It turns out, I kept thinking about it and it’s kind of an interesting idea. Why would somebody let shareholders in our their future earnings? For the same reasons companies go public, mainly to raise cash–I guess. Consider a young superstar athlete with no money to attend a school where he/she might get noticed by the pros. Or a wannabe actor that is so funny you think there is no way he won’t make it on the big screen, but yet he or she has no financial means to attend acting classes or even know how to start the process of getting noticed.  What if it was possible to say ok, I want to do this, I’m going public, which would mean investors could buy stock in the person and receive a share of future profits, or possibly lose everything if their investment does a Lindsay Lohan.

I know this is crazy, but stay with me, it’s a conversation starter.  Say you bought stock in an potential actor when he was young and the cost was next to nothing and he blew up, meaning your earnings blew up. You could then sell some of your shares, thinking he’s reached the ceiling of success. Or, you could buy more of his stock.  The individual would still make money by being the biggest shareholder, just like a CEO. He would have the most to gain and most to lose, which I would hope would be a good thing for investors.

Thankfully, this doesn’t exist, because after this article, my stock would have taken a nosedive. And for the record, Jay Pharaoh does a good Will Smith.

BP Exec by Mike Mitchell

This is an interesting question, for a number of reasons.  I won’t go into too much detail here on BP (BP); you should make your own decisions…but consider this:

Yes.
- Stock is already at 50% of it’s highest value for the year.
- Might get bought by another company which will immediately make the value more.
- Over the long term, oil is only going to increase in value.
- Crowd seems to think its a good buy: you see a bounce after every big drop, thats from others scooping it up.

No.
- They haven’t even made a dent in the leak.
- Company is literally hemorrhaging billions of dollars.
- Lawsuits against BP.
- Obama’s oil fund is going to be expensive.
- Rebuilding their image is going to be expensive.

What do you think?

The frugal living craze has done a lot of good things to improve consumer spending habits, but it has put an importance on immediate and often minimal savings over long-term financial goals. For example, the majority of us spend hours running around town buying goods from multiple stores that have the cheapest prices, but spend only minutes deciding on investments that determine when and if we retire.   We can refuse to go to a concert because the Ticketmaster fees cost 15 % of the total ticket, but could care less about choosing an investment with a high expense ratio that could cost us hundreds of thousands of dollars.

We also have the habit of associating certain debt and costs as socially necessary, regardless of our financial needs.  For example, taking out a home equity loan to overdue a home remodel or borrowing thousands for a private college degree, which is arguably worth the same as a local state college.  Again, such issues are generally not taken up at the water cooler at work, but probably should be.  When it comes to making important decisions that substantially affect our economic futures, people simply do not discuss these issues with others, largely in part because decisions of such magnitude make people uneasy and insecure.

Generally, daily frugality topics dominate discussions at home as well.  For example, it’s ironic that a couple will debate and argue about the best economical thermostat setting in their home and almost always choose one that puts them a few degrees past their comfort level just to save a few dollars.  Thus, almost guarenteed are continuous arguments about keeping the home too cold or warm, however, this same couple probably spend no time reading the details of a home mortgage loan, arguably the biggest investment decision of their life.

Perhaps spending a few extra dollars a week on indulges that truly make us happy is well worth the price and spending a few extra minutes making big picture money decisions is what we should really should be worrying about.  Although this message goes against many of the daily ways to save money we preach about, it’s important to remember that we spend the some of the best years of our life working hard and only a few minutes making some of the most important financial decisions of our life.

I have stressed before the value of investing directly into an index, an idea that has been tested as of late.  Buying into an index simply means your fund tracks the S&P 500 or Dow Jones Industrial Average, as two examples.  When you purchase a fund that tracks an index like this, you are essentially buying a little bit of each stock representing the index, not literally, but it’s a good way to picture it.  In my opinion, the main advantage of buying directly into an index like this is that you’re guaranteed, year after year, to get returns equally matching the index.  You won’t see returns above or below the index, which is what many investors dislike about this boring approach.  However, it’s nearly impossible to find a mutual fund that can consistently beat the index year after year, let alone find a mutual fund that can even match an index over its lifetime.

This approach to investing is very similar to a manager of a Major League Baseball team.  Everyone knows (except Ben) that in baseball, numbers and stats are relied upon to make decisions.  If a certain hitter has great career numbers versus a pitcher, he will likely get the start, regardless if he’s the best player for the position or not.  Taking this same approach to investing, if an index fund year after year continues to beat most mutual funds, Exchange Traded Funds (ETFs), and other investments, why would you play anything else?

I like the S&P 500 index, and thus, most of our retirement money is invested in it.  I invest in the index in two different ways; the first is through an employer sponsored retirement match program.  Typically, most retirement funds will offer at least one index fund.  The second way is by buying an ETF of the index in my  Roth IRA account.  Another advantage to these indexes is because they simply track an index, the day-to-day management of the funds is minimal, which means the fees associated with owning them are very low versus  a mutual fund for example.  This is significant because just a 1% yearly fee on a retirement account can reduce the earnings by 17% over a twenty year period (read more about the impact fees have on mutual and index funds here.)

Lastly, I do want to have a little fun and control over my investments, so I do buy individual stocks.  However, to keep myself in check, I limit my overall portfolio of individual stocks to not exceed 10% of the entire fund.  Overall, I’ve been OK at picking a few stocks.  For example, I recently got lucky buying Sirius radio (SIRI) when they were close to bankruptcy and since my purchase, it has gone up tremendously.  Having said that, I have made a few bad bets, primarily early in the financial crisis when I purchased a few bank stocks thinking they were steals, but I didn’t totally realize the severity of the economic crisis at the time.  This is a perfect example of why keeping your individual stock picks to a minimum is beneficial, in the end, I’ve returned close to what the index has over a short period, but I’ve had a lot of fun picking, researching, and watching the stocks.

Recession Rhymes
By: MYM

Humpty Dumpty
Hedge fund managers sat on a wall
The over leveraged risk takers had a great fall
All the taxpayer dollars and President’s men
Tried to put the wall street pieces together again

Old King Cole
Old Uncle Sam was a merry old soul and a merry old soul was he
He called for his checkbook  in the middle of the night
and he called for AIG
Every hard working American believed the riddle, and a very fine riddle was he
Oh there’s none so rare, your tax dollars can’t compare
With Uncle Sam and his new best friend—AIG

Jack be Nimble
Rich be nimble
CEO’s be quick
Accredited Investors
Jumped over the regulators stick

This Little Piggy
Rich little piggy went to the market
Working little piggy stayed home
Investing piggy stared in disbelief
Because now he had none
And all the little piggy’s went
wee wee wee to their foreclosed homes

Three Blind Mice
Billions played nice
A few rolled the dice
Now they run and count their sum
They pushed bad sales  and gave bad advice
Did you ever see such a thing in your life
When so few ruined it for all those playing nice?

Although most of our raises fall below our expectations, we still expect and count on them.  Raises are a little different than surprise windfalls like bonuses and tax refund checks in the sense that the money is spread out over a years worth of paychecks.  This isn’t news to anybody, but the reaction to raise to windfalls is dramatic.  Usually, with a windfall we unload on expensive items, where raises we too get excited but basically live the same way.  With a little financial planning, you can milk the most of your raise, like your employer milks the most out of you!

One of the biggest benefits to raises is the ability it gives us to pay of debts.  A raise in monthly income can easily be transferred over to recurring debt payments.  Obviously, any debt with the highest rate should be targeted and pay down first, however, many do not think about paying down debts that have no benefit.  For example, student loan interest can be written off, so many people hesitate to pay down extra money each month.  But, you can only write off $2,500 of student loan interest a year.  So if you are paying more than this in interest each year then there are no pros only cons for this debt, pay it off!  Granted, there really is no good debt in relation to having no debt.

A good way to allocate your raise is to figure out exactly how much money is added to each paycheck and divide it up.  One area that should be focused on is your savings.  We harp on this all the time, but especially in our current financial climate your emergency fund should be a number one priority.  Even if you only have a few dollars to stash away, do so and increase your amount with each raise and with each debt paid down you can increase your savings even more.

After paying down your high interest debts and allocating money into an emergency fund,  consider adding to your retirement accounts.  Whether this means increasing your work contributions limit, creating a separate tax-sheltered retirement account or saving for a down payment on a house (also considered an investment).  Its too easy to take a raise and start eating out more often and “forgetting” your lunch at work, but you will not regret stashing away a constant flow of money into a interest bearing account.

If you use the set it and forget it method when dealing with your raises like you probably do for most of your bills, then you will get the most out of checks without being tempted to spend foolishly.  Lastly, I think a raise is a reward for our hard work so putting a little more money into your entertainment fund is well warranted.

You generally get a raise because of your work ethic, responsible decision making, and your common sense shown in the workplace—why not show these same characteristics at home with your budget?  $

The Bernie Madoff scandal has exposed gaps in our federal securities laws, in addition to the pocketbooks of wealthy investors, including fund managers.  The idea that rich investors have any more ability to avoid frauds than the everyday main street investor is ridiculous, and the Madoff case should end with strong regulation changes.

I have a hard time understanding the need or appropriateness of the accredited investor standard that has been written into our securities laws.  The law basically assumes that rich individuals are somehow more capable of investing their money, especially in complex investments, like hedge funds.  An Accredited investor must have a net worth of at least one million US dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year.

This standard should be removed going forward.  The Madoff scandal has taught us that if anything, rich investors have more to lose and should be regulated as such.  All investors should enjoy the same protections against scammers like Madoff and a dollar amount of your net worth should not be the determining factor between federal protection or not.

Michael Jordan was an extremely talented basketball player, and thus has made a lot of money throughout his career.  This doesn’t make him a talent derivatives investor and exempt him from federal laws does it?  Warren Buffet is one of the best investor of all time, but this doesn’t mean he should receive less protection in other areas of his life like on the surgery table does it?  We don’t exempt the rich in any other regulated area in our society, so why is investing any different? $

Until the credit crisis, money market funds were enjoying returns around 5%, but now are seeing their yields sink below 2%.  On top of the declining return, money market funds have scared savers into believing their money is not completely safe.  Because the funds in a money market fund are invested (kinda), they are not FDIC insured, so it is possible you could lose your money, although the chance has historically and should remain very slim.
 

I have recently moved my money out of a money market fund and into an ING Orange Savings Account.  For me, I enjoy the FDIC insurance on my emergency savings, and at the current time, the return is higher than a money market fund at 2.75%.  However, I would stress that savings/emergency funds are NOT investments.  Try not to chase the highest rate of return all the time and especially do not lock up your savings in an investment promising a slightly higher yield.

Because ING and Sharebuilder have recently teamed up, I enjoy the Orange Account because it is linked to my Sharebuilder account, an option that can be used to increase returns on money waiting to be invested.  If you’re in the market for a finding a safer place to park your emergency fund and are interested in starting an Orange account, you can get a $25 bonus if you enter the following reference code at startup: SM424/VNZZ2RR5.  If this code does not work, open up any money magazine in a supermarket and you will likely find an up to date advertisement with a newer code to use.

Where do you have your savings?  $

For those that are just joining, a ponzi scheme, in simple terms is when someone buys and sells shares with unrealistic returns using later funds to pay earlier investors.  Check out the link to get more background.  

If this is such an old method to illegally make money, how in this day and age did this occur?  Was no one paying attention?  The short answer is yes.  
 

Harry Markopolos has been trumpeting from anything he can stand on since 1999 that this was going on.  Now that the final tab has amounted to $50 Billion dollars, he is seen somewhat as a prophet.  He was assigned to do competitive research on Bernard L. Madoff investment Securities and became curious when he saw the competitor having far better returns.  He complained to the SEC’s Boston office in May 1999.

No major league baseball hitter bats .960, no NFL team has ever gone 96 wins and only 4 losses over a 100 game span, and you can bet everything you own that no money manager is up 96% of the months either,” he said.

Now things are getting more spicy as the U.S. Attorney General (Michael Mukasey) removed himself from the probe, and the SEC is looking into the relationship between Madoff’s niece and a former SEC attorney who reviewed Madoff’s business.

The Securities Investor Protection Corp. announced today that it is liquidating Madoff’s brokerage and named Irving Picard, a lawyer at Gibbons PC in New York, trustee to return cash and securities to customers. While the Washington-based SIPC provides as much as $500,000 in insurance for any missing money in individual brokerage accounts, it does not protect against investment losses.

[Edit: As stated on SIPC's website, there is no claim form "yet" for making a Madoff claim.]

In New York, Madoff showed up at the federal courthouse to sign some papers in his case, wearing a baseball cap and walking silently past a reporter who asked Madoff whether he had anything to say to his alleged victims. Free on $10 million bail, Madoff now has a curfew and an ankle-bracelet to monitor his movements.

I’m one of the few who opted out of paying my property tax through my mortgage every month and instead recieve a direct bill from the county I live in each year.  I do this because I would rather put the money for my taxes in an interest bearing account so it can earn money until the amount is actually due, opposed to basically paying your taxes in advance through your mortgage.  Because I do this manually, I have to adjust each year to make sure I’m putting enough money away each month to cover the end of the year bill, our taxes go up incrementally ever year to adjust for the homes value (which is assessed every three years).

The point of this post is not to bore you with the details of my property tax bill, rather to give you an example of December strategies you should be taking now, to avoid financial headaches down the road in 2009.  Consider the following practices to get ready for the new year.

• Adjust IRA contributions to max out for the year.
• Use the remaining cash on employer sponsored health care pre-tax cards.
• Organize your savings distributions.  Can you afford to put away more?  Should more money be going to a high interest credit card?
• Start filtering money into savings to cover entire insurance bills rather than pay monthly and face a “billing” charge each month.  In addition, this strategy will allow you to earn interest.
• Create a reasonable budget for the new year.  You can’t start Jan 1 to begin a new budget, get a plan in place before you set your new years resolution and start the year on the right track.
• Organize/adjust your portfolio.  Although a total revamp is probably a bad idea, it can be helpful to make sure your risk level is still at a comfortable level.
• Give your self a financial reality check.  Examine your bills and general expenses.  What can you eliminate–are you really watching HBO that costs $15/month?
• Do you anticipate a refund from your taxes this year?  Start putting together responsible plans for putting it to work for you.  For me, I’m not tempted to blow my refund on “stuff” when I have a plan with an end result better than the instant gratification of a shopping splurge. $

Bonds: Investinginbonds.com. A one-stop shop, this free site provides historical prices and call information for specific issues, plus a wealth of market data.

Stocks and funds: Morningstar.com. For copious commentary and statistics on both stocks and funds, this site is hard to top. The juicy stuff will cost you $159 per year for a premium membership.

Credit reports: AnnualCreditReport.com. Forget copycat sites. This is the official Web site where you can get a free report from each of the three credit bureaus once a year.

Credit score: myFICO.com. Buy your score from one credit bureau for $15.95 or from all three for $47.85. Plus, get advice on how to raise your score, and use the site’s EZ Error Correct system to dispute mistakes.

Tax calculator: Kiplinger.com. If you got a tax refund, give yourself a pay raise by using our easy tax-withholding calculator.

Social Security calculator: http://www.ssa.gov/estimator. Type your name, Social Security number, birth date, birthplace and mother’s name into this secure site, and it will show your estimated benefits based on your up-to-date earnings record.

Health insurance: eHealthInsurance.com. Provides immediate quotes for most major health insurers and compares policies. For personalized attention, call 800-977-8860 or find a local broker through http://www.nahu.org.

Health insurance: Coverageforall.org. Offers strategies for finding coverage, especially for people with medical conditions or modest incomes.

Medicare: Medicare.gov. Chock-full of detailed information about Medicare, with excellent tools to help you pick the best Part D plan or Medicare Advantage policy based on your specific medications and health condition.

Life insurance: AccuQuote.com. An easy way to get term-insurance rates from many of the top companies. Call 800-442-9899 for personalized help, especially if you have a medical condition.

Life insurance: Insure.com. Use this site to see the detailed criteria you must meet to qualify for each company’s term-insurance rates.

Auto insurance: InsWeb.com. Lets you compare price quotes from several major insurers (the number varies by state). Also a good resource for money-saving tips on every kind of insurance. For personal help, contact an agent through the Independent Insurance Agents & Brokers of America.

Homeowners insurance: AccuCoverage.com. For a fee of $7.95, you can calculate how much coverage you need. Plug in data about your home’s age, building materials and other details, and get an immediate estimate of its replacement cost.

Customer Service: http://Naic.org/cis. The National Association of Insurance Commissioners maintains complaint records for each insurer in every state. Focus on the complaint ratio: the number of complaints for every dollar the insurer collects in premiums.

Change is the investor’s only certainty.” - Thomas Rowe Price, Jr.

The flip side to this is that it is a fine time to buy.  Shares almost across the board are at some of the lowest we have seen in years.  Buffett himself is famous for saying: “Be greedy when others are fearful and fearful when others are greedy.”  Seems to be working for him.  Just a little bit.

Whether you feel that the market’s tide will turn in January (due to Mr. Obama, or the simple idea that we can’t possibly see a 6,000 DOW) how can you know when the bottom is going to be?  We are not advocating, or insinuating, that we know how to time a market, especially one like this, but there are a few things to look at when trying to forecast a little bit.  We know of a few time tested trends to weigh when looking at economics for the country.  Lets take a peek…

1. The TED Spread.  This is the difference between the interest rate that the banks borrow from one another and the rate on 3-month Treasury Bills.  (Its called a TED Spread from T-Bills and the EuroDollar futures, by the way.)  The wider the TED Spread, the more skittish the banks are about dealing with each other.  Right now its 2.18, which is pretty high.  When we see it below 1%, things will start looking up.
    
2. Watch Real Estate.  Traditionally, about one months worth of the number houses on the market can tell quite a bit about the state of the prices of homes in the market.  Six months worth of “inventory,” or number of homes is a pretty good number for the U.S.; of course, right now, we have 10 months worth of inventory.  Thats not good.  Take a look here.
    
3. Unemployment Rate.  Not very far from where Frank and I work is the Labor Department.  Every Thursday or Friday, they release data about how many people file for unemployment benefits.  Lately, it has been running around 450,000 and 500,000 a week, nationally.  This is high, and once we see this come back at least 400,000 we will feel better about the over all factors for the market having at least more stability.  Here is BLS’ report.

Stocks experiencing these tumbles often look attractive because 1) they appear to be an unbelievable value and 2) their yields look ridiculous.  Be cautious before jumping on board because if the yield looks too good to be true, it probably is.  Often times you will see a company lower their yield shortly after they take a hit.  Companies may be able to sustain such yields for a few quarters, but in the end, it’s probable the yield will shrink and you will end up with a busted stock.

Generally, well established companies with a history of increasing yeilds are your safest choice.  Dividend heavy ETF’s are also an option to avoid some risk, by spreading your money accross multiple stocks that all provide a decent yeild.  $