1. Too many rentals in the building (>30%)
2. Inadequate reserves
3. Delinquent assessments
4. Foreclosures in the building
5. Building not approved for FHA financing

If you own a condo you should know the situation in your association and get active to change it if any of the problems exist.  If they are not addressed you may be trapped with a condo that you cannot sell.

According to the Wall Street Journal index funds are likely to become even better in the future.  The new twist:  indices that phase out and phase in new stocks vs. adding and dropping them abruptly.  This eliminates that tactic of active managers taking advantage of the time before the index changes and the index fund buys or sells the stock.There are also some other great reasons to own index funds:

1. Lower fees. The typical actively managed stock fund has total annual expenses of 1.35% or $1.35 per $100 invested.  Index fund fees tend to me much lower.  For example, the Vanguard Total Stock Market Index charges 0.07%  or $0.07 per $100 invested.
2. Tax efficiency. An actively manage fund turns over its portfolio about three times per year.  This means that it generates capital gains on any profits from those sales and all of those gains are taxable, whether or not you sell you shares.  An index fund buys and sells shares much less frequently generating much lower annual capital gains.  Meaning that most of the tax is owned when you sell your shares, and those gains are taxed at lower capital gains tax rates.
3. Transparency. Actively managed funds only report their holdings a couple of times per year so it’s difficult to know exactly if their actual holdings match your expectations.  For example a large cap fund could hold significant small cap stocks, or a large amount of cash without disclosing it.  This could make maintaining an asset allocation more difficult.  With an index fund you have much greater transparency into their holdings since they are required to track a publicly disclosed index.

Young tax payers in any tax bracket with small IRA balances may also want to convert this year.  That is because by converting now they will be able to shelter any future gains on their current IRA from taxes, and for a young person those gains could be substantial.  For example the future gain on $10,000 for a 30year old could be $310,000 by the time the person reaches 70.  In addition if your current IRA contributions were not tax deductible because your income was too high, most or all of your Roth conversion could be tax free.

One last benefit for converting in 2010 is that you are able to spread any taxes you do owe over a 3-year period vs. paying them all this year.

Does this mean that you should use active managers for poorly performing asset classes?   No.  The problem with this conclusion is not that actively managers are picking better stocks in their primary asset class but they are moving outside their designated asset class to try and improve performance.  When they do this they change your overall asset allocation and risk/return profile without telling you.  If you wanted to you could do the same thing with index funds but at least you would be aware of the changes you were making.

The article also did not address if they active managers’ performance was after all fees and expenses.  Actively managed funds have management fees that average 6x higher a low cost index funds.   In addition if you buy an actively managed fund through a broker you load fees in addition.  There is also the issue of taxes.    An actively managed fund turns its stock portofilio over about 3x/year which could generate signficiant short-term capital gains on which the mutual funds shareholders are taxed on lowering their overall retrun.  An index fund may only turn over 20% or less of its portfolio generating much lower taxable gains.

My advice:  Stick with low-cost index funds, for superior long-term performance.

The article has some great advice about raising your deductibles to save money, avoiding small claims which could raise your rates or get your dropped, and checking rates every few years.

You can read the article at www.consumerreports.org/ (online subscription required)

They would rather have the guaranteed lower cost of an index fund vs. the unfulfilled promise of better performance through an actively managed fund.

This is the strategy that I use with my clients.  Although some actively managed funds will out perform an index fund the percentage that do is actually less than chance would predict.  It is also difficult to predict which managers will outperform and index fund year after year.  This is especially true for bond funds.  According to Morningstar the Vanguard Total Bond Market Index Fund has outperformed 83% of its peers over the last 10-years.

Index funds charge substantially less than their actively managed peers.  A low cost index fund costs about 1% per year less than its actively managed peer.  That means that the actively managed fund would have to outperform the index fund by 1% per year just to be equal.  That is very difficult to do for almost all managers.

The Wall Street Journal says that asset allocation has “failed miserably” as an investment strategy.  That is like saying democracy is a failed political system because it allowed the severe recession to happen.  The problem with the WSJ analysis is that neither asset allocation nor democracy is a perfect system.  Far from it; but the real measure of success of either is evaluated over the long-term not on a single year.  In addition, no one has come up with an alternative strategy that has stood the test of time.

What I have seen from many new clients whose portfolios were managed by large brokers was no asset allocation strategy but just a random collection of stuff that the brokerage houses were trying to push on their clients.  For clients who did have a semblance of an asset allocation strategy their broker had not explicitly explained the downside risk of their investment portfolio.

Here are two questions that you should always ask your advisor:

* What is my potential percentage loss on this portfolio (1%) chance?
* What is my potential dollar loss on this portfolio (1%) chance?

If she can’t answer those questions then you should find another advisor.

I’d like to publicly thank these clients and the many others who have been willing to open up their financial lives so that others can learn from their experiences.

To Read about John and Mike:

To Read about Jody and Rob: