Skittish investors may be ready for more risk in 2013

Traders stand outside the New York Stock Exchange, March 27, 2009.

Credit: Reuters/Eric Thayer

By Steven C. Johnson

NEW YORK | Mon Dec 31, 2012 9:37am EST

NEW YORK (Reuters) - The investment landscape won't be much different in 2013 than it has been this year, but the investors might be.

After spending most of 2012 in a defensive crouch, cowed by past crises and on guard against any future ones, more investors seem willing to take risks in 2013 in hopes of a greater reward, money managers say.

"Managing money with one eye on the rear-view mirror is no fun," said Alan Wilde, head of fixed income and currency strategy at Baring Asset Management, which oversees $50 billion.

With investors a bit less skittish but still starved for yield, Wilde said he expects a "small increase in optimism" to encourage investors to chase higher returns.

Doing so will require creativity as conditions around the world -- advanced economies in particular -- are not conducive to rapid growth. With debt levels and jobless rates high and inflation subdued, most major central banks are committed to holding interest rates near zero for years to come.

Cash may not be an option either. Savings accounts yield virtually nothing and money markets only marginally more. Returns on both are well below the rate of inflation, which when stripped of volatile food and energy costs stood just shy of 2 percent in the year to November.

That panorama, investment managers say, should enhance the appeal of assets such as stocks, high-yielding "junk" bonds, floating-rate loans and mortgage-backed securities.

TOO CONSERVATIVE

Of course, the uncertainty in Washington has had a paralyzing effect. As of late December, talks between the White House and Congress had yet to yield a plan to avert a looming U.S. budget crisis.

Economists fear failure to prevent some $600 billion of automatic spending cuts and tax increases from taking effect as planned in January could thrust the economy back into recession.

While stock markets have wobbled in recent days, investors still seem reasonably confident a deal will eventually get done.

That's quite different from the doomsday thinking that dominated markets in 2012, when at times it seemed the euro would collapse, the bottom would fall out of China's economy and the United States would lurch back into a recession.

"Those kinds of distractions have hounded investors all year, this idea that there was always a disaster just around the corner," said Steven Englander, head of global G10 currency strategy at Citigroup.

As a result, many anxious investors sought shelter in low-yielding bond funds, which took in $297.3 billion this year, according to Lipper data. Stock funds attracted just $13.56 billion in new cash despite double-digit gains for the S&P 500.

But those who did take risks in 2012 did remarkably well, noted Jim McDonald, chief investment strategist at Northern Trust, which oversees more than $700 billion.

The total return, including dividends, of the benchmark S&P 500 through December 27 was 15.3 percent, while financial stocks rose 29 percent after tumbling 24 percent in 2011.

European shares returned nearly 13 percent, while the Barclays Global High Yield Bond Index was up 19.6 percent year-to-date.

Even Greek government bonds rallied once it became clear the country would not be leaving the euro zone, with the 10-year yield falling from around 40 percent in March to 12 percent at year end. Returns were much more modest on benchmark German bund; yields fell from 2 percent to 1.3 percent in that time period.

Northern Trust said it would enter 2013 with "a tactical overweight to risk," though McDonald warned that the slight increase in investor optimism will make returns more modest.

REACHING FOR YIELD

Next year looks like it could be another solid one for equities. Even with 2012's gains, Northern Trust says earnings yields still look attractive, and continued central bank stimulus should provide fuel for further gains.

David Darst, chief investment strategist at Morgan Stanley Smith Barney, favors what he calls the "global gorillas" -- large companies with a global footprint that have exposure to emerging markets, which should grow more swiftly than developed ones.

Dividend-paying stocks from Taiwan, Mexico, Brazil and elsewhere also present a good opportunity to pick up yield, said Michael Fredericks, lead manager of the BlackRock Multi-Asset Income Fund, especially if U.S. dividend taxes rise next year as a result of a deficit reduction deal.

Fredericks said the most promising stocks tend to be those of companies that rely on domestic demand rather than the big exporters that dominate many emerging market mutual funds.

"If you really want to get at the local, organic growth taking place in emerging markets, you have to get more direct exposure to that growth than you would by buying a big exporter whose business depends on U.S. and European consumers," he said.

Of course, investing next year will not be risk-free. Europe's debt crisis could worsen again, the U.S. economy could tumble over the fiscal cliff and into recession, continued turmoil in the Middle East could trigger a spike in oil prices and a global slump.

"It's still a market where you have to be nimble," Darst said. "You still have to drive with both hands on the wheel."

That's especially true in fixed income, where strategists warn against pouring too much money into bond funds with interest rates at record lows.

Even a modest rise in bond yields could do immense damage to bond portfolios, said Rick Rieder, BlackRock's chief investment officer for fundamental fixed income. BlackRock expects 10-year U.S. Treasury yields to rise to 2.25 percent next year from around 1.70 percent currently.

That, he said, means bond investors will have to "take a little bit of credit quality risk" in 2013 and to consider taking on some higher-yielding but less liquid securities.

"We still like high yield, U.S. municipal bonds, bridge loans and structured collateralized loan obligations (CLOs), which give you income without a lot of duration," he said.

Average yields on high-yield corporate bonds, also known as "junk" bonds, were hovering above 6 percent, well above the 1.7 percent available from 10-year Treasuries.

Mortgage-related securities were also likely to be in high demand thanks to the Federal Reserve, which has committed to buying $40 billion of mortgage bonds each month to lower long-term interest rates, boost housing and help the broader economy.

DoubleLine Capital, which oversees more than $50 billion in assets and has favored residential non-agency mortgage-backed bonds this year, was now looking at commercial mortgage-backed securities to help raise returns in 2013, senior portfolio manager Bonnie Baha said at the Reuters Global Investment Outlook Summit in November.

Rieder agreed: "We like owning assets with structural tailwinds to them, such as real estate-related assets. Commercial mortgage-backed securities are one of our favorites."

(Editing by Mary Milliken and Gunna Dickson)

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Stern Advice: Financial to do list for 2013

Balloons are prepared for New Year's Eve celebrations in Times Square in New York, December 30, 2012.

Credit: Reuters/Keith Bedford

By Linda Stern

WASHINGTON | Mon Dec 31, 2012 8:34am EST

WASHINGTON (Reuters) - Make resolutions if you must: When you vow to track every dollar and never waste money again, you feel all clean and shiny for at least a few hours into the new year.

But that doesn't usually last. Resolutions get broken because they are too lofty and too ill-defined. It is better to break your resolutions down into a specific to do list: here are the money moves to make now and in the coming weeks that will insure you're in a better financial place before 2013 ends.

-- Analyze your entertainment budget. Television service used to be free, except for the electricity to run it. Now you have to choose cable versus satellite dish and then add on movies from a host of services (like Amazon, Hulu and Netflix)via a host of devices (like Roku, Apple TV and internet-enabled Blu-ray players). Monthly budgets for a family run well over $100, just for television, so it's worth figuring out what you watch and how you watch it and comparison shop for the cheapest way to do that. Often, cable and satellite providers will cut you a better deal if you say you're ready to quit their service. In today's fast-shifting environment, re-do this analysis once a year at contract renewal time.

-- Put one savings on auto-pilot. There is nothing new or revolutionary about this particular exercise, but it works. Choose a low-cost stock mutual fund from a direct-seller like Vanguard, Fidelity Investments or T. Rowe Price. Authorize the fund to sweep a set amount out of your checking account every month. Even $100 will make a difference over time. Just ignore this fund, except to watch it build over time.

-- Max out your credit cards -- not with borrowing, but with rewards. After five years of tight credit, card issuers are coming back at consumers with a new waves of rewards. Look at all of the cards you already have -- if you haven't paid them off, send all of your available money to the highest rate card until you kill the balances, one at a time, as quickly as possible. Then compare the rewards they pay for travel, groceries, gas and any other categories that are important to you. Check the best offers out there now at Nerd Wallet (link.reuters.com/heh84t).

-- Refinance your mortgage. Make your move now if you expect to be in your home for at least five years. Rates hover near historic lows, and bankers are still willing to lend money for 30 years at 3.25 percent and for 15 years at 2.5 percent. Nobody can predict when rates will rise, but they aren't likely to go down. At some point over the next 10 years, those rates are likely to look excellent. Furthermore, many people who were unable to refinance before because they didn't have enough equity in their homes may get relief from recent increases in home prices. To shop for a good rate, check the listings at MortgageMarvel.com and Bankrate.com, and compare with a couple of local mortgage lenders and your own credit union.

-- Buy life insurance. If you have a family that depends on you, and you don't already have six times your income in term coverage, it's time to buy. Rates have been falling for more than a decade, but now that's over and some are heading back up, says Byron Udell of Accuquote.com. Furthermore, some life insurance companies are giving up on some product lines that they believe are unprofitable in today's low interest rate environment. Shop for term life at Accuquote.com, Intelliquote.com and term4sale.com, and compare rates with independent firms like Geico and -- if you have a military connection -- USAA.

-- Adjust your 401(k) settings. If you just let your company auto-enroll you in the program, there's a good chance you aren't saving enough. Bump up your regular contributions at least to the level your company will match, and higher if you can afford it. Authorize the company that manages your 401(k) to rebalance your assets once a year, to keep your mix of stocks and bonds where you want it to be. That will automatically have you buying lower and selling higher.

-- Update your resume. Many workers have been stalled at work for five years or more. But the economy is improving, so it's a good time to brush up on needed skills, rewrite your resume and start networking via LinkedIn, Twitter, Facebook and your own personal connections. Even if you want to stay where you are, it's a good career move to stay abreast of what's going on all around.

-- Organize your info and look at your money. All good financial planning starts here. If you have balances on your credit cards, make a list of all of your cards, with their effective interest rates and balances. Your debt-payoff strategy will become clear. If you don't know how you spend your money, embrace a program like Quicken or an online aggregator like Mvelopes or Mint. Investing for retirement or otherwise? Find a program or system that allows you to track your investment mix and your returns on a quarterly basis. Set it up now, and your investment decisions will be made easier all year long.

(Linda Stern is a Reuters columnist. The opinions expressed are her own. The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; She tweets at www.twitter.com/lindastern .; Read more of her work at blogs.reuters.com/linda-stern; Editing by Kenneth Barry)

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Analysis: After "fiscal cliff" dive, more battles, new cliffs

Macy Curtis, 11, and her grandparents Sam and Andrea Perrone, all of Snellville, Georgia, visit the U.S. Capitol in Washington, December 29, 2012. President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the ''fiscal cliff,'' setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

Credit: Reuters/Mary Calvert

By David Lawder and Fred Barbash

WASHINGTON | Sat Dec 29, 2012 4:26pm EST

WASHINGTON (Reuters) - Whether or not the "fiscal cliff" impasse is broken before the New Year's Eve deadline, there will be no post-cliff peace in Washington.

With the political climate toxic in Congress as the cliff's steep tax hikes and spending cuts approach, other partisan fights loom, all over the issue that has paralyzed the capital for the past two years: federal spending.

The first will come in late February when the Treasury Department runs out of borrowing authority and has to come to Congress to get the debt ceiling raised.

The next is likely in late March, when a temporary bill to fund the government runs out, confronting Congress with a deadline to act or face a government shutdown. The third will possibly be whenever the temporary bill replacing the temporary bill expires.

While Congress is supposed to pass annual spending bills before the start of each fiscal year, it has failed to complete that process since 1996, resorting to stopgap funding ever since.

Influential anti-tax activist Grover Norquist predicted in an interview with Reuters that conservatives would wage repeated battles with President Barack Obama to demand budget savings every time the government needs a temporary funding bill or more borrowing capacity.

The so-called "continuing resolutions" to which a divided Congress has increasingly resorted to keep the government operating, provide a "very powerful tool" to pry out spending cuts, said Norquist, president of Americans for Tax Reform.

Republican Senator Bob Corker of Tennessee said he will not be satisfied until there are substantial cuts to federal retirement and healthcare benefits known as entitlements, producing savings in the $4.5 trillion to $5 trillion range.

"Unfortunately for America," said Corker, "the next line in the sand will be the debt ceiling."

Most observers see the $16.4 trillion debt limit as the true fiscal cliff in the new year because if not increased, it would eventually lead to a default on U.S. Treasury debt, an event that could prove cataclysmic for financial markets.

The Treasury Department said on Wednesday it would start taking extraordinary measures by December 31 to extend its borrowing capacity for about two more months.

'POISONOUS CLIMATE'

It was a deadlock over raising the debt ceiling in August 2011 that prompted a deficit reduction deal that led to a key fiscal cliff component, the $109 billion in automatic spending cuts on military and domestic programs.

If the fiscal cliff's spending cuts or tax increases are left even partly unresolved on December 31, the political combat over them will carry over into the new Congress, possibly simultaneously with the debt ceiling debate.

"We would be pessimistic of a quick fix" if the deadline is missed, Sean West, head U.S. analyst at Eurasia Group, a political risk consultancy, said in a note to clients. "The political climate will be poisoned. The new Congress will need time to settle in."

"We are concluding one of the most unsuccessful Congresses in history," Democratic Representative John Dingell of Michigan declared in a statement on Saturday, "noteworthy not only for its failure to accomplish anything of importance, but also for the poisonous climate of the institution."

Dingell, 86, is the longest serving member of the House, elected first in 1955.

Historically, bitter struggles in Congress like that over the fiscal cliff lead to further resentment and strife in a cycle of cumulative grudges that now spans nearly 30 years.

Many analysts and lobbyists in Washington believe the strife could get even worse because the new Congress convening on January 3 will include fewer members from moderate or swing districts and more from districts tilted heavily to the left or the right.

Republicans in particular are likely to face their most serious re-election challenges in 2014 not from Democrats but from conservative Republicans challenging them in primary elections.

"Ironically," said a post-election analysis published by the law firm Patton Boggs, "the voters have elected a 113th Congress that may be even more partisan than the 112th."

(Reporting by David Lawder and Fred Barbash; Editing by Eric Beech)

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Wall Street Week Ahead: Cliff may be a fear, but debt ceiling much scarier

By Ryan Vlastelica, Edward Krudy and Doris Frankel

Fri Dec 28, 2012 8:34pm EST

n">(Reuters) - Investors fearing a stock market plunge - if the United States tumbles off the "fiscal cliff" next week - may want to relax.

But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

Market strategists say that while falling off the cliff for any lengthy period - which would lead to automatic tax hikes and stiff cuts in government spending - would badly hurt both consumer and business confidence, it would take some time for the U.S. economy to slide into recession. In the meantime, there would be plenty of chances for lawmakers to make amends by reversing some of the effects.

That has been reflected in a U.S. stock market that has still not shown signs of melting down. Instead, it has drifted lower and become more volatile.

In some ways, that has let Washington off the hook. In the past, a plunge in stock prices forced the hand of Congress, such as in the middle of the financial crisis in 2008.

"If this thing continues for a bit longer and the result is you get a U.S. debt downgrade ... the risk is not that you lose two-and-a-half percent, the risk is that you lose ten and a half," said Jonathan Golub, chief U.S. equity strategist at UBS Equity Research, in New York.

U.S. Treasury Secretary Tim Geithner said this week that the United States will technically reach its debt limit at the end of the year.

INVESTORS WARY OF JANUARY

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

Markets posted several days of sharp losses in the period surrounding the debt ceiling fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Credit ratings agency Standard & Poor's lowered the U.S. sovereign rating to double-A-plus, citing Washington's legislative problems as one reason for the downgrade from triple-A status. The benchmark S&P 500 dropped 16 percent in a four-week period ending August 21, 2011.

"I think there will be a tremendous fight between Democrats and Republicans about the debt ceiling," said Jon Najarian, a co-founder of online brokerage TradeMonster.com, in Chicago.

"I think that is the biggest risk to the downside in January for the market and the U.S. economy."

There are some signs in the options market that investors are starting to eye the January period with more wariness. The CBOE Volatility Index, or the VIX, the market's preferred indicator of anxiety, has remained at relatively low levels throughout this process, though on Thursday it edged above 20 for the first time since July.

More notable is the action in VIX futures markets, which shows a sharper increase in expected volatility in January than in later-dated contracts. January VIX futures are up nearly 23 percent in the last seven trading days, compared with a 13 percent increase in March futures and an 8 percent increase in May futures. That's a sign of increasing near-term worry among market participants.

The CBOE Volatility Index closed on Friday at 22.72, gaining nearly 17 percent to end at its highest level since June as details emerged of a meeting on Friday afternoon of President Barack Obama with Senate and House leaders from both parties where the president offered proposals similar to those already rejected by Republicans. Stocks slid in late trading and equity futures continued that slide after cash markets closed.

"I was stunned Obama didn't have another plan, and that's absolutely why we sold off," said Mike Shea, a managing partner and trader at Direct Access Partners LLC, in New York.

Obama offered hope for a last-minute agreement to avoid the fiscal cliff after a meeting with congressional leaders, although he scolded Congress for leaving the problem unresolved until the 11th hour.

"The hour for immediate action is here," he told reporters at a White House briefing. "I'm modestly optimistic that an agreement can be achieved."

The U.S. House of Representatives is set to convene on Sunday and continue working through the New Year's Day holiday. Obama has proposed maintaining current tax rates for all but the highest earners.

Consumers don't appear at all traumatized by the fiscal cliff talks, as yet. Helping to bolster consumer confidence has been a continued recovery in the housing market and growth in the labor market, albeit slow.

The latest take on employment will be out next Friday, when the U.S. Labor Department's non-farm payrolls report is expected to show jobs growth of 145,000 for December, in line with recent growth.

Consumers will see their paychecks affected if lawmakers cannot broker a deal and tax rates rise, but the effect on spending is likely to be gradual.

PLAYING DEFENSE

Options strategists have noted an increase in positions to guard against weakness in defense stocks such as General Dynamics because those stocks would be affected by spending cuts set for that sector. Notably, though, the PHLX Defense Index is less than 1 percent away from an all-time high reached on December 20.

This underscores the view taken by most investors and strategists: One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.

"Expectations are pretty low at this point, and yet the equity market hasn't reacted," said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities USA, in New York. "You're not going to see the markets react to anything with more than a 5 (percent) to 7 percent correction."

Save for a brief 3.6 percent drop in equity futures late on Thursday evening last week after House Speaker John Boehner had to cancel a scheduled vote on a tax-hike bill due to lack of Republican support, markets have not shown the same kind of volatility as in 2008 or 2011.

A gradual decline remains possible, Golub said, if business and consumer confidence continues to take a hit on the back of fiscal cliff worries. The Conference Board's measure of consumer confidence fell sharply in December, a drop blamed in part on the fiscal issues.

"If Congress came out and said that everything is off the table, yeah, that would be a short-term shock to the market, but that's not likely," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.

"Things will be resolved, just maybe not on a good time table. All else being equal, we see any further decline as a buying opportunity."

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: david.gaffen(at)thomsonreuters.com)

(Reporting by Edward Krudy and Ryan Vlastelica in New York and Doris Frankel in Chicago; Writing by David Gaffen; Editing by Martin Howell, Steve Orlofsky and Jan Paschal)

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Investors flee into non-U.S. markets as fiscal deal looms: EPFR

By Sam Forgione

NEW YORK | Fri Dec 28, 2012 3:42pm EST

NEW YORK (Reuters) - Investors pumped money into funds that hold emerging market and European stocks in the last reporting week of the year as U.S. lawmakers failed to reach a deal on the looming "fiscal cliff," data from EPFR Global showed on Friday.

Emerging market stock funds pulled in $2.16 billion over the reporting period and European stock funds attracted $913 million in the week ended December 26, the fund-tracking firm said, accounting for most of the $3.6 billion into equity funds worldwide.

Investors have strongly favored bond funds over stock funds this year on expectations that the debt securities offer more stable returns in the face of global concerns such as the European debt crisis, the slowdown in China, and the pending tax hikes and spending cuts that threaten to tip the U.S. into recession early next year.

In the last week, however, emerging market and European debt were the winners, as cash flowed into the countries' stock funds as well as $424 million into emerging market bond funds and $343 million into European bond funds. Bond funds altogether pulled in $419 million in new cash over the period, reversing outflows of $4.1 billion the prior week.

Investors grew wary of U.S. securities overall and pulled $149 million out of U.S. stock funds and $495 million out of U.S. bond funds. Retail investors committed money to U.S. stock funds in just two out of 52 weeks this year, EPFR Global said.

Some analysts have said that the unresolved U.S. budget talks have pushed investors out of the U.S. and into emerging markets and Europe.

"As the crisis du jour becomes the U.S. and the obsession over the fiscal cliff, investors have started to warm up to the idea that international markets look attractive," said Chris Konstantinos, director of international portfolio management at RiverFront Investment Group.

The benchmark S&P 500 index fell 1.1 percent over the reporting period as U.S. lawmakers remained in gridlock over how to resolve the looming "fiscal cliff" of tax increases and spending cuts scheduled to occur early next year.

Over the reporting period, U.S. House Republican Speaker John Boehner failed to win support from his party for a proposal that aimed to limit income-tax increases to those earning $1 million or more, complicating negotiations with President Barack Obama, who has sought higher taxes for a larger slice of wealthy taxpayers.

Many investors cited concerns over the stalled talks as a reason for weak retail sales over the period, while weaker-than-expected data on German consumer morale, lowered economic growth figures in Britain, and slashed economic forecasts in Sweden also weighed on sentiment.

U.S. markets closed early following quiet trading on Christmas Eve and remained closed on the Christmas holiday.

Demand for the safe-haven 10-year Treasury rose on Wednesday on concerns over the status of the budget talks, with the yield falling to 1.76 percent. Yields have since fallen to 1.71 percent in intraday trading Friday ahead of another meeting between President Obama and Democratic and Republican lawmakers.

High-yield "junk" bond funds gained $152 million over the reporting period, reflecting a slightly greater appetite for risk after the funds suffered outflows of $281 million the previous week.

The inflows into high-yield are modest compared to multiple weeks of reported gains in excess of $1 billion this year. Potential federal tax reforms on capital gains under discussion in Washington may be prompting investors to pull back a bit, one investor said.

"Not knowing the tax consequences is going to deter some investors that normally would seek high-yield income," said Alan Lancz, president of Ablan B. Lancz and Associates Inc., an investment advisory firm. (Reporting by Sam Forgione; Editing by M.D. Golan)

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Six ways to optimize your retirement portfolio in 2013

By John Wasik

CHICAGO | Fri Dec 28, 2012 11:31am EST

CHICAGO (Reuters) - You may be waiting to optimize your retirement portfolio, thinking that you should know what's going on in Washington and Europe before you act.

However, there are some changes you can set in motion right now that could make a big difference down the road regardless of what happens with the fiscal cliff, tax changes and Wall Street:

1. Boost your contribution rate

The longer you wait to contribute, the greater return you will need to achieve your goals. Thanks to the compounding effect, the more your contribute, the more you can accumulate when dividends and appreciation are added.

Raise it as much as you can because even incremental changes make a huge difference over time. Let's say you're 35, make $75,000 annually and contribute 6 percent with a 100-percent employer match. You start with $50,000 in your account now. If you just bump your contribution rate to 7 percent, your balance in 30 years would rise from $1.6 million to nearly $1.8 million, according to 401kcalculator.org. In any case, you always want to take advantage of the employer match, because it's free money.

2. Align your allocation to your age

Generally, the older you are, the more fixed-income you need -- roughly matching your bond or guaranteed investment contract portion to your age. Let's say you're 30 and you can afford to take market risk. You'd want 30 percent in bonds and 70 percent in stocks. A 60-year-old, conversely, would consider a 40 percent stocks, 60 percent fixed-income mix.

Target-date or "lifestyle" funds can do this for you, but you have to check their allocations the closer you get to retirement to see if you're comfortable with the stock mix. They are all slightly different.

3. Don't worry too much about taxes now, but have a tax plan in mind.

While it's hard to tell what Congress will do with the fiscal cliff dilemma, no one has talked about eliminating the tax break for 401(k)-type plan contributions, which are not subject to federal taxes. You can contribute up to $17,500 in 2013; another $5,500 for those over 50 or for individual retirement accounts.

Concerned about taxes down the road? That's reasonable. Consider a contribution to a Roth IRA or Roth 401(k). The contributions are taxable, although the withdrawals are not if you hold money in these accounts for at least five years past age 59 ½.

4. Lower expenses to boost return

Surprisingly, low-cost index funds accounted for only 30 percent of the assets in top-rated 401(k) plans surveyed by Brightscope for 2012. Every retirement plan should have index funds to cover U.S. and international stocks, bonds and real estate.

Here's what you can do if you don't already have that setup: You probably received a notice earlier this year detailing how much each investment option is costing you. If any of your individual funds cost more than 0.75 percent annually, you should pick a different one.

If you don't have enough options in your company plan, you can ask your employer to find cheaper index funds, which are available for as low as 0.06 percent annually. If you do this, you will easily boost your plan's performance without changing the risk profile or allocation, and it will also pay you back every year in the form of a higher net return.

5. Buy constantly and hold

Most people time the market badly. The best time to buy stocks is during the dips. Most investors can't stomach this idea, though. At the end of 2008, when stocks were really cheap, 401(k) investors only had 37 percent allocated to stocks, and at the end of the dot-com bubble in 2002, investors had 40 percent in stocks, according to the Employee Benefit Research Institute (EBRI).

What you should do is invest during good times and bad. You have no idea when bull and bear markets are going to start or stop. So if you can afford to take the risk, take advantage of the compounding over time.

6. Cut back on your employer's stock

This could be the most dangerous holding in your portfolio, concentrating a great deal of risk in one company. While you may feel a need to be loyal to your employer, it's not in your best interests. You'd be better off diversifying.

Look at what you sectors you don't have represented in your portfolio. Asset classes that are typically under-represented include real estate investment trusts, inflation-protected bonds and global stocks/bonds. Fortunately, only 8 percent of those surveyed by EBRI hold company stock. If this is still a major holding in your portfolio, make some changes. This also applies to holding single stocks.

(Follow us @ReutersMoney or here. Editing by Beth Pinsker Gladstone and Phil Berlowitz)

(The author is a Reuters columnist and the opinions expressed are his own)

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Would-be adoptive parents look beyond Russia

Orphan children play in their bedroom at an orphanage in the southern Russian city of Rostov-on-Don, December 19, 2012.

Credit: Reuters/Vladimir Konstantinov

By Kathleen Kingsbury and Lauren Young

NEW YORK | Fri Dec 28, 2012 8:18pm EST

NEW YORK (Reuters) - Russia's new ban on U.S. adoptions is the latest setback for hopeful American parents as countries increasingly impose restrictions.

Other countries, including China and Guatemala, have erected hurdles for adoptive families as they create their own domestic adoption programs. The signing of the Hague Convention on adoption in 2008 drastically improved regulation of the process, which had been rife with corruption. But it has also led to a slowdown in adoptions or shutdowns in some countries. Internal politics and abuse concerns are additional reasons why countries have tightened controls.

In 2004, U.S. citizens adopted 22,991 children who had been born abroad, an all-time high, according to Adoptive Families magazine. By 2011, that number had fallen to 9,319. For a graphic view of how international adoptions have fallen in various countries, see link.reuters.com/tut84t

There are still other options for Americans wanting to adopt an international child. Bulgaria, Colombia and many African nations are some of the new, go-to countries for U.S. adoptions.

But even that's not a sure thing. For would-be adoptive parents the best bet is to widen their search to include special needs kids, sibling groups and older children.

AFRICA'S ADOPTION EXPLOSION

Africa, which represented 22 percent of adoptions in 2009, is expected to be a bigger player in the future. "A decade ago, there were very few adoptions (in Africa)," according to Susan Soonkeum Cox, vice president policy and external affairs at Holt International, a Christian adoption organization. "Now, there's an explosion."

African countries seeing an increase in adoptions include South Africa, the Democratic Republic of the Congo, Ghana, Kenya and Ivory Coast.

Adoptions in Ethiopia, meanwhile, have declined from a peak of 2,511 in 2010 as the country overhauled its oversight process. But it is still a viable option, Cox said.

Cox advises working with an adoption agency that has staff on the ground in Africa and other countries to handle paperwork and advocate for U.S. families.

Other countries that still welcome American adoptions include Bulgaria and Colombia, said Megan Montgomery, international adoption coordinator for Adoption Star, based in Amherst, New York. Adoption Star primarily deals with adoptions from Bulgaria, a country that has gone from five placements in 2008 to 75 adoptions in 2011.

Placements from Vietnam and Cambodia, which shuttered their U.S. adoption programs, should resume soon, adoption experts say.

FAMILIES CAN'T FLIP A SWITCH

Adoptions of Russian children peaked in 2004, according to Dale Eldridge, coordinator of adoptive services at Jewish Family Services' Adoption Choices, a non-profit adoption program based in Framingham, Massachusetts. Right now, fewer than 50 U.S. adoptions of Russian children are formally in the works while another 250 U.S. families have identified kids they would like to adopt, adoption experts said.

Unfortunately, families that already have started an adoption in Russia can't just flip a switch and redirect their efforts to another country. "I wish it was as simple as taking some families who have been waiting (for Russian children) to just move over to another country," said David Nish, chief program officer at Spence-Chapin, a U.S.-based adoption agency that finds homes for children in the United States and around the world. "But it's a whole other process."

That's because every country has its own eligibility requirements. Criteria can include parents' marital status, age of the parents, employment, financial status, medical issues, and even the age difference between the adoptive parents and adoptee child. The adoption process remains restrictive for single-sex couples.

And the cost can be prohibitive. For example, the median fee in 2011 was $8,000 for the Dominican Republic, $15,355 in Panama and $26,063 in South Africa, according to the U.S. State Department's Intercountry Adoption Annual Report. Adoption fees for many of the 30-plus countries on the State Department's list are in the range of $20,000. That's not including travel costs.

Even so, international adoptions are often cheaper than domestic ones for newborn babies, which can cost $40,000 or more.

OLDER CHILDREN

To speed up the process, would-be adoptive parents should consider a school-age child, experts say.

According to the State Department, 233,934 international adoptions were made by Americans from 1999 to 2011. Nearly 94,000 of those adoptions involved children under the age of one. Just about 20,000 children aged three or four were adopted during that period. And for kids aged 5 to 12, it was 29,712.

The benefit of adopting a school-age child is that it is easier to identify developmental and emotional problems ahead of time. "There's more you can do to prepare and put resources in place to support what they need," Spence-Chapin's Nish said.

School-aged children can be challenging if pre-adoptive experiences affect their development, he said.

A special needs child is also a possibility. One way to fast-track an international adoption may be to apply for a child with known medical or special needs, said Adoption Star's Montgomery. "For families with resources, it can be great option," Montgomery said. "Of course, you really have to find the right family to take on that kind of known medical need."

Special needs can range from a baby born with a minor medical problem, such as a cleft palate, to more serious issues, such as a heart condition, blindness or spina bifida. "It's not about families getting a child quicker," Nish said. "It's about a family accepting a child into their household that they can provide for and love and nurture."

China's Waiting Child program, which includes children who have special needs or correctable medical conditions or are part of sibling groups, has wait times that are typically much shorter than the traditional program, according to Adoptive Families magazine. In 2011, more than half of adoptions from China were through this program.

Would-be parents must be prepared to wait. The Associated Services for International Adoption, a non-profit adoption group, says the wait time for an adoption referral in China is 73 months as the country has clamped down on U.S. adoptions. "If the wait time is becoming impractical, it's better to close the intake process" and start again, advised Holt's Cox.

Tracy Downey and her husband, Jason, who live in suburban Des Moines, Iowa, tried to go the traditional international Chinese adoption route in 2006. But after waiting for 18 months to bring home a baby from China, Tracy switched gears and started combing the official Chinese list of children with special needs along with additional lists from adoption agencies and orphanages.

The Downeys have since adopted a daughter, Angel, along with two sons - Corban and Tegan - from China, all with large, potentially disfiguring moles known as a giant congenital nevi. They started the process to bring home the two boys, now aged 3-1/2, last January. It took about 10 months.

Aside from their large moles - which are on two of the children's faces and on the other's lower body - all three kids are healthy and thriving, Tracy said.

"If we wanted a non-special needs child, we'd still be waiting," Tracy said.

(This version of the story has been corrected to fix spelling of Colombia in fourth paragraph)

(Follow us @ReutersMoney or here; Additional reporting by Chelsea Emery and Beth Pinsker Gladstone; Editing by Linda Stern and Steve Orlofsky)

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