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Archive for October, 2010

Mutual Fund Red Flags, High Cash Reserves

Sunday, October 31st, 2010

When selecting a mutual fund there is an area that is commonly overlooked, and that is cash reserves.

Perhaps you have heard the saying, ‘Cash is king’, well that may be well and good but it’s not king when you are paying your mutual fund manager to sit hoard it. I can do just fine sitting on my own cash and I don’t think I need to pay someone two percent to sit on it for me.

With a historical return of 4% on cash why is my mutual fund manager sitting on so much of it. I am not talking about conservative income funds or the money markets; I am speaking of actively managed growth funds with ten percent of their holdings being cash. When you buy shares of mutual funds you are paying them to own stocks and you are not paying them to own cash instead.

There are basically two reasons for keeping so much cash on hand. The first reason is they are keeping the cash on hand just in case shareholders suddenly decide to sell of their shares of the fund. Should the end of the world be nigh, they have the cash there so they do not have to sell stocks when they are at the lowest prices ever.

In addition to that mutual fund managers keep some cash available is to take advantage of times when the market is oversold and there is a fire sale in the equities market. It the classic buy low sell high, timing the market. Obviously managers do this because they think they can time the market and actually get in at the low. No one else can do that but apparently fund managers can, or so they would have you believe. In theory this is great but in practice it has turned out the opposite.

Research shows that mutual fund cash reserves are at their low right when the market is at the high and at their highest levels when the market is at its lows. In other words, if there is anyone who knows how to time the market (probably not); mutual fund managers are not those guys.

Good luck and happy investing.

The Laddered Portfolio, a Great Way to Invest in Bonds

Sunday, October 31st, 2010

There are many bond strategies, and the laddered portfolio is an excellent way to structure your interest payments and to reduce your interest rate risk.

One of the few risks involved in bond investing is the risk that interest rates will raise and investors will not have cash to take advantage of new bonds with higher interest rate (coupon). The problem can be solved by having a laddered portfolio.

When you structure your laddered portfolio the idea is to have bonds that mature every year or two, that way if rates raise you will have bonds maturing which will free up cash to buy the new bonds with a higher coupon payment. If rates are dropping you still have long bonds that have a higher rate than is currently available in the market today.

The other nice thing about having a laddered portfolio is that it is possible to structure your portfolio with bonds that pay their coupon payments every month or so. Since nearly every bond issue pays only twice a year you need at least six different issues if you want to insure that you have monthly income.

The only drawback here is that it takes a fair sized lump payment to get started. It can be tough to buy only one bond, or even five at a time. In general you need to get a lot of ten bonds at a time, which means you will need to spend $10,000 for each bond issue. This means you will need about $60,000 to build your laddered bond portfolio. Once you have made the initial investment then you only have to buy a bond when one matures and you will have the cash to do so from the maturing bond. If you don’t have the initial capital to structure a laddered portfolio but still need monthly income, you should look into one of the many bond mutual funds.

Good luck and happy investing.

Choosing a Financial Advisor

Friday, October 29th, 2010

You may like the company, but do you trust your Financial Advisor? Any given company is really only as good as they guy’s advice on the other end of the line when you call. Before working with any advisor there are some things you can do.

First go to this website: www.finra.org it totally free and easy to use. You can search for information about a firm or about individual Financial Advisors and you don’t have to know the brokers Rep Number either. Just input their first and last name in the search field and you’ll find your person. Here you will find employment history, tests they have passed, states their licensed in, and any customer complaints and disputes, as well as the outcome for those events.

Just because your Advisor has had a complaint or dispute lodged against them does not mean they are a rogue broker as they used to call them. It’s a tough business as sometimes not easy to avoid unhappy customers trying to make someone else responsible for bad decisions. No one complains about their Financial Advisor in a bull market, but when a bear market hits people point fingers.

I can over look one complaint or dispute if it was resolved in favor of the broker, but it there are a string of them, that’s not a good pattern; maybe look elsewhere. You should feel free to ask your advisor for clarification of what you find on his report as well.

This is just the first step to finding a good Financial Advisor. Check out the company, check out the man; you could save yourself a lot of headaches. If he checks out okay on the website ask what his philosophy towards investing is. Remember, Financial Advisors are similar to self employed workers and each has their own philosophy that may or may not be in line with the company they work for.

Good luck and happy shopping

Do I really need a Financial Advisor?

Saturday, October 23rd, 2010

This used to be a simpler question some years back, but now with the advent of the Internet, the waters have been muddied. Some investors wonder why anyone would have an advisor (and probably pay for it) when you can find out anything you need for free on the internet. Sounds like a slam dunk for the argument for not having an advisor (Stockbroker).

How well do all those content writers who write in those websites really know you? What do they know of your risk tolerance? What do they know about your retirement goals? Since the answer to that question is going to be a big fat no, can you really trust what you are reading on the net? There is so much information on the internet it is a real challenge to know what information is accurate and pertains to you and your situation and what doesn’t.

So how can my financial advisor help me? The more your advisor knows about you the better. He should know all your investments, your investment goals, particularly regarding retirement, and your risk tolerance.

In order for you to make a wise decision not only do you need to know the ins and outs of a particular investment you are considering, you also have to sleep at night after you buy it. A financial Advisor can sift through all the information and present only those things that pertain to you and your particular needs, based on your risk tolerance and investment timeline. The more your advisor knows about you and your situation the better help he will be, so don’t hold anything back.

I used to get asked if it was okay to have more than one advisor and I think it doesn’t hurt to get more than one opinion but remember the old saying, too many cooks can spoil the broth. No matter what position you take on an investment you can easily find five professionals who oppose your decision and five who agree with you. That’s why it is so important that you work closely with your advisor so you can get clear and concise advice that works for you.

Keep in mind, you may not have the time needed to make the best informed decisions, but your advisor will have his finger on the pulse of the market and the economy probably fifteen hours a day or more. If you don’t have that kind of time maybe you should consider working with a Financial Advisor. Just don’t turn your brain off the moment he is on the phone. It should be a team approach with you making the final decisions.

Good luck and happy investing.

Preferred Stock, the other Fixed Income

Saturday, October 23rd, 2010

Preferred stock, a close cousin to common stock is often purchased by investors who are looking for a steady source of income. Preferred stock pays out a dividend, usually monthly, and carries a credit rating similar to that of bonds. Companies with outstanding preferred stock are required to pay their dividends before they pay out any dividends on their common stock shares. You have an additional layer of safety here, because if the company goes belly up owners of preferred stock have a greater claim on assets than common stock owners.

There are two types of preferred shares, accumulative and non accumulative. Companies are required to make up any missed dividend payments on accumulative shares before paying dividends on their common shares. Non accumulative shares do not hold the same requirements and a missed dividend does not have to be paid.

Preferred stock trade on the New York Stock Exchange (NYSE) for about $25 a share and have a trading symbol like common shares.  Unlike holders of company’s common stock, holders of preferred shares do not have voting rights. Some preferred stock are convertible into the company’s common shares at a predetermined rate. Once converted they cannot be converted back into preferred shares.

Preferred stock are good for investors looking for income and who can weather a little more volatility than is normal for bonds. Bond investors may have a difficult time structuring a monthly payment schedule with bonds, but it is easily done with preferred stock that commonly pays dividends monthly or quarterly.

Who issues preferred stock? There are many companies that issue preferred stock, companies like; Ford, General Motors, PG&E, JP Morgan Chase, and Calloway Golf, and Bank of America, to name a few. Just Google the term preferred stock and you will find companies who issue preferred shares and additional information on this type of investment.

Happy Investing.

Bankruptcy and Your Credit — Part 2

Saturday, October 23rd, 2010

So you have filed for a bankruptcy, now what? Probably the first question in your mind is how will it affect my credit score? There are too many factors to accurately predict the fallout on your credit report. If you had a pretty high score prior to filing you may find that your score is still hovering around in the 600’s. However most people’s credit gets pretty trashed from lates and charge offs, so their score after filing is closer to 500 than 600.

The total number of credit accounts you have is a factor as well as the ratio of debt to available credit. Both those can sink your score in a hurry, especially when you pile up a chapter 13 or 7 on top of it.

So, which is better, chapter 7 or chapter 13? I am not a lawyer so I cannot answer that question and it should be put to bankruptcy lawyers.

What I do know is that there are a few advantages to chapter 7 over chapter 13. If you file a chapter 7 the process is quick, usually from 3 to 6 months. You get your discharge date rapidly and you are on your way to starting over, and with no debt hanging over your heads. If you file chapter 13 you are required to pay off your debts in 3-5 years. Most people who file chapter 13 do not complete the program and find themselves in hot water again. If you file chapter 7 you still get to keep most of your assets including the home you live in. Keep in mind, not everyone qualifies for chapter 7 and that is something you will have to research with bankruptcy attorneys.

Remember, just because you have a BK on your report that doesn’t mean you cannot refinance or purchase a new home. Check around with different lenders and let them know all the facts up front before you allow anyone to check your credit. You may be in for a pleasant surprise.

Related Link: Bankruptcy and Your Credit — Part 1

Bankruptcy and Your Credit — Part 1

Saturday, October 23rd, 2010

This is a big topic so I will try and break it down in a couple articles. Rather than focus on what your score may be after going through a bankruptcy, I am going to tell you how lenders view a borrower who has a BK (bankruptcy) on their report.

Of course everyone wants to know, how long do I have to wait before I can refinance or purchase a home? The answer is, quite often there is no set time you have to wait. Bear in mind that it will stay on your credit report for up to 10 years so get used to it.

All lenders have a bottom credit score they work with and that is usually 500. As long as your bankruptcy doesn’t lower your score beneath that floor, you may be in business. In fact, many lenders will still work with you even if your BK has not been discharged yet. Make the call and you will find a consultant that will be eager to push your loan through if there is any way possible to do it. If you filed a chapter 13 it will have to be paid off with the loan. You will also have to get a rating from the Trustee. That rating is much like your mortgage rating and if you do not have any late payments you may still be able to get your loan. However, if you do have late bankruptcy payments, that is kind of your last chance and you will have a tough time getting the loan.

The one factor that prevents many borrowers from getting a loan is the LTV (Loan to Value) that is allowed under the underwriters guidelines. If you have a recent BK many lenders will not let you borrow more than 60% of the home’s value. Some lenders are a little more forgiving so you will just have to check around. Some lenders will not let you get any cash out which will not work if you have filed a chapter 13 because you have to pay off the debt you own to your various lenders. If you have filed a chapter 7, wait till the discharge date has passed and it will be a lot easier to get the loan and you may find lenders who are willing to give you cash out, or at least let you borrow up to 80% of your home’s value.

Bottom line, having a bankruptcy does not necessarily prevent you from getting your loan. If you can wait, the one year mark is a magic number for many lenders and you will find them more agreeable after that date has passed.

Related Link: Bankruptcy and Your Credit — Part 2

Mutual Funds — No load versus Load Funds

Saturday, October 23rd, 2010

If you know anything about mutual funds, I am sure you have heard the never ending debate regarding no load mutual funds versus load mutual funds.

Keep in mind that just because a fund does not carry a load (sales fee) does not mean it costs nothing to own it. All funds, load or no load have expenses that owners of the fund are charged. No one is going to manage a mutual fund for free. People sometimes assume that the load has to do with expenses of the fund as well as a sales fee, but that is not true. The load has only to do with the fee the investor pays to purchase the fund. If you put $100,000 in a load mutual fund, part of that 100k will disappear right off the top. Some funds are strictly back end loaded. If and when you sell any or all of the mutual fund, a percentage will come off the top before you see it.

Many people believe one should never buy a fund with a load, arguing there are enough no load funds so one never has to buy a load fund.

Having been a stockbroker, I sold both no load and load funds, and I have to say, what really accounts is your real return on your investment. If you are looking to purchase shares of a value fund do yourself a favor and compare load and no load funds. Right now you may be wondering why should I pay to own a fund if I don’t have too?

It’s all about the returns. Let me say it again, it’s all about the returns. Compare the top no load value fund with the top load value fund and factor out all expenses and sales fees (load) and see which gives you the greatest return. If the load fund still gives you the greatest return, all things being equal, then buy the load fund.

Let’s simplify it. If I were to give you .50 cents a day would you refuse? Of course not. What if I made a deal with you? If you pay me $2 a day I will give you $3 at the end of the day. Now which would you prefer, the .50 a day, or the $1 a day? I’ll tell you what, if you offered to give me $3 for every $2 dollars I gave you, I’d do that transaction all day long.

Now go back to your mutual fund selection. If fund A was a no load fund and the return after expenses and fees was a percent lower than the return of Fund B, the load fund, which one really pays you the most? It’s a no brainer; the load fund is the clear winner. Bear in mind I am just talking straight returns here and assuming both funds were similar in investments, risk profile, etc…

So before you ignore the entire universe of load funds, look to see what your real returns are after fees and expenses; you may be surprised.

Happy Investing.

Criminals Target Unemployed

Friday, October 22nd, 2010

Being unemployed for months is horrible, getting cheated on top of that is very frustrating. Wall Street Journal published article detailing a scam that targets unemployed people. The scheme works like this. Crooks establish a company, website and post online job ad in job portals like careerbuilder.com. When the applicant sends the resume, the company asks the applicant to take some trial projects to ship certain items to Europe. To pay for these items, the company transfer the money to the applicant’s credit card. For each shipment, the applicant earns $350 in commission.

Sounds simple? Easy job, isn’t it? Only problem is that the money transferred to the applicant’s credit card is the stolen money. Read the complete article here.

Mutual Fund Red Flags

Wednesday, October 20th, 2010

If you’re thinking of investing in a mutual fund here are some important things to consider that investors sometimes overlook.

We all know that past performance does not guarantee future results, but past performance is much of what we have to go on. Perhaps you’ve found a mutual fund whose past results intrigue you, maybe they beat out everyone in its class for the last five years, or something similar. Here’s where you need to dig further and here are two important factors to consider.

You are going to want to know who the managers were when your proposed fund outmatched its rivals. Once you have their names check to see if any of them are still managing the fund today. If not, it’s a big red flag. Buying into a fund in these circumstances in almost like purchasing a brand new fund with no track record. Try to find a fund that has the same set of managers on board. Of course there is nothing guarantying the managers will stay after you buy into the fund, but it’s a good place to start.

The second thing to consider is, what investments was the fund holding when they got those fantastic returns that you are wanting?

You may be surprised to find that your income and growth fund was heavily invested in volatile tech stocks, maybe ones you do not own because of inherent risk. Do you really want to own a fund that relies on tech stocks to get their returns? Before you buy into a fund, find out what type of investments are allowed under its prospectus; it may surprise you.

If you find that your prospective fund has steady management and investments you can live with, then you have gone a long way into practicing the due diligence necessary before investing.

Good luck and happy investing.

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