I found this article over at www.aol.com and thought it fit perfectly with recent news and stories out and about in the finance world at the moment. So here, in its entirety, is the article from AOL.
By DANIEL SOLIN
Usually, by the time investors ask me for an opinion, it’s too late. Chances are they will have already made a big investing mistake, and they can’t do much about it. It’s all too easy for investors to make bad choices: The securities industry is very clever about always coming up with the “latest and greatest” way to make a quick buck. But almost all of these investment vehicles are structured to benefit brokers and investment managers. Investors wind up getting relegated to their usual status as victims with no redress.
Since prevention is cheaper than cure, here’s a list of 10 investments you should avoid in 2010 and beyond.
1: Limited Partnerships
These are private deals sold to “sophisticated” investors who meet minimum net worth requirements. The pitch is you are investing with the “big boys” — large brokerage firms with the inside track on elite investments.
The reality is that these partnerships are illiquid. Because they aren’t subject to Securities and Exchange Commission oversight, there’s no requirement for audited financial reports, so it is difficult to monitor them. They’re characterized by high fees paid to the general partner and affiliates. And there’s no evidence that the average returns of limited partnerships beat those of a broadly diversified stock portfolio.
Limited partnerships are great for the promoters and operators who shill them.
2: Any Offshore Investment
Many deals are based offshore, typically in locations like the Cayman Islands or the Turks and Caicos islands. Avoid them.
The U.S. is a large country with well-established laws and a comprehensive (albeit imperfect) regulatory system. The primary purpose of establishing an investment offshore is to avoid U.S. regulation. However, investors need more — not less — regulation.
Deals structured offshore have a much higher probability of engaging in questionable (if not fraudulent) conduct than deals subject to U.S. laws.
If you think investing abroad shields you from the IRS, think again. A recent agreement between Swiss banking giant UBS (UBS) and the U.S. and Swiss governments provided for the release of the names of wealthy Americans who thought they outsmarted the IRS by secreting money in Switzerland. Those folks are now scrambling to turn themselves in and hoping to avoid prison time for their conduct.
3: Hedge Funds
No guru is going to deliver outsize returns without taking commensurate risk. This includes hedge fund managers. (One pundit has correctly noted that hedge funds are for “stupid rich people.”)
These funds are illiquid. When things go bad, the fund can prevent you from liquidating your investment for significant periods of time. And the fees are obscene. Usually 2% of the assets, plus 20% of the profits.
They’re difficult to monitor. If the fund changes its investment strategy, you’ll never figure it out in time to do anything about it.
And they’re very risky. Since 2006, more than 117 hedge funds at 71 fund families have gone bust. The list includes funds from stellar names like Russell Investments, ING (ING), Carlyle Capital, Bear Stearns and Dillon Read.
4: “House” Funds
“House” funds are actively managed mutual funds created, owned and operated by brokerage firms. They can be sold only by brokers who work for that firm. The Morgan Stanley Emerging Markets Fund (MSF) is an example of a house fund.
Independent studies have shown that house funds usually underperform funds from major independent fund families, like Fidelity and Vanguard.
Brokers love them because they get paid a higher commission. You should avoid them.
5: Variable Annuities
Insurance companies sell variable annuities through brokers. The pitch is that you get the benefit of an investment and the protection of a death benefit. The reality is that these are high-commission products, which is why they’re sold so aggressively.
The costs of an annuity are difficult to discern, but they frequently exceed 2% a year, which will erode your returns.
The big selling point is that profits are tax-deferred. However, what the broker may not tell you is that you’ll be taxed at your marginal, ordinary income tax rate when you withdraw your funds. You’re also subject to a 10% penalty for early withdrawal, prior to age 59 1/2.
A former SEC economist concluded that, instead of investing in a variable annuity, “in virtually every instance” investors would have been better off in a mutual fund or a portfolio of stocks.
6: Equity-Indexed Annuities
Have I got a deal for you! You get the benefit of the stock market when it goes up and the protection of an annuity when it goes down. That’s the promise of equity-indexed annuities.
Sound too good to be true? It is.
This is really an insurance product so complicated it would take an actuary to figure out its true returns and costs. They are illiquid and saddled with significant penalties if you surrender the annuity prematurely. And the insurer can change the provisions even after you sign up.
The combination of nondisclosed costs and uncertain returns makes these investments a poor choice for investors.
7: Exchange-Traded Funds
I’m not opposed to all exchange-traded funds (ETFs). Some, like the iShares MSCI ACWI Index (ACWI), are a low-cost way to achieve a broadly diversified stock portfolio. However, you can achieve the same goal with low-cost index funds like the Vanguard Total World Stock Index Fund (VTWSX).
I prefer the use of low-cost index funds over ETFs because you don’t need to open a brokerage account to buy index funds. This means you don’t have to pay a commission that reduces your returns, especially if you buy regularly or over an extended period.
ETFs have “bid-ask” spreads, which further add to your costs. And you can’t automatically reinvest dividends back into your ETF. But you can with an index fund.
You should avoid the niche ETFs that track small sectors like cancer research stocks. Your chance of selecting an outperforming sector of the market is very small.
On balance, I don’t see the appeal of ETFs for most investors.
8: Individual Bonds and Most Bond Funds
The purpose of holding bonds is to stabilize the returns of your portfolio. If your bonds or bond fund defaults or loses significant value, you’ve failed in achieving that goal.
Most investors can’t buy enough bonds to properly diversify. Brokers love to sell individual bonds because they make more money doing so. You should avoid individual bonds altogether.
The key to buying bond funds is to focus on low-cost, short-term, investment-grade (rated BBB- or higher) bond funds. Ignore comparisons of the returns of these bond funds to those boasting higher returns. They may produce higher yields, but they do so by taking greater risk. The Schwab YieldPlus Ultra-Short Bond Fund (SWYPX) is a perfect example. It was sold as a safe bond fund that gave investors extra yield. It performed as advertised for a couple of years before it dropped by more than 30% in late 2007 and early 2008.
You should confine your bond fund selection to a fund like the Vanguard Total Bond Market Index Mutual Fund (VBMFX) or comparable, low-cost, high-quality, bond index funds from other major fund families. Avoid most of the bond funds on the market.
9: Pooled Funds
Pooled funds are funds from different investors aggregated for purposes of investment. There’s no evidence they perform better than publicly traded funds. They’re often structured in a way to avoid SEC oversight, which is a major disadvantage because it’s difficult to monitor their costs and investing style, and to verify their returns.
They’re often illiquid and valued only periodically.
More than 14,000 publicly traded mutual funds have established track records and can be monitored daily. I see no benefit to pooled funds but many disadvantages for the investor. Like hedge funds, they’re structured to benefit the advisers who sell them and the fund managers who run them. I would advise avoiding them.
10: Individual Stocks
Probably more money has been lost pursuing the latest “hot” stock than in any other area of investing. No one has ever proven to have Superior stock-picking skill. The price of any stock is determined by tomorrow’s news. Since no one knows what tomorrow’s news will be, picking a stock based on your instinct about its future price is simply gambling. The stock-pickers graveyard is littered with bad choices that once looked great: Lehman Brothers, Worldcom, Enron, Refco and General Motors are just some examples.
Holding individual stocks has another problem. You assume risks that are unique to that stock, like the death of its founder or embezzlement by its chief financial officer. When you hold a low-cost stock index fund, you diversify away almost all of this risk without sacrificing your likely return.
Individual stocks aren’t suitable for the portfolios of most investors.
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Avoiding these 10 investments won’t eliminate the possibility of losses. But it will improve the quality of your portfolio and keep you from becoming another victim of the poor advice all too frequently dispensed by brokers and advisers.
Many people know that there is a difference between a credit union and a bank, but not many people truly understand what the benefits are. Credit unions are owned by members rather than investors, meaning that there are distinct advantages for their clients. Membership in a credit union generally has some restriction – only military members, or employees of a certain company, or something similar. Despite the fact that millions of people have (or could have) access to a credit union, most people never take advantage of this fact!
The differences between banks and credit unions have definitely come into sharp focus in recent years. One primary reason for this is that banks have increased fees and other means of income to remain profitable. Credit unions have not been nearly as aggressive in raising rates in their branches. While these two opposing models of doing business definitely each have their advantages, credit unions defeat banks at their own game in several ways. Consider these, particularly if you’re in the market for a new place do to your banking:
Better Interest Rates
Credit unions often have significantly better interest rates. Keep in mind, we’re not just talking about interest that you pay on a loan, mortgage or a credit card, but also interest earned on your deposit accounts as well. Savings, checking, CD, and other interest rates are all better. By banking with a credit union, more money stays in your pocket. Compare the rates you receive or are charged between two or three institutions (even between credit unions). Wise choices always begin with information gathering efforts.
Lower Fees
Since credit unions are not “for profit” entities, they are under less stringent requirements compared to banks when it comes to money-making activities. Because of this, they do not consider banks as direct competition and are able to keep their fees lower.
There is a list of fees that you should be aware of any time that you open a new account: monthly minimum fees for checking and/or savings accounts, ATM fees, overdraft or NSF fees, and similar drains on your money. These are by far the most often levied against customer accounts, but you need to check with the institution that you are considering. While all financial institutions are subject to federal regulation when it comes to financing a house, any fees that you incur along the way are generally lower than a bank or what you will find offered by a mortgage broker.
Insured Funds
The FDIC (Federal Deposit Insurance Corporation) is in the throes of rescuing failing banks and reports are saying that the money is running out. Now, this is not to say that the funds aren’t covered – but it’s 
always best to stay as safe as possible. The funds that are on deposit with credit unions are guaranteed by a different organization – the NCUA. Yes, both banks and credit unions are insured by the Federal government, but right now, the NCUA is under far less stress than the FDIC due to troubled bank assets.
Better Customer Service
These days, it is a rare joy to walk in anywhere and get decent service. Generally, at credit unions someone actually greets you from behind the counter and acts as if you are important no matter how much money you have in their vaults. The fact is that most employees of credit unions are members too, which puts you on the same level as them – and they know how to treat their customers.
Less Stringent Loaning Rules
Credit unions, for much the same reason that they have lower rates, have less stringent rules on who they loan money to. Because they have rules about who they let into their circle of membership, it is easier for them to lend money out. Try taking your business to a credit union and see what happens. Since a credit union is member-owned, the rules are more relaxed for granting of loans. Yes, they too are subject to certain provisions and even a credit check, but they are also more forgiving and willing to work with you. They actually care about you and want your business!
Organization. The very word itself makes many people shudder, roll their eyes, or imagine filing cabinets and neat labels. Organization, from organize, defined as “to give structure or character to similar parts,” is a difficult thing to motivate oneself to do, particularly if it hasn’t happened in a while.
But we all know it is important -and when dealing with your finances, it can be especially so. It is too easy to lose track of where your extra checkbooks are, where last year’s tax returns were stashed, or 
how much you spent last month on groceries.
In order to be truly financially healthy, it is critical that you form some sort of organizational system. It is obviously going to be different for everyone – what matters is that you find something that works for you! For some people, throwing everything into a shoebox works just fine. Others need labels, folders, stickers, markers, and a passel of other tools to keep everything straight.
Now, I don’t mean that you need to color-code everything and have it alphabetized. I have seen some incredibly simple organizational structures – one person I know keeps thing ‘in the first place they would look for them.’ (This works very well for some – I tried it with some level of success, but after a few failures went back to something with a little more structure.) The goal is for you to be able to locate or identify what you need without unreasonable effort. Most people can make do with a few manila folders and some pens to label things – bills, receipts, old paystubs, tax forms, and so on.
To be financially healthy, it is important that you be able to
- Locate important documents quickly and effectively
- Be able to quickly access information you need (both on- and off-line)
- Maintain a balanced checkbook
- Keep track of relevant financial information, including insurance documentation, tax information, and so on.
Your system does not have to be glamorous. It does not need to be shiny, or colorful, or pretty – only functional. I have a beat-up old filing cabinet and some hanging folders with tags, and it works for me. Having your paperwork and finances organized will let you see problems coming and handle unexpected ones quickly and with ease.
Find something that works for you, and share it in the comments!
Tags: budget activities, goals, lists, necessary, organization, organize, writing
We’ve all done it. Seen that gadget in the window: the ice cream bar. The shirt or shoes we just had to have. Perhaps the latest movie or computer monitor at some price we just can’t pass up.
Then, a few hours or days later, we say to ourselves… Why? Why did I buy that. I didn’t want it, I didn’t need it… It was a waste of money.
When the inevitable pangs of guilt hit just as you dig your fingernails into the packaging around your latest gadget, you know you’ve probably made a rushed, financially unhealthy impulse purchase. One easy way around this is to implement a “$100 rule,” in which any purchase price is divided by that amount and considered for that many days—a $400 XBox 360 gets considered for four days, a $1,400 shiny new laptop is delayed for two weeks – time to be spent researching and looking for better deals.
Obviously, the scale of the item matters too. A chocolate bar divided into $100 gives you… About 20 minutes. You could do that during your grocery shopping – but the idea here is that you have to think about the guilty feelings before you buy the item!
If you have to, scale the rule down to $50. That will give you plenty of time to research better prices or deals before giving in and splurging.
Readers: What’s your method? Do you have a preferred system or habit to counteract the impulse buy? Share it in the comments!
Many of you may know that Benjamin Franklin is said to have coined the phrase “A penny saved is a penny earned.” He actually had quite a lot to say about compound interest. But, as it turns out, a few other founders of the United States of America had something to say on the subject of finance, too.
John Adams believed in the importance of a strong financial 
education:
“All the perplexities, confusion and distress in America arise not from the defects of the Constitution not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.”
– From a letter to Thomas Jefferson in 1787
Alexander Hamilton knew what created a sound economy:
“Industry is increased; commodities are multiplied; agriculture and manufacturers flourish; and herein consists the true wealth and prosperity of a state.”
– Report on Manufactures, 1790
Thomas Jefferson believed in spending less than you earn:
“I… know nothing more important to 
inculcate into the minds of young people than the wisdom, the honor, and the blessed comfort of living within their income, to calculate in good time how much less pain will cost them the plainest stile of living which keeps them out of debt, than after a few years of splendor above their income, to have their property taken away for debt when they have a family growing up to maintain and provide for.”
– From a letter to Martha Jefferson Randolph in 1808
Benjamin Franklin knew the power of compound interest:
“Remember that Money is of a prolific generating Nature. Money can beget Money and its Offspring can beget more, and so on. Five Shillings turn’d, is Six: Turn’d again, ’tis Seven and Three Pence; and so on ’til it becomes an Hundred Pound. The more there is of it, the more it produces every Turning, so that the Profits rise quicker and quicker.
– From “Advice to a Young Tradesman, Written by an Old One,” 1748
George Washington on the corruptive power of 
money:
“Few men have virtue to withstand the highest bidder.”
– From a letter, Aug. 17, 1779
Clearly the founding fathers had some idea of how to handle finances – both their own and those of the nation. We can all learn from their ideas and advice, and taking these five concepts to heart is a great way to start!
Tags: banking, compound, investing, long term, money, traditional
- For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.
- It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.
- Spend no more than 2 1/2 times your income on a home. For a down payment, it’s best to come up with at least 20%
- Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%
- Never hire a roofer, driveway paver or chimney sweep who is going door to door.
- All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA.
- To figure out what percentage of your money should be in stocks, subtract your age from 120.
- Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.
- The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.
- Aim to build a retirement nest egg that is 25 times the annual investment income you need.
- If you don’t understand how an investment works, don’t buy it.
- If you’re not saving 10% of your salary, you aren’t saving enough.
- Keep three months’ worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months’.
- Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or use some of your income to help out when your child is in college.
- You need enough life insurance to replace at least five years of your salary – as much as 10 years if you have several young children or significant debts.
- When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.
- The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high-interest rates will wipe out the benefits.
- The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.
- Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit card account is a scam artist.
- The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.
- Lease a new car or truck only if you plan to replace it within two or three years. Better yet – buy a cheap used vehicle and drive it into the ground!
- Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.
- Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.
- Don’t redeem frequent flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.
- When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacture.
Finances are an especially difficult part of life for many people, and your credit score has a huge impact on your long-term financial health. However, credit scores have many myths and misconceptions surrounding them which can lead even the savviest of consumers astray.
Not knowing what you are doing or following bad advice can severely impact your score, and negative marks are something everyone should try to avoid. Here are 5 important things to know that may seem a little odd.
Myth Number 1: “I shouldn’t check my credit more than once every few years because it can lower my credit score.”
Fact: You can check your credit score as often as you want without any negative impact (assuming you do it through a credit bureau). Checking your own credit score counts as what is known as a ’soft’ inquiry. These ’soft’ inquiries do not have an impact on your credit score. You can even get one per year from each of the three credit bureaus for free – go to www.annualcreditreport.com to check it out!
Myth Number 2: “Carrying no debt will mean I have a high score.”
Fact: Actually, not having any debt will negatively impact your score. Statistically (and credit scores are all about statistics) people who do not have a credit card or any credit accounts are a higher risk for default on a loan – and thus have a lower score.
Myth Number 3: “Missing a payment won’t hurt my score as long as I pay it off soon.”
Fact: Even a single late payment will have a bad impact on your score. Paying your bills on time is the single biggest determinant of your credit score. So make sure they all get in, on time, every time! Your score will take into account how late the payments were, how many there were, and how long ago they occurred – up to seven years’ history is tracked.
Myth Number 4: “Debt of less that X% of my income has a positive effect on my score.”
Fact: As a matter of fact, the various credit scoring agencies do not have a record of your income, and so it is not used in determining your score. The most important thing is that you demonstrate an ability to manage your money, pay your debts on time, and not default on loans.
Myth Number 5: “Closing the accounts I don’t use will improve my score.”
Fact: Actually, your percentage of revolving credit utilization – the relationship between total available credit to you and the amount you are using – is a major component of your score. Closing accounts decreases the amount of credit available to you, thus causing your utilization to increase, lowering your credit score. Another detracting factor is that closing old accounts reduces your history, another major factor of your credit score.
Keep all of these things in mind when you are thinking about your credit score! Seemingly beneficial actions can impact you negatively, so do a little research before you proceed – the few minutes will be well worth it.
Source:
Job Losses Show Breadth of Recession
DAVID LEONHARDT
NYT, March 3, 2009
http://www.nytimes.com/2009/03/04/business/04leonhardt.html
