My colleague Alexis Jeffries and I had fun reporting a recent story called "Five Ways To Pump Up Your Income," which ran in the December 2009 issue of MONEY.  Who couldn’t use some ideas right now on how to make more dough?

As Alexis recently blogged, many of the ideas we came up with didn’t make it into the final piece. But there’s an idea that did make it into the article — lending money to friends, families and strangers through so-called peer-to-peer networks — that had a surprising aspect that we didn’t cover in the piece. More

Investing in ETFs just got a little cheaper.

At a press conference in New York City Monday, Charles Schwab unveiled eight new exchange-traded funds, the first of the brokerage's Schwab-branded ETFs. The big news: For these select ETFs, Schwab has waived the commission typically charged when you buy or sell shares of an ETF or stock. In other words, an investor could jump in and out of these ETFs several times a day (not that that strategy is a particular good one) and not pay a dime in transaction costs. More

If you held on to your fund portfolio through the market downturn, you have plenty of reason to smile this year. The average large-cap stock fund has rebounded some 23% so far this year.  And some have done far better — small growth funds are ahead 30%, while Latin America stock funds have zoomed nearly 50%.

And best of all, you will probably pay little or no taxes on those gains.

That’s the assessment of Tom Roseen, a senior research analyst at Lipper, who tracks mutual fund taxes. More

Legg Mason's Bill Miller

For a top-notch stock fund manager, there’s nothing worse than poor returns. But one thing comes close: great performance that everyone ignores.  As The Wall Street Journal reported recently, many ace stock-pickers are having trouble attracting investors, even as they rack up double-digit return.

Consider Harry Lange of Fidelity Magellan (FMAGX), who has guided his fund to a 31% gain so far in 2009—some 15 percentage points ahead of the Standard & Poor’s 500. But during the first nine months of this year, shareholders have yanked $1.8 billion from the fund. More

This is sure to make financial advisers cringe, or at least send me a few angry emails. German researchers have found that on the whole, investors who use a financial adviser tend to underperform do-it-yourselfers.

Professors from Goethe University Frankfurt gathered data from a large German brokerage firm that allowed its clients to either run their portfolios themselves or use an independent financial adviser. On the whole, the adviser-led clients did better. But the researchers found that clients with advisers tended to be older and wealthier than average. Once the professors controlled for age and wealth, they found that the clients with advisers did worse.
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Money market funds have long been a refuge for investors seeking safety and liquidity. But ever since the market meltdown, money funds have been under siege. Last September Reserve Primary Fund, which had invested in suddenly worthless Lehman Brothers commercial paper, "broke the buck"—that is,  allowed its net asset value to fall below a $1 per share. That led to panic, as frightened investors began pulling their savings out of these funds. In the end, the federal government stepped in to offer a temporary guarantee for the $3.6 trillion in money fund assets.

The panic subsided—and the federal guarantee expires in two weeks—but the regulatory scrutiny is still underway. The Security and Exchange Commission has proposed money fund rule changes that include higher credit quality and shorter maturities. But the most controversial notion, which is not in the proposed rules but was offered up for public comment, is a so-called  floating NAV, which would mean that a fund's net asset value per share would be free to move up and down, instead of being pegged at $1 per share. More

If you're an investor, mispriced assets should make you happy. When stocks are too low, it's exciting (Buy!). When stocks are too high, it's exciting (Sell! or Sell short!). But when an asset is priced just right, you're left twiddling your thumbs or, worse, trying to find reasons to buy or sell anyway.

On Thursday, the S&P 500 marched tantalizingly close to 1,000 for the first time since November. But to many investors, all the recent good news has made the investing climate decidedly boring.

In a recent commentary (the S&P was at 950), GMO's Jeremy Grantham wrote that stocks and other assets "have all — or almost all — converged for a few unusual moments at fair value…It's difficult to be inspired." When I spoke yesterday with Mark Freeman, a portfolio manager at Westwood Management, he struggled to point to asset classes that investors could turn to for easy profits. "A lot of the market's mispricing has been taken out in the rally," he lamented.

Admittedly, some investors still feel strongly that the market's not going to hang around 1,000 for long. PIMCO's Bill Gross wrote today that the U.S. economy risks a permanently higher employment rate which would dampen stock prices. At the other end of the spectrum, Legg Mason's Bill Miller says, "I think bargains abound in the U.S. stock market." In March, keep in mind that nearly all of these guys agreed that the stock market looked attractive. If nothing else, we've lost that consensus.

At 1,000, the market's price/earnings ratio based on 10-year normalized earnings (which smooths out earnings bubbles and busts) stood at 17 — nowhere near its highs in 2006, but already above its historic average of about 16. Historically, when you've bought stocks at this level, the annualized return over the next 10 years has been about 6%. That's not bad, but it's not particularly exciting either.

So what can you do? For one, if you wisely decided to boost your equity stake a few months ago, as we recommended in February, now's a good time to go back to your standard allocation. If you don't know what that should be, use our Asset Allocation wizard. Don't go too far and make a bet that the stock market's going to drop to new lows. With the market floating at a price that's about fair, about the only thing that we can be sure of is…well…nothing.

There’s a new main character moving to center stage in the great real estate meltdown. Underwater homeowners vying to refinance or score a loan modification have grabbed much of the headlines (and bailout attention) to date. But now commercial real estate is moving into the spotlight as the next potential body slam for the economy.

Last week The Washington Post reported that the U.S. Treasury department has begun to contemplate what can muck things up for the economy and the recovery beyond what is currently being bailed out. This effort has come to be known as Plan C. As in, “Yikes, Plan B might not do the trick, so what do we need to focus on next?”

Reports the WaPo, "The officials in charge of Plan C — named to allude to a last line of defense — face a particular challenge in addressing the breakdown of commercial real estate lending.”

The story line reads like a sequel to the residential debacle: Commercial property owners are sitting on loans that need to be refinanced. The Real Estate Roundtable estimates that about $400 billion a year in commercial loans will need to be refinanced over the next decade.

But with commercial property values way down, vacancies way up, and the recession making it unlikely there will be a demand pick-up anytime soon, banks haven’t been inclined to offer refinancing deals. If they do open the spigot at all, the terms are nowhere near as cheap as what commercial property owners had enjoyed during the boom. Sounds familiar, eh?

Earlier this month, in testimony before the Congressional Joint Economic Committee, Jon D. Greenlee, the Fed’s associate director of banking supervision and regulation, summed up the Plan C worry: “At the end of the first quarter [of 2009]," he testified, "about seven percent of commercial real estate loans on banks’ books were considered delinquent.  This was almost double from the level a year earlier.”

Greenlee says there is about $3.5 trillion of outstanding debt associated with commercial real estate, and banks had about $1.8 billion trillion of that tidy sum on their books. That computes to about $126 billion (so far) in delinquent commercial mortgages on the banks’ books.

Now if you’re Goldman Sachs, you might be able to absorb commercial real estate writedowns (reportedly of more than $1 billion) with record trading profits elsewhere. And, to be sure, the vultures are already circling in the hopes of picking up distressed commercial property.

But if the squeeze on commercial real estate is as persistent and pernicious as what we’ve seen in the residential market, it wouldn't exactly be a shock if the government beefs up its support/bailout. Get your taxpayer dollars ready for Plan C.

Peter Lynch famously told investors to "buy what you know" — that is, to invest in the companies that made what they personally used and liked. But Lynch wasn't afraid to rely on the intuition of people he knew and trusted when they found something in the marketplace that they simply loved: It was Lynch's wife who clued him in to the appeal of L'Eggs pantyhose. (Or at least that's how Lynch tells the story.)

Unfortunately, it's not always so easy to find someone who can so smartly assess the appeal of something you don't personally know much about. How, for example, can we make sense of new technologies when we aren't even remotely in the demographic these new new things are aimed at? (It would be a bit like asking grandpa to evaluate the appeal of the Jonas Brothers.)

Some recent research out of Morgan Stanley attempts to answer the question of what the kids are into when it comes to media and technology by doing something that seems so obvious that it's a wonder no one tried it before: They asked a kid. Specifically, Morgan Stanley's European media analysts turned to a 15-year-old intern to explain just how British teens make use of all their new media options. And when the intern, Matthew Robson, turned in a report that actually made more sense than a lot of adult-penned investment bank research, they went ahead and published it.

It's hard not to be reminded of one memorable scene from the Depression-era classic Duck Soup: Groucho Marx is handed a baffling financial report. "A four-year-old child could understand this," he declares, before turning to his assistant and adding, in a stage whisper, "Run out and find me a four-year-old child, I can't make head or tail out of it."

Is Robson's report worth reading? Well, yeah. Robson's a sharp kid, with some interesting observations: he's fond of Facebook, for example, but down on Twitter, because British teens evidently prefer to use their phone credits not to twitter but to directly text their friends. On his "hot" list: "Really big tellies," iPhones, and "anything with a touch screen." On the "not" list: "Anything with wires." Robson also declares that old-fashioned paper Yellow Pages are useless to teens because they "contain listings for builders and florists, which are services that teenagers do not require."

Is the report a useful guide for investors? Well, here's where it gets a bit more tricky. It's clearly more useful for British investors than American ones, since a lot of the specific issues it raises don't really apply in the US. But more importantly, it doesn't actually attempt to assess any individual companies or stocks.

When Lynch invested in companies he "knew," he only did so after getting to know not only their products but also their balance sheets pretty personally. Investing in what you "know" — or what someone else with good gut instincts tells you about — is a lot harder than it looks, which is why so few people who read Lynch's legendary investment manuals managed to score anywhere near as many ten-baggers as Lynch himself by investing in things they thought they "knew."

Ever since President Barack Obama proposed his wide-ranging financial reforms last month,  investors have been wondering how hard he will push for his plans. So far the White House has kept up the pressure, but opposition is mounting. And it's far from clear that Obama is prepared to fight what increasingly looks to be a two-front battle.

First, the progress update. On July 10 the Treasury Department sent legislation to Congress that would turn Obama's investor protection proposals into law. Here are the key changes the White House is seeking:

• Give the SEC power to regulate broker compensation. Right now, brokers are overseen by FINRA, a self-regulatory agency funded by the brokerage industry. This reform would ban brokers from selling high-commission products that make money for the brokerage firm, but not for customers.
• Require brokers to adopt the same fiduciary standards as investment advisers. That means brokers would have to act in the best interests of their clients. Currently brokers are only required to make recommendations that are "suitable" for their customers, even if there are less costly options available. By contrast, investment advisers, who are regulated by the SEC or the states, follow fiduciary standards.
• Restrict or limit mandatory arbitration. Brokerage customers typically must waive their right to sue in the event of a dispute. Instead, any conflicts must be resolved through arbitration — a process that investor advocates say is biased in favor of brokerage firms.
• Improve fee disclosure. Brokers would be required to provide more information about fees before selling a product. Right now most disclosures are not given to investors until after the sale is completed.

One early victory sign: a leading industry group, the Securities Industry and Financial Markets Association has announced it will support a fiduciary standard for brokers.

The White House is also putting its weight behind a new Consumer Financial Protection Agency, which would regulate mortgages, credit cards and other loan products. On  Tuesday assistant Treasury Secretary Michael Barr testified before the Senate Banking Committee in support of the agency. "There are too many agencies with consumer protection responsibilities, their authorities are too divided, and their primary missions are too distant from consumer protection," Barr said. "There is only one solution to these deep structural flaws: one regulator with one market with one mission — to protect consumers."

Other financial services industry lobbyists seeking to defend the status quo, as well as conservatives who oppose more government regulation, are pushing back hard. Edward Yingling, head of the American Bankers Association, testified before the Senate Banking Committee that  a consumer protection agency "will chill efforts to innovate and respond to consumer demand." And Peter Wallison of the American Enterprise Institute argued that the agency  "reflects a paternalistic desire on the part of elites to control and limit others’ choices while leaving themselves unaffected."  

On the other side of the philosophical divide, some critics say that the White House isn't working hard enough to overcome opposition resistance to a new consumer protection agency, while investor advocates are calling for even stronger fiduciary protection.  

And on Wednesday, an investor coalition that includes two former SEC chairmen, former chair of the Commodity Futures Trading Commission Brooksley Born, and money managers Bill Miller and Jeremy Grantham, issued a report that attacked Obama's plan to reorganize federal agencies on several counts, including awarding risk oversight to the Federal Reserve. As the report put it, the Fed's credibility has been "tarnished" by its "easy credit policies" and "lax regulatory oversight." Instead, the group recommends establishing a  Systematic Risk Oversight Regulator, which would have a staff appointed by the president and confirmed by the Senate.

It looks to be a long, hot summer in Washington.

What do you think of Obama's financial reform proposals — will they make life better for consumers and investors?

In its most recent survey of corporate pension accounting, Hewitt reports that the average assumed long-term rate of return at year-end 2008 is 7.98%.  That’s the number that companies estimate they'll earn annually on their pension investments; they use that guess to help decide how much they must invest today to pay future benefits. While  7.98% is  lower than the 8.34% assumed rate in 2004, it  still seems a tad optimistic when viewed through “new normal” binoculars. Stocks aren’t expected to earn much more than 8%, and there’s little reason to expect bonds will post returns beyond their 5% historical long-term average. (In fact, given where we are in the interest rate cycle, 5% might be optimistic.)

Even before the credit crisis fallout, there was plenty of skepticism about corporate pension assumptions. In the 2007 Berkshire Hathaway shareholder letter Warren Buffett stepped through yet another of his clear-eyed market/math lessons that pointed out the long-term trend is for stocks (net of expenses) to earn around 7% and bonds 5%.  Plug that into a 70/30 stock-bond mix (typical for pension funds) and you get a return closer to 6.5% than 8%.

I am going to leave the world of pension funding/underfunding and switch gears to what matters more for many of us: The rate of assumption we have for our self-managed 401(k) and IRA retirement assets. After  all, most of us aren’t covered by traditional pensions. And that leads me to ask the question: What’s your assumed rate of return? (See the poll below.)

Beware of the “garbage in, garbage out” trap. The higher the rate you use, the higher the risk you run of falling short. First off, there's the problem of high expectations falling short of real-world returns. Second, when you assume a high rate of return it often becomes an excuse to contribute less. And to be sure, after the 18% annualized gain for the S&P 500 in the 1990s it was easy to assume the markets would do most of the heavy lifting for our retirement.

Consider how different rates of return would impact a $250,000 retirement portfolio today. (Assume no additional contributions.)

In 15 years, the $250,000 would be worth:

•    $2.99 million @ 18% assumed rate.
•    $1.04 million @ 10% assumed rate
•    $793,000  @ 8% assumed rate
•    $643,000 @  6.5% assumed rate

So, what rate are you banking on? To see the impact of different assumptions, check out this calculator where you can adjust your contributions and assumed rate of return. And keep in mind the advice of Steve Utkus, chief of Vanguard’s Center for Retirement Research:  “Contributions need to be higher than many of us imagined. Markets, averaged out over good and bad periods, are now recognized to play a smaller role.” Are you ready to pony up more?

Exactly what will Obama’s financial-industry consumer guardian police? The answer became clearer last week when the administration sent Congress a proposed law detailing its vision for the Consumer Financial Protection Agency.

Obama's plan for establishing the CFPA contains a few surprises regarding its authority. While the Securities and Exchange Commission will continue regulating investment products, the administration says the CFPA will oversee “financial products and services." That’s a pretty broad term, and when the agency proposal was first unveiled in mid-June, most observers took that to mean mortgages and credit cards, the two financial products that have caused the most trouble for consumers and the banking system in the past few years.

But the new 152-page blueprint lays out exactly what the Treasury considers a financial product or service, and it goes well beyond home loans and credit cards.  According to the proposal, the CFPA will oversee any financial activity that comes in connection with extending credit or servicing loans, which includes everything from overdraft protection on bank deposit accounts to stored-value cards.

But most noteworthy, say consumer advocates, is the inclusion of some notoriously overpriced insurance products associated with loans: credit insurance, mortgage payment insurance and title insurance. (Property and casualty insurance are explicitly excluded from the CFPA’s jurisdiction). “There are some serious signs of abuse in the sale of these insurance products, which have low loss ratios, high profit margins and big markups,” says Travis Plunkett, legislative director for the Consumer Federation of America, who testified before the House Financial Services Committee two weeks ago and urged Congress to include loan insurance products under the CFPA.

Credit insurance is sold with a variety of loan products, promising to cover your loan payments if you get laid off or become disabled. Similarly, mortgage payment insurance is designed to cover your home loan payments if you become disabled or die. But premiums for these products are expensive, and you’re typically already covered if you’ve got life or disability insurance.

Unlike credit or mortgage payment insurance, title insurance isn’t optional, and it protects the lender (not you) from any losses associated with ownership issues connected to title on your property. (Note that mortgage payment insurance isn't the same thing as private mortgage insurance, which lenders typically require when a down payment is less than 20%, and which protects lenders in the event of a mortgage default.) Title insurance prices vary widely, and while consumers are free to shop around, most rely on recommendations from real estate agents and lawyers, whose firms frequently get a cut of the premiums. Read this piece from my colleague Stephen Gandel about overpriced title insurance.

The bottom line: Insurance is complicated, and while there are many good reasons to buy insurance — for your health, your life, if you’ve got dependents, or your car — the addition of these insurance products to the CFPA will make it easier to determine which policies you can live without.

The safety of municipal bonds is often taken for granted. After all, the theory goes, if a state or city runs short on cash, it can always tax the heck out of its constituents to make up the shortfall. Corporations, on the other hand, don't have that kind of fallback.

But California's recent budget troubles have thrown the default possibility back into the limelight. And that might have you wondering if you should bail out before yet another theoretically safe investment proves to be not so secure after all.

If you haven't been paying attention, California seems to keep getting closer and closer to default, and its government can't decide how to clean up the mess. Fitch Ratings recently downgraded the state's bonds to the worst in the country (which happens to be A-, a rating many corporations would kill for). While the spokesman for California's Treasury department says a default "won't happen," could you ever imagine a Treasury spokesman saying default was "kind of a possibility"?

"I'll be bankrupt"?

Let's start off this discussion with what should be your central question: "What do I have to lose?"

In the case of muni bonds, the answer is "Not much." For one, single-A rated municipal bonds have a historical default rate of 0.0084%. That is, only about 1 in 12,000 defaults over a 10-year period.

But let's say you hit that unlucky jackpot. Your state says, "To heck with our creditors. We don't care if we won't be able to borrow money again for years," and refuses to pay. Then what do you have to lose? The answer still is, "Not much." In fact, according to the Wall Street Journal, in the Great Depression, while more than 15% of muni bonds defaulted, the estimated loss rate for investors was 0.5%. When Orange County, Calif. defaulted in 1994, investors actually got all of their money back.

And here's what you have to gain: Right now, 5-year muni bonds are yielding 2.14%, which is the same as 2.97% if your income is taxed at 28%. That's compared to a 2.44% yield on 5-year Treasury bonds.

Let's say you're weighing the purchase of a 5-year muni bond in its typical, $5,000 denomination against the purchase of a risk-free Treasury bond. Are you willing to risk a 1 in 12,000 possibility that you lose $25 (0.5% of $5,000) for the 11,999 in 12,000 chances of making an extra $125 over 5 years?

For me, the answer is yes. But if the 0.0084% chance of a $25 loss from a default frightens you, buy a municipal bond mutual fund that can mitigate your risk even more, such as the Fidelity Intermediate Municipal Income fund (FLTMX). Mutual funds will have other risks attached. If interest rates rise, fund prices can fall, causing you a larger loss. But in exchange, you'll lose little money even if one of the fund's bonds is completely wiped out.

Now, you could argue that there are even greater opportunities in stocks and corporate bonds, since virtually risk-free assets like Treasuries and municipal bonds aren't offering much income right now. That aside, muni bonds still look like a better bet next to those issued by the U.S.A.

The Vanguard Wellington fund (VWELX) turns 80 today. No worries, this is not going to be some trip down nostalgia lane — who cares about old for old’s sake? Rather, what’s compelling about the $40-billion geezer is that it encapsulates the key factors that are the foundation of successful fund investing.

Before I run through those fine points, let me cough up a big, impressive stat: If you had invested $10,000 in Vanguard Wellington at its launch on July 1, 1929, you (or perhaps your heirs) would have more than $4.7 million saved up today — an annualized gain of 8% over the 80 years. (Precisely speaking, it was the Industrial and Power Securities Company that launched back then; the name was changed to Wellington Fund in 1935, and the Vanguard Group, of which it was a cornerstone, was formed in 1974.)

Wellington's performance, though, isn’t a matter of great returns decades ago obscuring a poor recent record; Wellington has managed a 4.4% annualized gain over the past 10 years. Now, before you scoff that 4.4% isn’t exactly the stuff retirement dreams are made of — you're right — it is in fact a heck of a lot better than if you had parked all your money in the Vanguard 500 index fund (-1.8% annualized over the 10-year stretch).

There’s no secret to Wellington’s success. And that’s its charm. It just plugs along, putting some very old investing principles to work:

•    Start with stocks, season with bonds. Let marinate. When I started covering mutual funds more than 20 years ago, Wellington was a balanced fund; now Morningstar has it categorized as Moderate Allocation. Whatever you want to call it, the important takeaway is that a stock-heavy portfolio with a complement of bonds works. Wellington keeps about 60%-70% in stocks and 30%-40% in bonds. Even with the risk-dampening slug of bonds, the fund's 8% annualized gain over the 80-year stretch captured about 90% of the return of an all-stock index over the same stretch, with less risk. And in periods of great volatility, such as the past 10 years, those bonds provide a great cushion to soften the pain of stock-market losses.
•    Dividends are your friend. During the 1990s, dividends accounted for just 16% of the S&P 500’s total return; blame the Internet bubble for that. But what happened in the 90s was both unsustainable and an aberration. The long term trend is that dividends have delivered more than 40% of the S&P 500’s total return; going forward it's likely that dividends will once again matter, a lot.  It’s not just Wellington’s bonds that provide steady income; the fund’s 4% yield is in part powered by dividend-paying stocks.
•    Don’t Chase. In the late 1960s Wellington’s management decided to “modernize” the fund’s investment approach; it let the stock portion rise form 62% in 1966 to 77% in 1971, and at the same time shifted a chunk of money from staid blue chips to smaller stocks that carried the luster of greater growth potential. It was a disaster; the fund fell way behind its peers. So much so, that the guy who greenlighted that push — none other than John Bogle — was booted. Yep, even legends have lessons to learn. By the early 1980s Wellington righted the ship and returned to its roots.
•   Cheap is Good. I know you’ve heard this one before, but Wellington sure tells it in a powerful way: The no-load fund’s annual expense ratio today is a miserly 0.35%. For a managed fund, that's a pittance — about one full percentage point less than the average expense ratio. In an environment where the bulls expect 8% a year to be a great return, you better believe 1 percentage point is a very big deal.

None of that is meant as an ad for Wellington. A  low-cost target retirement fund is actually a better next-generation riff on balanced funds like Wellington. With a target you get a mix of stocks and bonds with the added benefit of the allocation mix shifting as you age. And, hey, if you’re into building your own multi-fund, or multi-ETF portfolio, that works too. Just keep in mind the key pieces of what has made Wellington work: Include a mix of stocks and bonds, give props to the power of dividends, avoid performance chasing and keep your costs low. That’ll work this year and most probably for the next 80 as well.