There were rumors and predictions for a while, but today it’s official. Kodak, the company that revolutionized film photography and adopted digital photography early, has declared bankruptcy. The company has been struggling since the 1980s; I’m surprised it survived this long without filing Chapter 11.

That’s what the company chose to do today, with debt adding up to $6.75 billion.

I’ve been a fan of photography for many years, and I’ve begun taking this interest more seriously in the past few. I’ve taken a number of eight-week photography classes offered by a local arts organization, and the classes have been helping me improve my art. They have also inspired an interest in old-fashioned film photography. While I still use digital cameras (mostly a Canon 1D3, purchased used), I also use a Mamiya RZ67 Pro II medium format film camera, also purchased used. Just in the last month, I decided it would be more frugal and more fun to develop black-and-white film myself instead of spending the money to a professional lab nearby.

Despite owning all the equipment I have — in addition to various cameras I have studio equipment like lights and backdrops — my struggle is to find the time to focus on photography.

While Kodak will continue to operate during the company’s Chapter 11 reorganization, the future of some of the best Kodak products is uncertain. There is no great alternative for photographers who like using Ektar and Portra color film and Tri-X black-and-white film; competitors’ products, like those produced by Fuji or Ilford are different. Now could be a great time to stock up on Kodak film; if it becomes difficult to purchase, the value could increase. Film has a short shelf-life, but many photographers are fine with purchasing expired film.

CNN

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Financial planners just love promoting 401(k) retirement plans. They have quite a few benefits, notably a tax deduction for contributions as well as a tax deferral for contributions and earnings. They’re also one of the most popular vehicles for introducing the working middle class to the stock market, something that might not have been accessible to this group in the decades before the 401(k) plan was established.

In addition to financial planners, fund management firms and plan administrators love 401(k) plans, and their love knows no bounds. Companies pay significant fees to other companies that operate and manage 401(k) plans. More fees are embedded in the funds within the plans, benefiting each fund’s management team.

The tax advantages, as well as a potential matching contribution if an employer offers one, offset some of the drawbacks of 401(k) plans.

1. Fees.

As already mentioned, most 401(k) plans are subject to fees, many of which are not immediately apparent to the investor. If you bother to read the prospectus associated with each fund you choose to invest in, you may find an expense ratio listed. If you do, there’s a good chance it’s higher than a comparable index fund. My former employer included investment choices that were annuity products disguised as mutual funds, and these didn’t have expense ratios listed. It was nearly impossible to determine how much of my investment I was losing to funds each year.

While fees are higher with 401(k) plans than with pensions, pensions offer a stable, predictable return. 401(k) performance depends on the investment choices and the associated markets. Pensions, when they are fully funded, tend to be more stable.

2. Employers are hands-off.

As the popularity of 401(k) plans grew, pension plans disappeared. A 401(k) is considered a “defined contribution” plan, while pensions are considered a “defined benefit” plan. That comes from the idea that the 401(k) balance is affected each payroll period by a contribution from the employee, while the pension balance increases at regular intervals by a contribution from the employer — a benefit of working at the company.

The value of a pension also tends to increase as the length of service at one company increases. As the popularity of pensions and other loyalty benefits decreased over the last couple of decades, employees had a decreasing incentive to stay at one company for their entire career. With pensions being a smaller part of most employers’ benefits, they do not need to worry as much about the solvency of these accounts. At the same time, it is up to the employee to make the right investment choices in a 401(k).

3. Automatic enrollment.

The advent of 401(k) programs brought on an increase of the nation’s wealth tied up in the stock market. That’s more income for money managers. It also creates a higher demand for investments, raising prices somewhat artificially. But there has also been a more recent increasing trend of employers automatically enrolling new employees into 401(k) plans once they are eligible. It’s a great idea to stimulate a better possible retirement outcome, considering many employees might not bother to elect to invest in a 401(k) immediately, even if they intend to.

Usually, any mechanism that automates your finances is a good thing. But too much automation can create complacency. It’s important to be aware and know what’s going on with your finances rather than blindly accepting what someone creates for you. You might be better off with an increased deferral rate than the default, or you may need to cancel your 401(k) contribution before it begins to improve your cash flow for necessary expenses.

4. Automatic allocation.

Like automatic investment, automatic allocation can be a trap. Some plans will, if the employee doesn’t elect specific investments, direct all contributions to a money market fund. Any investor could probably be better off in a high-yield savings account than a money market fund managed by a large investment house, even taking into the tax benefit of a 401(k) plan.

Furthermore, some plans will automatically invest your funds in a mix of stocks and bonds, with the percentages based on your age or your expected retirement date. This may or may not be appropriate for your situation, and importantly, it doesn’t take your outside investments into account. For example, if you plan on retiring 35 years from now, your 401(k) plan might recommend an investment of 90 percent stock funds and 10 percent bond funds, but if you already have a significant investment in stocks, your overall portfolio may be closer to 95 percent stocks and 5 percent bonds.

5. Loans.

With a 401(k) plan, you can loan yourself money. This sounds like it should be a benefit. In some cases it is, but often 401(k) loans end up being detrimental to someone’s finances. If there is an emergency and you cannot pay back the loan either on time or at all, you can face fees and penalties. If you lose your job with a loan outstanding, the entire remaining loan balance could become due immediately.

Overall, 401(k) plans can help the working middle class retire somewhat comfortably. And there is the possibility for investors to succeed financially significantly more than they might have with a comparable pension. The burden for performance has shifted from the employer to the employee, and that requires a little bit of financial education that might not have been as necessary (though still beneficial) in the heyday of pensions.

Photo: Yo Spiff

The original version of this article, 5 Reasons to Beware 401(k) Retirement Plans, is copyrighted by Consumerism Commentary.

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I used to work for a company in the financial services industry. Another branch of the corporation I worked for is involved with institutional money management. This department manages institutional investments like company retirement plans and pensions. This is a service they provided to other companies of various types, much like Fidelity and Schwab offer 401(k) management and administration to companies. This could be considered an in-house service, so as an employee of the company, my 401(k) plan was managed by this branch of the same company.

You would think that given the company’s standing within the financial industry, the 401(k) plan would include smart investment choices. Unfortunately, most of the funds available are high-priced, actively-managed mutual funds and annuity funds. There is one stock market index fund available, but its expense ratio is significantly higher than those of the low cost index funds found elsewhere. Nevertheless, I wanted to take advantage of the company’s matching contribution — after all, that’s free money — as well as the tax savings, so I relented and participated in the plan.

401(k) plans — and 403(b) plans available to non-profit and educational organizations — suffer from poor investment choices. They are often significantly more expensive than the index funds you can find for IRAs. A fund’s expenses play a significant role in an investor’s ability to grow wealth over time. A low-cost fund could save an investor over a hundred thousand dollars over the course of a career when compared to a similar fund with above-average expenses. Even taking inflation into account, this will be a significant amount of money.

Schwab has announced that they are now offering a selection of new 401(k) investment choices designed to cater to investors who are keen on keeping more of their money in a program called Schwab Index Advantage. It isn’t clear from the announcement whether the available funds will match what’s currently available to retail investors, but if they aren’t the same funds, they should be similar in cost. The Schwab S&P 500 Index Fund has an expense ratio of 0.09%, lower than even Vanguard’s competing retail S&P 500 Index Fund with 0.17%.

The brokerage also offers companies the ability to provide employees with investment advice and planning tools for an unspecified low cost. The GuidedChoice system will help employees make ongoing decisions regarding their retirement investing, and this should help employees save more for retirement. It’s individualized advice, which isn’t common with retirement plans. Most employees are lucky if their retirement plan comes with a web application that helps them determine an asset allocation strategy; individualized advice could, if the advice is good, help investors grow their nest eggs in a way that’s most appropriate for their goals.

Are you satisfied with your 401(k) retirement plan, its choices, and its included advice?

Charles Schwab

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Last week I met with a Certified Financial Planner for the first time. This was a free service provided by Vanguard, so it was a good opportunity to speak to a professional about my specific situation. For many years, I’ve been relying on mostly generalized advice, whether from books, large communities like the Motley Fool discussion forums (particularly the Living Below Your Means section), financial columnists, or a community of bloggers that has grown from fewer than a dozen to more than a thousand.

My financial planner and I started by discussing my goals. This was tough for me, as I’ve changed my long-term goals several times in the last decade. I’m trying to find the right mission for my life. I’ve made personal finance my passion since the creation of Consumerism Commentary in 2003, but long before that date I was passionate about other aspects of my life. I need to look at how I want to spend the next twenty, thirty, or forty years of my life and some of the more important developments along the way, like having a family.

From a financial standpoint, my next major expenditure will most likely be a house, though that purchase relies on making other choices in my life first.

With my current level of investable net worth — my assets outside of an emergency fund and money put aside for shorter-term goals like a house — I’m willing to give up potential returns in the stock market for less risk. We decided on a mix between 60% stocks and 40% bonds. Complicating the issue is the fact that almost all of my non-cash investments are in stocks. It will be important to look at my portfolio as a whole rather than analyzing my 401(k) separately from my IRA and separately from my taxable account. This is where tools like Quicken, offering charting and reporting across a variety of accounts regardless of where they are held, come in handy.

The 60%/40% split between stock funds and bond funds is more conservative than I would generally recommend for someone my age (thirty-five), but that might be appropriate based on my lower needs for long-term returns and need for maintaining value in the intermediate term as I determine the next steps for my life.

Before discussing specific investments, I made sure the planner was aware that I prefer index mutual funds rather than ETFs, managed mutual funds, or individual investments. The planner suggested that 70% of the stock portion of my portfolio be invested in the Total Stock Market Index with the remaining 30% in the International Stock Market Index. Half of the bond portion of the portfolio should be invested in the Intermediate Tax-Exempt Bond Fund with the other half in the New Jersey Tax-Exempt Municipal Bond Fund. I’m not sure how excited I am about the prospect of investing in New Jersey, but the tax advantage could be helpful.

I brought up the issue of tax efficiency. It was my understanding that tax-efficient investments, such as the bond funds recommended, should be invested in taxable accounts, while investments that did not offer any tax advantages should be invested in retirement plans like 401(k)s and traditional IRAs, where the tax is deferred until retirement. After analyzing my tax situation, the planner concluded the opposite would be true, admitting the idea seemed counter-intuitive. In today’s environment, the tax rate for qualified dividends, the result of stock-based mutual funds, is 15%, while income from bond-based mutual funds is taxed at ordinary income rates.

However, the bond funds he suggested to are federally tax-exempt, and one is also state tax-exempt as long as I continue living in New Jersey. The adviser’s suggestion to invest in bonds in my tax-deferred retirement accounts might make more sense if those investments were not tax-exempt. I think there’s a piece of discussion missing from my notes that might have explained this situation with a more satisfying rationale. I’ll seek a second opinion about this particular aspect of my planning.

With most of my portfolio in cash, the planner suggested moving these funds to stocks and bonds slowly, over the course of eight quarters. Leaving behind any amount I’d like to have let in cash at the end of two years, I would divide the remainder by eight to determine my quarterly investment amount. This method of dollar-cost averaging could ease the pricing risk inherent in investing a lump sum.

If my goal is only to have money for retirement, my time horizon would be long. Again, I’ll need to define some of my life goals to determine time horizons for specific pools of assets. That would be a topic for a later discussion.

In summary, these are the main points of our discussion:

• Six months to one year of living needs in cash, including an emergency fund and any other spending needs.
• With the rest, a 60%/40% split between stock funds and bond funds.
• Using a dollar-cost averaging investing strategy over the next eight quarters for current funds.
• Add the bond fund portion to 401(k) investments and stock fund portion to taxable investments.

What do you think of this strategy?

The original version of this article, My Future Investing Strategy, is copyrighted by Consumerism Commentary.

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As the end of the year approaches, take a break from stressing about the holiday season by getting your personal finances in order. It’s a great time to finish your charitable contributions and adjust your 401(k) contribution. It’s also better to fund your IRA now than it is to wait until the April deadline. You can also use this time as an opportunity to adjust your investment portfolio.

Having a hands-off approach to investing is an acceptable strategy. Over the long term, a diversified portfolio of stocks has historically grown in value enough to build wealth, but only over long periods of time. Advisers, especially those who appreciate the low-cost advantages of using index funds rather than actively-managed mutual funds or stocks, have generally said to invest now and leave your investments alone without too much tampering.

Some tampering is required, though. Even if you like the set-it-and-forget-it approach to investing, each year you should evaluate your financial needs, goals, and risk tolerance to ensure you’re still invested in the most effective way. There are two goals when rebalancing your portfolio. First, if your underlying investment approach needs to change, you can reflect your new needs in how you distribute your investments between stocks, cash, and other asset classes. Also, rebalancing gives you the opportunity to lock in gains in one asset class while taking advantage of lower prices in another.

Evaluate your goals and needs against your reality

There are circumstances where your investing approach might need to change. If you’ve been investing 10% of your income every year in stocks and no other investments, you are accepting a certain level of risk. If one of your family members suddenly becomes ill and needs expensive care, you might find that you now have a larger chance of needing the money you’ve been saving for retirement in the near future. Suddenly, having your wealth tied into volatile assets is riskier than you can afford.

In another example, you might have inherited an investment. If this changes your financial situation, you may find that you no longer need an annual return of 8% to reach your financial goals. You could accept less risk and lower returns, and this could be reflected in your investment strategy by moving away from stocks into less volatile investments like bonds.

Look at your entire investable net worth

Your 401(k) plan might have an option to periodically automatically rebalance your portfolio based on your preferences. Rebalancing in general, whether automated or not, is a good way to lock in gains and take advantage of lower prices, particularly in a tax-efficient account where you don’t need to pay the government anything as a result of your gains. For example, in a basic scenario, you might have chosen to invest 60% of your portfolio in stocks and 40% of your portfolio in bonds. If stocks have a great year, they might have increased in value to represent 65% of your portfolio, leaving 35% for bonds. Without changing anything, you now have a riskier profile than you intended.

Rebalancing will allow you to sell the 5% of your portfolio, invested in stocks, and use the proceeds to buy more bonds, moving your profile back to 60% stocks and 40% bonds. You’re selling high and buying low, precisely the type of investing strategy that has a good probability of succeeding over the long term.

If you set your initial investment and risk profile with just your 401(k) in mind, you might not be considering outside investments like IRAs and taxable investment accounts. Take a holistic approach, looking at your entire investment portfolio, including how much cash — money market funds or savings accounts — you have. When rebalancing, you should take your entire financial picture into account. This is a reason automatic rebalancing options in 401(k) plans are not always sufficient.

Photo: Cherice

The original version of this article, Year End Reminder: Rebalance Your Portfolio, is copyrighted by Consumerism Commentary.

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These last few weeks in December present a good time to prepare your finances for the coming year. My personal goal is to start January 1 on a good note, moving my life forward. In the grand scheme putting your finances in order takes a back seat to cleaning up your life as a whole, but it’s an important task because it can set you up for financial success. I’ve suggested changing your 401(k) contribution level early and donating to charity. It’s also a good time to fund your Roth (or traditional) IRA.

Usually, the reminder to fund your Roth IRA comes in March or April. The deadline isn’t until your tax return is due in the following year. For example, I have until April 16, 2012 to transfer money into my IRA and have the contribution count towards my 2011 limit. But why wait?

When investing for retirement, you can choose between two approaches. You can contribute to retirement accounts in a lump sum investment or you can use periodic investments (often called dollar-cost averaging) to spread your contribution over a longer period of time. You can also use a combination of the two approaches. For most savers, the choice comes down to cash flow.

Choose between lump-sum and periodic investments

Dollar-cost averaging, or using the same dollar amount to purchase a theoretically different amount of shares of investment regularly, can help smooth out the short-term volatility in stock prices. When compared to investing a lump sum, with periodic investments, you’ll sometimes invest when the prices of the stocks or funds are higher, and sometimes invest when the prices are lower. It’s one way to mitigate a small amount of risk. If your options are between dollar-cost averaging and saving up to invest in a lump sum later, thanks to the general long-term trend of an increasing overall value of stocks, you’ll generally be better off in the end using periodic investments.

That’s because it’s generally to invest what you can as early as you can. This is why many people choose periodic investments. Cash flow plays a large role in determining how a family or individual will invest. Unless you’re borrowing money to invest into retirement — a dangerous proposition — chances are good you won’t have $5,000, the IRA contribution limit for people under age 50, ready to go on January 1. The first day of the year is also the first day you can contribute to the new year’s IRA.

It can take a while to save up $5,000, so if you can spread the contribution over twelve months at $416.66 per month, now is a great time to configure your coming year’s investment strategy on your IRA plan’s website. If you don’t have an IRA yet, you can start one at any discount brokerage. I use Vanguard, but Fidelity is also good, and TIAA-Cref offers the benefit of very low investment minimums. All allow you to configure periodic electronic investments from your bank account.

If you haven’t invested in this year’s IRA yet and you don’t have the cash available to invest in one lump sum, create periodic investments that help you invest as much as you can budget for between now and the April deadline.

On the other hand, you might have cash available. If so, fund this year’s IRA up to the limit now, and prepare to fund next year’s IRA soon after December 31, both in lump sums. There’s a chance that you won’t get as good a price on your investment as you would the day before or the day after, but if you’re investing for the long-term, the difference between days should be much less influential on your financial success than market performance leading up to the day you begin withdrawing and the period of time to follow.

Choose between traditional and Roth IRAs

While the laws could change at any time, traditional and Roth IRAs have a few differences. In general, if you believe you’ll be in a lower tax bracket than you are now and you qualify for the tax deduction with the traditional IRA, that would be a better option. That’s particularly the case if you don’t have an employer-sponsored retirement plan such as a 401(k). On the other hand, if you’re already receiving the tax advantage of a 401(k), and you believe you could get a better tax advantage by taking a deduction in retirement because you expect to be in a higher tax bracket, the Roth IRA might be a better choice.

Of course, you can hedge your bets by splitting your contribution between the traditional and Roth IRAs. If, however, you earn enough money, you might not qualify for a Roth IRA.

You can use this IRA contribution wizard at Mint.com to determine which IRA is best for your particular situation.

Just do it

Keep in mind that with a long-term view, a lump sum investment is preferable, if you can invest that lump sum right away. If cash flow is a concern, set up a periodic investment to invest smaller amounts over time. Every major brokerage can support this hands-off, automated approach. Saving up to invest is a last resort. If you are not enamored with the idea of investing in the stock market right now, you can always choose a safer investment, even a money market fund or a certificate of deposit. Regardless, the sooner you get invested, the better for your future finances.

Don’t wait for the deadline; for the most part, people who consistently invest the maximum on the first day (January 1 of the coming year) will be better off than those who wait to invest the maximum on the last day (usually April 15 of the following year), because those who wait miss 15 and a half months of potential growth.

The original version of this article, Year End Reminder: Fund Your IRA Now, is copyrighted by Consumerism Commentary.

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At the end of the year, most people in the United States are thinking about the holidays and the potential credit card bills for gifts and family visits. One good way to control this potentially stressful month is to take some time to breathe and get your own finances in order. There are several actions you should consider and complete before the year ends in order to start next year on the best foot possible.

There is good news for everyone saving for retirement through a 401(k) account. The IRS has approved an increase in the 401(k) maximum. Anyone who is in a financial condition comfortable enough to maximize the contribution throughout the year will see an increase from $16,500 to $17,000 for the year. Savers age 50 or older qualify for an extra $5,500 in addition to the $17,000.

If you maximize your contribution, take the time now to contact your benefits department or visit your benefits website to change your deductions now. The change could take a few weeks to take effect, so if you want your changes to take effect for the beginning of the year, it’s best to start looking at the details now.

In many cases, employers offer some time of matching contribution. For example, the company might match half of your contributions up to the first 6% of your salary you contribute or math all your contributions up to the first 3% of your salary. In the first case, to maximize your tax benefit and matching benefit, you’ll need to deduct 6% of your paycheck every period if 6% of your annual salary adds up to $17,000 or less (or $22,500 or less if you’re 50 years old or older). In the second case, you’ll only need to deduct 3% of each paycheck. If the optimal percentage would result in exceeding the government-mandated maximum, you’d have to determine the best percentage that prevents you from exceeding that threshold.

I found out recently that some employers offer a benefit, sometimes called something like “spillover protection.” If you contribute more than the IRS maximum, companies that offer this feature will allow you to continue deferring income to your 401(k), it would just be considered after-tax contributions. Most employers will automatically stop your contribution once you hit the limit, and if the employer matches your contribution on a per-paycheck basis, you’ll miss out on some matching contributions.

Employers may also have other contribution limits. It’s common for a corporation to say that the maximum contribution percentage is 50% of an annual salary.

Recalculating the 401(k) contribution at the end of the year is not a tactic just for those earning enough to maximize the tax benefit. If you received a raise or cost of living increase this year and haven’t adjusted your 401(k) deferment to match the extra cash flow, the end of the year is a good time to bump your contribution by one or two percentage points. Some 401(k) plans have options where the investor can initiate automatic investment increases each year. This is a good opportunity to turn this feature on or manually adjust your contribution.

This advice isn’t just for people working for a large corporation. Non-profit organizations often offer similar benefits called 403(b) plans, and if you’re self-employed, you may save for your retirement using an individual (or Solo) 401(k) plan.

Don’t wait. The process of changing your contribution can take a few weeks to take effect, so if you want to contribute a consistent percentage of your income throughout the new year, the sooner you make the change, the easier that will be.

The original version of this article, Year End Reminder: Change Your 401(k) Contribution Level Now, is copyrighted by Consumerism Commentary.

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The Securities and Exchange Commission, an organization designed to regulate and oversee the financial industry, is charged with acting in investors’ best interests. Most of the time, however, the SEC works on behalf of the large financial companies under its purview. As a result, when consumers demand that companies be held accountable for misleading investors or playing a role in a systemic collapse of the economy, the regulators tend to look the other way. Some companies get by with a slap on the wrist, settling lawsuits with a paltry penalty.

That appeared to be the case recently when Citigroup and the SEC came to an agreement whereby the company would pay $285 million, or 7.56% of that quarter’s profit, to settle a lawsuit that charged that the company did not properly disclose the risk when selling collateralized debt obligations (CDOs) and bet against the same investments the company sold to investors. The benefits of a settlement like this would be that Citi could pay the small fine from its cash reserves without admitting wrongdoing, promise they’ll never break the rules again, and continue to operate business as usual.

Judge Jed S. Rakoff of the Federal District Court in Manhattan was not pleased with the resolution or collusion between Citi and the SEC. The judge rejected the settlement because it was not fair, reasonable, adequate, or in the best interest of the public. He demanded the company and the regulator to shed light on the facts of the case, something this settlement might have avoided, protecting the company from any real criticism. A settlement would mean that affected investors could not sue Citi, but if the SEC were to successfully win a case against Citigroup, proving the company was in the wrong, that decision could be used by harmed investors who sue the bank. At the core of the matter is whether a company should be allowed to avoid admitting guilt.

The trial will begin in July 2012.

DealBook

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Last week, a photograph by Andreas Gurksy, Rhein II, was sold at auction for $4,338,500 to an anonymous buyer. The record-breaking sale allowed Gursky to reclaim fame as the artist whose work has claimed the highest price paid for a photograph. This auction was a secondary market sale. As in most art auctions commanding high prices and press attention, the artist sees little if any financial benefit.

What do you think of the image? Is it art? Is it art you would consider to be worth $4 million? $1 million?

It wasn’t this lowly jpeg that was sold. Seeing the print — considered a very important part of the art of photography — is an experience in itself. To see this work in person, you would be gazing at a print eight feet by twelve feet. Even today’s relatively advanced digital cameras, devices used by professional wedding photographers and amateurs like me around the world, wouldn’t be able to produce a print that size with quality and resolution. This image was most likely produced with a large format camera using analog film.

There’s only one way to determine the value of a work of art: offer it to a wide audience of potential art buys and determine what at least one of them would be willing to pay to take it home. Looking beyond the simple supply-and-demand answer, any piece of art is able to fetch a certain price at auction due to only a few factors. Some aspects moving a price aren’t related to the specific piece of art as much as the artist.

• Buyers look for a works by photographers who have a history of creating art in demand by galleries and collectors.
• Photographers who were trained by other artists who have been successful are also rewarded for their potential.
• In most cases, buyers believe that the art will be worth more in the future, and view the purchase as an investment.

Some reasons behind a price relate to the process of creating the art. It’s only recently that photography has become accepted as art, color photography even more recently, and many artists still consider photographs with digital manipulation in editing software like Photoshop not art at all. Photography still has a long way to go before it’s fully accepted alongside oil painting and sculpture as art. That’s reflected in value as well; while this $4 million price for Rhein II is a nice sum, it falls short of the Running Man I sculpture by Alberto Giacometti, which fetched a sale price of $104.3 million recently.

The fact that this image was captured using a large format camera, a process that is significantly more involved than pointing and shooting, helps to add to the value, but many photographers, particularly landscape artists and architectural photographers, still use large format cameras. The type of camera cannot be the sole reason driving the value of art, but it is an important factor when an artist is striving for the best quality possible.

Although this image looks simple, a lot of planning went into its creation. Artists carefully plan the time and place, bring the right equipment, and without a digital camera, do not have the luxury of taking a flurry of snapshots to choose the best image of one hundred on a memory card. Often, a work of art is part of a series or a study on a particular theme, and in the case of Rhein II, the photograph falls within a series about the river in Germany.

Ken Rockwell, a respected but divisive photographer who has one of the most popular websites about the art, has this to say about the photograph.

It is valuable because it is art, not just a photo. Rules are worthless. If [Gurksy] was just a photographer instead of an artist, he would have been crippled by the nonexistent “rule of thirds” myth, and put the horizon someplace else. In his case, the horizon slams right through the middle, which adds to the power by giving a sense of unease. Our minds ask “what’s up with this? This is so barren and empty; where is this place?”

Likewise, if it’s not captured on film, it is not art. Artists create art, not photographers. Artists may choose to work in photography, but being an artist is what matters above all…

If shot with a digital Nikon or Canon like amateur photographers, it would not have been art. If he used a zoom lens or many modern prime lenses, their distortion would have subtly curved the lines, weakening and destroying the artist’s work.

Ken doesn’t point out that Gursky did digitally manipulate the image after making the capture. The view portrayed by the image above doesn’t exist in nature. Gursky removed people, dogs, and a building from the captured image to create the art.

Nevertheless, the image is so simple that it looks like something anyone can capture, standing beside any river in the world on any dreary day. One nature of art is the ability to stir emotions in a spectator, even if that emotion is anger in response to a sale price, frustration that an image of mostly straight lines and solid colors can be considered art, jealousy that another photographer’s images wouldn’t fetch such a price, confusion about why it’s acceptable for some digitally manipulated images to be considered art while others aren’t, or questioning whether the image is art at all.

This describes the industry reaction to the sale. The Luminous Landscape forums are buzzing with comments about this sale and the image from professional photographers — mostly commercial photographers who dabble with artistic photography, specializing in medium and large format cameras.

Why spend so much money on art?

With so many problems in the world, why spend $4 million on one piece of art rather than using that money to build a school or feed starving children? This is a fair question to ask. At this high level of sophisticated art acquisition, there is a big emphasis on the investment aspect of art. With the photographer still living and with photographic art still being rare compared to other visual art methods, there is a good possibility of the value of this work increasing over the very long term.

Although it’s common to question the intent of purchasing a work of art for $4 million, investors who dedicate the same amount of money to a company to become an owner of that company usually won’t face the same questions about the virtue of their investment. Both buying art and buying a company are capitalistic endeavors, but while the value of a company can be easily justified by looking at a set of financial reports, the art is more difficult to rationalize. Regardless of the reasons, the value of a company or a work of art is whatever someone is willing to pay.

By investing in art, it sends a signal that art, in general, is worth society’s attention. Art is an important part of civilized society, and both reacts to and inspires thought that drives a society forward.

Photo: Andreas Gursky/Christie’s Images, Ltd., 2011
NPR, Seattle PI, Ken Rockwell

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The Security and Exchange Commission (SEC) has advised the managers of super-secret hedge funds, investments of the most wealthy, that they will soon need to disclose more information to the regulators. Highly leveraged hedge funds contributed to the economic collapse, but the pressure to increase oversight has been mostly ignored by the industry. In response to heavy lobbying by the industry, the SEC has scaled back the requirements the commission intended to issue, leaving softer regulation likely to be ineffective.

Hedge fund managers like to keep their operations secret. If managers were required to report underlying investments, trades, and strategies, they might be at a disadvantage. Like a patented formula for creating pharmaceutical drugs, hedge fund managers rely on their proprietary operations to ensure no imitators and no rogue competitors using their strategies to cause them to fail. Most fund managers need to report their funds’ financial details publicly, with statements that outline the funds’ holdings, risk profile, expenses, and strategy. Hedge funds do not have this requirement.

The new SEC regulations allow hedge funds to file a minimum amount of data pertaining to the investments, and the filing will not be available to the public. Only a small committee within the SEC will be privileged enough to see the information. Additionally, only hedge funds with $1.5 billion in assets will be required to report the most detailed information to the SEC. Funds with over $500 million in assets need only report the extent that the investments are leveraged. Hedge funds with $150 million in assets or left will not be required to report anything.

The required reporting, which grows out of the financial crisis three years ago, is meant to allow financial regulators to monitor the risks that the funds may pose to the nation’s overall financial system, something that officials at the Federal Reserve, the Treasury Department and the S.E.C. did not have during the crisis.

By focusing on the largest hedge funds, it may seem like the new reporting requirements will achieve this goal of monitoring and evaluating systemic risk. Considering that the largest hedge funds can still get away with reporting vague information about their underlying investments, the SEC may still miss big risks.

Should hedge funds be subject to the same scrutiny as publicly traded companies? Does the idea that very few investors take advantage of hedge funds release these managers from public accountability?

New York Times

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Thanks to inflation, the maximum amount of money you may contribute to your 401(k) in 2012 will change. This applies to 403(b) accounts, as well. For 2009, 2010, and 2011, the maximum you may designate to your 401(k), not including your employer’s matching contributions, was $16,500, but in 2012, this will finally increase to $17,000. If you are age 50 or older, you can contribute an additional $5,500, which remains the same from 2011, beyond this maximum for a total of $22,500.

The total contribution limit, including employer contributions, has increased from $49,000 to $50,000.

For anyone who contributes to a traditional IRA, this is normally tax deductible, but this benefit phases out. In 2011, the phase-out occurred for single taxpayers whose modified adjusted gross income fell between $56,000 and $66,000, but in 2012, this phase-out begins at $58,000 and is fully eliminated for those earning $68,000. Similar increases pertain to married (filing jointly) taxpayers resulting in a phase-out between MAGIs of $92,000 to $112,000.

This past year, I worked fully for myself. Without an employer, I had no access to a regular 401(k), but I did initiate an Individual 401(k), which follows the same rules. By the end of the year, I expect to have maximized the employee portion of my 401(k) contributions at $16,500 with extra invested for the employer portion.

To lower your tax burden this year by up to $5,000, consider opening up an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.

My 2010 contributions fell short from the maximum by about $700, and a portion of that is due to leaving the company in the middle of December. I received the full company match, a 100% match on the first 4% of my salary that was contributed to the plan, in every pay period.

In 2009, I contributed the maximum $16,500, but I didn’t plan for an extra paycheck at the end of the year, so that last paycheck did not include a contribution to my 401(k). As a result my imperfect calculation, I missed out on a portion of my employer’s matching contribution. Some employers match after taking all contributions for the year into account, but mine contributes on a pay period basis. Any pay period that I did not contribute to my 401(k), the company did not match.

In 2008, I missed the full contribution amount by $1,000. That year, I made several changes to my contribution rate and lost track of what my rate needed to be in order to maximize my contribution.

The original version of this article, 401(k) Contribution Limits for 2012, is copyrighted by Consumerism Commentary.

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Without admitting any wrongdoing, Citigroup has settled a major lawsuit. The Securities and Exchange Commission claimed that Citi misled investors, and to settle the claims, the financial behemoth was ordered to pay $285 million to customers.

The issue focuses on collateralized debt obligations (CDOs) in 2007. The bank packaged subprime mortgages, loans with a good chance of defaulting particularly as the real estate market was not in a good position, into investments for sophisticated clients. According to the SEC, Citi didn’t disclose the real risk in these investments, so by selling the mortgages, Citi shifted the risk of default away from the company.

Furthermore, to appear unbiased, Citi claimed to investors that a third party selected the loans packaged into the CDO, but the bank did have a role in this selection, making it possible for the selection to be limited to loans most likely to default. While Citi earned $160 million in trading fees, the investors lost several hundred million dollars by November 2007. The biggest investor in Citi’s CDO has declared bankruptcy.

The investors affected most by Citi’s misleading claims are not individual investors or even most institutional investors. Individuals wouldn’t have had access to these investments at the bank. The $285 million in this settlement won’t be distributed to everyday Citibank customers, so unlike the Bank of America overdraft fee lawsuit, customers should not be looking for refunds from the bank. The Citi settlement funds will be distributed to the sophisticated companies who lost money investing funds through the bank’s Citigroup Global Markets division.

In the third quarter of 2011, Citi has reported a profit of $3.77 billion, at least on paper, helped in part by an accounting trick that allowed the bank to change the value of its debt. The financial industry took a hit with the recession, received government assistance, and is now profiting significantly while other sectors in the economy are still recovering. This settlement reflects 7.56% of this quarterly profit, which might seem significant, but is a slap on the wrist for the bank as Citi can easily handle this payment and has likely set aside funds for this outcome.

Washington Post, Wall Street Journal

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Betterment is a different type of brokerage. Unlike most discount brokerages whose purpose is to get customers to trade — as frequently as possible — Betterment is looking to be your asset manager. Currently, the brokerage is offering a bonus of $25 for new customers, but the way they do business is a bit different than most brokerages you may be familiar with. This uniqueness is evident as early as the account sign-up process.

When one applies for an account with a typical discount brokerage, the applications ask about income and net worth as well as investment experience. Betterment asked about the goals and purposes of my investments. Each new account holder is encouraged to designate a main account goal, such as retirement, a major purchase, or a vacation, as well as how many years he expects to take to reach that target or the age at which he’d like to achieve a goal.

The core philosophy for investing with Betterment is the asset allocation. This is the type of simplicity that I’ve seen with 401(k) accounts. These retirement investments often try to take an important concept of investing, asset allocation, and make it simple so that busy employees can simply submit a risk profile and the investment will use this information to determine the ideal mix of stocks and bonds. Betterment takes this concept further, making the process incredibly simple.

The fees can be lower than other forms of investing. Although you could have a free account with a discount brokerage and never pay a transaction fee, you may still be subject to fees built into the investments, like expense ratios or front-end load fees. Betterment’s approach is to charge a percentage of your account’s value — or assets under management — as is the more common custom among professional asset managers who generally work with high net worth clients.

This fee depends on how much you invest with Betterment. For small accounts, the fee is 0.9%, and this fee gradually decreases as the value of the account approaches $500,000. With funds invested with Betterment at this level, the fee is 0.3%. These fees are higher, and in some cases significantly higher, than investing in low-cost index mutual funds with Vanguard, for example. With Vanguard investing, you’re mostly on your own. You alone decide your asset allocation, and many investors do not consider asset allocation at all. Betterment is more expensive, but they are also providing a service that, depending on your needs and interests, may be worth the extra cost. At the same time, it’s less expensive than having a dedicated asset managers while offering many of the same features.

You’d have to be a hands-off individual to like the type of service offered by Betterment. You don’t choose your own investments like you would with a typical full-service or discount brokerage. Betterment chooses the investments for you, and their selections are based on a mix of index exchange-traded funds (ETFs). Betterment reinforces the idea that individual investors should not try to beat the market. For the most part, investors fail when they try, and their investments would have fared better had they remained diversified across a broad selection of investments and refrained from changing their risk profile.

In terms of financial security and legitimacy, despite being a new player in the world of finance within an industry where the major companies have been around a century or more, your assets are protected at Betterment just like they are at any major investment firm. Betterment is a Registered Investment Advisor with the Securities and Exchange Commission and is regulated by FINRA and the SEC. Accounts are insured by SIPC up to $500,000 per owner. This doesn’t protect investors from having their investments lose value, but it does protect the value if the brokerage were to fail. If Betterment were to go bankrupt or to go into receivorship, the insurance coverage would allow you to access your account.

Betterment‘s investments include baskets, and each basket represents exposure to a type of assets. To help an investment portfolio match a risk profile, the portfolio could include a combination including a stock market basket and a treasury bond basket. The treasury bond basket is split evenly between two investments, TIP: iShares Barclays TIPS Bond Fund and SHY: iShares Barclays 1-3 Year Treasury Bond Fund. The stock market basket includes these investments as of September 2011:

• 25% VTI: Vanguard Total Stock Market
• 25% IVE: iShares S&P 500 Value Index
• 25% VEA: Vanguard Europe Pacific
• 10% VWO: Vanguard Emerging Markets
• 8% IWS: iShares Russell Midcap Value Index
• 7% IWN: iShares Russell 2000 Value Index

Betterment will rearrange the balance between the different stock index ETFs as it sees fit, but investors control the relationship between stocks and treasury bonds through the risk profile.

Opening my account

Opening my account at Betterment was easy, and I was approved right away. Like any new financial account accepting electronic deposits from other banks, I needed to confirm my ownership of the linked account through the familiar process of verifying test deposits. I’m waiting for my external checking account to receive the test deposits so I can begin investing with Betterment.

For the micro-manager, Betterment might not be the perfect way to invest. It’s also not the appropriate service for someone who wants to trade their investments frequently or delve into investing in individual companies. Betterment’s services may be right for investors with the opportunity to save for their future outside of retirement accounts who want the simplicity of diversified investments, risk-based asset allocation, and a buy-and-hold-and-rebalance investing philosophy.

A few years, I met the CEO of Betterment, Jon Stein, at an event in New York City. At the time, Betterment was still in its planning stages. I’m glad to see the service has fully matured into something innovative and different than any other brokerage.

$25 bonus opportunity

Betterment is offering Consumerism Commentary readers a $25 bonus for opening a new account. To receive the bonus, new customers must deposit at least $250 within 60 days of opening the account and not withdraw the deposit for 60 days. For more information, visit Betterment’s welcome page for new customers.

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If you’ve been reading the financial news today, you might have heard that veteran investor and market-mover Warren Buffett invested $5 billion into the battered Bank of America. For this $5 billion investment, Buffett’s Berkshire Hathaway receives preferred shares, a type of investment that’s beyond the reach of most other investors. These shares come with a 6 percent dividend each year compared to the much lower dividend available with common shares.

Buffett’s investment could be seen as a significant endorsement in the future of Bank of America, a bank that is still in the process of settling a class-action lawsuit pertaining to overdraft fees and whose common stock price is down more than 40% this year.

The bank was willing to pay for this endorsement, offering the preferred shares at a $1.4 billion discount. In addition, when Buffett wants to redeem these shares, Bank of America will pay a 5% premium over valuation. Buffett’s standing put him in a powerful to negotiate the terms of the investment, and the bank could easily decide the size of the discount it would be prepared to offer in order to win Buffett’s endorsement.

This could be an opportunity to ride the wave, if you believe as Warren Buffett does that the government will never let Bank of America fail and that the long-term prospects of the bank’s profitability are secure. Just don’t expect to receive the same benefits Warren Buffett does for his investment. We average investors must settle for common shares and no special deals.

I’m not chasing Warren Buffett’s investment, but I would if I could get a 6% dividend and the other extras that come with preferred stock.

Update: Preferred stock is available for average investors. Morningstar explains how to set up a structure similar to, though not on the same terms as, Warren Buffett’s investment.

Bloomberg

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When gasoline prices at the pump increased to the point where the cost was a major news item engendering backlash among the public, oil companies were sporting big profits. Consumers reacted by buying more fuel-efficient cars and traveling less, but there is another approach for investors — an approach that mimics what commodities and hedge fund traders do. There are a few suggested approaches, but some work better than others.

One approach is to simply buy stock in the companies that are increasing prices to hedge against cost increases. The theory is that if prices of consumable goods increase to drive profits for the company, owning part of the company will turn those higher expenses to investment returns.

A quick check of gas price data and Exxon Mobil’s performance shoes that stock prices don’t always correlate with an increase in gas prices, but Exxon Mobil did provide dividends to investors during the last major period of gas price increases, from December 2008 to now. Investors during this time would have received $5 per share in dividends. If you estimate you’ve paid $5,000 more in total gasoline costs since December 2008 than you would have if gas had remained at $1.70 per gallon — and this is an assumption I’ll continue to use here — it would have taken 1,000 shares of XOM to earn that back in dividends. Those 1,000 shares would have cost a total of $80,000 in December 2008 and they’d be worth only $72,000 today.

This strategy would not have been very efficient. What about industry ETFs? The United States oil ETF, USO, would have seen performance not quite as bad as XOM over this period, but there would be no dividends. Investing directly in companies that profit from higher prices does not seem to be a winning strategy.

A bunch better choice would be an ETF that tracks gas prices closely, regardless of the stock performance of the companies involved with delivering gas to the consumer. Over this time period from December 2008 to today, UGA, an ETF that takes this approached, has increased 130%. Gas prices increased from about $1.70 to about $3.60 per gallon, or an increase of 111%. This seems to be the better approach for hedging against gasoline price increases. From an absolute dollar perspective, earning back the $5,000 in additional gasoline expense over this period would have required an initial investment of $3,850, a more reasonable down payment.

There are other ways to hedge gas prices, like selling put options on UGA. If you’re willing to gamble that UGA will trade at a certain minimum price on a certain day in the future, you can take a profit to help offset your gasoline expenses. If you take that bet and UGA is not trading at that price, you could lose money on the trade, but you’d be paying less at the pump, so you’ve saved money anyway. I think buying the ETF is a better idea for most investors than dealing with options.

Another option, in combination with investing, is to ensure you’re getting the best prices for the gasoline you buy. It doesn’t make too much sense to drive out of your way to get to the isolated station with the lowest price, but be aware of your options. Find the best gas credit card for you and use it to earn cash back, but be wary of stations that charge different prices depending on whether you use cash or credit.

If you are planning to buy a new car, consider cars rated with high gas mileage. The effects of these ratings aren’t linear; a 5 MPG upgrade from a 15 MPG vehicle to a 20 MPG vehicle has more of an effect on your finances than a 5 MPG upgrade from a 35 MPG vehicle to a 40 MPG vehicle, but it’s clear that a 40 MPG vehicle, while slightly better than 35 MPG, is a significant improvement over 15 MPG. Efficiency has its own environmental benefits beyond the cost of fuel, so some people may feel it’s worthwhile to buy fuel-efficient cars even if the higher prices make overall cost savings (including car price and gas) harder to achieve.

Right now, gas prices may not be the biggest financial concern for a family. The public now expects high prices despite not too long ago bemoaning when prices climbed above $1 per gallon. Transportation can be a significant expense for a family, though, particularly in locations where the career economy is based mostly on commutation, like New Jersey and California.

Photo: crowt59
Gasbuddy

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This is a guest article by Investor Junkie, focusing on alternative investments. This is a broad topic, so this article functions as a brief overview. There are many ideas within that deserve deeper explanation, something I’ll consider for future articles here.

Market turmoil is all around us. Last week, the 10-year US Treasury bond went below an unheard-of yield of 2%. Recently, the Federal Reserve formally announced that it will be keeping the Fed funds rate between 0% and 0.25% at least until June 2013. Savers are being punished, and traditional fixed income investments are yielding nothing. Investing for yield in this environment is very difficult. Where is one to turn to get some yield when a 5 year CD yields less than 3%?

In addition, inflation is expected to be around 3% this year, so any investment that yields less than this you are losing money in real terms. What are your options in this low yield environment? You do have no choice but to go up the yield curve. I won’t lie; some alternatives are risker than fixed income traditional fixed-income investments, though most have a low probability of default and generate much higher returns than government-secured investments. One could argue investments yielding less than the expected inflation rate is a risker investment. I would personally rather hold my money under my mattress than investing in a 10-year treasury bond.

That being said, what are the options? Some are traditional investments, and others are alternative investments that you may have not considered previously.

• Peer-to-peer lending
• High-yield corporate bonds
• Ginnie Mae bonds
• I-Bonds
• Municipal bonds
• High dividend stocks
• REITs
• Master limited partnerships

Here is a brief summary of each of these.

Peer-to-peer lending

I’ve been investing with the peer-to-peer lending (P2P) service Lending Club for over two years. To see my process, read my Lending Club review for the details. So far I’m very happy with my 11.49% net annualized return. Peer-to-peer investing isn’t perfect though, and it is still a very new investment class. It has potential to be a viable alternative to high-yield corporate bonds, with possibly less risk. If we do see another recession, it’s possible P2P loans will default more frequently, and increased defaults will decrease investment returns.

High-yield corporate bonds

High-yield corporate bonds, otherwise known as junk bonds, offer higher yields than traditional government bonds and can be 3% to 4% higher than government fixed-income investments. Of course, the higher yields come with higher risk and have a higher chance of default. Unless you are investing six figures, you are best to diversify in this category via mutual funds or ETFs focused on these investments rather than buying individual junk bonds.

Ginnie Mae bonds

Ginnie Mae bonds are federally-backed bonds that offer higher rates than traditional government treasuries. With Ginnie Mae bonds it is often best to invest via mutual funds only because most investors will not have the capital requirements to buy directly. I discuss about Ginnie Mae investing in more detail on my blog.

I-Bonds

I’m a big fan of U.S. I-Bonds, and for the next 11 months these investments offer at least a 2.51% annualized return. That rate could be even higher depending upon the CPI calculation in October. Like government TIPS, I-Bonds follow the inflation rate. There are no state taxes to pay on interest. Federal taxes are only paid when you cash out unless the bonds are used to pay for higher education, in which case they are tax-free. Unfortunately savings bonds have an annual purchase limit, and the U.S. Treasury Department just announced an end to paper-based savings bonds. Next year, the maximum you can invest is $5,000 per Social Security number.

Municipal bonds

For higher-income individuals, muni bonds offer a decent after-tax return with a historically low chance of default. Unless you are investing six or more figures you are best to diversify via a mutual fund. Muni bonds typically offer 2% to 3% higher returns than federal government investments. The primary advantage to muni bonds is the lack of capital gain taxes, though in this low fixed-income environment, individuals in lower tax brackets might want to consider them as an investment.

Dividend stocks

Many dividend stocks have a higher return than government treasuries. You also have the added benefit of the stock possibly increasing in price over time. There are dividend ETFs that can diversify your investment. I personally like the dividend aristocrats, which have increased their dividends every year for at least the past 25 years. These might be considered boring stocks, but they typically offer decent returns for the long haul.

REITs

Real Estate Investment Trusts (otherwise known as REITs) are publicly-traded real estate companies. You can invest directly in a specific REIT or via a mutual fund or ETF. With the decline in commercial real estate prices, it might be a good time to get back into specific real estate sectors, and these investments have an almost inverse correlation to stocks. Traditionally REITs have offered a stable 6% to 7% return. REITs are typically best held in tax-deferred accounts because the investor’s profits are generally considered ordinary income rather than capital gains.

Master limited partnerships

This is one of the rarely-discussed investments that generates a consistently high yield, and low to payout in taxes. Master limited partnerships (MLPs) are similar to real estate trusts, but are usually best to invest in taxable accounts. Most MLPs are companies related to the transporting of commodities, such as natural gas and oil pipelines. Typically, their pricing is not related to price of the commodity itself, but based upon the transportation of that commodity. If you do your taxes yourself it might not be a good option to invest your taxable money. MLPs can be complex when filing your personal tax return. I discuss more about MLPs in detail on my blog.

To diversify your risk, one could invest in many of these above investments, and still yield a decent return that’s stable. This article is meant as a summary of possible investment options than can generate some yield. Please do more research before investing any of the above options. With any investment you should always determine your risk, and if unsure contact a professional. In case you didn’t know, all investments have risks. Past performance does not guarantee future returns.

How are you investing in this low yield environment?

tenaciousme

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We pay a sales tax on most products we buy, so why isn’t there a tax when you buy stocks and bonds? In the United Kingdom, a tax on stock purchases raises four billion pounds annually. It’s hard to estimate how much revenue a tax on financial transactions would generate in the United States, but it’s an idea that could put a dent in the deficit.

The tax would most impact high frequency traders, who often speculate, and make the stock market more volatile. Taxes are used not only as a way to generate revenue but as a way to influence spending decisions, and a tax like this might decrease the public’s interest in trading. While the cost of a tax would be borne by the investment companies, the costs would be passed onto traders through higher spreads and less favorable pricing structures.

Productive and long-term investment would continue. Just like sales tax doesn’t stop consumers from purchasing what they need to survive in addition to desires affordable and not, long-term investors would hardly notice the tax. If this idea becomes law, the idea of taxing financial transactions will eventually become embedded in our expectations. That’s not to say that a law like this could be passed without a fight. Wall Street profits immensely from high frequency trading, and companies whose revenue would be subject to this tax and whose revenues could be affected by it have a loud voice and a lot of money in Washington.

Even if half of all frequent traders are discouraged away from their approach, a tax on Wall Street transactions could generate up to $175 billion in revenue. Congressman Peter DiFazio introduced the “Let Wall Street Pay for the Restoration of Main Street Act,” H.R. 4191, which would introduce a 0.25% sales tax on speculative trading and a 0.02% sales tax on derivatives. (Compare this with state sales taxes, ranging from 4% to 10%.) Retirement accounts, mutual funds, education savings accounts, health savings accounts, and the first $100,000 of any financial transaction would be exempt from this tax, in the current form of the bill. This helps to ensure the tax would be felt mainly by frequent traders, not most Americans investing for their future.

Do you support a tax on high frequency transactions?

New York Times

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A perfect predictor for stock market movements is the holy grail of investing. If you knew with certainty that the stock market would increase tomorrow, you would buy to take advantage of the change, and if yo knew with certainty it would decline, you would sell. If a predictor could be proven to be perfect, it would be its own undoing; if everyone uses the same decision making process and makes the same decisions, the predictor becomes the sole cause in this cause-effect relationships, and there would be no future movements to predict.

So predictors work best when not everyone jumps on board. But everyone wants this advantage. Mathematicians, engineers, and financial analysts try to come up with algorithms that will drive purchases and sales in order to make the most money, but perhaps social scientists have an advantage.

Researchers at Indiana University-Bloomington were looking at Twitter to see if language analysis could be used on the social network to gauge public mood. The assumption was that the public is generally happy after days where the stock market goes up and generally upset after days where the stock market tanks. They used the tumultuous recession in 2008 as the main data.

The results didn’t exactly meet the researchers’ expectations. Using standard word analysis used in medical research to determine the effect of pharmaceuticals, the moods measured on Twitter lined up with stock market movements — but three or four days in advance of those movements rather than as a result of the market activity.

According to the research, the mood on Twitter, qualified as “anxious” or “happy,” when added to a test algorithm based on stock market patters, improves the predictability of the stock market from 73.3 percent accuracy to 86.7 percent accuracy, a significant improvement.

This isn’t a perfect predictor, but it shows that public mood most likely has an influence on investors’ trades. It’s also important to point out that the public mood measured on Twitter doesn’t predict stock market activity alone, it’s only when this information is added to an existing moderately accurate pattern-based algorithm that Twitter moods are shown to make a difference.

There isn’t a causal relationship between moods on Twitter and stock market movements, of course, but if there is a correlation to be found, it could prove to be somewhat important, at least to fund managers looking for new ways to create and market equity funds. The same aspects of investor or public psychology that drive people to produce Twitter updates describing how they feel today could drive investors to buy and sell their investments.

A British hedge fund has already committed $40 million for investing using the researchers’ Twitter-based algorithms. So how has this fund, Derwent Capital Markets, performed so far? Its a hedge fund, so the information isn’t exactly public.

Market prognostication fascinates the mind of every investor. If there were just one way to know what stocks will do — and no one else were privy to this information — the lucky fortune-teller would never have to worry about money again.

Photo: JoshSemans
Wired, Indiana Daily Student

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There’s no doubt that the stock market has been a bit turbulent these past few days. After days when the stock market tumbles, the financial news media claims the double dip recession is here, and after days when the Dow and S&P shoot back up, stories point to the rally in 2008 that took place right after the biggest drop as a comparison.

This type of volatility is sure to scare investors away from stocks. Wise advisers have warned that if you can’t handle these day-to-day swings without loosing sleep at night, you shouldn’t be invested in stocks in the first place. It’s the risk of these swings that helps stocks earn long-term impressive returns compared to inflation.

If you’re losing sleep and have come to the realization that your risk tolerance is lower than you thought it was when the market was soaring high, your gut reaction is to get out of risky stocks and invest in bonds or nothing at all. Then after growth in stocks seems to be accelerating again, jump back on the bus (usually when it’s too late to take advantage). The long-term returns of the stock market relies on being invested at the lows, so selling low and buying high will ensure your investments will never perform at the advertised long-term returns.

Warren Buffett is buying more stocks right now, according to an interview with Fortune magazine. To run scared from a volatile market is not a good way to grow your wealth. Rather than come to the realization that you’ve overestimated your tolerance for risk, investors should embrace this time as an opportunity.

Losing sleep over day-to-day stock performance is not a result of a low risk tolerance that signals stocks are not the right investments. Stocks are the right investments, and people have to realize that this volatility is part of investing. If you run away, you lose. If you’re losing sleep, start viewing declines as an opportunity to double down and buy into the stock market when you can.

As people age, however, this volatility does become much more important. A stock market crash at the same time you need your money can undo many years of great performance. For this reason, it might make sense to gradually decrease exposure to stocks as you get older, but not too much. Even at the typical retirement age, you’ll still likely have many years to live and to let your wealth grow further.

Rather than investing in the stock market as a whole, building wealth can be much faster if you take Warren Buffett’s approach and invest directly in businesses. Whether it’s providing capital directly or investing in specific stocks, this takes significant research and work to do correctly. The risk is much greater — you could lose all your money — but the potential benefit is also much greater. This isn’t the right approach for everyone, but if Buffett is in buying mode, you should be, too.

Are you seeing this volatility as an opportunity or are you moving away from stocks?

Photo: Aaron Friedman
Fortune

The original version of this article, Warren Buffett: Buying More Stocks Amid Turmoil, is copyrighted by Consumerism Commentary.

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From now until August 31, 2011, the TradeKing discount brokerage is offering a $100 cash bonus for all new accounts that are funded with at least $2,500 and execute three trades. If you happen to lose money in an investment, you won’t be penalized and will still receive the bonus.

$100 bonus

The $100 cash bonus is the highest cash back bonus currently offered by an online discount broker. If you follow discount brokerages, you may notice that this promotion looks familiar; TradeKing seems to offer the same promotion several times each year. In the past, they’ve offered only $50, so this offer is even more attractive. Details on this promotion are straightforward, so make sure you follow the rules accordingly. Unfortunately for current customers, the bonus is for new accounts only.

As mentioned above, new customers who wish to receive the bonus must execute three trades within the first 180 days. If any of these rules are not met, the $100 cash bonus will be forfeited.

TradeKing continues to be one of the most impressive low cost discount brokers with low commissions ($4.95 per trade and $0.65 per option) and excellent customer service. It has repeatedly been voted top discount broker by Smart Money and Kiplinger. TradeKing also offers top-notch online security with data encryption as well as a world-class eduction center where account holders can communicate with and learn from each other.

Free trades

Over the past few days, the market has been volatile, and some TradeKing customers, anxious to trade either to take advantage of the volatility or to protect their holdings encountered some technical difficulties. As a result, all trades this Friday, August 12, 2011, will be free. The brokerage will charge commissions as usual, but they will be refunded on Monday. Here’s what a representative had to say:

When we founded TradeKing in 2005, we set a high bar: to do everything in our power to help ensure our clients’ trading success. The past few days have been rough on all of us. I want you to hear straight from me that, for our part, we acknowledge that we have not lived up to the stellar client service standard we set for ourselves and which you deserve and have come to expect from TradeKing… This Friday we’ll be offering a special free trade day for all clients. Any trades placed throughout the day on August 12 will be absolutely free of commissions..

This limited-time bonus offer will only be granted if you visit TradeKing through a $100 bonus link, which can be found in this article or on a few other personal finance websites, but the free trades are available to any account holder including new customers. No promotional code or coupon code is needed when signing up. To receive your $100 cash back bonus, visit TradeKing.com.

The original version of this article, TradeKing $100 Cash Bonus For New Accounts and Free Trades, is copyrighted by Consumerism Commentary.

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Although stocks are opening higher this morning, yesterday brought more devastation to the stock market. Stocks are now down 13 percent over the past week and down 11 percent for the year. This is bad news for stock investors, with the worst short-term performance since the market crashed at the beginning of the recession. This is, in most investor’s minds, the second dip in the “double dip” recession that people have been fearing for the past few years.

Ron Lieber, a financial columnist at the New York Times, explained who should use this as an opportunity to sell. Buying stocks after they’ve increased, the point where the media seems to agree there’s stability in the market, and selling stocks after they’ve decreased, the point where the media has decided there’s no hope, is a sure way to lose money in the long run.

If these major swings in the stock market keep you up at night, you shouldn’t be investing in the stock market in the first place. The reason stocks live up to their long-term growth potential is because they can be risky in the short-term. These swings and occasional, cyclical recessions, should be expected. Most people, those who aren’t interested in investing in their own business (an even riskier proposition) or trying to get rich by renting out property, the stock market is the only avenue for building wealth over the long term. This is the path to a comfortable retirement.

There is a lot of criticism of this point of view — the same advice that’s heard in the financial media every time there’s a significant stock market decline. Here are some typical responses from people who are offended by this viewpoint, and to some extent they may be right.

Note that these are the typical responses, not my opinion of the situation.

• The game is rigged. Only institutional investors or large investors can succeed in the stock market. The small-time average investor cannot succeed because the stock market is designed to favor those who have more buying power. The more money you have, the more investment options and better deals available.
• It’s a media conspiracy. The financial news media has been encouraging investors to continue buying because this is how financial companies make a profit. Whether you buy or sell, the financial industry profits, so they don’t care which you do as long as you’re continuing to make transactions. The media want the financial industry to survive and thrive so they have another day to write about it.
• Our political leaders want the market to fail. The nature of a two-party political system is competitive. Usually this is a good thing, but if one party has the possibility of bringing the economy down and blaming it on the other party, expect the politicians, whose only desire is more power, to take advantage of the situation. Never mind that millions of citizen’s finances could be ruined in the process.
• This (and every) stock market crash is a result of too much (or not enough) government regulation. This is the argument for and against a complete free-market economic system (which we’ve never had).
• The stock market is controlled by computer trading. Many of the large investors use models to trade, which tend to exacerbate sell-offs. If a program is designed to sell investments when they lose a certain percentage, the automatic and quick sale will continue to pull the price of a share down, triggering more computer models. How can an individual investor who busy and sells by researching a company and initiating a trade online keep up with the faster-than-light trading techniques that move the market?
• We’re entering a new paradigm. Each time the market suffers, there is a concern that we are entering a new era — a period of time when the fundamental concept of long-term performance can no longer be expected from the stock market because the economy is now somehow different.

Whether or not you succeed in investing in the stock market is defined by its performance leading up to when you sell. In the last recession, many retirees saw their nest egg plummet. The market may still have been up overall for the twenty or thirty or forty years they were investing, but when they had the most money in the market, as they approached the date of retirement, the bad performance was much more damaging. When you look at your portfolio in terms of dollars, that’s a valid conclusion, but retirees who need to access the value of their investments for cash could minimize the losses by only withdrawing small amounts over time, giving the market a chance to move up again.

Now that I’ve veered away from the concept of working at a corporate employer for the rest of my pre-retirement life, I’m not sure how my plans fit into the concept of investing until retirement and walking away from work one day. Most of my wealth is in my business — a risky business. I’m still investing in retirement accounts, recognizing that even if I decide to stop working early, I can’t touch these funds without incurring penalties until I’ve aged to the point the government has decreed as retirement age.

My plans haven’t changed due to the latest stock market downturn. I initiated a transfer yesterday to move the remainder of my money market investments in Vanguard to the total stock market index. In addition, I confirmed my monthly investment in my Individual 401(k). There may be some losses ahead in the short term, but I still think that the stock market will be the best option for this money over the long term.

New York Times

The original version of this article, Should You Sell When the Stock Market Tumbles?, is copyrighted by Consumerism Commentary.

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As a very last resort, employees with active 401(k) retirement accounts have an option to take out a loan against their future. Borrowing money is never a good position to be in, but if you’re borrowing money from yourself, you ease the pain. 401(k) plans permit borrowing at interest, and paying interest to yourself can help improve your finances in retirement.

The existence of a 401(k) account is often used as an excuse for not creating an emergency fund; if a loan is available at any time, why settle for low high-yield savings accounts when your money could be put to better use? This isn’t a valid argument as elucidated by the dangerous drawbacks of 401(k) loans.

Most people who take out 401(k) loans stop contributing new earnings to their 401(k) plans. Not only is the withdrawn loan not earning more or increasing value in your retirement account, you’re not adding new investments.

One of the most popular emergencies requiring more cash is the loss of a job. If you lose your job, you won’t be able to take a loan from your 401(k). Additionally, if you already have a 401(k) loan when you lose your job, it will be due within 60 days or less. At the same time you need cash, you’ll need to pay back your loan or suffer income taxes plus a 10% penalty. According to a recent study by Aon Consulting, 70 percent of workers who lose their jobs while having an active 401(k) loan default on that loan (pdf).

Even if the 401(k) loan is paid back in full, there’s another drawback. The interest on the loan is considered income, and therefore taxed, twice. When you pay interest back to the 401(k) account, it is paid with your regular income, which would be included on your tax return as taxable income. Once that interest is in your 401(k) account, it is mixed in with the before-tax contributions, if your loan was from the before-tax portion of your 401(k). When you retire and you withdraw your funds, the full amount of your before-tax contributions and their earnings will be subject to income tax. You could also argue that the principal portion of the loan payback amounts are taxed twice as well, because a 401(k) loan payback is not considered tax-advantaged and does not reduce your taxable income like a 401(k) contribution.

Congress is currently mulling legislation to limit 401(k) loans. If the law passes as it currently stands in bill form, employees could only take three loans against their 401(k) at a time. Repeated borrowing just sounds like trouble. The law would allow employees to continue contributing to 401(k)s while a loan is outstanding. I would think if any extra money is available, it would be better served paying off the loan rather than making new investments. I suppose it could be more tax efficient this way, but paying off debt should be a priority, even if the borrower is the same individual as the lender. Third, the law would ban 401(k) accounts from issuing debit cards that allow investors to use retirement funds as a transaction account. This sounds reasonable.

Some 401(k) plans might be more restrictive than the law. In most cases, borrowing from a 401(k) is just a bad idea. It’s tempting in emergencies, though, particularly for households that have not been able to create an emergency fund. A 401(k) loan should be a last resort. If you get stuck and are unable to pay the loan, the government takes a big chunk. On a $10,000 loan, assuming 25% federal taxes, 5% state taxes, and a 10% penalty, you’ll only be able to keep $6,000.

Have you or would you borrow from your own 401(k)?

The original version of this article, Don’t Take Out a Loan From Your 401(k), is copyrighted by Consumerism Commentary.

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I’ve always been a fan of Marc Andreessen. By the time the World Wide Web came into its own, I had already been a long-time user of and creator on the Internet. Marc’s Mosaic changed the way in which the Internet was viewed. It was fascinating, and I had to be a part of it. I was no software engineer, though; I was a music education student in college. I used the new tools to create web sites for the things I was involved with, like my school’s music department. Mosaic eventually became Netscape, and the Internet and its software became commercialized. Companies could now exist whose sole purpose was within the online realm.

Wall Street loved it, and it wasn’t too long before investors loved it so much there was no concern for real value. The market crashed, led by the tech sector.

Recently, the biggest companies in social media, a small realm within technology, have either had an initial public offering or are planning one. LinkedIn, Twitter, Facebook, and Zynga are hot right now, but some investors are concerned that most of the billions of dollars of value within these companies is based more on hype. Marc Andreessen is now a venture capitalist, and he believes that this is a great time to invest.

This is from a recent interview with the New York Times:

I’m certainly not an investment adviser, but on a 30-year basis, these things are cheap. If you compare how big industrial companies like G.E. are valued compared with big tech companies like Microsoft, Cisco, Google and Apple, tech stocks have never been valued more poorly in comparison. So not only is there no bubble — these prices are reflective of the fact that the market still hates tech. This bubble talk is about everybody being unbelievably psychologically scarred from 10 years ago.

As of writing this, LinkedIn has a market cap of of $9.41 billion. Facebook shares are going for $35 apiece on SharesPost, valuing the company at $82 billion. Twitter is valued above $8 billion, and Zynga is valued above $14 billion. If there is no bubble, there must be buying opportunities. Marc Andreessen’s venture capital firm, Andreessen Horowitz, is invested in Twitter and Facebook, but likely at a much better price than investors can receive today.

Is it fair to compare the valuation of Internet-based companies with the valuation of big industrial companies? Marc says tech companies are cheap compared to General Electric, so here’s a quick rundown of P/E ratios, all at the time of writing.

• GE: 15.84
• Google: 20.66
• Microsoft: 10.70
• Cisco: 12.29
• Apple: 17.14

Microsoft and Cisco have a cheaper valuation than GE, but Google and Apple appear to be more expensive, at least when compared to these companies’ earnings. Are Microsoft and Cisco opportunities just because they are valued lower than General Electric?

New York Times

The original version of this article, Despite Big Valuations, There is No Tech Bubble, is copyrighted by Consumerism Commentary.

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Mutual funds use annual returns as advertisements to attract investors. Investors are customers for managed mutual funds, and the better the annual returns, the more likely the fund will be to attract investors. Track the actual investor performance for someone who invests in a mutual fund, it often diverges greatly from the advertised performance. This is because the advertise fund performance assumes an investment at the end of one period and a measurement at the end of another period. Real investors just don’t time their investments that way.

For example, take a steadily-growing fund. In 2010, this fund increased at a rate of 1% each month, with a total of 12% for the year. (I’ve simplified the returns in this example.) If the investor purchased the fund at the very end of 2009 and sold the fund at the very end of 2010, she might have experienced that 12% increase.

• Most investors don’t invest dump sums, the invest periodically, when they have the money. In this example, with an investor investing once a month, each successive investment would be at a higher price, reducing the overall return. Only shares purchased at the beginning of the period would see a 12% increase.
• Most funds do not have such steady growth. A month of 15% return might be followed by a month of 25% loss, even when the same 12% annual result is achieved. Periodic investments with uneven growth result in actual investment returns that can swing wildly from the advertised returns.
• Along with unsteady growth, advertised returns don’t take into account the order of returns. From a fund’s perspective, there is no difference in annual returns whether the 15% return occurs at the beginning or the end of the year. From the investor’s perspective, more money is invested in the fund by the end of the year, so the last month has a larger effect on the overall investor return than the first month.

A recent article from Vanguard illustrates this well. As one invests throughout the year — or throughout a lifetime — it’s recent performance that has the most effect on whether an investment performs well. Retirees who sold investments after the market crashed in the recent recession have experienced this first-hand. The best investors can do is hope for low returns during the investment phase, and a great increase right before selling is necessary. While over the long term, stocks return 8% annually after taxes, most investors continue investing during that overall increase, reducing effective returns. Even when invested in a broad stock market index fund, bad recent performance will sour a lifetime’s worth of investment.

Most importantly, don’t expect to receive the same return advertised by a mutual fund.

Vanguard

The original version of this article, Investor Performance Won’t Match Advertised Returns, is copyrighted by Consumerism Commentary.

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Online bank ING Direct is offering some goodies in July in time for Independence Day. July 4 is a bank holiday in the United States, so this sale starts early. July 1 and July 2 are the only days this sale will be available, so this offer is only around for a very limited time. The promotions have been expanded from what ING Direct offered in previous years. Here is what the sale entails:

Electric Orange. Electric Orange is ING Direct’s paperless checking account. During this two-day promotion, new Electric Orange customers will receive a bonus up to $126. ING Direct is offering $50 just to try the account, after making three purchases or person-to-person payments within 45 days and an additional $76 for setting up direct deposit and making deposits of at least $250 by August 31.

Orange Savings Account. ING Direct’s Orange Savings Account is the flagship online savings account. Normally, ING Direct offers $10 bonus for each customer referral, up to 25 referrals. During today and tomorrow, any referral emails current and new customers send out will generate a total of $76 to you, as well as $25 to each of your friends who open an account. Two successful referrals are required in order to receive the $76 bonus (the $20 standard fee for two referrals plus $56 additional).

ShareBuilder. ING Direct’s discount brokerage arm offers low transaction fees, and for today and tomorrow, all new customers receive a $76 bonus just for opening the account and making one transaction.

Savings IRA. ING Direct offers savings IRAs to save for retirement. If a low-risk investment choice is part of what you need for retirement, having cash in a savings account in your IRA could be a good way to balance your portfolio. Current ING Direct customers who open a savings IRA with at least $1,000 will receive an additional $76 bonus. The bonus counts as a 2011 contribution, so if you’ve already maxed out your IRA, you wouldn’t qualify.

Easy Orange. ING Direct offers mortgage loans, and their rates are often lower than what you might find at a local branch-based bank. During this limited time sale, ING Direct is offering $1,776 off closing costs.

Finally, if you visit the ING Direct store, you’ll receive 17.76% off everything you could buy. Just use coupon code 1776. The ING Direct store has a variety of items included branded messenger bags, bicycles, children’s books, and boxer shorts.

I’ve been a happy customer of ING Direct since July 29, 2002, and I usually recommend the bank’s savings account to friends looking for a good place to keep their money. Although their interest rates are no longer in the upper echelon, it’s a solid choice for most customers. I’ve also been happy with ShareBuilder for the past several years. Thanks to bonuses I’ve earned there over time, most of my (infrequent) ETF and stock purchases have been free to me.

Photo: David Hepworth

The original version of this article, ING Direct Financial Independence Days Sale, is copyrighted by Consumerism Commentary.

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My former employer has a generous company stock purchase plan for employees. Each quarter, the company offers the opportunity to buy stock at a discount of 15 percent off the share price at the close of the first day of the quarter or the last day of the quarter, which ever is lower. When I first enrolled in the employee stock purchase plan, I designated ten percent of every paycheck for the program, and sold the shares soon after they were purchased. With the 15 percent discount and a stock price that continued to rise, I was cashing in a decent profit.

Then the recession began. My former company is a financial firm, but thankfully was not involved in any of the worst of the debacle. Nevertheless, the financial sector fell apart in the market, and the share price took a nosedive. At one point, shares were trading down 90% from their peak. My last stock sale before the decline was very close to the peak, and I was able to buy more shares through the stock purchase plan at the low. From a financial standpoint, I was still doing well.

After the crash, however, I was stuck with shares purchased at a much higher price than the market price, even after the 15 percent discount on the quarterly purchases. I could have continued to sell on a quarterly basis, keeping the risk associated with overexposure to one stock low, but I decided, perhaps from an emotional standpoint, to hold on. I’d prefer not to cash in at a loss. For the most part, I’ve been holding onto the company stock I continued to buy until my tenure ended in December 2010. I haven’t sold company shares in this plan since November 2007, when the stock was close to its highest value.

That is changing today. Rather than continue waiting for the stock price to rise back to its lifetime maximum, which could take years and is not guaranteed, I put in an order to sell the company stock I purchased between December 2007 and June 2009. Although the price I’ll receive today will be lower than the cost of some of the quarterly lots, overall, I locked in a profit.

One benefit to waiting to sell these shares rather than selling on a quarterly basis, either immediately as they become available to share or after waiting two years for more favorable taxes, is the ability to avoid repetitive transaction fees. E*TRADE operates the employee stock plan, and there’s no way to avoid the $19.95 transaction fee. Rather than paying this every quarter, I’ve saved money on fees by waiting and selling several lots together. Given the nature of the volatility of the stock price, however, $19.95 on a $17,000 transaction is a small issue. I could have waited one more day to sell the stock, and the price could have been higher or lower by much more than the cost of the transaction.

Between selling these shares and rolling over my 401(k) to Vanguard, I have greatly reduced my portfolio’s exposure to one stock. I may miss out on some fantastic gains in the future, but reducing this risk could save me from trouble if the financial industry takes another serious hit or if the company were to have problems in the future.

The original version of this article, Life After Salary: I Am Selling 18 Months of Company Stock Today, is copyrighted by Consumerism Commentary.

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To someone with debt, receiving an inheritance can feel like winning the lottery. Occasionally, an heir doesn’t realize money will be coming her way and hasn’t planned for the windfall or thought about her options. Even those who do plan often realize that contemplating options for managing a potential windfall is quite different from making decisions once that money is in hand. There is a tendency to have a riskier approach to managing money until the windfall arrives in the bank account. Often, preservation instincts kick in and prevent people from taking action.

Whether to use extra money to invest or pay off a mortgage is a common concern. Economists look at the numbers. If, after taxes, you can earn more in interest or appreciation by investing the funds than the amount of interest you’ll save by paying off a mortgage early, it is a better financial decision to invest rather than accelerate debt repayment. In its most simple approach, this ignores that the savings from paying off a mortgage early are guaranteed, and finding a rate that would beat the mortgage for investments could be very risky.

A Consumerism Commentary reader offered the following question:

I am a single 53-year-old female with a 13-year-old daughter still at home. My mother passed away recently and I inherited a little over one hundred thousand dollars. My mortgage payoff is $41,000 and I have a second that is $14,000. My Lutheran Brotherhood rep tells me to invest all of it and to not pay off my mortgage since I only have seven more years on the loan at 5% interest. My gut tells me that I should pay off my mortgages to be totally debt free. Any thoughts would be greatly appreciated.

Nothing beats finding and working with a trusted financial planner when handling these questions. Being debt free is obviously important to this reader. Paying off debt is a burden. Every month, the work you do generates income already designated for someone else. Debt may not be slavery, but you will never fully own your income and the work you do to create that income until you are free to do what you want with all of your (after-tax) income.

The representative may have positioned 5% as being a low interest rate. It’s not a terrible mortgage interest rate, and you might even be benefiting from the home mortgage interest tax deduction. With only seven more years left in the loan, however, the biggest tax benefit is behind you because the majority of each mortgage payment goes to the principal of the loan rather than interest.

Can you beat 5% by investing the $100,000? It’s possible, but not guaranteed. A Lutheran representative should be aware of the risks; recently, Thrivent Financial for Lutherans was one of a select number of organizations that lost almost all of its investments due to a risky and possibly fraudulent investment scheme at J.P. Morgan. A proper mix of simple stock and bond index funds could beat 5% in the long run, but performance over shorter periods of time, like a decade, could be worse than the 5% you’d achieve by paying off the mortgage.

Even if you use $100,000 to pay off the remaining mortgage balances, you’ll still have $45,000 left, so it’s not an all-or-nothing question. Going further, if you strongly feel that investing is a better way to secure your financial future but you also feel strongly about reducing debt, you might be more comfortable using the windfall to pay off half of your remaining mortgage balance, leaving a larger remainder to invest. This would give you the benefit of exposure to stocks for the long-term while greatly reducing your monthly mortgage obligations or allowing yourself to finish paying off the mortgage a few years earlier than expected. If your daughter is 13 now, she may move out in five years. That could be a good time to downsize your living arrangement to save money, and when that happens, you may feel more comfortable if your house were to be completely paid off by then.

One other thing to consider is whether the representative you spoke to is also representing an organization like Thrivent Financial for Lutherans. This is a non-profit organization designed to help the community of Lutherans succeed financially through prudent investing. Due to his affiliation, he would suggest investing. Not only is it an acceptable choice and probably not a terrible decision, but his affiliation with the organization would certainly sway his advice towards the benefits he can provide. If you walk to a car dealership an ask a salesperson, “Should I buy a car or pay off my mortgage?” you can expect the car salesperson to suggest buying a car — from him.

This question is open to anyone who would like to comment. Should this reader use a $100,000 inheritance to pay off the remaining $55,000 balance on the 5% mortgages or invest the entire windfall?

The original version of this article, Reader Question: Invest $100,000 or Pay Off Mortgage, is copyrighted by Consumerism Commentary.

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As the market was collapsing, J.P. Morgan Securities continue to convince clients to invest in a complicated investment made up of credit-default swaps, even though the underlying investments were selected by a hedge fund, Magnetar Capital LLC, that would benefit from seeing the investment fail. Allegedly, J.P. Morgan was knowingly selling an investment designed to tank. Now the Securities and Exchange Commission (SEC) is requiring J.P. Morgan Chase to compensate the investors who were misled through this investment.

Most investors who look into complicated investments like collateralized debt obligations, like this one, are not your typical individual investors interested in growing a nest egg for retirement. These are often large organizations who pay investment professionals to manage significant portfolios. These are institutional investors who look for alternative investments. Three of the dozen institutional investors who lost nearly their entire investment are Thrivent Financial for Lutherans, Security Benefit Corporation, and General Motors Asset Management. A good portion of the $153.6 million settlement will go towards paying these investors back for their losses due to investing in this CDO.

The SEC is also targeting the executive at an advisory firm who had oversight for the marketing of this investment, Edward S. Steffelin. He’ll be required to give up any compensation he received for the success of this scheme — remember, the investment succeeded for Magnetar’s investors when the CDO investment failed. It’s odd that the SEC didn’t identify any parties responsible at J.P. Morgan Chase.

While the proliferation of complex investments like this CDO and selling tactics like this uncovered by the SEC helped pave the way for the financial collapse of 2008 and 2009, most affected by the onslaught will not see any justice like this. The recession that touched every American invested in the stock market. Some of the investors who at the time were willing to take on risk may have lost everything, just like these institutional investors. But these investors, like average investors who lost some value in stocks or in real estate, are too far down the line of importance to receive any type of consideration for losses.

Securities and Exchange Commission

The original version of this article, J.P. Morgan Misled Investors, Will Pay $153.6 Million, is copyrighted by Consumerism Commentary.

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In late April, I described the process for rolling over a 401(k), and last week, I finally got around to doing it myself. I quit my day job nearly six months ago, and I’m slowly unwinding all of my employer-related investments. My 401(k) was worth about $106,000 and was my largest investment account, so I wanted to be careful with the move from my employer’s managed plan to Vanguard.

With one call on June 1 to Vanguard and one conference call with Vanguard to my former employer’s 401(k) department, everything was set into motion. I had to options when moving my funds to Vanguard. I could choose whether to move shares of stocks and funds as they are (in-kind) or sell the shares I owned in the 401(k), move the cash, and invest in new funds at Vanguard. There are no tax consequences to selling investments in a 401(k) when the purpose is to rollover the investment to a new provider and the purchase is completed quickly. Since I did not want to be invested in the same higher-priced investments that were available in my employer’s 401(k), I chose the latter option.

I had a portion of my employer’s 401(k) in a Roth 401(k), so I needed to designate two separate accounts for the rollover process. I brought my Roth 401(k) into the same Roth IRA account I’ve had at Vanguard for the past few years, and I designated the standard pre-tax 401(k) funds for the Rollover IRA I created when I rollef over my pension earlier this year.

One aspect of this process made me nervous. The only option for transferring funds from one company to the other was a check. The fastest this process could be complete would be overnight, if I were to decide to pay extra for faster delivery. I chose to settle for the free option, regular delivery. This means that my investments would be sold on one day and invested a few days later. Whether overnight or a few days later, this opened up an opportunity for the stock market to increase while my biggest investment account was not invested. The long-term performance of the S&P 500 is well documented, but if you miss out on the days with the biggest gains, you would only see a small portion of the reported performance.

On June 1, when my investments were liquidated, VTSAX was at $33.25; when the check finally arrived at Vanguard and I was able to purchase shares yesterday, VTSAX was at $32.48. It appears I avoided a 2.3% decline by the luck of timing. I wasn’t invested in VTSAX with my employer’s 401(k), though, so this is not a perfect evaluation of the situation.

One thing I liked through this process was the level of customer service I received from the Vanguard representative. She ensured my account would be ready to receive the check from my former company, and accompanied me on the phone when speaking with my former company to ensure the check would be designated and addressed correctly. After dealing with the 401(k) rollover, I asked about whether Vanguard offers a service for managing my business’s money. I’m looking for one location to handle business checking and investment. Apparently, by opening a new account using the corporation as the owner rather than an individual, I can use Vanguard as my business bank, with access to all the services available in a personal account. There is no distinction between business and personal accounts, and as long as both accounts are registered with the same address, the combination of assets would qualify me for Vanguard’s next level of service, “Voyager Select.”

Now that the rollover is complete, I’ll be looking at this next major task.

The original version of this article, Life After Salary: 401(k) Rollover Complete, is copyrighted by Consumerism Commentary.

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Selling newsletters offering stock-picking advice is a big business. This is how sites like The Motley Fool survive, and it’s also a big draw for products carrying Jim Cramer’s name. You may remember Jim Cramer from such CNBC entertainment broadcasts as “Mad Money.” This is a fun show where Jim runs around, punches in sound effects, and yells his buy/sell advice at the camera. Every once in a while, he reminds viewers to consider the long term, but the message contained in the remainder of the broadcast is of more use for people who are looking to trade frequently. His picks haven’t always played out to beat random performance; there have been more than a few websites and videos comparing the stock-picking prowess of Cramer and that of a monkey. The monkey is just as likely to outperform the market.

But monkeys don’t sell stock-picking newsletter, so they can’t get in trouble when they lie. In a recent email newsletter from TheStreet.com, Jim Cramer’s company, there was a chart that showed Cramer’s performance compared to the S&P 500, stating that the portfolio is “crushing” the S&P 500. It was a faulty comparison. The chart didn’t include dividends in the S&P 500 return, while Cramer’s number did include dividends. According to Jason Zweig at the Wall Street Journal, Cramer’s 39.2% did barely beat the accurate benchmark rate of 38.3%. Fees and commissions would eat into that portfolio return, however, if a real investor followed Cramer’s advice. Just squeaking by isn’t as compelling an argument than doubling the S&P 500, Cramer’s marketing team’s original claim.

To approximate Mr. Cramer’s return, you would have had to make an average of 774 trades annually over the past three years, Mr. Barton said. Meanwhile, you could have bought and held an S&P 500 index fund and then done utterly nothing except reinvest your dividends. And you, too, would have more than doubled the market’s return — calculated without dividends.

It’s relatively easy to manipulate numbers to use them to your advantage. People trust numbers, so when a trustworthy source claims a number is true, it’s easy to accept without independent research. I’m not immune to this; I am taking the numbers mentioned in Jason Zweig’s article at face value, much like newsletter readers take Cramer’s numbers without a second thought.

Do you trust what you read? Preconceived notions are sticky. If you read something that agrees with your preconceived notions, you’ll generally accept it as fact, but if something you read goes against what you believe to be true, you’ll assume the writer is wrong or has an agenda to pursue.

Photo: Tulane Public Relations
Wall Street Journal

The original version of this article, Beat the Market By Lying, is copyrighted by Consumerism Commentary.

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Have you given up on the stock market like a large portion of Americans? I’m getting ready to dive in.

According to a survey by a large financial company, 58% of Americans have lost faith in the stock market and 44% believe they will never invest in the stock market again. While the first question should be whether the sample of over 1,000 respondents included in this survey represent the country as a whole, assuming the study was well-designed and the survey is accurate, a lot of people are rightly dissuaded by the recession, the perception of Wall Street, and recent stock market performance: On Wednesday, the Dow and S&P 500 had steeper losses than they’ve had in one day in almost a year.

I can’t predict the future, but avoiding the stock market will a problem eventually. For all I know, we could be heading for a decade or two of no growth in the stock market, but eventually stock market performance will most likely return to the averages. To return to an average after a period of bad performance, the stock market must experience a period of great performance, and that’s not something an investor should avoid.

You may have heard stock prognosticators say, “Sell in May and walk away,” referring to historically sluggish stock market performance over the summer months. Analysts seem to be calling for more poor returns this summer, though analysts seem to be influenced more by recent history than predictions for the future. Nevertheless, this anticipated low point may be a good chance to buy in.

I’ve been avoiding the stock market for several months now, investing only with a monthly contribution to my Individual 401(k). I’ve initiated an automated investment plan than takes some of the cash I have in money market funds in my IRA at Vanguard and moves it over to the Total Stock Market Index fund over the course of the next eight weeks.

Photo: ericabreetoe
CNN Money

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A few days ago, I received an email from E-TRADE that my brokerage account there qualified me to participate in AIG’s latest public offering. The government is beginning to sell its stake in the company, and this would be a unique opportunity to purchase stock not usually available to most people. IPOs have a history of paying off big for investors who get in early.

I looked into the details of the offering, and I decided to place an order for 50 shares, the minimum, at a price a few dollars lower than the expected offering price. Not surprisingly, there were enough interested buyers at higher prices, so I didn’t make the cut when the stock price opened at $29 a share. At the time I’m writing this, the price per share has already dropped 3.3%. The government has still has a significant portion of equity, 1.5 billion shares, to release to the public over the next few years, and they’re betting on a profit.

This may have been a missed opportunity on my part. If I had bid $29 for my 50 shares, I still wouldn’t have been guaranteed to qualify; bigger sharks feed first. However, I priced myself out of the running by not being confident about the valuation the market placed on AIG. If AIG continues to struggle, however, I may have done the right thing.

What would you have done?

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The year 2010 was an anomaly. Usually, the members of the Institute for Private Investors, a country-club type of investment group that only welcomes you if you have $30 million in investable assets, beats the S&P 500 benchmark in terms of average annual returns. Looking at the latest ten-year average return, that’s what we see. While the S&P 500 returned an average of 3.6% annually over this time, this group saw an average return of 6%.

In this group, the investment philosophy is more aggressive than that of the S&P 500; with more money available to invest, investors have better access to unique investment opportunities, like start-up businesses. The other day I mentioned how diversification needs are different for people who have enough wealth to control a company, and this is just another example of how investing rules apply differently depending on your financial condition.

Here is what the super-rich are concerned about.

“Sophisticated private investors are essentially early adopters who typically lead the market,” said IPI founder Charlotte Beyer. About 42 percent of respondents to the April survey said they held some alternative investments in 2010. Hedge funds, on average, comprised about 19 percent of their portfolios, little changed from 2009 but off the peak of 24 percent reported in the group’s 2006 survey.

There is more information in the Reuters article outlining the survey and investment results.

Reuters

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There are two main reasons to head towards precious metals as a major investment. One reason one might significantly invest in metals is the belief that the value of gold and silver will increase more than other types of investments like stocks and bonds, or that the investment in metals will provide a certain type of diversification. Another reason is the belief that the dollar will eventually lose all purchasing power and metals, due to their “intrinsic value,” will be all that’s left to pay for daily needs.

In the doomsday scenario, banks fail, governments fall, and currency becomes worthless. Those who hold gold and silver, in theory, would have no problem. With the first situation above, ETFs representing gold and silver will often suffice, but for the second situation, in which the world is in turmoil, holding physical gold and silver is the best course of action.

Earlier, I received this question from Consumerism Commentary reader, KT:

I know nothing about purchasing precious metals. I have wanted to purchase some gold and have it delivered to me in its pure form, but after three years I am still looking for a company that can deliver this type of service. Can you recommend to me solid companies so my chances of getting taken in this endeavor are decreased? I would not trust a company who sends a piece of paper with the transaction it rather than the actual metals. I would like to purchase the gold, have it in my possession, and use it when my money runs out for the chemotherapy I am having to pay for out of my own pocket.

First, determine the amount of gold or silver you want to buy and what form suits you. You may want to take delivery in the form of coins (rounds) or bars. The choice is based on your preference; any amount you buy can take the form of rounds or bars. Keep in mind that the fewer pieces you buy, the better you chances of getting a good price. For example, buying a ten-ounce bar will probably be less expensive than buying ten one-ounce rounds.

Second, you’ll need to find a shop. There are many dealers online, and this is likely where you’ll find the best price. For example, APMEX is a reputable dealer. They were selected by the US Mint to be one of the few dealers allowed to purchase government-minted metals directly and sell to customers. From this list, the Mint further narrowed down the list of approved dealers for handling a major metal sales event featuring the first of the American the Beautiful five-ounce silver rounds, a special coin designed by the Mint that went on sale earlier this year.

You’ll find many options from a dealer like APMEX. To get the most for your money, buy as much as you want in one transaction and look for the least expensive option. Usually government-minted or branded metals, like American Gold and Silver Eagles, will cost more money than the APMEX house brand, yet they have the same composition.

Also look for coin dealers in your area. When you shop online, you will need to factor in shipping and possibly tax. You may be able to avoid at least the shipping cost by walking into a dealer’s storefront. They may charge a higher price per ounce for the metal, but you could end up paying less in total for your purchase. The phone book was once a reliable source for local dealers; these days, it may be better to search online for dealers in or near your town. Use Google Maps to help you locate the dealers rather than Google’s web search.

KT also asks:

Finally, what degree of purity most gold is being sold these days?

For gold, look for .9999 fine (or .9999 pure). This is 24-karat gold. American Gold Eagles, by contrast, are 22-karat, the long-held standard for gold coins for commerce. You won’t go wrong with American Gold Eagles or similar gold coins produced by other mints, however, although the composition includes slightly less gold.

With silver, look for .999 fine.

The purpose you state for buying gold doesn’t make too much sense, though. First, it’s unlikely that your doctor or healthcare provider will accept gold as a form of payment, despite the metal being considered legal tender. Therefore, you would need to sell the gold to pay for your chemotherapy.

Second, you’re guaranteed to lose some money. While no one can be sure what the value of gold will be in the future, I can guarantee that you’ll pay fees for buying the gold, and you’ll pay fees to sell. When you buy gold, you’ll pay a price per ounce that is a little higher than the market price, and when you sell gold, you’ll receive cash at a price per ounce that is lower than the market price. The winners are the dealers who make money regardless of whether customers are buying or selling.

The price of gold relative to the dollar might increase from the time you buy to the time you sell, offsetting some or all of the fees you pay, but you’re taking a bet with money you know you’re going to need.

Photo: covilha

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That is the question.

For most small-time investors, diversification is necessary. Index funds offer diversification across a type of investment, and with a strategy like this, you can be sure you’re avoiding investment management who, on a whole, perform worse than the indexes. Diversification through index funds allows investors to spread small amounts of money over a wide variety of investments. This doesn’t necessarily reduce risk, but it does mean that an investor in a diversified fund won’t be exposed to any one stock’s decline.

Imagine an orchestra with 80 musicians. For an orchestra to performing well, 100% accuracy is required from the entire group. When all musicians are playing together, however, one musician neglecting to play may not be noticeable. The diversity of instrumentation means if one violin out of a section of five forgets to play one measure, the other four will likely provide enough volume to hide the problem.

When it comes time for the violin solo, forgetting to play one measure is a big problem. There is no coverage from the other violins to cover the mistake. Investing a significant portion of your money in one company is like playing a solo. There’s no buffer to protect you if you make a mistake.

Nelson Petz is an asset manager in charge of a multi-billion dollar partner. He claims that diversification is for sissies. In this case, that would be violinists not prepared to perform a solo.

It’s true that focusing on one company can provide much better returns than investing in a broad cross-section of stocks. But here’s the difference not fully addressed in his Fortune Magazine interview: Nelson can invest enough money through his management firm that he has the power to change the operations of that company. When he puts his support behind a company, it’s because he knows the company’s management is not living up to its full potential. With enough money, he can influence or change management.

On the other hand, the less financially endowed investor who does her research and puts the bulk of her investment into an established country is in trouble. She puts all of her money at risk. Even with the knowledge of how the company could improve its performance, unless she has invested enough funds to influence management, she is still at the whim of the company.

Diversification is for people who may not have access to enough money to influence the outcome of their investment.

Photo: *L*u*z*A*
Fortune Magazine

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It’s widely popular in the financial media to encourage the strategy of dollar-cost averaging (DCA) when investing. It’s a simple strategy that calls for investing the same dollar amount at regular intervals. When you assume that stocks or other investments at lower prices are bargains, dollar-cost averaging allows you to buy more of an investment when the price is better (lower), and less of an investment when the price is higher.

For example, consider someone who invests $100 into a broad index fund or ETF every month on the first day of the month. The price of the index, driven by the market, on January 1 is $10, so $100 buys ten shares. The price on February 1 is $12.50, so at this worse price, $100 buys only eight shares. You’ve received a better deal for a larger portion of your shares than you would have if you kept the number of shares you purchased steady rather than the dollar amount. In other words, if your other option was splitting the eighteen shares over two months, buying nine in January and nine in February, your gains would be lower.

This is, of course, a simplification of the issue. Many people often argue that, under the assumption that the stock market generally rises over long periods of time, you’d almost always be better off by buying the full eighteen shares as early as possible — in this case, January 1. Assuming the values trend upwards, that’s always the case — or at least it averages out to be over time. Many financial gurus then suggest forgetting about the idea of dollar-cost averaging and turn towards investing a lump-sum as soon as possible.

Reality gets in the way of that idea, unfortunately. Over my lifetime, I might invest $1 million. I have no idea of that will be true of course, because I cannot predict my future, but it’s a good figure to start with. Of course I’d be better off investing that $1 million at the moment I am legally allowed to do so, while just letting the account grow (on average) over large swaths of time. In fact, isn’t this the dream of every time-traveler? “If I could just take the $100 I have now, put it in the bank in 1795, and show up to collect the proceeds this year, I’d be a multi-millionaire!” Those who prefer gambling might be interested in taking Grays Sports Almanac: Complete Sports Statistics 1950-2000, a surprisingly thin compendium, back to 1955 and placing bets. (Come to think of it, Biff Tannen from the alternative 1985 reminds me a little of Donald Trump. Is it just me?)

Comparing lump-sum investing with dollar-cost averaging is not feasible most of the time. Thanks to reality, most of us are not time-travelers. We cannot take the amount we intend to invest over our life time and do it all at once at the beginning. You can, however, use leverage to invest more than you can afford to take advantage of these gains, but your returns will be hurt by the interest you pay on this debt and it amplifies your risk to often unacceptable levels. No, most people don’t invest using a lump sum because they need to earn the money they plan to invest through income, and that generally happens over time.

Furthermore, the more frequently buy an investment, the possibility for racking up transaction fees is higher, and these eat into your profits quickly. That’s a negative aspect of DCA, and it’s avoidable by dealing only with low-cost investments.

Dollar-cost averaging is effective because it allows people who can only budget for a small amount of investing to buy more shares of their investment when prices are lower. Most people can’t afford to invest in a lump sum.

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Launched towards the end of 2005, TradeKing is a relatively young discount brokerage when compared to many of their competitors. TradeKing, more than any other brokerage, is more in tune with today’s social networking and social media trend. This online trading network is somewhat of a forum just for investors, where they can connect with one another, share experiences, strategies and ideas.

Online brokerages have become more sophisticated recently, offering not only competitive pricing but innovative tools and technology. Here is was TradeKing has to offer its customers.

TradeKing pricing and fees

The commission to trade stocks and ETFs is $4.95 every day, whether you use a broker for assistance or do it yourself online. Up to 8 contracts, options also cost $4.95, but have an additional cost of $0.65 per contract. If you trade more than 8 options contracts, the commission is the $8.95 base plus an additional $0.15 per contract.

The brokerage also offers no-load mutual funds for a commission of $14.95, bonds for $4.95 with a minimum of $14.95 per transactions, and treasuries and CDs for $24.95 per transaction.

While some brokers offer trades for less than $4.95, most brokers charge $10 or more per trade. In terms of overall price, TradeKing usually beats other brokers. They offer more features than some of the less-expensive brokers, though, so as you get to know what TradeKing has to offer beyond other discount brokerages, keep that in mind.

Funding your TradeKing account

The easiest of the several ways to fund a new TradeKing account is through wire transfer. Wire transfers could take anywhere from a few hours to one business day, depending on your bank. Most lileky a more popular choice is the ACH transfer. This takes one or two business days, but your bank will most likely offer this option for free.

You can also send TradeKing a check to their P.O. Box or directly to their customer service office address included below. For any customer who wants to transfer funds or securities of any kind directly from another broker or mutual fund company without selling and buying, TradeKing will accept direct transfer of your investments. This process can take five to seven business days.

If your bank or brokerage charges you any fees to transfer your cash or funds to TradeKing, including wire transfer fees, account termination fees, or any other cost to move your money, they will reimburse you up to $150.

TradeKing technology and trading platform

Among the tools you may now expect from an online broker, TradeKing offers an options pricing calculator, a probability calculator, a profit and loss calculator, options and strategy scanners and screeners for stocks, ETFs and mutual funds. TradeKing also has a variety of research tools like market and company overviews, a watch list, live quotes, interactive charts and options chains. TradeKing is an innovator in the online trading tools arena, and they constantly improve these tools to meet the demands of active traders.

TradeKing offers an iPhone app for any customer who happens to have an iPhone or iPad. The app provides access to accounts, stock quotes, and many of the same online features in an interface that suits the mobile interface.

Industry awards

• Rated #1 in customer service by SmartMoney in 2010
• Received the maximum five-star rating for its customer service and trading tools by SmartMoney in 2009
• Recognized as the “Best for Option Trading” and earning 4 out of 5 stars by Barron’s 2009-2011
• Named the leader in Web Site Speed and Availability in the Gomez “Best of the Web 2009″ Report

TradeKing promotions

To entice new customers, TradeKing often provides bonuses and incentives. Here is what is available today.

1. Get $50 for referring a friend. TradeKing will deposit $50 in your account and $50 in your friend’s account when you refer him or her to TradeKing. Your friend must open a new account funded with at least $1,000 for both of you to qualify for the referral fee.
2. Switch to TradeKing and they will refund your transfer fees. Open a TradeKing account, complete and print an account transfer form, mail or fax the signed form along with a copy of your most recent broker statement to TradeKing, and request your reimbursement by faxing your transfer form, as well as proof of your transfer charge to -866-699-0563. Fees up to $150 will be refunded.

Customer service

To differentiate the company from its competition, TradeKing focuses on customer service. If you’ve had experience with TradeKing’s customer service, share your thoughts, either positive or negative, in the comments below. TradeKing offers several communication lines for customers.

1. By phone at 877-495-5464 during their office hours, 8:00 am to 6:00 pm Easter Time, Monday through Friday
2. By fax at 866-699-0563
3. By email at service@tradeking.com. TradeKing guarantees your emails will be answered within two hours during regular business hours and within 24 hours on the weekends.
4. You can also send them checks, forms or letters to: PO Box 49050, Charlotte, NC 28277-3432, or overnight deliveries to: 13024 Ballantyne Corporate Place, Suite 500, Charlotte, NC 28277.
5. You can speak directly to a representative using their online Live Chat via the TradeKing website during their business hours noted above.

With TradeKing’s focus on customer service and technology, any investor should consider using them for their daily trading needs. There are better options out there for those interested in cheaper trades but for a few dollars more per trade, these guys go above and beyond in terms of research, tools and service. Customers should decide whether these features are worth the slightly higher transaction costs. For some traders, they will be.

To visit TradeKing for more information or open up an account, head over to tradeking.com.

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A few months ago, I initiated the process to roll over my pension to an IRA at Vanguard. Leaving my job early, but after having worked at the company long enough to be vested in my pension, I chose to receive a lump sum of my accrued pension, about $18,000, rather a lifetime annuity of $65 per month. The transfer was finalized this week after a long delay. It’s time to turn my attention to my 401(k).

It often makes sense to roll over a 401(k) when you leave a job. I’m considering a 401(k) rollover to a discount brokerage to alleviate some of the problems I have with my former employer’s retirement plan. These problems are common among employer plans, even those managed by the same discount brokerages you’d likely consider to receive a rollover.

• Management fees. Most employers’ 401(k) plans have expensive management fees. One third of the investment options in my company’s 401(k) have expense ratios over 1%. I am choosing Vanguard for comparison because most of my other investments are held there and the management fees are low. My 401(k) balance right now is a little above $100,000, so a difference of 50 basis points in an S&P 500 index fund is worth $500 a year. I normally wouldn’t throw $500 out the window.
• Investment options. In my employer’s plan, I’m limited to 15 investments. That may be a larger number than what many other employers offer, but it’s a drop in the bucket compared to what I’d have access to if I move the 401(k) elsewhere. A brokerage can provide investment opportunities in the form of stocks, bonds, mutual funds, ETFs, metals, real estate, and more. All of these can be part of your IRA, in many cases allowing you to defer tax on your gains until you start receiving your distributions. My choice, though, is Vanguard, where I would choose to invest only in Vanguard’s mutual funds. Even this option provides more flexibility than leaving the funds in my former employer’s retirement plan.

Once you decide that you don’t want to keep your 401(k) at a former employer, you will need to decide the destination of those funds. These are the typical options:

• A brokerage, providing the most investment choices.
• A mutual fund company, like Vanguard, offering limited but low-cost choices.
• Your new employer’s retirement plan, possibly offering limited and expensive investment choices.
• Your bank account, possibly triggering income tax and penalties.

For the first three options, you can limit yourself to as small an amount of trouble as possible — rollovers seem to involve at least a minimum of some trouble — by initiating a direct rollover. This way, the funds are sent directly to the new retirement plan provider. There’s no risk of you accidentally keeping some of the funds. The fourth option should be considered only as a last resort. If the funds are designated for retirement you might as well leave them in an account that you can’t touch, avoiding extra expenses.

When you are considering a rollover, keep in mind the form of your funds in your 401(k). For example, some of my retirement funds at my former employer are in a Roth 401(k). When I move these investments to Vanguard, I will need to handle the rollover separately to ensure they end up in a Roth IRA. If you have an after-tax 401(k), these funds will need special consideration, as well. Some brokers and mutual fund companies won’t accept Roth or after-tax rollovers, so verify your chosen recipient can handle your entire 401(k) before you initiate any changes. I’ve found it helpful to speak with a representative at the company who can review your entire 401(k) to increase your confidence that you’re choosing the correct retirement plan options.

The last consideration should be whether your new asset allocation, after the rollover, should match your old asset allocation. My current allocation is a bit of a mess:

I could choose either to invest similar amounts in funds that roughly match this investment mix or just put everything into the total stock market index fund. This is the my current dilemma, and I’d want to decide what to do before initiating the rollover. It won’t hurt you in terms of taxes to transfer money from one fund to another within your 401(k), so take this opportunity to rebalance your portfolio.

These are the steps I plan to follow once I’m ready to begin:

1. Contact the recipient. In my case, Vanguard. I can either create a new account or roll over my 401(k) into an existing traditional IRA and an existing Roth IRA. I’ll need to make Vanguard aware that my former employer will be sending a check. In some cases, you can initiate an asset transfer. Regardless of the type of transfer, the recipient will offer instructions for sending the funds.

2. Instruct the former employer’s plan management. You may need to complete forms to be mailed in or you might have the option to submit your transfer request online. You’ll need the information provided by the recipient to avoid having a check sent directly to you.

3. Choose your new investments. Remember to look at your entire collection of assets when determining your optimal asset allocation. Your investments should also match the amount of risk you’re comfortable with.

4. Verify your transfer is complete. Although I initiated my pension rollover in February, it wasn’t complete until the end of April. The process was long, but both companies completed the process as they agreed. I expect the process of rolling over my 401(k) will be somewhat faster.

The original version of this article, Life After Salary: 401(k) Rollover, is copyrighted by Consumerism Commentary.

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This is a guest article by Rob Bennett, a personal finance journalist and author of the blog A Rich Life. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s.

Most view the years from 2000 through 2009 as bad years for stocks. Returns were so low that many have come to refer to that 10-year stretch of time as the “Lost Decade” for stock investors.

This is a mistake. Those years were actually good years for most stock investors; it is the prior decade, the years from 1990 through 1999, that was more problematic.

To explain why I say this, I will need to report to you numbers generated by the Returns-Sequence Reality Checker, a calculator that I have co-developed with Sam Parler. Please don’t feel a need to learn how the calculator works to read this article. I will report the numbers it generated for me when I explored scenarios I will describe to you. If you like, you can return to the calculator at some later time and examine additional scenarios of your own.

The reason why I call the calculator “The Reality Checker” is that it throws doubt on one of our most fundamental beliefs about stock investing — that positive returns are good and that negative returns are bad. It’s not hard to understand why most of us think that. If your stock portfolio is valued at $100,000 at the beginning of the year and you see a 10 percent gain for the year, the portfolio is valued at $110,000 at the end of the year. If the gain is 20 percent, the ending value is $120,000. It’s obviously better to have $120,000 in your retirement account than it is to have $110,000 in your retirement account.

Except it’s not. Not really. Not when you look at what big, positive returns do to your portfolio balance in the long run.

The thing that fools us is that we think of ourselves as owners of stocks. In markets, the interests of the owners of the thing being offered for sale are opposed to the interests of the people considering buying the thing being offered for sale. Owners want high prices and buyers want low prices. To the extent that we really are owners of stocks, we are right to think of price gains as a good thing.

But we forget that we are not only owners of stocks. We are also buyers of stocks. Most of us are more buyers than we are owners. To the extent that we are buyers, we are rooting against our self interests to root for price gains.

Say that you have $10,000 invested in stocks today and that over the next 30 years stocks will be generating the same long-term return that they have generated since the U.S. market opened for business — 6.5 percent, after taking inflation into account. Are you better off seeing 10 years of 20 percent gains or seeing 10 years of 5 percent losses?

Both scenarios produce the same portfolio value at the end of 30 years: $66,144. Positive returns in the early years cause negative returns in the later years and negative returns in the early years cause positive returns in the later years. It all evens out over time.

But few of us invest a single lump sum in the market and then sit back and watch it grow over three decades. Most of us are buying stocks each year. That means that positive returns hurt us. Positive returns increase the amount that we need to pay to acquire stocks. The higher the price we pay for the shares we acquire, the lower our lifetime return and the smaller our end-point portfolio values.

You will be shocked to learn how big a difference this makes.

Say that you start with a portfolio of $10,000 and add $10,000 to it in each year of a 30-year time period in which stocks produce an annualized return of 6.5 percent real. In Scenario One, you see gains of 20 percent in each of the first 10 years. In Scenario Two, you see losses of 5 percent in each of the first 10 years. Do you care to take a guess as to how much difference that will make in the size of the two end-point portfolio values?

The Scenario One portfolio will be worth $549,859 at the end of 30 years. The Scenario Two portfolio will be worth $1,739,987. The portfolio with early losses grows to more than three times the size of the portfolio with early gains!

We’ve got it backwards! Losses (lower prices) are good. Gains (higher prices) are bad.

If you happened to start making annual contributions of $10,000 to the market in 1990 and the 30-year return ends up being the 6.5 percent average return that has applied for as far back as we have records, at the end of 30 years your portfolio value will be $746.162. However, if you happened to start making annual contributions of $10,000 to the market in 2000, at the end of 30 years your portfolio value will be $1,628,503.

We need more Lost Decades!

The original version of this article, The Good Side of Stocks’ Lost Decade, is copyrighted by Consumerism Commentary.

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Despite the convenience of Mint.com for tracking personal finances, it’s not flexible and in-depth for my needs. I’ve stuck with Quicken as a desktop program for many years. It’s unlikely I’ll move my data to the “cloud” until Mint.com or a similar service provides all the functions included in Quicken.

Even the desktop version of Quicken isn’t as complete as I’d like. While it is the best overall software for tracking investments, there are a few areas where it still falls short of the ideal tracker. There is no way to track bullion investments. With silver and gold spot prices hitting highs recently and volatility in the dollar, more people are turning to precious metals to stabilize their wealth and protect against inflation.

I don’t think now is a great time to invest in gold or silver — the best time would have been when the values were at their lows. Nevertheless, holding bullion in round or bar form is a common investment, and it’s pretty much ignored by Quicken.

Configuring your precious metals account

It’s not too difficult to get around this, though. Start by adding a new investment account, held at a brokerage. Choose the brokerage option even if your gold and silver is kept in a safe in your home, in a safe at a bank, or at a private investment firm. For the name of your brokerage, you can use whatever you like, because your holdings will not be downloaded automatically into Quicken; any changes need to be made manually. I chose “Precious Metals,” but you may choose “Safe at Wells Fargo” or “Harry’s Private Investments and Fine Shoes.”

Give your account a name. I also chose the uninspired “Precious Metals” for the name of my account, but you may be more creative.

I entered a starting date of the beginning of the year for the account, and started with a cash balance of zero. This will allow my purchase of a metal — and in my case, silver — become a transfer into this account.

After entering the starting balance, Quicken asks for investments. In order to track prices, I suggest using ETFs. Even though you are not owning the ETF, you’re owning the underlying investment, using the ETF to track values will save you a lot of effort. Otherwise, whenever you wanted to analyze your net worth, you would need to manually enter gold and silver spot prices. This is one of the situations where the programmers behind Quicken should consider improving the software. Because you can’t define custom investment classes and automatically download prices for metals, the workarounds include using a regular brokerage account and ETF prices.

Enter GLD and SLV if you intend on owning gold and silver. For the security names, enter “Gold – One-Tenth Ounce” and “Silver – One Ounce.” Using these names will help distinguish your investment from other investments you may have in these exchange-traded funds.

The SLV exchange-traded fund tracks the price of one ounce of silver, so you do not need to make any further adjustments. On the other hand, GLD tracks the price of one tenth an ounce of gold, so when you enter your investments, you’ll need to multiply your quantity by ten. For example, if you buy two ounces of gold, you would enter this as a purchase of 20 shares rather than two.

In order to continue configuring the account in Quicken, you’ll need to choose “other” on the next screen to indicate the investments of GLD and SLV are neither stocks nor funds. Indicate that this account will not be a “single mutual fund” account. This will complete the account set-up.

Entering your first transaction

There may be additional fees to consider when you buy gold or silver, and to be complete, all of this information should be recorded in Quicken. If you were to purchase silver from APMEX rather than from your local dealer on foot, you will have to pay for shipping. Once you make the purchase, create a new transaction in your payment account for Quicken. For example, enter a new transaction in your checking account. Split the categories so that the shipping charges are an expense and the remainder is a transfer into your Precious Metals account. By keeping the shipping charge separate, you can more accurate track the performance of your investment. In this example, I transferred $91.86 for the purchase of two one-ounce American Silver Eagles.

Now view your Precious Metals account in Quicken and enter the investment transaction. This is a “Buy – Shares Bought” transaction. Choose the purchase date, the metal, the total ounces, and enter your total price. Make sure to include any investment fees if there are any. I don’t consider the spread between the bid and ask prices fees — this will just be part of your cost basis.

Note: If there is no shipping fee, and the total you pay is the price of the metal like it may be for an in-store purchase, you could skip the transfer from your checking or credit card account and when you enter the purchase in the brokerage account, you could choose to use the cash directly from your other account, making this what Quicken calls a “BoughtX” transaction.

As soon as I entered my transaction, my immediate loss was apparent. Because the price of silver is less than the price I paid per ounce, my $91.86 was reduced to a book value of $76.60. Verifying the most recent spot price on Kitco, an ounce of silver is $39.17, so the downloaded value of the ETF is pretty close. Just by purchasing the silver, I’ve experienced a 16.61% immediate loss. Consider this when you buy your investment. It could take a long time to make up that 16.61%.

One of the reasons for this loss is the high price I paid for the silver. Since I chose American Silver Eagles rather than cheaper silver rounds, I paid a hefty premium over the spot price. When you invest in silver or gold, the main concern should be getting a price as close to spot as possible. That’s possible with APMEX, particularly if you’re willing to buy in bulk.

Before investing in gold and silver, ensure you’re not attracted to metals due to recent hype. While precious metals can be an important part of a portfolio, understand the risks — which, for commodities, often include the opportunity cost of missing out on better performing investments.

See also:

• How to track airline miles or points in Quicken
• How to track restricted stock in Quicken

The original version of this article, How to Track Gold and Silver Bullion in Quicken, is copyrighted by Consumerism Commentary.

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Paul La Monica shares my concern that today’s market is reminiscent of the dot-com bubble of 1999. The bubble, if it exists, would be evident in higher than expected valuations for private companies like Facebook ($75 billion) and Groupon ($25 billion), not to mention Huffington Post’s recent sale to AOL for $315 million. In his article, Paul also refers to a few publicly-traded companies whose valuations are extraordinarily high compared to their earning estimates.

For companies whose shares are trading on private exchanges like SecondMarket, the hypothetical bubble may not affect most investors. I’d be concerned once Facebook, Zynga, and Twitter go public, though. These companies will probably go public at some point to take advantage of an influx of cash from a wider array of investors.

It just goes to show that some things really haven’t changed since 1999. The dot-com sector, like any other, has its winners and losers. Investors have to do their homework to find the former and steer clear of the latter.

It’s easy to judge Pets.com as an imminent failure after the fact, but it’s much more difficult to identify over-exuberance when it is happening. Doing homework and studying financial reports isn’t going to be enough when and if the bubble bursts. Right now, most investments seem historically high — tech stocks, oil, and gold, for example — while the only type of asset that seems to be laying low, at least when compared to values for the past several years, is real estate.

Just as it might be the best time to buy houses, particularly as an investment, it’s more difficult to get loans to do so on a leveraged basis. Buying low and selling high isn’t always as easy as it sounds with certain forces, putting aside investor behavioral psychology, work against you.

CNN Money

The original version of this article, Are We in the Next Tech Bubble?, is copyrighted by Consumerism Commentary.

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I’m not surprised that smaller trading firms attract the attention of the larger brokerages and banks. ING Direct acquired ShareBuilder (see my ShareBuilder review) in 2007. Today, OptionsXpress (see my OptionsXpress review) has announced that it will be acquired by Charles Schwab for $1 billion.

OptionsXpress is one of the best discount brokerages, offering low fees, particularly for trading options, the obvious focus of the brand. Schwab and OptionsXpress will continue to operate under their own brands as they do today, and I expect the integration for the time being will be similar to that between ING Direct and ShareBuilder, with linked accounts and immediate transfers, but separate platforms.

From the press release:

“The combination of optionsXpress and Schwab will offer active investors an unparalleled level of service and platform capabilities. optionsXpress’ industry-leading and award-winning client tools will be well received by our existing active investor clients who are increasingly using options and other trading strategies as a key part of their total approach to investing,” said Walt Bettinger, Schwab President and Chief Executive Officer.

There’s quite a bit of marketingspeak in the press release, but the bottom line is that each company see this as a way to take advantage of the other company’s strengths and cut back their expenses at the same time.

I don’t believe this will be the last acquisition we’ll see in this space. Larger brokerages — even those that consider themselves “discount brokerages” — see the advantage that online-only small brokerages offer. It may be a different type of customer, perhaps younger, who prefer using online tools and doing their own research. While that has been the model of larger discount brokerages, their institutional type of brand hasn’t translated well to the needs and preferences of Generation Y and younger investors.

The original version of this article, Charles Schwab Acquiring OptionsXpress, is copyrighted by Consumerism Commentary.

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When it comes to investing for the future, there appears to be an interesting dichotomy. The typical financial advice marketed to the middle class — upper and lower — calls for long-term growth through investing in the stock market. The typical sales pitch — and I use “sales pitch” as a general term, not necessarily something you hear from a salesperson, but often you do — mentions or implies an almost guaranteed return of 8%, sometimes 10% or 12%, over any thirty-year period. For many people, the stock market is their only hope for collecting enough wealth for retirement.

For the most part, wealthy people have a different approach to building for the future. Owning companies and investing directly in businesses, when successful, are much more successful than investing in the stock market. Don’t forget that a lot of investors of this type fail or go bankrupt. Occasionally they continue trying until they become one of the success stories, but often, survivorship bias dooms them to oblivion forevermore. For those who succeed, once that wealth has been built, goals turn towards eventual retirement and the cessation of the hard work of diligent company-acquiring or fervent CEO-ship. It’s not the stock market for these folks, however.

One of my favorite examples is Suze Orman. She is one of the most popular television personalities, and she doles out financial advice on television, on radio, and in her books. She, like most other financial advisers and planners, looks towards the stock market for long-term growth — for those who have the stomach to sit through short-term volatility. Peek inside her own portfolio, and you might find a different story. Suze prefers investing the bulk of her wealth in super-safe municipal bonds, triple-A rated, rather than stocks. The information on Suze’s portfolio is now a few years old, and it’s quite possible she may have shifted her asset allocations and changed her diversification, but the information is relevant. In 2007, just 4% of Suze’s non-real estate portfolio was invested in stocks — at a time she was recommending an allocation of mostly stocks to callers her same age.

Of course, age isn’t the only consideration. 4% of Suze’s portfolio in 2007 amounted to $1 million, and that amounts to larger exposure to the stock market than most middle class workers. Though I’m sure she wouldn’t like to lose $1 million, she could certainly afford to. She can take this small amount of risk. She doesn’t need to build up towards retirement; Suze could retire today and live off bond income for the rest of her life.

In light of the volatility in the stock market following the earthquakes and tsunami in Japan, analysts are saying the stock market is now too risky for investors. The risk doesn’t change depending on market condition, however. The risk has always been there. There is some kind of association in the bran that makes people think that when stocks are going up, stocks are the best methods of building wealth, while when stock markets are volatile, they are bad. The equity market doesn’t change characterization overnight. The same rules apply — there is always risk in the stock market. Those who can afford to take the risk do so appropriately. Others who believe the stock market is their only hope for a comfortable retirement invest because, thanks to the financial planning industry, they believe they must. Those who don’t want to take this type of risk run companies and acquire businesses. There is risk in that, as well, and in fact those who do are often more exposed, but most have determined that bouncing back is possible and are willing to put the work in the promise for greater returns than the stock market and, perhaps more importantly, never being required to put the bulk of their money at risk again.

Do you believe that owning companies and investing in businesses is a better way to prepare for retirement than investing in the stock market, even index mutual funds? Is the stock market just too risky today?

Photo: Cyron

The original version of this article, Are Stocks Too Risky?, is copyrighted by Consumerism Commentary.

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Read to the bottom of this article for the latest ShareBuilder bonus.

I’m not a frequent trader. With my long-term view of investing, looking at stocks every day and executing costly trades does not make sense for my approach to my own finances. My strategy does not involve trading stocks or ETFs, timing the market in search of better returns. That being said, once in a while, I set aside a relatively small portion of money to test some theories. Here is an example from about a year ago: After a company received some bad news, I purchased about 10 shares of its stock, with the thought that the recalls were temporary problems that shouldn’t significantly affect the overall value of the company over time.

The stock price has recovered since then, but after the fee to buy the stock, I’m only ahead about $20 right now. If I had to sell, my profit would be even less. These fees cut into profits and should be minimized as much as possible. If you want to play in the stock market, it makes much more sense financially to use a discount brokerage than a full-service operation, due to the smaller fees. The accounts that hold my small investments in this company, as well as similarly small investments in an ETF and two other companies, are held at ING ShareBuilder. Here’s my ING ShareBuilder Review.

Opening the account

It has been a while since I’ve opened my account at ShareBuilder. I did so before the company was acquired by ING. ShareBuilder offered a variety of bonus codes to invite new users to join. In fact, they allowed the same individual to open several accounts, earning a bonus for each. The Internet went crazy, and there were reports of people opening as many as 50 accounts, earning a $25, $50 or $75 bonus for each account. This was apparently, not against the terms, but some customers who took excessive advantage of the offers were asked by the company to consolidate or close their accounts.

The typical personal information is required when you apply for a discount brokerage account with ShareBuilder, but current customers of ING Direct will have a streamlined process where some of their information is ported directly.

Transaction fees

Many discount brokerages offer roughly the same set of tools. Each company may have a few bells and whistles, but for the most part, this type of service is a commodity. Many of the resources offered by discount brokers, like charting and analysis tools and access to some analyst reports, can be found in other locations for free. When it comes down to it, the most important aspect of a discount brokerage is the cost. Paying a $20 fee to sell $100 worth of stock immediately and significantly cuts into any profit you may have had or amplifies a loss. For this reason, look carefully at all the costs involved in buying and selling.

ShareBuilder has two tiers of membership, Basic and Advantage. The Advantage plan requires a monthly fee of $12, but with this membership, you receive 12 free trades each month, if those are done by automatic investment. Each automatic trade in excess carries a fee of only $1. Real-time online trades, on the other hand, are $7.95. Real-time trades are executed as soon as possible after you place the order. Automatic trades are less expensive because they are bundled together with other customers’ automatic trades and effected only once a week. In other words, ShareBuilder gets the benefit of combing your sale of 30 shares of Microsoft with another investor’s purchase of 30 shares on Microsoft. ShareBuilder does not need to go into the open market to settle these trades, so everyone gets a better price, including ShareBuilder who still collects the same fee as the would with other automatic trades.

With the Basic plan, automatic investments carry a fee of $4 and real-time trades are $9.95.

ING ShareBuilder offers real-time market orders, limit order, stop-loss orders, and several types of options. Some customers might also qualify for margin trading.

One of my favorite features is the lack of an inactivity fee. Most brokers want to make money off of you, which they can only do if you trade. The more actively you trade, the more money the broker earns from you. When they are not earning money from you through trades, many companies want to find other ways to make holding data for you on their servers worthwhile. That’s the beauty of the inactivity fee from the broker’s perspective. Active trading is not generally a sound investing strategy, so buy-and-hold investors are discouraged when charged a fee just for leaving an account open. Perhaps it’s wrong to assume that any company should hold money or investments for free, but since some do, those who charge fees appear to be unfair.

As long as there still are brokers who don’t charge fees for an inactive account, I’ll continue seeking them out for my business.

None of the above can be said without pointing out there is another important fee that often goes unmentioned: the account transition fee. If you decide to close your account and transfer your investments to another without selling and triggering tax ramifications, ING ShareBuilder does charge a $75 fee. If you’re not closing your account and transferring only a portion of your assets, the charge will be $15 per security, up to $75.

Linking accounts

A nice benefit of having an account with ING ShareBuilder is the ability to link your ING Direct savings and checking accounts with your ShareBuilder account. This ensures that you can easily and quickly transfer money from your ING Direct account whenever you want to trade, even if you don’t have cash in your ShareBuilder account. You can link other bank accounts as well, but this “Express Funding” service costs $6.95 if your linked account is not held at ING Direct. Sometimes it’s better not to have cash available because you’re prevented from making rash purchasing decisions. Active traders or those who want to aim for a certain time on a certain day do not need to worry about having cash in their ShareBuilder account if they are a customer of ING Direct.

Bonus

Currently, ShareBuilder is offering a $50 bonus for new accounts. This is perfect for people who are interested in getting their feet wet with stocks or ETFs. This is the type of deal I took advantage of to get started with ShareBuilder. Open a ShareBuilder account, and fund the account with $50 of your own money from a linked ING Direct account or another bank account. Buy $46 worth of stock or ETF using ShareBuilder’s Basic plan for $4. You just used a total of $50, the same amount of your bonus. When you receive the bonus within a few weeks, transfer $50 back to your savings account. In effect, you’ve made your first trade with free money. If you’re willing to spend some of your money, transfer more to ShareBuilder and see how your investments perform. The bonus is available only for a limited time, and will currently no longer be offered following March 31, 2011.

The original version of this article, ING ShareBuilder Review, is copyrighted by Consumerism Commentary.

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Two years ago, Michael Brush from MSN said, like many other financial columnists, that the buy-and-hold investment strategy, or the long-term efficacy of that approach, is a lie. This echoed a lot of the prevailing popular thinking at the time. The stock market was at an all-time low. People who believed in buy-and-hold investing, which says one should avoid trading frequently in favor of holding investments for the long term, where particularly hit by the stock market downturn.

Experts pondered whether the stock market had fundamentally changed. The average annual returns of 8% would never be seen in domestic equities again. The MSN article provided the reason for this paradigm shift: there was more risk in stocks. I liked this response from a reader:

This guy, like many finance authors on MSN, not only has no clue what he’s talking about, but is saying the exact opposite of what is true. When the stock market goes down, the risk goes down with it. The cheaper the prices, the less the risk.

On the plus side, all the ignorant articles on MSN enable truly intelligent investors to make more money over the long-run.

Matt Krantz, financial columnist for USA Today, has good news for buy-and-hold investors:

Investors who have hung on haven’t done all that badly. It’s true that the stock market is still roughly 15% below where it was at its 2007 peak. But buy-and-hold investors have actually done better than that. For one thing, these investors have continued to collect their roughly 2% a year dividend yield. Adding that in, investors are only down 9% from the high.

Yet, many buy-and-hold investors are probably doing even better than that. One of the key tenets of buy-and-hold is continual investing. Rather than trying to time and market and dart in and out of stocks, prudent buy-and-hold investors added to their investments during the downturn. If you did that, buy-and-hold has paid off handsomely for you and has helped to get you to back even to the peak. In fact, many buy-and-hold investors might even be up from the 2007 peak if they bought during the downturn.

Michael Brush’s MSN article from 2009, which echoed popular opinion, should have been a good sign that enough investors had given up on the stock market. The sentiment, in a short two-year context, may have signaled the best time to double down and take advantage of low stock prices, with the exact buy-and-hold strategy that was being vilified.

There certainly is a possibility that the stock market will fall again, and perhaps find a new low water mark. Political unrest around the world is usually not a good sign for global short-term economic growth. Nevertheless, over time, those who continue to buy will most likely be rewarded. Buy-and-hold is back.

USA Today, MSN

The original version of this article, Saving Face for Buy-and-Hold Investing, is copyrighted by Consumerism Commentary.

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One of the investing pitfalls I’m trying to avoid is buying when the market is high and selling when it is low. That’s a certain way to lose money during any economic environment. The best solution, other than investing what you can, when you can, regardless of the state of the market, is to move money into stocks when the market is low and move out when the market is high.

It’s nearly impossible to get this right, however.

You don’t know when the market is low or high. “Low” and “high” are relative terms. With the S&P 500 at 1,300, there’s no way to know whether this will be the high or low water mark for the next 52 weeks. You can only compare today’s number to the past. If the market is sitting at a high for the past two years, that could indicate it’s time to sell or it could indicate the market will go higher for another three.

It’s not all or nothing. The buy low, sell high strategy seems to rely on a fixed pool of assets moving back and forth between equities and another investment not reliant on the stock market, like cash. That’s not how most people invest. When people receive income every two weeks or every month, unless they have an automatic investment plan, they need to decide whether it’s a good time to put a portion of that income into stocks.

Those who do have automatic investment plans based on a fixed dollar amount, as long as they resist the temptation to change the plan based on the economy, buy more of the stock market when the price is lower. This is the best approximation to buying low and selling (or buying less) high, and is flexible enough to stand up to long-term performance. The only way to beat dollar-cost averaging is to buy your entire portfolio at the onset of your investment strategy and hold onto it for as long as possible, but that’s impossible for most people who can only invest as they earn money.

This runs against investor psychology. When the media scream that the market is at historic lows and the public is fleeing the stock market en masse, the numbers message is usually accompanied by reports predicted even lower numbers. Financial columnists and planners whether the rules of the game have changed or whether the stock market will ever recover. At this time, they’ll remind investors that past performance, like the 8% annual return for stocks over long periods of time, does not guarantee future results.

The normal reaction is to run away. If the boat is sinking, you’re not going to jump on. If you fight the urge to invest like everyone else, you might be able to buy when the stock market is low and sell during bubbles of market exuberance.

Mixed messages. Investing against popular trend isn’t a secret. Even when the market has tanked and the media is flooded with messages about the downfall of stock investing, the Internet makes it possible for minority opinions to have a strong voice, too. You’ll see more than enough messages in the media saying that it’s a great time to buy. If your approach is to invest in the opposite direction of the general public, you can’t necessarily judge whether most people are selling or most are buying.

Do you try to buy low and sell high? What do you look for to ensure that this philosophy works?

The original version of this article, Why Buying Low and Selling High is Impossible, is copyrighted by Consumerism Commentary.

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In a country where large employers are offering fewer defined benefit plans, like pensions, and more defined contribution plans, like 401(k)s, it’s surprising I have a pension. A little more than a month after quitting my day job, I received a notification from my former employer that I was eligible to begin receiving payments from my cash balance pension, a type of pension where the employer contributes a percentage of my salary, above my salary, to a plan that accrues interest credits every month.

This pension is significantly overshadowed by my 401(k). While I was contributing the maximum allowed to my 401(k), the pension grew more slowly, with an interest rate of 3.87%. I am fully vested in the plan, so the company offered me the choice between a lump sum payout and an annuity, based on the full amount of the pension. With no spouse, and with the payout scheduled to begin on March 1, annuity payments would amount to about $65 per month for the remainder of my life, while the lump sum would be about $18,000. A $65 payment each month for the rest of my life would, assuming I live long enough, provide me with more money over that period of time when compared to the lump sum, but inflation would quickly erode the real value of increasing my income by $65 per month. By taking the lump sum now, I can invest the full amount and likely, over time, create a more valuable benefit for myself.

I elected to receive the lump sum, but to forgo accepting the payment as income now by rolling the benefit over into a new Traditional IRA at Vanguard. I also had the option of leaving the pension alone until a future date, delaying the benefits payout until as late as April 1, 2041, but I decided to take the benefit now rather than wait.

I have not included my pension balance in my net worth, so once Vanguard receives the check and credits my IRA, scheduled for March 1, my calculations will be affected.

Do you think I made the right choice? Given the numbers above, would you take the annuity payment or lump sum? Would you let the cash balance pension remain accruing interest credits and wait before receiving the benefits or take the benefits as soon as possible?

The original version of this article, Life After Salary: Rolling Over My Pension, is copyrighted by Consumerism Commentary.

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Now that I’m not working for an employer other than myself, I no longer have the benefit of investing part of my salary in a company-managed 401(k), and I also no longer have the benefit of the employer-matched contribution. I’ll miss the 100% return on the first 4% of my pay. Before leaving my day job, I researched my options for replacing my employer’s 401(k), and after carefully considering my choices, I decided to open an Individual 401(k) to accompany my already-existing SEP IRA.

Benefits of an Individual 401(k)

There are two types of contributions that an Individual 401(k) — also called a Solo 401(k) — can take: employer’s contributions and employee’s contributions. There are slightly different rules for sole proprietors than there are for corporations. Since my business is a corporation, the maximum employee contribution is $16,500 or up to 100% of compensation, whichever amount is lower, just like a regular 401(k). This contribution, combined with the employer contribution, have a maximum of $49,000.

For tax purposes, the employee contributions are taken before they income is taxed and reduce the income of the employee, while the employer contributions are deducted from business income.

Choosing Vanguard

For me, choosing Vanguard for the Individual 401(k) made sense. Their low-cost Admiral shares will, if one believes the principle of investing in index funds and a buy-and-hold strategy, provide the best returns by the time I “retire.” There is an annual maintenance fee of $20 for the account per participant, but that fee is waived if you qualify for Vanguard’s Voyager Services. Once you have $50,000 at Vanguard across almost any type of account, you qualify for the eliminated fees with Voyager Services. In fact, if you have more than one employee, it only takes one employee to qualify for Voyager Services to fees to be eliminated for all participants.

Update: I signed up for Admiral shares in my Individual 401(k), but it turns out they are not available. Apparently, Vanguard does not want to offer Admiral shares in Individual 401(k) accounts because it would amount to unfairness between highly-paid employees and those who are not. Vanguard offers Admiral shares to encourage customers to move more money, but in situations where Vanguard is a an employer’s choice, rather than an individual’s choice, they want all employees to have a level playing field. (I would argue that they should offer the lower cost option to all employees if they want equity among various income levels.)

Although I chose Vanguard, many popular brokers offer Individual 401(k)s. Fidelity and T. Rowe Price are two low-cost options as well. My brick and mortar bank offered me the option when I visited the other day to talk about my business checking account, but I was not happy with their investment options and fees.

The opening process

Establishing a new Individual 401(k) is not as simple as applying for a savings account online, however. Visit the Small Business section of Vanguard’s website and locate the information on the Individual 401(k). There is a link to download the Individual 401(k) Kit for Employers. This is a PDF document that contains all the forms you need to establish a new Individual 401(k) for your business as well as accounts for any participants. The forms cannot be submitted online.

Here is what the kit includes:

• Individual 401(k) Plan Adoption Agreement. This establishes the Individual 401(k) plan from the employer’s side.
• Individual 401(k) Plan Authorization Form. This form informs Vanguard who will have access to make decisions about the 401(k) on the company’s behalf. Although Vanguard includes an attachment with this form as required by law, do not complete the Attachment A. If you complete the attachment and include it with your paperwork, Vanguard will not be able to establish or amend your plan as necessary.
• Individual 401(k) New Account Form. I am my only employee, so I completed this form to establish the employee side of the Individual 401(k). If there were other employees, I could copy this form, have all employees provide their own information, and include the completed forms in the package.

When all forms are complete, just send the package back to Vanguard, to the address provided multiple times within the collection of forms. Not long after Vanguard receives the information, the brokerage will provide more information about how to contribute to your Individual 401(k). It took me longer than I wanted to get around to completing the forms, but it was much simpler than I imagined. You will be able to establish recurring contributions for the employer as well as the employees.

Accessing your Individual 401(k)

Vanguard has a separate website for small business customers. While I can view my Individual 401(k) using the normal user name and password I’ve had established for years, the Individual 401(k) requires me to establish a new user name and password for the small business side. All contributions, both employer and employee, will need to be established using this alternate user name. I don’t particularly like having two separate user names for the same brokerage.

After Vanguard processed my paperwork and established my account, I received an email to link my new participant account. Logging in was a frustrating process at first because I did not know that a new user name was necessary. The small business website rejected my user name, and I called customer service for help. The representative was able to explain the above to me, and I established my account. Furthermore, you cannot be logged into the individual investor side of Vanguard.com and later log into the small business side. You must clear your browser’s cookies in order for the login to work properly.

Contributing to the Individual 401(k)

Like many businesses, it will be difficult for me to predict what my business income will be for 2011, and will therefore prevent me from knowing exactly what my personal income will be. While it’s usually better to invest as much as possible at the beginning of the year, this unpredictability leads many businesses to contribute to these plans at the end of the year. I’ll be investing throughout the year, month by month, once I determine each month’s income.

The original version of this article, Opening an Individual 401(k) at Vanguard, is copyrighted by Consumerism Commentary.

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Jeremy Siegel, the author of Stocks for the Long Run, was correct with his prediction for the stock market comeback in 2009. Looking back, it may be easy to say that was an easier prediction due to the low starting point that year, but many experts thought the stock market had further to dive.

This year, Siegel expects a 4% increase in the stock market due to low interest rates and dividend-paying stocks. In this recent video, Jeremy butts heads with Robert Shiller, who thinks the stock market is currently not undervalued, and doesn’t have much room to increase this year.

Take a look at the discussion. Will you be investing in the stock market this year or waiting on the sidelines?

Can’t see the video?

The original version of this article, Jeremy Siegel’s Economic Outlook for 2011, is copyrighted by Consumerism Commentary.

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Although OptionsXpress is a discount broker that focuses on trading options and other derivatives, this discount broker is also worth a look for the more traditional trading of stocks and ETFs as well as investing in an IRA for little or no fees. Right now, the discount broker is working to attract new customers. For a limited time, OptionsXpress is offering a $100 cash bonus for all new account holders.

OptionsXpress $100 bonus

For a limited time, new customers of OptionsXpress can earn $100 in free cash if they follow three simple requirements:

1. Make an initial deposit of $500
2. Execute three trades within the first six months of opening the account
3. Maintain a $500 balance is maintained in the account (minus any losses) for at least six months

Once all three criteria have been met, OptionsXpress will deposit the $100 bonus in your account within 30 days, so it could be seven months after your initial deposit that the company will provide you with the bonus. If OptionsXpress were to provide the bonus before you have met the six month requirement and you fail to maintain your balance, they reserve the right to remove the bonus from your account. The $100 cash bonus is the largest offered by an online discount broker today, so despite the possible seven month wait, it’s an attractive offer.

OptionsXpress history

In 2000, Ned Bennett, David Kalt and Jim Gray founded OptionXpress, headquartered in Chicago Illinois. As the years progressed, OptionsXpress went international, developed new trading tools, went public (Nasdaq: OXPS). The brokerage continues to design and launch new technology, such as mobile applications and a downloadable streaming quotes features, to compete with the lager discount brokerages.

OptionsXpress commissions and fees

OptionsXPress is not the lowest-cost discount brokerage. The fee for trading stocks is $9.95 per transaction, and if your transaction includes more than 1,000, the cost increases to $0.01 per share. For options, the brokerage encourages active trading with a reduced commission: $12.95 flat free for up to 10 contracts or $1.25 per contract when trading more than ten contracts. The fees for dormant traders are slightly higher at $14.95 for up to ten contracts or $1.50 per contract for larger transactions.

Here is a complete list of OptionsXpress trading costs.

OptionXpress trading tools and education

OptionsXpress offers more than 20 different trading tools with an entire section dedicated to teaching investors about trading and how to use their tools. OptionsXpress is a leader in trading technology. These tools help OptionsXpress stand out among its competitors.

The Dragon. Scan for stocks and options that match your chosen criteria, from stock activity to P/E plays to percentage change. The Dragon ranks the top 50 results from your search with convenient links to pre-populated order forms, options chains and charts.

Strategy Scan. Find an investment strategy that aligns with your investing goals, trading experience and risk level. Preview up to three opportunities based on your criteria, complete with maximum potential gain, risk profile and profit and loss characteristics, or view a matrix of up to nine different possibilities.

XpressTrade. Get quick, convenient access to a compact version of their Quote Detail feature, basic order forms, real-time quotes, a variety of charts, and real-time information on account equity, buying power, positions and orders.

Option Pricer. Variables like strike price, time to expiration, and implied volatility are dynamic, making it difficult to understand how a change in only one of them might affect an option’s price. The Option Pricer helps you understand how changing market conditions might affect the price of your option investment.

OptionsXpress customer service

Any good online discount broker will be available during normal trading hours but a top notch broker is available well beyond 40 hours a week. Currently, OptionsXpress offers three different ways to contact them. Whether by phone, email or online chat, you can always expect OptionsXpress to get back to you quickly and courteously. Here are the hours customers can contact OptionsXPress.

• Live Chat. Live Chat is available Monday through Friday from 8:00 am to 10:00 pm ET and on Saturday from 10:00 am to 2:00 pm ET.
• Email. Any questions sent through email are responded to within 24 hours, unless they are sent on a weekend, at which point it can take up to 48 hours to receive a response.
• Phone. General phone support is available Monday through Friday from 9:00 am to 10:00 pm ET, and trader support is available Monday through Friday from 9:00 am to 5:30 pm ET.

OptionsXpress awards

OptionsXpress is rated a four star broker by Barron’s based on usability, trade experience, trading technology, range of offerings, research amenities, portfolio analysis and report, customer service and access, and costs. This rating has remained consistent for nine years in a row. Aince 2002, OptionsXpress has won “Best Online Broker” from both Smart Money Magazine and Barron’s on multiple occasions.

Transaction costs can be a determine for those who shop for the lowest fees. After all, any fee eats into the potential profit of your investment. I don’t suggest active trading; for me, this type of investing is more like gambling. But for those who are interested in online trading, OptionsXpress is one of the best discount brokerages thanks to the features and services, despite the price. This $100 cash bonus will offset some of those transaction costs, but it’s only available for a limited time. Consider signing up for an OptionsXpress account today.

The original version of this article, OptionsXpress Review and $100 Cash Bonus, is copyrighted by Consumerism Commentary.

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