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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.

Saturday, September 30, 2006

Annuity Options

Here we will discuss a couple options you have when deciding on what annuity is best for you.

-Lifetime Income for you and your spouse
Here you will be paid as long as you or your spouse still lives. Decide if the initial payment you receive is low or high or if payments will remain the same after the first person dies. The higher payment that drops by half when one spouse dies is another option to consider.

-Lifetime Income for you
You will get the highest income with this option and will recieve a flat monthly payment the remainder of your life. Once you are gone the money stops. So don't die early!!!!

-10-Year Certain
Flat payment, but if you die before 10 years are up your spouse will receive payments until the 10th year is up.

-Inflation Protection
Your beginning payment would be low, but will increase every year as inflation does.

Friday, September 29, 2006

The Stock Market

Well, it looks as if the Fed choose correctly to stop the interest rate hicks a couple months back. The economy has reacted positively as has the stock market. Housing has cooled off, but that was expected and now the Dow Jones is near its all-time high. People seem very bullish on the immediate future for the stock market. The falling oil prices has helped the economy in many ways and soon it will show up in company's bottom line.

Be cautious. Times like these has many of the same characteristics as past recessionary markets. Keep your portfolio diversified and do not panic if things begin to go bad.

Thursday, September 28, 2006

Large Mutual Fund Companies

Mutual funds are as popular as ever for most investors and they are a great way to have your money professionally managed and diversified. If you are investing in mutual funds I recommend that you do everything on your own. Doing the research is easy. Decide what type of fund you need and then go on to one of the many websites (Yahoo Finance, Smartmoney.com) that will screen out the funds you do not want. Focus on 5-10 year performance and statistics (ignore short-term results). Choose one that fits your criteria and then call them directly. Ask them questions you have about the fund and invest directly through the mutual fund--it will save you money on fees, however, you will have more paperwork. Remember to never buy a mutual fund that has a front or back load (sales charge), there are too many good mutual funds available that are no loads.

Typically I would not recommend large mutual fund companies like Vanguard, T. Rowe Price, etc., but these funds do have their place. Because they are so large they can offer the novice investor more investment options that fit a specific criteria as well as lower expense ratio. Sometimes you might be able to get enough funds from one company to have a diversified portfolio. If you invest enough in any kind of mutual fund you might be elligible for breakpoints. Sometimes that is much easier to do if you are invested in one fund family.

Wednesday, September 27, 2006

Cash and Cash Equivalents

Cash and cash equivalents are type of investment.

They . . .

  1. Preserve your principal
  2. Have low to high liquidity
  3. Are sometimes FDIC insured
  4. Have very low fluctuation of principal and return
  5. Are taxed as ordinary income in the year received evn when you roll it over
  6. Are short-term debt instrument issued by a bank or the U.S. government

Tuesday, September 26, 2006

U.S. Government Bonds

U.S. Government bonds are consider one of the safest invest available. Since it is safe it does provide as much return as other bonds.

  1. Investment objective is to provide income while diversifying
  2. Liquidity is from low to high
  3. This is guaranteed for timely payment of principal and interest by the U.S. government
  4. Low to high fluctuation of principal and return
  5. May be exempt from state taxes and is taxed as ordinary income
  6. You are an investor of the U.S. government

Monday, September 25, 2006

Large Mutual Fund Companies

Mutual funds are as popular as ever for most investors and they are a great way to have your money professionally managed and diversified. If you are investing in mutual funds I recommend that you do everything on your own. Doing the research is easy. Decide what type of fund you need and then go on to one of the many websites (Yahoo Finance, Smartmoney.com) that will screen out the funds you do not want. Focus on 5-10 year performance and statistics (ignore short-term results). Choose one that fits your criteria and then call them directly. Ask them questions you have about the fund and invest directly through the mutual fund--it will save you money on fees, however, you will have more paperwork. Remember to never buy a mutual fund that has a front or back load (sales charge), there are too many good mutual funds available that are no loads.

Typically I would not recommend large mutual fund companies like Vanguard, T. Rowe Price, etc., but these funds do have their place. Because they are so large they can offer the novice investor more investment options that fit a specific criteria as well as lower expense ratio. Sometimes you might be able to get enough funds from one company to have a diversified portfolio. If you invest enough in any kind of mutual fund you might be elligible for breakpoints. Sometimes that is much easier to do if you are invested in one fund family.

Sunday, September 24, 2006

Municipal Bonds

Municpal bonds are another form of bonds that investors can choose. We will discuss the characteristics of munipal bonds.

  1. Investment objectives are strictly income
  2. Liquidity low to high
  3. There is a high to low fluctuation of pricipal and return
  4. Interest payments are exempt from federal taxes. You may be subject to the alternative minimum tax (AMT). Federal taxes apply to any capital gains
  5. You are a creditor of issuiong municipality and are subject to default risk
  6. Do not hold tax-exempt investments in retirement accounts.

Saturday, September 23, 2006

Corporate Bonds

Corporate bonds are a popular way to lower risk in your portfolio while diversifying. Here we will go over the traits of corporate bonds.

  1. Investment objective is income and diversification
  2. Liquidity can be low or high
  3. Fluctuation in pricipal and returns can be low or high
  4. Interest payments along with principal are taxed as ordinary income in the year received

Friday, September 22, 2006

International Government Bonds

International government bonds are the road less traveled but can be helpful to your portfolio. Here we will describe the aspects of investing in international bonds.

  1. Investment objectives are growth, income and diversification
  2. Low liquidity because it is foreign
  3. The fluctuation in principal and return goes from low to high
  4. Interest payments and principal taxed as ordinary income in the year reeived in the country earned
  5. Because it is foreign there will be economic, political, currency and market liquidity risks

Thursday, September 21, 2006

Domestic Large Capitalization Stocks

Domestic large cap stocks are very popular with investors because they are the best-known companies out there. We will lay out the main characteristic when investing in large caps.

  1. Investment objectives are growth and income along with diversification
  2. Because they are large company there is always a market so they are very liquid
  3. Just like any other stock there is a high probability of fluctuation of principal and return.
  4. Your capital gains and dividends taxed in the year received

Wednesday, September 20, 2006

Domestic Small Company Stocks

Investing in U.S. small companies stocks is another asset class that goes along with a diversified portfolio. We will look at the essential characteristics of small company stock.

  1. Investment objectives are growth and diversification
  2. High to low liquidity depending much on the volume of stock trades
  3. Expect high levels of fluctuation in pricipal and return because smaller companies tend to go under more than really big ones.
  4. Capital gains and dividends taxed in year you received.
  5. More volatile and risky than large cap stocks. Huge price changes can occur very quickly.

Tuesday, September 19, 2006

International Stock: Developed Markets

Another subset of international stocks is developed markets. These are 1st world countries with plenty of investment options.
  1. Investment objectives are growth and diversification
  2. Low to high liquidity
  3. Just like U.S. stocks; international stocks range from low to high in risk, but the pricipal and returns can fluctuate a lot.
  4. The tax features reflect emerging markets'.
  5. While more stable these countries are subject t economic, political, currency and liquidity risks.
  6. Different accounting standards.

Monday, September 18, 2006

International Stocks--Emerging Markets

International stocks can be categorized many ways. Here we will discuss Emerging Markets. Below you can find some characteristics of this asset class.
  1. The investments objectives for you are growth and diversification
  2. The Liquidity is low
  3. Fluctuation are principal and return is high
  4. Capital gains and dividends taxed in the year received in the country you earned it.
  5. Subject to political, economic, currency and liquidity risks
  6. Different accounting standards

Sunday, September 17, 2006

Recessionary Stock Performance: 1945-2000

The stock market is closely related to the health of corporations so the performance of the stock market often reflects what is going on in the economy.

When downturns come in to the U.S. economy it is also felt in the stock market. If you graphed out all the recessions from 1945-2000 you will see that $1 invested at the end of 1945 becomes $1,000 by the end of 2000. However, the most important aspect of this is to examine the economic recessionary periods and correlate it to the stock market performance. Immediately before, after or during a recession the stock market is almost always affected negatively.

Saturday, September 16, 2006

Long-Term Investment Strategy

When developing an asset allocation program you need to understand what your options are and what defines them.

Stocks
You can divide stocks into large, mid, and small cap stocks--strictly based on their market capitalization. Foreign companies are represented in international stocks. Owning some of each asset class you will lower your risk and help your portfolio's performance in the long run.

Bonds
The U.S. government is the largest bond issuer in the world. The payment of interest and pricipal is backed by the U.S. Treasury. This being said, U.S. bonds are considered one of the safest investments in the world. Corporate bonds will typically offer a higher interest rate of return because their is a risk that the company could default. Municipal bonds are issued by state and local governments and any income made from this is exempt from federal taxes. International bonds are issued by foreign governements.

Cash Equivalent
Cash equivalents represent investments in short-term, high-quality securities like money market funds, Treasury bills, and certificates of deposit. These investments are much less risky and more liquid.

Real Assets
Real assets are those assets falling outside of traditional classifications of stocks, bonds, and cash equivalents. They have a value outside of the monetary units in which they are dominated and can help hedge against inflation.

Friday, September 15, 2006

Debt Numbers

There was another report out recently that spelled the troubles of Americans when it comes to saving money. The U.S. had an average –0.5% saving rate last year—the lowest of any major economic nation in the world. The average household has over $7,000 in credit card debt. How is this sustainable?

It is not. Attitudes and culture must change in America to change it from spend spend spend to save for your future and a rainy day. Spending money on things you cannot afford is much more fun than contributing to your savings account. These problems are magnified when you look at the housing market. Manuy of the people already in debt were getting interest-only loans on their home or dangerous ARMs. Things for the average American will be getting worse very soon and the divide between the Haves and the Have Nots will expand further.

Thursday, September 14, 2006

Long-Term Investment Strategy

Wednesday, September 13, 2006

Large Cap Stock Market Returns

1920-1929: Black Thursday, October 24, 1929 marks the beginning of the Depression. The market had shown signs earlier in the year of weakness.

1930-1939: By the summer of 1932 the stock market had lost 86% of its market capitalization

1940-1949: After WWII the U.S. is the only economic superpower and begins the shift from war-time economy to peace-time.

1950-1959: Time of steady, sustained growth.

1960-1969: Early in the 1960s a tax cut had spurred growth , but the financing of the Vietnam War and the Great Society set up stagflation of the 1970s.

1970-1979: Double-digit inflation, stagnant economy, high interest rates, high oil prices all of which went a long way to bring about the demise of the U.S. manufacturing sector.

1980-1989: October 19, 1987 stocks fell by more than 20%, but it regained those losses by 1989.

1990-1999: 1995-1999 marked the only time the market had returned more than 20% for five straight years.

The early 2000s have not ended, but factors like Septmember 11, 2001, the market downturn of March 2000, the War on Terror and the accounting scandals will probably dominate this era.

Tuesday, September 12, 2006

Buying a Car

Now is the time to take advantage of the automobile market. Ford and GM are in some serious pain with bankruptcy looming as a future possibility. They are doing whatever they can to sell a new car to you. Take advantage of being in a strong position. Even foreign car dealers have better than normal deals to jump on.

Also, interest rates on vehicles are on the way up so strike while you can. Plus the 2007 models will be coming soon so dealers will want to get rid of inventory. Zero percent financing on a car is hard to pass up and it is hard for the automaker to make money. Therefore, it cannot last for too long.

Monday, September 11, 2006

Money

If you have money worries you are not alone. Real estate is on a downward trend, average income levels have flattened, goods and services are more expensive as is oil. More and more Americans owe significant amounts of money on their credit cards. Money is getting more expensive and if you have not already acquired lower rates on your loans and debt--now is the time. If you have been putting off paying back that credit card debt do it as soon as you can. Despite some reports the average American is not doing better than they were 10, 20, 30, 50 years ago. Americans have gotten into bad mortgages and the rising prime rate is making their lives difficult. The Fed is trying to curb inflation, but when the price of gas has doubled in the past few year it affects the entire economy and all goods and services become more expensive. Try to right your boat now because in the future it might be even more difficult to do.

Sunday, September 10, 2006

Pre-Tax Savings

As stated before contributing to tax-deffered savings plans can help you when the taxman comes calling. The government entices people to save for retirement by allowing pre-tax contributions. Because it is pre-tax it will affect your bottom line of how much money you will take home.

Take two people: both gross $75,000. One sets aside 8% ($6,000) of pre-tax wages in a brokerage account while the other contributes 8% to a 401k at work. Both save the same amount of moeny, but the one contributing to the 401k takes home almost $2,000 more per year. That can make a big difference in the short and long term.

Saturday, September 09, 2006

Effects of Taxes and Inflation on Cash

Cash-equivalents have historically been vulnerable to inflation and taxes. Taxes and inflation can completely eat away at any gains you receive by investing in them. Treasury bills, money market funds, and CDs can return negative growth when considering taxes and inflation.

Take $10,000 in 1980-2000. Their average was 6.6% resulting in an ending value of $36,072, but when you add in the effects of taxes the $10,000 became only $21,384. The average return after both taxes and inflation results in a -0.3%. So remember to consider these factors before investing in these instruments.

Friday, September 08, 2006

Returns before and after Taxes

Obviously, taxes reduce the amount of return you receive on your investments. Here we will examine a hypothetical investor that has a normal long-term investment strategy and the tax consequences involved.

Assume that stocks after taxes were purchased and held for five years and then sold then capital gains kicks in. The net proceeds from the sale were reinvested as were any dividends. From 1926-2000 the average return for this portfolio was 11%, but only 8.5% after taxes.

Now bonds were turned over 20 times within this same 75-year period. Capital gains were reinvested at sale. Bonds averaged 3.8% after taxes compared to 5.3% before. This 3.8% barely outpaced inflation. Holding cash will earn you 2.2% after and 3.8% before taxes--you actually lose money this way.

Therefore, it is essential to understand the tax-impact on your portfolio to know your true return.

Thursday, September 07, 2006

The Impact of Currency Fluctuation

Currency fluctuation is something you need to pay attention to when investing internationally. That fluctuation can increase or decrease the dollar value of an investment.

  1. Market performance: one component of fireign investing
  2. Currency translation: supply and demand of a currency fluctuates the price of securities. Local currency investors of a certain country will have different returns than you will have in the U.S. on the same investment.
When U.S. investors purchase foreign securities you have to convert the amount from the U.S. dollars to local currency. When sold they are converted back to dollars. So a strengthening dollar reduces the value of the foreign investment by an American and a weakening dollar increases the value of the foreign investment.

Example, in 2000 UK stocks returned -4.5% to a local investor and the pound depreciated (-7.2%) versus the dollar giving the U.S. investor a return of -11.8%. So this goes to show you that it is important to understand the effects of currency fluctuation.

Wednesday, September 06, 2006

The Risks of International Investing

You can never completely rid yourself of risk in your portfolio, but diversification will help you sleep at night. Investing internationally will help your risk/return trade-off, but foreign investments have some risks the domestic stocks do not.

  1. Currency Risk: Changes in foreign currency rates can effects the returns of foreign investments. Exchange rates change constantly because of supply and demand of countries' currency. Also, when you sell a foreign security or receive dividends there needs to be a currency conversion. Change in foreign currency rates can increase or decrease the dollar value of an investment even if the foreign security remains unchanged.
  2. Economic/Political Risk: Economies around the world do not possess the diversity or stableness of the U.S. Political unrest can have major negative results on foreign investments' returns. So understand the politics of the country before diving in.
  3. Market Liquidity Risk: This risk is if a security becomes difficult to sell in a secondary market. Most foreign stock do not trade in the volumes that U.S. stocks tarde.
  4. Differences in Accounting Standards: With all the accounting malfaesance that has gone on in the U.S. this decade it is easy to see how a country's accounting rules can significantly affect a stock. Most standards are quite different from the U.S. model.
  5. Costs of Investing Internationally: For all the reasons we discussed, investing in foreign markets typically has higher expenses than domestic. Obviously, this can reduce your overall return.

Tuesday, September 05, 2006

Domestic Versus Global: 1970-2000

Take two portfolios: one is a Domestic investment portfolio and the other is a Global portfolio. When you examine the Domestic portfolio you see that it contains 60% U.S. stocks and 40% U.S. bonds while having an average return of 11.5% and risk of 10.9%. Now take the Global portfolio--42% U.S. bonds, 41% U.S. stocks and 17% International stocks. This mix results in the same average return of 11.5%, but a lower risk level of 10.2%. So this is another example to show how diversification pays int he long run. You get same/similar returns while lowering your risk.

Monday, September 04, 2006

Real Estate and Homes

If you decided in Q1 or Q2 to hold off on a home or real estate purchase it looks like you made an excellent choice. It might not be a bubble, but the current market is slow and sellers are not getting what they were getting several months or a year ago. Interestingly enough interest rates on mortgages have gone up, but very little compared to what it could have been. It looks like the flippers are the ones getting caught with their pants down, but this is an opportunity . . . Buy low, sell high, right? If you are looking for a home--start looking seriously right now and get all the necessities out of the way so when you find a deal you can move quickly.

Sunday, September 03, 2006

Stock Market Status

The market continues to perform well despite all the exterior factors that can influence it. The S&P continues its steady rise and it looks like those that called for doom were wrong . . . at least in this short term. Good factors and bad factors alike seem not to shake the market's movement up Either this is irrational and the end is near or this could be a big climb that is just starting. Watching it play out th rest of 2006 we will see what the long-term really held.

Saturday, September 02, 2006

International Investments Enhances Domestic Portfolios

As you now know you can help your portfolio's risk/reward trade-off by including international stocks with your domestic investments.

By expanding the the set of domestic portfolios to include foreign stocks you can improve that risk/reward trade-off. In comparing a portfolio of domestic stocks and one with global investments you can receive higher returns at certain levels of risk. Because of the low correlation between domestic and foreign stocks they complement one another very well and will help your portfolio in the long-run.

Friday, September 01, 2006

Benefits of Global Investing 1969-2000

Investing abroad will enable you to to take advantage of broad diversification.

The world is in flux constantly and investing internationally is essential to having a well diversified investment portfolio. Examine this: Take the period of 1969-2000 and invest $1,000 in a global, U.S., European and Pacific based portfolios. Which performs best?

The global one outstrips the others with a result of $46,849 at a 13.2% average clip. The U.S. and European portfolios are not terribly far behind, but when you consider the benefit of lower risk in a global portfoliothe benefits are even more important. pacific stocks lagged with a $32,505 result, but in the future those stocks might perform best. You never one where will be the leader so by covering all your bases you will be best positioned to take advantage of this.