The annuity in its simplest form is a contract between you and the issuing insurance company. Annuities in rare occasions can be a useful place to invest some money if you’ve exhausted all other tax-deferred retirement plan options, but you really need to do your homework. In many cases, it may be better to buy a mutual fund outright in a taxable account. There are numerous insurance companies out there feeding off of the uneducated investor by collecting surrender charges, loads, and other bogus charges. Don’t let yourself be one of those victims.
An annuity can have an impact that reaches far into your financial futureYou have to think ahead because, in most cases, you can’t reverse your decision.
Although the idea of income for life sounds great, there is one huge pitfall that most annuity salesmen forget to mention. Once you annuitize your contract, the contract is frozen - your decision is final.
Let’s look at an example:
You put $264,000 into an annuity at age 60 and accept the insurance company’s offer to pay you $1,000 per month for the rest of your life. You will have to live until age 82 to break even on the contract. If you live past age 82 the insurance company must continue to pay you the monthly check, but if you die before you reach age 82 the insurance company keeps the remaining funds. So even if you die as early as age 63, the insurance company keeps the remaining balance of your $264,000. Many investors find this hard to swallow. Nevertheless, prior to selecting payout, they have to decide whether annuitizing will be beneficial - and, ultimately, this depends on how long they think they will live.
Let’s look at the example from the article I read, this is what they are selling you, this is how they are stealing your hard earned and saved money: “For example, with interest rates recently at 4.56% on a 20-year Canada bonds, a 65-year-old who buys an annuity with a 15-year guarantee on $100,000 capital will receive ANNUAL (emphasis on me) income of $7,300 to the time of his or her death, which is the equivalent of a 7.3% annual return”
Thos sounds good?? If you do all above, investing your own money in the same bond you will have the same return AND you still have the capital!!!!!
“The example of a 75-year old who buys a 10-year guaranteed annuity on a $100,000 capital base with recent long-term interest rates. His or her ANNUAL (emphasis on me) income (and this example is not accurate as female annuitants receive higher incomes) would be 9,333
It you take $100,000 divided with 10 years gives you $10,000 per year. IF you invest that money in any kind of investment which gives you some return you are better of. It just doesn’t make sense to me why would anyone hand over their lives savings without some REAL benefit.
Take the $100,000 and invest it in a Segregated Found (if you’re uncomfortable with Mutual Founds) just because they have a guarantee so even in the down markets your money is guaranteed (and I will explain how Segregated Founds Work) at a rate of return of 6% (what is obtainable) you would have an annual income of 6,000 so you would have to use still 3,333 a year to make up the difference up to 9,333. In a 10 year period that’s about $34,000. If you deduct $34,000 from $100,000 you still have $66,000 after 10 years. If your investment has a better return you’ll have more of your capital.
This is what the bank does:
They take your $100,000 capital what you just invested in annuity, invest you money in credit cards with 18%-28% a year. Their return on one year is a min. of $18,000 and then they give you $9,333 and on top of that you loose your capital.
I really wonder who’s best is this? Yours? Or the Bank? Judge for yourself!
Although the idea of income for life sounds great, there is one huge pitfall that most annuity salesmen forget to mention. Once you annuitize your contract, the contract is frozen - your decision is final.
There are always dangers in putting all your savings into just one type of financial product. What happens if you need extra cash quickly for a medical emergency? If all your money is in an annuity, you won’t be able to get the extra money you need.
Create your own annuity from investing your savings: You could invest in very low-risk investments that will give you a guaranteed cash flow. It’s like having regular annuity income, but you don’t have to lock your money in at a lower interest rate. Just make sure you can get enough income from your investments. Even Guaranteed Investments Certificates (GICs) and government bonds are better then annuities. Take control of your capital. It’s your hard earned money. If you are not really into investing find someone you can trust to take care of your future, someone who really wants YOUR best. A financial expert can help you find the best strategy for your own situation.
April 21, 2009
Protect Your Capital with Annuity
Choosing the Right Annuity For Your Retirement Fund
In these days of economic stress, tumbling financial markets and colossal losses to various retirement and pension funds, annuities have caught the attention of many concerned investors. Annuity sales were originally expected to top $200 billion in 2009 but first quarter activity indicates that figure could be conservative as investors seek to supplement their retirement funds and acquire guaranteed payouts.
An annuity has distinct characteristics. There are no other investments that can provide the owner such substantial deferred tax advantages along with guaranteed payments, regardless of market activity. Annuities have flexibility and can be tailored to meet the investor's needs. While early withdrawal penalties from annuities can be punitive, the typical annuity investor selects an option that achieves the desired goal and holds other funds in reserve.
Annuities have been around for a long time. There is a belief that a form of annuity was originally created during the Roman Empire and later emerged in Europe around the 17th Century. The Pennsylvania Company for Insurance on Lives and Granting Annuities was the first American company to market annuities. During the Great Depression, many investors viewed insurance and insurance products with great favor. Annuities blossomed in the 1930's. Those early 20th century annuities had many similarities to some of today's products, which have expanded in scope to meet new investment strategies and opportunities.
Today, there are four basic types of annuities; Fixed Annuities, Immediate Annuities, Equity-Indexed Annuities and Variable Annuities. As with any investment, the client must define their investment goals, assess their risk comfort level and then choose the annuity that best fulfills these criteria. Generally, Immediate and Fixed Annuities are the most conservative while Equity-Indexed and Variable Annuities are more aggressive.
The Immediate Annuity is safe, can yield a lifetime payout and is very popular as a vehicle to supplement other retirement income. With an Immediate Annuity, the insurance company guarantees the investor a fixed rate of interest from a certain period of time or until the investor dies, whichever time frame is longer. A typical Immediate Annuity could be described as Life with a 10-year period. As soon as the lump sum payment is received, the monthly payments from the insurer begin. These payments continue for 10 years or for the remainder of the investor's life, whichever is longer. If the investor dies before 10 years, a beneficiary receives the payments for the balance of the 10-year period. This investment is not affected by market conditions and is popular because of the stable monthly payment.
With a Fixed Annuity, the investor makes a lump sum investment with an insurance company and determines the amount of time of the investment. The insurance company guarantees a fixed rate of return for the life of the investment. When the time expires, the investor can withdraw the principal. Most Fixed Annuities permit the investor to withdraw between 10 and 20% annually.
June 4, 2008
INVESTMENTS
ANNUITIES
An annuity provides a means of reducing the risk of outliving one's investment income after retirement from full-time employment. Purchasing an annuity may be a possible solution to reducing this risk. An annuity may be considered the opposite of a traditional life insurance policy. An individual who buys insurance agrees to pay annual premiums to an insurance company. In return, the company will pay, according to instructions agreed upon at the time of purchase, the face value of the policy in a lump sum to beneficiaries when the purchaser dies.By contrast, an individual who buys an annuity pays the insurance company a sum of money and, in return, will receive a monthly income for as long as the purchaser lives. Naturally, the longer one lives, the more money is received. The holder of an annuity never outlives the return, regardless of how long-lived the individual is. Life insurance protects one's beneficiaries against financial loss as a result of the purchaser's dying too soon, while annuities protect purchasers against financial loss as a result of living longer than their funds do.
Annuity income depends on life expectancy and is thus classified as life insurance. Understanding this is important because the classification allows the annuity's investment earnings to be treated as tax-deferred, with no tax on its accumulation until payments are received.
CERTIFICATE OF DEPOSIT
The concept of the certificate of deposit (CD) is simple. It is a savings instrument issued by a financial institution that pays the purchaser interest at a guaranteed rate for a specific term. When the CD reaches maturity, the investor receives the principal and interest earned. Unlike bond interest (paid periodically), the interest from a CD usually compounds, which means interest is earned on prior interest earned also. An investment in CDs, up to $100,000, is insured by the federal government.
CDs are appealing for safety, liquidity, and convenience. Less appealing is the lower yield when compared with other investments. CDs make sense as emergency funds, savings for short-term goals, a way to complete a long-term goal, and a place to park; money while an investor seeks more profitable investments.
CORPORATE BONDS
A bond is a form of debt issued by a corporation in exchange for a sum of money lent by the buyer of the bond. The issuer of the bond promises to pay a specific amount of interest at stated intervals for a specific period. At the end of the repayment period (on the maturity date), the issuer repays the amount of money borrowed.
It is important to understand the differences between corporate bondholders and corporate stockholders. The holder of a corporate bond is a creditor of the corporation that issues the bond, not a part owner, as is a stockholder. Therefore, if the corporation's profits increase during the term of the bond, bondholders receive no benefit since the amount of interest they receive is fixed at the time the bond is purchased. On the other hand, the bondholders' investments are safer than those of the stockholders. Interest on bonds is paid out before dividends are distributed to stockholders. Furthermore, the claims of bondholders take precedence over those of the stockholders in the case of bankruptcy or liquidation.
When interest rates rise, bonds lose value; when interest rates fall, bonds become more attractive. Most bonds issued today are "callable," which means corporations can recall them if interest rates rise before the maturity dates.
GOLD
Some investors find gold an appealing investment. Gold has been used as money since biblical times. Several characteristics of gold have made it desirable as a medium of exchange and for investment. Gold is scarce. It is durable. More than 95 percent of all the gold ever mined during the past 5,000 years is still in circulation. It is inherently valuable because of its beauty and its usefulness in industrial and decorative applications.
Gold has been referred to as the "doomsday metal" because of its traditional role as a bulwark against economic, social, and political upheaval and the resulting loss of confidence in other investments, even those guaranteed by national governments.
As an investment, gold is not for the faint of heart or for people who desire a high level of predictability. Its value can fluctuate daily, owing to economic and political conditions. When interest rates in the United States fall, the dollar grows weaker in relation to other currencies. As a result, foreign businesspeople find U.S. investment less attractive, and some of them invest in gold instead. This forces the price of gold higher. When interest rates in the United States rise, the reverse occurs.
Investing in gold may be done in several ways: bullion, coins, shares and funds, and certificates. A number of companies specialize in the buying and selling of gold.
Sphere: Related Content
November 9, 2007
How to Spot a Rich Person
I was talking to a Jaguar salesman last week and asked him what the hardest part of his job was.
“You can’t tell who’s rich anymore,” he said. “It used to be if someone walked in with jeans and a T-shirt I could ignore them or ask them to leave. Now that guy could be a billionaire. You have to be nice to everybody these days.”
Tim Blixseth, the billionaire timber tycoon, once told me about the time he visited a men’s clothing store near Palm Springs to buy a suit for his son. When they walked in, wearing work boots and jeans, the salesman headed them off at the door and said “I think you’d be better off at the mall.” They eventually bought a suit, but Tim made sure to drive by the front door in his Rolls Royce and wave goodbye to the salesman.
Identifying the rich used to be fairly simple: They dressed, talked and looked a certain way. They had iconic last names like Hutton or Hearst or Phipps, often with Roman numerals at the end.
Today, wealth has been democratized and individualized, and the rich come in all ages, shapes, sizes and ethnicities. People often ask me, “What do the rich wear? How can you tell by looking at someone today if they’re rich?” Such questioners are usually recalling old myths about watches and shoes, but my answer is that there is no way to tell. The rich don’t have a uniform anymore. Today, they all wear their wealth differently, from the dot-commers in T-shirts to the hedge-funders in khaki to the CEOs in classic pinstripes.
In her Journal column today, Christina Binkley takes a stroll down Rodeo Drive to do an “emotional audit” of salespeople — i.e., to find out how nice and welcoming they were. A woman at jeweler Van Cleef “sent us out the door with little more than her scowl,” she writes, while a woman at Yves Saint Laurent didn’t offer a smile but a “single upturned corner” of her mouth. In other words: not welcoming.
As Christina writes, “Many luxury companies are finding there’s a fine line between positioning themselves as lofty — to signal just the right amount of exclusivity — and being so haughty they alienate their customers.”
I think it goes beyond balance. When that guy who walks in your art gallery wearing jeans and a sweater could be David Geffen, you need to be nice to everyone. It’s especially true for retailers trying to peddle “mass luxury.” Once you start selling $50 silver trinkets and $60 sunglasses and calling them “luxury,” you can no longer be as choosy with your customers.
http://blogs.wsj.com/wealth/2007/11/01/how-to-spot-a-rich-person/trackback/
Markets Tumble As Dollar's Fall Adds to Anxiety
The credit crisis sparked by mortgage problems reared its head anew, as stocks tumbled on fears about shaky financial institutions. This time, the dollar's fall to record lows and oil's flirtation with $100 a barrel added to the worrisome brew.
The Dow Jones Industrial Average fell 360.92 points, or 2.64%, to 13300.02. The index has now wiped out all of its gains since the Federal Reserve on Sept. 18 made the first of its two recent interest-rate cuts, sparking a short-lived rally that sent the Dow to a record high Oct. 9.
Wall Street is once again nervous about how much damage remains from subprime mortgages and other bad credit, even after tens of billions of dollars in write-downs. The wave of credit-rating downgrades on mortgage securities continued yesterday, and bank shares were especially hard-hit. Shares of Washington Mutual Inc., a major lender, lost 17%, and after the market closed American International Group Inc. and Morgan Stanley reported new write-downs connected to housing problems. (See related article.)
Something else is beginning to nag at investors. The dollar and oil are pushing to opposite extremes, one to record lows and the other near record highs. Gold, an age-old refuge in times of financial turmoil, is once again above $800 an ounce. The combination of economic worries and market movements is reminiscent of the chaotic 1970s, when the U.S. was beset by inflation, recession and a stock market going nowhere.
The global economy is much different today than it was then. Inflation is generally under control, and most investors trust central banks to keep it that way. The U.S. economy, though slowing, has kept growing even as higher energy prices hit consumers.
Still, the parallel points to some challenges that policy makers are trying hard to manage. One is the threat of inflation. Another is the risk of a broad international loss of confidence in America and its currency, which has long been the place where countries with big foreign reserves put the bulk of their assets.
"This is a critical juncture," said Jim O'Neill, head of global economic research at Goldman Sachs. "The dollar is behaving in the past couple of days as though the market is testing its reserve-currency status."
On Wednesday, the dollar took a sharp turn lower against several major currencies, sliding to a new record low against the euro and hitting its lowest level in decades versus the Canadian dollar. One dollar now buys only about 93 Canadian cents. At one point in 2000, the euro was worth only 85 cents. Now one euro buys $1.46.
One spark behind the dollar's latest downturn was a comment by a Chinese lawmaker suggesting that the country should buy more euros. Although the lawmaker isn't responsible for financial policy and later amended the remark, the comment fueled pessimism about the dollar's prospects amid slowing U.S. economic growth.
The price of oil, meanwhile, is pushing toward $100 a barrel, a price that just a few years ago most economists agreed could fuel a nasty recession. Strong demand from developing countries, constrained supplies around the world and speculative pressure are joining to push it higher. And gold closed yesterday at $831 an ounce on the New York Mercantile Exchange, its highest level since 1980, as investors sought its perceived protection against inflation.
The combination of movements in the dollar, oil and gold was similar in the 1970s. Back then, the dollar became unhinged after President Nixon abandoned the gold standard and the global system for regulating exchange rates collapsed with it. That was one factor behind oil's rise during that decade. Because oil is traded in dollars, exporters were earning less in other currencies for every barrel, and had a big incentive to restrict supply to drive up prices.
The world is far different today. The 1970s were wracked by recession and double-digit inflation. Today, strong global growth is a major force pushing the price of oil and the dollar in opposite directions. Central banks are acutely aware of the danger posed by inflation, and declare their readiness to move quickly to combat it. U.S. consumer prices in October were up 2.8% from a year earlier.
"Economies are much more resilient and much less prone to a creeping inflation process," says Eric Chaney, an economist at Morgan Stanley in London.
Fears of a falling currency were likely a factor when the Fed signaled last week, at the time of its latest interest-rate cut, a reluctance to cut rates again. The dollar's decline "could lead to higher prices for imported goods," Fed governor Kevin Warsh said yesterday. "If these same forces cause inflation expectations to become less reliably anchored, then inflation could increase in the longer run as well."
So far, the dollar's decline has benefited U.S. exporters by making their goods cheaper abroad and boosting the value in dollars of money earned overseas. That has helped lift the share prices of many multinationals. Taken too far, however, a dollar slide could hurt stocks broadly, if investors become unwilling to hold U.S. dollar assets.
"If you get a dollar rout and people start dumping quickly, that will complicate monetary policy and undermine the Goldilocks scenario that investors are hanging on to," said Russ Koesterich, head of investment strategy at Barclays Global Investors.
George Magnus, a senior economic adviser at UBS AG, notes some echoes of the past in the way some international investors are treating the dollar. Back in the 1970s, Germany and Japan, which had supported the dollar, tried to demand gold in exchange for their burgeoning reserves.
Today it's oil-producing countries and emerging economies like China that find themselves sitting on mountains of dollar reserves that are losing value. Some are looking to diversify their reserves, for instance by creating sovereign wealth funds that turn those dollars into other real assets. China has purchased a stake in Blackstone Group, the private-equity firm. "Some of the storylines are the same but the characters are obviously different," says Mr. Magnus.
As before, a sliding dollar gives oil exporters an incentive to keep prices high to avoid eroding their own purchasing power, although the major causes of high oil prices are soaring demand and constrained supply as key producer nations are unable to raise output.
The dollar's swoon means that consumers in different parts of the world don't feel the same pain. Since the start of 2003, oil prices in dollars have tripled, but in euro terms, they have a little more than doubled.
Some economists fret about a vicious cycle in which Persian Gulf countries put more of their oil earnings into the euro and other currencies, which drives down the dollar and leads the oil producers to keep a tighter leash on production. That drives up oil prices and brings in even more money for the countries to convert into nondollar currencies.
Some analysts say oil markets have attracted investors specifically looking for a hedge against the rapidly falling dollar. "The perception is that you want to own whatever benefits from the dollar weakening. And commodities are an ideal play on that," says Ben Dell, an energy analyst at Sanford C. Bernstein & Co.
John Taylor, head of FX Concepts, a New York-based hedge fund that specializes in currency trading, was a foreign-exchange analyst in 1970s. Then, he says, the U.S. was also struggling with budget deficits due to war spending and with a spike in commodity prices. One advantage the dollar enjoyed in the 1970s was that the U.S. still saved more than it spent. Now the country depends on foreign money to finance its debt, which could keep the dollar under pressure.
But Mr. Taylor is also more optimistic about the ability of leading governments to coordinate action to stop the dollar's slide if needed. The Group of Seven developed nations, which had its first meetings in the 1970s, has built three decades of experience responding to currency gyrations.
By JOANNA SLATER and CRAIG KARMIN
November 8, 2007; Page A1
April 11, 2007
Making Money in Bad Companies
How Counterintuitive Investments Can Improve Your Results
Sometimes, you can make more money by buying the least attractive stock in a particular industry if you believe the sector is due for a turnaround. Although it is counterintuitive, a little bit of simple math can show why it makes perfect sense and can leave the shrewd analyst with a much fatter pocketbook. These types of operations are for investors that have already built their complete portfolio and are on financially sound footing; they should not represent a substantial portion of your assets and are best left to those who have a good grasp of the economics and risks of the situation.
An Example in the Oil Industry
Imagine it is the late 1990’s and crude oil is $10 per barrel.
You have some spare capital with which you wish to speculate. It is your belief that oil will soon skyrocket to $30 per barrel and you’d like to find a way to take advantage of your hunch. Ordinarily, as a long-term investor you would look for the company with the best economics and stick your capital in the shares, parking them for decades as you collected and reinvested the dividends. However, you remember a technique taught in Security Analysis and actually seek out the least profitable oil companies and begin buying up shares.
Why would you do this? Imagine you are looking at two different fictional oil companies:
- Company A is a great business. Crude is currently $10 per barrel, and its exploration and other costs are $6 per barrel, leaving a $4 per barrel profit.
- Company B is a terrible business in comparison. It has exploration and other expenses of $9 per barrel, leaving only $1 per barrel in profit at the current crude price of $10 per barrel.
Now, imagine that crude skyrockets to $30 per barrel. Here are the numbers for each company:
- Company A makes $24 per barrel in profit. ($30 per barrel crude price - $6 in expenses = $24 profit).
- Company B makes $21 per barrel in profit ($30 per barrel crude price - $9 in expenses = $21).
More Information
Typically, these operations are most successful in industries that are dependent upon underlying commodity prices for their profitability such as copper producers, gold mines, oil companies, etc. The wild fluctuations in the underlying commodity can result in huge swings in the earnings of the business, making them good candidates. Of course, unless you are a professional, you should not engage in these types of transactions, instead focusing on building long-term wealth through value based, intelligent, and discipline investments that focus on getting the most earnings at the least risk.
beginnersinvest.about.com
March 4, 2007
Iran gives green light to five foreign investors
Iran’s Ministry of Economic Affairs and Finance Saturday approved five foreign-financed projects -- three valued at $950,000 and two worth €8.9 million.
To enforce Article 6 of the law on supporting foreign investment, the permission was granted to Georgian Mining-Geological Project Ltd.
The company was allowed to invest in exploratory projects of basic metals such as copper. The whole capital is $250,000, of which 90 percent is invested by the Georgian company and 10 percent by Iran’s private sector.
Two Afghan nationals received the nod to establish an independent Iranian company to process and package sesame. The company’s capital is equal to $500,000.
Two other Afghan investors were also permitted to invest in Mashhad clothing companies. Totally $200,000 will be invested in the project.
The other permit was given to Austria’s Voest-Alpin Intertrading Company that is to invest in the Caspian Cereals Trading Company by €90,000, 48 percent of the stocks, to construct warehouse, and loading and unloading installations.
Three Iranians are the others who were allowed to invest in paper manufacturing project via establishing an independent Iranian company by an €8.7 million investment.
Sphere: Related ContentFebruary 28, 2007
Survive a market drop - and make it work for you
Survive a market drop - and make it work for you
Losing money never feels good. But keep things in perspective and you can boost long-term returns.
It takes nerves of steel to shake off a stock drop like the one that came Tuesday - even conservative index-fund investors are more than 3 percent poorer.
But the world's best investors not only shake them off - they thrive on them.
They know sell-offs are common, perfectly normal (see table), and even healthy. When stocks go way up in a hurry, their prices become unrealistically high. Only by falling occasionally (and even sharply) in the short run can stocks continue to rise in the long run - without the agony of today's drop, the ecstasy of tomorrow's good returns becomes impossible.
Consider the terrible slide of 1973-74, when the S&P 500 index lost 48 percent of its value. Richard Nixon had resigned the Presidency, oil prices had quadrupled, Cleveland and New York City were on the verge of bankruptcy, and inflation had flared up to 12 percent.
If ever there's been a good time to panic, that had to be it. But as the old saying goes, things are darkest before the dawn. If you'd sold out of stocks at the end of 1974, you would have missed 1975's 37.2 percent return and 1976's 23.8 percent gain - two very strong years for the stock market.
Even after the Dow's wrenching plunge in Oct. 1987, remember that the index actually ended up rising 2 percent in value that year. And it took only 15 months (until January 1989) for the Dow to make its way back above 2246.73, the closing price on the last trading day before Black Monday.
In fact, there's such a thing as paying too much attention to your money. In the late 1980s, Paul Andreassen, a psychologist then at Harvard University, conducted a series of laboratory experiments to determine how investors respond to financial news.
He found that people who pay close attention to news updates actually earn lower returns than people who seldom follow the news.
When you think about this a little more, it actually makes good sense. News coverage tends to make market movements seem even bigger than they are - and to make them seem likely to persist just when they are most likely to reverse.
Fortunately, there are several simple and effective steps you can take to turn a stock market crash to your advantage.
Amp up your 401(k). Since a down market can be a great time to buy solid investments at bargain prices, contribute as much to your 401(k) as you can, because you'll be picking up more shares for the money, which will pay off when the market rebounds.
If you can't contribute the maximum your plan allows, at the very least contribute as much as is required to receive the company match. Typically, companies match 50 cents on every dollar you contribute, up to 6 percent of your compensation.
That means for each dollar you invest up to 6 percent, your employer adds another 50 cents, instantly transforming your investment into $1.50. This will not only help cushion any fall in stock prices, but it will amplify your gains once the market recovers.
Adjust your risk. A market sell-off is a good time for a gut check. Did the mutual funds you own take too much risk and fall much more than their respective indexes?
Obviously you would have wished you'd known before this decline. But at least you'll know which funds you want to ride into the next one.
It's also a good time to make sure you have the right mix of stocks and bonds, which can add ballast to a portfolio during downdrafts. Even if you have a lot of years to go, a decent dose of bonds - say 10 to 20 percent - is a good idea: you'll still get a lot of the growth stocks offer without as much volatility.
Determine your deadlines. Ask yourself when you will need the money you've invested. For example, if you have a newborn child, it's a good idea to invest some money to pay college tuition down the road - and you can put most of it in stocks, since 18 years should be long enough for the market to recover from a crash.
But if you're about to make a down payment on your dream house, that money should go in a safer bucket, where a stock market crash can't hurt it; there, you want to hold mainly cash and bonds. Tuesday's drop was relatively small and you can still make those adjustments.
Spread your bets. If all you owned was U.S. stocks or stock funds, the crash has just reminded you that being diversified is the best offensive - and defensive - weapon in any investor's arsenal. Even if you're young and like to take risks, you should have some cash, some bonds, and some foreign stocks, which, over the long run, will combine with your U.S. stocks to lower your risks without crimping your returns.
Sphere: Related ContentFebruary 23, 2007
The Best Time to Buy Everything
The Best Time to Buy Everything
AT 50 CENTS a roll — instead of the regular retail price of $4 — buying wrapping paper after New Year's is an easy way to save. The same holds true for buying half-price inflatable pool loungers and patio furniture after Labor Day weekend.
In fact, bargain lovers know that there's a smart time to buy just about anything. For example, those looking for a great deal on a car should shop on weekday mornings in September. Groceries are cheapest on Sunday evenings.
We talked to the experts, and found the best time to buy everything from wine to wedding dresses.
Airplane Tickets
When to buy: On a Wednesday, 21 days (or a couple of days earlier) before your flight.
Why: Airlines make major pricing changes (and run fare sales) every week, typically on Tuesday evenings and Wednesday mornings. About 21 days out from your flight, you'll see plenty of deals out there as airlines scramble to fill seats, says Anne Banas, executive editor of SmarterTravel.com, a consumer travel advice Web site. Don't wait much longer, she cautions; prices jump significantly from 14 to seven days ahead of departure.
Appliances
When to buy: During a holiday weekend.
Why: You'll find sales on select models all year long, but retailers bring out the big guns for holiday weekends, says Carolyn Forte, homecare director for the Good Housekeeping Institute. But don't worry about spending your Fourth of July and Labor Day weekends shopping for a new fridge — smaller holidays like Columbus Day and President's Day have their share of sales, too.
Baby Clothes
When to buy: During your pregnancy.
Why: Once you know your due date, keep an eye out for end-of-season clearances, recommends Alan Fields, co-author of "Baby Bargains." "If you're [newly] pregnant now, you know you'll be having a baby next summer," he says. "Well, right now, stores are closing out all the summer clothes." You can pick up newborn essentials like onesies for less than half price. (For more ways to save, see our column Oh Baby!)
Broadway Tickets
When to buy: Hours before the curtain rises.
Why: How does a $25 front-row seat to the smash musical "Wicked" sound? Several musicals offer same-day ticket lotteries that offer up orchestra seats at inexpensive prices. If you'd rather not gamble on getting a seat, wait in line at the famous TKTS booth in Times Square. There, you can get tickets for hit musicals for up to 50% off. On a recent night, prime seats were available for "Hairspray," "Rent," "Sweeney Todd" and "Beauty & the Beast."
Cars
When to buy: Weekday mornings in September.
Why: By September, all the next year's models have arrived at the lot, and dealers are desperate to get rid of the current year's leftovers, says Phil Reed, consumer advice editor for Edmunds.com. It's the prime time of year for incentives and sales, not to mention bargaining. "Any car that's been on the lot for a long time loses its value in the eyes of the car salesman," he says.
Heading to the dealership on a weekday morning also helps because there's low foot traffic, meaning you'll have ample time to negotiate and fewer people trying to buy the same car. The more demand, the less willing a salesman is to go down on price, says Reed.
Champagne
When to buy: December
Why: Most people assume that because everyone wants a good bottle of Champagne for New Year's Eve that prices go up during the holidays, says Sharon Castillo, director of the Office of Champagne, USA, which represents the trade association of growers in the Champagne region. But due to fierce competition among the Champagne houses, prices are actually lower during the holidays than they are at any other time of year.
Clothing
When to buy: Thursday evenings, six to eight weeks after an item arrives in stores.
Why: After an item lingers in stores a month or more, retailers start dropping its price to get it out the door, says Kathryn Finney, author of "How to Be a Budget Fashionista." These season-end clearances tend to be the same month that designers host fashion weeks (February and September) to preview the next fall or spring collections. So smart buyers can check the catwalk to see if any of this season's trends — say, leggings or military-style jackets — will still be hot next year, and then scoop them up on clearance.
Hitting the mall on a weekday ensures you'll get a good selection. "On the weekend, you'll only get picked-over stuff because the stores don't have time to restock," she says. By Thursday, most of the weekend sales have begun, but everything available is on the floor.
Computers and electronics
When to buy: Just after a new model is launched.
Why: When the latest and greatest of a product is released, you'll often see prices drop on what had previously been the best thing out there, says Tom Merritt, executive editor for CNET, an electronics review web site. Case in point: When Apple released the Nano last September, prices for the now-discontinued Mini dropped 12%, from $199 for a 4GB to about $175. So keep your eyes open for announcements from major manufacturers. Want a little less work? Time your purchases for after big annual technology show like MacWorld (next held Jan. 8-12, 2007) and the International Consumer Electronics Show(next held Jan. 8-11, 2007).
Gas
When to buy: Early morning or late evening on a weekday.
Why: Time your trip based on whether prices are rising or falling, advises Marshall Brain, founder of HowStuffWorks, a consumer guide. Gas stations tend to change their prices between 10 a.m. and noon, so hit the pump in the early morning if gas prices are on the rise. Go later in the day if prices are falling. Tipsters on GasPriceWatch.com reported that on Sept. 3, a WaWa gas station in Lanoka Harbor, N.J., was offering regular gas for $2.85 a gallon. One day later the station's price had dropped to $2.65. In that case, going early would have cost you 20 cents more per gallon.
Try not to buy gas on the weekends, Brain says. Gas prices are often slightly elevated, as stations try to profit from leisure travelers.
Gift Cards
When to buy: A day or two before you give it.
Why: These days, gift cards carry a plethora of hidden pitfalls, from expiration dates to dormancy fees, says Dan Horne, a professor of marketing at Providence College known as the "Gift Card Guru." That countdown to fees starts as soon as you buy the card. "You don't want to short-change the recipient," he says.
Groceries
When to buy: Sunday evenings.
Why: Store sales tend to run Wednesday through Tuesday, says Teri Gault, founder of The Grocery Game, a consumer savings program. On Sunday, you'll also have the latest round of manufacturer's coupons from your morning paper. "You can maximize your coupons available for that shopping week," she says. Heading to the store close to closing time means you'll have access to sales on fresh items that must be sold by the end of the day, such as meats and baked goods.
Of course, you'll also benefit from in-season items that can be frozen for use later in the year, says Gault. That means turkeys at Thanksgiving and hams at Christmas and Easter. During the spring and summer, buy fresh produce. Peaches bought at $1 per pound now can be kept frozen for smoothies and pies throughout the winter, she says.
Shrubs, Trees and Other Plants
When to buy: Fall
Why: Take a break from raking up leaves to purchase trees, shrubs and other perennials for your yard. Prices nosedive after midsummer, as garden supply stores and nurseries try to clear out their stock. You can also get great deals on bulbs during the fall. Just store them according to the package instructions for best planting results next spring.
Televisions
When to buy: Six to 12 months after a particular model is launched.
Why: A new TV drops in price after a few months on the market, says CNET's Merritt. Although there will be newer models out there, it's unlikely they'll offer any significant improvements to justify that brand new price. "The technology is proceeding at such a pace that the models out there are not going to be obsolete anytime soon," he says.
Wedding Dresses
When to buy: Between Thanksgiving and Christmas.
Why: Boutiques are stocked up on dresses for the post-Christmas rush (many people get engaged over the holidays), yet traffic is low, says Fields, who also co-authored "Bridal Bargains." "It's not a busy time to buy a wedding dress because people are thinking about the holidays," he says. You'll also have room to bargain.
Wine
When to buy: Early fall.
Why: For best selection, you can't beat the fall harvest season. That's when most vineyards release their latest vintages. Buying in August and September is also your best shot at snagging so-called "cult wines" — those with limited production and high demand, says Kathleen Schumacher-Hoertkorn, CEO of New Vine Logistics, an online interstate wine retailer. (
Sphere: Related ContentFebruary 21, 2007
102 Personal Finance Tips Your Professor Never Taught You
If you're anything like me, you graduated from college and perhaps even took a finance class or accounting class here or there, but you didn't learn anything about managing your personal finances. In fact, there probably wasn't even an opportunity to take any such class in either high school or college. But if college is partly about training us for a job, shouldn't we learn what to do with the money we earn from a job? Especially in a country where 45% of college students are in credit card debt and 40% of all Americans say they live beyond their means, I think it's time to wise up to some of the challenges of money management. A few (say, 102) simple rules can help get your financial life (back) on the right track.
The Painfully Obvious But Rarely Followed Tips
- Pay yourself first. Try to put away at least 10% of your pre-tax income into a savings account.
- Spend less than you earn. While this seems obvious, Americans are notorious for doing just the opposite. Stop spending and start saving.
- Pay your bills on time. Avoid needless late fees and know how much money you actually have.
- Avoid debt to the extent possible. Student loans and mortgages can be "good debt", but even then, make paying them off a priority.
- Set a budget. And live by it. Use a computer program or just a paper and pencil. Whatever works.
- Set concrete goals. Know when you want to buy a new home, when you want to retire, and how much you are expecting each to cost you.
- Have an emergency fund. Have at least three months' income (some say six) in a high-yield savings account that can be easily accessed.
Career and Education
- Get educated. A college education always pays for itself and more. In 2004, bachelor's degree holders earned an average of $51,206 per year, while high school graduates earned only $27,915, according to Census data compiled by HighBeam Research.
- Your career is your most valuable asset. Manage it with a higher priority than you would with any other investment. Remember that without this asset, you couldn't survive.
- Save enough. You should try to save enough to cover at least one-third of your kids' total college costs.
- Consider public schools. Especially for college, state schools can often times be just as prestigious, if not more, than private schools.
- Consider community college or online college for your first year or two. You can then transfer these credits to a more expensive (and prestigious) school to finish your final two or three years.
- Invest in a 529 college savings account. It's tax-free. What more needs to be said?
- Ask for a raise. Use the Salary Wizard Calculator to see if you're making as much as you should. If not, consider asking for a raise, especially if you've been at the company for more than a year.
- Get a professional certificate. Some professions offer a certificate that, if earned, will generally provide you with a higher salary.
- Don't major in English. If you love studying English, there's nothing wrong with that. Just be aware that English majors generally don't earn very much. Six of the top ten list of majors with the highest salaries are engineering majors, with chemical engineering topping the list.
Credit and Loans
- Get a rewards card. If you need a credit card, the best type to get is a no-fee rewards card that you pay in full every month.
- Borrow no more than 30% of your available credit. Borrow any more, and your credit score won't look too good.
- Pay off your credit card debt. Credit card debt is usually the debt with the most interest. So pay it off first. Better yet, don't accumulate it in the first place.
- Don't use your credit card for cash advances. It will harm your credit score and the interest rates are outrageous.
- Know your credit score. Order your credit score from Equifax, Experian, and/or TransUnion.
- Protect yourself from identity theft. Obtain your free credit report at least once per year and follow these tips.
- Pay all credit card balances in full each month. Leaving a balance on a credit card account will leave you susceptible to a very high APR. You may as well be throwing cash into the fireplace.
- Consolidate your loans. Especially those student loans. With a student consolidation loan, you can lock in several loans at a fixed interest rate and have just one lender to pay each month.
- Avoid payday loans. Bottom line: they're scammy and they charge high interest rates. If you do need an emergency cash loan, just be aware of the risk of high interest rates.
- Beware of scams. There are a lot of scams that deal with credit. Debt suspension offers, paying fees in advance, buying credit protection, and rebuilding credit usually sound too good to be true. There's a reason for this: they are.
- Be cautious with home equity loans. If you can't make a payment toward a home equity loan, you could lose your house.
Frugality
- Buy a used car. The most expensive miles on a car are the first 10,000. Let someone else drive those for you. Buying used can save a lot of money considering how little value the car has actually lost.
- Be patient. Don't buy that new gadget today. Wait a month or two and the price will certainly go down.
- Buy airline tickets as far in advance as possible. The cheapest flights are the ones the are bought at least two months in advance. For holiday travel especially, buy as soon as you can.
- Get the most bang for your airline miles. Be sure each airline mile you redeem is providing you with at least 1 cent toward the price of a ticket.
- Never buy the extended warranty. Often times, your new product already comes with a 90-day or 1-year warranty (when most "faulty" things will break, anyway). There's a reason everyone wants to sell you an extended warranty: they're hugely profitable (for the business, not for you).
- Make your own meals. Eating out gets to be expensive if you do it too often.
- Make your home more energy efficient. Bankrate.com has a list of 17 ways to do so.
- Get a better cell phone plan. If you've had the same cell phone plan for a couple of years, chances are there's something better out there. Look around or call your current provider and ask for a better deal.
- Banking fees are for suckers. A lot of banks will charge you checking fees or minimum account balance fees. Find a bank that does not.
- Keep track of your spending. At least for a month, keep a journal of everything you purchase. At the end of the month, review your spending priorities and make adjustments.
- Ditch your car. Walk, bicycle, or take public transportation. You'll save on car payments, gasoline, parking, and speeding tickets.
- Use your frequent flier miles often. They may expire before you know it. There's no sense in stockpiling them. If you have enough for a free flight, use them.
- Buy through your favorite airline's partners merchant store. AA.com, for instance, has multiple retail partners from whom you can earn frequent flier miles with each purchase.
- Negotiate fees. For example, ask a bank to waive late fees. Often enough, they will.
- Get your free money. Money might be owed to you. Get it.
Homeowning
Upgrade your old bathrooms and kitchens. These are often selling points on a house. A modernized bathroom can provide over a 100% return, while a modernized kitchen can return about 90%.
- Refinance your mortgage if you can cut at least one point. The costs of refinancing are considerable, so it should only be done if you can trim your interest rate by at least 1%.
- Never spend more than 2 1/2 times your income on a home. Know what you can afford and what you cannot.
- Put at least 20% down on a home. Making a down payment of less than 20% will usually result in a private mortgage insurance (PMI) fee being added. This is usually 0.5%, meaning it could cost you about $1,000 a year on a $200,000 principal.
- Use a mortgage broker. The better your mortgage, the more you'll save. Shop around.
- Investigate different types of mortgages. There are dozens of mortgage options out there. Find the one that suits you best.
- Buy a house that needs repairs. Buy for cheap and then add to the value with repairs. You'll save money
- Deal directly with the seller. Avoiding agents' fees is a good thing. If you do decide to hire an agent, do your homework and get one who will be on the same page as you. You should be the one calling the shots.
- Find out about homeowner taxes. Know what the property tax is in your area and be prepared to have enough to pay it.
- Find out about secondary costs. In addition to monthly payments, be prepared to incur some secondary costs, including repairs, notary, escrow fees, and title insurance.
- Get the house inspected by a professional. Have the house thoroughly inspected before making an offer.
- Negotiate the selling price. Home prices are almost always negotiable. Never offer the asking price, but rather a few percentage points below it.
Insurance
- Insure yourself against financial ruin. There should be no higher financial priority in your life than health insurance. Without it, if your health takes a turn for the worst, hospital bills could easily bankrupt you and your family.
- High deductible is your friend. Keep those monthly premiums as low as you can.
- Don't use insurance as an investment vehicle. Liquidity and certainty are not on your side.
- Have enough. Have enough life insurance to replace at least five years of your salary, ten years if you have kids or significant debts.
- Don't have too much. You need health insurance. If you're single and have no dependents, you don't need life insurance.
- Think about insurance before you buy a car. Typically, the more expensive your car, the higher your insurance cost will be. Take this into account when buying a car.
- Choose the right car insurance. Don't assume you should get the cheapest auto insurance or the one with the most protection. Find out exactly how much coverage you need.
- Consider dropping collision coverage. Especially if you have an older car, there's not much sense in protecting it against getting wrecked if it's already a wreck.
- Buy homeowner and auto coverage from the same insurer. You'll usually get a better deal than you would if you bought the two separately.
- Write a will. If you have any dependents, you need a will. Write one and protect your loved ones.
Investing
Be wary of mutual funds. Few mutual fund managers can beat both the market and the expense fee that they charge.
- Don't try to pick stocks. Picking stocks can be a very dangerous game, unless you know what you're doing.
- Avoid fees. With long term investing, fees are a primary factor in total return. Avoid brokers who take high commissions and avoid funds with high management costs.
- Stocks are high risk, high reward. Over the long term, stocks have historically outperformed all other investments. But over the short term, they can be risky if they lose a lot of value in a short period of time. So, do invest with stocks, but only with funds you won't need to withdraw over the short term.
- Stocks first, bonds later. Invest in stocks when you're young, and then move into bonds are you grow older. Stocks are a good long-term investment strategy. If you're still young when the market turns south, you'll have plenty of years left ahead of you to make it up. As you get older, invest in bonds. They're less risky.
- Past performance is not a guarantee of future success. Just because a stock has been up for the last six months does not mean it will continue to go up tomorrow.
- Diversify your portfolio. Never invest more than 10% of your portfolio in any one company. Even if it's a "sure thing".
- Build a nest egg that is 25 times the annual investment income you need. Don't think you can rely solely on social security.
- If you don't understand how an investment works, don't buy it. Research an investment vehicle thoroughly before you get into it.
- Don't borrow from your 401(k). Think of it as robbing yourself. You'll get hit with high fees and taxes, too.
- Invest for the long term. There is no such thing as a guaranteed get rich quick scheme. And in investing, there is no high reward without a high risk. Use caution and diversify your portfolio for the long run.
- Seek professional help. Don't feel the need to turn yourself into a day trader. Hire a personal financial advisor if you can afford to.
- "Fee-only" is your friend. Go with a fee-only financial advisor, not a fee-based or a commission-based. Only fee-only advisors are legally obligated to act in your best interests.
- Index funds are your friend. Index funds are passively managed and are generally cheaper and more tax-efficient than actively managed funds.
Retirement
- Optimize your 401(k). If your employer offers employer match, you must set your 401(k) contribution to at least that amount.
- Play the IRA game smart. Max out your 401(k) first, your Roth IRA second, then your traditional IRA.
- Increase your 401(k) contribution. Especially when you get a raise. Some employers even give you the option of having your contribution automatically taken out of your paycheck.
- Don't buy stock in the company you work for. This is the opposite of diversification. What happens if the stock tanks, and you lose your job and pension because of downsizing?
- Don't be afraid of stocks. More than two-thirds of 401(k) money is in low-yielding bonds. Especially if you're still young, invest in stocks. Over the long-run, they perform the best.
- Sign up for Medicare. Don't forget to sign up for Medicare before you turn 65, even if you haven't retired yet.
- Plan. Use the Social Security Retirement Planner to ensure that your retirement goes smoothly.
Saving
- Save now. It doesn't matter if you're six or 60. You should be saving a little bit every month, aside from retirement savings. The sooner you start, the better.
- Pay off high interest debts before you start saving. Earning 5% in your savings account isn't going to do much good if you're accruing 17% interest on your credit card debt.
- Save at least 10% of your annual salary for retirement. This should help to provide a nice retirement fund when you need it.
- Keep at least three months' worth of living expenses in a savings account or high-yield money market account.
- Open an online savings account. Online savings accounts, such as Emigrant Direct or HSBC Direct, offer yields of greater than 5%.
- Set up an automatic savings plan. You should be able to set up your checking account so that a certain amount is automatically transferred to a savings account each month. It's a good way to force yourself to save.
Taxes
Know when to file your taxes. If you expect a refund, file your taxes as early as you can. If you owe money, file as close to the due date (usually April 15) as possible.
- Consider itemizing your deductions. If all of those tax breaks receipts you keep add up to more than your standard deduction, it is definitely worth filling out all of the extra paperwork to itemize.
- Be aware of other tax deductions. Contributions to a traditional IRA, student loan interest payments, alimony payments.
- Save money on tax credits. Some tax credits to look out for include the Hope Scholarship Credit, Lifetime Learning Credit, Child Tax Credit, Earned Income Credit, and Child Care Credit.
- Bunch your deductions into one year. If you're taking the standard deduction this year, consider making charitable contributions and office-related purchases after January 1, so you can possibly itemize your deductions next year.
- Recheck your withholding every year. If you get married, have kids, or become the head of a household, you'll want to add these allowances on your W-4 so you can have fewer taxes withheld.
- Keep your receipts (especially on big ticket items). You'll want them if you plan to itemize, or in case you get audited.
- Concentrate on tax-free investments. Tax-free investments, like bonds, allow you to earn interest without being taxed.
- Buy a hybrid vehicle. Hybrids tend to be more expensive than their traditional counterparts, but you can save money on gasoline and possibly receive a tax credit of up to $3,400.
Lastly
- Take a deep breath. Even if you're only able to follow the first seven tips, which are the real basics, you will have already succeeded in making a huge positive difference in your financial life.
- Money isn't everything. Health, family, and happiness are important, too. And remember, money can't buy you love
December 12, 2006
10 rules for building wealth
Fumbling when it comes to investing? Don't panic. There are easy ways to get your money to work for you.
1. Start early
More than any one stock or mutual fund pick, the age you start investing will determine how much wealth you build. To illustrate: Employee A starts putting away $100 a month when she's 22. Her money grows at 8 percent a year, and after ten years she stops contributing - and lets her stake grow. Employee B waits until he's 32 to set aside $100 a month, also growing at 8 percent a year, and he keeps it up until he hits 64. When they both retire at 64, she will have $234,600, and he'll have only $177,400. Need we say more?
2. Use your 401(k)
If you're not already enrolled in your company's plan, stop reading now and sign up. Since you're putting in pretax dollars, a 401(k) is an unrivaled savings vehicle, and passing up an employer match is - literally - giving up free money. Confused about how to manage all the choices in your 401(k) plan? New pension legislation is encouraging companies to offer third-party investment advisory services, so call HR to find out if yours offers any on-the-house guidance.
3. Keep it simple
If you have a full-time job and it's not picking stocks, acknowledge that. Choosing three or four index funds - say, an S&P 500 fund, an EAFE fund, and a small-cap stock fund - will give you broad exposure. ETFs (low-cost mutual funds that trade like stocks) are also an easy way to invest in more exotic asset classes, like commodities. If you're close to retirement, consider life-cycle funds from Vanguard or T. Rowe Price, which will automatically rebalance your account according to your goals.
4. Don't try to beat the market
Even the best fund managers have trouble beating the S&P 500, so give up the chase. The most straightforward way to avoid this trap is to diversify your assets and then rebalance your portfolio at least once a year. Check your asset breakdown with Morningstar's free Instant X-Ray tool (www.morningstar.com). Essentially, rebalancing means selling some winners that are taking up too big a share of your portfolio and redeploying that cash to bulk up in areas that have lagged. (Buy low, sell high - get it?)
5. Don't chase trends
You want to grow your money for the long haul, so you can't switch your strategy every time you read the headlines. If you see an asset class that's catching fire - like real estate investment trusts (REITs) in the late '90s or commodities this year - ask yourself some basic questions: Can I describe how it works in plain English? If not, start your research at Investopedia.com. Why is it so popular right now? If the answer is "Paris Hilton bought some," best to stay away.
6. Make saving automatic
No one wants to think about saving - so don't. Already more companies are making 401(k) enrollment automatic (34 percent of big companies, vs. virtually none ten years ago). If you're already maxing out your 401(k), see whether your company can transfer money directly from your paycheck into your Roth IRA or a taxable account. Or ask if your bank can transfer a set amount (even $100 a month) from your checking account into a high-interest-bearing online savings account (check out HSBC's and ING's offerings).
7. Go heavy on stocks
The more time you have, the more risk you should take. If you're just starting out, 80 percent to 100 percent of your assets ought to be in stocks. "If you have, say, 30 or 40 years, what happens over the next three months or even three years doesn't matter. If you need the money in two years and it drops 40 percent in one year, that's a problem," says Stuart Ritter, a certified financial planner with T. Rowe Price. The simplest trick? Subtract your age from 120: That's the percentage you should have in stocks; the rest should be in bonds.
8. Hold down fees
Be wary of any mutual fund charging a management fee higher than 1 percent (a few stellar managers may be worth it; most are not). A manager with a high buying and selling rate (called "turnover") should also set off warning bells. If you aren't interested in watching your fund manager like a hawk, stick with an index fund, like one from Vanguard, where expenses are typically around 0.2 percent. And if you're trading stocks, don't be fooled by low commissions: They add up.
9. Ditch credit card debt
All debt is not created equal, so rank yours by interest rate and pay off the bad stuff first. That usually means credit cards, which can carry interest rates as high as 30 percent. (Compare your card's APR with others at Bankrate.com.) On the other end of the scale are student loans. Those rates are generally between 3 and 6 percent, so consider making the minimum payment and investing in your 401(k) instead. Hey, even Supreme Court Justice Clarence Thomas was still paying off his school loans when he joined the bench.
10. Defer taxes
Eager to lock in your gains on a hot investment? Before you click on sell, consider the tax implications. In a taxable account, you'll pay 15 percent in capital gains taxes every time you sell a winner you've owned for more than a year (the longer you can defer paying taxes, the more time you're giving your money to grow). Come tax time, however, it can be a good move to sell losers in your portfolio to take advantage of the annual $3,000 capital-loss deduction limit and offset any capital gains on your winning picks.
December 10, 2006
Tax Stuff You Need to Keep in Your Records
Be sure and BOOKMARK this for future reference!
Here are some suggestions that I found in The Ernst & Young Tax Guide 2007 of records that you should keep on hand in addition to your income tax return.
I recommend that you…
1. Get yourself a hanging folder and label it for the tax year
2. Get three manila folders labeled with the following three categories: Income, Expense, and Credits
3. File all of your records according to which manila folder they belong in
4. Your accountant will LOVE you
INCOME
EXPENSE
- Domestic Employee Expense - Canceled checks, state unemployement tax payments; see Chapter 40 - What to Do If You Employ Domestic Help in the book
- Self-Employment Expense - Bills, canceled checks, receipts, bank statements, all business books and records
- IRA Contribution - Year-end account summary, deposit receipt
- Keogh Contribution - Year-end account summary, deposit receipt
- Alimony - Divorce settlement papers, canceled alimony checks
- Medical and Dental Expense - Bills, canceled checks, receipts, pay stubs if employer withholds medical insurance from wages
- Taxes - Canceled checks, mortgage statements, receipts, Form W-2
- Interest Expense - Bank statements, mortgage statements (Form 1098), canceled checks
- Charitable Contributions - Canceled checks, receipts, detailed description of noncash property contributed
- Miscellaneous Deductions - Receipts, canceled checks, or other documentary evidence (see Chapters 27 - 29 in the book
- Casualty and Theft Losses - Description of property, photograph of damaged property, receipts, canceled checks, policy and insurance reports
- Exemptions - Birth certificates, Social Security numbers
CREDITS
What Statistics on Home Sales Aren’t Saying
Down in Naples, Fla., a fast-growing city on the Gulf of Mexico, there was an auction of houses about a month ago.
An auction isn’t the usual way to sell a home, but it can make sense for people who don’t want to leave their houses on the market for months at a time and also don’t want to take the first offer to come along. So on a Saturday morning inside the Naples Beach Hotel and Golf Club, a few dozen houses went on the block in front of about 500 audience members.
Based on the official housing statistics, you might have guessed that the sellers would have made out just fine, despite all the talk of a real estate slump. According to one widely followed real estate index — tabulated by the government agency that regulates and Freddie Mac — the average house in Naples sold for 20 percent more this summer than it would have a year earlier.
But that wasn’t what happened at the auction. In fact, if you were at the beach club that Saturday, you could have been excused for thinking that the real estate market was crashing.
The highest bid on one three-bedroom ranch house with a pool was $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, received a high bid of $880,000, compared with $1.35 million a year earlier. On average, the bids suggested that the houses at the auction had lost about 25 percent of their value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the results.
Now, Naples is not a typical housing market. House prices nearly tripled in the first half of this decade, and speculators, who are more likely than residents to sell a house in a panic, flooded into the area in recent years. But with that said, Naples is not as unusual as you may think.
The truth is that the official numbers on house prices — the last refuge of soothing information about the real estate market on the coasts — are deeply misleading. Depending on which set you look at, you’ll see that prices have either continued to rise, albeit modestly, or have fallen slightly over the last year. But the statistics have a number of flaws, perhaps the biggest being that they are based only on homes that have actually sold. The numbers overlook all those homes that have been languishing on the market for months, getting only offers that their owners have not been willing to accept.
In reality, homes across much of Florida, California and the Northeast are worth a lot less than they were a year ago. The auction in Naples may have exaggerated the downturn in the market there, but not by much. Tom Doyle, a Naples real estate agent, estimated that a typical house there, sold in the normal way, would go for about 20 percent less than it did the previous fall.
In the Boston area, prices have fallen about 10 to 15 percent since the middle of 2005, estimated Chobee Hoy, who owns a real estate brokerage firm in Brookline. Jerome J. Manning, who runs the Massachusetts-based auction company that conducted the Naples sale, told me he thought that values had dropped about 20 percent around Boston. (The government, meanwhile, says the average price rose 1 percent from last summer to this summer. But here’s all you need to know about how well the government tracks the Boston market: the index excludes any mortgage larger than $417,000.)
In September of last year, Ms. Hoy sold a one-bedroom condominium in Brookline for $395,000. She recently sold another apartment of the same size in the same building for $300,000. Since March, her firm has been listing a house in the Fisher Hill neighborhood of Brookline that cost $995,000 when it last sold, in the summer of 2004. Ms. Hoy expects it to sell this time for less than $900,000.
The market in northern Virginia is similar: prices are down 10 to 15 percent, according to an analysis by Mr. Lawler, a former Fannie Mae executive who’s based there. In Portland, Me., the typical house has lost about 10 percent of its value in the last year and a half, said Bill Trask, the former head of the local Realtors’ board.
In New York City, where co-op boards generally bar the door to absentee speculators and creative mortgages, prices seem to have slid a bit in the last few months, but only to roughly their 2005 levels. In the New York suburbs, though, values have fallen perhaps 10 percent or more since last year. Prices also appear to be down in Sacramento and San Diego.
For many homeowners, of course, the decline doesn’t much matter. They didn’t really benefit from the run-up, and they won’t suffer from the decline. And for any renters hoping to buy a home, the fall in prices is downright good news.
Unfortunately, there are also a lot of families that took on huge mortgage debts based on the ephemeral peak values of their properties. In effect, they cashed in on the housing boom without cashing out. As Ed Smith Jr., the chief executive of Plaza Financial Group, a mortgage brokerage firm near San Diego, said, “So many people picked up their homes, turned them upside down and shook them like a piggy bank.”
The withdrawals have been so big that the average household in Boston now has slightly less equity in its home than it did in 2000, according to an analysis by Moody’s Economy.com that took inflation into account. And that analysis used the house prices reported by the National Association of Realtors, which appear to be more accurate than the government’s data right now but are still too rosy.
Then there are the people who bought their homes in the last couple of years and made almost no down payment. Many of them may now be underwater, owing more on their mortgages than their houses are worth.
Most worrisome, growing numbers of these families are falling behind on their mortgage payments, and they won’t be able to bail themselves out by refinancing or selling their homes. “We’re now going to combine a high amount of debt with falling home values,” said Mark Zandi, chief economist of Economy.com.
For the broader economy, this may turn out to be just a hiccup. Big piles of debt can often look scarier than they really are. Then again, the housing slump of 2006 may also be the start of something larger. Mr. Zandi considers it to be “the most significant threat to the global expansion.”
Over the last few decades, the world’s financial system has endured a crisis roughly once every three or four years. There was the stock market crash of 1987, the Asian and Mexican meltdowns in the 1990s, the dot-com implosion of 2000 and, most recently, the aftermath of Sept. 11, 2001. We may now be living on both borrowed money and borrowed time.
Sphere: Related Content
4 secrets of the successful job search
Snagging a new job is about more than having the right skills and suit.
Secret 1
Know where to look for jobs
Not only is it not your father's job search anymore. It's not even your slightly older sister's.
While employers still use headhunters to vet candidates, especially for senior positions, increasingly they are relying on resume scanning software and online "assessment" tests to do an initial sort of the wheat from the chaff.
And rather than posting an opening on a general jobs site, which can bring in too many you-must-be-joking candidates, companies are using jobs sites or parts of jobs sites that are specific to their industry, said Mark Bartz, cofounder of resume and job-search consulting firm Executive Careers Inc. They're also beefing up their corporate sites so potential hires with a specific interest in a company may submit resumes.
Increasingly, too, job seekers may submit resumes for a type of job rather than a specific job opening, said Ginny Gomez, vice president of product management of Peopleclick, a recruiting software and consulting firm.
When a job does open up, HR will electronically sort through the resumes looking for key words to find attractive candidates, Bartz said. (See Secret 2 on how to make your resume stand out.)
When you do use a corporate site to submit your resume, you may be asked a series of questions designed to give the employer some sense of whether your personality is a good fit for the type of job you're seeking and to test your advertised skills.
"(The questions) are an ever-growing component to a company's recruiting strategy and knowing this, candidates should know that by not completing an assessment, they are removing themselves from consideration," Gomez said.
Secret 2
Ensure a company wants to talk to you
Tailor your resume so that it highlights high up your experience relevant to the job or type of job in question. Make it easy on the person reading it to figure out why they should consider you, said Phil Carpenter, vice president of marketing at SimplyHired.com, a jobs search engine.
One way to do that is to "stress results, not activities," said Amy Hoover, executive vice president of TalentZoo, a recruiter specializing in communications jobs.
Your goal is to get the person who eventually reads your resume (and cover letter) to ask, "How did you do that?" said Mark Bartz, cofounder of resume and job-search consulting firm Executive Careers Inc.
What will set you apart from your competition is to give an answer that not only speaks to your education, training and experience, but also to soft skills that you possess but that can't be easily taught, such as intuition, discernment, creativity and resourcefulness. "That's the X factor that gets you the job," he said.
But the only way you'll ever be asked the question is if your resume makes it through the early lines of defense, which may very well be resume scanning software, which looks for key words or phrases specific to the nature of the job you'd like and the industry it's in.
Bartz recommends branding yourself on your resume and cover letter - for example, as "a product marketing manager with expertise in product branding, market research and team-building." Then pick out from your past work experience 12 to 20 key words or phrases that amplify each of those areas of expertise. For instance, for market research, you might have worked on projects involving "demographic analysis" or a "product lifecycle."
Secret 3
Demonstrate that you want the job
Saying that you want a position and showing it are two different things.
What will distinguish you from other candidates is, for starters, a cover letter that lets the recipient know you've actually spent time thinking about the company's business and the role you could play in it if you're hired, said Phil Carpenter, vice president of marketing at SimplyHired.com, a jobs search engine.
Beyond that, before or after an interview, put something together to show the company how you think it might market its product better or improve its service, said Amy Hoover, executive vice president of TalentZoo, a recruiter specializing in communications jobs. "It will set you apart from the competition."
In an interview, highlight the successful projects you worked on in which you had the most fun because your passion will come through, and that is a trait companies want to see, said Mark Bartz, cofounder of resume and job-search consulting firm Executive Careers Inc.
Secret 4
Stick to the tried-and-true
There are some things about a successful job search that remain timeless:
Having a firm understanding of the nature of the job you're applying for, the company where you'd like to work and the industry the company is in are all critical, said Ginny Gomez, vice president of product management of Peopleclick, a recruiting software and consulting firm.
There's nothing like having an "in" at a company as opposed to just going through HR channels. If you don't know someone personally at a company, you might find a connection through one of the business-focused networking sites such as LinkedIn and NetShare, said Mark Bartz, cofounder of resume and job-search consulting firm Executive Careers Inc. (Read about how LinkedIn works here.)
Once you do get an interview, give the interviewer something to remember you by, such as a sample of a successful project you worked on, said Phil Carpenter, vice president of marketing at SimplyHired.com, a jobs search engine.
Courtesy is as an asset. "A proper handshake and thank-you-for-your-time goes a long way," said Amy Hoover, executive vice president of TalentZoo, a recruiting firm specializing in communications jobs. And be sure to email a thank-you note within 24 hours after an interview.
By Jeanne Sahadi, CNNMoney.com senior writer
6 funds to invest in with your kids
Are you looking to introduce your children to investing? Consider these tips and a half-dozen mutual funds with low initial outlays.
At Morningstar, we've often emphasized how important it is to start investing early in life. Not only does it give you a big head start in building a nest egg for a first home, a college education or retirement, but learning good investing habits early on can have a positive impact for years. That's why it's an excellent idea for parents to teach their kids about money and investing.
There are plenty of good ways to do this, some of which Morningstar's Sue Stevens recently described in her column (registration required).
Ultimately, there's no better way for kids to learn about investing than by doing it themselves, whether it's with money they've saved on their own or money given to them by a parent or other relative. Traditional tools such as summer jobs and savings accounts are still important, but mutual funds can also be an excellent way for older children to learn the value of a buck. Not all mutual funds are right for young investors, but with a little thoughtful research, it's possible to find some that kids can feel at home in.
What to look for
Broadly speaking, when helping kids invest in mutual funds, it's best to keep things simple. Focus on stock funds rather than bond funds because kids have very long time horizons and can take on plenty of risk. Large-cap stock funds are generally best; not only should they form the core of any long-term portfolio, but they're more likely to hold stocks of which the kids have heard. Kids will generally have no need for sector funds or other niche funds.
Young investors generally don't have a lot of money to throw around, so a fund that requires $5,000, $10,000 or more upfront is effectively closed to them. There are plenty of funds with minimum initial investments of $1,000, $500 or even $250, making them much more welcoming for beginners. You can read about some of these funds in this column by Christine Benz, and you can use Morningstar's Premium Fund Screener (membership required) to find funds with low minimums in addition to any other criteria you want. You might want to eliminate load funds; some of them have low minimums, but they're not appropriate if you're going to make lots of small purchases, as kids probably will.
Often it's possible to start with an even-lower initial investment -- sometimes zero -- if you set up an automatic investment plan, or AIP. Under that kind of plan, you arrange to automatically add a certain amount, such as $50, to the account each month. This can be a good option for kids with jobs that provide a regular income; not only does it allow them to start investing without a lot of money up front, but it will teach them how quickly that nest egg can grow when additions are made regularly. You can find out whether a fund has an AIP -- many do -- by looking on the Purchasing Information page of its Morningstar report, and you can use the Premium Fund Screener to screen for funds with AIPs.
Watch the expenses
Low expenses are a feature any fund investor should look for, and you'll do kids a favor if you instill in them early the importance of fund costs. This can be trickier than it seems at first because the cheapest funds can sometimes have high minimum purchases; still, kids can't go wrong if you steer them toward low-cost funds whenever it's feasible. Morningstar's free Mutual Fund Screener lets you screen for funds with expense ratios below their category average, and the Premium Fund Screener allows for expense screening that's more detailed.
Finally, it's often considered kid-friendly for funds to avoid alcohol, tobacco, gambling or pornography stocks because some parents or grandparents might not feel comfortable having kids investing in such businesses. Columbia Young Investor (LYIAX), a pioneer among kid-friendly funds that's soon being merged away, has always had such restrictions on its portfolio, as does its rival USAA First Start Growth (UFSGX).
This is a more personal standard than the other ones above, and it is one that parents might want to discuss between themselves and with their kids. If you do decide that you'd like a fund that screens out certain kinds of stocks, you can use Premium Fund Screener to find socially responsible funds, most of which at least shun alcohol and tobacco stocks. However, you'll also need to look at each fund individually to see whether its standards are ones with which you agree because funds can differ greatly in their definitions of "socially responsible" investing.
Six funds to consider
With all this in mind, here are some funds to consider if you have a child who's dipping his or her toe into the waters of investing. Of course, these aren't the only kid-friendly funds out there; judicious use of the screening tools mentioned above can help you find other candidates fitting the criteria that are most important to you. However, this list provides a good starting point for young investors:
USAA First Start Growth (UFSGX).
Now that Columbia Young Investor is on the verge of disappearing, this will soon be the only mutual fund explicitly geared toward young people. It's not without its drawbacks; its 1.45% expense ratio is high for a large-cap fund, and 25% of its assets are now in bonds, a higher percentage than most kids probably need. But manager Mark Baribeau avoids alcohol, tobacco and gambling stocks, and you can start an AIP for no money upfront and just $20 a month, one of the most kid-friendly plans out there.
TIAA-CREF Equity Index Investor (TCEIX).
Index funds have a place in any investor's portfolio, and kids are no exception. The big kahunas among index funds, Vanguard 500 Index (VFINX) and Fidelity Spartan 500 Index (FSMKX), are very cheap but have minimum initial investments of $3,000 and $10,000, respectively, putting them out of most kids' reach. This fund from TIAA-CREF has a minimum initial investment of $2,500, but that minimum is only $50 if you set up an AIP that invests $50 a month. Plus, this fund only costs 0.26% a year -- not as cheap as the Vanguard or Fidelity funds but still cheaper than most index funds and nearly all actively managed funds.
Vanguard STAR (VGSTX).
If you want to teach kids about the importance of low fund expenses, there's no better place to start than Vanguard. Some of Vanguard's most popular funds, such as 500 Index, are geared more toward older, more experienced investors, but Vanguard STAR is a good option for beginners. It provides exposure to 11 different Vanguard funds of various asset classes, including significant foreign exposure, and its track record is outstanding. A major factor in that good track record is the fund's rock-bottom 0.36% expense ratio. It does require a $1,000 initial investment, with or without an AIP, but nearly all other Vanguard funds require at least a $3,000 minimum, making this the best entree into this world-class family of funds.
Pax World Balanced (PAXWX).
This is one of the best socially responsible funds out there, with a strong long-term track record and reasonable expenses. It also has a low $250 minimum initial investment, whether or not you set up an AIP, making it an attractive starter fund. The fund keeps 25% to 45% of its assets in bonds, which makes it a bit conservative for most kids' needs, but it also provides significant mid-cap and overseas exposure, which can be hard to find in socially responsible funds.
T. Rowe Price Spectrum Growth (PRSGX).
This fund of funds is good way to obtain diversified, actively managed stock exposure. It invests in nine T. Rowe Price equity funds ranging from small to large cap, value to growth and domestic to international, and it has compiled one of the best long-term records in the large-blend category. Plus, like all T. Rowe Price funds, it's friendly to beginning investors; you can start an AIP with just $50 to start and $50 a month after that.
Ariel Appreciation (CAAPX).
This fund has struggled lately, but we have enough confidence in veteran manager John Rogers that it remains an Analyst Pick in the mid-cap-blend category. Rogers avoids tobacco, firearm and nuclear-energy stocks, and prefers firms that are environmentally friendly and cultivate diversity. It's also an easy fund for youngsters to get into; you can set up an AIP with no money upfront and $50 a month thereafter. On top of all this, Ariel maintains a number of educational initiatives to help disadvantaged young people.
