Investing

Investing Ethically

by Smithee on January 30, 2009

Last year we wrote an article about Ethical Consumerism, the practice of spending your money on businesses who support your ideas of a healthy community and environment.

In addition to where you spend your money, you can also put a lot of thought into which investment vehicles agree with your personal ethics. This is something weighing on my mind as I start from scratch learning about investing as a whole (see my previous article on the subject: What Do I Know About Investing?). There are a few different strategies, as I see it so far:

Invest in things you think will succeed, regardless of your own ethics

One of my co-workers is the sort of person who eats well, exercises all the time and generally treats his body as a temple. When I asked him if he ever does any investing, he quickly answered, “Only in the Vice Fund”. The Vice Fund invests in alcohol, gambling, tobacco and aerospace and defense industries. You could think of it as the “World is Going to Hell Fund”. The way I see it, investing in something with that kind of mission statement is akin to hoping other people keep destroying themselves.

For a guy who treats his own body as a temple, this seems like a weird contradiction, but as he tells it, the fund has been very lucrative for him, excluding 2008.

A similar example might be a vegetarian with a lot of stock in Burger King. Doesn’t make a whole lot of sense, except it could be quite profitable.

Invest in things you wish would succeed

For example, I wish that solar, wind and geothermal energy would succeed, and if I believed my Fifth Grade teachers, by 2009 those are the only sources of energy we should be using. I’m not particularly opposed to oil and coal because they’re dirty and they may be funding who-knows-what kind of overseas operations; I’m opposed to them primarily because they are finite resources. Eventually we will run out, and we may as well start weaning ourselves off of them now, because of the other environmental and political reasons. But do I think all humans will stop using oil and coal by the time I should be retiring, in about 30 years? I’m not sure.

Hedge your bets

Well, there’s one method of hedging your bets, which is to invest both in the things you think are successful-but-harmful, and in the things you think would benefit the world if only people saw things the way you do. But this doesn’t seem like a strong, long-term strategy to me. One of them will eventually fail. Thankfully, there’s another nuance:

The oil giant Shell is following BP and releasing a bunch of commercials highlighting how they’re committed to refining new ways to power things. This reminded me of another transition that shook up some companies: when photos moved from film to digital.

Nikon, for example, cruised along for decades making some very good (and some very cheap) film cameras. When computers became fast enough and connected enough, people started sharing their photos digitally and demand for digital cameras grew. Not willing to let a different company take their market share, Nikon became expert at making digital cameras as well.

Oddly, I don’t hear the names Kodak and Polaroid as often as I used to, though I know they’re still around.

Today we think of Exxon and Shell as “oil companies”, but they may very well position themselves as leaders in the geothermal energy space in the future. Here’s where my earlier advice about doing lots of research come back into play.

What Do I Know About Investing?

by Smithee on January 23, 2009

There’s more wisdom on this subject over at fool.com.

Flexo has often touted the benefits of using a real credit card (as opposed to a debit card) for daily spending, and paying off the balance each month. I guess this finally permeated my skull, since as soon as I saw the news about a credit card that deposits 2% cash back into a brokerage account, I went and got one. At the time, I knew as much about investing as my dog knows about plumbing. I also don’t know a lot about plumbing, but I know how to fill up a water dish, and that’s all the dog cares about.

I did a lot of reading online in preparation, and I’ll be doing a lot more. I even got one of those best-selling books, but I didn’t like what I read in it. That’s okay; it’s just as important to know what you don’t agree with as what you do agree with. There are still plenty of terms I couldn’t define for you, like “solvency”, but my eventual goal is to be a wise, seasoned investor. To start with, I thought I’d summarize for you the things that I’ve read that have resonated with me.

Invest only with the money you don’t need

For the purposes of this article, I’m going to have to assume that you’re not close to retirement. If you are, don’t listen to me. The rules are very different for you; please talk to a financial planner.

I use the phrase “money you don’t need” because I want you to think about the big picture. Think about your monthly budget, savings goals, 3-month emergency buffer, upcoming vacations, birthday and yuletide presents, lofty home improvement goals, and your daydreams of moving somewhere with a nicer climate. Now that you’ve thought about those things, do you have any money leftover? In other words, is it just sort of hanging out in a savings account? If you do, you can consider investing it.

Note: There’s at least one exception to this guideline: company-sponsored 401(k) and IRA plans. If your employer has one of these, and if they’re matching some part of your contribution, take them up on it. My employer is matching 100% of the first 3% of my gross paycheck I contribute, so I’m contributing 3%. This is free money your employer is offering. Now, there’s a good chance that the matching contribution they’re making won’t “vest” (meaning: actually benefit you) until your employment with them reaches some milestone, like 3 or 5 years. So if you don’t like your job, re-think this plan.

Another category of “money you don’t need” is a sudden windfall. You’re chugging along, working within your budget with no credit card debt, and a relative gives you $2,000, or you find through MissingMoney.com that someone owes you $155.

Finally, there’s always the proverbial garage sale. You probably won’t earn enough from a garage sale to make a big investment, I’m just saying it’s free money.

There are no low-risk, high-reward investments

Investing and gambling are not quite the same beasts, but they have one huge quality in common: you’ll be making a bet on what you think will happen in the future. And none of us has a plutonium-powered Delorean, flying or otherwise.

Thankfully, brokerage firms don’t offer you free drinks when you’re doing well (on second thought, with some clients they probably do …). My point is that if you’re hoping to see a 50% return on your investment, it won’t be through a mutual fund. So if you want a big reward, you’ll have to forgo a managed investment and make your own predictions, which brings me to research.

You’ll be doing a lot of research

Yes, you’re using the money you don’t need, and you should be willing to lose it, but you don’t want to, so do everything you can to avoid that. Namely, learn about the investment opportunity in front of you. Read about the company, its history, its founders, their histories, etc. We’re living in an Information Age; Google is your best friend.

If you have a friend, even a close one, who comes to you with an “it can’t fail!” opportunity, they’ll probably encourage you to invest all you can, as soon as you can. Take it from a guy who’s just starting to learn (call it beginner’s wisdom): there isn’t a worthwhile investment in the world that couldn’t wait a week for your learned contribution.

If you can, invest as early as possible

I don’t mean quickly, I mean early in your lifetime. I’m 33, so I failed at this. Until now, I’ve had all of my money tied up in food and shelter. I encounter this “start early” advice more frequently than I care to, because it makes me angry at myself. Compound interest is your best friend (Google is now your second-best friend).

But on the other hand, I’ve enjoyed a lot of my life so far, seen a lot of good movies and eaten at some nice restaurants. I wish I’d had the discipline to save even $10 a week when I started working, but I did what I did, and I have to accept that and move forward. If I had that Delorean, I’d go backward, instead.

That’s all I know so far

It’ll be a while before my brokerage account has enough “free money” in it to make any kind of worthwhile investment. In the meantime, I’m going to keep reading, learning from others and absorbing wisdom. I’ll be back every Friday to discuss what I’ve learned and share general investing news with you.

If you have any advice for me or the other readers, please leave a comment or start a topic in the forums (registration password: pluto).

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Your TARP Money Put to Good Use

by Flexo on January 21, 2009

About the author: Jeff Rose is an Illinois Certified Financial Planner™ and co-founder of Alliance Investment Planning Group. He is a veteran of Operation Iraqi Freedom, having served in the National Guard.

Warning: For those of you that have been laid off recently, received a pay cut due to the recent economic crisis or frustrated with the government’s misuse of TARP money, this article might be hard for you to read. First, let me give a bit of a background.

Prior to becoming an independent financial planner, I worked for a regional brokerage that was bought out by Wachovia Securities back in 2007. Upon the announcement of the buyout is when I first learned about the concept of the “retention package.” Basically, when a brokerage firm gets bought out, it is industry standard for the purchasing firm to pay the newly acquired brokers to retain them and prevent them from jumping ship to the competition. Most people who survive a buyout or merger are usually thankful that they have a job, and definitely don’t expect to get an upfront check to stick around. So the idea that somebody makes a payday for just staying put sounds a bit absurd, even more so considering the state of the economy.

What the buyout means to you

Okay, let’s fast-forward to modern day. As I’m sure you’ve heard by now, the largest and well known brokerage firm, Merrill Lynch, was bought out by banking giant Bank of America. When I first heard this announcement, the first thing I thought of was, “How in the heck are they going to pay retention packages to the brokers?” The housing market has been a mess and write downs are still a reality. From a PR standpoint, I just couldn’t see them justifying paying huge amounts “just to keep” brokers that are already in the top 1% of all wage earners. But then again, this is corporate America. Here’s what was offered, according to planadviser.com:

Advisers who produce $1.75 million in fees and commissions will receive 100% of their last year’s book of business (as of September 15): 75% of their bonus in a seven-year forgivable loan, and another 25% in deferred cash over three years.

Advisers who produce $1 million to $1.749 million in fees and commissions will receive a seven-year forgivable loan equal to 75% of their last year’s book of business, and can receive up to a 25% growth reward, payable over four years.

Advisers who produce $750,000 to $999,999 will receive a 50% seven-year forgivable loan and can receive up to a 25% growth reward.

Advisers who produce $500,000 to $749,000 will receive a 25% seven-year forgivable loan and can receive up to a 25% growth reward.

Advisers who produce less than $500,000 will receive get a 20% deferred cash payment.

For those that are outsiders to the industry, let me explain the first bullet point. An adviser that produces $1.75 million in fees and commissions generally will take home about 50% plus. The other half goes to the firm. So figure a broker who is at that level will make about $875,000 (minus taxes of course), plus deferred comp and other little perks that aren’t mentioned. That same broker is now getting paid $1.31 million up front just to stay put with another $437,000 coming over a three year period. Notice, too, the number is based off their trailing production as of September 15th, 2008, just prior to the market collapse in October. Isn’t that convenient? Keep in mind that the broker is still getting paid the fees and commissions that they generate. Remember, they didn’t lose their job. They just got bought out.

Your TARP money to work

Just the other day, Bank of America just received another $20 billion of TARP money to help with their acquisition of Merrill. Based on rough numbers, it’s estimated that $3.6 billion of this will be paid for the top brokers to stay in their seats. How’s that for our tax dollars at work? The $20 billion is in addition to the $15 billion that Bank of America received last October and the $10 billion that Merrill received on January 1st. There’s more to it, but I’ll leave it at that for now. In a nutshell, our tax dollars are going towards paying brokers to not seek employment from a competitor. In case that last sentence did not register, please reread it, think it over, and let it digest. How did that taste?

How does that make you feel?

With U.S. unemployment flirting with 8%, how does it make you feel knowing that a broker who already makes almost a million dollars a year is going to get paid over a million just to stay with his company? There are many words that come to my mind, but I’ll let you fill in the blank for me. Please share your thoughts.

If you enjoyed this article, please read more from Jeff Rose at his blog, Good Financial Cents, where he writes about financial planning and investing. You can also subscribe to the Good Financial Cents RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

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Should Investors Who Profited From Madoff Scheme Return Their Money?

by Flexo on January 15, 2009

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It may be true that everyone who invested with Bernard Madoff without knowing the extent of his scheme was a victim, but some investors have profited from Madoff’s plan. For example, assume an investor gave $1 million to be invested in Madoff’s fun in its earlier years. A few years later, but still early in the life of the pyramid scheme, the investor’s statement from Madoff might have valued the “investment” at $3 million. The investor decided he needed to cash out, collected the gain of $2 million, and left $1 million in the fund to earn more money.

A this point, there were enough new investors to pay for the occasional withdrawals of earlier investors. The gain of $2 million didn’t come from appreciation of an asset, simply deposits from new investors. Keep in mind I’m using fictional numbers here to illustrate the point. Let’s say that in March 2008, Madoff’s statement to this investor valued his portion of the fund at $5 million. This is still before investors discovered the fund was a pyramid scheme. Now, this $5 million is “lost.” The investor is considered a “victim” of Bernard Madoff, and victims are now filing with the Securities Investor Protection Corp. (SIPC) to get back the money they “lost” (up to $500,000).

Even though he didn’t know it scheme, this investor benefited from the pyramid scheme. He gave Madoff $1,000,000 and received $2,000,000 in return, without an underlying appreciation on an asset. This “victim” is actually came out ahead.

Lawyers are encouraging Madoff’s investors to do some math before filing a claim with SIPC.

“I had a call yesterday from a guy who said, ‘I’ve taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?’” said Steven Caruso, a New York attorney specializing in securities and investment fraud…

Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

The courts can rule that investors who profited in the earlier days of the fund can be required to pay back these “profits.” But most, if not all, of these investors did nothing wrong other than not questioning the underlying investments of the fund and ignoring the secrecy shrouding Madoff’s investing techniques. These investors included public pension funds.

What would you do if you were an early investor who withdrew more than you invested and you believed you still had money invested in Bernard Madoff’s fund? Would you file a claim with the SIPC to receive as much $500,000 if your latest statement indicated you had more? Would you stay under the radar and not advertise to the SIPC that you profited from this mess?

Madoff ‘victims’ do math, realize they profited, David B. Caruso, Newsweek, January 8, 2009

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2009 Economic Outlook from Jeremy Siegel

by Flexo on January 15, 2009

Jeremy Siegel, author of The Future for Investors and Stocks for the Long Run believes that the economic recovery will be faster than expected this year. Siegel has been criticized in the past for being overly optimistic, but he may be right considering stocks don’t have to perform well this year to improve over 2008.

The U.S. economy will recover faster than expected. Unquestionably, the last quarter of 2008 and the first quarter of 2009 will show a significant decline in GDP. But I think the decline in those two quarters, which some are now predicting to be -7% and -5%, respectively, will be milder, and the second quarter might surprise with an uptick. This more optimistic forecast is based on low mortgage rates stabilizing the housing markets and increased lending by banks.

Equity markets will enjoy returns of 20% or higher… U.S. Treasury bond yields will rise over 3% as the economy improves.

A 20% return in the S&P 500 from December 31, 2008 to December 31, 2009 would be a welcome improvement. If this year plays out to be one of recovery in the stock market, then it would make sense to invest more in the beginning of the year to take advantage of as much as the upside as possible. My 401(k) doesn’t work this way; every two weeks, I invest roughly the same amount of money, so I’ll be dollar cost averaging as the stock market increases. For my SEP IRA, and Roth IRA if I qualify or Traditional IRA if I don’t, I’ll likely invest a lump sum in April. I may reserve a portion of that in a money market fund, so I can continue to invest periodically.

Are you planning for a recovery in the stock market this year?

Economic and Market Commentary, by Jeremy Siegel, January 2009

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401(k) Contribution Limits for 2009

by Flexo on January 2, 2009

If you contribute to a 401(k) plan, you may be happy to hear that this year’s contribution maximum is increasing. In 2008, the tax code allowed employees to contribute up to $15,500. Anyone who turned 50 years old in 2008 could also add a catch-up contribution of $5,000 above this limit, bringing the maximum to $20,500 for these employees.

In 2009, the basic maximum for 401(k) contributions is $16,500. Employees 50 and older can add an additional $5,500. These limits take your pre-tax, after-tax, and Roth 401(k) contributions into consideration, so the sum of all your 401(k) contributions in 2008 cannot exceed the limit for your age group.

I fell short of contributing up to the maximum in 2008, but only by about $1,000 or $1,500. That’s mainly due to bad planning and changing my contributions throughout the year. The other danger is to set your contribution rate too high and miss out on the employer matching contributions. My new contribution rate for 2009 is set to bring me to the maximum based on my current salary.

In this economy, though, anything can happen. I may receive a substantial raise or I could be laid off. I can only plan using the knowledge I have right now.

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Traditional and Roth IRA Contribution Limits for 2009

by Flexo on January 1, 2009

The total contribution limit for IRAs is not changing in 2009. Just like 2008, the maximum you can contribute to your IRAs across both Traditional and Roth types is $5,000. Anyone who becomes 50 years old this year has a higher maximum of $6,000. Keep in mind that this maximum is across IRA types, so if you’re 49 years old and have already invested $4,000 in a Roth IRA, you can only add $1,000, whether the amount is invested in a Traditional IRA, Roth IRA, or split between the two.

The phase-out ranges for Roth IRAs change this year. If your modified adjusted gross income (MAGI), a specific calculation on the 1040 tax form, is above $105,000 for single filers or above $166,000 for those who are married filing jointly, your maximum allowable Roth IRA contribution begins to reduce to zero. If your MAGI is above $120,000 (single) or $176,000 (married filing jointly), you do not qualify for Roth IRA contributions.

If you haven’t contributed to your 2008 IRA, don’t panic. You have until your tax filing deadline to fund your 2008 IRA. I haven’t contributed to my 2008 Roth IRA yet. I need to calculate my MAGI first in order to determine my maximum contribution amount.

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When to Begin Investing for a Child’s Education

by Flexo on January 1, 2009