Friday, May 27, 2005

Financial Advise for my friends

Since I've started my investment account I've been getting more than a few questions from my friends reguarding financial advise. So I thought I'd drop in my more or less unbiased thoughts on the matter.

401k or not?

Generally speaking, if your employer offers a 401k, with a matching contribution, not only should you take it, but you should put in at least the maximum amount they match to. This lowers your taxable income now, but on the otherhand: whenever you go to pull that money out after retirement you get taxed on it as income. Now most people tend to think that they will be making less money in retirement, personally though I think that's a bad way to look at it if you're trying not to starve when you're older. If nothing else, you want to have *more* assets when you retire don't you? As such, if you pull out from your 401k $50,000 a year, you're going to get taxed on it at about 28% according to today's current tax rates. Of course, income taxes could allways go *up* too.

However, if your employer doesn't match, or even if they do, but only to a ridiculously low amount, its probably better to open up a Roth IRA. A Roth is different from a traditional IRA in the sense that you pay taxes now, but nothing on what your money earns in interest over time. That means when you retire, and you draw out that same $50,000, you pay absolutely zero taxes. Also IRA's are different from 401k's, in that you can set them up usually with more options, and you can actively manage it yourself if you want. Also, you don't have to pull out of it at a certain age unlike a traditional IRA/401k, which requires withdrawls by the time you're 72 and 1/2.

Now, lets weigh the advantages:

Traditional IRA or 401k:
Advantages
Employer Usually Matches.
Less Taxes now.
Disadvantages
All gains are taxed later as income
No Active Management for a 401k (usually)
Employers often match your contribution in company stock.

Roth IRA:
Advantages
All interest gained on money is untaxed.
Disadvantages
Employers usually do not match a Roth IRA
You have to pay taxed on it now, which may or may not put some of your money in a higher tax bracket.


Now, lets look at some other simple options:

Savings Accounts: Are simple, but offer allmost no growth (usually well below inflation), and do your money really no good, aside from maybe keeping you from spending it. Best to be used only as a temporary account to put money allready acrued, for large short-term purchases.

Money Market: You can shop around for alot of different yeilds on these, usually the best single yeild I've found for smaller investors is http://www.virtualbank.com. They're only slightly more complicated (number of widthrawls, some require minimum balances, etc.) than savings accounts but offer much better yeilds. Do not use these are retirement accounts, their yeilds are increadibly low compared to other investments, with virtual bank topping out most of them at 3.05%

Municipal Money Market: Great places to put cash you haven't decided what to do with, make sure that the money market is reputable, and that the financial standings of the municipalities its invested in have been fairly good in the past. Municipal bonds can be tricky to directly manage yourself, as generally the safest bets offer the lowest returns, while those with the worst credit ("junk bonds"), offer the highest returns, but also the highest risk. I personally, am not into the bond market, so I won't make too many comments on it. Bonds are seen as a "safer" investmen than stocks by some investors, historically however stocks have allways out preformed bonds. I keep my uninvested cash that I don't immediately need to spend in a municipal money market fund; Why you ask? Because they're tax-free. Totally tax free.

CD's and Treasury Bonds: Long term investments, usually offering better returns the longer you give them your money, simple investments for many people with little money. Also well liked are Zero-cupon bonds (Which are bought for less than their face value) for the same reason, and inflation adjusted bonds, which are guaranteed to accrue inflation plus X amount in interest. Personally I consider the last one among the best if you're going to buy into bonds, and are not going to play the "bond market".

Mutual Funds: The advantages of a mutual fund, are that you can engage in alot of different market activities (such as option chains, and commodities), without having to know exactly how to do any of it. In otherwords, you're pooling your money with other people, and someone else is using their knowledge to play more complex investment strategies than you know, or can individually afford. On the other hand, they make money by taking a percentage of what you put in, sometimes this can total up to 2% or more of your gains, which can mean alot of money over time. Its best to shop around to find a good mutual fund (Remember, IRA's and 401ks are mutual funds too), 2% might be worth it if it's been returning 15% on average for the last 10 years or so (Hedge funds make insane amounts of money, and usually take 20% of the gains). Likewise, indexed funds (funds that are simply electronically indexed against the DJIA, S&P 500, or another index) tend to be cheaper than other mutual funds. They also, on average, tend to fair better. On the other hand, ETF (exchange traded funds) are even cheaper, and you can buy and sell them like stocks. Life-cycle mutual funds are also good for retirement as they re-adjust themselves the closer you get to retirement. One Caveat Emptor: Make sure if you have a life-cycle fund that the fund manager(s) are properly re-calibrating your investments as you get older, alot of them have been discovered to do it improperly.

Securities Accounts:By securities, I mean stock brokerages mainly. There are do-it-yourself sites like ameritrade and e-trade (I use e-trade), discount brokerages, and full service brokerages. Generally speaking, thats also the order of "how much of a cut they take". Full service brokerages offer alot of investment advice and strategies, but they may be biased toward their own investments. The advantages of brokerage accounts as a suppliment to retirement accounts are many, there's no "Tax penalty" of 10% for drawing out of them before retirement, and if you hold your stock for more than a year its taxed at 15% flat instead of income tax. Also, generally speaking you are on average going to get an increased return, usually well in excess of a money market or what-have-you, you may or may not get that raise come your annual review, but the money you've allready earned is growing, to give you a de-facto raise anyways.

Anyways, those are generally the options available to the average non-rich person. And that should serve as a quick introduction of how to get more money via investment. Also, generally speaking the best way to get more money is to get more degrees.

Finally, a few stock strategies to make things easier:

Indexing: Simply indexing your stock holdings against a economic index. Advantages are simplicity, and less risk, plus you can generally expect a good return. You can either buy stocks in equal measure to an index, buy ETF's, or buy into an indexed mutual fund.

Dogs of the Dow: Or S&P 500, or any other index. It's a variation on indexing, that basically says "Why follow the whole index, and not just the top dogs?" Historically this has been a fairly successful strategy. Buy equal amounts (say 100 shares) of the top 10 stocks on the index, and every year adjust for equal holdings, if someone drops off the top 10, sell their shares and buy the newcomers. Now, it has some drawbacks, sometimes the best preforming on a given year might all be in one sector and if that sector does poorly you may lose on all your holdings. Likewise, lets say the entire index goes down in a given year, usually the companies at the top are best readied for a general loss....on the other hand, they might be responsible for the whole downturn of the index by being in major financial trouble. Likewise, lets say the whole of the index does poorly that year, that doesn't necissarily mean that say #50 didn't do good, and move up to say #25.

Also, you can follow the purchases and long term holding strategies of the "best players" of the market like say George Soros, or Warren Buffet. Or, if you have alot of money you could allways buy into Berkshire Hathaway, ran by Warren Buffet. When he went public, it traded at $8 a share, now about 30 years or so later, preferrred shares go for around $85,000 and B shares for around $2,500. He's out preformed every last major economic index, and has had a 5,000% return over the life of the company, averaging about 30% interest per year, every year.

Of course, he's in his 70's and has no clear successor. When he dies, Berkshire Hathaway will inevitably go down in price per share, but there's a question whether or not his successor will perform as good as him...

Then again I don't have $85K sitting around, so I don't worry so much.

Tuesday, May 17, 2005

Short update after my long hiatus

No, I haven't died. I've just been very busy. I've been trying to get my finances together and we've been planning for the delivery in september. Also I've been suffering a long bout of writers block that hasn't gone away too much. Part of it probably has to do with not being around too many people where I'm able to discuss ideas in depth at all.

Bummed about that.

I've been wanting to get together with people in person and share ideas and build networks, and I just really haven't had the time or real opportunity out here. There's a real derth of interested people out here, even in our own local problems. And my own personal concerns have also taken first place over that. Personal concerns primarily revolve around money and lack-there-of, what else is new.

Not all doom and gloom though, I've opened up an investment account and taken some good steps toward increasing my income.

My current 5 year plan of sorts is to land some form of employment where I'm making approximately $2,500 a month after taxes (or about $30,000 net a year), so that after my expenses I'll be able to invest around $800 to $1000 a month. Which also means if I adopt long term holdings I'd be taxed at a lower rate as well. I also need to start school, and to do that I probably need to get a laptop, but I'm not particularly looking foreward to that expenditure.

Kinda unsure about how my future in the particular property I'm at is going, I'm hoping they're not looking for excuses to pass me up for promotion. I really like it here but simply cannot afford not to get a (well deserved mind you) promotion, and corresponding pay raise. I'm really not being utilized to the best of my abilities either, I could do alot more, and bring in more revenue or improve operations if given the chance. The problem is we have too insular of a decision making process and communication is allmost allways one way. Essentially the head doesn't know what the feet are doing, and vice versa.

Anyways, not too much to comment about concerning current events and such. I've simply shut myself off from that for awhile. I've been giving myself a break from it and reading more books. I'm going to look into distance learning. I'd like to be able to get an actual degree online, rather than the generally crap degrees offered by "online universities". Why they're only offering crap degrees is beyond me. The technology is there that I should be able to go for just about any degree I want and be able to do most of, if not all of, the work and study online. I don't want a technical nor vocational degree goddamnit.

I do promise more rants in the future though, and hopefully some more essays sometime soon.

Nil Carborundum Illigitum