This should prove to be a good study of professional prognostication. Last December, Fortune Magazine predicted the best stocks to hold in 2008, directing investors to ten specific stocks the magazine thinks will perform well this year.

How are these stocks holding up so far, compared to the indexes? The S&P 500 Index is down 5.46%, the Nasdaq is down 9.21%, and the Dow Jones Industrials Average is down 3.32%.

Annaly Capital Management (NLY). “It buys mortgage-backed securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac…” Down 5.5%.

Berkshire Hathaway (BRK.B). “Warren Buffett knows how to exploit panics.” Down 9.73%.

Dick’s Sporting Goods (DKS). “Dick’s emphasizes a store-within-a-store sales approach. Each department has its own look and staff, which appeals to the enthusiast who purchases a lot of sporting goods.” Down 4.43%.

Electronic Arts (ERTS). “Still, if there’s one tech niche that should be immune to a slowdown, it’s videogames… It’s now the No. 2 developer of Wii games, behind only Nintendo.” Down 10.87%.

Genentech (DNA). “Even with the FDA setback, Genentech is still expected to grow earnings 18% next year.” Up 7.22%.

General Electric (GE). “Immelt has sold off laggard operations such as insurance and plastics, putting more emphasis on manufacturing and infrastructure businesses. The timing has been excellent.” Down 12.44%.

Jacobs Engineering (JEC). “in a slowing economy, you want to own companies that can demonstrate superior earnings growth regardless of what’s happening around them.” Down 6.89%.

Merrill Lynch (MER). “Yes, Merrill’s shares deserved a punishment for the firm’s mortgage-related bungling. But the public flogging has far exceeded the transgression, which is why smart investors should buy this stock before everyone else comes to their senses.” Down 12.38%.

Petrobras (PBR). “Petrobras is cheap enough, at 16 times earnings, that it can be a winning investment…” Up 11.78%.

St. Joe (JOE). ”... [W]hen Florida real estate does rebound, investors will be kicking themselves for not recognizing today’s $28 stock price for St. Joe Co.” Up 12.56%.

In general, these picks have shown poor performance this year, but 2008 isn’t over yet.

[Fortune Magazine: The Best Stocks for 2008, December 12, 2007.]

Last year, a reader wrote into Consumerism Commentary with a story about how her elderly father was convinced to buy a variable annuity, locking away his money until after his likely passing. He had wanted to talk to a financial adviser, but found his way to Banc of America Investment Services.

Recently, Dateline took a look into Annuity University, seminars designed to teach brokers how to sell annuities to the elderly. Undercover, the Dateline producers infiltrated seminars and sales calls to show how the salesmen deceive would-be customers.

Dateline’s four-part special shows how these particular salesmen play down or intentionally ignore surrender fees, claim annuities are more liquid than CDs, and “puff up” their credentials by putting their photos on official-looking books and magazines and by creating recordings of fake radio shows.

Agents in these seminars are taught to treat the elderly like they are 12 years old and use scare tactics. They are instructed to tell clients that money is riskier in an FDIC-insured bank account than in an annuity product.

I firmly believe that any customer has the responsibility to research any financial product before purchase. Problems arise when seniors (or others) are trusting and when agents flat out lie. It’s difficult to make informed decisions if the information you receive is intentionally incorrect or misleading.

Not all annuity salesmen follow these tactics, of course. I would suggest being wary of any salesperson whose fiduciary interest is in their own commission from the sale. Not all annuity products are bad, either. Even Ben Stein is a big fan (with friends in the annuity business).

Please take the time to view the four-part Dateline presentation which uncovers the truth about Annuity University and some of its “graduates.”

I own shares in one exchange-traded fund, iShares Dow Jones U.S. Telecommunications Sector Index Fund (IYZ). I picked up the shares with free money from a Sharebuilder bonus, and since it was free money, I decided to attempt to choose an investment narrower than my typical investing philosophy would normally allow. Rather than a broad stock market index fund, I selected an industry that I thought would have great prospects for the 21st century.

For a while, ETFs became a favorite investment vehicle in the financial media. In the most basic form, ETFs are like index mutual funds. They benefit from low turnover, little tax liability, and low management fees. You can trade ETFs like stocks with a similar transaction fee. If you have a lump sum to invest for the long-term, the larger the lump sum investment, the smaller the fee is as a percentage of the assets.

According to Money Magazine, Wall Street is taking advantage of the popularity and frugal reputation of ETFs by creating an increasing number of these investments with higher turnover and fees.

Like index mutual funds, ETFs were designed to track traditional market benchmarks with long track records, like the Dow and the S&P 500. But to stand out from their rivals, lately providers have been cobbling together portfolios based on custom-designed indexes they hope will beat the market’s performance…

No question, traditional index ETFs are still dirt cheap, typically charging 0.20% or less. Yet the average expense ratio for ETFs overall is much higher—0.53% of assets vs. 0.35% in 2002. What’s the deal? Newer ETFs with complex strategies tend to incur higher management and transaction fees.

IYZ falls right below the industry average with a total expense ratio of 0.48%. What have I received for this fee so far? I funded the account on August 9, 2005 with $50. As of today, after reinvesting dividends, my account is valued at $46.99.

Would I have been better off with VOX, Vanguard’s equivalent ETF? It appears that the two funds follow each other closely, but Vanguard carries a slight advantage. The lower expense ratio (0.23%) seems to account for Vanguard’s better performance. That slight advantage could account for a significant difference between the two funds’ performance if I hold onto the account for decades.

Despite recent poor performance, I believe the telecommunications industry is a great choice for the next century or so. I don’t mind “timing” the market with a free $50.

The best investment in 10 years: Get in while you can [Money Magazine]

Here is a case study in why you shouldn’t fret over the details in an account that’s designed to keep funds invested for the long term. I would probably stay saner if I wait three decades before looking at my 401(k) account again.

I received my retirement account statement in the mail today. This is one of the last of my accounts for which there’s no electronic-only option for statement delivery.

Despite investing about $3,500 throughout the first quarter, the account’s balance is down almost $1,000 since December 31. That’s a loss of $4,400 if realized.

All in all, my performance for the first quarter was a sad -9.2%. That reflects my allocation of 33% large cap stock, 17% mid cap stock, 2% small cap stock (likely the most expensive of the fund offerings), 26% international stock, 10% commercial real estate (REIT fund), and 12% company stock. Company stock performed the worst over the quarter, with a drop of 15.5% (annualized).

I divested significantly out of company stock when it was very close to its high last year, so the decline didn’t hurt me as much as it would have otherwise. I still have probably too much invested in the company, since I also have stock purchase plan from the last two quarters. Of course, my income relies on my company as well.

How was your first quarter performance? Better than mine, I hope. I’d be better off if I file or even shred these statements, never to be seen again.

Do investment companies need to market to “Generation X” and “Generation Y” differently than the general investing public? Would new, “hip” investment products encourage individuals falling within these particular demographics to care about their financial future? Thrasher Capital Management was founded on the principle that these markets, as well as minorities, are currently under served by the financial industry.

[The Thraser Funds investment model] seeks to capitalize on the convergence of what the firm believes to be global, generational, and socioeconomic dynamics that touch an array of industries: the Baby Boomer’s increased life expectancy, elongated career life cycle, along with Generations X and Y’s increased access to capital.

To approach this investment model, Thrasher created the GendeX Mutual Fund, and is marketing the investment to Generation X and Generation Y, individuals who do not seem to fit in with the generally-accepted notion of “investor.” A visit to the Thrasher Funds website makes this clear. The first thing you’ll see is a photograph of a group of “non-conformists.” Their individuality is indicated by the diversity of clothing and stature/stance, with no one looking like your typical “professional” investor. “They invest. Do you?” Peer pressure is a powerful force.

If you like, there is the option to peruse the Thrasher Funds website with a soundtrack designed especially for Thrasher Funds’ customers. Play the music at the bottom of the website to listen to a smooth track. It makes you wonder if those who market to youth’s individuality really believe in that individuality.

So what about the GendeX mutual fund [GENDX]? Investors should look past all this marketing and determine whether the investment itself is worthwhile. Their website is not yet ready for prime time, so those seeking data on past performance are pointed to Yahoo Finance’s website. Information there is sparse as well. In GendeX’s short history, it has followed the S&P closely. As I tried to find more information, I discovered that Google Finance has no information on the fund at all. The symbol and fund name are not recognized by Google’s vast financial database.

GendeX invests in companies that are admired by their demographics, such as Apple, Louis Vuitton, Gucci, Volkswagen, Coca Cola, and Nike, among other companies that appeal to the masses, like Time Warner and Google.

The fund features an expense ratio of 1.50%, above average and eight times the expense ratio of VFINX, Vanguard’s index fund that follows the S&P 500. The fees keep on coming. While the fund is happy to accept investors with a low $100 minimum if combined with an automatic investment plan of at least $50 per month, you’ll have to pay $2 per month if your account value is less than $2,500. That’s basically an extra 1% fee or more. If you withdraw money from the fund that has not been invested for over 12 months, you’ll face a 2% redemption fee. Redemption fees are usually used to recoup costs for selling investments with hard-to-find buyers; considering that the underlying investments of GendeX are actively traded, I don’t see a need for this redemption fee.

So will you be cutting back on skateboards and tattoos in order to invest in GendeX? If so, leave a message on Thrasher Funds’ MySpace page where “investing is a party” with 445 other friends.

As someone on the young side of Generation X, I’ll stick with index mutual funds, as boring and unmarketable as they are.

Will politicians say the word recession? Not if they’re serious about helping their party get elected. Yet, it feels like we are in a recession—or at least, that’s what the media wants us to believe. The stock market, measured by the indexes, is certainly in a downward trend, but I suppose I agree with Kiplinger. There are some reasons to be happy.

1. The rebate check. Soon, most Americans will receive a check from the IRS, possibly for $300, maybe $600, or even $1,200 or somewhere in between. The government’s intention is to spur the economy—or is it? Perhaps it’s more of a feel-good measure in a year when Democrats and Republicans alike must create fan-friendly press. The last time the IRS sent rebate checks en masse, it didn’t have much effect on the economy. In fact, the economy was already recovering by the time the checks arrived.

If you’re wondering how much of a rebate you’ll receive, use this economic stimulus tax calculator. The “rebate” is an advance on a new tax credit that will appear when you file taxes for your 2008 income. If you qualify, you’ll get the rebate this year instead of next year.

2. Undervalued stocks and bonds. Go for it. Yes, in general it’s bad to time the market. Yes, it’s possible stocks in general will go down more this year. But I believe that dips like the one we’re experience are perfect opportunities for long-term investors to pick some good values company by company or buy the overall market through a low-cost index fund like VTSMX.

3. Lower interest rates. Kiplinger says that as the Federal Reserve lowers the federal funds target interest rate, opportunities are available for those with good credit ratings to borrow cash as needed. I’m not quite sure this has played out quite yet. From what I’ve seen, banks are still being tight and not lending as much even to those who are well qualified. Interest rates on mortgages certainly haven’t dropped much. In fact, rates for a 30-year fixed mortgage, a typical loan for qualified home buyers, have increased in the last few months, from 5.5% to 5.9% (source: Bankrate).

4. New tax breaks. “You might owe less to the IRS this year thanks to a new deduction for private mortgage insurance, an extension of the sales-tax write-off and a boost in the alternative minimum tax exemption amount.” This is helpful for home buyers who couldn’t afford to put 20% down on their house and were required to resort to paying PMI.

5. Falling house prices. Well, at the moment, there are more people trying to sell homes then there are buyers. This inequity between supply and demand means that in order to sell houses, prices must fall. But as there are fewer people looking to purchase than there are looking to sell, this benefits fewer people than increasing house prices.

6. Higher retirement account limits. Kiplinger suggests using the rebate check to turbocharge your retirement savings. This year, you can invest $5,000 (or $6,000 if you’re over 50 years old) in a Roth, Traditional IRA, or a combination of the two. If you have a 401(k) you can contribute up to $15,500 (plus another $5,000 if you’re over 50). These limits will continue to increase, too.

7. Help with college bills. Got student loans? If you’re a teacher or if you work in public service, you may be able to receive grants. Those with high debt and low income will benefit the most.

8. New rollover option. If your adjusted gross income is $100,000 or less, you can now roll over your 401(k) directly into a Roth IRA without having your funds go through a Rollover Traditional IRA first. Not only that, but if your income is above the $100,000 threshold, just wait until 2010 when the income limit disappears. For any funds in your 401(k) from a pre-tax source, you will owe tax when you roll over into a Roth IRA, providing early tax income to the government, possibly to help pay for expensive programs like Social Security.

The option I’m most excited about is easily number 2, undervalued stocks. I was interviewed by Columbia News Tonight, a weekly television program produced by Columbia University’s Graduate School of Journalism the other day, and we talked about this topic. I’ve increased my 401(k) contributions to the maximum this year, a feat made possible thanks mainly to my additional income not from my employer, even though my retirement account’s value is down about 10% so far this year.

Image source: azrainman
Good News in Hard Times [Kiplinger]

Although Ben Stein likes variable annuities, these insurance products can be an expensive way of investing. They do “assure” a level of income over a certain time period, but depending on where you go to receive this product, you could be paying too much for a service that can be found somewhere else for less.

Additionally, the variable annuity product is not right for some people. Not all salespeople are ethical and even when innocent, they often have their own commission check in mind rather than the fiduciary health of their customer.

If you find yourself with an expensive variable annuity, you can switch. The IRS allows you to transfer your assets to a different annuity product, even one offered by a different company than the current insurance carrier. Normally there’s a 10% IRS withdrawal penalty if you liquidate the annuity before the age of 59½, but this penalty is waived for a qualifying transfer.

There are two catches:

1. You can only switch products if you haven’t begun to receive payments.
2. Your insurance carrier may require you to pay a surrender fee.

Catch number one has no wiggle room. Either you can perform the transfer or you can’t. The second catch requires you to weigh the surrender fees against the lower expenses of the new annuity product.

This escape clause should come in handy if you or a loved one is “trapped” in an annuity product that was misunderstood at the time of contract.

Does Your Variable Annuity Cost Too Much? [Schwab]

Ever since I’ve been investing, nigh on six years now, the general sentiment has been that stocks are the key to long-term growth. Investing in the stock market is risky, but bumps even out over long periods of time resulting in close to double-digit annual growth. Young people like myself (six years ago) should invest as much as possible in a broad stock market index and wait several decades for results.

Allan Sloan from Fortune Magazine is warning that the high returns that have been typical for long-term investors in the stock market over the past generation should not be expected to continue in the upcoming decades.

Barring a miracle – or the creation of a New Math of the market variety – there’s no way we’ll ever see a bull market along the lines of what so many of us grew up with. During that enchanted period, the boring old S&P returned more than 19% a year. When you include compounding, your money more than doubled every four years. Pretty slick.

That was more than twice what stocks earned in the previous 56 years, when they returned about 9%. More than half of that was from dividends, which were almost triple their current level.

I’ll be satisfied with a 9% return on the money I invest for retirement.

Don’t expect another bull market [Fortune Magazine]