating mold and musty sme:lls withoU1olJetheating the space around it.

the InSUIal1Ce Inforruarion lnsrirure . Bundling your auto and home insurance
wi rn the same carrier could shave a few bucks too, as could trading in your car for one that's less costly to insure.
• G£TSMMlTBH ABOUT Cl1..i'.D1T.

director of Illinois's insurance division. One rhing your underwriter might do is app Iy new discou nts, Some carriers offer discounts for professional degrees-even a master's in education may qualifywhile others may apply a "persistency" credit just for being a longtime customer. If you've started working from home or get laid off, let your insurer know you're no longer commuting by car, You could save up to 10 percent, for example, if you now drive less Than 10 mites a day.
• TwEAK YOUR

Underwriters

use a credit-based

score

your premium-and if you have a few black marks all your record, you'll probably get hit hardest. Paying-overdue bills and fixing errors on your credit report are good places to stan. Using less of your available credit can hike your score too, according to Fair Isaac, the big credit-scoring fum. Insurers such as State Farm may also give you a break for a hardship such as a job loss, divorce or identity theft. Only certain hardships q ualify, and only if they negatively affect your score. But you won't get a break if YOLl don't ask. -Daren Fonda

to help calculate

Not Worth It
The Kenmore 35 pint-Dehumidifier ($159) gels the government's Energy Star rating but has tended to stop working after a year or two. The company admits to "problems" and says it's "continuing to advance the model." -Laurenee Witherington

roucr,

Most experts don't advise going with your state's minimum

lia bili ty coverage,

'"
c

_Q

J

"

JUNE 2009

SMARTMONEY

83

by Jason Kepha.rt

1. "Frankly. there are just too many parks."
FO R BUDG ET- .MINDED

2.."Our mission? We're confticted"
'WHEN. SUE RUDDY, a S6-year~old reacher ill Mich igan, grew tired of the anuua I summer tri p to Flori cia, she and her husband decided to rake a tour

adven turers

planning their vacation. America's 391 national parks and historical sites are a big dra w. Roughly 27S million visi tors a year trek to such natural wonders as the Grand Canyon or Jandmarks like
the Statue of Liberty, Unfortunately, their popularity is a double-edged sword, as the wear and tear caused by so many visitors leads to increased maintenance requirements-and costs. Keeping these sites in top condition is the iob of the National Park Service, a bu rea II of the Department of the Interior, Bur rhe sheer number it's responsible for, coupled wirh long-term

3. "We'd throw money at our problems-if we had it to throw~ OF ALL iHESITE.1} maintained by the Park Service, more than b.1II£ are
historical or cultural, such as Alcarraz

of national parks.with stOps in Grand Teton, Zion and Yellowstone, to visit [be geographical marvels of the U"5., she says. Visitors to national parks generally come in one of two varieties: Some are like Ruddy, who wants to experience the pa rks undisturbed by the outside wo rl d, wh de others come seeking differenr forms of recreation. "nUH creates some conflicts," Barna says, partie ularly arou IJd rhe issue of noise. The original Park Service mandate-e-which be says is
to "preserve

Island in San Francisco or Abraham Lincoln's birthplace in Kentucky" But
because of the lack of money for the upkeep of these places, many may no t be preserved for future generations. TIle National Parks Conservation Associa tion, a pa rks advocacy grou p, recently did a survey of the condition of sites, measuring the deterioration of historic buildings and artifacts, and overall, gave them a failing grade, says Ron Tipton, the organization's senior VP 0. f policy, who. oversaw the study.

uuderfunding, has left a $9 billion back log of rnai ntena nee projects. This year's operating budget of $2.13 billion-s-plus $750 million ill stimulus
money-s-will he] p . But the creation of new parks arid sires only compounds

and protect

these sites

the j_J roblem, says .left Ruch, executive director of the Public Employees for Environmental Responsibility. In the past ZO yea I~, the nu m be r has grO\\fn by 13 percen t, to 391. And don't ask the Park Service to pick and choose. AJl the parks and sires are equally important, sa)'!> Park Service spokesperson David Barna, since tbey"contribure m what defines us as Americans, "
84 SMARTMol'-J'EY

unimpaired and allow for recreational use"-wasn't designed to account for roda y's idea of recreation, including motorboats, fully equipped RVs and ubiquitous cell phones. One solution would be to split things up. Alre~dy, designated recreation parks, like La ke Mead io Nevada, offenlUrdooI fun that ranges from swimming to Jet Skiing. Meanwhile, wilderness parks, like Olympic National Park and Yosemite National Park. are great
Ior visitors who just want to

"It shows that the long-term condition is seriously threatened," he says. For example, the monuments and memorials at Gettysburg marking major baule sites are declining yearly, and there's no gua rarrree they'll be around 10 20 years, saysTipton, The main problem is lack of Funds, without

which

"it's hard for the Park Service managers to address those challenges,"

says Mike Cipl"a, the California Desert
program manager at the 'Nariona 1 Parks Conservation Association.

commune with nature.

Supporters can make a donation at Narionall'arks.org or via the donation boxes loca ted in ria tiona! park sites.

JlJNE2(}0\1

National Parks Wont Tell You

4. ~We're keen on expansion, not mainterraace" THE NO. '1 CAUS.E of fa tali [ies in
Death Valley National Park is singlevehicle car accidents, ofwhicb there are typically three to six a year, says Ten), Baldino, spokesperson for the park, "That's very high," he says. So you might assume thar mainraining the park's heavily used roads would be ar the top of the Park Service to-do list. But the main thoroughfare in Death Valley still has a very dangerous 13'Olile stretch, says Cipra-e-the shoulders are narrow, there's ba rely room for cars to pass each other, and. the pavemeur is chipping away."Tt seems basic that roads in the park should at least be drivable," Cipra says. Indeed, the past few years have seen a lot of "sexy ribbon-rutting things," says Barna. Bu r that's la rgely because of the Centennial Challenge, a 1O-year, $3 billion hmd-ra ising plan to match donations from private parties to build new features inside parks, like visitor cen ters, fa ther tha n rai:l<le the long list of maintenance issues-which

5. "Honk if you love crowds!"
ll\l THE LATE 1990s the nurn her of annual visitors to national path peaked at over 285 million, then fell off after 9111, bottoming out at 266 million in 2003. But in recentyears, attendance bas bounced back Nor surprisingly, the most popular parks are leading the way, seeing some of the biggest increases in attendance numbers: Last year the Grand Canyon had 4.4 million visitors.u 7 percent increase from 2003, and Zion Na tioual Park accornruoda ted 2.7 million people, a 9 percent increase from 2003. Unfortuuately, that's not necessarily good news for visitors. "The popular parks are getting loved to death, .,.says Ruch,

6. "They're not called the Great Smokies for nothing.~'
HIKING IN TI-£E Smoky Mountains this summer could lea ve YOLI out of brea th.-and it lllay have little ro do with fitness. The Great Srnokies are in one of the most polluted national parks; on some days the ozone and particle levels are OJ1 par with New York or LA. Wind currents b ring in pollutants from Knoxville, Tenn., and Obio, which, due to the orientation ofthe mountains, get trapped in the park, In fact, 011 J 7 da ys last summer, wa rnings were issued rhar the air quality was too poor for, say, a vigorous hike, according to the conservation association. Visitors to Shenandoah 111 Virginia used to be able to see the Washington Monument, over 80 miles away, frOIll points on the park's Skyline Drive. But today you might not be able to see a single mile. Unde.r the Clean Air Act of 1977, the Environ menta I Protection Agency was supposed to prevent significant deterioration of air qual ity in national parks, But it's complex, says Tipton, since rherwo main causes are cars and coal plants ..The EPA says it has responded to che problem with its Regional Haze Prognlll1, which calls fo r state and federa lgovernment to work together in improving visibility conditions in parks=-by 2064.

Trying to vi si r the sou th 16m of the Gran d Canyon in July, for exa 111 pie,
could leave YOlI searching for parking for over an hour, says Tipton. Try the north rim instead, says Deborah Trevino, an Illinois-based travel agent. "I t's II lot less crowded, and you don't have to take a shuttle bus." Another good way ttl avoid the tourist swarm is ttl get out of your car and explore 00 foot; most visitors stay close to main rhol"O\Jgh fares or parki ng areas when

in tum creates additional

maintenance

requirements for these new features. It's a real problem, says Barna. "We neglect to take. into acco unt the futll re operating costs of these facilities, and tha r's part of the burden."

visiting national parks. Ask at the
visitor center for advice <.,J1l getting a little further off the beaten path.

me

J1JNE 2009

SMARTMONEY

85

access

which is supposed to give you the en ti re park. But those fees don't necessarily COver hikin.g and
to

carload,

camping in the backcoun t'Y, the pa rt
of the park that hasn'r been developed for visitors. To do that you need a permit, which can COSt up co $25, and you may face extra charges for every night you spend there. Before the 19905, all backcounrry permits were free, They were used LO cap [he number of visitors in those areas at arty one rime, in order to limit the impan Oll the na rural euvironmen r. Bu rIree or not.these passes remain in high demand; you generally need to app ly for one a [ least three months in advance. To do so, conracrrhe perk's visitor center,

mountain biking on their trails. Visitors to Grand Teton Narional Park, fur example, can also hit the Bridger-Teton National Forest righr next door for unlimited mountain biking on all its trails. in Bridger-Teton YOl1'Jl6nd 4.4 million acres, roughly twice the size of
allow unlimited Yellowstone, where mountain bikers can ride on auy trail they like ..

1 "Good luck finding a ranger this summer." ONE ONGOING IS8~Tefur national
parks isthe lack of n;mgers. National Park rangers=-who serve as both security staff and as tour guides->are generally considered to be among [he best in the world. But during peak season, during the months of July and August, 11;,') tiona I parks routinely rely 011 volunteers CD serve as tour guides, since due to budget constraints, they often can't hire enough rangers [0 accommodate the large crowds. Tha t means getting a guod guide often becomes a "crap shout" at best, says Tipton. The good news is that 'the Park Service is planning to add 3,000 seasonal rangers this year. But even so, you still ha ve a nether option at many locations: Visitors can download all audio Of video podcast to their smartpboue. Don't have one? At Shenandoah you can rent a CPS Ranger loaded up with pack information, Not all the parks offer such u [\.i ts yet, btl t there .are plans in the works ['0 use technology to improve [be visitor experience across the board.

10. "In our lodges you're paying for loeation,. not luxury:'
ONCE YOU'VE MADE your decision to visit a national park, you're going to need to figure OLl [where to Stay. If you 11ave your eye Oil one the iconic lodges right inside a national park, be ready [() pay luxury prices, anywhere

or

from $150 9. "There's trouble brewing between hikers and bikers:' If YOU WANT'TO go mountain
biking in the wilderness of a national park, your options might seem pretty limited. You generally have to stick to the few parks-e-snch as Canyon

to $600 a nighs, for what most people woul d n'r necessarilycall luxury, says travel agent Trevino. Jenny Lake Lodge ill the Grand Teton National Park, for example" costs $585 a night for ,1 room for two.

Lands National Park ill Utah=-that
have desiguared mountain-biking paths. But there might be more paths on the way: Nea dy 8 million acres of hackcountry all aCI'08S the U.S. could eventually be opened 'to mountain bikes, depending on a proposed review of a lO-year-old regulation rha t made ir difficult for parks to implement that change, If such a change were made, trails that are currently opel) to hikers and horseback riders conld also be open to mountain bikers=-

'What do you get for that kind of money? Complimentary breakfast, a five-course dinner and the use of horses, What's more surprising is what you often don't get-there's no te levision, 110 radio and nQ Wi- Fi access in many of. these lodges" So regardless of which park YQu'(e in, be prepared [,0 go rustic. "Most of the lodges are ve F'J basic, " T rev ino says. "You might get lucky and have a TV iu some.
M

8. "Real wilderness? That'll cost extra;' TF YOU REALLY want to rough it, build your own campfire, took yOlJI"
food and sleep under the sta rs, then a National Park's backcountry is where you want to be. Entrance fees to smile of rhe most popular parks range anywhere from $5 to $25 a
OWIl

a move hiking and riding advocates say could be dangerous. Besides
the extra wear mountain hikes would leave on the trails, the mere sight of an off-road Lance Armstrong (Quid readily startle a horse. One alternative for mountain bikers who don't want to wail is ro visit those national forests that

Looking for a more modern accompaniment to your nature !:,'<lZI Try checki ng out the horels ng? near, Pur not ,j nside, the na tiona I parks. 111ey're generally 1 0 to L5percent cheaper than on-si te lodging. To lind

a Iist of places to sta y both ina nd around the parks. go to www.nps.gov, search fol' the park you plan to visit, then dick {~!l Plan My Trip .•,. "
You'll also find informacion there on making camping reservations, 0

86 SNlARTMOl'JEY

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Tough Customer Anne Kadet

Mourning Our Money
As losses from the market crash continue to sink in, Americans are heading to the therapi sr's couch.
AN1-IATTAN GRIEF COUNselor Diana Nash typically sees clients who are struggling with the loss of someone dosf'---"<),pa rent, a child, a spouse, But lately, she's taken on a handful of clients

mental bargaining? So maybe we WOn't see the Dow at 14000 again in our lifetime-well. settle for keeping our iob, Even if our j osses were 111 inor, 1Ila.I1Y of us still get jittery over rhe

headlines: GE's CEO Jeffrey Immelt recently referred to his da scan of The New York Times and The Wall Street

uy

[ournal as [he "hour of doom." W'hilemost of us muddle through
Iust fine, some- people becomecomplerely overwhelmed, says Nassau Guida nee & Call nse ling Centers director Kathleen Dwyer Blair, who COLU1SeiS several iJ1VCstO[S. And as anyone who has.mffered a major loss can tell you, actions spurred by grief-clouded tb inking can make a rough situation worse. Take it from William Volk, 52,. a California entrepreneur. In 2000 he bad three kids in private schoo [,

who want help dealing with a differentki nd of loss: a gu reed retirement accoun t. Though months have passed since the market meltdown, they still can't deal with [he fact that their nest egg is fried. "Some of them can 'r get out bed," says Nash.

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Yes, people are starting to see grief counselors for [hell- market losses, and in some cases employers are footing the bill. Ken LeBeau, director of employeeassistance programs for health care giant Cigua, says that since last fall, call volume grew 25 percent thanks to aU the folks grappling with financial fears, while calls seeking immediate counseling rose 60 percent. "The sense of urgCDCY increased drama tically," he says. We ali feel it to some degree. Unless you were a lready broke when rhe rna rkers started crashing last fall, the economy bas probably su bj ected you to a tiresome pa rade of unpleasant feelings. III fact, the stages of grief, first identified by Elisabeth Kubler-Ross to describe the experiences of the fenninaJIy i II, apply rather nearly to folks who suffer major market losses. There's the denial: refusing to open your account statement. Then there's the anger, which explains the ongoing national temper tantrum aimed at targets like ArG and Bernie Madoff. And who among IJS hasn't done a little

a IUCTa rive chief technologist job at a booming dot- com and a few million in employee stock. By 2001 he found himself hounded by bill collectors and scram bling for a consulting gig. Then came the divorce. He recalls OD~ evening when he stopped for gas and rea.iized he had only enough in his bank account to get him home. Nut surprisingly, his loss made him a Iirtle 11urry, "But a t the
rime, you just aren't aware of it, " be says, When his company folded, for example, Yolk put on a bra ve face to his farni ly, They continued the private schools, vacations and restaurantsHad he faced facts

earlier, he says, [hey might have kept the house. Later,
he wasted time ruing his mistakes and blogging bitter rants about the dot-comhipsters who ruined things for legitimate businesses. Utterly convinced that life would never imp rove, be took a series of bad gigs. Things ha ve brightened considerably since then; he's engaged to be married and managing partner of a mobile technology finn. But life might have turned around faster, he says if
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he'd dealt with reality rather than reacting to his loss. As usual, OUI friends in government are one step ahead. The Substance Abuse and Mental Health Services Administration recently produced a brochure, "Getting Through Tough Economic Times," that suggests we "keep things ill perspective" and engage in "positive thinki ug, " You have to wonder if the Feds aren't a little grid-addled themselves. At least there's one sunny side to
the economic
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mess: more work for grief counselors.
ANNE KADET

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reach senior writer

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akaciet@sl]J<lrtIlloney.com.

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