Friday, February 20, 2009

America’s Lost Confidence

I try not to let the current state of our economy get me down or the losses in my retirement portfolio. For the most part they have not. What has got me down and angry is the failed leadership of both our corporate and political leaders. First the tax issues of President Obama’s picks. If our political leaders cheat on their taxes, what do they expect the average American to do? Our system works because millions of Americans line up every year to pay their fair share of taxes to keep the country running.

Personally I do not see why anyone would need to cheat on their taxes. Individuals like Timothy Geithner should know the system well enough to barely pay taxes. I get my effective tax rate below 15% and some years 10% because I know the system.

On The Journal with Bill Moyers he played a sound bite of a top Morgan Stanly official basically explaining to management about their “retention award” in his own words, “…please don’t call it a bonus…” What a slap in the face to the American people. Not so much the fact that they are paying out a bonus, but that they believe the people are so stupid that we would believe rebranding the word bonus to retention award would have us believe it is any different. I guess the managers were being lured away by Merrill Lynch or Lehman brothers.

On top of this entire financial crisis you have the Madoffs of the world coming out of the woodworks. Guys who work hard, not to make you money, but to rip you off. As someone who works in the industry I want these guys to do hard time in the same prison with criminals who rob us with a gun instead of a pen.

Then the icing on the cake or should I say peanut butter. One of the largest manufacture’s of peanut butter blatantly let a tainted product be consumed by millions, killing about 8 people that we know of. As far as I am concerned this is a capital punishment case.

I know there will be people who say that it is easy to point out what is wrong and we need to focus on what is right. I think we need to point out what is wrong, demand change and do what ever it takes to get it. I am optimistic about America’s future because at the end of the day it is a government by the people and we can change what is wrong.

Sunday, February 15, 2009

Spend More, Save Less

There is a lot of talk among economist that Americans need to spend more and save less to help get the economy moving again.  There is a reason why they are called economist and not financial planners.  It is true that Americans are saving more than they have in the past, but it may not be what you think.  Including in the savings rate are those who are paying down debt.  So if you put an extra $100 a month toward your credit card bill that is counted as savings.  What economist are saving is true, when everyone starts to “save” at the same time it has a negative impact on the economy, but telling people to spend in this environment is poor financial advice.

Americans are doing the right thing by paying down debt and padding their bank accounts.  It is not the role of the individual to get the economy moving in such a crisis.  Let the government borrow and spend.  They have the power to print money and tax the people.  They will not lose their home or go hungry from borrowing. 

In theory government spending should grow the economy and create jobs.  As individuals get a 3-5 year contract to build a bridge or road they will feel confident in their employment and start spending again.  Their spending will ripple through the economy and put more money in the pockets of merchants who may hire help or spend more themselves.  That is the theory, but before you start spending again the advice from the financial planning community is, pay down debt, build your savings and cut expenses. 

If the government stimulus does turn the economy around, then you will be in a better position and can always start spending again.  

Monday, February 9, 2009

Mutual Fund Share Classes

Many investors have no idea what mutual fund share class they are in or why. If you are about to do business with a broker or advisor a little education will go a long way.
There are three main share Classes; A, B, and C. Class Y will represent other share Classes explained later.

Class AClass BClass CClass Y
Managemant Fee.
12b-1 Fee.251.001.000
Total annual Expense Ratio.851.651.70.65

Excluding class Y, you can see from the table above that Class A has the lowest annual expense ratio. The annual expense ratio is the fee taken from the fund each year. It is somewhat of a hidden expense because you never see it come out of your personal account. Instead it is taken from the fund's assets. The net effect to you is a total return minus the expense ratio. So if you own Class A shares and the fund returned 10% the fund company takes .85% and you get 9.15% versus Class B where you would get 8.3%. So why would anybody by Class B or C? Class A carries a 5% or more front end sales load. A front end sales load is taken from the amount you put into the fund. If you contribute $10,000, only $9,500 is invested.

Class B has a back end or contingent deferred sales load. The load is on a declining scale. For example if you sell your shares in the year one or two you pay 5%, year three you pay 4% until the load goes to zero in year 6 or more.

Class C you will only pay the load if you sell the shares within the first year. After the first year the load usually is zero.

Now you are thinking why buy Class A or B. The answer is because of the expense ratio. Class A has the lowest expense ratio and Class C the highest. Over long periods of time Class C becomes the most expensive. The class with the lowest expense ratio will have the highest rate of return. You pay less year after year so you keep more of the return. Eventually the compounding of the higher return makes up for the front end load in Class A. With most companies Class B shares will convert to Class A shares after a number of years and to the lower expense ratio. The Class C shares never get a reduction in expense ratio.

If you are going to hold your shares for 10 or more years more often you are better off with Class A. If you think you are going to hold your shares for 5 years or less, Class C may be your best bet and between 6 and 10 years Class B.

I also put Class Y in the table above. I picked any letter to describe the next set of share classes. Some companies may have one or two more share Classes and other will have several. Most of the other share classes have to do with shares offered in pension plans, 401(k) plans or sold through fee only advisors. They are generally the lowest priced share Class.

The information above is very general including the table. There are many variations to the share Classes by company. For example the spread in the over all expense ratio between the Classes, how long the contingent deferred sales charge is and when and if Class B converts to Class A. The aim here was to give you a general understanding of how share Classes work. I also wanted to point out that what seems like the obvious choice when looking at the sales loads, may not be your best bet when you consider the entire expenses of the fund.

The details about overall expenses can be found in the mutual fund’s prospectus. I encourage everyone at a minimum look at the expense section of the prospectus before you invest.

Saturday, February 7, 2009

Recessions, Painful but Healthy

There has been a lot of news lately about a change in America’s attitude toward saving and becoming more fugal.  Americas have gone from a negative savings rate to a positive one.  It is now common place to hear people talk about how they are trying to save money on purchases.  This change in the savings rate and attitude was brought about by the recession.  Going back years you could read about how disturbing it was to financial professionals that we were at a negative savings rate.  People did not change their behavior until they had to. 

Recessions happen because we stray to far from the basics or fundamentals.  This time both individuals and companies over extended by borrowing or leveraging to much.   We ignored the fact that allowing individuals to borrow 100% or more with closing cost to purchase a home is a fundamentally flawed practice. At some point something has to give.

Take a look at the auto industry.   The companies that have been more efficient like Toyota, Honda, and Ford are doing much better than General Motors or Chrysler.  Without government intervention both GM and Chrysler would have failed and other auto makers would have become more profitable.  All the companies, even with the bailout are currently being forced to become more efficient. I am not trying to start a debate about the auto industry’s bailout, but most economists believe that a bailout only prolongs the economic cycle. In the end the recession will bring about long needed change in the auto industry.       

So what has changed for investors this time, nothing!  It really never does.  If you stick with the fundamentals and have time to wait out the corrections you will do well.  The hard part is turning off the noise coming from the talking heads.  Here is a question to ask if you are paying for managed money.  Did your advisor, trust company, broker etc. do any better for you than the market itself?  It will be hard to get a straight yes or no, but the answer will be no the majority of times. 

The fundamentals of investing are simple but hard to follow. 

Keep expenses low. 

Stay diversified.

Do not chase returns, like technology in the nineties, real estate this last go around and gold/commoditiess now.

Pay attention to taxes.

Buy good companies with good management and hold on to them.

Tune out the noise.

I do not know when the recession will be over, but it will end.  Those who follow the fundamentals will soon see profits again.

Wednesday, February 4, 2009

Reaquainting Myself with the Food Saver

Currently my household is running at a deficit and I do not think there is anything in the stimulus bill with my name on it, so I have been trying to think of ways to cut my expenses. The first thing I did was change my cable package. I all ready have a programmable thermostat and compact fluorescent light bulbs throughout the house. My wife and I have not been out to eat in months or done anything for entertainment. I just could not think of many other expenses to cut.

I kept thinking and finally it hit me, I stopped using my Food Saver. The Food Saver allows you to buy in large quantities and freeze food for a very long time without worrying about freezer burn. I looked in my freezer and it was almost empty. I made two lists one for my local supermarket and one for Sam’s Club. I checked out the prices at my local supermarket for items like ground beef and chicken to do some comparison shopping. One pound of ground beef at the supermarket was over $4 a pound. A package of chicken breast ranged from 8-9 dollars (I forgot to look at the weight). One pound of frozen peas, which I bought, was $2.50.

I got 6 lbs of ground beef at Sam’s Club for under $11.00. I got what would be the equivalent to 4-5 packages of chicken breast for $23.00. The same brand of frozen peas that I paid $2.50 a pound for was 5 lbs for about $5.30.

When I got home I repackaged everything with the food saver into one pound packages. My family consumes about 1 lb of meat at dinner. Ok, I eat most of it and my wife and kids eat some. By buying some of my food at Sam’s Club and using the Food Saver I am getting five meals for the price of one. That can add up to big savings over the course of a year.

The other thing I stop dong was buying my produce from the produce store that sell for example 3 heads of lettuce for $1.50 versus the supermarket that was $1.99 a head. Often when I buy produce from one these stores much of it goes to the compost pile. So I am going to ask my neighbors if they want to split the bill and the produce. This should save us even more money and I won’t feel guilty for wasting food.

I know many of you may all ready be doing the above, but I figure if I forgot about the Food Saver in the cabinet maybe others did to. Now if I can only start using the bread and pasta maker.

Share your suggesting on cutting expenses.