Your Money Matters, June 22, 2014


In recent columns, my goal has been to give an overview of some of the most common investment vehicles you encounter when investing. We've looked at mutual funds and their various flavors, closed end funds, and this time we'll take on one that's quickly gaining popularity — exchange traded funds.

Exchange traded funds, or ETFs as they are commonly called, are very similar to mutual funds in that they are a vehicle designed to provide a investors a level of diversification that would be difficult to achieve by investing in a basket of stocks on their own.

ETF's, like mutual funds, pool investors' money together to purchase many stocks or bonds, perhaps hundreds or even thousands, according to its stated objective. To invest on your own in a way that matches "the market," the S&P 500 index, you would need to purchase stock in all 500 companies from the index. That's quite a bit of money and management. Instead, with a mutual fund or ETF that tracks that index, you can invest a much smaller amount of money and still be spread across the same stocks.

So what is the difference between a mutual fund and an ETF? The most obvious difference between the two is how they trade. When you buy or sell a mutual fund, regardless of when you put the order in, your trade will be processed after 4 p.m. when the markets close. That is because the price of the fund for that day (the net asset value, or NAV) is determined based on the closing price of all the stocks or bonds that comprise the fund.

An ETF on the other hand, trades all day long, like a stock. That means the price fluctuates throughout the day, based on the prices of the investments it holds as well as the supply and demand of the ETF itself. While in most cases the price does not stray too far from the value of the investments it holds, it can cause a problem if you invest in an ETF that does not have a lot of trading volume.

If you are looking to sell your ETF and there are few buyers out there, as there may be for a newer one or a specialized fund, you may find yourself in a position to be selling for less than the value, since you are selling essentially to another individual buyer. Mutual funds, on the other hand, must have enough liquidity to redeem your shares for the asset value whenever you want to sell.

Since ETFs are available for trade during the day, they are listed on the stock exchange, and you can follow their prices up and down as you might a stock. Buy and sell transactions are handled similarly. ETFs don't have the sales loads (sales commissions) that some mutual funds do, although there are plenty of no-load mutual funds available on the market, too. Although there is no sales commission, depending on where you are buying and selling, you may pay a broker's trade commission or fee.

Trading a mutual fund may cost more or less than trading an ETF, depending on what fund you are buying and if it is on the brokerage company's no-transaction fee list or not. For instance, at a discount brokerage, you may pay $7 for an ETF trade, $17 for a mutual fund that has a transaction fee, or zero for a no-transaction fee mutual fund.

Just like mutual funds, ETFs have ongoing operating costs, which vary from fund to fund. The original ETF market consisted mainly of funds that tracked indexes passively, which kept costs down, just like an index mutual fund that holds only the investments of specified indices like the S&P 500. But you can buy an active ETF — an ETF that is run by a fund manager or management team — with the goal of beating their benchmark through buying and selling investments. The cost differential can be wide. For example, the iShares Core S&P 500 (IVV) carries expenses of 0.07 percent, while PowerShares Dynamic Market's (PWC) is 0.60 percent.

Now, 0.60 percent is a far cry from the more than 2 percent expense ratios I've seen in some (ugly) actively managed mutual funds, but it is quite a bit higher than 0.07 percent. These funds have different objectives and are not apples to apples comparisons, so don't take that to mean that one is necessarily better than the other; it simply illustrates the point that fees can vary and should be taken into consideration when evaluating a fund.

When looking for an ETF for your investments, just like when choosing a mutual fund, start with personal objectives — factors like what are you investing for, what is your time horizon, what kind of risk do you want and can afford to take and then what allocation between stocks, bonds or other investments (and what types within those categories) are appropriate for you — before deciding how to meet those objectives.

Mutual funds, ETFs, individual stocks or bonds, all are tools you can pick from, but they are not the objective themselves. Always start with why you are investing and what you are trying to accomplish before moving on to the how to do it. Be sure any adviser you may work with does the same.


Your Money Matters, May 25, 2014


Ah, the college graduation season; the time between celebration and that moment you realize your loans will be coming due and you need a J-O-B.

With the average loan balance upon graduation approaching $30,000, which coincidentally is just about the cumulative limit of no-questions-asked Stafford loans, thoughts of recent college graduates quickly shift from kicking back to considering when and how to pay back those loans.

Most undergraduate student loan payments actually carry a six-month grace period (although Perkins loans have nine months), so you get a brief reprieve to formulate a plan. Become very familiar with the website is full of information for sorting out federal loans, meaning Staffords, both subsidized (government pays the interest while you are in school, awarded based on need) and unsubsidized, and PLUS loans. Information about nonstandard repayment of Perkins loans (which are also based on need and subsidized) must come from your school; the rules are different. Loans taken out privately with a bank or other lenders do not come with the same flexible options as federal loans. We will focus on federal loans here.

Your first task on is to take inventory of your loans. With multiple loans disbursed over multiple years, you can lose track. The site has a link to track your loans and view the terms. Next, check out the repayment calculator and see where your payments are under the standard repayment plan. Standard means the traditional 10-year repayment period and making full payments. Run it for each of your loans and add them up to see what your monthly debt repayment will be.

Is the payment out of sight? Don't panic, you have options.

While the default payment plan is 10 years, the federal loan system makes other options available. Depending on the type of federal loan, you may be eligible to extend your payment plan for up to 25 years, or go on a graduated payment schedule, giving you smaller payments in the beginning, increasing over time as your income presumably increases. Naturally, the longer you stretch out payments, the more interest you will pay over the term.

If you need to go that route because your income is too low to support a standard payment plan, you may want to check out the income-based plans instead. While your payment may be the same under these plans as the extended or graduated plans, they come with additional benefits. Payments under the Income Based Repayment Plan for example, cap at 15 percent of discretionary income, which is re-evaluated each year.

Discretionary income is the difference between your adjusted gross income and 150 percent of the poverty guideline for your family and state. You may find your payments early on to be zero. Even if your income skyrockets, your payment will never be more than it would have been under the 10-year plan, and if you continue your payments and meet the requirements for 25 years, any unpaid balance will be forgiven.

What's more, for any subsidized loans you hold, should your payment be so low it does not cover the interest due, the government will pay that interest for up to three consecutive years. In normal circumstances, interest not covered by your payment will be added to your loan, or capitalized, but if you face a partial financial hardship, that interest still will accrue but not capitalized, so you won't pay interest on interest.

Borrowers with partial financial hardships may also be eligible for the Pay As You Earn program, which limits payments to 10 percent of discretionary income, and after 20 years of qualifying payments, the outstanding balance is forgiven. For those ineligible for either program, there is the Income Contingent plan, which calculates payment amounts according to two different formulas but won't exceed 20 percent of discretionary income.

The traditional routes of forbearance and deferments are still available, too, for borrowers under certain circumstances, such as continuing your education, illness, military service or period of unemployment. Requirements differ under each: Generally a borrower who meets the criteria for deferment cannot be turned down, but in some cases a lender may refuse to grant forbearance. With deferment, your subsidized interest will be paid for you, and does not accrue, but forbearance does not provide that benefit.

When it comes to paying for college with military service, most people think of the GI Bill, but there is another option: the College Loan Repayment Program. For highly qualified, enlisted service members with no prior service history (except for former active duty now joining the reserves), Congress authorizes up to $65,000 of student loan balance payments. However, each branch has its own requirements and limits. The Army, for instance, will pay up to that $65,000 for applicants that meet qualifications that include scoring a 50 or better on the Armed Services Vocational Aptitude Battery test and enlisting in a critical occupational specialty. The Air Force, on the other hand, limits repayment to $10,000. The payments are taxable both on the state and federal level, and you will receive a W2 at year end.

It's important to note that the College Loan Repayment Program and the GI Bill cannot be used for the same term, so if you intend to go back to school at some point, don't forfeit your GI Bill without weighing the benefits of each program. For multiple enlistment terms, you may be able to use the CLRP for your first term of enlistment and the GI Bill for the second, but confirm and verify before making any decisions, and follow the instructions exactly to preserve benefits to which you may be entitled. These are important choices that need to be made in basic training, so know your options before you go; making life decisions while under the duress of basic is not the best idea.

Military not for you? You may still find loan forgiveness if you work in other professions. The National Institutes of Health has a program for researchers, New York State has a program for licensed social workers, and even lawyers working for the Department of Justice or as public defenders may find relief. Nurses interested in working in underserved areas should check out the Nurse Corps Loan Repayment Program. Loan forgiveness may be in your future if you dedicate time to AmeriCorps, the Peace Corps or VISTA, too.

Teachers and librarians can search a funding database with the American Teachers Foundation to find programs for not only loan forgiveness but professional development resources. Check Finally, eligible parents and spouses of victims of 9/11 who died or became permanently disabled due to the attacks may qualify for loan forgiveness through the Spouses and Parents of 9/11/01 Victims Loan Discharge Program.


May 4, 2014, Your Money Matters

As a follow up to my last column on mutual funds, this one will focus on another breed of investment funds — the closed end fund as suggested by a reader.

The name closed end fund may suggest simply a slight variation of what we normally think of as a mutual fund. But in reality, a closed end fund is completely different. Like a mutual fund, a closed end fund invests for a defined objective, whether it be a particular stock strategy, an income strategy, or even a mix of stocks and bonds. However, it acts more like a stock when it comes to investing in one. When a closed end fund is created, it is sold via an IPO (initial public offering), just like a stock. There are a fixed number of shares available, and then the fund closes to new investors.

After that, shares of the fund sell on the secondary market, which means to buy, you are in essence buying existing shares from someone else, and vice versa if you want to sell.

On the other hand, with an open ended mutual fund, the money you use to buy shares actually goes into the fund and gets invested. When you sell your shares, the cash you receive comes out of the fund, or investments are liquidated to raise cash if there is not enough available (as in a day when many investors sell off) So a mutual fund may need to keep an amount of cash uninvested to satisfy redemptions (sales) when they come in. Closed end funds are not concerned with that, so there will be less idle cash in the fund.

Mutual funds are priced once a day, after trading closes, so the price, or net asset value, will be established based on the closing price of all of the stocks or bonds that comprise it. That is when the orders to buy and sell are executed.

Closed end funds, like shares of stock, trade all day long, the share price fluctuating throughout the day. The price is determined by the market value of the share itself, not by the value of the underlying stocks or bonds. What that means is, what you pay for a share of a closed end fund will not be equal to the NAV of the fund itself, and rather will trade at a premium (the price per share is higher than the value of the investments inside of it) or at a discount (price per share is lower).

Naturally, a closed end fund trading at a discount is good for a buyer. It is not so great for someone who purchased in the IPO. That buyer likely paid a premium to get in due to the costs associated with IPOs (such as offering expenses and broker commissions).

Some closed end funds are designed to pay out a distribution quarterly or annually. For investors seeking a regular source of income, that can be appealing. In a mutual fund, dividends and capital gains are paid out regularly, too, but they will differ from quarter to quarter, based on what the underlying investments are actually earning. The closed end fund may instead choose to distribute a flat percentage for predictability of income.

That means, though, that if in a certain quarter the actual income is less than the percentage promised, part of the distribution may be paid out of principal, or really, a return of your investment. So in some cases that distribution rate may be deceiving. That's not necessarily a bad thing, but if you have a fund that does that on a regular basis, it can actually affect the net asset value of the fund.

Just like a mutual fund, a closed end fund has operating costs. They vary widely from fund to fund, so it's important to know what those costs are, because over time, those costs will eat away at your return. There will also be a cost to purchasing the fund. You'll want to evaluate those costs against any potential greater return.

An important note about that potential greater return: A closed end fund may use leverage (borrowing) to acquire additional capital to make investments. Leverage increases the risk of the fund. Remember, there's no free lunch, so if you are getting significantly more income than you can find elsewhere, you can bet there is an accompanying increase in risk.

Closed end funds may be appropriate for you — or not. As with any investment, you must do your due diligence on the fund before investing. With a closed end fund, you may find the answers to questions about fund composition, expenses, leverage, pricing and distributions from the company itself, and also from the prospectus and other filed reports in the Securities and Exchange Commission's EDGAR (electronic data gathering, analysis, and retrieval) database at

Exchange traded funds are yet another, more common, breed of investment vehicles that I will tackle in the next column.

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April 13, 2013, Your Money Matters

The theory of risk reward says that in order to obtain more reward, one must take on more risk.

In my last column, we discussed the little reward available these days in accounts that by design must be safe. For money that can and should take on risk in pursuit of a better return, investing in mutual funds is one way to do that.

The universe of more than 8,000 open-ended mutual funds have varying compositions, objectives, purposes, investing styles and expenses. Which funds are right for you depends on those factors and how they fit into your plan.

Let's start at the beginning.


What is a mutual fund?

A mutual fund is a collection of stocks and/or bonds that are bought and sold by the fund in keeping with its stated policy. Investing in a mutual fund allows an individual investor to own a greater volume and variety of stocks or bonds than he may be able to have on his own.

An open-ended fund means that investors can buy and sell directly with the fund, and the fund's shares are priced at their net asset value, or the value of all fund assets, minus liabilities, and divided by the number of shares outstanding. Open-ended is the most common form of mutual fund and the one we will look at here.


What kinds of funds are there?

Funds are designed to capture different sections of the market (market meaning the entire universe of stocks and/or bonds), or even the entire market. An equity fund invests in stocks, while a bond fund invests in bonds. There are also funds that invest in both.

Within each of those, there are further breakdowns. For instance, there are funds that invest only in large company stock (such as Exxon Mobil or Apple), and others that invest in smaller companies, such as American Airlines or Foot Locker. Some invest internationally, and still others concentrate in sectors like real estate or health care.

Bond fund holdings may include Treasury bonds, corporate bonds, global bonds or mortgage bonds, and the bonds vary in maturity length from a short time period to many years out.

The design of your personal portfolio will likely include funds representing different asset classes, put together in a mix that depends on your financial life stage, your age, your capacity for risk and volatility, and what investment or savings assets you have in other places.

For smaller portfolios, or when you don't want to construct your own portfolio, there are ready-built funds with prescribed mixes of stocks and bonds. These funds may have names like "balanced" or "asset allocation" funds, and typically range from conservative (less stocks, more bonds) to aggressive (more stocks, less bonds), with moderate somewhere in the middle.

Because each fund has its own twist, it's important to look at the actual composition and make sure it's right for you. Beyond that, there are target date funds, which match the fund breakdown to a specific goal in your life., usually retirement or college. Pick out the year that fits the goal, and the funds will change year by year to match the asset allocation appropriate for the time horizon, without any changes on your end.


Investment style

In addition to choosing what your mutual fund invests in, you'll need to choose what kind of investing style you want in a fund. Funds hire managers or management teams to make the investment decisions; some make those investments by active management, some by passive management or indexing, and others by enhanced indexing.

Actively managed mutual funds are ones in which the manager or management team buys and sells according to where they believe the market is heading. They are being paid to find good values, dump what their research tells them are losers, and anticipate trends, all with the goal of outperforming.

You can tell by the multitude of magazine headlines that call out which funds are hot now (which sometimes end up on the loser list the next month) that fund managers win some and lose some — sometimes they beat the index and sometimes they underperform.

Passive management, or indexing, on the other hand, simply strives to do what its benchmark does. A fund that invests in the S&P 500 index, for instance, will hold the same 500 stocks that constitute that index, and only replace a stock when the index changes (reconstitutes). The theory behind using passive management is that the market will do what the market will do, and active management will lose as many times than it wins, so trying to outperform is futile and costly.

A hybrid between active and passive management is enhanced index investing. Fund managers using the enhanced indexing strategy pursue greater than market returns, but rather than trying to predict where the market is going, managers apply academic- or research-based screens to their portfolios, resulting in a portfolio that changes more frequently than a true passive index fund, but changes are made only when the objective model calls for replacing certain stocks or bonds.


What are the costs?

Mutual fund costs vary widely, and come in two dimensions. Each fund has an operating cost associated with it, called an expense ratio; this cost covers things such as paying the managers, marketing, trading costs and more.

Passive funds almost always have the lowest costs, because there is not a lot of movement inside the fund. Actively managed funds naturally cost more. Funds of funds, such as an asset allocation fund that contains several funds within it, can be more costly, too, because you are paying for multiple layers of fund operating expenses.

FINRA, the Financial Industry Regulatory Authority, has a fund analyzer to help you compare the cost of owning mutual funds:

If you purchase a fund through a broker, you may pay a sales charge, or load, or if working with an investment adviser, an advisory fee.


March 27, 2014, Your Money Matters

The past few years have been downright pitiful when it comes to earning interest on bank accounts.

With the average savings account paying close to zero, and some even charging fees, which puts your return in the negative, it can be discouraging to see your savings sit idle. But what options are there? With some work you might be able to find a way to squeeze out a little bit more.


Go online

For cash you won't need tomorrow, I'm a fan of online banks, which typically pay an interest rate approaching 1 percent. Check out for the highest national rates, noting any minimum balances to open or to maintain to avoid fees. Also watch for introductory rates that expire, and take care to stay within the maximum number of transactions per month.



If you don't mind jumping through some hoops, a Kasasa account can pay nicely and support your local community at the same time.

Kasasa is not a bank, but a company that partners with local credit unions and community banks to offer a much higher than market interest rate. In exchange for earning that rate, you agree to meet certain terms each statement cycle. That might mean using your debit card a minimum number of times and having a direct deposit to the account.

Right here in Stroudsburg, First Keystone Community Bank is a Kasasa provider, and its Kasasa Cash account pays 2 percent on up to $10,000, assuming in that statement cycle you also have at least 12 debit card purchases per month, receive e-statements, and enroll and log into online banking at least once.

Didn't make the requirements? Not to worry, you'll still get .05 percent.


Shop around

From time to time, banks and credit unions offer promotions to attract deposits. They don't usually last long, so catch them while you can.

Go online from time to time to visit websites of our local banks; you may find one offering a promotion. Or check out the website, which has a list of promotions that includes an offer from PNC Bank of $150 for new Virtual Wallet customers.

These tend to be one-time cash bonuses, so check out any transfer fees or penalties that could eat up that bonus upon moving your money should you decide not to keep it there long term.


Privately insured credit unions

The rules of risk and reward say that to get more reward you must take on more risk. If you are in the position to take on risk, you may be rewarded by using a privately insured credit union.

While the vast majority of credit unions are federally insured, a small number of state chartered credit unions carry private deposit insurance.

One example is the Christian Community Credit Union, which offers a new-member promotional rate CD with a 5 percent APY.

It is critical that you do your due diligence on these credit unions, look at their financial strength and be ready to accept the risk of possible loss of funds.


Note: This does not constitute of an endorsement of the promotions listed. Be sure to check out terms and safety, and make sure they are right for your individual financial situation before opening an account.