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Should We Have Been Investing in the Country, Instead?
In September, the Wall Street Journal published an article about nervous investors who were buying low yield, short term U.S. Treasury Bills as safe securities. ("Demand for Short-Term Treasury Debt Puts a Crimp in World-Wide Supply")
I remembered that because I just read another article about nervous investors buying government securities at low yields, under 1 percent. This time it is the Washington Post writing about the low yield U.S. Treasury bonds and declaring that "it's terrible news for the economy, which relies on people's willingness to invest and lend money." ("Flight to U.S. Treasury Bonds Bad News for Economy")
Others in the financial world are quoted. One said "The simplest way to think about this is that nobody wants to hold any risky assets." Another said, "You can cut rates all you want, but if nobody wants to take risk, no matter how attractive an investment seems to be, no one will put up the capital for it."
But wait a minute. Buying government bonds is investing and lending money. Consider the wreckage of the last few months after a decade of mortgage lenders making billions of sub prime mortgage loans.
Investment houses like Bear-Stearns and Lehman Brothers risked billions of America's loanable funds and our savings speculating with sub prime mortgages, and it did nothing except give them a chance to resell financial assets at a higher price.
Our savings could have helped fund our massive Federal deficit. Instead we owe foreign nationals who bought U.S. Treasury Bills and Bonds while Americans were on a speculative spree buying up risky assets that have failed by the billion.
We want our savings to fund the production of long lived assets and valuable services. The private sector has failed to do that lately.
Government bonds earned 4 to 5 percent interest for the last 10 years. If we had invested more in the government and government had used our savings and rebuilt New Orleans we would have something to show for it and thousands of jobs in the process.
The past decade has proved in the most decisive fashion that Americans are ready to take risks and to lend and invest money, but there is nothing that makes private lending and private debt better than public lending and public debt. It all depends on the assets we buy.
Remember one rule: it is not who invests, but in what.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Can Credit Ratings Be Trusted?
Many savers with a 401(k) or other investment account are probably familiar with the Standard & Poors, Moody's or other credit rating firms. Monthly statements usually include their ratings alongside a list of assets.
Lately though the credit rating firms have admitted to Congress [Washington Post, Credit-Rating Firms Grilled Over Conflicts, October 23, 2008] their ratings have been tainted by conflict of interest. Moody's and Standard & Poors are paid by the firms they rate.
The article quotes a memo written at Standard & Poors by someone who said "Let's hope we are all wealthy and retired by the time this house of cards falters."
Long before I read that anonymous statement, I wondered about credit ratings and whether they are good guides for savers and investors. Credit rating firms use past performance to rate future risk.
Forecasting the conditions in markets years ahead is hard enough, but the current wave of defaults on mortgage-backed securities has spread to other firms in a domino effect. The good management and triple A rating at one firm can be affected by defaults at other firms. Ratings cannot be given in isolation from the solvency of the larger financial system.
Since a bond is an enforceable contract just like a home mortgage, it is worth asking whether a failure to pay interest and principal on time is the important financial risk. As long as a defaulting institution remains after a default, then late payments can be recovered later.
For example, corporate bond holders risk losing interest and principal in a default, but a corporation can literally disappear in a bankruptcy. Cities, counties and states do not disappear. Even if they go into default they continue to have taxing authority to meet their legal pledge of full faith and credit to pay their bond obligations.
Furthermore, city and county governments are created and governed by state legislation, which makes state government responsible for city and country bond payments in the event of their default.
Following this logic, even small municipalities should have higher credit ratings than private sector corporations. Size and name recognition should not matter in credit ratings and the difference of market interest rates between government and corporate bonds may not reflect actual differences of risk.
Remember that non-federal government bonds and bond funds are not taxed as part of income.
The article did not tell readers if Congress wants to impose professional standards, or what if anything it intends to do about this newly reported conflict of interest.
In the mean time, remember governments are likely to be around to pay their bills.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Using Prosper to Diversify in a Down Market
Everywhere you go, you hear that the stock market is tanking — and analysts are discussing what you should do to keep more of your money.
While my philosophy of index investing says to buy more when stock prices are low, I came across a guy using an additional method to get returns on his money: peer-to-peer lending at Prosper.com.
We've talked a little bit about Prosper before, but if you're new to it, the site allows users to make and borrow loans from other individuals at agreed-upon interest rates.
So if you've got some extra cash, you can bid on loans as part of or as the entire amount that a borrower is looking for. With interest rates as high as 35%, it's an attractive alternative to watching your money tank in the stock market.
Have you considered loaning out money at Prosper? Share your experiences with us in a comment.
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How Much Money Do I Need to Retire? ING Your Number
ING Direct is rolling out a new advertising campaign and Web site focused on determining how much money you need to retire.
ING Your Number (http://www.ingyournumber.com) is a financial calculator for figuring out "your number" — meaning, the amount of money you need to live at a level you'd like in retirement.
On the Web site, you're given a Flash presentation where you insert six fundamentals for determining your number:
- Current Age
- Marriage Status
- Household Income
- Expected Retirement Age
- Desired Income at Retirement
- Age until you'll need the incomeAfter your number is determined, ING points you to financial professionals whether you have one or you don't.
At first use, it seems helpful — you've got to know where you're going before you can get there. But at the same time, how are you supposed to know how much you'll need to live on in retirement? (It may not be the 80% often quoted.)
And, more importantly, how can I figure out when I'm going to die? (Death clocks not withstanding)
Now that ING owns ShareBuilder, it makes sense for them to be making a bigger deal out of investing for the future. We'll see how long the "your number" campaign plays out.
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What Happens If My Investment Company Fails?
I'm in the process of bringing over an IRA to the company where I do most of my investments. I thought having as many things in one place would be convenient for me and my eventual heirs.
Then I got to thinking — what if my investment company had some type of Enron-like collapse? Would my balances go down the drain with their stock? Or am I exempt, because my balances are not invested in the company, but instead in mutual funds they offer?
So now I'm thinking, maybe not only is diversification amongst holdings a good idea, but diversification of the companies you do business with may be a good idea as well.
In reality, my investment company is a very large industry leader, so I couldn't imagine that they would not be bailed out by another company or the government.
But what if I was consolidating my assets with a smaller company that carried no clout? Could I lose everything if they went under?
Does anyone have any insights or thoughts on this topic?
Tom Valenti is a marketer and project manager who currently works for a financial institution in New Jersey. Read Tom's blog at http://thriftyhomeowner.blogspot.com or learn more about him at http://tomvalenti.com.
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If This Isn't Gambling, I Don't Know What Is
Trent at the Simple Dollar posited to his readers last week that investing in individual stocks is basically gambling.
Individual stock investing is something like playing blackjack at a casino where, on every hand, the dealer is wagering just a little tiny bit more than you, but there are thousands of people around you shouting out suggestions.
He argues that you might have a slight advantage (his italics), but being profitable is "far from a guarantee and the work needed to get those earnings is tremendous."
Obviously, the fools at The Motley Fool feel otherwise. In their story on how to get 50% annual returns, here's what they suggest:
Lesson 1: Sell your index fund
There is no surer way to not beat the index than by investing in the index itself. Not exactly a revelation, right? Investing in index funds leads to nearly certain long-run underperformance, because of transaction costs and management fees.Putting aside the preposterous proposition of actually getting 50% returns (which they admit), are they actually arguing that transaction costs and management fees are the downfall of index funds?
That doesn't make any sense. Index funds are great because, in addition to owning an entire index, they're passively managed and have some of the lowest fees in the market.
I actually met Tim Hanson, one of the authors of the article, when I interviewed at the Motley Fool (full disclosure: they didn't offer me the job because they were "going to give priority to candidates with more experience in investing." — aka stock picking).
I told him index funds were my investments of choice, and while he agreed they are the right way to go for 80% of investors, the Fool recommends an "index-plus" approach … meaning, invest in an index fund and buy the stocks they are hocking in their newsletters (because that's what they're really selling you).
Not only are they suggesting ways to get almost impossible 50% returns, but they're spreading disinformation in the process.
Please remember to think about who benefits from the "advice" you get.
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What Kind of Person is the Stock Market?
Stanley Bing has an amusing post up today about the qualities of the stock market and how they translate into a person.
Among them, he offers up:
Rich: There’s a lot of money in the stock market. Having all that money doesn’t really make it any happier, though.
Nervous: In fact, being so wealthy and privileged makes it incredibly anxious. If peace of mind rests in the feeling that one has nothing to lose, the Market is the exact opposite. It has everything to lose, first and foremost in its anxious, monkey mind.
Greedy: Over-riding that anxiety is a fine patina of opportunism and atavistic desire to get more, have more, to profit while others are screaming down into the ocean of defeat. When the greed overcomes the nervousness, the Market is happy and flies very high;
Gutless: On the other hand, even the specter of a shadow of a doubt that things could go the other way and the Market starts heading for the exit. In a disaster, this is not the person you want in the lifeboat with you. If it doesn’t push you overboard, it will try to eat your leg;
Intelligent: Nobody is saying the Market is stupid. It’s not. It’s just like a lot of my friends — too crazy to be smart a lot of the time;
Irrational: I don’t care how many PowerPoint presentations investment bankers, lawyers and security analysts offer to me at boondoggles past, present and future, nobody will ever convince me that the Market is rational. Buffett to the rescue! Hurrah! Let’s go up! Oooh. Wait. Buffett’s motives are impure. Ouch. Let’s go down. Sure, apologists for the Market will come up with a million reasons it does things. So do we all.
Of course it's possible to beat the market. It can be done, and it has been done.
But the more important question: is it worth it? What will it cost you to beat the market?
I don't know about you, but I don't have the time or money to try and beat the market. The chances of it happening are slim, and even if it happens, it'll cost you the difference in fees.
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Digg Tackles 401(k)s: Why The Dow Drop Doesn't Matter
While the mainstream media is all over the place with news of the stock market's big drop Thursday, the community at social news site Digg isn't worried.
Check out some of the right-on-the-money comments from this story: Have any money in a 401(k)? You just lost a huge chunk.
cause letting it sit under my matress is so much better. It can take a dunk considering its been steady going up for the last five years.
The market will come back eventually. Now is actually the perfect time to BUY! Buy cheap sell high, and live below your means, you will retire well.
the title has nothing to do with the article. the whole point of a 401k is longterm investment for your retirement. one crappy period in the span of the 40 years until you retire really isn't worth losing any sleep over
These comments are encouraging, especially when the mainstream media is so focused on the stock market's fall.
Now, one could argue that Digg users tend to be younger than most mainstream media consumers, therefore have a longer time to go before they retire.
But it's really good to see smart personal finance fundamentals spread.
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How to Transfer Your Retirement Accounts to Vanguard
A lot of visitors come here by Googling information about transferring their retirement accounts, either the IRA or their Roth IRA, many to Vanguard.
Since there seems to be interest in the topic, and I just completed my Roth IRA transfers from Ameriprise to Vanguard recently, I'll recap the entire process.
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5 Online Money Scams You Should Avoid
When the Internet was in its infancy, consumers were much more likely to be caught in an online investment or money scam than they are today.
But even though we're more skeptical of the "work at home" emails and the "send us your social security number" requests, online scams can still cost you dearly if you're not careful.
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