California is facing a $24 billion budget gap with no obvious way to close it. You may not live in CA, but the budget cuts in CA and its Govt's inability to pay its own employees is a warning bell for all those California "bond" holders like you.
A "bond" is something Govt's issue to raise money for infrastructure projects. So its essentially an IOU from the Govt where the U is literally you the investor in mutual funds. If the CA Govt does not feel the need to pay its employees because of the budget cuts, it certainly will default on the IOUs it has doled out to the average Joe investor. California defaulting on its $59 billion in outstanding general obligation bonds is unavoidable.
To the average Joe investor this means check your mutual fund portfolio and make sure you are not heavily invested in CA govt bonds through local municipal bond funds or national funds that invest heavily in CA. Unfortunately, CA is the highest issuer of tax exempt bonds, so its popularity is high and it is probably sitting right there in your portfolio about to go bust.
Thursday, June 25, 2009
Monday, June 15, 2009
Target date mutual funds
Target date mutual funds (aka Life cycle, retirement funds) are growing in popularity in company 401Ks and IRAs. They are mutual funds where you pick a date when you want to retire (say 2030) and then you pick a fund with that date. Target date funds model the classic investment mantra of picking more risky stocks over bonds when you are still young and decades away from retirement and then as you approach retirement you limit your risk and have some income generating bonds in your portfolio. The appeal of these funds is that all the rebalancing and asset allocation is done for you automatically and is adjusted as you approach your retirement age. These funds are ideal for passive investors who do not have the time to research funds on a continuous basis nor do they have a professionally managed portfolio. Since a target date fund models diversification, asset allocation and all that good stuff for you, it makes sense to allocate 100% of your money to a target date fund in your portfolio. If you have other funds in your portfolio, your "overall" portfolio mix will be skewed I.e. you might be over/under invested in stocks/bonds.
Most fund families (Fidelity, T.Rowe Price, Vanguard and Oppenheimer) with their respective 2030 funds (FFFEX, TRRCX,VTHRX) offer no-load funds. Look out for expense ratios, fees, Morningstar rating, read about the fund manager and have an idea on the fund's objective.
Most fund families (Fidelity, T.Rowe Price, Vanguard and Oppenheimer) with their respective 2030 funds (FFFEX, TRRCX,VTHRX) offer no-load funds. Look out for expense ratios, fees, Morningstar rating, read about the fund manager and have an idea on the fund's objective.
Friday, May 29, 2009
CD Ladders
Simply put, a CD ladder is a collection of CDs bought at regular intervals so that they’ll mature at regular intervals as well. Let’s say I wanted to create a simple CD ladder out of six month CDs. I buy one on the first of each month for six months. Then, on the first day of the seventh month, that first CD I bought matures and I collect a nice return. I can then either buy a new CD for the original amount and pocket the return, just keep all of the return and the original amount for some purchase, or I can buy a new CD for the total return. After that, each month, a CD matures and I can either buy a new one or use it for something else.
Advantages
Advantages
- Usually higher rates than a savings account
- Recurring income
- Easy liquidity
- Taxes.
- Money is locked in.
Saturday, May 23, 2009
Hedge fund like mutual funds
Do you have a million dollars in your back pocket, or $200,000 a year in income? If not, you can't qualify as an accredited investor according to the SEC, and it means you are completely shut out of investing in hedge funds.
Hedging is a strategy of investing in a manner to limit risks. If you are long on a stock, you are totally at the mercy of the stock going to zero. If however, you also went short on the same stock you would limit your risk since the investment would go up in a downturn.
Hedge funds have been notoriously famous as the rich people's investment vehicles. Hedge fund managers are famous for their over the top salaries partly because they bust their behinds trying to maximize returns for their investors. Unlike traditional mutual funds which have a SEC limitation of not holding more equities short than long, hedge funds are kinda under-regulated allowing hedge fund managers to adopt aggressive strategies to make money.
New mutual funds have popped up recently that adopt hedge fund like strategies (long/short, market neutral, arbitrage). The following chart shows the different hedge-fundish mutual funds compared to JDVBX (a somewhat conservative mutual fund)
Compare
Hedging is a strategy of investing in a manner to limit risks. If you are long on a stock, you are totally at the mercy of the stock going to zero. If however, you also went short on the same stock you would limit your risk since the investment would go up in a downturn.
Hedge funds have been notoriously famous as the rich people's investment vehicles. Hedge fund managers are famous for their over the top salaries partly because they bust their behinds trying to maximize returns for their investors. Unlike traditional mutual funds which have a SEC limitation of not holding more equities short than long, hedge funds are kinda under-regulated allowing hedge fund managers to adopt aggressive strategies to make money.
New mutual funds have popped up recently that adopt hedge fund like strategies (long/short, market neutral, arbitrage). The following chart shows the different hedge-fundish mutual funds compared to JDVBX (a somewhat conservative mutual fund)
Compare
Index linked CDs
The classic "Certificate of Deposit" CD is the the fixed interest rate CD. There is also an index linked CD where the interest rate on the CD varies with the underlying equity index. It can go down or up and there is no guarantee that you will get a fixed return after maturity, although there is a high probability for the return to be higher than a traditional fixed rate CD should the market behave well.
There is one interesting catch with an index linked CD though that sets it apart from mutual funds and raw stocks. Your principal is FDIC insured. So at the end of 6 months, you may not make any money on the principal but the volatility of the equity market does not eat up your principal, something that would happen in a mutual fund or a raw stock.
Index linked CDs are an attractive option for nervous wannabe stock market investors who don't want to lose what they have but don't mind making more!. Index linked CDs are ideal for an IRA account. You get tax deferred capital preservation with a possibility of making money!
There is one interesting catch with an index linked CD though that sets it apart from mutual funds and raw stocks. Your principal is FDIC insured. So at the end of 6 months, you may not make any money on the principal but the volatility of the equity market does not eat up your principal, something that would happen in a mutual fund or a raw stock.
Index linked CDs are an attractive option for nervous wannabe stock market investors who don't want to lose what they have but don't mind making more!. Index linked CDs are ideal for an IRA account. You get tax deferred capital preservation with a possibility of making money!
Friday, May 22, 2009
Scrambled nest eggs
The average 401K plan savings has gone down by 30% thanks to the economic downturn. That is a significant hit for a person who is about to retire today. You are left high and dry smack dab in the middle of your retirement plans because of the wanton greediness exercised by the higher echelons of the finance industry. You put your good faith in the US equity markets and at the end of the day you are shoved the tiny footprint in your face "FDIC Not Insured".
Why are some aspects of the 401k plan not FDIC insured?. The first $250,000 of a bank account are insured by the FDIC, why then is the principal that I deposit through my paycheck every payday not insured?. The capital gains on the principal need not be insured. I don't even care if the company match is insured. Hell, I'm even willing to pay higher capital gain taxes if I'm guaranteed to have my principal when I'm about to cash out my 401K.
We tout this plan as a retirement plan, a supposed "nest egg" and it has a zero safety net!.
No thanks, If I want my eggs scrambled, I will go to IHOP. Please leave my 401k nest egg alone!
Why are some aspects of the 401k plan not FDIC insured?. The first $250,000 of a bank account are insured by the FDIC, why then is the principal that I deposit through my paycheck every payday not insured?. The capital gains on the principal need not be insured. I don't even care if the company match is insured. Hell, I'm even willing to pay higher capital gain taxes if I'm guaranteed to have my principal when I'm about to cash out my 401K.
We tout this plan as a retirement plan, a supposed "nest egg" and it has a zero safety net!.
No thanks, If I want my eggs scrambled, I will go to IHOP. Please leave my 401k nest egg alone!
Copycat investing.
Picking stocks/funds for investing is neither an art nor a science. It is voodoo. For those of us with non-finance and non-investment related full-time jobs, it is time consuming to research stocks and get the story straight on any one particular stock. It is easier instead to peek into the portfolio of a seasoned investor and see what they are up to and try to mimic or learn from that.
While trying to know what Warren Buffet's portfolio looks like, I stumbled upon StockPickr. It lists the portfolios of many famous investors and Wall St. veterans. It also lists what stocks some mutual funds hold.
Copycat investing should be prudent and make common sense. A few things to remember are
While trying to know what Warren Buffet's portfolio looks like, I stumbled upon StockPickr. It lists the portfolios of many famous investors and Wall St. veterans. It also lists what stocks some mutual funds hold.
Copycat investing should be prudent and make common sense. A few things to remember are
- It is important to note "when" the investors got in on the stock. Timing is everything. If Buffet got in on a stock X when it was $60 and today the stock is $100, you are kinda late to the party. Move on to the next stock.
- You also want to know if the investor is "long" or "short" on the stock. Don't go long on a stock that Carl ICahn is shorting. That is like swimming against the tide!.
- Also you should still get to know the underlying reason why the investor got in on the stock, because when that reason ceases to exist, you should bail out of the stock before the seasoned investor does (which is very difficult). Usually, when a a big player sells his position in a stock, there is a sell off and you don't want to be riding that downward slope.
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