stocks | Online Savings Blog

What Happens If My Investment Company Fails?
05.08.08 | Online Investing | 0 Comments | by Tom Valenti

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I'm in the process of bringing over an IRA to the company where I do most of my investments. I thought having as many things in one place would be convenient for me and my eventual heirs.

Then I got to thinking — what if my investment company had some type of Enron-like collapse? Would my balances go down the drain with their stock? Or am I exempt, because my balances are not invested in the company, but instead in mutual funds they offer?

So now I'm thinking, maybe not only is diversification amongst holdings a good idea, but diversification of the companies you do business with may be a good idea as well.

In reality, my investment company is a very large industry leader, so I couldn't imagine that they would not be bailed out by another company or the government.

But what if I was consolidating my assets with a smaller company that carried no clout? Could I lose everything if they went under?

Does anyone have any insights or thoughts on this topic?

Tom Valenti is a marketer and project manager who currently works for a financial institution in New Jersey. Read Tom's blog at http://thriftyhomeowner.blogspot.com or learn more about him at http://tomvalenti.com.
If This Isn't Gambling, I Don't Know What Is
04.07.08 | Online Investing | 1 Comment | by junger

Trent at the Simple Dollar posited to his readers last week that investing in individual stocks is basically gambling.

Individual stock investing is something like playing blackjack at a casino where, on every hand, the dealer is wagering just a little tiny bit more than you, but there are thousands of people around you shouting out suggestions.

He argues that you might have a slight advantage (his italics), but being profitable is "far from a guarantee and the work needed to get those earnings is tremendous."

Obviously, the fools at The Motley Fool feel otherwise. In their story on how to get 50% annual returns, here's what they suggest:

Lesson 1: Sell your index fund
There is no surer way to not beat the index than by investing in the index itself. Not exactly a revelation, right? Investing in index funds leads to nearly certain long-run underperformance, because of transaction costs and management fees.

Putting aside the preposterous proposition of actually getting 50% returns (which they admit), are they actually arguing that transaction costs and management fees are the downfall of index funds?

That doesn't make any sense. Index funds are great because, in addition to owning an entire index, they're passively managed and have some of the lowest fees in the market.

I actually met Tim Hanson, one of the authors of the article, when I interviewed at the Motley Fool (full disclosure: they didn't offer me the job because they were "going to give priority to candidates with more experience in investing." — aka stock picking).

I told him index funds were my investments of choice, and while he agreed they are the right way to go for 80% of investors, the Fool recommends an "index-plus" approach … meaning, invest in an index fund and buy the stocks they are hocking in their newsletters (because that's what they're really selling you).

Not only are they suggesting ways to get almost impossible 50% returns, but they're spreading disinformation in the process.

Please remember to think about who benefits from the "advice" you get.
Investing in Education: How Much It Pays
04.01.08 | Money, Work | 0 Comments | by Fred Siegmund

There are several ways to estimate returns on investments in education. One way is to compare wages between jobs using general workforce skills with jobs that need college degree skills.

Compare wages for a certified teacher with a college degree to wages for a teaching assistant, for example.

Another way converts college tuition and expenses into an estimate of a minimum wage or minimum salary increase that will make college a paying investment. The process requires interest calculations because money paid for college tuition and expenses could be used to buy stocks and bonds or other interest earning assets.

Tuition and expenses amounts to an investment in a higher paying job, even though college students may want to go to college for other reasons.

Suppose in-state tuition at public college is $6,000 per year each year for four years. In some states like North Carolina, the state tuition is reported as $3,886, while in others like Michigan it is $7,115. Some are above and some are below, but let's use $6,000 as a representative tuition for 2007.

In the first year, $6,000 invested in stocks and bonds would earn interest or dividends. Similarly in the second year, except $12,000 would be invested and the second year earns interest or dividends on $12,000.

At the end of four years at the time of graduation, the principal invested and the interest earned is a total amount, which will equal $27,230.82 at 5 percent interest.

The principal amount of $27,230.82 earning 5 percent interest over the next 10 years and compounding monthly will be equal to $44,849.42. Start at graduation and $288.82 of extra income each month over the next 10 years using 5 percent interest will also be the same $44,848.63.

The $288.82 equals the minimum extra monthly earnings necessary to pay for a college education at an interest rate of 5 percent. Using a forty-hour week and 160 hours a month, it is less than $2.00 an hour of extra wage and salary that pays for college.

Nothing is a guarantee — but expect college to pay.

Our thanks for these calculations go to the built-in spreadsheet functions on MS Excel. Experiment yourself.

Use the Excel help file under FV, which is the future value function. The spreadsheet entries above are =FV(.05/12,120,0,-27230.82,1) and =FV(.05/12,120,-288.82,0,0).

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
10 Smart Money Moves We Made in 2007
01.04.08 | Money | 4 Comments | by junger
2007 was a great year for us financially. No, we didn't win the lottery or get any other kind of windfall, but we made a bunch of smart money moves that will pay off well in the long run.

Here are 10 smart money moves we made in 2007, in no particular order.
- We Moved Cities
  It wasn't a cheap move, but by moving to a more affordable area, we're much more prepared to purchase real estate. Moving is not a small change — but it can have big effects on your financial situation.
- We Started a Housing Fund
  In order to meet our home-savings goal, we opened a new online savings account earmarked for housing money. Every month, HSBC automatically pulls money from our checking account and deposits it — paying ourselves first.
- We Started Using Index Funds
  Rather than trying to beat the market (an unsuccessful long-run plan), we transferred our Roth IRAs from Ameriprise to Vanguard, investing in low-cost index funds.
- Increased Monthly Roth IRA Contributions
  In addition to our move to Vanguard for our Roth IRAs, we increased our automatic monthly contributions. Last year, we used a chunk of money from our tax returns to max out our Roth IRAs — this year, we'll be closed to maxing them out without additional funds.
- Got a Promotion
  Earlier this year, I got a promotion at work, leading to more responsibility, more work and, yes, more money. While my paycheck is a bit fatter, our lifestyle isn't. We're spending nearly the same amount of money as we were before the promotion — pocketing the difference for savings.
- Bumped Up 401(k) Contribution to 10%
  At the same time I got a promotion, I upped my 401(k) contributions to 10% of my salary. Because I did it at the same time my pay went up, I never "knew" the difference and questioned its worth.
- Opened an FSA
  As I've said, the smartest $400 I ever spent was on my FSA. With a flexible spending account, the money comes out pre-tax, and with a debit card, purchases are seamless. Since it's not coming from my normal accounts, it's like buying things for free!
- Joined Yodlee to Track Finances
  If you don't know where your money is going, you don't know how to save. Even though we use a written budget, we joined Yodlee for more automatic budgeting and to track all of our accounts and net worth.
- Downgraded Cell Phone Plan
  I wasn't using all of my cell phone features, so why should I pay for them? Earlier this year, I downgraded my cell phone plan, saving money every month on features I don't use. (Even though Spring screwed up my plan change.)
- Automated Our Finances
  Even though we think about our finances daily, we don't worry about when bills are due or if we can pay for them. Nearly all of our bills are paid automatically, our savings are transferred without a key stroke, and our salaries are deposited directly.
Well, you've heard our smart money decisions for last year. Now, we want to hear yours.

What were the smartest money moves you made in 2007?

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