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What Do I Know About Investing?

by Smithee on January 23, 2009

in Investing

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

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

in Investing

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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The Schwab Bank Invest First™ Visa Signature® Credit Card

by Smithee on December 9, 2008

in Credit

The name of the card has clearly too many symbols and arguably too many syllables, but when the daily financial news is consistently dire, I should just be happy to see something that is this innovative and attractive.

It’s a credit card that gives you free money for investing.

Of course, we at Consumerism Commentary always recommend against carrying a balance on a credit card from month to month (incidentally, so does Dave Ramsey, who proves it by not accepting them on his Web site), but if you’re put together enough to literally take advantage of a credit card’s bonus features, check this out:

  • Unlimited 2% “cash” back on purchases
  • the cash is actually a deposit made into a Charles Schwab brokerage account
  • no minimum purchase or annual fee

See more details at MarketWatch.

I’m not a Charles Schwab customer, so I don’t know what kind of investment options you get when you sign up for the card. For example, maybe you’re limited to mutual funds with front-end load fees. Hopefully someone can help out in the comments below.

Anti-disclaimer: This is not an advertisement. I honestly found this when looking at the news and thought it was compelling enough to write about.

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