Saturday, May 16, 2009
Bond Fund Breakdown
Tuesday, April 28, 2009
Bank of America; Point of no Return
The government is at the point of no return with the big banks. They have poured billions of dollars into these institutions and are not going to let them fail now. I held off and did not buy. Then I read a Wall Street Journal article about the testimony of the CEO of Bank of America. What I got from the article is that the takeover of Merrill Lynch was forced on Bank of America’s shareholders and the shareholders were to be kept in the dark about the details of the deal. Correct me if I am wrong but as a shareholder, if BofA did fail I feel as though the shareholders have a class action suite against the government.
I am not concerned about starting a class action suite against the U.S. Government, but I think this supports my logic that there is no way the government is going to let BofA fail and is still a buy at its current price of $8 a share. I have not pulled the trigger, but will be watching the stock all week and in all likelihood will but is a market order.
Tuesday, April 14, 2009
Performance Guaranteed Variable Annuities
After the market collapse I was getting grief from some individuals that I talked out of purchasing variable annuities with a minimum guaranteed rate of return. The annuities go by many names and are different in their benefits and features across companies. The bottom line is that they all guarantee a minimum rate of return no matter what the performance of the underling funds you select. This made many individuals pick some of the riskiest investments offered in the product. The philosophy was that by going into the riskiest funds you had unlimited upside potential but the downside risk is a guaranteed minimum return by the company of 6-7 percent.
Wednesday, March 11, 2009
Finding the bottom with Behavioral Finance
Below is an explanation of behavioral finance from Wikipedia.com
It is important to point out that I only make slight changes to my allocation like going from 80% equities to 60%. I just take some off the table. This way if I am wrong I do not get hurt that bad. I also want to point out that I moved all my retirement money into equities when the Dow dipped below 8000 the first time. I did not use behavioral finance but I got anxious. If I was using behavioral finance I would not of bought.
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.
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
There are three main share Classes; A, B, and C. Class Y will represent other share Classes explained later.
Class A | Class B | Class C | Class Y | |
Managemant Fee | .50 | .50 | .50 | .50 |
12b-1 Fee | .25 | 1.00 | 1.00 | 0 |
Other | .10 | .15 | .20 | .15 |
Total annual Expense Ratio | .85 | 1.65 | 1.70 | .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.