This week Time Magazine had a thought-provoking article titled Why it’s time to retire the 401(k). The article is pretty long and detailed and as you would expect it points out many of the flaws of the 401(k) and argues that for many people it is doing more harm than good.

History of the 401(k)

The article starts by going into the history of the 401(k)…

“Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation’s retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that’s exactly what happened.”

and…

“Congress was trying to close a loophole on executive bonuses when it created the 401(k). Most companies intended 401(k)s — which were originally called salary-reduction plans but then renamed for the portion of the tax code that makes them possible — to be a perk for highly paid executives, not a pension replacement. That’s because lower-paid employees probably could not afford to defer a portion of their paychecks. So companies held on to their pension systems even as they added 401(k)s, which by law they had to make available to all employees. When the market took off in the 1980s, the rank and file clamored to get in.”

Recent Performance

The article points out that, “from the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%.” My 401(k) actually almost fell 40%, but who’s counting?   The article goes on to present a few more dismal retirement figures…

“The average 401(k) has a balance of $45,519. That’s not retirement. That’s two years of college. Even worse, 46% of all 401(k) accounts have less than $10,000. Today, just 21% of all U.S. workers are covered by traditional pensions, and the number shrinks every year.”

The 401(k) Alternatives

The article continues by suggesting a few alternatives to what we know as the 401k…

• “The most popular solution is the so-called automatic 401(k). Under that plan, all workers would be enrolled in 401(k)s when they’re eligible. Companies would establish default settings to boost returns and make the portfolios safer as workers near retirement.”

• “Teresa Ghilarducci, an economics professor at the New School, has proposed a plan in which the government would divert 5% of everyone’s wages. In return, you would be guaranteed in retirement a check for 26% of your final salary every year until you died.”

• “The ERISA Industry Committee (ERIC), a group that represents the nation’s largest employers, has proposed a system of exchanges that would allow individuals the ability to buy a guaranteed retirement account on their own. Some government regulation would be needed, but it would be a private plan. What the ERIC plan and others like it are essentially proposing is a form of retirement insurance. So instead of putting 6% of your salary into a 401(k) or some other investment account, each pay period you would send 6% of your check to a retirement-insurance provider. The policy would work similarly to a traditional pension in that it would provide a guaranteed monthly check equal to about a quarter of your final pay, from when you quit working until you die. Some employers might even be willing to pay the annual premium as a perk. If not, employees would pay for it much as they currently fund their own 401(k)s. But the policy would be portable. Contribute for 30 years and you would be guaranteed income in retirement, no matter how many employers you worked for. Combine your retirement-insurance check with the money you get from Social Security, which can equal as much as 50% of final pay, and presto: you have something approaching retirement security.”

Thoughts

Since so many companies are saving millions of dollars by offering 401(k) plans rather than pensions, I don’t see pensions coming back in style. But it is scary to me how many people put no thought to their retirement – and without a pension, they will be trying to survive off of Social Security (if it is even around).

I think some of the 401k alternative options could have some promise, but I think education is the key. We have been trained to brush our teeth every day because we know that if we don’t our teeth are going to fall out. You would think that we should know by now if we don’t save for retirement, we will be eating Alpo in retirement (as Dave Ramsey says).

But that only takes care of one half of the equation, once people understand that they have to start saving, then we have the challenge of investing wisely in the 401k – which is another can of worms. One thing I liked that my old employer did was that they had a staff financial planner available for any employee to visit to discuss 401k allocations. It wasn’t a perfect solution, because it still required the employee to be motivated enough to set up an appointment, but it seemed like a step in the right direction.

(By the way, if you are looking for a great book to help you pick your 401k allocations check out The Shortest Investment Book Ever)

So, I want to hear what you think. Do you think killing the 401k is a good idea? Should we just start from scratch? Or should the government force companies to offer pensions again? Thoughts?

Bob enjoys dark chocolate, paying off debt, giving, Foosball, loose-leaf tea, helping people succeed, learning, anything God created, playing guitar, doing things the "long" way, Philippians, excellence, Chick-Fil-A, and making his wife smile. He started ChristianPF in 2007 and has been having a blast ever since. Find him on Facebook & Twitter.

Sorting out Retirement Solutions for the Small Business Owner

Five retirement plans you may want to consider

Many times people come into my office looking for advice on how to appropriately plan their financial future. Asset location is often just as important as asset allocation. While asset allocation looks to spread your assets among many different assets classes, asset location helps you spread your assets among taxable, tax-deferred, and potentially tax-free accounts. Many who are employed by a corporation have retirement planning options at work, but what about the business owner? How do you choose the best location for your assets and that of your employees?

So you own your own business, who’s planning your retirement?

If you own your own company and want to have a retirement program for yourself and possibly your employees, here are five plans you may want to examine.

1. The SEP IRA.

A Simplified Employee Pension IRA plan allows you to make contributions toward your retirement and your employees’ retirements. You can also enjoy the benefits of a SEP and still add to other kinds of retirement accounts at your business simultaneously. The limitations are generous also. For example, A SEP IRA allows business owners annual tax-deductible contributions equal to 25% of your compensation if you set up your business as a corporation. As a sole proprietor you are allowed to contribute 20% of your self-employment income.

2. The solo 401(k).

Many ignore 401(k)s once they set up their own business because they are unaware that they are a possibility. You are allowed to set up 401(k) when you are self-employed. You can include yourself, your spouse (if he or she is an employee), and other employees.

Solo 401(k)s also have a profit sharing twist. They may be funded by the employee through deferred compensation and the business as a percentage of profit. The annual contribution limits are $16,500 for those under age 50. If you are over age 50, you can put in additional $5,500. Additionally, solo 401(k) plans allow you to make tax-deductible profit-sharing contributions equal to 25% of your compensation (corporate entity) or 20% of self-employment income (sole proprietor). You also have the potential to set up a solo Roth 401(k) for potentially tax free growth. However, there is more paperwork and cost to set up as these plans do require a third-party administrator.

3. The SIMPLE IRA.

SIMPLE plans as they imply are very easy to create. They also have very low administrative costs and no annual IRS reporting requirements. Both of these advantages make these plans attractive to business owners who like to keep it simple! You simply set up a traditional IRA for each eligible employee. The employee can then contribute to the IRA on a tax-deferred basis via payroll deductions. You then choose to either match the contributions of plan participants or you can contribute a fixed percentage of all eligible employees’ pay. The employees fully own all the money put into these plans.

4. Profit-sharing plans.

Do you want to compete with larger companies for talented employees? Profit sharing contributions are usually deductible at both the federal and state levels. They also share generous contribution limits (equivalent to a SEP). Annual tax-deductible contributions may be made according to the 25%/20% rule depending on your business entity. Contributions are not required. If your business cannot afford to make contributions during a down year, you can choose to skip payments. Any assets placed within the plan grow tax-deferred.

5. New comparability plans.

These plans are essentially a profit-sharing plan set up to reward senior or key employees more than others. The most appropriate use of this type of plan is when you have a small business with multiple owners having similar incomes but varying ages. Keep in mind: These plans must be tested to meet Internal Revenue Code nondiscrimination requirements. It’s most attractive selling point is the different levels of compensation allowed to be contributed to different groups within your business.

Which plan is right for you?

If you are thinking about putting a plan into place or switching to a retirement program more easily administered than the one you have now, don’t go it alone. Talk to your CPA, a financial advisor, or professional with expertise in the retirement plan marketplace. Which one should you choose – and what is the next step? Take your first step today by seeking to find a professional who can help you review your options and find the most appropriate solution that fits your company’s needs.

Jay Peroni, CFP is the founder and editor of FaithBasedInvestor.com, a Christian stock investing newsletter. He is an author, speaker, and financial advisor. He's been featured on Crosswalk.com, TheStreet.com, and here at ChristianPF.com. Jay started FaithBasedInvestor.com to help investors find investments they can be ―"proud to own". For a FREE report on how to screen your investments and build a winning portfolio, go to FaithBasedInvestor.com.

When you buy low and sell high, investing is easy!

3 stock market investing traps to avoid

If we all knew the exact time to buy and the exact time to sell we’d all be rich and there’d be no point to talking about investing. Few people, if any can know exactly when to buy or sell with any degree of accuracy. Most investors get it completely wrong. Need proof?

If you analyze data from the Investment Company Institute (ICI) and look at the all time highs of the stock market (such as October 2007: Dow 14,000), you’ll see the greatest number of people buying and when you look at some of the lowest points of the market (such as March 2009: Dow 6,600), you’ll see the highest number of people selling. This confirms that most people buy high and sell low. This is the exact opposite of what they should be doing!

Let’s look at three investing traps that leading to buying high and selling low:

1. Following Investment Fads

Since 1990, we’ve seen investing fads come and go. In the 1990s it was technology stocks, followed by real estate, and then it became oil and gold, then emerging market countries like Brazil, Russia, India, and China. Today many flock to any form of green or environmental investing. Investment fads are only in vogue until everybody knows about them. Once they become cocktail party conversation, financial magazine material, or an internet sensation, the fad is as good as dead on arrival.

I remember late in 1999 when I received a call from one of my beloved clients Molly. Molly was in her mid-80s and a very conservative investor. She was wondering if she should sell many of her dividend stock investments and put them into an Internet mutual fund. I asked Molly about her nearly 30% return from the prior year. Was she not happy? She said she had a friend (and everyone has one of these friends) who made over 100% the prior year in an Internet fund. After explaining the risks, and discussing her personal situation, I talked Molly out of investing in the Internet fund. Not that I had a crystal ball or anything, Molly had no place being in the internet.

Normally a fixed income and dividend stock owner, this would have taken her risk level from a 4 all the way to a 10. Molly took my advice and we all know how the Internet story unfolded. I don’t always claim to get it right when it comes to trends or predicting short-term movements in the stock market, but what I can spot are troubled signs that a strategy is headed for disaster. Human nature drives people to invest in fads only after prices have already risen. This means those late to the game are the most apt to get hurt. We only hear about a trend after people have already been successful making it less and less likely that you can follow their success. Instead, you need to figure out how to buy low and sell high. Here’s a hint: investing in fads is not the way.

2. Falling for the Media Madness

Money magazine, Fortune, USA Today, CNBC’s Jim Cramer, Forbes, you name it, they are all there to entertain! Let me repeat this they are all there to entertain. This means sell you something! If you don’t tune in, buy from their advertisers, and continue to frequent them regularly, they go out of business. Bold headlines, irrational advice, entertaining news, sensationalized stories…it must capture your attention.

How poor is the advice from the media? In 2000, Case Western Reserve University conducted a study showing that investors who follow media recommendations lose 3.8% of their money in the following six months after the recommendation. So why do so many people blindly follow the media’s investment advice? Predictions made about sports, weather, and Wall Street make good conversation pieces, but poor investment strategies!

3. Buying the biggest, best known companies

When it comes to investing, many turn to the well known well established institutions. After all they can’t fail? Wait, Enron, Worldcom, Lehman Brothers, and Ginnie Mae to name a few, were giants who became extinct just like enormous dinosaurs. Bigger is not always better! In fact, much of the growth for many companies takes place within the first few years of operation.

One of the biggest advantages of investing in smaller, lesser known companies (small-cap stocks) is the opportunity to outperform many institutional investors. Many mutual funds are limited from buying too many shares of any one company’s outstanding shares. This prevents some mutual funds from giving many small cap stocks any meaningful position in the fund. Because many of these same companies have fewer shares traded, a larger fund also risks bidding up the price of the stock.

Bloomberg provided further proof that the largest companies aren’t always the best. Their publications (as of December 31, 2008) show that 49% of the companies in the S&P 500 (largest, most widely known companies) had lower prices in 2008 than in 2000. In fact Merrill Lynch lost 78% in 2008, AIG lost 97%, Fannie Mae lost 98% Freddie Mac lost 98%, while Wachovia lost 85%. Still not convinced?

From 2000 to 2002 GE lost 53%, from 1999 to 2005 Coca-Cola lost 40% within seven years, from 2000 to 2002 McDonald’s lost 60% in three years, even trusty old Wal-Mart lost 37% from 2000 to 2007 (a 8 year span). These are some of the largest companies in the entire world. If they can lose almost half or more of their value within a relatively short period of time, biggest isn’t always best!

Don’t get me wrong, large company stock has its place in a portfolio. My point is just don’t assume that because you’re buying the biggest and best companies you will profit. As they say “timing is everything”.

In order to truly understand an investment opportunity, much homework is needed. You should evaluate a company’s financial potential by looking at a wide number of financial data available at sites like Morningstar.com, valueline.com, zacks.com, and Yahoo Finance to name a few. Avoiding these three traps will make it much easier for success.

How do I evaluate an investment opportunity?

I avoid mutual funds like the plague. They are too many fees, costs, and few perform well over longer periods of time. Instead, I typically invest in a well diversified portfolio of 20-25 stocks I know very well that line up with my faith and values. Some of the key qualities I look for include companies with:

• Great products and services in an expanding industry
• Strong managers with significant insider ownership
• Strong balance sheets with little or no debt and plenty of cash
• Commitment to returning value to shareholders in ways such as paying a dividend or repurchasing shares
• Strong cash flows, increasing revenues and earnings, improving margins, extremely attractive valuations
• Above all, no involvement in any immoral activities (abortion, pornography, embryonic stem cell research, homosexual activism, etc)

Jay Peroni, CFP is the founder and editor of FaithBasedInvestor.com, a Christian stock investing newsletter. He is an author, speaker, and financial advisor. He's been featured on Crosswalk.com, TheStreet.com, and here at ChristianPF.com. Jay started FaithBasedInvestor.com to help investors find investments they can be ―"proud to own". For a FREE report on how to screen your investments and build a winning portfolio, go to FaithBasedInvestor.com.

It’s not what you earn, it’s what you keep

Grandpa should have listened

How many times have you heard, “it’s not what you earn, it’s what you keep”? I sure wished my grandfather had paid attention to this principle. However, if he had I may not be a financial advisor today. You see, I got into this industry because of my grandfather, who was quite possibly, the hardest working guy I ever knew.

Willis worked three jobs to put food on the table for his wife and seven children. He retired with nearly $500,000 and a pension. He put his life savings into CDs and then inflation, taxes, and eventually the nursing home took everything he worked for. I saw this as a teenager and got into the financial services industry to make a difference. Today, I treat each client like a part of my family and give advice based on the best available information and options available. It breaks my heart to see so many people allow the “three great enemies” to attack their life savings.

What are those three enemies?

• Time – will we have too little or possible too much time (outliving our money)?
• Taxes – will we pay too much in taxes to Uncle Sam?
• Inflation – will our purchasing power be eroded?

Today, let’s look at an enemy that is almost guaranteed to get worse for most of us. With the out of control deficit, our government spending like drunken sailors, and the President determined to pass the greatest welfare program in history (healthcare overhaul), one thing is for certain: taxes will have to go up! And not just for the wealthiest Americans, it will hit the middle class the hardest. Most of the wealthy have very good tax advisors, know how to play the game, and have ways to absorb a tax increase. Most of us aren’t so fortunate…

One of the most overlooked areas of our financial life is tax planning. When you read about investing and other financial topics, you occasionally see the phrase “tax efficiency” or a reference to a “tax-sensitive” way of investing. What does that really mean?

The after-tax return vs. the pre-tax return

Everyone wants their investment portfolio to perform well. But it is your after-tax return that really matters. If your portfolio earns you double-digit returns, those returns really aren’t so great if you end up losing 20% or 30% of them to taxes. In periods when the return on your investments is low, tax efficiency takes on even greater importance.

Tax-sensitive tactics

Some methods have emerged that are designed to improve after-tax returns. Money managers commonly consider these strategies when determining whether assets in an investor’s account should be bought or sold.

Holding onto assets

One possible method for realizing greater tax efficiency is simply to minimize buying and selling to reduce capital gains taxes. The idea is to pursue long-term gains, instead of seeking short-term gains through a series of steady transactions.

Tax-loss harvesting

This means selling certain securities at a loss to counterbalance capital gains. In this scenario, the capital losses you incur are applied against your capital gains to lower your personal tax liability. Basically, you’re making lemonade out of the lemons in your portfolio.

Assigning investments selectively to tax-deferred and taxable accounts

Here’s a rather basic tactic intended to work over the long run: tax-efficient investments are placed in taxable accounts, and less tax-efficient investments are held in tax-advantaged accounts. Of course, if you have 100% of your investment money in tax-deferred accounts such as 401(k)s or IRAs, then this isn’t a consideration.

How tax-efficient is your portfolio?

It’s an excellent question, one you should consider. But this brief article shouldn’t be interpreted as tax or investment advice. If you’d like to find out more about tax-sensitive ways to invest, be sure to talk with a qualified financial advisor who can help you explore your options today. What you learn could be eye-opening.

How to control your taxes?

As President of Values First Advisors, our firm uses tax efficient strategies for many of our clients. Instead of using tax inefficient vehicles like mutual funds where we have no control over how much or when our clients pay taxes, we use Exchange Traded Funds (ETFs) and individual securities. This allows us to have better control as to when and how our clients pay taxes. We also help determine asset location (not to be confused with asset allocation of which we help with too). Asset location is setting up the proper amounts of taxable, tax-deferred, and tax-free accounts. As you are probably overlooking many tax saving opportunities, I encourage you to seek a professional who specializes in tax efficiency.

Jay Peroni, CFP is the founder and editor of FaithBasedInvestor.com, a Christian stock investing newsletter. He is an author, speaker, and financial advisor. He's been featured on Crosswalk.com, TheStreet.com, and here at ChristianPF.com. Jay started FaithBasedInvestor.com to help investors find investments they can be ―"proud to own". For a FREE report on how to screen your investments and build a winning portfolio, go to FaithBasedInvestor.com.

I got an email yesterday from the guys at Zecco.com telling me about a new promotion they have going on. As you may know Zecco used to have completely free stock trades, but apparently that wasn’t the best business model. So a few months back they decided to start charging about $4.50 for each trade – in order to keep their business a float I presume.

Zecco’s 20 free trades promotion

So, they currently have a deal going where you can get 20 free stock trades if you sign up as a new customer. I signed up with them about a year ago, but have yet to complete a trade since we have been so busy saving up for our house we are buying.

From what I have seen of Zecco, I do like them so far. They offer cheap trades, have no minimum balance, and no inactivity fees. But like I mentioned, I haven’t done any trading with them so far, so I can’t really vouch for them. Most of my trading over the last 5 years has been done with ING’s Sharebuilder, and they have been great. The features are pretty much the same as Zecco, except that they are a little bit better since they allow you to buy fractional shares – which just makes it that much easier for new and smaller investors.

So if you are interested in getting the 20 free stock trades from Zecco.com, just head on over to their site and use the promo code “bonus1″ when signing up.

More details about the promotion…

Get 20 free stock trades when you sign up with Zecco Trading!

Zecco Trading is offering 20 free stock trades — a $90 value — to all new brokerage customers who sign up by Sunday, September 13th 2009! Use promo code “bonus1” to qualify.

These free stock trades are special, because you have a whole 90 days to use them. Some other brokerages give you free equity trades to use within 30 days of signing up, so by the time you transfer money into your account, the free stock trades might have expired! With Zecco Trading, you have more time to use your free stock trades when it makes sense to trade.

Plus, these trades are completely additional to the 10 free stock trades Zecco Trading customers can earn every month when they keep a balance of $25,000 or make 25 free trades per month. And stock trading commissions at Zecco Trading are a low $4.50 each.

Be sure to use the promotion code “bonus1” when signing up. Be sure to use all lowercase or the code won’t work.

Special terms and conditions:

• New Zecco Trading accounts must be opened and approved by Sunday, September 13th, 2009.
• The 20 free stock trades will be granted on or before September 16th, 2009. The free trades will expire 90 days after the date they are granted.
• Offer not eligible to existing Zecco Trading customers.
• Limit one bonus per household.

Bob enjoys dark chocolate, paying off debt, giving, Foosball, loose-leaf tea, helping people succeed, learning, anything God created, playing guitar, doing things the "long" way, Philippians, excellence, Chick-Fil-A, and making his wife smile. He started ChristianPF in 2007 and has been having a blast ever since. Find him on Facebook & Twitter.

This article has been submitted by the folks at NewRetirement.com, a website dedicated to provide unbiased and comprehensive coverage on retirement financial issues and ensure that retirees save money, increase their income, save their assets, and secure their future.

How to choose the right annuity

Purchasing an annuity can be a great way to guarantee your retirement income for as long as you live as well as protect your assets from inflation, stock market fluctuations, a serious medical crisis or other unforeseen circumstances. However, like most retirement financial products and services it is best to sit down and carefully figure out how an annuity can or cannot fit into your general plan for retirement. Below, you will find in-depth information on annuities that will give you many of the facts you will need to make a decision. We will describe the benefits and drawbacks of certain types of annuities and then discuss broader issues regarding annuities in general, so that you will be able to weigh what is most important to you.

There are four main types of annuities, fixed lifetime annuities, fixed term annuities, variable lifetime annuities, and variable term annuities. While there are some variations to consider when thinking about these annuities, we will get to those in the end of this article under “further considerations”.

Fixed Lifetime Annuities

Fixed lifetime annuities are usually considered by financial advisors to be the safest bet for a retiree. These types of annuities allow you to purchase a guaranteed monthly income for the rest of your life. This monthly income is not prey to stock market performance since it is based on something fixed like a bond, which is why many consider this the safest bet. Also, if you live to a ripe enough age your annuity can pay a higher sum than you originally invested. However, there are two drawbacks to this type of annuity. One, it provides for less flexibility because you have a guaranteed income so if the market is doing well you will not receive more income. The second drawback would be if you happen to pass away before you recover your initial investment in the annuity, then unless you have premium protection (see “further considerations” ) you will lose whatever investment money is left on your annuity.

Fixed term annuities

Fixed term annuities provide a guaranteed income over a specific period of time, say 5 or 10 years. Fixed annuities might be a good consideration if you know exactly how long you are going to live or if you know that your income needs will decrease as you age. If not, then most advisors would suggest a lifetime annuity.

Variable lifetime annuities

Variable lifetime annuities provide a lifetime income, like fixed lifetime annuities. However your monthly income will depend on the market and more specifically the underlying fund for which the annuity is based. Variable funds are a riskier investment in retirement but, just like most risks, you could end up doing considerably better if you play your cards right.

Variable term annuities

Again, similar to fixed term annuities except your income is based on the underlying fund.

Drawbacks

While annuities will provide you with a steady income, subject or not subject to market conditions, depending on the type of annuity you purchase, there are some general downsides to annuities that you should definitely consider when evaluating your options.

One drawback is that annuities are inflexible because they tie up your lump sum of money into an annuity, reducing your overall liquidity. As such, many financial planners agree that you reserve at least 40% of your retirement assets for unforeseeable circumstances. There are third party lenders that will buy your fixed income payments for a lump sum, but normally you should do this only if absolutely necessary.

Further considerations

First and foremost, make sure that if you purchase an annuity that you purchase one from a reliable and trustworthy financial advisor. Make sure to ask for references and talk to his/her other clients. Your retirement is too important to go to the advisor who gives you the best “deal”.

Here are some other items you should make sure to address:

• COLA- Consider purchasing an annuity with “cost of living adjustments” (COLA), which protect the value of your income stream by adjusting your payments along with inflation or the cost of living.

• Joint and Survivor Benefits – Annuity products can be tailored to accommodate one person or a family. If you are married, you will probably want to purchase an annuity that guarantees your own income – as well as your spouse’s financial welfare after you die. Furthermore, if you pass away before you get a return on your investment, the remaining money can go to your heirs.

• Finally consider using your 401k or IRA funds to purchase an annuity as this purchase will end up being tax free, the only taxes you will have to pay is on the income the annuity will end up giving you.

• While we have tried to cover most aspects of annuities for you to get started on the right decision, our final suggestion would be to talk to a reputable financial planner about your current situation and what you desire from your retirement. That way you will be able to enjoy your “golden years” ahead. Good luck and happy retirement!

Solomon once wrote, “Where there is no guidance the people fall, But in abundance of counselors there is victory.” (Proverbs 11:14 NASB) In the world of investing, there is no shortage of people willing to give you advice. From mutual fund offerings to investment advisors to insurance salesman, everyone wants to get in the game of advice. But could this advice be detrimental to your faith and wallet?

The other day I read a puzzling report about how mutual fund inflows were the highest in nearly two years. Strategic Insight, a firm specializing in mutual fund consulting reported that over $136 billion flowed into stock and bond funds during the 2nd quarter of 2009. The money going back into the market isn’t the troubling part; it’s the amount going into mutual funds, especially retail mutual funds. Retail mutual funds tend to have layers of hidden fees.

Here are 5 reasons why mutual funds may be a bad idea for your family:

1. The fund manager’s values and interests often are in direct opposition of yours

When I think of investing, I am often reminded of Mark 8:36, “What good is it for a man to gain the whole world, yet forfeit his soul?” I believe this verse has much wisdom that can be applied to one’s portfolio. What is more important the amount of profit or the source of that profit?

Mutual fund companies seek one major goal: to make a profit. This profit often comes at your expense. In 2008, almost every equity mutual fund lost money yet mutual fund companies kept collecting their fees. They make money regardless of whether or not you ever see a profit.

On top of that, many funds invest in companies that directly oppose your values. They are free to invest in companies supporting abortion, pornography, alcohol, tobacco, homosexual activism, and embryonic stem cell research. Do you really want to profit from these industries? The heart of faith-based investing is seeking companies you could be proud to own: companies making a positive difference in our society all the while avoiding companies that are morally polluting our culture. Though the question you must ask yourself…is…will God bless your investments if they go to support efforts that are contrary to the bible? That’s the one that should keep you up at night…

2. A lack of transparency

It is very difficult without proper tools to have any understanding of what you truly own inside of your mutual fund. The lack of transparency essentially leaves you in the dark as to where and in what you are investing. Do you own assets that violate your values? Do you have exposure to companies going bankrupt? The lack of an ability to “know what you own” is a major disadvantage for those seeking to align their faith and values with their investment plans.

3. Supersized fees

The biggest problem I have with mutual funds are the high-level of fees. Even when you “think” you are paying 1 percent a year, you may be shocked to “know” that the fees you are paying actually exceed 4 percent. Over time, this can mean thousands or even millions of dol­lars. The longer you invest in mutual funds, the more you pay in fees. In The Faith-Based Millionaire, I wrote about how a 1 percent fee quickly turns into a 4 perfect fee.

So how does 1 percent become 4 percent? If you look at the fixed expenses of a mutual fund, they are included in what is known as the Annual Expense Ratio (found online or in the fund’s prospectus). Every mutual fund and exchange-traded fund (ETF) charges this fee. “No-load” funds (no commissions when you buy or sell shares) still charge annual fees. The expense ratio pays for the fund’s recurring operating costs (such as salaries, research costs, technology, and service, to name a few), but it does not cover trading and other costs. Morningstar, the leading independent third-party mutual fund rating company lists the average expense ratio as 1.56 percent per year.

What are not listed in the expense ratio are variable costs. The biggest variable costs are brokerage commissions and trading expenses. When­ever the fund manager buys or sells a security, he pays brokerage com­missions—just as you would if you were to buy or sell a stock or bond. Typically, funds spend tens of millions of dollars in trading costs per year, and these expenses are not included in the Annual Expense Ratio or even disclosed in the prospectus. To find these and other expenses, you must look in the fund’s Statement of Additional Information (SAI).

These additional expenses are difficult to determine, but a 2007 analysis by Virginia Tech, the University of Virginia and Boston Col­lege revealed that the average SAI charge is 1.44 percent per year. This is in addition to the 1.56 percent charged by the average Annual Expense Ratio. In other words, the total charge of the average mutual fund is 3.00 percent per year. If you pay an advisor 1 percent or more per year to manage your assets in what is known as a “wrap account,” you may be paying total annual costs that exceed 4 percent per year. In this down market, the last thing you need is to be hit with layers and layers of fees!

4. All chips on the table all the time

Though I do not recommend market timing (trying to predict short-term stock market movements), I do believe it is prudent to be more cautious or defensive at times. Most mutual funds stay 100% fully invested in the market at all times and do not account for changing economic conditions. The charter of most equity mutual funds requires the fund manager to maintain high exposure to stocks indefinitely. Whether there are good buys available or not, said manager has to keep buying companies knowing full well that the timing may not be right. Worst yet, he may have only 20-25 stocks he feels have good upside yet his charter requires more diversification so he is forced to buy “losers” to spread out risk.

5. One size fits all bad advice

Mutual funds get paid to keep you invested all the time. Marketing materials can be sliced and diced to tell you the story you want to hear. The fact of the matter remains that most mutual funds underperform their respective indices. Good money managers are hard to find yet there are thousands of mutual funds lining up to handle your money.

So where do you go?

It starts with find a team of financial professionals you can trust. If you are a faith-based investor, a great place to start is seeking out a qualified Kingdom Advisor, who specializes in faith-based or biblically responsible investing. There are many faith-based options that can support both your family’s goals and values. Mutual funds aren’t the only game in town. Stocks, bonds, ETFs, real estate, commodities, and gold offer additional choices to diversify your portfolio and help you have a better understanding of exactly what you own.

Jay Peroni, CFP is the founder and editor of FaithBasedInvestor.com, a Christian stock investing newsletter. He is an author, speaker, and financial advisor. He's been featured on Crosswalk.com, TheStreet.com, and here at ChristianPF.com. Jay started FaithBasedInvestor.com to help investors find investments they can be ―"proud to own". For a FREE report on how to screen your investments and build a winning portfolio, go to FaithBasedInvestor.com.

Why are investors turning to exchange-traded funds?

Exchange-traded funds (ETFs) have become fundamental instruments in the pursuit of tax-efficient investing. ETFs have low operating costs, so they represent intriguing alternatives to garden-variety mutual funds that can gradually “nickel and dime” an investor.

Four Reasons ETFs may make some sense for you:

1. The fees are minimal. With their very low charges and management fees, ETFs give you a cheap and convenient way to build a portfolio of index funds. The annual expenses of an ETF (which come out of dividends) range from 0.1-0.65%. If you search, you may find an index mutual fund that charges 0.1% – but some charge more than 3%.Besides being more tax-efficient than index mutual funds, ETFs are easier to manage when it comes to tax loss selling (the swap of short-term capital gains or income tax liabilities for lower long-term capital gains liabilities). And of course, they give you tax deferral to aid in compounding.

2. They trade like stocks. Unlike a conventional mutual fund, ETFs trade throughout the day. They can be bought or sold at any time of the market day. Compare that to mutual funds – you can only redeem them at the closing price of a trading day.

3. You can see what’s inside. The transparency of an ETF is really appealing. When the market is volatile and a stock drops like a rock, you can easily find out if your ETF holds those shares or not. When does the typical mutual fund tell you what it holds? Once a quarter.

4. They allow you to “become” the market. A variety of thoughtfully chosen ETFs can allow you to realize broad exposure to the stock, bond and REIT markets and even global markets. When you have that kind of wide-ranging diversification plus a skilled third-party money manager who can exploit market inefficiencies, you have the potential for some solid performance. The performance of a collection of actively managed mutual funds, on the other hand, can be beleaguered by overlap and concentration in certain stocks.

ETF’s and 401(k)s

ETFs are finding their way into 401(k) plans. Perhaps that seems redundant, as 401(k)s are tax-deferred to start with. But as more and more retirement plan vendors and sponsors are being pressured to disclose plan fees, they are starting to welcome ETFs into these programs. Anyone who has a 401(k) knows that mutual funds are the bedrock investment choice – and many of those funds operate with revenue-sharing agreements. That means that the fund company may be paying the plan provider to help cover administrative costs. Often – as part of the fund expenses – those costs are passed on to you. ETFs don’t have revenue-sharing agreements.

So many people want to learn more about ETFs. A qualified financial advisor can help you examine your many options here – there are ETFs to represent nearly any segment or sector of the market. See what the buzz is about, and see how these funds may allow you to improve the tax efficiency of your portfolio.

What about faith-based ETFS?

No faith-based ETFs currently exist but five are in the process of approval. FaithShares Inc., which is advised by FaithShares Advisors, is asking the Securities and Exchange Commission for approval to offer five new SRI-themed ETFs. Those would be:

• The FaithShares Baptist Values Fund
• The FaithShares Catholic Values Fund
• The FaithShares Christian Values Fund
• The FaithShares Lutheran Values Fund
• The FaithShares Methodist Values Fund

Jay Peroni, CFP is the founder and editor of FaithBasedInvestor.com, a Christian stock investing newsletter. He is an author, speaker, and financial advisor. He's been featured on Crosswalk.com, TheStreet.com, and here at ChristianPF.com. Jay started FaithBasedInvestor.com to help investors find investments they can be ―"proud to own". For a FREE report on how to screen your investments and build a winning portfolio, go to FaithBasedInvestor.com.

This is a guest post from Bill Provenzano who is a 20‐year veteran commodity trader of the CME. He is also the founder of Upside Breakout, a biblically based coaching and mentoring program for Christian stock and commodity traders. Find out more at ChristianTradingCoach.com.

Trading Traps

I couldn’t help but think today about the devastation that the housing crisis has brought upon our economy. As I gave it more thought, I realized that a Trading Trap that many traders fall into was one of the issues at the core of the housing bubble. Trading Traps are those behaviors that sabotage a trader’s profits. One of those traps is the fear of missing out. This manifests itself when a trader fails to act on a trading signal and then watches helplessly as the trade he should have executed goes in his favor. He is left to stare at his screen watching the opportunity continue to move away from him as the position he should have executed goes in the direction he thought. He feels sick to his stomach as he mentally adds up the profits he missed out on. Finally, he can’t take it anymore! He enters the trade at a point far too high to have enough upside potential to balance his downside risk.

Mr. and Mrs. Hopeful

The same thing happened to many ordinary folks who watched housing prices climb higher and higher. So many people felt like they were missing out on one of the greatest trading opportunities of their lifetime. It seemed that all of the family and friends around them flipped a rehab, built a spec house, upgraded to a 3,000 square foot home, or bought a vacation home that skyrocketed in value. Not wanting to miss out, Mr. and Mrs. Hopeful took the plunge. They made the trade with the help of an eager mortgage broker, friendly appraiser and a bank willing to wear blinders (yes, everyone is to blame).

Know well the condition of your flocks

As it relates to both trading and investing, one of my favorite verses is Proverbs 27:23 which says, “Be sure to know the conditions of your flocks, and give careful attention to your herds.” Flocks and herds were the investment accounts of that day. This proverb advises us to know what we are invested in and to understand the factors that impact our investments.

In 2005, aside from my primary residence, I owned 6 other investment properties. I was preparing to purchase another investment property but had a keen eye on the extreme nature of the housing market. It seemed that the price appreciation would never end, but I knew that could not be true. As part of my “knowing well the conditions of my flocks”, I paid close attention to any speech given by Alan Greenspan, the then Chairman of the Federal Reserve. The Federal Reserve sets the course for interest rates and, therefore, has a very real impact on the housing market.

In a speech given to Congress in 2005, given in typical “Green‐speak”, the “you‐have‐to‐guess‐what‐I‐am‐saying” language that Mr. Greenspan spoke in, the Fed Chairman made some statements that made me sit up in attention. After reading and rereading a transcript of the speech, it was clear that Mr. Greenspan was about to set upon a path of steadily raising interest rates to let the air out of the housing bubble. In fact, he was far clearer about his plans than in any of the previous speeches that I had read. I still remember how shocked I was to read that Greenspan was not only unusually clear about his intentions, but that the housing party was about to come to an end.

The bubble burst

Now, to be clear, the severity of the downturn would have been far less if the housing bubble were allowed to slowly leak rather than burst. Slowly raising interest rates should have been the slow leak. But because of extremely loose lending standards, even modest declines in home prices accelerated mortgage defaults which accelerated the rate of depreciation which in turn increased the rate of defaults….you get the picture. Because I had taken the time to pay close attention to the housing market and to keep myself aware of what the arguably most powerful man on earth was saying about interest rates, not only did I not buy the investment property I had my eye on, but I also I sold four of the homes I was invested in over the course of 2006. I kept two investment homes, which I plan to keep for many years to come.

In hindsight I look like a genius. But in reality, this is the kind of thing that we all can experience when we apply God’s word to our trading and investing. When we execute our trades, we must be aware of the factors that impact the stock or commodity we are trading. We must “know well the conditions of our flocks”. And as we keep self‐aware of Trading Traps like fear of missing out, we can side‐step the devastation of that behavior.

Can i invest in real estate with my IRA?

With investment property priced to move, some IRA owners are buying actual real estate properties. Did you know you could do that? Most people don’t. Not everyone can do it; not everyone should do it. However, some people are doing it – particularly high net worth IRA owners who see great deals in a buyer’s market.

Everyone assumes IRA assets have to be invested in securities, but it is fully possible to invest in real estate with retirement funds. IRS Code Section 401 IRC 408(a)(3) prohibits life insurance contracts from being held in IRAs, and IRS Publication 590 states that your IRA will be hit with additional taxes if you invest in collectibles. Those warnings aside, IRA assets may be invested in other options, such as real property.

Careful, not all IRAs are created equal!

You can’t buy real estate with any old IRA. You have to create a self-directed IRA or an IRA LLC. You also have to find an IRA custodian that will let you make non-traditional investments. This custodian has to be a registered trust company. One I have had a lot of success with is Pensco Trust.

If you set up an IRA LLC, you retain control over the invested IRA assets held with said custodian – that is, you have “checkbook” control and don’t need IRA custodian approval to make the real estate investment.

Why buy real estate with your IRA?

Aside from the appreciation potential of real estate, the keywords to remember are “tax-deferred growth” (Traditional IRA) and “tax-free growth” (Roth IRA). Many kinds of IRAs can be converted to self-directed IRAs.

The self-dealing test

If you are going to invest in real estate with IRA assets, the IRS wants your investment to be for the benefit of your IRA and not for your personal benefit. Does that sound like a fine line?

Well, the IRS offers some guidelines. In IRS Publication 590, you’ll run across a list of prohibited transactions involving IRAs. These transactions amount to “self-dealing” – that is, they are judged to explicitly benefit you rather than your retirement account.

According to Publication 590, you cannot…

• Sell property to your IRA
• Purchase property for personal use (present or future) with IRA funds
• Receive unreasonable compensation for managing your IRA
• Use your IRA as security for a loan

If you, your fiduciary, or your relatives/heirs commit such violations, the account stops being an IRA in IRS eyes as of the first day of the year in which the violation occurs.

An opinion counts!

An opinion letter, to be precise. Real estate and legal professionals often recommend two steps when it comes to investing in real estate with a self-directed IRA:

• Creating an LLC
• Asking an attorney to provide you with an opinion letter stating whether the transaction is legal or prohibited

The bottom line: proceed carefully, and with the right minds advising you. If you’d like to learn more …. talk to a financial advisor who can link you to the right legal, tax or trust resources that can counsel you if you wish to make a non-traditional investment with IRA funds.

Jay Peroni, CFP is the founder and editor of FaithBasedInvestor.com, a Christian stock investing newsletter. He is an author, speaker, and financial advisor. He's been featured on Crosswalk.com, TheStreet.com, and here at ChristianPF.com. Jay started FaithBasedInvestor.com to help investors find investments they can be ―"proud to own". For a FREE report on how to screen your investments and build a winning portfolio, go to FaithBasedInvestor.com.