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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Friday, June 30, 2006

Renter's Insurance


If you rent an apartment you might not know that renter's insurance is not really an option--it should be mandatory for you. Your landlord's insurance covers the building; not what is inside your apartment.

There are policies that:
  • Protect your private property from fire, theft and vandalism
  • Give you liability coverage in case someone is hurt inside your apartment
  • Are flexible to your needs

The HO-4 policy is designed for renters, while the HO-6 policy is for condo owners. Both HO-4 and HO-6 cover losses to your personal property from 17 types of perils:


  • Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Aircraft
  • Vehicles
  • Smoke
  • Vandalism or malicious mischief
  • Theft
  • Damage by glass or safety-glazing material that is part of a building
  • Volcanic eruption
  • Falling objects
  • Weight of ice, snow, or sleet
  • Water-related damage from home utilities
  • Electrical surge damage.
Some definitions from wikipedia on types of renter's/homeowner's insurance:
HO-1
A limited policy that offers varying degrees of coverage but only for items specifically outlined in the policy. These might be used to cover a valuable object found in the home, such as a painting.
HO-2
Similar to HO-1, HO-2 is a limited policy in that it covers specific portions of a house against damage. The coverage is usually a "named perils" policy, which lists the events that would be covered. As above, these factors must be spelled out in the policy.
HO-3
This policy is the most common written for a homeowner and is designed to cover all aspects of the home, structure and it contents as well as any liability that may arise from daily use as well as any visitors who may encounter accident or injury on the premises. Covered aspects as well as limits of liability must be clearly spelled out in the policy to insure proper coverage. The coverage is usually called "all risk". Also called an "open perils" policy.
HO-4
This is commonly referred to as renters insurance or renter's coverage. Similar to HO-6, this policy covers those aspects of the apartment and its contents not specifically covered in the blanket policy written for the complex. This policy can also cover liabilities arising from accidents and intentional injuries for guests as well as passers-by up to 150' of the domicile.
HO-5
This policy, similar to HO-3, covers a home (not a condo or apartment), the homeowner and its possessions as well as any liability that might arise from visitors or passers-by. This coverage is differentiated in that it covers a wider breadth and depth of incidents and losses than an HO-3.
HO-6
As a form of supplemental homeowner's insurance, HO-6, also known as a Condominium Coverage, is designed especially for the owners of condos. It includes coverage for the part of the building owned by the insured and for the property housed therein of the insured. Designed to span the gap between what the homeowner's association might cover in a blanket policy written for an entire neighborhood and those items of importance to the insured, typically the HO-6 covers liability for residents and guests of the insured in addition to personal property. The liability coverage, depending on the underwriter, premium paid, and other factors of the policy, can cover incidents up to 150' from the insured property, all valuables within the home from theft, fire or water damage or other forms of loss. It is important to read the Associations By-laws to determine the total amount of insurance needed on your dwelling.
HO-7
For mobile home owners.
HO-8
It is usually called "older home" insurance. It lets house owners with higher replacement cost than the market value insure them at the lower market value rate.

Keep in mind if you have car insurance and renter's insurance with the same carrier you will get a discount.

Is This the Top of the Stock Market?

Oil prices are over $73 a barrel, the U.S. has an enormous trade deficit; huge national debt, the Fed just raised interest rates because of fears of inflation; Iran, North Korea, Israel and Palestine; typically you would not think people would be bullish right now. After the market skyrocketed today about 2% many breathed a sigh of relief because The Herd thought if the Fed acted as they did today (raising interest rates) they thought the stock market may bottom out. But it did not bottom out today.

I am not saying that the stock market will go bear all of the sudden, but it might. Today just was not that day.

Usually when the stock market has a slow down or is in a recession there is a big jump up before the stock market becomes a bear market. I am not predicting this, but I want to alert people that there are a lot of indicators out there that historically point to the potential of the market beginning a lull. Just remember to be diversified.

Thursday, June 29, 2006

Fed Raises Rates

Today, the Fed raised the Fed Funds interest rate another 0.25% to 5.25%. This marks the 17th straight rate hike since December 2004 and shows how seriously the Fed and Ben Bernanke are taking inflation concerns. At one time the stock market was up over 1% this morning before the news was announced so we will now wait and sit to see how the stock market reacts in the short-to-mid-term to this news. Currently the stock market has jumped another full percentage point since the announcement.

Credit Card Debt

If you are like many Americans you have struggled at times to get out of credit card debt. Obviously, it is best if you never get into credit card debt. But if you do get some debt you need to take it seriously and start taking big chunks out immediately. If you pay only the minimum it will take years and years to get out of debt while paying that credit card company way too much in interest on your balance.

If you are paying 18% interest on your credit card balance of $5,000 you are essentially paying $75 a month in interest (or $900/year). Is that ok with you? Because it should not be. If you interest rate is that high you need to focus on paying that balance as soon as possible. Sacrifice what you must because if your minimum payment is $100 a month on that balance and you pay the minimum, only $10 a month is going towards the principal. Here are some ideas to help:

  • Try to negotiate with your credit card company a better interest rate
  • Try to transfer that balance to a lower percentage rate credit card (ask for them to waive the transfer fees)
  • If you have debt with lower interest rates focus on the highest interest rate, but still make at least the minimum payments on the other
  • Get a second job. It sounds tough, but a couple hundred extra dollars a month an go a long way to paying off your debt.

If you have some other good ideas on how to pay off credit card debt please share with everyone.

Wednesday, June 28, 2006

Personal Finance Courses

If you want to learn more about personal finance taking a personal finance course is always a good idea. Scores of websites give you good information on personal finance, but sometimes having a human in front of your giving you explanations and taking questions can really benefit your finance knowledge.

Of course, you can look at those sites and go through their tutorials on personal finance and that can be helpful. But maybe check out your local community college and see if they offer personal finance classes. It is an inexpensive option and can inspire you to improve your financial knowledge. You also can find out a lot from the web in finding those that can help you. Maybe there is a personal finance club in your area or maybe you can start one to share knowledge. Search your community and you should be able to come up with some method of increasing your personal finance knowledge in a face-to-face environment.

It is great to learn on the web, but a classroom environment with instant feedback is important to gaining good personal finance knowledge.

Tuesday, June 27, 2006

Bonds: Income Generator

From 1970-2000 bonds gave a higher and more stable income stream than stocks did. Bond investors receive their income at fixed intervals, which can be used to offset cash obligations or increase portfolio liquidity. Bonds from 1970-2000 provided greater cash income compared to income provided by stocks. So if you are ever in the investing position that requires income generation bonds are a great way of generating investment income.

Monday, June 26, 2006

Investing in Penny Stocks

Investing in penny stocks is a little like playing the lottery in that it is very difficult to actually to make money investing investing in them. There are many people that say you can get rich off investing in penny stocks, and it is possible, but there is less information available out there on penny stocks. You have to access information on the pink sheets about investing in penny stocks--that information is not always reliable because penny stocks are not regulated like the normal stock market. They are listed on the pink sheets because they do not meet the listing requirements of the exchange. Not all companies listed on the pink sheets are scams, but you need to be very savvy in order to not get taken by a company listed on the pink sheets. If you receive stock-related spam in your email account often times it is for speculative penny stocks.

Be very careful investing in penny stocks.

Sunday, June 25, 2006

Google Finance

Google Finance is still in its Beta stage, but it plans on taking on the other big financial sites like Yahoo Finance and MSN Money. Google Finance is still relatively plain, but soon it will add much more options so it can go live and take on Yahoo and Microsoft for this portion of web traffic and information.

From Google's website here are some ways Google Finance will differentiate itself from the competition:


  • Company Search — With Google Finance you can search for stocks, mutual funds, public and private companies, using both company names and (where available) ticker symbols.

  • Interactive Charts — Google Finance charts correlate market data with corresponding dated news stories to help you determine if there is a relationship between them (for instance, by seeing news stories that came out about a certain company in the context of what that company's stock did that day). You can also click and drag the charts to see different time periods and zoom in to see more detailed information.

  • News and More News — Google Finance incorporates our Google News service, which gathers stories from more than 4,500 English news sources worldwide. Stories are clustered by topic so you can see different opinions on a single subject; you can also review news stories by monthly date range and by importance (which is determined by algorithms).

  • Blogs — If you want the opinions of citizen journalists, you got 'em; Google Finance includes company-related postings from Google Blog Search.

  • Company Management Team — Google Finance helps you put a face to a name. Mousing over an executive name shows you their picture as well as links, where available, to their biography, compensation details and trading activity.

  • Discussion Groups — Talk amongst yourselves. Google Finance offers high-quality Discussion Groups whose dedicated team of moderators work to keep conversations on and spam-free.

  • Portfolios — Google Finance offers a fast, easy and powerful way to keep create and maintain your portfolio of stocks and mutual funds.
When this comes to fruition google will be a player and seriously take on Yahoo Financial and MSN Money. While in the beta stage they will continue to tweak it and get feedback from people like us.

Historical Bond Performance 1925-2000

From 1925-2000 bonds did not lead all asset classes in performance returns, but it did show stable returns over that long-term period. Over that period stocks well-outperformed any type of bonds or Treasury bills, but of course there is much more risk in stocks. In this period corporate bonds outstripped government bonds and Treasury bills, but those corporate bonds possessed much more risk (default) than the latter. Municipal bonds were outperfromed by other bonds, but they provide a tax advantage of not having to pay federal income tax on them and sometimes state and local taxes as well. Bonds do not provide the long-term growth that stocks do, though during tougher economic times they do tend to outperform stocks. Because of these characteristics bonds are a source of diversification to your overall investment portfolio.

Benefits of Bonds in Your Portfolio

Bonds can be an excellent way to diversify your overall portfolio. Though they typically garner lower gains, the risk involved is also low. When adding Bonds to your stock portfolio you have instantly reduced your risk and as you know diversification will help your portfolio in the long run. Here are some other good reasons to look toward bonds.

Potential Growth
Historically bonds give you growth in your portfolio while lowering your risk

Historically Low Risk
Take any long-term slice of history of the U.S. stock market and you will see bonds are lower risk than stocks.

Diversification Benefits
Stock prices and bond prices often move inverse to one another and this is why diversification through bonds is a great investment idea.

Income Generation
Because bonds oftengive you steady income at regular intervals this increases your portfolio's liquidity.

Saturday, June 24, 2006

Life insurance is not always an easy concept to grasp and it gets more convoluted when discussing which is better: term versus permanent insurance. Because of the confusion getting the right information is crucial.

Term life policies offer death benefits only upon the policyholder's death.

Whole Life insurance policies
offer death benefits plus an account value so that if you live you will receive some amount of money spent on premiums back. It is a sort of hedge or a way to have your cake and eat it too. The policyholder can receive their money back by cashing in their whole life policy or borrowing against it like a home equity loan.

Whole life insurance is more expansive than term life insurance. You will pay more in premiums because you are investing and owning life insurance. So like a savings account, the longer you have paid into it the more it will accrue and the higher cash value it will have.

  • Term life insurance is strictly a payment if you die; no savings or interst accuring. Premiums for term life insurance will increase over time while whole life insurance premiums typically do not.
  • Whole life insurance's high premiums at the start means it will grow just like a retirement account.
  • The downside is that your life insurance agent gets a sales commission on the whole life policy just as would a stock broker would get a commission by you buying a certain mutual fund that his or hers investing house has a sales deal.
  • With whole life insurance the cash value of the account is tax-free to your beneficiary.

You will hear many like Suze Orman say to buy term life insurance and never buy whole life.
The length of time you plan to have the insurance is important in making your decision between the two life insurance products. However, there are so many variable that it makes it difficult to make the blanket statement that if you plan to have the life insurance over 20 years you should get whole life insurance.

Compare

Term insurance
  1. You can buy term insurance that stops after a specific term, e.g. 10 or 20 years, or that can be continued until age 70 or later. You have the option of choosing to have your premium increase every year--annual renewal term--or you can pay the same amount for your premium for a fixed number of years.
  2. Most term policies the options of current payment schedule and a maximum rate. Your insurance company wants to be able to raise premiums if the company's costs increase. With others, the issue is your health.
  3. Sometimes you will be required at specific re-entry ages to display good health to keep your premiums low.
  4. Most term policies can be converted into whole life policies without evidence of good health.
  • Universal life insurance is more flexible than traditional whole life because the premiums can vary from year to year. Universal life has maximum guaranteed premiums and least minimum guaranteed cash values and death benefits. Instead of dividends, universal life policies earn interest at the credited interest rate determined each year.
  • Variable life insurance provides few guarantees and with risk can come reward if the investments go well. There are required guaranteed annual premiums and a guaranteed minimum death benefit. However, if you pick the wrong investments it will hurt your cash value.
Do Not:
  1. Use Life insurance only as an investment. After all, some of your premiums are being used to buy the death-benefit coverage and to cover other expenses.
  2. Life insurance should not be purchased on children to save for college.
  3. You should have all the coverage you need before you buy any on your children.

Friday, June 23, 2006

Handling Personal Finance Debt

If you have ever seen the numbers they are startling: the average American owes approximately $8,000 in credit card debt. This does not even include student loans, car loans, mortgages, etc. These numbers have increased significantly in the past decade. American's often do not understand how much they can afford or do not care. You see it from people buying too fancy of a car to purchasing a home that is more than they can afford. Because of this trend car loans are sometimes 6 years and some people have 40-year mortgages just so they can afford the payments. What they do not understand is that paying debt back over a longer period of time means they are paying more in interest than they should.

Get a plan:
  1. Identify all of your personal debt
  2. Figure the rates of interest that you pay on each
  3. See if any of the interest rates can be lowered
  4. Pay off the highest interest debts first
  5. Paying the minimum on credit cards is not an option (You will wallow in debt for years and pay an outrageous amount of interest)
  6. If you are serious about lowering your personal debt levels you must examine your spending habits and decide what can be sacrificed in order for you to get out of debt
Being in debt might be a common thing, but you do not want to be in perpetual debt.

Wednesday, June 21, 2006

Today's Stock Market

The U.S. stock market had another big-gain day today. At one time the NASDAQ was up 2.1% for the day. It is very difficult to read the U.S. equity market right now. Two weeks ago many thought the perfect storm of inflation, consumer debt, national debt and the trade imbalance was going to whack the stock market. It has, but it has almost bounced back to where it was before fears began rushing in. This is no help for predicting the future, except to say that it will be unpredictable. Reactions after the Fed announcement next week will make things at least a little less cloudy.

Extended Warranties for Your Personal Computer

Do you know why at Best Buy or Circuit City they always ask if you want an extended warranty on your personal computer you just bought from them? Because companies make big profits from those warranties. The extended warranty is rarely taken advantage of to make the money you pay upfront.

Think about:
  • How fast technology advances--in 5 years you will not want your computer to be replaced with a similar computer
  • How well you take care of your stuff--if you take care you won't need an extended warranty
  • Is it something you know you would follow-up on if your computer broke down
  • Do you have so little faith that you are willing to pay a high price for an extended warranty?

Retirement Planning: SIMPLE IRAs

SIMPLE IRAs are another retirement planning option for small business owners. Owners can to make contributions toward their employees' retirement and their own retirement with a SIMPLE IRA. Here is some important information regarding SIMPLE IRAs:

  • Any business with 100 employees or less is can have a SIMPLE IRA
  • IRS forms 5304-SIMPLE or 5305-SIMPLE is used to set up a SIMPLE IRA
  • The company must allow all employees to participate
  • The company must give information to all employees regarding the SIMPLE IRA
  • Each eligible employee may make a salary reduction contribution and the employer must make either a matching contribution or a non-elective contribution
  • Employees can defer up to $10,000
  • Employers must match dollor-for-dollar up to 3%
  • Employers can decduct all their contributions on their taxes

Tuesday, June 20, 2006

Retirement Planning: SEP IRAs

SEP (simplified employee pension) IRAs is a form of IRA that acts as a low-cost pension plan for small businesses.

Important Information:
  • All contributions made under a SEP are employer contributions--not employee
  • Not required to make contributions each year
  • SEP-IRAs of all participants must get contributions (you cannot pick and choose)
  • Employers can deduct the contributions on their tax return
  • Sole proprietors, Partnerships, Corporations can all participate
  • Employee owns 100% of contributions to SEP
  • Contributions the employee’s SEP-IRA cannot exceed the lesser of:
    • 25% of a participant’s compensation or
    • An annual dollar limit.

Can Ethanol Lower Energy Prices?

Ethanol has been seen as a possible answer to oil prices and global warming. Recent demand
has made its price skyrocket. Is it the answer for Americans looking for lower energy prices?

Maybe or maybe not. There are strong arguments that state currently ethanol makes gasoline more expensive. Other arguments say it a great answer to our farm over-production. Instead of the subsidies that would go to farmers, the farmers could make ethanol so the U.S.A. is energy self-sufficient (and we could take oil off our national interest policy list). Many think it is good for the U.S.A. in so many ways. But global warming certainly is not slowed by the use of ethanol because the production of it uses more energy than it saves.

The important part of this argument is that the more that people discuss and argue about alternatives to fossil fuels the more scientists, inventors and entrepreneurs will create ways thatalternative energy sources that will lower energy prices, and for everyone's sake lessens humans' impact on global warming.

In the short term we should all be ready for more of a rise in energy prices because no matter what we use there will be a transition cost to get away from oil. We will have to see if the market and science bears that out or not.

Sunday, June 18, 2006

Alternative Minimum Tax

The AMT, or Alternative Minimum Tax, is a tax lottery you do not want to win. Studies show that within the next few years a significant percentage of American taxpayers will fall under the criteria to pay AMT. Congress created it in the 1960s to prevent the rich from getting away without paying any taxes. The problem is that is has not been adjusted for inflation and it has begun affecting more middle-class people. When Congress passed the Tax increase Prevention and Reconciliation Act (TIPRA) this had provisions to reduce the odds that more Americans would be caught in the Alternative Minimum trap in 2006 . . . but there is always 2007.

Long-term Capital Gains Rates

The latest tax bill this year has extended through 2010 an excellent rate structure for long-term capital gains for investment assets held over 1 year as well as dividends. The highest rate of taxation on capital gains will stay at 15% through 2010. Individuals in low tax brackets (10% and 15%) will continue to get the 5% rate on capital gains through 2007 and then go to 0% from 2008-2010. So things have not changed much with long-term capital gains except in lower taxes brackets, but it is good to know this information when trying to understand your investments.

Saturday, June 17, 2006

Home Personal Finance Plan

Whether you are single, married, divorced, have 10 kids or none you need a realistic home personal finance plan. If you have no plan, you need to set up the building blocks so you know how much money is going where. Oftentimes people do not respect their money and so they avoid putting together a personal finance budget and plan. Respect the money that you work for; keep track of where it is going and know what you plan to do with your money now and the future.
  1. Set up a budget
  2. Get personal finance software like Quicken or Microsoft Money
  3. Sit down with family members to discuss you Family Finance Plan
  4. Discuss your Personal Family Budget
  5. Set Personal Financial Goals
  6. Decide where your money should go
  7. Track your spending and budget

Friday, June 16, 2006

The U.S. Stock Market Rollercoaster Ride

The past couple weeks have been a roller-coaster ride for the stock market. If you have been tracking the stock market and trying to learn more about investing and Wall Street this fortnight has been a crash course for you. Be aware that the stock market’s performance is not always this hectic, but you need to be prepared for when it is. If you have learned anything from this personal finance blog I hope you have learned that when investing you must diversify to survive wild stock market swings. In my personal retirement investment account I have seen my investments lose half their all-time gains in one short period to almost back where it was when the stock market’s dysfunction began a couple weeks ago. The next 2 weeks will probably be decisive on which general direction the overall stock market will follow.

Personal Finance Training

If you are a beginner or someone who would like to expand their personal finance acumen through personal finance training--this site and others are a great place to start.

Smartmoney.com's investing, saving and personal finance information they have is superior. They provide solid personal finance training because their information is fresh and usually at a beginner's level. Free personal finance advice is what you need so you want to go to sources you can trust and smartmoney.com is a great source.

At Finance For Dummies I try to cover all aspects of personal finance online at all levels. The personal finance advice I give is from experience and knowledge I have obtained through work-related and self-taught personal finance training. I want to provide personal finance help to those out there in need.

I look forward to comments on this blog to see if people have specific personal finance advice they might need.

Thursday, June 15, 2006

Today's Stock Market

Well, as I have said it is difficult to time the stock market and although early this week signs pointed for more bottoming out the last couple days have not brought that. I thought everything pointed to more down days for the market, (and that still might be) but right now the stock market has bounced back well yesterday and today. Bad times might still lie ahead, but this goes to show how difficult it is to predict how the market will behave. Signs might point one way, but the market can go the other.

The S&P 500 is up over 1% for the day as we speak and showed great resilience yesterday by finishing up. Again, we will need to wait a couple weeks for the Federal Reserve to announce whether they will be raising interest rates or not. Once that and other economic information are revealed the market should not behave so erratically.

Wednesday, June 14, 2006

Historical Market Downturns and Recoveries

From 1926-1999 the U.S. stock market has seen several downturns and recoveries of varying length. During the Great Depression stocks lost 80% of their value and it took 12 years to recover. Often these downturns are preceeded by high returns, but you cannot predict a downturn.

Downturn Recovery
Period Length Amount Period Length
09/29-06/32 34 months -83.4% 07/32-1/45 151 months
06/46-04/47 11 months -21.0% 05/47-10/49 30 months
08/56-02/57 7 months -10.2% 03/57-7/57 5 months
08/57-12/57 5 months -15.0% 01/58-07/58 7 months
01/62-06/62 6 months -22.3% 07/62-04/63 10 months
02/66-09/66 8 months -15.6% 10/66-03/67 6 months
12/68-06/70 19 months -29.3% 07/70-03/71 9 months
01/73-09/74 21 months -42.6% 10/74-06/76 21 months
01/77-02/78 14 months -14.1% 03/78-07/78 5 months
12/80-07/82 20 months -16.9% 08/82-10/82 3 months
09/87-11/87 3 months -29.5% 12/87-05/89 18 months
06/90-10/90 5 months -14.7% 11/90-02/91 4 months
07/98-08/98 2 months -15.4% 09/98-11/98 3 months


The Wall Street Herd

In biology the “herd instinct” is a social instinct of groups of animals to herd together. Wall Street investors behave in a very similar way and they love to conform to the group of a certain opinion. The herd on Wall Street is always there, but is not always dangerous. Right now, because the Fed will announce at the end of June what they plan to do with interest rates, the herd is pushing the market and this can be dangerous. If the herd decides before or after the Fed announcement on interest rates that the U.S. economy is heading for higher inflation and a slow down things can get a bit chaotic. Real or perceived—it does not matter--because once the herd makes up its mind millions of investors will follow. This could make a downturning economy worse than it should actually be; or in good times make a rising economy over-inflate itself. Be careful of the herd mentality and respect it because if it begins to move public opinion things can shift quickly.

Current Stock Market Update

Well, it looks like it might get worse before it gets better. The recent downturn in the S&P 500 and overall market (S&P 500: -1.03% yesterday; -3.65 for June; -5.49 for the quarter) has spooked a lot of investors. When the stock market turns sour like it has recently many panic and sell as the market dives. Others are waiting for the stock market to bottom out and will try to get a deal. No one knows how the market will behave, but for some insight to stock market corrections during bull markets click here and scroll down to the Equity section and you will find a pdf to click on for a market correction chart. Once The Fed announces what it will do with interest rates everyone will have a better idea of where the stock market might go, but in the meantime investors are going to continue to behave irrationally.

Try to stay diversified and this rough time will not be as rough.

Tuesday, June 13, 2006

Do Stock Winners Repeat Themselves?

Between 1980-2000 there was a study of stocks that had exceptional positive returns. The questions is do these handful of winner stocks repeat themselves?

Often you will read in the news that a particular stock has risen 20%-30% in a very short time and we kick ourselves for not getting part of the quick rise in stock value. In this study it is shown that individual stock perform much like asset classes; they have good periods and bad periods of performance. At the same time, individual stocks have a significant amount more of volitility and risk than asset classes because asset classes are a bunch of stocks and because they are more diversified than an individual stock the risk is less.

If you look at this period and take the top 10 performing stocks (minus the smallest 20% of the market) the average annualize 3-year performance of these equal-weighted portfolios of ten stocks was 135.3%. However, when you look at these 10 companies' performance in the next three years they average 9% (the S&P average for this period is 17.3%). So if you chased performance and tried to market time and bought these stocks at the top you would be very unhappy with the results when compared to the S&P 500's results.

Monday, June 12, 2006

Benefits of Long Term Investing in the Stock Market

Many believe that the stock market is a risky place to put your money, but when you examine it closer and look long-term the opposite seems true.

The stock market will have its bad periods (e.g. downturn of March 2000 and post-9/11), but fixed-income investments can also have periods of poor performance although considered less-risky than stocks. But when you look at long-term losses they typically can be recovered after a downturn in the stock market.

If you look at the period from 1926-2000 and break it down into one-year periods; five-year periods and fifteen-year periods you will see some interesting results.
  • 75 one-year periods and 21 resulted in a loss
  • Increasing the period to five years only 7 of the 71 overlapping five-year periods resulted in a loss
  • In the 61 overlapping 15-year periods from 1926-2000 there were zero that resulted in losses
So you can see the longer your time horizon the less your chances of losses to occur over a long time horizon.

Sunday, June 11, 2006

Stock Diversification

When investing for your stock portfolio (retirement and non-retirement) often people will own a couple of individual stocks. One of the problems with owning a couple stocks is the lack of diversification. Let's say you own stock in two companies, and those two companies end up being run poorly or cannot make a steady profit. By investing in only two have have little diversification and you are exposing yourself to way too much company risk (risk relative to the performance of that stock).

The larger the amount of stocks you own the less risk you assume and typically you will be well diversified. If you own 100 stocks you have eliminated almost all of your company risk. It is difficult to own 100 stocks on your own so many people turn to mutual funds. Mutual funds have the ability to invest in scores of stocks much easier than you can plus they have the added benefit that they are professional investors. This is a good option for most. However, market risk is not eliminated by holding scores of companies because although your company risk is extremely low you cannot get rid of market risk.

Company Stock in Your 401k

Rule #1 of Investing is to be diversified. However, millions of employees who have the option of owning their company's stock in their 401k do own the company's stock. That is not a problem--the problem lies in the fact that they mistakenly believe that owning their company's stock is a safe way to invest a major portion of your 401k.

After the scandals of 2001-2002 (see Enron, et al), many were hoping that investors learned their lesson vicariously through other peoples' misery. However, 4-5 years later people have not learned that lesson and continue to expose themselves and their families to an extraordinary amount of risk in their 401k portfolio. So if you do have company stock in your 401k be aware that if your company is under scrutiny of the SEC or the investing community for fraud, or even worse allegations, you could see your 401k's balance go from a healthy amount to you putting off retirement for a few extra years because your balance has plummeted.

I bought Enron stock on the way down before all the facts came out of their malfaesance. I bought it at around $9.00 and rode it all the way to $0.22. Luckily, I did not have a lot of money invested in Enron. I learned my lesson not to buy into a stock that the bottom is falling out of (there is a reason the bottom is falling out). Hopefully, with this information you will be prepared to diversify your 401k portfolio and not put all your faith in your company's stock to lower risk in your 401k.

Saturday, June 10, 2006

Roth IRA for College Savings?

Many people do not consider a Roth IRA when they are saving for college. However, the Roth IRA is an excellent option. Once you have funded your 401k up to the company matching contribution, you should open a Roth IRA. Because it is a Roth IRA you can take out contributions at any time without penalty because you have already paid taxes on that income. Even better is that your can withdraw any earnings made within the Roth IRA without penalty as long as those funds are used for education.

Elligibility:
  • Married income under $160,000; if single income under $110,000.

Stock Market Status

The stock market had a very tough week. Many insiders and outsiders fear the worse: a recessionary stock market. Many believe this is being brought on by the Federal Reserve Chariman, Ben Bernanke. Recently whenever Bernanke has spoken publicly about the United States' economy the stock market has dipped or dived because his remarks tend to be on the side of increasing interest rates to halt inflation. Most experts disagree with this strategy and believe that if "The Fed" does raise interest rates the U.S. economy will have a hard landing and cause the stock market to go down further.

Now nothing has happened yet and a lot of financial and market information will be announced next week. So brace yourself and stay diversified. If you like to speculate and believe the market will dip further then invest in companies that people will use no matter what state the economy is in (groceries, drug stores, etc.).

Friday, June 09, 2006

Insurance Tips

There are some good tools out there for checking rates of different types of insurance so you know you are not getting ripped off.


When considering home owner's insurance there are many variables to consider:
  • The age of your home
  • Flooding
  • Natural Disasters
  • Changes in your life since your bought your home (e.g. kids, widowed, etc.)
  • Cost to completely rebuild
  • Add-ons
  • Your valuables inside the home
These are important factors to consider when discussing what type of home owner's insurance to get and what coverage.

Thursday, June 08, 2006

Consolidate Your Student Loans before July 1

Rates for federal student loans are set on July 1--and they most definitely will be higher (maybe 2 whole percentage points). You need to consolidate now if you have not already. Get more information at www.finaid.org.
  1. Parents: PLUS loans consolidate now because rates will rise to approximately 8%
  2. Graduates: Stafford loans will probably be set at over 7%
  3. Full-time students: Students can lock at approximately 4.75%, but after graduation you will not have a grace period to begin paying back the loan. That might scare you, but rates in July 2007 might scare you even more.

Wednesday, June 07, 2006

Taking Care of Yor Credit Score

As we have discussed before your credit report and credit score are very important to many aspects of your life these days. Equifax, Experian and TransUnion are the three credit reporting agencies that hold your financial well-being in their hands. Here are some steps to get the power back and control of your credit report and credit score.

  • Get a free credit report from all three credit reporting agencies
annualcreditreport.com or 877-322-8228 is the only true free source
  • Your credit report does not contain your credit score
You can get it free when you apply for a mortgage
Your FICO score is what you need
  • Look through your credit report for errors: 25% have errors
  • How is your FICO score computed? 35% Bills paid on time; 30% Ratio of debt to credit limit; 15% Length of credit history; 10%Credit applications; 10% Variety of loans
  • Always pay your bills on time
  • Live within your limits: Use under 30% or less than your available credit
  • Old accounts are your best accounts for your credit score
  • Do not open store credit cards--they hurt your credit score
  • Shred paperwork, be careful with your social security number, monitor your credit report

Small-cap Stock Historical Excess Return

Yesterday we discussed the importance of the volitility of small-cap stocks in your portfolio. Today, we will look at the historical excess return of small-cap stocks over large cap stocks.

Positive excess return for small caps have been larger than negative excess returns on average over the period of 1926 through 2000. There were 42 years where excess returns for small-caps over large-caps were positive and 33 negative years. From 1926-2000 small caps returned 12.6% and large-caps returned 11.0%. Small-caps are more risky than large-cap stocks and more volitile. Over this period there have been 23 negative periods for small-cap stocks and 21 negative periods for large caps.

What this means is that to invest (and be diversified) takes will to stay through the rough times of poor performance because the excess returns of small-caps stocks are worth the volitility and down periods because of their excess return they give in good times.

Tuesday, June 06, 2006

Long-Term Investing

If you look at charts comparing the growth of small company stocks v. large company stocks the results are interesting. If you invested $1 on December 31, 1925 through December 31, 2000 small company stocks outperformed large company stocks. They follow a similar path along those 75 years, but the ending wealth for small companies is $6,402 with an average return of 12.4%. While large companies had an average return of 11%, but the ending wealth is at $2,587. Greater volitility followed the small stocks and it was displayed by higher peaks and lower valleys. If you want to maximize portfolio growth over the long term you have to take on volitility in your portfolio.

Monday, June 05, 2006

Fundamental Investors versus Technical Analysis Investors

There are a couple ways of evaluating the stock market and investing: Fundamentals v. Technical Analysis. These two camps use different methodologies to evaluate the growth potential for a particular company.

Fundamentals Investors: click here for example
  • Look for the financials of the company
  • Operatings of the company
  • Balance Sheet
  • Income Statement
  • Cash flow

Technical Analysis Investors: click here for example
  • Look at charts and trends therein
  • Moving Averages
  • Volume


Often times the two camps are as split as the Democrats and Republicans, but there are wise ways to include both while investing your money in the stock market. Click here for an article explaining how.

Sunday, June 04, 2006

Rule of 72 Refresher

The Rule of 72 explains how long it takes for money to double and it works the same way for investments as it does for debts.

All you have to do is divide 72 by the percentage rate you are earning on your investment or paying on debt.

Think about this:
  • You have a savings account with $10,000. It earns 4% interest from the bank. 72 divided by 4 is 18. It will take 18 years for your $10,000 to double to $20,000 if you don't make any deposits.

  • Here is an everyday example for debt: You have $5,000 in credit card debt. Your credit card agreement stipulates that you will be charged 18% interest. 72 divided by 18 is 4. It will take 4 years for your $1,000 debt to double to $2,000 if you did not make any payments.

Saturday, June 03, 2006

Transfer Money Overseas

It can be costly to transfer money overseas to a friend or loved one. Below is some important information when transfering money overseas:

Cash Transfers

  • Western Union: can transfer money overseas by phone or online. You can use a bank card or credit card.
  • If you need to transfer money overseas in person you need cash and will have an extra charge.
  • Fees, procedures, and the locations of money transfer agents are available on WesternUnion.com or by calling 800-325-6000.
  • The recipient of your money transfer should be able to pick up the funds within the hour depending on the location's operating hours. You must have identification.

MoneyGram allows you to transfer money overseas online now. It has 75,000 agents in 170 countries. Western Union and MoneyGram both have calculators on their website to calculate the cost of your money transfer.


Money Orders: U.S. Postal Service & Banks

The United States Postal Service issues international money orders to transfer money overseas:

  • Maximum allowed is $700 per money order, but you can up up to $10,000 in one day in money orders.
  • The USPS will charge a processing fee which ranges from $3 - $8.50 per money order.
  • You must fill out the recipient's name on the money order before mailing to the recipient.
  • U.S. Money Orders can be cashed in banks or post offices in most countries around the world.
  • Keep the numbered carbon copy receipt for your records in case of problems occurring with the money transfer.


Banking Transfers, Sending a Check Abroad, Foreign Drafts and Wire transfers are other methods to transfer moeny overseas, but they are more difficult, slower and more costly.


Western Union
$29
Recipient can pick up cash in 20 minutes.
MoneyGram
$25
Recipient can pick up cash in under 60 minutes.
Money Order
$3-$10
Five days mailing time. Will probably be able to cash the money order on the same day.









Credit Card v. Savings

If you have credit card debt, like most Americans do, you need to plot out a plan to make that debt disappear. The average American has a balance of $8,000 in credit card debt. The national average for credit card interest rates is approximately 13%. For easier math purposes let's say it is 12% you have on $10,000 of credit card debt. That would be $100 in interest you would have to pay each month just to keep the balance at $10,000 and by the end of the year you have paid $1,200 on interest and you are in the same predicament. Think about money that you have saved. Maybe it is making 1% interest or you have some other money making 6%. As long as that interest rate does not exceed the 12% you pay on your credit card you should be using that extra savings you have to pay back your credit card. Let's say your extra money was making 6%. That is still another 6% below what your credit card interest is so it only makes sense to pay off as quickly as possible the credit card debt.

Loan Payments

People often make the mistake when at a car dealer of telling the salesperson how much they want their monthly auto loan payments to be (e.g. I want my monthly car payments to be under $300). Salespeople will then fit your into a more expensive car and extend the number of years on the car loan in order to meet that financial requirement. By extending the life of the auto loan you get the benefit of lower car payments, but you are increasing the amount in total interest you pay.

So try to avoid that 6-year car loan or 40-year mortgage because you end paying much more in the end. If you stay within your means there will be no need to have loans like these.

IRA: Tax Free Bonds and Annuity?

Never:

  1. Buy a tax free bond (e.g. municipal bond) in any retirement account. You receive no benefit from the tax-free part of the investment. If you have someone recommending this run far away from them.
  2. Buy an annuity in any retirement account. See number 1.

Word to the wise. Municipal bonds are typically a good investment for those that are in very high tax brackets because they avoid paying federal taxes (sometimes, state and local taxes as well) on the profits.

Credit Cards

Many people now have credit cards that give them airline miles to fly for free. There are a few problems with this:

  1. The airlines are in trouble and might go bankrupt: there you lose your miles
  2. It takes a while for frequent flyer miles to accrue
  3. Once you have accrued enough frequent flyer miles it is often difficult to find a flight and often they are not much desired flights (e.g. redeyes)
One way to get some more out of your credit card is to get one that offers cash back for purchases. Currently the card that my wife and I use gives you 1% of each dollar spent and 5% back for gas purchases. We charge almost all of our purchases and expenses and that 1% and 5% can add up. Plus, you see the rewards quickly (the month after the current bill you get the cash back). With rising gas prices and charging most everything we do save a significant amount of money over a year.

Friday, June 02, 2006

Jim Cramer’s Mad Money

On Jim Cramer’s Mad Money show yesterday he proffered the idea of “orphan” stocks. (Now you should remember that he only proposes this for your investments you can afford to lose, not your retirement investments. Only if you want to speculate should you enter this investing area.) “Orphan” stocks are small-to-mid-sized companies that are followed by one or two investment houses at the most. This is possibly profitable because if they are solid companies they will eventually be “found” by Wall Street and will be “adopted.” This gives you a huge potential upside because with more exposure from analysts comes more investors. He gave some specific stock tickers yesterday and you can go with that or do your own research. Another criteria for good “orphans” was that they have little to no debt. He mentions this because they are smaller companies that are more prove to bankruptcy than large cap stocks. So if you are prepared to take the challenge you can go with his ideas or try to find your own.

Thursday, June 01, 2006

Credit Reports

For some reason many people cannot get themselves to check their own credit reports. Your credit score is one of the most important aspects of your life because a bad score can affect so many different areas of your life. So here are some steps to follow

  1. Order Your Credit Report
  2. Examine Your Credit Report: See if any errors exist--some reports say a large portion of reports have bad information on it.
  3. Correct Errors to your Credit Report: Call Experian, Equifax or TransUnion
  4. Check up on Your Credit Score: After you have corrected an potential errors order your credit score a couple months later to see if your score has improved and the corrections (if applicable have been made)
Click here for more information.