Six Reasons to Give Thanks

Money matters may not rank high on most people's list of things to give thanks for this weekend. The unemployment rate, at close to 10%, remains stubbornly high, and about 14% of all mortgage holders are at least one month overdue on their loan payments. Many households are still in bad shape.

With that as a backdrop, we should all be thankful if we're able to enjoy a hearty Thanksgiving repast with family and friends in our well-heated, well-lit homes. And if we have extra money to set aside for savings and investing, we should feel truly blessed.

In fact, despite all of the economic pain, investors actually have quite a lot to be thankful for this holiday season. Here are some items you can put on your short list.

A Solid Year for Stocks (So Far)
Following a bang-up 2009 in which the S&P 500 gained more than 25%, one might've expected a ho-hum (or worse) year for stocks in 2010. Not so. Despite some scary market action back in the spring, most domestic large-cap funds have gained 7% or more thus far this year, and many small-cap, mid-cap, and international-stock funds have delivered much higher returns than that. The S&P 500 is now in the black, albeit barely, on an annualized basis during the past decade, and those investors who added to their equity holdings during periodic market downdrafts have done much better than that. As a result, many investors' equity portfolios have been steadily clawing their way back from the losses they incurred during 2008 and early 2009.

A Benign Interest-Rate Environment
While many investors are bracing themselves for a sharp rise in interest rates, the interest-rate environment has been pretty benign for much of this year. Of course, that translates into skimpy bond yields, but there's a silver lining: Due to the mild interest-rate environment and steadying economy, bond prices have been stable or even rising through much of 2010. As a result, intermediate-term bond fund investors have pocketed returns in the high single digits so far this year. Another beneficial side effect of low rates is that mortgage rates remain ultralow, making it an ideal time to buy a home or refinance. (Just make sure you have super credit.)

A Strengthening Consumer
Despite high unemployment and a still-weak housing market, the U.S. consumer is beginning to look like the little engine that could, according to Morningstar's Bob Johnson. Consumer spending rose for the fifth straight month in October, the holiday retail season is shaping up decently, and auto sales have also been showing slow but steady improvement. Although some prognosticators had argued that weak consumer spending would be a drag on the economic recovery, that no longer appears to be the case. (Let's just hope at least some of those consumers have gotten religion about living within their means.) 

Low Inflation Rates
There's been a lot of hand-wringing about whether inflation will rear its head in the future, and commodities such as soybeans and cotton have seen dizzying price spikes of late. But in aggregate, inflation appears to be well under control. Low costs are an expression of weak demand and the economy's still-frail health, so the lack of price inflation isn't a pure positive, but it's a helping hand for households trying to make ends meet amid wage freezes, pay cuts, and job losses. Low inflation is particularly beneficial for seniors living on fixed incomes because higher costs don't erode the purchasing power of the income they're drawing from their portfolios.

Roth Anything
Tax rates are set to go up in 2011, barring some Congressional action. But investors have at least a small (and maybe even a big) way to blunt the pain. By contributing to a Roth vehicle, whether it be an IRA or 401(k), you'll pay taxes on your contributions at today's low tax rates and won't owe Uncle Sam a dime when you make qualified withdrawals in retirement. Savers at all income levels can contribute to a Roth 401(k), provided their employers offer this option. (A side benefit for high earners is that because you're contributing aftertax dollars, the effective allowable contribution is higher than is the case for traditional 401(k) contributions.) 

Furthermore, if you're a high-income earner who hasn't been able to contribute to a Roth IRA to date, you now have an in. Starting this year, investors of all income levels are able to convert a traditional IRA to a Roth, thereby ensuring tax-free withdrawals and no required minimum distributions in retirement. Individuals who earn too much to make Roth contributions directly should consider making a nondeductible IRA contribution; they can immediately convert those assets to Roth status. Income limits on new IRA contributions will remain in place, but it will still be possible for those high-income earners to take a backdoor way into additional Roth contributions by continuing to make nondeductible IRA contributions and then converting shortly thereafter. It's possible that Congress may close this loophole down the line, but for now it looks like an opportunity.

Price Wars in Index-Fund Land
Due to the growing popularity of exchange-traded funds, index-fund price wars rage on. There's no telling who will end up on top, but it's safe to say that investors have been the big winners of this fierce competition thus far. Schwab lowered costs and minimums for its index funds last year, and Fidelity has eliminated commissions for many ETF trades on its platform. (Fidelity's traditional index funds also have very low costs.) Meanwhile, Vanguard has been particularly aggressive of late, cutting out commissions on its ETFs and making its low-cost Admiral share class available to a much broader swath of investors. There's no guarantee investors will use ETFs well, and some ETF expenses remain stubbornly high (looking at you,  iShares MSCI Emerging Markets (EEM)). But there can be little doubt that low costs are a win for investors looking to obtain no-fuss market exposure. Price wars in the index-fund world also put pressure on active managers to justify their expenses or fold up their tents.

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