I do very little stock trading. In fact, the only individual stocks I hold are Microsoft (MSFT) and Akamai (AKAM), both of which I purchased with free money for opening a brokerage account. Naturally, I think free cash is a perfect candidate for experimentation with the stock market and I most likely would not have made these purchases without this particular incentive.
Zecco Trading is offering a different incentive for those who have funds for trading stocks but would like to avoid pesky transaction fees that eat into your returns. For a very limited time, Zecco is offering 20 free traders. This discount brokerage normally offers 20 free trades each month for customers who maintain a $25,000 bonus in their account or execute 25 trades each month. Otherwise, each trade costs $4.50, still one of the lowest transaction fees available.
Here is how to receive 20 free trades without meeting the minimum balance or minimum trade volume. First, be a new customer. Only new Zecco customers are eligible. Apply for your Zecco account here, and use the code bonus1 when signing up for your account. Your application must be complete and approved by September 13, 2009.
As long as you meet the above criteria, you will see 20 free trades available in your account by September 16, 2009.
For more options, see this summary of five true discount brokerages.
For the last few years, I have been participating in my company’s stock purchase plan at the maximum level. Every paycheck, ten percent of my gross salary is withheld. At the end of each quarter the funds are used to buy my company’s stock at a 15 percent discount from the lower price of either the first day or last day of the quarter. As my company’s stock declined mostly due to the economy at large and the industry in which I work, this was a losing proposition. I decided not to sell the company stock until prices returned, rather than selling at the first available opportunity as I had been earlier.
So now I have company stock that I have been holding since December 31, 2007. About half of the shared purchased then and since then are in a losing position while half are now in a winning position. My only opportunity to sell this quarter is closing soon, so I should decide what to do. Here are some of my options:
- Sell all of it. It’s risky to hold so much in one stock, and I already have company stock in my 401(k). I can write off the losses against the gains to reduce tax liability.
- Sell the shares in a losing position. I can write off the losses against any realized gains if I sell stocks later this year.
- Sell nothing until they are held for two years. The stock will probably go up, and after two years, they will be long-term capital gains, taxed at a lower rate.
- Sell the shares in a winning position. This would help my cash flow, but I’ll owe income tax.
What would you do?
The option to convert a Traditional IRA to a Roth IRA has been around for a while. Here are the differences between a Traditional IRA and a Roth IRA for those new to these retirement accounts. As long as your modified adjusted gross income (MAGI) is under $100,000 you have qualified for this conversion. Contributions to the Traditional IRA is tax-deductible, which means that your tax bill is calculated after ignoring the amount you deposit into the IRA. You will pay those taxes after you retire and begin withdrawing these funds. If you have a higher tax rate now than you will in retirement, the Traditional IRA is a good choice.
On the other hand, the Roth IRA is not tax-deductible, so the deposits into this type of IRA are not exempted from your total income calculation for tax purposes. In effect, you use “after-tax money” to invest in a Roth IRA. This is a great choice for people who believe their tax rate now will be lower than it will be in retirement once they begin taking distributions.
There are two other benefits to the Roth IRA that often go unnoticed. The Roth IRA does not require distributions after age 70 1/2 like the Traditional IRA, offering more flexibility in retirement. The Roth IRA is better for estate planning; choosing a Roth IRA rather than a Traditional IRA for funds passed onto your heirs will allow them to avoid tax bills.
These benefits come with a drawback: if your MAGI is above $105,000 ($166,000 for those who are married filing jointly) your maximum allowed contribution begins to reduce and will completely phase out at $120,000 ($176,000 for married filing jointly). But there is now a law that will help you get around this for a short time.
In 2010, the $100,000 maximum for Roth IRA conversions will temporarily disappear. If you believe the Roth IRA is a better option for you but you have been prevented from investing in this type of account due to income limitations, now is your chance to make the change. Here is why this will be allowed: When you convert from a Traditional IRA you owe taxes on the amount of the conversion, and the government would really like that income.
If you must pay those taxes using funds from your IRA, the conversion might not be a good idea, but if you have cash saved for the tax bill you will be better off.
You can also convert accounts known as SEP IRAs and SIMPLE IRAs.
Here are some quality resources regarding Roth IRA conversions.
Although I do not have children, I am considering starting to save for college. With the cost of tuition rising well above levels of inflation, the sooner I get started, even before any children exist, the higher the chance my child or children will be able to go to school without an insurmountable pile of debt. Unfortunately, most college savings plans are complicated. They are tax efficient, but only if some conditions are met. If you need to withdraw money from the funds for purposes other than education, you can face penalties. There are a number of variables to consider, least of all is the idea that I may not have children at all.
Kiplinger’s Personal Finance has named its top five 529 college-savings plans to help parents or possible future parents like me decide which options to pursue. None of these options sound perfect, however. I do not like the sound of any of these top five, either due to flexibility or fees. In addition to fees by the dollar, all plans charge a management expense, fees as a percentage of assets, in addition to the underlying funds’ management expense.
Illinois Bright Start College Savings Program. Pros: Low fees. Cons: Low fees only apply to actively-managed funds (poor performers). If you choose Vanguard funds you must pay $10 per fund.
Alaska’s T. Rowe Price College Savings Plan. Pros: Good investment options. Cons: $25 yearly fee for some accounts.
Michigan Education Savings Program. Pros: Plan includes a guaranteed return option. Cons: The plan is run by TIAA-Cref.
College Savings Plan of Nebraska. Pros: Investors can choose from a wide variety of mutual funds. Cons: Every account has a $20 annual maintenance fee.
Virginia CollegeAmerica. Pros: Kiplinger’s counts the fact that this plan is sold by financial advisers as a pro. Cons: The plan includes only funds from American Funds, which are expensive and underperform.
Kiplinger’s also includes a state-by-state guide to 529 plans. Use this guide to determine whether your state offers its own plan with tax benefits. The benefits may compensate for the other drawbacks of the plan. I live in New Jersey, which does not offer any 529 plans with tax benefits, but I could invest with another state’s plan. While I live in New Jersey, I would not be able to benefit in the other state’s tax advantages.
Best 529 College-Savings Plans, Thomas M. Anderson, Kiplinger’s Personal Finance, June 26, 2009
There is some speculation that Coca-Cola, General Electric, and Wal-Mart are seeking to raise capital by offering stock… in China. The companies have not responded to these rumors, but China seems open to allowing western companies to participate in the country’s stock exchanges once trading resumes.
If American companies want to be on the Shanghai Stock Exchange, American investors might want to be there, too. The way things stand now, it is difficult for foreign investors to participate in the Shanghai Stock Exchange. Any individual investor outside of China must be aligned with a Qualified Foreign Institutional Investor in order to trade companies listed on this exchange.
A more accessible way to access the China stock market may be through mutual funds offered domestically. The Fidelity China Region Fund (FHKCX) is a strong choice despite the 1.11% expense ratio. (Expense ratios will tend to be higher for international funds.) Vanguard does not have a comparable fund, and FHKCX is up 31.25% so far this year.
Funds like FHKCX invest in Chinese companies, and it’s unlikely, if western companies begin trading on the Shanghai Stock Exchange, that these funds will include shares of these western companies in their portfolios. So this doesn’t solve the problem of accessing the shares of these companies that would theoretically be traded in China.
Regardless, if companies see China as an opportunity for growth and capital, it might not hurt to follow them by investing overseas.
Photo credit: SmokingPermitted
Coca-Cola, GE, Wal-Mart May Seek China IPO, UBS Says, Allen Wan and Veronica Navarro Espinosa, Bloomberg, June 17, 2009
Shanghai Stock Exchange, Wikipedia, June 17, 2009
Well, I sold my first stock. I agonized over when would be the right time, but then I just pulled the trigger, anyway.
Earlier this year, I started using the “free money” I was getting from this credit card to buy some stocks.
In March, we paid our tax bill of over $3,300 using that card, so the 2% rewards were higher than normal. I asked a friend of mine who knows a lot more about the stock market than me what stocks were catching her eye, and on her unofficial recommendation I bought 60 shares of CAR, the Avis car rental people.
That was April 17th. The stock price was $1.50. With a $9.95 commission at Sharebuilder, I ended up “spending” a total of $99.95.
And then I watched as the stock price just rose and rose and rose.
On about May 20th I started wondering if I should sell my proceeds. We’ve had rather more pet problems than usual and I was a little worried that our upcoming vacation might suffer as a result. The “overall return” on that investment, according to Google Finance, was hovering around 200%, which is a heck of a lot more than the 7 to 9% we’re taught to expect from long-term investments.
So I sold it on May 27th. I was a bit alarmed to see that there was yet another commission of $9.95. To me, that’s like paying a toll over a bridge going in each direction.
Stock proceeds: $282.24
Minus original investment of $99.95: $182.29
Now, if I’m reading this Capital Gains Tax table correctly, we’re going to be hit with a 25% of the “cost basis” come next April. If the cost basis is the amount I spent on the investment, that’d be the $99.95 number again, which means a tax of about $25.
Profit minus upcoming tax: $157.29
So I spent $99.95 and got $157.29, a real profit of 157%. Not the nearly 200% that Google Finance was teasing me with, but not shabby, either.
The other way to look at it is that since the $99.95 was free money in the first place, I made a profit of infinity dollars.
More importantly, when we take our vacation next month, we’ll have $157 that we otherwise wouldn’t have had. That’s one fancy dinner with some very good wine. I’m looking forward to it.
March 9, 2009 was a bad day to retire. On that day, the Dow Jones Industrial Average hit its bottom of 6,547, a low not seen since 1997. If you followed mass-market retirement investing advice, you may have entered retirement with a portfolio 100% invested in a stock market index, like the S&P 500, whose pattern is similar to the Dow.
If you began formally planning a year in advance on March 9, 2008 with a portfolio worth $1,000,000, by the time you retired one year later, that portfolio may have only been worth $600,000. This market drop has left investors feeling betrayed by the long-term promises of a diversified portfolio stocks, usually touting an eight to twelve percent return over long periods of time, depending on whom you ask.
This is no consolation to new retirees who lost 40% or more of their portfolio and have had to change their plans. Unless you cash out your entire investment portfolio on the day you retire, the market drop won’t have a permanent effect on your finances. If you are healthy, you can expect to live several decades in retirement. Your portfolio must be aggressive enough, even in retirement, to last as long as you need it. Stocks might still be an important part of your portfolio in order to achieve the growth necessary for your income from investments to last at least as long as you continue live.
The recent downturn has forced people re-evaluate the level of risk they are willing to accept in their portfolios. When the market experiences a multi-year rally, investors are more likely to say they are willing to accept risk if it will increase the chances of long-term growth, while economic recessions frighten investors away from the riskier choices. While these are human instincts, the more you can separate your emotions from your finances, the better you will be off in the long run.
This is a difficult task thanks to the exabytes of information we can access about our own money with the click of a button. We receive quarterly statements from our investment accounts in the mail explaining in plain text how much money we have lost on paper, and these statements do not apologize nor do they include just one frowning emoticon to make us feel better.
While stocks are the best bet for long-term growth, a balanced portfolio should include some bonds to cover retirement funds you may need within ten years. On the date you retire, you should know how much money you’ll need to draw from your investments each year. Your bonds should cover that amount, leaving room for some growth. But that needs to be balanced by your long-term needs in retirement. Having too much invested in bonds runs the risk that your investments will not last throughout the remainder of your life. If your nest egg is small, keeping ten years’ worth of income in bonds may not leave enough of your portfolio left for stocks, if any.
This difficulty is one of the primary reasons people often choose annuities for retirement. You can take a part of your retirement nest egg and buy an insurance product that “promises” a certain absolute return for a set period of time or the remainder of your life. Buying an annuity when you’ve all ready lost 40% of your account value can result in a smaller benefit than you were planning to live on, and that could be a problem.
There is no easy solution to this problem. Even if you don’t retire on the day the stock market hits its lowest point, chances are good the stock market will be significantly down during some point during the next few decades. Here is what I plan on doing:
- Approaching retirement with an investment allocation among stocks and bonds that matches by true level of risk tolerance. It’s best to measure your risk tolerance during a period in which you are experiencing neither high or low returns on your investments to keep emotions and short-term memory out of the equation.
- Rebalancing my portfolio periodically to ensure I’m not more exposed to any investment type. As stocks experience a boom, it’s natural to keep money in stocks to ride the wave. Avoid a crash by keeping an eye on the percentages and move money around when the portfolio is unbalanced.
- Adjusting my asset allocation using the lowest risk investments that will provide the needed returns. Suze Orman, with a portfolio value of $25 million, keeps $24 million invested in bonds. These investments results likely approach $1 million each year. She also investments another $1 million in stocks, an amount she can afford to lose. If annual needs are provided for by an investment offering a lower but more stable return, stick with the lower-risk investments rather than accepting unneeded risks.
What will your portfolio look like when you entire retirement?
Photo credit: Scubabix
It is human nature to search for Truths that describe the world we live in. This is one reason why personal finance gurus are so popular amongst a group of individuals that listens. Many of the more popular authors, seminar leaders, and cult favorites stick by their mantras, Grand Unifying Theories, such as “credit cards are evil,” “invest in stock index funds for the long term,” and “always buy a used car.”
Any individual who has been able to build a following, cult or otherwise, within the subject of personal finance would do well not to let others peek inside the leader’s own. The advice doles out to the public is usually for a specific intended audience, and it is rare for a guru to fit within the audience he or she is addressing.
In her book, Women and Money, Suze Orman explains that everyone should be invested 100% in stock index funds until close to retirement. This is solid, definitive advice for Suze’s audience, and in this case, men as well. There are some instances where this statement may cause trouble, such as the recent stock market collapse. The book was published in February 2007, as the stock market was reaching a recent peak.
Yet, the average person entering retirement will still have several decades to live, several decades in which the nest egg must last even when being drawn upon. The best way to do this is with a stock index fund. But if we look at Suze Orman’s own portfolio, she doesn’t follow her own advice. As of last year, Orman had $1 million invested in the stock market, a lot of money but only 4% of her own portfolio. The rest was mostly invested in municipal bonds which are very safe but earn less over time. In an interview, she stated she only invests in the stock market what she can afford to lose.
The rules, defined and proliferated by Suze Orman do not apply to her. And they shouldn’t. Why would someone with assets of $25 million follow the same advice as Suze’s audience, in which members might have a net worth anywhere from several hundred thousand dollars below zero, in debt, to several hundred thousand dollars above zero?
The mathematics don’t magically change when you are rich, but the only chance for average individuals to survive through retirement is to take relatively risky bets on the stock market. While the stock market has failed to disappoint in the long term if you look at the numbers, real performance doesn’t always match the statistics thanks to timing. Wealthy individuals, like Suze, can afford to accept less risk. A bond return of 4% on $24 million invested results in an income of $960,000 a year — and that doesn’t include speaking engagements, royalties and television deals. Suze, who is quite comfortable at this stage in her life and career, should not be required to live by the same philosophies she preaches for her callers.
Should you stop following her advice? Suze Orman has helped many people come to terms with their financial condition. But unless you’ve spoken to her about your specific situation, take her mass-market advice with a grain of salt. Yes, her nuggets of wisdom are in many cases helpful, but not everyone falls neatly into the same category.
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