Monday, May 31, 2010
Thursday, May 27, 2010
Investors and savers searching for income are starting to squirm. As CD rates continue to drop, those who have maturing CD's have a difficult decision to make. Do I reinvest my 5% CD into a 1-2% CD or take my chances in the stock market by buying a stock with a nice dividend? One option many people forget about is bonds. Bonds come in many varieties, Government bonds, Corporate bonds, and Municipal bonds, to name a few. Many people shy away from bonds mainly because they don't understand how they work. One perception is that they have a very long holding period, like 20 or 30 years. While its true that some bonds when first issued, can have a 30 year maturity, bonds can be purchased in the secondary market with maturities of a year or two. So if you're worried about inflation and interest rates rising again soon, you can buy a bond with a short time horizon. Another mistake is thinking that you will lose money buying a bond. Well, you can lose money buying anything. That's the risk of investing. But the way most people lose money with bonds is because they sell them for less than they paid for them, just like stocks. On the other hand, if you find a bond and buy it at a discount, you will make money if you hold it to maturity. In addition, you will collect some nice interest payments, called coupons, along the way. The other way you can lose money with bonds, is if they default. That is why you need to make sure to buy high quality, or investment grade bonds. These days, investment grade, corporate bonds can be found on the secondary market that are maturing in less than 5 years, that are paying over 5% and can be purchased at a discount. Government bonds, while safer, are not paying anymore than CD's, and municipal bonds are much harder to find at a discount. Most are now selling at a high premium, making them less desirable. So if you need income, and can't stomach the paltry rates that bank CD's are paying, buy bonds! They're not as scary as you think!
Friday, May 21, 2010
Now that gold has passed through the $1200 per oz barrier, people are talking about gold again. Should I buy gold, should I sell gold? Like any other investment, it all depends. The main reason people buy gold is as a hedge against inflation. Right now, inflation is still not a problem. So why has the price of gold jumped up lately? Well, the Euro is very weak right now and there has been tremendous volatility in the stock markets due to the problems in Europe, particularly Greece, Portugal, and Spain. Not too mention the so called "Flash Crash" that we had on May 6th. In addition, many people feel stocks had run up too fast and were due for a correction anyway. All this has people all over the world worried, and when doom and gloom prevails people buy gold. Like anything else, if everyone wants something that is in limited supply, the price is naturally going to go up. So some people are buying gold as a diversification tool in their portfolios. Not a bad idea, just don't go overboard. Here are a few key things to remember about gold as an investment. It doesn't pay income or dividends. Gold is strictly a capital appreciation play. What form are you going to buy it in? You can buy gold funds or ETF's which can be held in your investment portfolio, but if you buy gold coins or bars, you have to consider the storage costs and safety issues. Items placed in your safe deposit box at the local bank are not FDIC insured. So what are the alternatives? Many experts believe commodities in general, not just gold, are still in a bull market and have room for advancement. While we may not see inflationary pressures on interest rates anytime soon, the prices of commodities may continue to rise for a while. Silver, while similar to gold, is much cheaper than gold and has many other uses to people and industry than does gold. So what to do? Keep your options open, and if you do buy gold, don't go crazy. Most experts recommend 5 to 10% of your portfolio tops.
Tuesday, May 18, 2010
One strategy for CD buyers looking for higher yielding CD's is to buy CDs that mature farther into the future. That is, instead of buying a one year CD, buy a 3 year or 5 year CD. You may be surprised to know that CD's can have maturities up to 20 years out! Currently, many CD shoppers are buying one year CD's or less, because they are worried that interest rates will go up next year. But what if they don't? The Fed has not changed rates since December 2008, and they haven't given any indication that they will raise rates anytime soon. The risk in CD's is that you don't know what the rates will be in the future. So what's a better approach? Build a CD ladder with CD's that mature in staggered maturities. Many people want their CD's to mature each year so they can access cash for planned purchases or emergencies without penalty. If you build a CD ladder, you will have money available each year to spend or reinvest. So how do you do it? Buy a 1, 2, 3, and even a 4 year, and 5 year CD to begin. As each CD matures, you buy another 5 year CD which will go on the back end of your ladder. After 4 years, you will own nothing but 5 year CD's, but you will have a CD maturing each year, so you can take advantage of available cash, or buy another 5 year CD. Remember, 5 year CD's will always pay more than 1 or 2 year CD's, and if rates start to go back up, they will go up for all CD's not just the shorter ones. So if you are going to buy CD's, do yourself a favor and buy smart, build a CD ladder. For more aggressive investors, the same thing can be done with bonds.
Tuesday, May 11, 2010
Unless you own a 1963 Corvette Split Window Coupe or some such other vintage sports car from yesteryear, your vehicle is most likely worth less now than when you bought it. New cars can lose 20-30% of their value when you drive them off the lot! Now to be sure, in America and especially the Midwest, a car is a necessity for most people. Public transportation is not adequate for most people needing to get to and from their places of employment, much less stores, shopping centers, and other places of business. When you do buy a "new" car, buy one that is "pre-owned", not brand new. Your best value will be vehicles that are 2-4 years old because most of the depreciation is taken off and it should still have relatively low mileage. Pay cash when at all possible for your new ride. Finance charges and interest add up and cost you a lot of extra money in the long run. When you pay off your current car, keep making payments to yourself. Set up a new savings account for your next car and save up until you have all or most of the money needed to purchase you next vehicle. Keep your car 6 years or until you have 100,000 miles or more on it. You will spend a lot of extra money in your lifetime if you buy a new car every 2 or 3 years. Sure it's fun to buy a new car, but cars are expensive. Ultimately, a new car or truck purchase is an emotional one and usually not a necessary one, unless you really do have a clunker that just died in your driveway. There are lots of reasons you can find to buy a new car, but there are also lots of reasons you can probably think of to keep the one you currently have another year. Some of you might want to know what kind of car I drive. Well, if you really want to know, it's a 2003 Dodge Durango. I'd like to get a new ride, but it's only got 58,000 miles on it. Should be good for a while longer!
Friday, May 7, 2010
Yesterday's wild stock market activity just reinforces the reason why so many people do not invest in stocks. The fear of loss is much greater than the prospect of gains in your account. While most people would love to book 10% gains in their portfolio, they are deathly afraid of a day like yesterday or a year like 2008. But what if you could invest in stocks knowing that your principal was protected? Even better, what if this investment was FDIC insured? So you could reap the benefits of stock market appreciation without the downside risk of loss. Not possible? Doesn't exist? Think again. A relatively new type of investments called "Structured Notes" are now available to retail investors. The most popular kind right now are ones called Annual Income Opportunity CD's. These are like CD's on steroids! Basically you have a CD that is linked to a basket of 10 stocks. Each year the CD's pays interest based on the average return of the basket of 10 stocks. So if the stocks averaged 8%, you would be paid 8% interest. Cash! If the stocks went negative, you would get nothing. But you would not lose anything either. If your CD is held to maturity in 5 years, your principal is returned, guaranteed! Now, the returns are capped, typically in a range of 8-13% on the high side, so last year, if your basket averaged 27% and your cap was set at 12%, you would have received a 12% payment. It's kind of like going bowling with those bumper guards they put up for kids so they can't get a gutter ball. They probably won't get a strike, but they sure won't get a gutter ball! Ask your financial advisor if he or she sells structured notes. If they don't, well, you make the call...
Tuesday, May 4, 2010
If you look at the historical charts of the Dow Jones and S&P 500 stock indexes, you can't help but notice that over time the indexes go up and they go down. In general, they tend to go up more than they go down which is why people like to be invested in the stock market. With the recent return of 32% in the S&P 500 over the past 12 months, most stock watchers would suggest that it may be time for a pull back. While most people have not recovered their losses from 2008, the recovery since March of 2009 has been a welcome surprise to those who were overly pessimistic and were predicting the Dow Jones to go down to 5000 (it's around 11,000 right now!). So what should you do? If you agree that it's time for the market to take a breather, you can sell some positions where you have gains and take some profits. If the market drops 5-10% in the short term, you have cash to buy back in at lower prices. You will have to decide how much you want to sell for your repositioning, but do not sell everything. If the market continues to climb, having some positions still invested will help you. Remember, it's better to be wrong and see the market continue to go up, than it is to be wrong and watch the market tank before you could get out. The market will be watching the Fed to see how they think the economy will effect the markets in the short term. While this is entertaining to some, its not terribly important for long term investors.