WalletPop

Millionaires are investing their money. Are you?

Tracy Coenen — 2008-05-01T11:00:00+00:00

A recent study of the investing activity of millionaires has found that 27% plan to invest more in individual stocks this year. Only half as many will invest more in real estate, and only a very small percentage say they'll decrease their stock investments.

This is seen as good news for the American economy! Our economy grows when people invest in companies and technologies, which creates new opportunities, new jobs, and new wealth. It can have a snowball effect, much the same way as decreased investment can have a negative snowballing effect on our economy.

You're thinking to yourself, "Who cares! I'm not a millionaire." We might not be millionaires, but there are certainly some lessons we can learn from them, and one is about the value of saving and investing.

Oh sure, it's much easier to save or invest when you have several hundred thousand dollars lying around waiting to be used. But if millionaires were interested in only spending all the money they're making, they may not be millionaires for long.
The moral of this very short story is simple. No matter what your income level is, it's wise to try to set some money aside. When you get a windfall (no matter how big or small), consider saving that money instead of giving in to the urge to run out and spend it. Yes, I am suggesting that you take your tax rebate check and save it! What a perfect excuse to open a savings account or a brokerage account... with money that is seen by many as "found" money.

Think about the satisfaction you will feel when you look at your bank account or your investment account and see that balance growing. Isn't that more fun in the long run that spending your windfall on something you don't really need?

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

Buy milk to beat inflation!

Josh Smith — 2008-04-29T14:00:00+00:00

Filed under: Food, Shopping, Wealth, Investing

Inflation was recently ranked as a number-one worry to consumers in a CNN poll. I can definitely understand why, CNN showcased several price increases over the past year, from 13% for milk to 33% for gas! It's clear that the prices for items we use everyday are going up up up.

These changes to the economy should spur you to change your saving strategy if you want to ride ride out the ever inflating prices at the pump and the supermarket. Right now you would almost be better of buying milk than putting money into your savings account, 13% growth is pretty good. Pity milk doesn't keep like gold though.

CNN offers three rules to use for anyone trying to save during a time of inflation.

One of the best rules they offer up is to avoid saving in a CD, which typically earns less than the rate of inflation. With all of the recent cuts by the Fed, even my high yield online savings account has dropped below the rate of inflation. I'm not yet ready to pull out and invest elsewhere since that is our emergency fund, but it is disheartening to know that it isn't even keeping up with inflation. The article also points savvy investors toward physical goods for investing and advocates heavily to get a fixed rate for your debt.

So if you are essentially losing value to inflation because of decreased interest rates, should you go on a spending spree? It almost seems like the prudent thing to do doesn't it? It's no wonder the savings rate in the U.S. has tanked in recent years. Combine this with government bailouts for those who borrowed irresponsibly rather than saving and you have significant disincentives to save.

Even with these factors, I don't plan to take the my paycheck straight to local dairy at the end of the week. If you can't get yourself to invest while losing money to inflation, keep shopping around to find a best case scenario or work to pay down any debt you are carrying.

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Mortgage Confidential: Will a higher rate give me more tax write-offs?

David Reed — 2008-04-28T15:30:00+00:00

Filed under: Real Estate, Ripoffs and Scams, Investing, Mortgage Confidential

Mortgage expert David Reed invites Walletpop readers to ask him questions about real estate financing. leave your questions in the comment section of this post.

Q: David -- I've been asked by Freepoint to refinance with them. This company claims that I would build up wealth by investing the difference in my equity with them, getting an interest only loan. They state that having equity in your home is not good because someone can sue you and have a claim on your equity. After several years, one would have enough money to pay off their mortgage if they desired. I would like to get advice on this. They said the higher interest would be a tax write off and I would be investing the equity and getting a higher return. Please advise. Thank you. - Helen

A: Helen -- Don't return their phone calls. I don't know who that company is, and while I'm sure they're a fine organization, I'm not comfortable. I see three big problems with this "pitch" which used to be very popular among mortgage loan officers yet seems to be falling by the wayside.

Build wealth by investing the different in equity with them
Having equity in your home isn't good because someone can sue you
The higher interest would be a tax write off

Sheesh. And I thought loan officers like that were out of business or selling cars or something.

Build wealth: Sure. The math always works with their calculators that show how much money you'd be making if you invested XX amount over XX number of years. Okay, fine. Which stocks? Which mutual funds? For how long? And how do they know any of this? The fact is that they don't, and you can bet your bottom dollar (if you have one by the time these folks get through with you) you'll be signing a horde of disclaimers saying that there are no guarantees. And you can still invest money each month any way you want without such a plan.

Equity isn't good. Since when? Since when all those people over the past few years tried to sell their house but couldn't because they didn't have any equity? Personally I think equity is darned good, especially when you have it and no house payment. Yeah, yeah, I know. If push came to shove then you use the proceeds from your investments to bail you out. Right. That apparently went down really well in places like Miami, San Diego and Detroit. And people can sue you all they want but that doesn't mean they can take your house

The higher interest is a better tax write-off. This is the hilarious one. If that were true, then why not take a mortgage with a 99% interest rate so you can take advantage of the higher mortgage interest deduction? These guys are some real Einsteins.

The fact is that people like these folks really don't care about you or your situation, they want to do two things: Strip the equity out of your home via a refinance so they can make money on your mortgage (with a higher loan amount, by the way, so they can make even more money off of you) and make commissions on investments they make on your behalf. I know this is only my opinion, but such pitches -- and they are pitches -- (and I'll just bet their "loan officers" are trained to read a script), make me sick to my stomach. -- David

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.

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Mortgage Confidential: Why haven't rates dropped more?

David Reed — 2008-04-25T17:00:00+00:00

Filed under: Real Estate, Investing, Mortgage Confidential

Mortgage expert David Reed invites Walletpop readers to ask him questions about real estate financing. leave your questions in the comment section of this post.

Q: The Fed has reduced rates by three full percentage points since last September. I have been following long term mortgage rates for quite some time. 15 and 30 year fixed rate mortgages are only .25% lower than they were last September. No one I ask seems to know why mortgage rates are still so high and happen to be rising as I write this. The current yield on the 10 year bond is 3.83, up from 3.47 early last week. My question is this. Do you think we will see lower mortgage rates in the future? - Carl

A: Carl -- good question. No, I really don't see lower rates in the future, certainly not anything like three percentage points. If 30-year and 15-year fixed rates do fall they might go down another 1/4 to 1/2% but nothing near to what the Fed has done with the Fed Funds Rate.

The fact is that the Fed has very little to do with fixed mortgage rates. Surprised?

Fixed mortgage rates are directly to to their respective mortgage bond, which are traded all day long. They're then securities backed by mortgages (mortgage-backed securities). The Fed reduces the Federal Funds rate, which is a very, very short term rate...as in overnight. This rate is what banks pay for short term loans, typically in order to meet their reserve requirements. The Fed can raise or lower this critical rate to make money more or less expensive. The lower the rate, the increased likelihood banks will lend money to businesses which theoretically would stimulate the economy.

During economic downturns, like we're experiencing now, the Fed will act to make money less expensive by lowering the Fed Funds rate. 30 year fixed rates are not tied to overnight lending rates but to their associated mortgage bond, or specifically a Fannie Mae 5.50% 30 year bond or a Ginnie Mae 6.00% bond. Since bond values are susceptible to inflation, any indicator of inflation will eat away at the future value of a mortgage bond. Prices for those bonds would then fall which would raise the rate.

Inflation can occur when economies are running at full speed and demand for products and services rise. Inflation can also occur when the cost of money is so cheap the currency is devalued, like we're experiencing now. Fixed mortgages rates anticipate the likelihood of inflation.

So while the Fed indeed has dropped the Funds rate by 3%, fixed rates have remained relatively stable. You can find more information in my book, Mortgage Confidential.

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Naked Truth Investing: Is now a good time to invest?

Dan Solin — 2008-04-24T18:02:00+00:00

Filed under: Retire, Wealth, Investing

This is part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

This is a very common question: How do you know when to invest? Have the markets bottomed out? Or are we in for a precipitous decline?

Here is the answer: No one knows.

Here is what we do know:For the 36-year period from January, 1970 through December, 2006, missing only a relatively few days in the market resulted in a dramatic difference in returns.

During this period, the annualized compounded return of the S&P 500 index was 11.23%. But if you missed the 25 best return days, your returns were only 7.82%.

Missing only the 10 best return days in a given year can wipe out all of the market gains for that year.

It would be great if someone could time the markets and tell us when to be in and when to be out. That is what market timing newsletters attempt to do. They are not very good at it.

Studies of the performance of market timing newsletters demonstrate that following their recommendations caused investors to under-perform the markets. Given this dismal track record, it is not surprising that one study of over 15,000 predictions by 237 market timing investment newsletters from June,1980 through December, 1992 found that 94.5% of the newsletters had gone out of business!

What's an investor to do?

Determine your asset allocation by taking an asset allocation questionnaire. You can easily find one on the internet.

Invest in a globally diversified portfolio of low cost index funds consistent with your investment objectives and tolerance for risk. You can find a good selection of index funds from reputable fund families like Vanguard, Fidelity and T. Rowe Price.

Maybe it is more important to tell you what you shouldn't do.

Don't use a broker or advisor who tells you she can "beat the markets." This would exclude practically all brokers and most advisors.
Don't try to time the markets.

You should always be invested -- the right way!

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.

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Only snobs should read this

Geoff Williams — 2008-04-24T16:30:00+00:00

Filed under: Extracurriculars, Real Estate, Shopping, Wealth, Travel, Investing

Reuters is reporting that the 24th richest man in the world is planning on spending $150 million starting a magazine, web site and TV station called -- get ready -- Snob.

Snob has slightly a different meaning in Russia. They think of a snob as someone who has made a lot of money in life and is entitled to brag about it if they want. In America, of course, we see a snob as someone who looks down on others who aren't as rich or as classy, and thus, the rest of us tend to look down on snobs. At any rate, Andrei Shmarov, one of the billionaire creating Snob, told Reuters, "It's for people who are successful and those who want to be successful."

The web site will be out in June, the magazine in July, and it will focus on lifestyle, business and travel articles. The cable channel will follow shortly after that.

But Shmarov isn't the only billionaire working on this project. One of his partners, according to the Moscow Times, is Mikhail Prokhorov, the fifth richest person in the world. He told the paper that the web site will have a social networking site. Don't bother looking for it online, though. This is the "don't call us, we'll call you" routine. The snobs at Snob are inviting about 3,000-5,000 people or so to be charter members on the social networking site. They only want educated, successful professionals.

"Wealth is not a criterion for membership, but it tends to be a quality of the target audience," said Shmarov to the Mowcow Times.

All I can think is... he's a billionaire... his publication is bound to pay well. I'm a magazine writer. If I could get in on the ground floor, I could make out like a bandit... Hmmm... Anyone think they can teach me Russian? In the next few weeks?

Geoff Williams is a business journalist and the author of C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America (Rodale). He doesn't like to brag, but it's been estimated he is the 639,345,712th richest person in the world.

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Naked Truth Investing: Ask me about retirement planning

Dan Solin — 2008-04-21T12:20:00+00:00

Filed under: Ask WalletPop, Retire, Investing

Retirement expert Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008).

Ask him your questions in the comments box and he will answer as many as he can. You can visit his website at Smartestinvestmentbook.com.

Read his most recent "Naked Truth" posts here. This column is designed to provide information about investing for retirement that will be relevant to a large group of readers. If you require legal service or other expert assistance, please seek the services of a competent professional.

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Naked Truth Investing: The prediction scam

Dan Solin — 2008-04-18T16:00:00+00:00

Filed under: Real Estate, Retire, Recession, Investing

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Want to make a lot of money in a down market? Write a book predicting a financial meltdown.

It worked for Howard Ruff. He racked up huge sales with his book, How to Prosper During the coming Bad Years, written in 1979.Ditto for Ravi Batra. He wrote The Great Depression of 1990. It was a best seller when it was written in 1987.

Remember all those books that told you how to make a fortune in real estate? It was so simple. You didn't even need a down payment.

Now that times are tough, there seem to be no end of books advising investors how to prosper when the "inevitable" financial meltdown hits.

Investors are told to liquidate their U.S. stocks. To invest in precious metals. To buy foreign stocks only on foreign stock exchanges and to hedge against the declining dollar. Maybe they are right and maybe they are wrong. I don't know.

But that is precisely the point. They don't know either, but they make a great living by pretending that they do.

One seminal study found that the predictions of economists about the future of the economy were worthless. You would think that their training would give them some meaningful insights about "turning points" in the economy. There is no data indicating that this is the case.

So what should investors do in these troubled times?

They should not rely on the predictive powers of self-styled "experts" who are no more than financial astrologers.

Instead, they should determine an asset allocation appropriate for them and implement that allocation with a globally diversified portfolio of low cost index funds, passively managed funds or Exchange Traded Funds.

Here is my prediction:

Based on historical data, investors who follow this advice will be in the top 5% of all professionally managed money over the long term.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.

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Make sure your investment broker is registered

Tracy Coenen — 2008-04-17T12:00:00+00:00

Filed under: Investing

The Securities and Exchange commission has rules in place which require investment brokers to be registered with them. This is for the protection of you, the consumer. It is just one way that the SEC tries to regulate the investment world and protect people from their own stupidity. (Along with that other simple rule: If it sounds too good to be true, it probably is.)

The SEC just launched a new program to warn you, the consumer, about doing business with unregistered brokers. Here's the deal: If someone is trying to sell you an "investment" and they're bragging about how much better it is than other investments out there, and they're unlicensed... there's a problem.

These kinds of guys are out to steal your money, and many of them aren't even selling a legitimate investment. They simply have an elaborate Ponzi Scheme going on, in which they're going to use your money to pay off investors who came into the deal before you did. You are left hoping that the scammer can convince more people to give him their money, in order for you to get paid back... and at some point the whole scheme crumbles.The SEC program is called PAUSE, for Public Alert: Unregistered Soliciting Entities. One of the easiest ways you can protect yourself is by asking to see the registration of the person selling you their "investment." If they don't have one or won't show it to you, you should run the other way. If they do have a registration, you still need to be cautious about your investment, but this is one simple tool to help weed out the scammers.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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Naked Truth Investing: Hedge funds are for stupid rich people

Dan Solin — 2008-04-14T18:03:00+00:00

Filed under: Retire, Saving, Investing

This is part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

An overriding concern of investors is saving for retirement. Yet the data indicates that, when you consider the ravages of fees, inflation and taxes, the average equity investor actually loses money.

These investors would have been better off not investing at all.

The first rule of intelligent investing is not to lose your money. Here is one suggestion: Don't invest in hedge funds.

I have never understood the underlying premise of these funds. We know that only a small percentage of traditional mutual funds equal or beat their benchmarks over the long term. Is it really possible that hedge fund managers have some special insight that has eluded the best and brightest on Wall Street?

Not according to the data.

One study showed that on average every major category of hedge funds provided lower risk-adjusted returns than the S&P 500 from 1995-2003.

Another study demonstrated that, after fees, 80% of the hedge funds studied provided no added value.

As if that was not bad enough, a recent study concluded the huge fee structure of hedge funds could attract "mediocre managers and con artists" to the market.

Recently, we have seen a number of large hedge funds implode. More are sure to follow.

When investing for retirement, don't be seduced by the promise of excessive returns made by hedge fund promoters. They come at the price of high risk. In addition, there are added problems of lack of liquidity, lack of meaningful regulation and lack of transparency.

My advice? Just say "no."

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.

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Charitable annuities: For that warm and fuzzy feeling in retirement

Josh Smith — 2008-04-08T17:30:00+00:00

Filed under: Budgets, Retire, Tax, Charity, Investing

For most people, the benefits received from a charitable donation are simply the "warm fuzzies" and a tax deduction. However if you happen to be sitting on some extra cash earning a paltry 3% in a CD then an annuity could net you an even greater return!

A charitable gift annuity is a vehicle for giving to charity which also provides income for life to the donor and their spouse based on a set rate tied to your age. While this may sound too good to be true, charitable gift annuities have been around for many years and are used by many respectable charities.

Charitable gift annuities can be set up with almost any charity and will provide payments back to the donor on either a quarterly, annual or semi-annual basis. These payments don't fluctuate with the market and will last your entire life, even if the return surpasses your original gift amount.

The rate for charitable gift annuities is set every year in July based on the discount rate and the longer you've been living the higher your interest rate is. Currently a 55-year old can earn 5.5% for life while an 85-year old can net a 9.5% return on the principle donation. These rates are based on a one-life annuity and will be slightly lower on a two life plan.On top of the return you receive from the annuity, there are numerous other benefits. An annuity provides several tax benefits including an initial deduction for the gift which sets up the annuity. Part of the income you receive each year will also be tax free, netting you even more cash for your retirement days.

Other benefits will vary between charities and on the amount of your gift and range from scholarship naming, donor recognition or a visit with the president.

The rates for charitable gift annuities will drop at the end of June by 8/10ths of a point thanks to Mr. Bernanke, so if you are interested in using one as a vehicle for retirement and charitable giving you should act soon. Many charities require a minimum gift to set up an annuity with an industry standard of $10,000, however other charities will go lower to $5,000.

A gift annuity is easy to set up and shouldn't cost you anything as the fees will be paid by the charity you set the gift up with. The rates are the same from charity to charity so the only reason you need to shop around is to find the charity which matches your interests and makes the best use of your dollars.

Several other charitable gifts can provide income or pass wealth on to your heirs including Charitable Remainder Annuity trusts (CRAT), Charitable Remainder Unitrusts (CRUT), and Lead Unitrusts. Each of these provides different benefits requiring higher contributions, lawyers and complexity. The additional benefits include a fixed dollar return(CRAT), a variable return tied to the performance of the trust (CRUT), and the ability to skip a generation and pass on wealth to your grandkids (Lead Unitrust).

So if you need to provide for yourself or you don't trust your children but still want to provide for your grandkids the best place to invest for retirement may be with your favorite charity.

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Suze Orman says pay off your mortgage by age 63

Zac Bissonnette — 2008-04-01T09:00:00+00:00

Filed under: Real Estate, Retire, Investing

Given that year over year property appreciation in the double digits is no longer seen as a birthright,, many retirees and soon-to-be retirees are feeling cash-strapped and aren't sure about how to plan for their futures.

In this great interview with Brian Williams, personal finance queen Suze Orman opines that people who are planning to stay in their current homes for life should make paying off their mortgages by age 63 their top financial priority. Your mortgage is $1,500 per month, by paying it off quickly you effectively reduce your retirement expenses by $1,500 per month -- it's pretty hard to make that up with savings, after taxes.

Suze's right, in the current environment: with CDs and savings accounts paying under 3%, paying off a mortgage at 6% makes sense. If interest rates rise and more attractive conservative investments become available, this strategy will lose its appeal.

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