Good morning!
Anyone want to talk about money and investing--seems that it would fall under employment and careers.
2. CalGal - 2/23/2001 12:38:14 PM
Erin,
One thing that has been in my mind a lot lately is how getting rid of a lot of my debt has really opened up my options as far as employment changes.
As you know, I've toyed with the idea of going back to school, and am still prepping for the GMAT. But I really thought it was a pipe dream--between paying for Spawn's education, needing to keep money coming in for bills and so on, and then even when I was done with the degree I'd have to find a job that made as much money.
Now that I've paid off all of my debt, am investing regularly (including for Spawn's education), I realize that if I keep it together (not a given) I will have a lot more options. I won't have to make as much money if I don't want to, I might be able to keep my school costs and bills paid working only a few months out of the year, and I can do it all while still saving for Spawn's education and making other investments.
I wish I had begun saving even small amounts sooner, because I'd be even further ahead of the game. But while it has been a huge relief to be in this position financially, the employment ramifications have only just started to sink in.
Has anyone else had this sort of crossover between financial needs and employment?
3. Erin R. - 2/23/2001 12:52:31 PM
Cal,
I'm in a place I suppose you were a while back.
I've doubled my salary recently, which has had the curious effect of reminding me of how tenuous anyone's position and ability to work for income really is. This applies to direct employees like me and independent contractors like yourself.
I recently read a book on my trip to Dallas called Rich Dad, Poor Dad. It was all about education yourself on how money works, and raising children with a similar mindset.
It has forced a sea change within me. I'm no longer thinking of saving money and buying mutual funds, but saving money to invest in real estate and stocks. No longer do I simply wish to make more money, but to place my money, over time, in investments that will generate the income needed for an upper middle-class lifestyle.
My income places me in perhaps the top 10 percent of all wage earners (I'm guessing), but I still depend on my employer. I want to, over time, invest and replace my eared income with cash generated from investments.
Sounds crazy to the vast majority of people, I know. Few people will say bluntly that they want money--people are uncomfortable with greed. I don't see why I shouldn't be looking for ways to work less for money, and to get money to work for me.
I'll be back later to post more.
4. Erin R. - 2/23/2001 1:53:53 PM
Anyway, I know where you're coming from WRT saving.
Years ago, I came into $10K in college and blew the whole thing on pizzas, clothes, doodads. If I had invested the money (back in 1991), I would have something to show for it. Oh well!
I spent most of my 20s running up debts. Now, the majority of my consumer debt is paid off; the rest should be paid in about six months. We will then be looking at paying off our car in a couple of years, and are looking for ways to move that schedule up. I have student loans and we have a mortgage.
Once we have our credit cards paid, we'll be looking to start investing. Conventional wisdom is that no one who owes money should invest, but frankly, working for someone else gives me a level of insecurity. You never know what can happen.
My goals: continue to pay off consumer debt, get my toes wet by investing in liquid assets such as stocks, and look to building a nest egg to purchase income-generating real estate.
So I'm looking for good books to buy on investing, and asking people what they do to build their assets.
5. Erin R. - 2/23/2001 2:07:28 PM
Has anyone else had this sort of crossover between financial needs and employment?
Not yet, but we're working on it!
6. PsychProf - 2/23/2001 2:11:45 PM
haha...the crossover has been college-delayed for me. I just cashed in $17,000 in bonds, gave it to a College, and now I have to pay the damn taxes on it. Delayed indeed...
7. seadate - 2/23/2001 2:35:25 PM
Has anyone else had this sort of crossover between financial needs and employment?
Cal (or whoever), what is meant by "crossover".
8. CalGal - 2/23/2001 2:37:17 PM
I've doubled my salary recently, which has had the curious effect of reminding me of how tenuous anyone's position and ability to work for income really is.
I have always felt that my ability to work for the type of income I made was tenuous and in fact I think that contributed to my resistance to think of myself as a member of the upper middle class. But the goal you have--generate income to maintain that lifestyle--has to start by thinking of yourself as in that set. (incidentally, this is true no matter what income you have, or what quintile you belong in).
I think that people's feelings about money and investing has a huge amount to do with the income and "class" of their parents. If you consciously set out to accumulate assets, obviously, it won't matter where you started. But if you're just someone who intended to work and do well in life, the lessons of your family of origin are probably the ones you unconsciously pick up on. I know I did--I make far more money than my parents, but it never occurred to me that I might not have to live solely on what I earned by using that money a bit more wisely.
9. CalGal - 2/23/2001 2:38:05 PM
Conventional wisdom is that no one who owes money should invest, ...
That's my feeling, as well. I could easily have figured out a way to save $100/month even while paying off a huge amount of debt, and I'd be better off now. Happily, I did decide to start saving three years ago, so I am now well started on my investment plans. Clearly the priority should be on getting rid of debt, but I think it is perfectly appropriate to put some small amount into asset accumulation that you can't touch.
A year ago, your goals on income stream would have seemed unreachable to me--although not greedy. As you know, I think the most important thing about employment is income, because income gives you options--including the option of putting together enough money so you don't have to care about income.
But now, I am also working at saving money, putting it to different use. Sure, I have mutual funds, but I am also telling my fp to take some of my money and be more aggressive, since I have some to spare. I have a home in NC that has always just paid its way, but I am refinancing and now it will generate a healthy chunk of change each month--which I plan on investing. Eventually, I will look to selling that property and rolling it over into a more appropriate property, since my NC home was never intended to be a revenue stream. On top of all that, I have my own investing in stocks, which is a smaller percentage of my total at this time.
I find that this has really changed my thinking on my current employment, too. Employment is now an income stream, as well as the way I make my living and the way I pay for me and my son. This makes me feel less trapped, for some reason.
10. CalGal - 2/23/2001 2:45:55 PM
Seadate,
You know how a lot of people have career changes? At the point I thought I might want to consider it, I realized that I had incredibly few options because I have to make a fair amount of money in order to pay off debts, be able to save--or at least have enough income to borror--for Spawn's college, and so on.
Now that I have my debt paid off, I realize that I have a lot more options as far as employment goes--even if not right away--and that I can think of educating myself for new careers and still have enough money to send Spawn where he wants. Assuming no disasters, of course.
That's what I mean by crossover, anyway. I don't think it is an issue for everyone. Some people are perfectly happy with what they are making, others have already thought of these issues from a much younger age and planned for it, and still others have enough options at their income level that they could move about without taking a huge hit.
So it's not necessarily universal. But I do think that our own values about finances and lifestyles plays into our career choices and I was wondering if anyone else had this sort of interaction going.
PP--until recently, I assumed that I would have all my debt paid off just in time to borrow more for Spawn to go to college. The fact that I'm saving money for him is a real kick.
11. CalGal - 2/23/2001 2:48:32 PM
On the subject of income protection:
How many of you have disability insurance? If you are employed, what protection does your job give you?
I strongly recommend you investigate. If you are employed and unprotected, go get a good policy now and keep it up no matter what. I am right now going through the steps to upgrade mine--I have a five year policy based on what I made five years ago. Since I am self-employed, it is much harder to get disability insurance, especially to protect my actual income. The best time to lock down a policy is when you have a job.
12. Erin R. - 2/23/2001 2:49:57 PM
Yes, I understand how you feel: employment is my *primary* income stream, but I sure as hell don't want it to be the *only* income stream!
My parents basically taught me to go to school to find a good job, buy a house, and have a family. I was told nothing of asset accumulation. Because they regarded the house they lived in as their primary asset (in truth, it's a liability), I have really only even begun to understand what an asset is in the past couple of years.
I don't want my son to go through that. I want him to have a level of economic expectations that I didn't have growing up.
How did you find a financial planner?
13. PsychProf - 2/23/2001 2:56:51 PM
Cal...indeed. I have spoken with many parents who disagree, but I always assumed that college payments were my responsibility. I promised my sons a free ride to college...their job was to take advantage of this opportunity. This was our last payment, so Ms PP now gets to go to Latvia for the first time and visit her birthplace.
Spawn sounds like the independent type that will flourish in college...
14. CalGal - 2/23/2001 3:10:17 PM
PP--I have always told Spawn that I would go into debt for him to go to college, but that I would expect him to work for it as well. I still hold that position. He'll never have to limit his college choices because I wouldn't come through with money, though.
Erin,
He was a fresh out of college American Express/IDS cold caller, and I had strep throat and was home sicker than a dog the day he called with a check from my last job's 401K plan that had been sitting on my desk for six months collecting dust. Since that time he has built his own clientele, left Amex, and only takes people above a certain asset base. I didn't have that base when he first left, but he kept me because I was one of his first five clients. I am happy to say that I qualify now.
He is self-employed, but he works through Linsco Private Ledger.
While I'm doing links, I also highly recommend Netstock. I wish I'd known of it earlier.
15. Erin R. - 2/23/2001 3:12:16 PM
I do not have disability insurance, but we are looking into life insurance for me (my husband already has life insurance).
16. CalGal - 2/23/2001 3:14:50 PM
Erin,
Read up on disability insurance. I haven't ever needed it, but I really do think it is the most useful protection I pay for--and in my case, it costs less than car insurance. (however, keep in mind how many tickets I get).
Life insurance is important, particularly now that you are the main breadwinner. I'm sure you have some through work. That's the other thing I'm upgrading at this time--I got my current policy 10 years ago when I made about 25% of what I make now. Term life is usually considered the best thing to do unless you want to use life insurance as an investment tool.
17. Erin R. - 2/23/2001 3:27:19 PM
We found a life insurance policy for me that is less than $200/month for $500,000. We think this is a good place to start, but we imagine that it will be more in the future. My husband has significantly less, but we'll probably double his amount.
18. CalGal - 2/23/2001 3:32:10 PM
We found a life insurance policy for me that is less than $200/month for $500,000.
?????
That can't be term life. I'm older than you, and I'm getting quotes for $45/month, locked in at that price until I'm 65.
19. Erin R. - 2/23/2001 3:36:11 PM
It's universal, I think.
Our insurance saleswoman says that only 11% of people die during the term, so it isn't a good policy in general.
Have you heard differently?
20. CalGal - 2/23/2001 3:45:06 PM
Erin,
Yes. I have heard differently. The real issue is whether or not the whole life policy is the best you can do with that money. It is something you should read up on, because the difference in commission between whole life and term is huge and so you need to be informed on your own, rather than rely on the insurance salesperson. To contrast, my financial planner gets a commission if I buy whole-life but he gets most of his money based on the performance of my entire portfolio. Does he recommend I buy whole life? Hell no, because he knows that he and I will both make more money if I buy term life and then put the rest in other investments that will pay off far better than the policy.
Suppose you could lock in insurance at your age for $35/month. That's about $150/month you could invest with. Look at the payout on the whole life and see if you think you could do better than that.
This is not to say that there aren't times when insurance policies as investment tools aren't the right thing to do. I remember reading an article on the times when it's appropriate and I'm pretty sure that they all involved income protection for the super rich--something that isn't a high priority for you right now, you want to invest.
Don't take my word for it--but don't take your insurance salesperson's word for it, either. Read up on it, is my recommendation, and if you find a list of the reasons when whole life is the right choice, let me know where it is so I can refresh my memory.
21. Erin R. - 2/23/2001 3:54:50 PM
I'll have to look at the quote she prepared us, then do some research this weekend. Maybe even get a quote for comparison.
This is why I need to find a financial planner. The sales person is our next-door neighbor. We've known her since 1997. She seems like a trustworthy person, but I wouldn't just assume that.
And I do want to start investing. My husband is concerned about the possibility of needing life insurance on me, since I am the primary wage earner. If he died, I would only need a certain amount of income to pay for the things he does around the house.
I want to get out of this mindset and start building wealth so that this is not a concern.
22. Erin R. - 2/23/2001 3:57:06 PM
I'm searching life insurance at the Motley Fools...
23. Erin R. - 2/23/2001 4:03:42 PM
There isn't enough information there for me to determine whether this is a good deal for me--I'll have to review the quote when I get home.
For those of you who invest: what are you doing now that you wish you had done five or ten years ago?
24. CalGal - 2/23/2001 4:08:29 PM
Dollar cost averaging stock purchases. I wish to hell I had started that ten years ago. Or even five. At the time I would have had to do the DRIP stuff (something I never heard of until five months ago) instead of Netstock, but that's my big wishlist.
I wish I had realized sooner that paying down debt is more important than a sterling credit history, and that cash flow is the best way to insure that I don't get more debt.
And since you're travelling a lot, I will hand over my other wishlist--that employers would pay for their employee travel costs, rather than making us front the money on credit cards and then using the cash for other things. Please don't misunderstand me, it was my choice (something I did early in my career) but it easily added up to some $8K of debt that I didn't need, and I think that employers rely too much on their employees for that sort of thing. If it's travel for the business, then why should employees even have to use their credit cards?
25. CalGal - 2/23/2001 4:14:11 PM
Erin,
Whole life vs. Term Life
It's off the net, but it describes the basic issues that I've read many times.
26. Erin R. - 2/23/2001 4:37:49 PM
What is dollar cost averaging stock purchases?
27. Erin R. - 2/23/2001 4:45:10 PM
Travel: I have a corporate AmEx--I will charge even concessions at the airport to my card, then submit the expense report right away.
28. CalGal - 2/23/2001 5:10:56 PM
Dollar cost averaging in general is when you purchase the same dollar amount of something with a variable cost every month (or week, I suppose).
If the price goes up, you are buying less--if the price goes down, you are buying more.
This has always been possible with mutual funds, but unless you went directly to companies that offered DRIPs--and not all companies did--you couldn't do it with stocks. Well, you could, but it would cost a fortune. Imagine deciding to buy $25 of IBM every month, when the transaction fee was $10.
So along comes Netstock (also buyandhold) and you can now buy stocks on a periodic basis by a dollar amount--and it only costs $2/transaction. $1 for custodial accounts.
So you can buy a lot of different stocks, whether they offer DRIPs or not, keep track of them on one account statement, and do it fairly cheaply.
29. Slackjaw - 2/23/2001 5:12:45 PM
Dollar cost averaging is the process of buying a certain, fixed dollar amount of a stock at regular intervals. The fixed amount will buy you a lot of the stock when the price is low, and less of the stock when the price is high. The claim is that it's a way to operationalize "buy low, sell high."
I think it's borderline senseless, despite its persistence among financial advice givers.
30. Slackjaw - 2/23/2001 5:14:56 PM
(stocks or any asset I guess)
31. Erin R. - 2/23/2001 5:20:01 PM
Why is it borderline senseless?
Come to think of it, I think I heard Bob Brinker talk about this years ago--I actually haven't listened to him in a while.
32. CalGal - 2/23/2001 5:23:10 PM
Well, dollarcost averaging isn't going to work if the stock continues to drop, obviously. And if you know the stock is going to increase dramatically, then you're better off buying a whole bunch at once.
33. Slackjaw - 2/23/2001 5:29:43 PM
The future price trajectory of any asset is, to a first approximation, random. That's not exactly true, but it's true enough that the exceptions are basically irrelevant for the everyday investor.
So, when the price of a stock is low, it's equally likely to keep dropping as to rise again. (That's also not exactly true because there is an overall upward trend in asset prices.)
Dollar cost averaging is sensible if you reasonably expect the price to rise in the future. But like Cal said, if that's true, there's a better strategy still -- buy the whole pot asap.
In short, dollar cost averaging will certainly implement "buy low," but only low relative to the past. That's irrelevant; the expected future is all that counts.
34. seadate - 2/23/2001 5:29:54 PM
Erin,
Peter Lynch's first book ("One up on Wall Street")provides some good fundamentals. An excellent comprehensive book on investing is "The Power of Money Dynamics" by (Vinita Van Caspel?).
Erin, if you want life insurance, buy term, period. If you want to invest for a return, then do so, but not in the form of additional life insurance premium. Whole life policies are a scam and should be outlawed (seriously).
35. Erin R. - 2/23/2001 5:33:22 PM
Why are they a scam?
36. CalGal - 2/23/2001 5:35:54 PM
Dollar cost averaging is sensible if you reasonably expect the price to rise in the future.
But suppose you expect stock to go up, but over time, and you also don't know that it will go up a huge amount. Suppose the price varies from $20 to $80 and back down, over and over again--and then shoots up to $150 for a while, and then back down.
You never know what high or low is. So why not just shrug, pick stocks that are going to be around for a while, and buy the same amount every month?
37. seadate - 2/23/2001 5:52:48 PM
Erin,
Insurance companies take your principal (let's call that the difference in whole and term life premiums - the amount you could've invested in another vehicle), invest it (your principal!), make a fortune over the years, and then only return a *portion* of the principal when you cash out.
People think, "wonderful, I get a $50,000 check when I cash out" - This amount is less than their principal! ... and they might have millions with compound interest!
38. Erin R. - 2/23/2001 5:57:52 PM
It honestly doesn't bother me that insurance companies invest my money and make a profit on it.
I'll have to look into this further.
39. seadate - 2/23/2001 5:58:28 PM
Erin,
Insurance companies are successful with this scam by confusing insurance and savings/investment.
Consider insurance and savings/investments as separate financial outlays.
I'd be happy to discuss this at greater length later, but I'm getting out of this office for the weekend.
40. seadate - 2/23/2001 6:01:57 PM
Erin,
They are investing the amount *over* what you would pay for term life - they are investing money you could've invested.
I'd like to go through the math with you later, if that's ok.
41. Erin R. - 2/23/2001 6:02:19 PM
I understand the difference between insurance and investments. I'm just trying to understand the best use the the cash.
42. Erin R. - 2/23/2001 6:03:06 PM
Yes, please when you come back on Monday, I'd really like to understand this.
43. seadate - 2/23/2001 6:04:01 PM
Erin,
Right on, the best way to make any financial decision is with pen and paper.
44. seadate - 2/23/2001 6:07:16 PM
You're on. Here's what we need:
1. Whole Life Premium
2. Term Life Premium
3. Duration of the Whole Life policy you're considering
4. Cash value of the Whole Life policy at it's maturity.
Have a nice weekend, Erin.
45. seadate - 2/23/2001 6:09:21 PM
BTW, I don't sell insurance. I just consider whole life policies a great tragedy.
46. Erin R. - 2/23/2001 6:10:54 PM
You too!
47. Erin R. - 2/23/2001 6:11:42 PM
I'll try to remember to bring the policy in with me on Monday.
48. Shannon - 2/23/2001 10:34:35 PM
On another money subject: I just started 529 plans for my kids' college. I started putting money in a mutual fund about a year ago as a college savings plan. I'm still doing that too, but the tax advantages of the 529 are quite nice.
49. Slackjaw - 2/23/2001 11:45:50 PM
But suppose you expect stock to go up, but over time, and you also don't know that it will go up a huge amount.
If these are your beliefs you should take all the money you would have spent on the asset in the future and spend it now. The magnitude of the change doesn't matter.
Suppose the price varies from $20 to $80 and back down, over and over again--and then shoots up to $150 for a while, and then back down.
You mean as in a regular pattern to the price change? There's a much better way to exploit that than dollar cost averaging.
I'm not sure I see exactly what you are postulating about the expected price changes over time. If I am reading these examples right dollar cost averaging is transparently inferior to another approach.
You never know what high or low is. So why not just shrug, pick stocks that are going to be around for a while, and buy the same amount every month?
Generally, it exposes you to more risk than you need to get a certain expected return. Say you go to Vegas with a gambling pot of $X and you're going to play R roulette wheels (in expectation identical). The equivalent of dollar cost averaging is to play A on the first wheel, 2A on the second wheel, and so on to R on the Rth wheel, with (1 + 2 + ... + R)A = X. You get the same expected return with less risk by simply betting X/R on *each* wheel. Dollar cost averaging places too little on the early wheels and too much on the late ones.
50. CalGal - 2/23/2001 11:58:24 PM
No, roulette isn't a good analogy because all stocks aren't the same.
There's no advantage to dollar cost averaging speculative stocks.
51. Slackjaw - 2/24/2001 12:33:54 AM
they don't have to be the same. The point is that stock price changes, which is what you're betting on, are as if drawn by the spin of a wheel. (Try it with the changes in the daily closing price of your favorite stock, it's fun!) Different stocks have different wheels, but that's irrelevant. Dollar cost averaging is about adding $X of GM or whatever given stock to your portfolio at given intervals.
52. Slackjaw - 2/24/2001 12:38:04 AM
I once heard someone an investment call in show irately sputtering to draw out the differences between investing and gambling. Which is strange, because they are exactly the same thing. They may create different sensations in one's head, but they are both about obtaining some amount of money if some uncertain event happens in the future, and losing some money if it doesn't.
In fact the modern theory of finance is built on exactly the same apparatus as the modern theory of decisions in a casino, or any other risky situation.
53. CalGal - 2/24/2001 12:47:44 AM
Oh, okay. I see the roulette analogy now.
54. CalGal - 2/24/2001 12:49:12 AM
I once heard someone an investment call in show irately sputtering to draw out the differences between investing and gambling.
No, that's not what I was objecting to.
55. Slackjaw - 2/24/2001 1:08:57 AM
no, I know that, it just got me thinking about it.
I think his main point was that you can go to school to learn how to pick assets (no you can't, any financial advisor who says otherwise is of course a hack), and you can't use research and information to do better in gambling (sometimes you can, try counting cards in blackjack -- certainly more valuable than poring over past stock price changes).
56. CalGal - 2/24/2001 1:30:15 AM
Slack,
As for dollar cost averaging.
Suppose you bought 12,000 dollars of stock for $90/shr. Someone else bought 1,000 dollars of stock every month for 12 months and, because the price varied, their average price was $86.50/shr. At the end of the year, the stock is at 91/shr.
Is my math that screwy that I'm wrong, and the 12K up front has made more money?
Heck, I can look at my own investments over the last year. If I take my current amount owned and multiply it by the original price I bought in at, the cost of my investments (and my loss) would be much larger. Granted, the market has gone down--but that means that if it stays down, I've lost less--and if it goes up, I've made more (having bought in at a smaller amount).
Obviously, if the stock goes up religiously every month, you're better off having bought it at the lower price. But given how stock prices vary, it seems to me that you are most protected against a down market and positioned to take advantage of variable prices, which is common.
It also seems to me that you are more protected in the event that you need your money in a hurry. If you sink the whole 12K in and then need 5K after 4 months, you may have to sell it at a loss. In the other case, you have $5K available.
57. alistairconnor - 2/24/2001 3:31:55 PM
I have made a major switch over the last year. After 20 years on a salary, I pretty much expected to stay that way till retirement, for lack of entrepreneurial spirit or ability. But then, when in New Zealand (where I worked and my wife didn't), we decided that when we went back to France, she would work and I could look after the kids, garden etc for a couple of months, then look for contract work, ie no pressure to go back to a salary job.
This was a viable option because, although my wife only earns a modest schoolteacher's salary, we have no debts, and we own our house with no mortgage.
As it turned out, she got short changed... a contracting opportunity came up sooner than I had expected, and I never really had time to look after the kids etc...
58. CalGal - 2/24/2001 3:36:07 PM
You were salaried before that? I didn't realize. How do you like contracting thus far? I'm assuming you are working directly for the company, or are you going through a third party?
59. alistairconnor - 2/24/2001 3:53:09 PM
Starting out as an independent, I have very little money going out. After a couple of years, I'll be paying 40% to 50% of my gross income in tax and various compulsory social security contributions. But currently, I'm paying peanuts, based on last year's non-existent income.
After several months of ridiculously big bank balances, I had a serious think about money for the first time in my life. One day, I may want to go back to a salaried job, and I'll have a year or so of catch-up payments to make. So I need to put away a hefty chunk of money to cover this. And if I just stay on being independent, it'll be retirement money.
I am currently buying about $1500 worth of a share fund every month. The fund seems to track the value of the French stock exchange pretty well (since I've started buying, it's been heading steadily down!).
But the point is, I'm not a worrier, and I have no intention to become one. I set aside a fixed amount every month which is automatically invested. I don't want to think about it any more than that; I've got other things to think about, and a lot of them are more enjoyable to me than thinking about money.
And besides, even if I was sure that the stock market was going to rise suddenly, and wanted to buy six months' worth in one hit, where would I get the money?
Borrow it I suppose... and worry.
60. alistairconnor - 2/24/2001 4:06:06 PM
I'm astonished at how much more serene I am as a contractor. I'm a hermit by nature, and I get to sit around at home and work when I feel like it. I don't have to drive to work, I don't have to be polite to colleagues, I get to see my kids at lunchtime, heaps of advantages.
Until three years ago, I worked for the same company for ten years, then everyone left around the same time. As a result, I have plenty of potential contacts for finding work. But in practice, I work almost exclusively for one company, which is a simplification which I'm very happy with.
But now, I have to learn enough accounting to do my books for 2000 and declare my tax. A nightmare.
61. wonkers2 - 2/24/2001 8:04:33 PM
The best long-term investment for working Americans who are eligible is a Roth IRA invested in a Vanguard index fund, in my opinion.
62. Fielding - 2/24/2001 10:49:23 PM
The biggest mistake that people make in managing their financial condition is to look only at one small aspect. Questions about personal finance are invariably inter-related.
63. alistairconnor - 2/25/2001 7:01:28 AM
... um you invest your funds in the Irish Republican Army, Wonk?
What sort of pay-off do you expect, exactly?
64. Erin R. - 2/25/2001 5:41:50 PM
Why is a Roth IRA such a good strategy?
65. wonkers2 - 2/25/2001 10:53:51 PM
Alistair, Ha!
Erin, A Roth IRA compounds tax free from the time the money is invested until you take it out at age 59 1/2 or later. And, best of all, in contrast to a regular IRA, you pay NO TAXES WHEN YOU TAKE THE MONEY OUT. The downside is that you do not get a tax deduction for the original contribution, $2000 or less, from your taxes for the year in which the contribution is made. That is, Roth IRA contributions are made with after-tax money and regular IRA contributions are made with pre-tax dollars. Both compound tax free, but payouts from regular IRAs are taxed as regular income. Roth payouts are completely tax free under current tax laws.
66. Erin R. - 2/26/2001 8:27:47 AM
Morning!
Question: what individual stocks are people buying? I'm hearing a lot of buzz about tech blue chips (Intel, Microsoft, Cisco, Dell) and was wondering if folks here would like to discuss their purchases.
I'm checking in from home. I'll be in the office at around noon and I'll have the insurance quote with me then, so I'll be ready to discuss it then. I hope that others can also take something away from the conversation.
67. seadate - 2/26/2001 9:53:08 AM
Good Morning Erin,
My email is cloudysail@hotmail.com.
You asked about a Roth IRA .... whether this is the best choice for you depends on your specific situation and your goals ... and, of course do the math comparing this tool with a conventional IRA, 401(k), etc.
68. wonkers2 - 2/26/2001 3:48:01 PM
Most people are better off not buying individual stocks. Transaction costs and taxes tend to make them a losing or less attractive proposition than a good low-cost index fund. The stock buying process has been likened to a gambling casino where the odds favor the house. If you are interested enough to spend some time on it and you find stock picking enjoyable, take ten percent of your savings and dabble in the market. Put the rest in something surer, like a low cost Index 500 fund.
Microsoft has been strong for the past couple of months, perhaps on the assumption that the final remedy won't be as onerous as the initial decision by the jackass Penfield.
69. alistairconnor - 2/26/2001 3:55:00 PM
That's my thinking too, Wonk. Imagine that I spent a few hours every week studying the stock market, and making my own investment decisions. I'm lucid enough to believe that my picks would be significantly worse than those of the people managing my fund, in the long term. Plus, since I wouldn't enjoy doing it, that time would come out of my working hours rather than my leisure, i.e. I'd be billing less. Sounds like a very expensive proposition to me.
70. wonkers2 - 2/26/2001 3:57:14 PM
Seadate is, of course, correct that what is best differs from person to person depending on their situation. But Roth IRAs offer great advantages for many people.
Seadate is also correct that term life insurance is the only way to go, if you really need life insurance, that is. You can get the same coverage for a much lower premium and invest the difference in something with a much higher return. Also, shopping around is worth while. Buying from a salesman always costs more. There are life insurance companies that sell direct for lower prices.
71. CalGal - 2/26/2001 4:08:59 PM
I combine the two. I think that mutual funds are a good place to put your money and unless you want to devote your life to the stock market, you want the majority of your money in a good spread of funds--or a straight index fund, which is what I'm going to do next.
But I have found that I have had a lot more interest in how companies work and what decisions they make since I started dollar cost averaging purchases in various stocks. I would never be the sort who watches the market to buy high and sell low--but I find that buying stock to hold in companies that we all expect to be around for a long time has really helped me stay more involved in my investments.
But it's only because of Netstock that I can indulge this. I can buy $25-50 of a bunch of stocks and keep my stock portfolio diversified.
I buy a mixture of stocks, at this time I have tech, financial, services, and retail covered. Then I keep looking for other industries that interest me (or interest someone) and pick new stocks accordingly.
But mutual funds are the majority of my "portfolio", such as it is.
72. wonkers2 - 2/26/2001 4:17:11 PM
That's a good way to do it. I also own several stocks, mostly because I enjoy trying to pick winners. All of them are tech stocks, except for Wells Fargo and Exxon, so last year didn't treat me very well, to put it mildly (Cisco, Intel, Microsoft, Applied Materials, Amazon). Luckily, most of my savings is safely tucked away in a Vanguard IRA. If only I could get it out without paying income tax on the withdrawals. Hence my fondness for Roth IRAs, but alas I don't have any!
73. CalGal - 2/26/2001 4:19:17 PM
Isn't there an income requirement on Roths as well?
74. wonkers2 - 2/26/2001 4:33:38 PM
Yes, it's $100k, at least for converting from a regular IRA to a Roth IRA. Also, you have to pay regular income tax on the full amount of the regular IRA converted. That didn't seem attractive at my age. But, on my advice, my three kids converted their regular IRAs to Roth IRAs while they were still in school or in low tax brackets. That money will compound tax-free for 30-35 years if they don't touch it, and they will be able to withdraw it without paying any taxes at all. I believe they can withdraw it early, without penalty, for certain specified purposes such as a downpayment on a home or for big medical expenses.
75. Erin R. - 2/26/2001 4:45:40 PM
Is $100K the upper limit?
I'd like to play around with about $50/month in the stock market through some vehicle like netstock. I think it would be fun. But we'll also be looking into mutual funds as the basis of our portfolio.
OK, the insurance plan: it's called a flexible premium adjustable life insurance plan that pays a death benefit of $500K if the person dies before the maturity date. I don't understand this part: "The policy will mature on the policy anniversary following the insured's 100th birthday"
???
76. wonkers2 - 2/26/2001 5:17:18 PM
$100k adjusted gross income is the upper limit for CONVERTING a regular IRA to a Roth IRA. I'm not sure what the limit is, if any, for making a $2000 annual ROTH IRA contribution. I'll look it up and let you know.
I am not an expert on life insurance and individual circumstances vary. However, most financial advisers recommend plain old plain vanilla term insurance purchased after shopping around to find the cheapest policy from a reputable company.
I'm not familiar with netstock. I do know people who belong to investment clubs which meet and invest monthly in common stocks. It's a good way to learn about the market and invest modest amounts if you can find a compatible group. Another way to do it would be to put your $50 a month into a good no-load, low cost mutual fund. You could put it into a broad index fund if you want to be cautious or into a sector fund (health care, energy, biotech) if you want to be more venturesome.
77. wonkers2 - 2/26/2001 5:26:55 PM
ROTH IRA eligibility limits:
$95,000 adjusted gross income for single taxpayer
$150,000 adjusted gross income for married couple filing jointly
78. wonkers2 - 2/26/2001 5:30:41 PM
A good source of accurate information on investments, IRAs, etc., is www.vanguard.com/.
79. Erin R. - 2/26/2001 5:32:02 PM
In a few months, once the credit cards have been paid off, I'll have significantly more to invest. Probably something in the neighborhood of $500-$1,000/month, not including quarterly bonuses.
My insurance salesperson says that relatively few people will die during the term with term life insurance.
How exactly does term life insurance work? What is the term?
Looks like a Roth IRA would work for us. What happens when you go over the ceilings? Are you grandfathered in?
80. ScottLoar - 2/26/2001 5:38:46 PM
I cannot understand why reasonable, responsible and evidently intelligent people suddenly become unreasonable, flat-out dumb and irresponsible by distrusting a financial advisor to help assemble and manage a portfolio (great or small) but insist on making their own investments.
Let's assume one may know a little about how to make money by my job, but that same one rarely knows how to invest the money in the stock market. Sure, anyone can "play around" in the market risking whatever amount they feel comfortable with, and that's their choice, but that's not serious investment. At least I don't think so. It's more akin to throwing darts at a carnival to win a kewpie doll.
I suggest most persons link up with a good financial advisor (not a stockbroker!), sock away more money than first blush suggests you can afford, invest for the long-term (15-20 years at least),never-ever get in credit card debt, and become fiscally responsible.
Me? The bulk of my investments are above 10 years old and in mutual funds. I have above 30 investment vehicles. I continue monthly, religiously, to invest a fixed sum, as I have for years.
81. CalGal - 2/26/2001 5:41:51 PM
Scott,
I do have a financial planner. But I do other things as well, primarily because I find it keeps me vested in the outcome and thinking more often of investing (in mutual funds and everything else). Every time I decide to increase my fun investments in stocks, I also call up my financial adviser and tell him it's time to increase my savings.
It's my goal to get to 30 investment vehicles.
82. ScottLoar - 2/26/2001 5:46:13 PM
CalGal, you seem to be doing okay. My point was directed to those who for some reason known only to God and themselves believe they are the best ones to manage their investments. You know, in my whole circle of acquaintances I must confess (but never to them!) not one of'em seems qualified. The dive in the NASDAQ really hit some.
83. Erin R. - 2/26/2001 5:48:45 PM
Who is suggesting that anyone not talk to a financial advisor?
84. seadate - 2/26/2001 5:51:18 PM
Erin, the*term* for Term life insurance is much like car insurance - say monthly, quarterly, or semi-annually.
85. wonkers2 - 2/26/2001 5:52:00 PM
Financial planners are a mixed bag. Some are disguised mutual fund, insurance and variable annuity salesmen. If you're going to pay a financial planner, get a FEE ONLY planner who does not get a commission on anything he recommends or a commission on any trades, as in the case of a stock broker. However, Vanguard offers plenty of free financial planning advice on it's website or through the mail. For a reasonably intelligent person who has the time and is willing to take the time to find out things for himself it's not necessary to pay for a financial planner, especially one who is raking off a commission on the investment vehicles he recommends.
86. Erin R. - 2/26/2001 5:54:18 PM
I don't understand how this is different from other types of insurance a person would pay for periodically.
87. seadate - 2/26/2001 5:55:28 PM
Erin, you're catching on.
88. wonkers2 - 2/26/2001 5:57:05 PM
And even Warren Buffet doesn't have 30 investment vehicles. There is a lot to be said for simplicity. Unless you enjoy picking individual stocks or mutual funds there is no need for 30 "investment vehicles." That just unnecessarily complicates your record keeping and tax preparation without improving your returns.
89. seadate - 2/26/2001 5:57:28 PM
Erin,
I don't intend my previous post to be condecending, but it's really no different.
90. CalGal - 2/26/2001 5:58:37 PM
Scott,
I know a lot of people who are very upset about the NASDAQ dive and have sworn off investing in any way. They sold low. In most cases, this wasn't a good idea. If I were holding Microsoft, AOL, and Cisco, I'd hold onto them before I'd sell them (assuming that they'd already bought high).
Earlier in the thread, Erin was asking about financial planners. But they do vary, and you have to be careful.
91. Erin R. - 2/26/2001 5:58:46 PM
So you're saying there is absolutely no difference between the two?
I found tons of quotes for $1 million at quotesmith.com, for less than $1,000/year. I'm at the fool.com website trying to find more information.
92. ScottLoar - 2/26/2001 5:59:19 PM
Mundane Money Lesson 1
a) Save money. Do it now, no excuses, no procrastination. Do it now. Save more each month than you think you can afford, because you can afford it if you (see b)
b) Organize a budget by looking at income then looking at expenses. Look for waste and you'll find it. Cut back on damned pizzas delivered to the home. Apply discipline to your spending.
c) Look to the future, not short-term gains. I don't care if your uncle made a return on investment of 66% the last three quarters, think about making 12-15% over the next three decades. Yep, time goes faster than you think.
c) Never, never, never accrue debt, especially credit-card debt. Home debt is different; it's tax deductible, but shame on them who buys a home beyond their means.
d) Do invest in the education of your children, especially grades K-8. Yes, be lavish, do whatever it takes to get them into a good school with an established history of academic achievement and moral instruction. I myself, a Methodist, find Catholic schools best for that purpose.
e)Once you're investing do not break the habit. If you need something that bad and so forgoe the custom for some while or, God forbid!, ever even consider taking money out of your investment, then you don't need that something that bad.
f) Your spouse is your partner in this. You need their understanding, their fullest support, their confidence and mutual cooperation.
93. Erin R. - 2/26/2001 6:01:10 PM
Wait--my sales person said that only 11 percent of people die during the "term" with term life insurance. What does this mean, exactly?
94. seadate - 2/26/2001 6:02:45 PM
Erin, could your salesperson answer that question?
95. Erin R. - 2/26/2001 6:05:34 PM
I haven't asked her for clarification yet--but she made this point as a selling point, as if it were very important.
96. ScottLoar - 2/26/2001 6:07:03 PM
Yes, I have more than 30 investment vehicles, Warren Buffet be damned.
97. seadate - 2/26/2001 6:09:24 PM
Erin,
You sure appear to have a lot going on. I expect you'll make well informed decisions in these matters you're confronting because you've got some snap and aren't afraid to ask the "dumb" questions in pursuit of the facts.
98. CalGal - 2/26/2001 6:09:53 PM
Erin,
The reason she is making that point is because the policy she wants to sell you will give you money back for the term whether you die or not. This implies that you are "wasting" your money on term life, since you only get payback 11% of the time.
But the real issue is what you do with the cost differential.
In other words, suppose the term life policy is $400/year and the whole life is $4000/year. In both cases, if you die you get $500,000. If you don't die, you get nothing from the term life. If you don't die, you get [number] from the whole life anyway.
What do you do with the other $3600? If you invest it and you can get far more than [number] from the whole life (and you can) then nothing else really matters. What Seadate (and most people) are saying is that you can almost put the money in your mattress and do better than [number].
99. wonkers2 - 2/26/2001 6:18:19 PM
Scott's Mundane Money Lesson #1 is right on. Especially the part about credit card debt. Credit cards are great IF you pay them off in full at the end of each month.
So, step one for investors is to pay off any credit card debt in full.
Step two, in my opinion, is to max out your contribution to your 401k plan, especially if
your employer makes a matching contribution. This enables you to invest at a discount. The maximun contribution for 2001 is $10,500, if my memory serves me.
Step 3, put your contribution to the 401k in an index 500 fund or a good growth stock fund. Don't put it in bonds. You want it to grow and compound for the next 10-20-30 years.
Step 4, don't put any more than you have to into stock of the company you are working for. This is putting too many eggs in one basket (your job and your life savings and very possibly the value of your house which could go down in value if your employer goes under, depending on the size of your employer and the community where you are located.)
Step 4, then look at other possible investments such as no load growth mutual funds or individual stocks if you like to gamble.
100. wonkers2 - 2/26/2001 6:23:32 PM
And if your employer doesn't offer a 401k do a Roth or regular IRA every year, putting the $2000 in a no load growth mutual fund.
101. Erin R. - 2/26/2001 6:23:36 PM
You know, that's another good point.
I joined my company when the stock was at $15. I've been here three months and the highest it's been is $24, after the quarterly earnings call.
I'm locked in to buy 500 shares (I think) at $15 in nine months, my one-year anniversary. Assuming that I plan to buy and sell right away, how do I determine at what price to do this?
102. CalGal - 2/26/2001 6:31:43 PM
Is that your option? I believe that if you get the options and buy/sell immediately, you have to pay it as a short-term capital gain. If you can buy the options in advance and hold onto them for over a year, then the purchase and sale isn't treated as such.
That is an accountant question, though.
103. Erin R. - 2/26/2001 6:33:10 PM
I'll look at the paperwork they sent me and touch base tomorrow.
Hopefully, this advice will help someone other than me!
104. wonkers2 - 2/26/2001 6:37:34 PM
There is no magic answer to that question. It depends on what the overall economy and stock market do and how successful your company is. One thing you might do is get on the Web and see what analysts are saying about your company--Yahoo or other services. Or go to your local library and look up your company in Standard and Poors and whatever other investment services are available. Then use whatever knowledge you have about the profit outlook for you company. Then make up your mind.
In my career of 30 some years with a big, blue chip company with a stock option plan and a stock purchase plan, I followed a simple rule nearly every year: I sold all the company stock that I was eligible to sell and invested the money in an index 500 fund. This worked out pretty well. I had to hold the company's stock for 3 years as I recall. At the end of the three years I didn't try to predict whether the stock was going up or down. I just sold it on that date. Forecasting the price of an individual stock is very difficult. I had a good friend in the company who kept all his stock until one day during the middle of a recession when he was in his late fifties his job was reorganized out of existence and he was asked to retire. Due to the recession the price of the company's stock was less than half of what it had been a year earlier, he had trouble selling his house he had bought a couple of years earlier at a peak in the market and took a big loss on it, and of course his early retirement pension cut his income in half. He still had a couple of kids in college. Sad story.
105. CalGal - 2/26/2001 6:48:15 PM
While I completely agree with Wonkers post about priorities, it is worth mentioning this: of the five people I know who became millionaires because of company stock, three of them worked at Charles Schwab. Schwab's stock has been a phenomenal performer, and not much discussed as such.
So you never know what is going to happen with stock. That's the bitch of it all.
Another true Schwab stock story: When I opened my retirement fund after leaving Schwab, I had 1227 shares. My retirement planner (not the same guy I have now) recommended I sell all the stock. I was reluctant, because it had done reasonably well. But he pointed out that it was 50% of my portfolio and it was ill-advised to keep half my account in one stock.
I figured he was right, so I said he could sell 1200 shares. He said that it was best if he sold all. I said, Naw. Keep the 27.
At the time I sold the stock, those 27 shares were worth about $600 and were 1% of my overall portfolio. Those 27 shares are now 783 shares and represent anywhere from 8-15% of my portfolio, depending on the price. My financial planner keeps on telling me I should sell. I keep reminding him that if I had refused to let the other guy sell my shares, I'd be a millionaire.
106. CalGal - 2/26/2001 6:49:22 PM
Ack. Not priorities, company stock. Where did priorities come from? Beats me.
107. CalGal - 2/26/2001 6:57:11 PM
Scott,
What sort of investment vehicles do you have? I am investing in three mutual funds in my non-retirement investing plan thus far, although I have a host of others in my retirement portfolio.
I am wondering if there is ever a short term reason to put money in a bond fund at my age. It seems to me that it would be a good way to offset inevitable losses in other areas and that you could then sell off when it hits something reasonably high.
108. wonkers2 - 2/26/2001 7:00:32 PM
Cal, You beat me to it. I came back to say that my attitude toward owning the company stock reflected the fact that I was working for a large, mature and shrinking company. Back then I heard tales of Sears Roebuck secretaries that became millionaries in Sears stock and I knew a couple of Xerox millionaires in the sixties and seventies. Today, if I were working for Cisco or Microsoft or Schwab might well make sense to hold on to a chunk of the company stock. But even with the best of them you have to be prepared for some uncomfortable roller coaster rides and even total disaster as in the case of the dotcoms dropping like flies. Merck employees who held onto their stock over the years have done very well as have those at Pfizer and Wells Fargo, another great Bay area company, formerly Bay area I guess. So, even at a growth company it is prudent to diversify, at least partially, as the opportunity presents itself.
109. ScottLoar - 2/26/2001 7:19:09 PM
Wonkers2, you ain't dumb. Sound advice, all of it. And, you know a lot more about investments than I do.
110. wonkers2 - 2/26/2001 7:58:47 PM
Thanks for the compliment. Not sure that's true. On the individual stocks that I own I continually feel that I am at the end of the food chain--i.e. the last to find out both the good news and the bad news. So, I sell before the good news makes the stock go up and after the bad news makes it go down!
111. Erin R. - 2/26/2001 8:36:43 PM
OK, the fools say only deviate from term life insurance if you are old and infirm, and you can't find any other way to save money.
But my husband has non-term insurance. We'll have to look into that.
Next, I'm looking at my company 401(k) and stock options plans.
112. CalGal - 2/27/2001 11:45:47 AM
Erin--that link doesn't work. If you post the book name I'll look it up.
Money Magazine website. I bought the March 2001 issue on impulse and it was most useful for taxes. It also discussed retirement and insurance issues, Erin. I don't know how much of it is available on the website, so if you see the issue (Warren Buffet is in the right corner of the cover) you might want to pick it up.
113. Erin R. - 2/27/2001 11:54:50 AM
The Wealthy Barber, by David Chilton.
Has anyone read The Richest Man in Babylon. I'm going to order it from Amazon.
114. Erin R. - 2/27/2001 12:00:18 PM
I wish I could get my husband to read books on financial planning--they all say to pay yourself first. He's very conservative, and believes in paying bills first. Of course, we're not very motivated right now to save, if we pay bills first, because what's left over doesn't seem like much.
I'm thinking of using most of my quarterly bonus checks for my 401k plan. Since it's technically gravy, and we don't count it in our budget, I don't think we'll miss it.
115. CalGal - 2/27/2001 12:02:12 PM
The Wealthy Barber
The Richest Man in Babylon
Another one I've heard a lot about: The Millionaire Next Door
Wonkers, you mentioned wanting to start an investment and money thread. Are you interested in hosting?
116. Erin R. - 2/27/2001 12:10:28 PM
I would love to see an investment and money thread. I wouldn't mind hosting, if Wonkers doesn't want to.
Although I don't know near as much as Wonkers does!
117. CaroBeth - 2/27/2001 3:15:00 PM
ScottLoar, a question. Yesterday, when you posted your Mundane Money Lesson (which I have since printed out, to remind myself) you stated that one should never accrue debt. In general, I agree with this, but I have read that if you are applying for a loan, they like to see that you have some debt and that for that reason you should always keep some small amount of credit card debt. I am currently not a homeowner, but would like to become one and if maintaining some credit card debt helps me get a home loan, then I would do that. But if not, then I would prefer not to have the credit card debt. Opinion? Comments?
118. ScottLoar - 2/27/2001 3:27:46 PM
CaroBeth, your point is very well taken indeed but slightly off the mark.
When I first returned from overseas to live in the US as a tax-paying adult consumer I had no debt, nor employment record, nor credit history and so no credit card. It seems you do need some small debt that requires constant payment - a mortgage, or a major purchase like a car bought on an installment plan - which proves you have a history of paying debt. But, do not confuse this with credit card debt! Credit card interest is high in the extreme, sometimes above 18%, much, much higher than the interest on a home or car loan. Moreover, I can't prove so, but my instinct tells me money owed on a home or car seems more "responsible" than that for credit cards. Why not buy major appliances on the installment plan to help you establish a credit history? I don' want to appear overly severe, but I know of no one who can afford credit card debt; it is simply the most foolish use of one's money.
Anyone else with an opinion on this?
And on a separate note, when using a credit card make sure you get a bonus for using their money. My favorite is airline mileage for every dollar I spend on the credit card.
119. ScottLoar - 2/27/2001 3:28:55 PM
CaroBeth, I advise you to copy down Wonkers2 advice which will prove to be of greater use as you get on several years later.
120. ScottLoar - 2/27/2001 3:32:14 PM
CaroBeth, the only debt I now have is my home mortgage, which I could pay off with a single stroke but dare not for I'd lose the tax break. My point being, a small debt conscientiously paid on time over a certain period is needed only to establish a credit history.
121. Erin R. - 2/27/2001 3:33:21 PM
I honestly don't think credit card debt is the end of the world. This may be easy to say now that my husband and I will be CC-debt free within a few months.
From my perspective, depending on your individual situation and preferences, it can even make sense to even invest when you have consumer debt.
CaroBeth, do you not have student loans and the like? Why not get a copy of your credit report and see what's on it.
122. ScottLoar - 2/27/2001 3:38:04 PM
Well, Erin R., you do have the choice of prolonging your credit card debt, yes? Surely the interest you pay is better spent elsewhere?
123. CalGal - 2/27/2001 3:39:19 PM
Scott, Wonkers, I suggested an investment thread and either one of you would make a great host (see Suggestions). I'd be happy to move these posts over, too, if such a thread occurs.
About credit card debt: those who don't have it, it is wise not to get it. Those who have it, I have some unorthodox recommendations to consider for paying it off. One of the problems I have with those who say "Just pay it off" is that those people quite often never had the debt to start with.
The single biggest problem I had that caused me to acquire debt was cash flow. If this is also a problem you have--as well as a lot of debt--then I recommend prioritizing cash flow above timely payments when necessary. I found that sacrificing my credit history in the short term (for payments that were up to 60 days late) did a great deal to eliminate my need for credit.
I think a lot of people who have debt problems are also disorganized. Many recommendations for paying down debt (and doing it before anything else) are made by people who are extremely organized. It is not a happy mixture.
124. Erin R. - 2/27/2001 3:47:53 PM
CalGal's last paragraph is right on, as far as I'm concerned. If you have to wait until precisely the right moment and circumstances to invest, you might never do it. I haven't.
In my case, I really don't have that much consumer debt. I need to get into the habit of finding good investments, and investing on a regular basis. At this point, that is worth much more to me than the few hundred dollars I would save by paying everything off and waiting even longer to start investing.
The Wealthy Barber suggests that even with poor day-to-day financial management, a majority of people who pay themselves first will come out ahead--way ahead.
125. CaroBeth - 2/27/2001 3:49:11 PM
I'm not worried about credit history. My husband and I each have separate credit cards, which we have held for years and which we are currently paying down. We've had car loans and student loans. I should get a copy of my credit report, however, to make sure everything is clean.
My point was, that I thought I remembered reading somewhere (Motley Fool, TT?) that some loan organizations liked to specifically see credit card debt on someone's application. That somehow a car loan or student loan was not sufficient evidence of credit worthiness. Now, perhaps this is all bullshit. I don't know. That was my question.
(Apologies for sending this off-topic. We should perhaps start an investing thread.)
126. Erin R. - 2/27/2001 3:54:05 PM
Find a mortgage broker (or two), sit down for a consultation, and get their opinions.
I second the idea of an investment and money thread (again).
127. CalGal - 2/27/2001 3:54:36 PM
Caro--no worries. We'll get back to employment soon enough. I like the idea of an investment thread, so if either Loar or Wonkers is interested (or if Erin wants to take on two threads) we can move all this over. I originally thought it was on topic because there is a clear intersection between employment options and money requirements. How do we all work towards a point when our employment isn't our only income stream?
As for your question: I think you could meet both Scott and the loan organizations requirements by having a credit card that you use periodically and pay off immediately.
128. CaroBeth - 2/27/2001 4:05:33 PM
Cal, that is an interesting question you've put out there. It struck me the first time you posted it. I had never considered the possibility of employment not being the only income stream before retirement or hitting the Lotto. I guess I just assumed that until I retired, all income would go towards building a retirement fund or debt servicing. I did not envision enough income from investments that they could be used for living expenses before retirement. Most certainly something to think about.
129. CalGal - 2/27/2001 4:06:31 PM
Erin brings up a point that I don't think a lot of financial writers touch on enough: debt and investing are two entirely different things. Also, discipline in paying down debt is arguably more important than getting rid of it at all costs.
For example, I had $13,000 worth of debt a year ago. (down from a much higher number). I also have well more than that in a high-yield savings account. A lot of financial advisers would have told me to take the savings and pay off the debt. But the savings was there as my 3-5 month buffer against unemployment. If I paid off my debt right away, I wouldn't have had as much protection in a down cycle. Sure, I could have used credit cards in that case--but isn't that what I'm trying to avoid?
More importantly, though, I didn't get into that debt all at once. I got into it month by month, year by year. Having the discipline to pay it down, and feeling that satisfaction, was well worth whatever it cost me in interest. More importantly, learning how to pay down all that debt, learning how to keep my cash flow a priority at all times, has been a much more important lesson.
At the same time I started paying down this debt aggressively (some four years ago) I also began tentatively investing in mutual funds. I find committing to savings to be far more stressful than committing to paying down debt. I can't even think why, but there you have it.
So what might make sense financially, to hyper-organized financial planners, may not make sense behaviorally to less organized or less disciplined people--whether they have money or not. I find that learning the behavior is far more important and well worth the price paid in higher interest.
130. Erin R. - 2/27/2001 4:20:38 PM
The idea of paying yourself first frightens me a bit. It makes excellent sense, but it freaks me out to think of actually *keeping* some of my money rather than sending off every spare cent to the CC companies.
131. Laura C - 2/27/2001 4:24:44 PM
And the MWT gang says you ignore the emotional/psychological side. Hmmph.
Naive query:
Say I can devote a monthly $100 to investing, over and above my IRA. I don't want to buy individual stocks and probably can't due to a conflict at DH's job.
Moreover, I believe that the markets are headed for a prolonged slide - not just individual stocks, but the overall index will decline in the next year.
Why is investing in an index fund superior to, say, putting the money in a CD for 12 months, and reassessing then? What am I missing?
132. Laura C - 2/27/2001 4:25:45 PM
The first paragraph to CalGal, of course.
133. CalGal - 2/27/2001 4:27:52 PM
I know. Especially the 10% part. I am saving what seems to me a huge amount now, but am still not quite at 10% (a goal I intend to reach by yearend). But at this point it isn't reluctance to spend, but a desire to think more about where and how I want to spend it.
Of course, as Alistair points out some time ago, most mutual funds are going to pay off sufficiently in the end.
Hell, if all I did was take the money and put it in my mattress it would be better than spending it--so the value of the investment hasn't been my top priority up to now.
But I'm trying to change that by thinking more about it, reading up a bit.
134. Erin R. - 2/27/2001 4:29:46 PM
It seems to me that it would be better to let the market hit bottom, but who's to say what bottom is? I'm faced with a similar situation. If I do max out my 401k plan, that still leaves me with some monthly cash left over, some of which I'd like to put in mutual fund(s).
135. CalGal - 2/27/2001 4:31:38 PM
Laura,
I'm not sure it is worse. It's just that I would find trying to time the market to be wearying, you know? How do you know when it's time to take the money out of the CD and start buying index funds again--when the prices are still low enough to benefit from the rise?
The one thing that seems likely about an index fund--it's going to turn around and go back up, too. So if you buy into them at the lower prices, your return is much better over time, I think.
If you need the money quickly, though, and don't want to risk it then it seems to me that a CD makes a lot more sense.
136. Laura C - 2/27/2001 4:33:28 PM
Exactly. We are still paying down student loans, but I should be investing (outside the 401k) on top of that. But I don't want to buy at the top of the market. I'd rather get a small but guaranteed return until things stabilize a bit.
137. CalGal - 2/27/2001 4:34:11 PM
I am having a similar quandary about a bond fund. It seems to me that right about now, bond funds would do well. All my advisers say, "Ack! No! Put your money in other investments that pay back more over time!!!"
But if I'm willing to sell my investment in a year or two, wouldn't it make sense to put money in a bond fund, which probably has a guaranteed ror of 6%? It will offset the depressing downturn that some of my other investments will make in the short run--even while I'm taking advantage of all the cheap buys.
138. CaroBeth - 2/27/2001 4:34:45 PM
I read an interesting article in the NYT recently about behavioral economics and how this is a new field. That for years economists have assumed that individuals, faced with monetary decisions, will do the "rational" thing, rather than the emotional one. Only recently have they begun to examine how people's emotional responses effect their behavior with regards to investing, planning, etc.
Money is so obviously an emotional issue with many people. I find it amazing that these things were not taken into account before.
139. CalGal - 2/27/2001 4:35:52 PM
Caro,
You should read up on the Slow Thread. Slack is our game theorist God (just got hired at University of Chicago) and has much to say about behavioral economics. There is a recent discussion about it--something to do with buffets.
140. Laura C - 2/27/2001 4:38:27 PM
Yes, that's it - my gut tells me that while the economy will continue to grow and blossom over time, consumer confidence is shaken enough, and enough people are either being laid off or fearing they will be, that 2001 will be a bumpy year.
But then I am almost pathologically risk-averse, which is a problem.
I should really run some numbers, figure out how much we need in the short-to-medium term (to move from the apartment into a house, say 2-3 years from now) and how much I can play with for the long term.
141. Erin R. - 2/27/2001 4:40:46 PM
Another way to look at it is that $100 isn't really that much money. I mean, it's not nothing, but I personally could easily waste that much money each month. In fact, I probably do.
142. CaroBeth - 2/27/2001 4:43:06 PM
My husband has his MBA from U of Chicago and one of my good college friends got her Ph.D. in either math or economics there. I have great respect for that place.
143. CalGal - 2/27/2001 4:43:24 PM
That's what finally got me started--my first amount was $125/month. I figure hell, I spend more than that a month on lunch.
Scott's post about how much you have to save really hits home for me. I'm saving a huge amount and am still not taking a hit in the way that I live.
The only major savings decision I have made recently is that I'm not going to buy a new car. What with car payments and my already ungodly insurance, it has occurred to even me, the lover of all things new in cars, that I can do without for awhile.
144. Erin R. - 2/27/2001 4:46:27 PM
I would love it if we could drive our present car into the ground. We financed it over five years. I think we still have two years to go.
I will make a lesson of myself: buy a used car, never buy new.
145. wonkers2 - 2/27/2001 5:38:13 PM
Mortgage and credit card balances aren't comparable--7% vs 12-18%, tax deductible vs. not tax deductible. So, the after-tax cost of a home mortgage may be 5% compared to 12-18% for a credit card balance. High credit card balances don't help your credit rating. They reduce the amount of a mortgage you can qualify for based on your income. What can help is having a credit card and paying the balance off on time every month. Having a small balance, say, under $5000, and making regular payments is okay. Anything more is a definite minus.
The problem with credit card balances is that the interest rate on them is higher than the 7-10% average long run return you can expect to get in the stock market. Therefore, the math says that carrying credit card balances and, instead of paying them off, putting the money in stocks or mutual funds is a losing proposition. If the balance isn't too big, it may make sense to go ahead with investments while whittling away at your credit card balance. [I'm not suggesting that credit card balances not be used as a matter of convenience for vacations, etc, without disrupting regular savings and investment.]
An exception to paying off credit card balances before investing, would be where your employer offers an attractive 401k plan with a generous matching contribution. Then your likely return in the long run might well be higher than the cost of carrying the credit card debt. Again, income tax savings is an important factor--contributions to 401k plans reduce your taxable income dollar for dollar up to the maximum of 10% or $10.5k. The tax savings, together with the employer match, make a good 401k plan a very attractive investment, probably the most attractive investment around. The next best is a wisely invested IRA.
Cal, I don't have any desire to be a host. I'm content to shoot my arrows from the sideline. I will promise to contribute to the dialog.
146. CalGal - 2/27/2001 5:42:44 PM
What can help is having a credit card and paying the balance off on time every month. Having a small balance, say, under $5000, and making regular payments is okay. Anything more is a definite minus.
This is pretty much what I was saying to Caro, and I agree.
One thing, though, to those who say that all of your money must go to debt reduction: sometimes the market can do better than your credit card interest rates. So while I think it's best that most of the money go to debt reduction, I see nothing wrong with some small sum going monthly into mutual funds at the same time. I wish I had started saving even earlier, given how good the market has been.
147. Slackjaw - 2/28/2001 1:42:15 AM
Cal Message # 1420, re dollar cost averaging
It's not that you can't construct a trajectory of asset prices that makes dollar cost averaging work out better, after the fact, than another given strategy. It's that that is not relevant for decision purposes. The question is what you expect before the fact, and how dollar cost averaging stacks up in that way. And I think you'd need to postulate a very special and particular expected trajectory to make it look decent.
It also seems to me that you are more protected in the event that you need your money in a hurry. If you sink the whole 12K in and then need 5K after 4 months, you may have to sell it at a loss. In the other case, you have $5K available.
Liquidity constraints can definitely be an issue. But then, suppose you expect daily asset price changes to be as if drawn from a spin of a roulette wheel (and more specifically a random walk). Say you have $X in your gambling pot and would have used DCA over R periods. Compare dollar cost averaging to putting $X/R on the stock in the first period, and every subsequent period, keeping the level invested on that stock at $X/R.
Now you have some tax issues to worry about if you cash out your gains in any period, granted, but modulo that, the liquidity issue is obviated with this alternative strategy (a one commonly discussed in basic finance I think) *and* you have more favorable risk exposure for the given expected return of DCA. (In fact that strategy is exactly like the one I mentioned for the roulette wheels in Message # 1413.)
148. CalGal - 2/28/2001 1:49:39 AM
It's that that is not relevant for decision purposes.
????
The question is what you expect before the fact, and how dollar cost averaging stacks up in that way.
But what if what I expect is in line with how dollar cost averaging stacks up?
149. Slackjaw - 2/28/2001 1:56:14 AM
????
????
But what if what I expect is in line with how dollar cost averaging stacks up?
See And I think you'd need to postulate a very special and particular expected trajectory to make it look decent.
In particular, it couldn't be a random walk. That you have to adhere religiously to that belief. But it is probably your best bet.
150. CalGal - 2/28/2001 2:07:15 AM
And I think you'd need to postulate a very special and particular expected trajectory to make it look decent.
I am not seeing your point, and I hate it when that happens.
I have x number of stocks, and I don't know how any of them will do--although I expect all of the companies to be around for the duration. I have x number of dollars I want to spend every month, and I want to buy more stock when it's cheap and less stock when it's expensive.
What is unusual about that expected trajectory?
151. Slackjaw - 2/28/2001 2:17:54 AM
There is not an expected trajectory of the stock price implied by that. How do you think the stock price will move? Or is that what you mean by "don't know how they'll do"? This can't be evaluated without a specification of exactly how you don't know.
152. Slackjaw - 2/28/2001 2:19:46 AM
For example, imagine a bell curve of tomorrow's price, centered at today's price. Tomorrow's price could be anywhere on the curve. It's more likely to be around places near the hump.
153. Slackjaw - 2/28/2001 2:21:11 AM
...in that case, you don't know what they'll do, but you don't know in a different way than if tomorrow's price lies on a two-humped curve with humps on either side of today's price (aka a bimodal distribution).
154. ScottLoar - 2/28/2001 8:54:27 AM
No, I can't have my name affixed to any work not of my making or control, please. I am simply absent far too often, and my narrow knowledge of investments is limited and personal.
155. CalGal - 2/28/2001 3:15:13 PM
Whooops--154 was an accident. Okay, Erin, take it away.
156. seadate - 2/28/2001 3:31:32 PM
Erin,
I finally sent a response.
157. Erin R. - 2/28/2001 4:30:21 PM
We're home, we're home!
First order of business, seems to me, is setting up relevant links.
Cal, can you help us set up links? And does anyone have any really good websites they'd like to link?
158. wonkers2 - 2/28/2001 4:57:16 PM
Here are two good ones:
www.vanguard.com--for information on IRAs and Vanguard No Load Mutual funds and general information on investing for the long run.
www.personalfund.com--for analyzing the cost of mutual funds you own or are considering.
159. Indiana Jones - 2/28/2001 5:00:50 PM
160. Fielding - 2/28/2001 5:06:29 PM
Nice thread!
161. CalGal - 2/28/2001 6:02:41 PM
I have a Vanguard Index fund set up for Spawn; it is a very good site.
Second the mention of The Motley Fool, which I love--I also use it to track my own investments.
Netstock is a great place to buy stocks in small amounts monthly, no matter what Slackjaw says about the practice. (g) Transaction fee is $2 ($1 for custodial accounts), but they charge $20 to sell--so make sure you only put investments in there for the long haul.
Erin--Did you see my instructions for setting up links in Suggestions? I can't do that for you, but it's pretty easy. Email if you have questions, or post in Suggestions.
162. wonkers2 - 2/28/2001 10:14:26 PM
Cal, Here's an idea for your son perhaps when he's older and gets a summer or part time job. Let him keep the money he earns as an incentive in a savings or investment account but transfer an amount equal to what he earned to an IRA account, Roth, preferably. Report his taxable earnings to the IRS so that he can get a refund for taxes withheld. Continue contributing up to $2000 of his earnings to an IRA each year that he has earnings from a summer or part time job. By the time he gets out of school he will have a good start on a retirement nest egg that will continut to compound, tax free, until he retires or reaches age 70 1/2. [This really works. I started small IRAs for my kids with their baby sitting and paper route money when they were in junior high school. Later they got higher paying summer jobs which permitted $2k IRA contributions in most years. Now the three of them, all under 30, have IRAs ranging from $25-60k. And they all converted from regular to Roth IRAs, before they got into high tax brackets. Their IRAs are invested in Vanguard Index funds where the lower cost will add significantly to the return over 35-40 years or so.]
163. joezan - 2/28/2001 11:32:44 PM
Here is a pretty nifty Quicken tax calculator for figuring your taxes, individually, under the Bush tax proposal. Just for the heck of it, try a few differnt brackets/situations. It's quick (immediate).
164. Indiana Jones - 2/28/2001 11:48:15 PM
I think a good stock to look into right now is Intel (INTC).
165. CalGal - 3/1/2001 12:06:41 AM
It seems to me that chips are going to become even more of a commodity. I'm still debating about Intel. I'm thinking of adding Philip Morris to my list of purchases, along with the half of HP that isn't any more. (I can never remember its name).
Don't tell anyone in my state about the cigarette company, though.
166. CalGal - 3/1/2001 12:09:18 AM
Wonkers,
Spawn is still a bit young to work--but I've told him that he will be putting money into an IRA.
167. Erin R. - 3/1/2001 11:34:44 AM
I'll try to set up the links later today. If not, it'll have to wait until tomorrow--I have *six* meetings today.
Have to protect that income stream!
168. CalGal - 3/1/2001 2:26:32 PM
Question: if you are self-employed, is the cost of a financial planner to manage your retirement fund tax deductible?
169. Indiana Jones - 3/1/2001 2:39:04 PM
Cal: My experience with chip stocks is that they're very cyclical. If you buy a good company at the bottom of the cycle, hang on and are patient, you'll do well.
I've made good returns on Micron Technology several times doing that. It's probably been my biggest winner.
Intel is an even better company, and it has taken a beating. (Though just about anything can happen to anybody in this market now. The only thing I think is fairly certain about it is no one ought to expect anything like we were so fortunate to see for two or three years there, especially in techs.)
There may be more downside in the NASDAQ because when people are emotional they do unreasonable things. But I think it's been wrung out pretty well and if you have the stomach for it, you can buy good companies now and expect to profit. If not sooner, within five years or so.
Unfortunately most investors have been so spoiled they've lost the discipline for looking at that large of timeframe.
170. CalGal - 3/1/2001 2:41:19 PM
I'm the sort who will probably forget to sell altogether. If it requires organization, ferget it.
I agree about chip companies in general. My point about Intel was simpler--a good deal of its value is due to its dominance. I'm not sure that it's going to dominate as completely.
171. PsychProf - 3/1/2001 2:44:08 PM
172. Indiana Jones - 3/1/2001 2:44:15 PM
Question: if you are self-employed, is the cost of a financial planner to manage your retirement fund tax deductible?
I'm fairly certain you can deduct it against taxable income, meaning if the investment income is taxable now, yes (against that income). If it's tax-deferred, you could deduct it when you do pay taxes on the income.
Also, IRA administration fees are tax deductible.
But IRS advice is something I wouldn't trust to discussion boards.
173. PsychProf - 3/1/2001 2:46:19 PM
I invested with Intel at 41...so I will not advise on this page...
174. Indiana Jones - 3/1/2001 2:47:08 PM
If you still have it, PP, just hang on.
175. CalGal - 3/1/2001 2:50:31 PM
Also, IRA administration fees are tax deductible.
This is what I was looking for. And actually, since I also have taxable capgain income, I suppose I can also deduct a small percentage of the admin fees.
I know what you mean about IRS data--on the other hand, it has been established time and again that no matter how hard you try to find the right answer, you will have to pay if the answer is wrong. And it doesn't matter if the people giving you the wrong answer work for the IRS--so what difference does it make where you get the answer from? If it's wrong, you're gonna pay.
176. Indiana Jones - 3/1/2001 2:57:45 PM
Cal: That was just me covering my own ass.
177. grannypatsy - 3/1/2001 3:15:37 PM
I uasually wath the tape while I have my coffee; lately I just have my coffee. There is something moderately depressing about watching a string of red go by.
178. CalGal - 3/1/2001 3:33:41 PM
I try to comfort myself by remembering I'm getting some really good buys. It helps a bit.
179. Fielding - 3/1/2001 5:00:31 PM
If you still have it, PP, just hang on.
Actually, if you still have it in an after-tax account, you should sell it, realizing a nice tax deduction, and buy an equal amount for your IRA. You won't have to pay taxes on the IRA gains until you withdraw them, so you've acquired a nice tax advantage for nothing.
I recommend doing this with any stock that has lost a large amount of value in an after-tax account.
180. Indiana Jones - 3/1/2001 5:06:16 PM
Fielding: Unless there's a special exception about IRAs that I'm not aware of, you have to wait 30 days before buying a stock again as you describe (if you want the tax deduction). But if you think INTC will still be about where it is now 30 days from now, yours is a reasonable suggestion.
181. Fielding - 3/1/2001 6:04:43 PM
Indy:
That's a good point. The wash transaction rule does apply. There are a few ways to get around it. One is for a spouse to make the transaction. I have asked a tax attorney friend for others.
Also, you can always buy the INTC now for your IRA, and sell the INTC in 31 days. The risk is that you double your downside exposure for 30 days.
182. wonkers2 - 3/1/2001 10:24:04 PM
Or sell the INTC and buy a no load index fund where the odds of making more money are better for most people. Aside for the entertainment value, trying to pick individual winners in the stock market isn't a very reliable way to make money. Or, at least, there are more reliable ways.
183. wonkers2 - 3/1/2001 10:47:04 PM
Trading stocks generates high commission and tax costs even if you are able to pick winners. Buying good stocks and holding them for a long time can work if you pick the right ones and buy at the right time, ie, when they aren't overpriced which is hard to determine because they can either be overpriced because the market is over priced or because the company is over priced. Hard to tell when either or both are not the case.
184. CalGal - 3/1/2001 11:31:43 PM
I said earlier why I buy individual stocks: it's fun and it gives me a feeling of being "vested" in the outcome that mutual funds don't provide. I would never recommend that someone only buy stocks, and I agree that if you buy and sell a lot you're wasting a lot of money in commissions and taxes.
But buying stock in well-established companies and holding it for a long time is not going to hurt, if considered as part of an overall strategy. I was just talking to my financial adviser about this and he was saying that I am sufficiently diversified that he thinks that I can start using some money to buy "chunks" of stock--up to now I've been buying small amounts monthly. I don't plan on doing it right away, but it's nice to see that I'm progressing.
185. wonkers2 - 3/2/2001 8:42:38 AM
Investing on the Internet--Watch those decimals!
Paul Parsons, a day trader in Dallas, was a big loser in a NASDAQ fiasco this week. On Monday morning he saw the stock with ticker symbol ACLS rising and decided to bet that the gain would not last. He put in a short-sale order through Bloomberg Tradebook, an electronic network. With the Nasdaq quote then at $18.81, he expected to get that price. Instead, it was filed at $24.94. "I thought that was fantastic," he said later. He sold more stock, at prices up to $54.44
The stock was Axcells Technologies, although Mr. Parsons did not know the name. Nor did he know why it was moving: because a hedge fund trader had entered an order to buy the stock at any price from $10 to $95. The trader meant $9.50, not $95, but decimals can be confusing. The electronic network he used, RediBook, sprayed the orders all over Wall Street, driving the price as high as $93.
The rising price started take-over speculation, which hit the rumor sites on the Internet. Mr. Parsons bought stock to cover his short position. He made $145,908.
He got the bad news at 11am Tuesday. Most of his short sales had been cancelled, on the ground that the prices were "clearly erroneous." But his purchases stood. He owned 14,400 shares, bought at an average price of $19.03. With the stock down now to $10.06, his profit has turned into a loss of $130,065.
Behind the scenes, there was chaos on Mon. Brokerage firms called Nasdaq, which had no answers until it consulted with officials from the SEC. Eventually, Nasdaq decided to cancel trades above the arbitrary price of $22, but only if the buyer complained and if the trade had gone through a Nasdaq system. It did not consider adjusting trade prices. Richard G. Ketchum, Nasdaq's president, did not know that was allowed by Nasdaq's rules.
more
186. wonkers2 - 3/2/2001 8:50:45 AM
Confusion still reigns. At first Nasdaq said it could not have halted trading, and then yesterday said it could and should have done so. Then, last night, it said the SEC had told it that it had no such authority.
The electronic networks did as they chose. Some canceled all trades above $22, some adjusted them to lower prices, and some canceled trades only if the buyer complained promptly. The trader who started the mess did complain and his purchases above $22 were canceled.
Wall Street is not ver wympathetic to the losers. "What we did is absolutely fair," Mr Ketchum said. Larry Leibowitz, RediBook's chief executive, said he saw no reason to compensate Mr. parsons or others like him.
Speaking privately, some Wall Streeters express scorn for day traders. "they are just momentum players who don't care about fundamentals," one said. "This is not your Aunt Millie from Dubuque," another said
That should not be the attitude. It was not Mr. parson's fault that the hedge fund trader erred. it was not his fault Lthat RediBook's systems did not stop the ridiculous orders. It was not his fault that Nasdaq failed to halt trading, or to put out a warning, or to act promptly to adjust or cancel trades. But he and other traders like him are the ones hwo lost. Wall Street should find a way to compensate them. Otherwise, Nasdaq looks a lot like a casino that values a customer's business only until he starts winning.
Floyd Norris NYT
187. Erin R. - 3/2/2001 10:45:32 AM
Well, I talked my husband into maxing out my 401k with my bonuses. Even with the max out, we'll still get a bit from each check. He's suggesting an index fund and a stock fund with more risk. So I'm going to discuss it with the investing company my employer uses.
He wants to start investing in stock. We're going to discuss it this weekend--I want to do mutual funds and stocks.
188. wonkers2 - 3/2/2001 4:18:09 PM
Now may be a better time to buy stocks and mutual funds than any time in the past couple of years. But if you buy individual stocks be prepared for a roller coaster ride. For example, about a year ago CISCO Systems, the premier tech stock in recent years, traded at 82. Today it is trading for 22 1/2. Nothing has changed much at CISCO. It is still growing rapidly. It dropped because it became apparent that the U.S. stock market was quite high compared to historical levels, the tech stocks were even higher, and CISCO at more than 100 times a year's earnings per share was the highest priced of the tech stocks in Nasdaq that were profitable. Then CISCO missed the quarterly earnings forecast by a penny (18 cents instead of Wall Street's expectation of 19 cents).
Plenty of others that were not yet profitable dropped even more than CISCO. Amazon, Healtheon (Webb MD) Teligent, Loral and a host of others lost more than 90 percent of their value. And nobody is predicting whether, let alone when, they will ever recover to their former peak prices. (I speak from my own personal experience, having owned some of all the above companies.)
If you are interested in mutual funds, read John Bogle's latest book. It contains a lot of impeccable advice. And don't EVER pay anybody a commission or load (sales charge) to buy a mutual fund. Pay attention to the annual fees. They are a big drag on the return you get on the fund. The cost calculator linked to one of my posts above is a good tool to illustrate the effect of management fees, taxes and other costs on the return you realize on your investment. (www.personalfund.com)
189. Erin R. - 3/2/2001 4:33:03 PM
My husband and I agreed that this is a good time to get into stocks and mutual funds.
In addition to the 401(k), we're prepared to invest a modest amount each month. As we get our feet wet, we'll be better able to determine what's working for us and increase that amount.
I ordered another book, I think I mentioned it a couple of days ago, "The Richest Man in Babylon." I'm trying to read a book at a time, then do additional research and reading to make sure I understand the concepts.
190. wonkers2 - 3/2/2001 5:07:28 PM
I haven't seen "The Richest Man in Babylon." Who wrote it? Let us know how it is. The classic book on investing in the stock market is "The Intelligent Investor" by Warren Buffet's professor Benjamin Graham. There are plenty of other good ones, except I'm not much of a believer in investing in individual stocks although I am addicted to it with a fairly small percentage of my assets (growing smaller daily).
191. wonkers2 - 3/4/2001 11:16:44 AM
THE SHORT AND HAPPY LIFE OF HENRY BLODGET, MERRILL LYNCH TECH ANALYST, Front page article i
in Sunday's NYT
Thirty-five year old Yale history major grad, Merril Lynch ace tech analyst paid in the millions and a fixture on CNBC...his recommendations are down 79 percent, on average, from the beginning of last year, with several trading for less than $1. But Mr. Blodget, the senior Internet analyst at Merril Lynch, keeps his chin up.
"Things change," he said last week, furrowing his brow after every few words. "The market went from saying 'We like companies that are growing quickly but are losing a lot of money' to saying, 'We ant to see earnings.' It's very hard to predict a 180-degree turn like that."
Starting in 1998 Blodgett's ratings on AMAZON were BUY when the price went from under 20 to nearly 100 and back to about 65 when Blodgett lowered the rating to ACCUMULATE when the price soared to over 100 and then back to just over 40 when Blodgett raised the rating to BUY and the price rallied again to nearly 90 and then dropped to around 60 when Blodgett lowered his rating again to ACCUMULATE and the stock soared again to over 100 before dropping to 60 and bouncing to 80 when Blodgett increased the rating to BUY wherupon the stock dropped again to just under 40 when the rating was dropped again to ACCUMULATE where it remains to day with the price just under 10. (Prices in the table adjusted for splits. Actual price soared to over $400/share.)
"I don't think we fanned the euphoria," Mr. Blodget said. "I said over and over that all trees don't grow to the sky." (But some do??)
192. wonkers2 - 3/4/2001 11:25:28 AM
cont'd
Such warnings didn't prevent investor complaints. D. Kanjilal last week filed a formal complaint, seeking arbitration, with the NY Stock Exchg; he blames Mr. Blodget and his firm for hundreds of thousands of losses on an investment in InfoSpace [Beware of companies with interior capital letters in their names!], an online Yellow Pages. Despite Mr. Blodget's recommendations the stock has fallen 96 percent since Mr. K bought it.
Mr. K argues that Mr. B was trying to protect a deal Merrill had been netotiating. Merrill says the charge is baseless and that Mr. Blodget didn't know about the deal until a few days before it was announced.
Merrill continues bo back Mr. Blodget strongly. The firm recently gave him a choice, added assignment, covering Microsoft. "He is a top-rated analyst of absolute integrity, and Merril Lynch stands begind him." Susan McCabe a company spokeswoman said.
193. CalGal - 3/4/2001 11:39:18 AM
I read that article. Blodget is a history major who said that Amazon would go from 70 to 400. Cohen, his predecessor at Merrill Lynch, said that it would drop. Amazon went up past 400--Cohen quit, Blodget got his job. Of course a year later, Amazon is within pennies of Cohen's most recent prediction. Blodget had recommended buy.
The article makes the interesting point that Merrill Lynch is well-served by Blodget. It is actually better for ML that he makes covered predictions that are far too optimistic. People buy, IPOs get funded, ML makes money.
This point was also made in a Money article earlier this month. I hadn't intended to listen to analysts in any event, but it is actually spooky to realize that analysts are shills.
194. wonkers2 - 3/4/2001 11:46:57 AM
Right.
"But where are the customers' yachts?" [Customer to J. Pierpont Morgan or some other mogul, as I recall reading several times somewhere.]
195. JudithAtHome - 3/4/2001 12:19:36 PM
I read something interesting today about "cashless collars" on stocks...Mark Cuban, who sold his Broadcast.com to Yahoo made a fortune in Yahoo stocks and when they started to tank, he was home free...lost no money at all because of this cashless collar thing. It kept the value of his stock at high amount. (I can't find the link to the story which explains it.)
But don't get excited...investment firms only offer this option to large accounts, like $5 million and up.
Must be nice...I'd like the option to do that on our piddley little account but I guess that's reserved for the people with serious money only.
196. CalGal - 3/4/2001 12:36:27 PM
Cashless collars are just two options--a call and a put. It's a way to protect a stock position that you don't want to sell, or can't sell--but yes, I believe it has to be a large stock position.
Cashless Collar
197. JudithAtHome - 3/4/2001 12:41:43 PM
Well, the article explained it that way, about the calls and puts...and it said $5 mil and up. Of course, to guys like Cuban, who made the remark Yahoo could go down to $1.00 a share and he'd still have a (B) in front of his name, $5 mil is probably peanuts.
198. CalGal - 3/4/2001 12:55:02 PM
But keep in mind, you have to be really sure that the stock is going to go down--you could take a serious hit if the stock goes up.
It also requires a financial institution--it's not something you can decide to do yourself, and that's why the financial requirements about size of the investment. It has to be worth their while.
Requirements
Creating a collar requires a "counterparty," a financial institution (usually a major bank or brokerage) that simultaneously buys the call from and sells the put to the investor.
The financial wizards at the counterparty carefully structure the calls and puts so their firm can make a profit. As a result, counterparties have stringent rules when it comes to collaring a stock.
To be worth the effort, the stock that the investor controls must have a minimum market value of $2 million.
In addition, the stock's market cap -- the current share price multiplied by the total number of available shares -- must exceed $500 million.
Also, the stock must be liquid, trading at least 20,000 shares daily on Wall Street. And the current share price should be at least $10.
Individual investors can protect their stock positions with puts and calls, too.
199. JudithAtHome - 3/4/2001 1:05:30 PM
Cubans partner, Todd Wagner, said this:
"A lot of people kept saying, 'Why collar? The price is only going to go up.' But it would have been crazy for us not to do it. Unless you're the greediest SOB on earth, it only makes sense to lock in the gains."
Maybe a billion or so is more than enough for some people.
200. CalGal - 3/4/2001 10:55:16 PM
Question: I want to open a money market account for the bulk of my savings--just use my business savings as the depository. My financial planner told me that it makes more sense for me just to open an account at my bank. But when I checked out their description of their money market account, it said:
An investment in a [bank name] money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the [bank name] money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Funds. Past performance is no guarantee of future results and yields will fluctuate. The collected balance in your account is swept daily to and from a [bank name] money market fund. The daily sweep constitutes a purchase or redemption of fund shares which are not FDIC-insured.
I know this sounds dim, but is it really possible to lose money in a money market account? How likely is it?
201. wonkers2 - 3/5/2001 12:06:31 AM
Theoretically, but I don't think it has ever happened. That's why they all sell for $1/share.
202. CalGal - 3/5/2001 12:13:08 AM
So this is the usual money market? I was worried that I wasn't looking at the right sort of account.
203. alistairconnor - 3/5/2001 6:06:46 AM
After evaluating options for my short-term liquidities, I discovered that all I could get is about 3.5% for on-call money at a bank. The interest is taxable, so it works out closer to 2% net.
However, there is an "alternative" bank which provides funding for good works (third world aid, environment, rehabilitation etc) and encourages people to choose their own interest rate, with the possibility of opting for 0%.
The difference between the maximum rate offered and the chosen rate is considered to be a donation to charity, and therefore qualifies for a 50% tax reduction.
So : if I invest 10 000 F in a normal bank, that's going to net me about 200 F a year. If I invest it in the charitable bank (which I have), it will net me about 150 F (tax reduction). It costs me 50 F, and the charitable bank gets 300 F or so.
204. wonkers2 - 3/5/2001 8:04:35 AM
Cal, I'm no expert on money market funds, but my impression is that they only invest in short term government and triple A corporate securities, meaning the only real risk would be some kind of fraud in a fly-by-night organization. The risk at Vanguard, Fidelity or Wells Fargo would be about as close to zero as you could get.
205. wonkers2 - 3/5/2001 8:05:42 AM
allistaire, Almost like alchemy!
206. Erin R. - 3/5/2001 10:46:28 AM
OK. We had dinner last night with the insurance saleswoman. My husband made the mistake of mentioning that we would be getting term insurance for me, at a cost of roughly $50/month, rather than the universal rate she was recommending, which was $200/month.
She went into a hard sell, reasoning that the policy was about buying a lifetime policy over the space of 30 years, with a payoff of $500,000.
I did an investment calculator for the difference. $150/month over 30 years at 12% comes to $524,244.62. A 15% return comes to $1,038,491.94.
So we're making our decision by the numbers. Overall, I've really enjoyed figuring out how to make this decision. I learned a lot in the process. And I'm excited about being a millionaire when I'm 60!
I also did a calculator to determine the value of maxing out my 401K contributions. Over 30 years, contributing $875/month (the maximum contribution currently allowed), in pre-tax dollars at a 12% return I will have $3,058,093.62. At 15% that comes to $6,057,869.66.
207. Erin R. - 3/5/2001 10:57:45 AM
BTW, I welcome any comments on my analysis. I am a novice and want to hear any criticisms on my thinking.
208. seadate - 3/5/2001 11:01:15 AM
Judith,
Have you traded options before?
209. seadate - 3/5/2001 11:08:50 AM
Erin, your analysis is dead on.
210. seadate - 3/5/2001 11:15:21 AM
Judith,
The reason I ask is that buying options as a hedge has been a common practice for a number of years and is what keeps CBOE in business. A hedge is insurance purchased for protection against the down-side and (although sometimes justified) I've *never* seen free insurance of any type.
211. JudithAtHome - 3/5/2001 11:24:49 AM
seadate:
At the risk of sounding like a boob, I've never traded options before and what I know about investing is zilch. All I know is we are debt free and own our house...
212. seadate - 3/5/2001 11:32:44 AM
Judith,
You certainly don't. I have utilized options heavily in the past, but haven't traded in the last 5 years. As I see it, a collar is very simple (as options strategies go) - you're buying a put as a hedge (to cut your losses) an selling a call to cover the cost of the put (to cut your gains). I'm convinced this is rarely a good strategy for the individual investor (ad would be happy to explain ad infinitum - later). For a fund manager, it may be a good strategy so he/she won't get fired if they're wrong on a stock pick.
213. seadate - 3/5/2001 11:33:54 AM
Judith,
It's amazing how one F-16 can put you on easy street (g).
214. JudithAtHome - 3/5/2001 11:41:51 AM
seadate:
Isn't it just?
215. wonkers2 - 3/5/2001 12:14:26 PM
Erin, Good analysis. My only question is have you analyzed whether you really need even term life insurance? Have you analyzed what you are insuring against? Do you have children or expect to have children? That might be a good reason if they would need money in the event of your untimely death. If you see a current or down-the-road need for insurance another possible reason might be to get it now while your health (and that of your spouse) is good and you (and your spouse) are insurable, rather than waiting until later when you might not be insurable. Also, are you getting a non-smoker discount? If not,wait and quit smoking and re-apply.
Another factor to consider is what may be offered by your employer. It can make sense for some people to "go bare" on life insurance and instead put that money in a good no load growth mutual fund.
216. wonkers2 - 3/5/2001 12:31:58 PM
There's a great Tom Toles cartoon in my paper today showing a fat cat boss behind a big desk talking to a rather small and thin employee:
Cell #1 Boss says "We've changed your retirement plan so it will build benefits more slowly."
Cell #2 "And be smaller overall."
Cell #3 "And you never know about Social Security."
Cell#4 "So figure on working longer, possibly forever."
Cell #5 Employee asks "Isn't there an EARLY retirement plan? What about that?"
Cell #6 Boss replies "We have several, in a size to meet your needs." And he holds up a paper labeled "EARLY GRAVE."
Toles footnote: "Depending on what you urn."
[This is a wry commentary on what is actually happening to a lot of retirement plans these days, at the shrinking number of employers who even have a retirement plan other than a 401k.]
217. Erin R. - 3/5/2001 12:32:57 PM
I am married and I have one child. We will probably have another within the next couple of years.
A $1 million term policy would just about cover debts, living expenses for my survivors, and a private college education for my son.
I do smoke, half a pack a day, and I'm getting more and more motivated to quit, not only for health reasons. I read "The Millionaire Next Door," about the money habits of people with a net worth of more than $1 million. One example that was given was a couple that smoked something like three packs a day between them, over 46 years. If the couple had invested their cigarette money during that time in Philip Morris, they would have accumulated $2 million!
I do intend to go as cheap as I can on life insurance, and do a 20-year term. By the time I'm 50, it's entirely likely that I will have accumulated $1 million.
Question: the insurance saleswoman said that the life insuranced payoff is tax-free. I didn't think about it at the time, but surely she means it is free of estate taxes, but not of income taxes, correct?
IOW, my family gets $1 million when I die, but that is considered income, no?
218. wonkers2 - 3/5/2001 12:48:20 PM
I'm not qualified to answer questions about income or estate taxes. I do know that wealthy people sometimes use term life insurance for estate [tax] planning purposes. Exactly how that works I'm not sure.
219. wonkers2 - 3/5/2001 12:54:49 PM
Cal, Schwab is trading at $19.73. Let me know when you think it has bottomed out. (I own a few shares, too.)
220. CalGal - 3/5/2001 1:11:53 PM
Wonkers,
I was just talking to my financial planner about Schwab. He had a sell order at 38 that he was going to execute whether I liked it or not, and the stock's high was 37+. I would be surprised if it will go much lower, although I would still hold onto it in any event. Schwab has nearly a trillion dollars in assets and one of the best management teams going. The slowing in the stock market will obviously hurt it, but they have always been creative about dealing with down times--from spotting new opportunities to reducing employee costs to avoid layoffs.
The "furlough" that is in the news now is not their first. Back in 1988 they offered a number of innovative programs that ranged from voluntary to mandatory, depending on the organization. You could/had to take a day off every week (without pay or as a vacation day) or take a 3-month sabbatical at 25% pay. Within 6 months the crisis was over. I think it's actually a good idea to cut costs immediately, rather than be forced to layoff later.
I think Schwab's a good buy right now. But then, I originally bought it at 16 in 1987 (at the IPO) and then watched it sink to 6 after the crash of 87, where it sat for a number of years. Some of my co-workers sold it again at 16, in relief. Dumb, dumb, dumb. I don't see myself selling it anytime soon--worst case, it won't be a sterling performer for a while and will pick up with the economy.
221. CalGal - 3/5/2001 1:13:20 PM
Thanks for the responses on the market rate funds, Alistair and Wonk.
Alistair, I don't generally worry about taxes--although that may change. In any event, I am currently paying taxes on 2% interest, so it makes more sense to pay on 5.
222. Erin R. - 3/5/2001 1:43:09 PM
I'm at Nolo doing some research on life insurance taxes vs. regular estate taxes.
So far there doesn't appear to be much difference. And the ceiling on estate taxes will be $1 million by 2006.
223. Erin R. - 3/5/2001 1:49:03 PM
You know, this is all rather fascinating stuff. Now that I'm getting into it, I don't know why more people don't take the time to learn how to get their money to work for them.
224. CalGal - 3/5/2001 3:58:12 PM
A few questions:
1) Am I the only person who didn't know that you could have only six transactions per month on a savings account? I got a warning letter in December, which I took quite seriously--but I had assumed that the problem was due to it being a business account. But I was talking to a bank teller today and it's any savings account. Another reason to get cracking on a money market account.
2) Has anyone seen the "involuntary unemployment insurance" forms at the bank? I assume these are some variation on the ones you get from credit card companies, but I'm wondering if they are new, and if they are worth it.
3) Third call on bond funds or bonds in general. Anyone have any feedback on whether it's a decent short-term investment?
225. dusty - 3/5/2001 7:24:53 PM
The Motley Fool Money-Making, Life-Changing Special
Despite the less than reassuring name, the boys at Motley Fool do have decent advice, and they attempt to keep it in ordinary language as much as possible.
I'm recording this show this evening; it is on at various times and dates around the country. I will try to give a summary after I've seen it, but get your VCR's and Tivos ready.
226. wonkers2 - 3/5/2001 7:56:37 PM
I have seen a number of recent recommendations to buy junk bond funds (high yield corporate bonds). They have already moved a fair amount in the past couple of months, but could move some more if interest rates continue downward. Also the spread between junk bonds and investment grade bonds has been unusually wide and could narrow. Vanguard has a good high yield bond fund, but they discourage short term trading and have a withdrawal penalty if you sell it within 3 years.
For a short term investment, intermediate or short term bonds may be better than long term bonds. If you have enough money you can buy these direct without using a bond fund. I have never done either. I have either used a money market fund or bought a junk bond fund. Of course a lot of people use CDs to park cash for short periods.
227. CalGal - 3/5/2001 8:15:09 PM
Dusty,
Motley Fool is just awesome. Thanks for the heads up.
Wonkers,
I wasn't thinking of junk bonds. That's interesting news about Vanguard Bond funds, since they were the ones I was considering. Still, 3 years is pretty short-term for my normal investment pattern.
228. Slackjaw - 3/6/2001 5:20:04 AM
Money & Investing Poll:
do you think that a good financial advisor is capable of predicting future changes in an asset's price? For example, "Intel will reach $X by May," or at the very least direction of change over some specfied interval?
229. wonkers2 - 3/6/2001 9:39:07 AM
Doubtful for common stocks, especially short run price predictions. But if your definition of "asset" includes,e.g., $10,000 invested in a good no-load Index 500 fund, a financial adviser can predict with high confidence that it will appreciate in the future. And the longer into the future, the greater the confidence in the direction and range or approximate rate of appreciation.
230. Erin R. - 3/6/2001 10:25:55 AM
Just finished reading "The Millionaire Next Door."
I recommend this book to anyone who wonders why they earn a high income, but don't have any assets.
A recurrent theme throughout was the fact that poor and middle-class parents don't teach their children about frugality, investing, discipline and independence. This really struck a chord with me because my parents were and are great accumulators of belongings, and I was raised to believe that upper-class people drive nice cars, live in huge homes, and wear expensive clothing.
Yet the book points out that the average millionaire never spends more than $399 for a new suit.
231. Dusty - 3/6/2001 11:45:17 AM
Slackjaw
I'll largely echo wonkers2 comments: if the statement is about a specific stock with a price and a time horizon, the "prediction" is almost useless. I'll also add that this conclusion depends on another part of your example—that it is made by a finacial advisor. I am open to the possibility that there may be some people in the world who have the ability to make prediction, with enough predictive ability that they are worth something, but those people aren't financial advisors.
(Sorry if this is mildly disparaging of financial advisors, but I've had a few call on me over time, and I usually know more about investing than they do. I'm sure some are btter than others, and many know enough to be valuable totheir clients, but I haven't met one I would use.)
232. Dusty - 3/6/2001 11:46:07 AM
(Sorry for failing to do spell check before hitting post)
233. Dusty - 3/6/2001 11:49:30 AM
Slackjaw
Extending the comment, I do think that there are people who can make probabilistic comments about classes of assets, such as equities or bonds of a certain quality, over some time horizons. I confess to a bias in this belief, as this is core to what my division does for a living.
234. Erin R. - 3/6/2001 11:55:48 AM
I have never worked with a financial advisor. Wouldn't have any idea how to find one or what to look for when hiring one.
I do have a poll: how long have you been investing? What made you start?
235. Dusty - 3/6/2001 11:56:39 AM
Slackjaw
David Dreman wrote a book—I think the title was Contrarian Investment strategies. The anecdote I recall isn't precisely your scenario, but I think it is close enough. He didn't look at stock price predictions, he looked an analysts predictions of earnings. To oversimplify his conclusions, he concluded that analysts are abysmal at estimating earnings, even over fairly short periods of time. While I suppose it is theoretically possible to predict stock prices without being able to predict earnings, I would think it should be at least as hard, if not harder.
236. CalGal - 3/6/2001 12:01:32 PM
Slack,
do you think that a good financial advisor is capable of predicting future changes in an asset's price?
No. That's not why I go to a financial adviser, btw. In fact, we almost never talk stock--the conversation I referenced above is the first time I can remember that we specifically talked about price.
Erin,
I've been meaning to get that book for a while; your review has bumped it in priority.
What started me investing? In mutual funds, it was my financial planner, who looked me straight in the eye and said, "You are living hand to mouth, not like someone who makes as much money as you do." I really thought about that, and realized he was right--that there wasn't anything stopping me from starting to save other than my own fear. I told him right then and there that he was right, and that now his number one job was to get as much money away from me as he could every month. I started at 125/month back in 98, and increased the amount dramatically over the next two years.
I began investing in stock because of the Daniel Kadlec article on Netstock. I had thought about investing in stocks before, but I couldn't justify the capital. Netstock made it possible for me to invest in a diversified portfolio with small amounts monthly.
237. CalGal - 3/6/2001 12:04:03 PM
I agree with Dusty and Wonker's responses, btw. I was thinking more specifically.
Erin,
A recurrent theme throughout was the fact that poor and middle-class parents don't teach their children about frugality, investing, discipline and independence.
My parents taught me about frugality, discipline and independence--they just didn't mention investing. My attitudes toward debt and spending were learned from my ex-husband, a classic Yuppie boomer when we met--but another one who came from a lower income background with no knowledge of investing.
238. Dusty - 3/6/2001 12:11:56 PM
Erin R.
That's a good question. I've never searched for one, so I may not be the best person to ask, but I'll take a stab at it.
My first piece of advice is that you have to do some homework yourself, if only to be knowledgeable to tell the difference between a good advisor and a bad one. Many people call themselves financial advisors, when they are little more than life insurance sales people, with a access to a few mutual finds, and a company generated spreadsheet.
In the same way that knowing nothing about cars means that finding a good mechanic can be tough, knowing nothing about finances you could get a poor financial advisor.
So how does one go about getting a basic education in finances?
I'd start with:
239. Erin R. - 3/6/2001 12:13:04 PM
I can't imagine "The Millionaire Next Door" not having a positive impact on any reasonable person's outlook on money.
As I said, my parents own great stuff--not assets. When I got the $10K windfall in college, I was given no advice or guidance. Not even a beginner's book on investing, or a subscription to the Wall Street Journal.
I don't blame my parents, though. They came from very poor backgrounds and struggled to become middle-class people. They didn't have a lot of knowledge to pass on to me.
240. seadate - 3/6/2001 12:26:44 PM
I do have a poll: how long have you been investing? What