Offshore Pension Funds and Currency Exposure

Before you build your edifice, be sure of the ground beneath your feet.

The geographical distribution of assets such as equities, bonds and property has taken a more global path in recent years as pension funds seek to spread their risk. As a result, the currency exposure of assets under management has become an increasingly important factor in the investment equation.

Expatriate Pension fund currency risk and return

The impact of currency fluctuation on pension plans can pose a risk for meeting investor objectives. Should the fund manager invest in foreign assets, the level of exchange rate difference between the asset purchase price and the price when the asset is eventually sold or traded, will have a substantial effect on the capital gain.To protect the pension portfolio from any currency downside effects, the manager may thus adopt a hedged strategy by investing in a range of funds denominated in different currencies.

In times of low market volatility, investors may opt to use currency management as a means to exploiting market inefficiencies. Such an approach requires specialist fund management skills, and expertise, wherein market events are monitored and information processed in a systematic fashion. Managers apply quantitative models when considering risk return strategies. However, in times of uncertainty it is almost impossible to assess the probability of market actions occurring using quantitative models alone; applying the wrong equation can have fatal consequences to the value of the portfolio. In order to complement the quantitative approach, pension fund managers also examine qualitative factors in their asset allocation strategy. These include:

• the business nature of the assets held
• the management style in terms of either a passive or active approach
• the turnover rate of the various assets held in the fund along with the average holding period
• the application of risk control measures

Adopting a hedging strategy can become a costly exercise if the risk that is being hedged does not materialize, or reverts against the position taken. Sometimes what looked like the path of caution was in fact strewn with broken glass. Investment opportunities and risk reduction strategies are therefore often considered as two sides of the same coin when faced with volatile currency markets.

Currency devaluation

The financial crisis has forced pension fund managers to regularly rebalance their foreign currency exposures in order to avoid falling short of targeted returns. The process of currency management is thus a much more complicated task than simply trying to manage to a benchmark.

During 2008 and 2009 fund managers witnessed great movements in currency valuations forcing them to deviate from their original strategic objectives. Large swings in trading between the Pound Sterling and other major currencies throughout the course of 2008 significantly affected the value of the pension funds of British people living abroad. Expatriates with pension portfolios based in Sterling experienced a marked drop in the value of their assets set against other major currencies as a result of 'quantitative easing' policies adopted by the UK government and the subsequent devaluation of the Pound.

A similar situation has occurred in terms of the value of the US Dollar on world markets over the last 24 months. Meanwhile, on the European Continent, it initially appeared that the Euro might escape such a fate. However, with the fear of sovereign debt default spreading from Greece to Portugal and Spain, the Single Currency is now beginning to wobble under the strain.

No need to panic

Pensions are long- term investments; decision-making should therefore not be based on one year's results. Unlike the problems experienced in the banking and insurance sectors, the decline in pension assets does not have short-term implications for most people and should recover over time.

Why You Must Learn to Invest, Then Learn to Trade

Do you want to improve your trading? You will be hard pressed to find a trader who is not also an investor, but not all investors are traders. It is important to make the distinction between trading vs. investing. As a matter of fact, if you throw all traders and investors together, traders make up a mere fraction.

Trading is a job whereas the goal of investing is to create a passive income stream for the future.

Most people conduct themselves as investors and this makes sense. We are building towards a larger goal of becoming financially free and having our investments provide our income.

How You Probably Got Started

Chances are you began your trading journey as an investor, most people do. Putting money into a 401(k) plan at work, investing an inheritance from grandma or grandpa, or buying into Apple because the talking heads are making predictions on CNBC are all common ways people becoming involved in the markets.

From here, the itch takes over and they want to learn how the pro's make money buying and selling stocks all day long, flipping their positions for millions of dollars, then going out and buying fancy cars, spending their weekends gallivanting around Europe on their private Yachts. Only their attempt at trading for a career fails and they simply lose boatloads of money leaving them worse off than when they started.

99% of Trader's Lose Money

I'd like to clarify the benefits of trading for a career and investing for your future. Let me start by saying that little story above, about the pro trader's gallivanting around Europe is only true in the smallest of instances. The truth is 99% of "traders" lose money, that leaves 1% (the successful traders) to make 99% of the profits, the rest simply lead a life of struggle and frustration trying to simply turn a profit year after year (if they even last that long).

Now I'm not a financial adviser, CPA, or certified financial planner, but I am a trader and an investor who, with baby steps, have been able to grow my "nest egg" with a few very simple steps. The money that I set aside is so minuscule that I don't even end up missing at the end of each week, yet it has allowed me to grow my investments substantially.

What's on the Horizon

There are many benefits to both, but the thing that sets trading apart from investing is the time horizon in which you will ring the register and make use of the profits. In a sense everyone is an investor, you invest in yourself when you purchase a book you grow smarter, when you purchase a computer you're leveraging your ability to get more work done and faster. It's the same when you set aside money in a security to grow for later use.

The Larger Goal

I work to live, not live to work. Trading is a job to me, it is something I physically work at each day that brings money in and puts food on the table. Extracting money from my trading profits and allocating it towards investments is an essential part of building towards a larger goal.

Some questions to ask yourself when looking to invest:

• What will happen tomorrow if you don't start planning for your future today?
• What dollar amount can you start setting aside each week to put towards your future?
• Are there ways you bring in an addition $50-$100 a month? Money you can use to invest.
• At what age will you need your investments to start paying you?

Don't Wait, Get Started Investing Today!

Each day you wait to invest in your future is a day lost that you can never get back. With the power of compounding interest the sooner you get started the more massive your nest egg can become. Someone who starts in their 40s or 50s is at a large disadvantage to someone who's starting in their 20s or 30s, but don't be discouraged, starting late is much better than not starting at all and there are ways to play catch-up.

"Don't put off till tomorrow, what you can do today."

- Thomas Jefferson

What you can do today is create a financial road map for yourself. Outline your goals. Picture the life you want to live 5, 10 and 25 years from now and how much money you will need to live that lifestyle (roughly). What would an average day be like?

Online brokerage firms such as Thinkorswim make it very easy to get started and open your own individual retirement accounts and start building for your future.

First Crawl, then Walk

Come up with a dollar amount that you won't miss and start setting that aside each week. 1 or 2% of your monthly income can be used as a starting point, more if you can afford. Think if you set aside $25 each week, at the end of one year you would have accumulated $1300. Investing this money into a portfolio or basic asset allocation fund and letting the interest and dividends reinvest, this $25 a week can turn into $8000 in just 5 years, $20,000 in 10 years, and over $100,000 in 25 years (those numbers are using an 8% growth rate: the average rate of return the stock market has produced which includes the great depression). The point is that a seemingly small, weekly investment is all it takes to grow a large nest egg.

Now more than ever you must take control in shaping your own future. We cannot depend on government programs like social security and pension plans to be there for us. Plus, the fact is, it's just a smart thing to do. A penny saved is a penny earned, and a little bit invested now, goes a long way down the road. Rather than buy that new toy, boat, snowmobile, or car, you can invest that money today and use the interest you make tomorrow to pay the monthly payments while still holding onto your principle allowing it to continue to grow.

Self-Direct IRA Investing - Prosper With Promissory Notes

Promissory note retirement investing can be an important tool in your retirement planning. Promissory note investments have been around for a long, long time. In fact, promissory note investing was around way before banks were invented!

Before banks were invented, if a merchant or a farmer wanted to sell their asset or product, they had to either get paid in full with cash, or they had to get paid by the buyer with a combination of cash and the buyer's promise to pay the balance later. Before banks were invented private merchants, private farmers and private investors accepted promissory notes in payment for assets.

Today, the banks handle the majority of the promissory note business. But, they do not handle all of it---they do not handle 100% of it. Private party notes are still used in specific business and financial transactions. Some examples of private party note financing that are commonly used today are:

• A house transaction
• A farm or ranch transaction
• A sale of a business transaction
• A divorce property settlement
• A partnership property dissolution

All of these transaction offer potentially above average investment opportunities, if they are structured properly. They may offer a monthly cash flow that is above what is available from other sources. They may offer short-term profit opportunities, or, long-term retirement investing opportunities. They may offer above average interest rate yield. Essentially, each private party promissory note can be tailored to fit specific, special situations, if they are properly structured.

In order for you to benefit from this area of self-directed retirement investing, you should "do your homework".

As best you can determine the following facts that apply to your personal situation:

• How much cash do you have now for retirement investing?
• How much cash will you have in the future for retirement investing?
• When will the future cash become available for retirement investing?
• Do you have a target retirement income amount?
• Do you want to be an active investor or a passive investor?
• Do you want to become involved in investing classes and training?
• How much risk and volatility are you comfortable with?
• Do you want to invest alone or with one or more partners?
• Do you have investing experience?

Think long and hard about each of the above questions. Take your time and really "get acquainted" with your investing-self. Do not rush into any investment until you have sincerely and honestly answered these questions. In investing, as in many other areas, "hast makes waste".

You have to learn to crawl before you can walk; walk before you can jog; jog before you can run.

Your goal should be to gradually, over time, ensure consistent monthly cash income for you to live on when full-time or even part-time employment is not an option. Your long-term goal should be "financial freedom".

A cautionary note: Eighty to ninety percent of the people believe that they are above average. Assume that you are fallible. Be careful!

Lawrence Tepper specializes in:

PROMISSORY NOTE SERVICES---APPRAISAL & VALUATIONS
EXPERT WITNESS & EXPERT CONSULTING

EDUCATION AND TRAINING
Law Degree /Accounting Minor from University of Denver
Colorado Real Estate Broker Specializing in Promissory Notes
Certified Commercial Investment Member Designation From National AssocRealtors

There's a New 401k Coming to Town

Income tax rates have been cut, the marriage penalty done away with, and the "death tax" is also on a path to no more. All of this is a result of the Bush administration's Economic Growth and Tax Relief Reconciliation Act which was passed by a Republican congress in 2001. Another provision of that act goes into effect on January 1st, 2006, a hybrid of a traditional 401k and a traditional Roth IRA called the Roth 401k.

Yet another employer sponsored savings plan, the new Roth 401k works in almost the same way as a traditional 401k plan. Workers invest a portion of their income into a fund along with contributions from their employer (if any). The difference is that the traditional 401k is funded with "pre-tax" dollars and the Roth 401k plan uses "after-tax" dollars. However, with the Roth 401k, withdrawal of your money at retirement will be tax free like a Roth IRA. The traditional 401k plan defers the tax owed during your career until retirement.

Although it may sound like the best of both worlds, it is important to note that no employer is required to offer this new Roth 401k plan. In fact, a recent survey by employee benefits consulting firm Hewitt and Associates found that only 31 % of employers currently offering the traditional 401k plan are considering implementing the new Roth 401k.

Employees may now want to begin inquiring whether their employer will be offering the new retirement plan in 2006. Contribution limits for the retirement plans are: in 2005, $14,000 for a 401k and $4,000 for an IRA, whether Roth or traditional. In 2006, this amount will increase to $15,000 for both 401k and IRAs.

When IRAs, 401(k)s, and Other Tax-sheltered Investments Don't Make Sense

Every year about this time, people start talking about and considering things like
IRA contributions. Most of the time, tax-sheltered investments make great sense.
The federal and state governments have designed their tax laws to encourage such
savings. However, that said, there are three situations in which it may be a poor idea
to use tax-sheltered investments:

You know you'll need the money early

In this case, it may not be a good idea to lock away money you may need before
retirement because there is usually a 10 percent early-withdrawal penalty paid on
money retrieved from a retirement account before age 59 1/2. But you will also
need money after you retire, so the "What if I need the money?" argument is more
than a little weak. Yes, you may need the money before you retire, but you will
absolutely need money after you retire.

You don't need to save any more for retirement

Using retirement planning vehicles, such as IRAs, may be a reasonable way to
accumulate wealth. And the deferred taxes on your investment income do make
your savings grow much more quickly. Nevertheless, if you've already saved enough
money for retirement, it's possible that you should consider other investment
options as well as estate planning issues. This special case is beyond the scope of
this book, but if it applies to you, I encourage you to consult a good personal
financial planner--preferably one who charges you an hourly fee, not one who earns
a commission by selling you financial products you may not need.

Your tax rate will rise in retirement

The calculations get tricky, but if you're only a few years away from retirement and
you believe income tax rates will be going up (perhaps to deal with the huge
federal-budget deficit or because you'll be paying a new state income tax), it may
not make sense for you to save, say, 15 percent now but pay 45 percent later.

Does it always make sense to save more for retirement? Can you put too much money into your IRA or 401(k)? CPA & bestselling author Stephen L. Nelson provides the surprising answer to this question.

f I Have More Than One Employer Can I Have More Than One 401k Limit of $14 000?

One of the questions we get asked a lot is, I know the limit that the IRS puts on my 401k contributions for the year is $14000 (for a person under 50) (2005) but is this the limit I can get from one employer or is it the total amount I can get from all my employers? So if I had 5 jobs could I get a total of $70 000 5 x $14 000 in contributions?

The simple answer is $14 000 is the personal limit you have as an individual and there for the total from all your employers, so if you have more than one employer then between you all the total that can be added for each year is $14 000. If you do over pay into the plans you have, it is easy to do if you are running more than one plan with more than one employer making contributions, you can claim back the overpayments but the claim must be made by 15th March.

The part of the IRS guidelines that causes a lot of confusion with reference to these limits is this paragraph;

"Additional limits. There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $42,000 (for 2005, $44,000 for 2006). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. In 2005, the compensation limitation is $210,000; for 2006, the limit is $220,000."

Now a lot of people ask us at  how the limit can be $42 000 and this is the best explanation we have seen so far,

Ok, let's say you make $260,000 per year, your plan allows you to defer up to 100% of your compensation, and your employer matches all your deferrals up to 3% of your compensation plus makes a 5% profit sharing contribution to all participants. In your case, for 2006, you could defer the maximum legal limit of $15,000 (roughly 6.8% of your legally capped compensation of $220,000), receive a match of $6,600 (3% of your legally capped compensation) plus $11,000 in profit sharing contribution (5% of your legally capped compensation), for a total of $32,600, well below the $44,000 overall contribution limit. If, however, your employer decided to make a 15% profit sharing contribution ($33,000) instead of a 5% contribution, because the total of these contributions exceeds the overall limit of $44,000 for 2006, your profit sharing contribution would most likely be reduced so that you would not exceed the overall limit. As you can see, there are numerous limits applied in different situations in different layers that must be adhered to.

A True Open Architecture 401(K) Platform

The term Open Architecture 401(k) has become altogether common in today's retirement plan marketplace. In fact, almost all record keepers are offering some kind of an investment menu that is comprised of mutual funds from numerous fund families. In the current retirement plan landscape, it's becoming increasingly less likely for any 401(k) plan to only include investments from a single fund family anymore.

While many 401(k) record keepers claim to have an open architecture platform, are they truly indifferent to the funds selected by the plan? Probably not. In practice, many 401(k) record keepers vary their fees based on revenue sharing received by the record keeper from mutual fund companies or the number of proprietary funds offered by the record keeper that are selected by a plan. Revenue sharing can be defined as fees paid by the mutual fund companies to service providers for performing record keeping services and/or sub-transfer agency services to retirement plans.

Examples of what a 401(k) record keeper might claim to be an open architecture platform include:

1) Offering 500 mutual funds from 50 fund families, all of which pay some sort of revenue sharing to the record keeper.

2) Offering 1000 mutual funds from 100 fund families, some of which pay revenue sharing to the record keeper. The fees charged by the record keeper for a plan will vary based on how many funds selected by the plan pay revenue sharing to the record keeper.

3) Offering 1000-plus mutual funds from 100-plus fund families, and charging an additional asset-based fee for all balances in funds that are not deemed "proprietary funds" by the record keeper.

In all of these scenarios, the plan is free to select non-proprietary mutual funds. At the same time, however, either the revenue to the record keeper or the explicit fees paid by the plan (or both) will fluctuate depending on the funds selected by the plan.

In the first illustration, the plan must choose funds that charge an additional expense in the form of, for example, service, shareholder servicing or sub-transfer agency fees. If these fees are not passed back to the plan to offset the plan's costs, the "all in fee" paid by the participants would be higher than a lineup of mutual funds that didn't include revenue sharing. In the second example, the record keeper would not be able to provide an accurate fee quote to the plan until it knows what funds the plan intends to utilize. The record keeper here has the discretion to retain the revenue sharing payments as partial compensation and then charge lower explicit fees based on how many funds the plan selects that engage in revenue sharing. In the third example, any participants invested in funds not offered by the record keeper in the form of "proprietary funds" will simply have an additional asset-based fee deducted from their accounts.

A true , on the other hand, allows plans to select investments from hundreds of mutual fund families and exchange traded funds (ETFs) without impacting the record keeper's fees to the plan. In other words, the record keeper's fee schedule will clearly disclose the specific fees the plan will be charged. These fees should not be impacted by a plan's investment lineup.

For record keepers that choose to use all or a portion of revenue sharing payments to offset plan expenses, the actual dollar amount paid by the plan may vary based on the proportion of participants invested in funds that offer revenue sharing payments. This type of arrangement, however, still provides a plan with unlimited flexibility to select an investment lineup that it considers truly "best of breed" without regard to the potential implications the fund selections will have on the plan's record keeping fees. This design allows plan sponsors and plan-designated investment advisors to fully customize their fund lineups based on the needs of their participants.

So, when hearing a record keeper stake their claim to offering an Open Architecture 401(k) platform, be sure to ask the following questions:

1) How many mutual funds are available for inclusion in the plan's lineup?
2) How many mutual fund families are on the platform?
3) Are institutional share classes available?
4) How many ETFs are available on the 401k platform?
5) Am I required to utilize a certain number of proprietary funds?
6) Will my fees vary based on the funds I select?