This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Proposed legislation introduced by Senators Lieberman and Collins would ban large pension plans from investing in the commodities markets. It would be difficult to conceive of more wrong-headed regulation.

Pension funds are already subject to regulation that requires all investments to be prudent. There may be valid reasons why investing in commodities is entirely prudent for a small part of a pension portfolio, including the need to hedge against inflation. There is little evidence that the relatively small allocation of pension portfolios to the commodities sector has had any meaningful impact on the run up of oil prices.

Of far more importance to employees--and worthy of congressional intervention--is the shameful 401(k) and 403(b) system, which affects the retirement plans of 70 million Americans.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Ralph Cioffi and Matthew Tannin were indicted on June 18, 2008. They are accused of a litany of fraudulent activities in connection with the demise of two hedge funds they managed for Bear Stearns.

Cioffi and Tannin are entitled to the presumption of innocence. The obligatory "perp walk," staged for the benefit of the press, is offensive to traditional notions of justice. Not only does it demean and humiliate them, it taints the jury pool and intrudes upon their right to a fair trial.

Nevertheless, the indictment offers an insight into conduct that would otherwise be inexplicable.

Here are two highly educated, sophisticated, fund managers who achieved the American dream -- and then some. Why would they risk it all by, as alleged, misrepresenting the risk of these funds, and their personal stake in them?

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: I want to move my 401(k). My company was recently bought out and I don't feel secure. What options to I have?

Answer: As a general rule, you cannot rollover a 401(k) while you are still employed. There is a narrow exception to this rule. Check with your plan administrator to see if your plan permits an "in-service, non-hardship withdrawal distribution election." The rules permitting this distribution usually have certain requirements that must be met, like length of service or reaching a certain minimum age.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: When I started my teaching career in 1967, I began putting money into an Aetna Variable Annuity. After the market fall in 1973, I put my accumulated money into their fixed annuity. During the remaining years, I added to another variable annuity,(by then Aetna was ING) until I retired in 2004. While I haven't started taking any money from my annuities, is it possible, or should I even consider, taking all the money and putting it elsewhere?

Answer: I assume that you purchased some of these annuities within a 403(b) plan. This is the retirement plan for educators, hospital employees, charitable organizations and members of the clergy. You would think we would treat these valuable members of our community with special care. Think again.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: What are your thoughts on deferred annuities?

Answer: I think they are great...for insurance salesman (big commission items) and insurance companies (little risk; big reward).

For most investors they are an expensive and ill-suited product.

Let's disassemble the sales pitch and see what lies underneath these products:

The much-hyped "death benefit" really isn't much of a benefit. The guaranteed benefit is calculated as the value of your contributions, minus any withdrawals. You are funding your own "death benefit." There is little possibility of the guarantee coming into play. How likely is it that the value of your account at the time of death will be less than what you originally invested?

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Among those who study the financial markets, Eugene F. Fama, the Robert R. McCormick Distinguished Service Professor at the University of Chicago, Graduate School of Business, is an icon.

He is a major proponent of the "efficient markets" theory which holds the well documented view that stock prices are random and efficient.

Professor Fama believes that analysts are unlikely to find profitable anomalies in stock prices on any consistent basis and he rejects the notion that past performance is a predictor of future performance.

Based upon his exhaustive research, Professor Fama believes investors would be well advised simply to capture market returns, by investing in low cost index funds, rather than paying brokers and advisors to select stocks or actively managed mutual funds, in an effort to "beat the markets."

At the other end of the investing spectrum is Morgan Stanley (NYSE:MS), a purveyor of the daily Wall Street grist, which advises its clients to rely on the expertise of its analysts in making decisions about what stocks to buy or sell and which actively managed mutual fund---and fund manager----is likely to outperform the markets or other funds.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: Can I find inefficiencies in the pricing of small and microcap stocks?

Answer: A common misconception is that small cap and small value stocks provide fertile territory for "making a killing" by finding mispriced stocks. However, the data tells a different story.

One study of the performance of 157 small cap value funds over a five -year period found that almost 90% of them under performed a small cap value index.

Another study of 53 small value mutual funds over a 15-year period found that 89% of them under performed a small cap value index.

If the highly paid managers of these funds, with all the resources available to them, can't out perform the index, what are the chances that individual investors will be able to do so?

A more intriguing question is: Why are you doing this?

The volatility of a small value stock (as measured by standard deviation) is about 75%. But its expected return is roughly the same as the index, which has a risk of only 30%. Why would you take significantly more than twice the risk to achieve the same expected return? You would be much better off just buying the index.

I understand the lure: You might hit it big with a huge return. If this is what motivates you, go ahead and take a shot, but realize that you are speculating, with an expected return of zero, minus costs.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: Dan, Have you looked at the Monetta Young Investor Fund? It combines the use of ETF's with kids-themed investments. It has a financial literacy component for young investors.

Answer: I am all for financial literacy--for adults and for children. Unfortunately, this fund educates its young investors in the wrong way to invest.

The fund invests 50% of its assets in "other funds" that seek to track the performance of the S&P 500 index. The balance is invested in stocks that the manager believes will beat the index. It has an expense ratio of 1.00%.

The best way for all investors to capture the returns of the S&P 500 index (or any other index) is to buy a low cost index fund that tracks that index. For example, the Vanguard S&P500 index fund has an expense ratio of only 0.15%. It will always capture the returns of the index, less these low costs.

The risk of attempting to beat the markets is nicely illustrated by the performance of the Young Investor fund. In the past year it has under performed the index by 0.88%. This is not surprising. Only one in three actively managed funds equals or exceeds its benchmark in any one year, and less than 5% of them do so over a 10-year period.

Parents should educate themselves about investing before they start educating their children. A good place to start, and a very easy read, is John Bogle's excellent book, The Little Book of Common Sense Investing (Wiley 2007).

Perhaps he would consider writing a book for young investors!

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.


Tags: Dan Solin, DanSolin, Naked Truth Investing, NakedTruthInvesting, retirement

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: What about those "experts" who investing/trading only when temporary catalysts create irrational prices? Such as when a company like Kentucky USA Energy (KYUS) with no actual business spends millions on spam mailers...Or when broker margin calls force short sellers to buy into stock like Mexco Energy (MXC) and the sleepy stock surges from $3 to $50 within a few weeks--once the mailers and margin calls stop, would the odds not overwhelmingly favor a drop in stock price? (my strategy)

Answer: All of the information about listed companies is public. It is scrutinized by tens of thousands of professional traders and by millions of investors. This includes the kind of information you set forth in your question.

Ask yourself: Is it really likely that the professional traders at Goldman Sachs and other world class investment bankers have missed the significance of this information and that these stocks are not efficiently priced?

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Every survey I have seen indicates that saving for retirement is the number one goal of Americans.

Given the extreme importance of this subject, it is puzzling why investors continue to look for investment advice in all the wrong places.

Case in point: Many investors rely on Jim Cramer's stocks picks. Yet academic analysis clearly demonstrates that the stocks he recommends have an initial bump in price, but reverse their gains less than two weeks after his recommendation. These studies show that Cramer can move markets, but only for a very short period of time.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

There is no doubt that the coming retirement tsunami will make $4.00 a gallon gas look cheap.

In a thought provoking article, entitled Common Cents, by benefits consultant, Brooks Hamilton, the author notes these signs of impending crisis:

• The majority of American either have no retirement plan or don't participate in the one they have;
• Those that do participate, don't contribute early enough and don't make adequate contributions;
• The returns earned by participants are dismal.

This perfect storm for retirement disaster is exacerbated by longer life expectancy and sharply increasing health care costs.