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.

12 Comments:

Anonymous andy said...

good comparison. i contribute to a 401k right now but am considering the switch.

June 13, 2005 at 11:19 AM  
Blogger xbse9vihu60upwr said...

St0ck For Your Review - FCPG

Current Profile
Faceprint Global Solutions (FCPG)
Current Price $0.15


A U.S. based-company dedicated to the goal of
bringing effective security solutions to the marketplace.

With violent and white-collar terrorism on the rise,
companies are starving for innovative security solutions.

FCPG is set to bring hot new security solutions to
the industry, with currently over 40 governmental and
non-governmental contracts, being negotiated.

Please Review Exactly What this Company Does.

Why consider Faceprint Global Solutions (FCPG)?

Faceprint Global Solutions (FCPG) holds the exclusive
marketing rights from Keyvelop, to sell the world�s
leading encryption technology to be distributed directly
to the Healthcare industry in North America.

Faceprint Global Solutions has completed its biometric
software that recognizes facial features of individuals
entering and leaving through airports, ship yards, banks,
large buildings, etc.

FCPG acquired Montreal-based Apometrix Technologies,
which enhances the companies mission of being a
full-service provider to the multi-application smart
card industry. The North American market appears ready
for significant expansion of price-competitive, proven,
multi-application solutions on smart cards. Apometrix's
forecast of over 300 customers and sales of more than $50
million in North America over the next five years, appears
very realistic, according to company management.

Faceprint Global Solutions is currently in contract negotiations
with over 40 governmental agencies and businesses seeking to use
their encryption, biometric, and smart-card technologies.

Breaking News for Faceprint Global Solutions (FCPG)

Faceprint Global Solutions (FCPG) is pleased to announce that
IBM will now offer the world�s leading encryption software to
its major Healthcare clients in North America.

With FCPG owning the exclusive North American rights to distribute
the worlds leading encryption and transmission software developed by
Keyvelop, FCPG is poised to capture large volumes of sales generated
by customers currently using IBM�s software in the healthcare and other industries.
�This is a very positive move for FCPG and for Keyvelop,� said FCPG
CEO Pierre Cote. �We are very happy about the decision to go with IBM.
This is a continuation of the progress made by everyone associated
with FCPG and its partners.�

Buell Duncan, IBM's general manager of ISV & Developer Relations commented,
�Collaborating with Keyvelop will ensure that we develop open solutions
that are easy to maintain and cost effective for our customers in the
healthcare and life sciences industry.�

Among other things, this new software technology which is currently
being used by a number of European healthcare companies, is used to
send any file, regardless of format or size. Encryption keys, evidence
of transmission integrity with fingerprint calculation, time-stamping
of all actions and status record updating, pre-checking sender and
receiver identities, validating file opening dates are part of Keyvelop features.
About FacePrint Global Solutions, Inc.

FCPG operates a business, which develops and delivers a variety of
technology solutions, including biometric software applications on
smart cards and other support mediums (apometric solutions). FCPG�s
products provide biometric solutions for identity authentication and a
host of smart card- and biometrics-related hardware peripherals and
software applications. Apometrix, FCPG�s wholly-owned subsidiary, combines
on-card or in-chip multi-application management solutions with best-of-breed
�in-card matching� biometrics. Keyvelop�s secure digital envelope solution
and Apometrix�s on-card biometrics work together to produce the winning
combination in the fields of security, traceability and identity management.
Conclusion:

The examples above show the Awesome, Earning Potential of little known
Companies That Explode onto Investor�s Radar Screens. This sto,ck will
not be a Secret for long. Then You May Feel the Desire to Act Right Now!
And Please Watch This One Trade!

GO FCPG!

Disclaimer:
Information within this email contains "forwardlooking statements" within
the meaning of Section 27Aof the Securities Act of 1933 and Section 21B of
the Securities Exchange Act of 1934. Any statements that express or involve
discussions with respect to predictions, expectations, beliefs,
plans, projections, objectives, goals, assumptions or future events or
performance are not statements of historical fact and may be "forward
looking statements". "Forward |ooking statements" are based on
expectations, estimates and projections at the time the statements are made
that involve a number of risks and uncertainties which could cause actual
results or events to differ materially from those presently anticipated.
We were paid a sum of three thousand USD to disseminate this information from
ir marketing. Forward loking statements in this action may be identified through
the use of words such as "projects", "foresee", "expects", "will", "anticipates",
"estimates", "believes", "understands" or that by statements indicating
certain actions "may", "could", or "might" occur. Risk factors include
general economic and business conditions, the ability to acquire and develop
specific projects, the ability to fund operations and changes in consumer
and business consumption habits and other factors overwhich the company has
little or no control. The publisher of this newsletter does not represent
that the information contained herein are true and correct.

August 17, 2005 at 10:01 AM  
Blogger ashley said...

Found a lot of useful info on your site about 401k - thank you. Haven't finished reading it yet but have bookmarked it so I don't lose it. I've just started a 401k blog myself if you'd like to stop by

October 13, 2005 at 7:11 AM  
Anonymous get out of debt now! said...

Congradulations on a very well written, interesting and surperb blog!

Hi I am a "bot" who works for Scott. I never complain or cry that I work too hard and I try to write my very best compliment on each deserving blog. Some times I repeat myself so please excuse me if I have complimented you more than once as I am here to please you and I would like for you to check out Scott's webpages. They deal with stuff like, click here: get out of debt now! and then feel free to e-mail me or Scott with your words of wisdom.

P.S. I'll sure put the word out about your site and I would appreciate any business you may send our way...

Later, Scott's bot ;-)

November 6, 2005 at 12:19 PM  
Anonymous Domain Business said...

Hi UberIcarus, it’s late in the evening, quiet and peaceful. This is good computer time for me. I thought I would check on Worldwide Income and see what came up. Financial Advise for my friends is something that is interesting to many people. I will also spend a little time checking on Worldwide Income. Getting late, have a good evening.

November 10, 2005 at 10:32 PM  
Anonymous Permanent Income said...

Hi UberIcarus, taking a little time today to see what Domain Business will send me to that is interesting. Financial Advise for my friends looks interesting and is a great read. Will also try Domain Business in my e-travels. Have a super day!

November 11, 2005 at 1:31 AM  
Anonymous Sicily retirement said...

retirement is good, UberIcarus

November 17, 2005 at 4:22 PM  
Anonymous odds and ends said...

Great blog, UberIcarus. Did you look at Greece retirement at all?

November 19, 2005 at 8:53 PM  
Anonymous Greece retirement said...

UberIcarus, may your blog live in glory. Visit retirement for more great retirement info

November 21, 2005 at 6:58 PM  
Anonymous Great Britain retirement said...

Financial Advise for my friends is a good one - I like it. UberIcarus, visit Great Britain retirement if you get a chance

November 21, 2005 at 7:52 PM  
Anonymous plan said...

Hey this blog is not about plan

I have been doing hours of research on "401k" and it brought me to your blog on Financial Advise for my friends. Anyways, UberIcarus I was reading your blog and I think it is really cool. It’s really a pleasure reading your posts! Keep up the great work.

Keep blogging away :-)

December 15, 2005 at 3:43 AM  
Anonymous ira said...

Hi UberIcarus, I was just blog surfing and found you! Wow, I really like this one.
It’s such a pleasure to read your post …. Interesting! I was over at another site

looking at ira

and they didn't go into as much detail as you, but nonetheless interesting.

December 25, 2005 at 5:48 AM  

Post a Comment

<< Home