Financial Health & Personal Money Management

[GrkScorp]

Now, i'm not trying to make this a Financial Forum, but I was totally blown away at how useful this Personal Development section was back when I asked about advice on my Singing.. It really was useful.. and (misobra) has totally given me if nothing else (which she has), motivation to continue to learn a wonderful skill/art.

This thread is for anyone with Financial Questions, and for people with answers to those questions. Money is an important part of everyone's life, reguardless of your age! Knowing how to manage it is a critical part of your Personal Development.

So, here is a little about myself before anyone starts..

B.A. in Economics (Summa Cum Laude)
M.S. in Accounting (CPA, CFA)
J.D. (Specializing in Taxation & Securities Regulation) "In Progress".

I've worked as a Real-Estate Agent for 2 years, and now have my Broker's license which will be pointless after Law School, but it was an interesting experience.. lol

So, if you have any (Tax) questions, i'll definately be able to help out, short of (telling you what to do), I can only involve myself as far as (suggesting), just to be clear.

Furthermore, any (Business & Investment) questions, i'll be happy to help out on. Anything from Real-Estate investing, to Structuring a Portfolio, to analysing the benefits to making a Corporation/Partnership and what to put down in any Business agreements.

Why? Well.. because we're family, I have spare time, feeling generous.. and people like free stuff, so if you're thrilled about getting a free pen or free food (about $5 in value), then you should be thrilled to get free legal & business advice (about $100-400 in value).

Besides, it's a great idea, and they say generosity is contagious. So, let's hope that's true, and I hope to see people alot better off financially during the course of thier lives, and hopefully alot more user traffic on Loveforum.net as it becomes a more useful-multi-purpose forum : )

[Gigabitch]

You rock, GrkScorp. I'm glad you're back.

[GrkScorp]

You rock, GrkScorp. I'm glad you're back.

lol.. well i'm glad you're still around.. : )

I never really left.. fine.. i guess i did.. but only because first year was very busy.. but now things are alot more casual, less formal.. less pressure.. etc.. so I have ALOT more free time.. lol

[Tiay]

great idea, grk! I wish I *had* any money to manage, but alas, I am broke.

oh hey.. I'm wondering, is buying stock ever a good idea? I mean, for regular people investing small amounts..
A while back Irelands state telco was privatised and the stock sold, lots of regular working people got burned on that.

also, are you familiar at all with the irish real estate market? lots of crappy, shoddily built houses, going for INSANE prices. Like 400k for something who's true value is probably around 150k. Only now, it's starting to slow down. Everyone here has been chanting "invest in real estate invest in real estate it will go up and up and up indefinitely". only surely it can't? what happens when it stops? does it crash? can anyone predict it?

[vashti]

I would like to know how I can get free money.

[GrkScorp]

oh hey.. I'm wondering, is buying stock ever a good idea? I mean, for regular people investing small amounts..

also, are you familiar at all with the irish real estate market? lots of crappy, shoddily built houses, going for INSANE prices. Like 400k for something who's true value is probably around 150k. Only now, it's starting to slow down. Everyone here has been chanting "invest in real estate invest in real estate it will go up and up and up indefinitely". only surely it can't? what happens when it stops? does it crash? can anyone predict it?

Well, i'll answer both questions.

1. It's NEVER too early to get into the stock market and to start investing. There's an old theory about the (Time-Money struggle, where you either have alot of one and too little of the other, the stock market is a great TOOL to help aid in keeping the right balance).

First, if you think about your investment alternatives, you have (typical savings account, 5.00% APY, money market account, 5.05% APY, or money market mutual fund, 5.25% APY) Honestly, they all look the same to me.

What's important to note is the terminology (APY), it means Annual Percentage Yield, so your monthly rate is not actually 5%, but by the end of the year, you would have realized a 5% increase in your account. That's great, but you can do better.

This is where the stock market kicks in. Think of the stock market like an investor's candy store. He/She can pick between really sweet investments (high risk/return), or healthy investments (low risk/return). That's an important choice!!!

High Risk Investments take alot of planning, management, and TIME! You can spend most of your day, and week, and YEAR, looking over your risky investments; and that's exactly what "day traders do". However, all other people except them have regular lives, and don't get paid to invest other people's money, we work so we can invest our own.. and WORK is where we get money from, not INVESTMENTING. Investments are simply a way to preserve the money we worked so hard for, and try to increase the amount we have saved to accumulate (Wealth/Equity).

So, as you can probably tell, i'm a fan of LOW RISK investments. I myself have a portfolio, although very small (Under $15,000). But there's a benefit, it doesn't take too much of my time, so I have enough of it for school, work, relaxation & loveforum! I maybe go and check how it's doing once or twice every week, unless something MAJOR happens on the news relavent to the stock market. That's because by definition, these are LOW RISK investments. These investments typically return (5-8% per year). Obviously, the safest investment is a U.S. T-Bill, but you'll do better keeping your money in the bank. So you have to find a reasonable standard of return, and a risk level that works with your available time during the week.

So, I still haven't gone into some basics about the Stock Market. First of all, if you want to open up an account and do it all yourself, etrade.com is great (I do not endorse etrade), i'm just simply suggesting it. The transactions are cheap, especially if you're not that active! And you can log on and check how you're doing at any time during the day. But how do you know what to look for in a stock?

Well, first, go to Google.com, go over the More tab, go and click on Finance. Now that you are there, I'd like to welcome you to the world of stock research. You can spend your entire life looking at Top-Movers, Sector Summary, News, etc. But DON'T! Instead, go to Sector Summary and click on Conglomorates (that just means they do alot of different things). Scroll down until you see the company list. By default, each sector's companies are arranged by their Market Capital (the value of all assets, less liabilities the company has; basically what the company is worth). Usually (almost always) companies with the highest market capital are the less volitile (risky, shaky, all over the place, up & down every 2 seconds, you get the point). That's because the %Change in a company depends on how much their Market Capital HAS increased, or is EXPECTED to increase. Therefore, you can imagine how hard it is to really change the price of a company like (General Electric) for example, who's market capital is over $0.4 TRILLION; (representing an entire 3.6% of the U.S.'s GDP, just from one company!).

General Electric is HUGE, bigger than a Michael Jackson's p***s in a children's playground; making it a Portfolio essential! Now, just so you see what a solid LOW RISK company looks like, click on (General Electric Company). You should now be looking at a fancy graph with a whole bunch of numbers all over the place.. Breath, it's ok.. you already know half the stuff that's on there.

You know Market Capital, Open Price, Low Price for the Day, High Price for the Day, etc. What's really important here is ONE number... (BETA).. it's a statistically significant number which represents (RISK)..

A Low beta is close to zero, but in the stock market, a beta close to 1 is considered low... In the case of GE, it's SO LOW RISK.. that it actually has a beta below 1!!! That's amazing! You start to reach High Risk investments when you are getting closer to and above a beta of (2).

Hope this was helpful.. will talk about Real-Estate after I wake up tomm.. : )

[GrkScorp]

also, are you familiar at all with the irish real estate market? lots of crappy, shoddily built houses, going for INSANE prices. Like 400k for something who's true value is probably around 150k. Only now, it's starting to slow down. Everyone here has been chanting "invest in real estate invest in real estate it will go up and up and up indefinitely". only surely it can't? what happens when it stops? does it crash? can anyone predict it?

I'm not familiar with the Irish Real-Estate Market, but I am familiar with the U.S. Real-Estate Market, and the Economics of the Real-Estate Market.

First, with some simple Economic theory. Even if you haven't studied Economics before, you're probably talked about it all the time if you're in Europe, so at this point, it should be second nature to you.

You have Houses, that is what everyone is looking to buy and sell. So, in this market, you have sellers (suppliers of homes), and buyers (purchasers of homes). Now, at any given time, you have a normal demand for homes, and a normal supply of homes.

In the U.S., unethical lending practices gave financing to families who could NOT afford to normally get financing for a home (the so called "heart-beat loan", if you had a beat, you could qualify). As a result, this pushed up the demand for houses, (flooding the market with buyers, while the number of sellers were fixed!).

For a short time, sellers didn't know what was going on, they were selling their homes in under 1 week! In some areas, they had what were labeled "lightning sales", once the property was listed, it was sold almost instantly! (That is an indication that the market price for those homes was actually alot higher than the asking price, which is why they were selling so fast).

When sellers caught on, they started raising prices (pushing asking prices closer to the market price for homes). The problem started when investors thought that the (Real price of homes was going up do to natural economic growth) and started investing in Real-Estate. This increased demand even further, and flooded the market once more with buyers who did not previously exist.

As a result, the short-term market value of homes increased by (168% in 5 years!). But now there was trouble. Sales flat-lined. Homes took an average of 6-weeks to sell, as buyers no longer found homes to be a bargain.. The Real-Estate surge was over!

That being the case, Investors were no longer buyers, (decreasing demand, and lowering the market price of homes). At the same time, people who had purchased homes with the aid of (sub-prime loans) were starting to miss payments or even default. This eventually got strict regulations in place by Government & Private bodies, and Banks were no longer giving out financing so easily. This took out ALOT of buyers from the market (further decreasing demand, and lowering the market price of homes drastically).

But downhill in Real-Estate isn't as smooth as other sectors. In other sectors, (like fashion) when you buy inventory at $50 and the next season comes around, you will sell it for $45 and get a loss, because you are accepting its $45 market value, and are not trying to recover your losses, because the amount is not that much per unit. The problem in Real-Estate is that the losses are not just $5, and for most people, it's the ONLY unit of Real-Estate they are dealing with.

Since the events happened so fast, people did not register the change in market prices, and as a result, people's expectations of Real-Estate prices remained "outdated". Investors and homeowners who had purchased Real-Estate just a couple of years earlier were dealing with HUGE losses that they were looking to recover. No sellers were selling homes anywhere NEAR close to the market price. As a result, when the asking price is significantly higher than the market price, you have (unsold homes).

But something interesting occurs in Real-Estate. Real-Estate is connected to frictional unemployment (unemployment related to how fast it takes people to relocate to new places of employment). If you don't have homes being sold, then you can't have homes being bought. Many families want to move to find work, and are trying to sell their home for (above market price, and are stuck with it). Until they can sell it, they will not be able to buy a new home next to their new job, and hence, unemployment may even increase!

This is the case of the U.S., but sound familiar? Sounds to me like the Irish Real-Estate market is flat-lining, and the bubble is about to pop, just not as fast as it did in the U.S., because there are hopefully no unfair lending practices going on in Ireland.

But since it's flat-lining from overheating (meaning a dramatic increase in prices).. you intuition should tell you that prices are going to fall, so it would NOT be a good time to get into Real-Estate, but rather a good time to start SAVING to get into Real-Estate in the next 3-5 years.. when it will be relatively cheap in Ireland.

Real-Estate cycles usually last 5 years. 5 years up, 1 year flat, 5 years down, 1 year flat.. and then all over again.

[GrkScorp]

I would like to know how I can get free money.

Well, just to be a ball-breaker... In theory, and I guess in reality, there is no such thing as "free" money.

Since time is valuable, a value that can translate and be quantified into money terms, we can see that (earning) money, no matter in how little time it takes, still takes time, so a (cost) exists unless it takes you (zero) time.

Even if I were to give you $1 for free, you would have to waste some of your time to get it. For instance, if you want free money.. I will give you $1 for free... just come to N.Y., i'll give u a safe public place we can meet during the day (Central Park), and i'll give you $1.

Is there a problem? I'm giving you free money, but for some reason I get the feeling that you're not going to show up. That's because there are costs involved. It will cost you much more than $1 to come to N.Y.

Fine, so what if I were to pay for your trip here and back, and on top of that, would give you $1? Still wouldn't come? No! At least not for the $1.

That's because even with your money costs paid for.. your time is worth something. You would pay much more than $1 to have all that free time (time to and back from NY).

So even if something is labeled FREE.. it's really NOT free.

[IndiReloaded]

So, okay GrkS. Say I have access to reasonable assets available for investment. Done the standard retirement portfolio, mutual funds & real estate. Now I want to get into stocks. In particular a certain area of the technology sector that I know quite a lot about. I have a couple specific companies in mind, three in fact.

Would something like etrade let me get started? Or should I go thru my financial planner (she's more conservative than we are--we ignored her advice a few years ago and made $$$).

I'm in Canada, and we have these accounts called 'self directed RRSPs'. They are basically like 401Ks. What do you think of these? Useful, or just a chance for the banks to make more service charges (the accounts are pricey).

[vashti]

Well, just to be a ball-breaker... In theory, and I guess in reality, there is no such thing as "free" money.

Since time is valuable, a value that can translate and be quantified into money terms, we can see that (earning) money, no matter in how little time it takes, still takes time, so a (cost) exists unless it takes you (zero) time.

Even if I were to give you $1 for free, you would have to waste some of your time to get it. For instance, if you want free money.. I will give you $1 for free... just come to N.Y., i'll give u a safe public place we can meet during the day (Central Park), and i'll give you $1.

Is there a problem? I'm giving you free money, but for some reason I get the feeling that you're not going to show up. That's because there are costs involved. It will cost you much more than $1 to come to N.Y.

Fine, so what if I were to pay for your trip here and back, and on top of that, would give you $1? Still wouldn't come? No! At least not for the $1.

That's because even with your money costs paid for.. your time is worth something. You would pay much more than $1 to have all that free time (time to and back from NY).

So even if something is labeled FREE.. it's really NOT free.

You could drop the money in the mail, or send me the plane tickets. I would definitely go to New York because I have a friend who lives there, but I don't know that I'd try to collect that dollar.

[GrkScorp]

So, okay GrkS. Say I have access to reasonable assets available for investment. Done the standard retirement portfolio, mutual funds & real estate. Now I want to get into stocks. In particular a certain area of the technology sector that I know quite a lot about. I have a couple specific companies in mind, three in fact.

Would something like etrade let me get started? Or should I go thru my financial planner (she's more conservative than we are--we ignored her advice a few years ago and made $$$).

I'm in Canada, and we have these accounts called 'self directed RRSPs'. They are basically like 401Ks. What do you think of these? Useful, or just a chance for the banks to make more service charges (the accounts are pricey).

First of all, i've Audited the books of Banks, and (fees, servies charges, overdrafts) don't even account for 2% of their revenue each year. Banks are in the business of holding onto your money for the least amount of interest possible.. and lending your money for the most amount of interest possible.. (Especiall checking accounts, which are mostly 0% interest).

Now, i'm a big fan of 401Ks, you have alot of flexability, but there is no reason to keep it in a bank which you feel the fees are excessive in. Take it out and put it in some other bank, or take it to eTrade, but be careful to preserve the nature of the 401k. You obviously don't want to get his hard and heavy with taxes by seeming as if you're cashing out your 401k and opening a new account with the funds. eTrade is great, simple to use, and just call them up for help with anything.. plus is very cheap, especially if you're not an active trader.

The best way to manage risk in a portfolio is by (diversifying & hedgeing). Both sound the same, but are quite distinct.

- Diversification, (not placing all your eggs in one basket, splitting losses and gains). A classic example is baseball cards. Your grandmother gives you $100. You can buy class (a) cards or class (b) cards.. but at this point.. both types are worth $50. Class (a) cards don't go up much, but are safe, class (b) cards go all over the place and are super-risky.

Well, let's see what happens under all 3 cases.

1. The most boring case is you buying 2 class (a) cards. They go up by 5%, and now your cards are worth $105. (yawn).

2. Or, you can go all out and buy 2 class (b) cards. They can go up by 50% or down by 50%.. so you can either have cards woth $150, or cards worth $50. (Notice how large the range is, $100!!!, that doesn't tell you much about how much you can reasonably expect to make)

3. You can split the investment & diversify, buying one of each class of cards. So while the class (a) goes up by 5%, leaving you with $52.5, your class (b) cards may either be $75 or $25. But let's see where that leaves you, (your range is now either $127.5 or $77.5 with a spread of only $50, making it much more predictable).

The ultimate goal of diversifying is to optimize your portfolio's expected return by increasing the probability that your average (mean) return is actually realized. You can probably find an Excell Spreadsheet that can support exactly (3) different investments and break down the optimal ratios to which you should invest by. You can also purchase professional software to calculate ratios for more than three investments. [Normally, you can optimize two investments by hand using calculus, but it gets very lengthy with 3 investments, and progressively longer and more complex with more investments.]

A (CFA), someone with a Series 7, 9, or 10 may be able to assist you in doing this, but NOT a (CFP). CFP designation does not really enable you to do anything legally, so it's not a professional designation, and more importantly, you only need a general & limited understanding of finance and tax law to pass the exam and get the designation.

Anyway.. so what is (Hedgeing)? It's the hottest thing since dog fights, you put two hedge-hogs up against eachother and see who sees it's shadow first... No, that's not what it is..

It's a VERY mathematically intensive trading strategy involving the exploitation of mathematical relationships between securities. For instance, if a 5% increase in Stock (A) causes a 10% decrease in Stock (B), you can create a portfolio which runs off of hedging these two securities.

How? Well, purchase the Stock of the more Volitile security (Stock B) and play the Options of the less Volitile security (Stock A). If Stock A goes up, you make money, but loose money from Stock B. But if Stock B goes up, you make money, even though you loose some money from Stock A. Not clear? Example time..

Stock A - $90
Stock B - $100
Option A - $100

You buy 1 Stock B & 1 Option A.

Stock B goes up by 10%, but Stock A goes down by 5%. How much have u made?

Well, if you hedge the wrong way, You made 10% from Stock B + 5% from Option A, for a total of $15. Why is this wrong?

What if Stock B goes down by 10%, so Stock A goes up by 5%? That means you lost 10% from Stock B + lost 5% from Option A. That's not the purpose of hedging.

Instead, what if you played Options consistent with the Direction of Stock A?

If Stock B goes up 10%, Stock A falls 5%. You make 10% - 5%, so 5% gain. Likewise, you would only realize a 5% loss in the opposite direction. Allowing you to exploit and play with risky investments, yet not have to worry so much about sudden market movements. In theory, under a "perfect hedge", you would not care where to market goes, because your Gain% will always equal your Loss%, giving you a 0% Gain/loss. But hopefully you would like to realize some gain.. lol

The most popular way to hedge is known as (pairs trading), where you sell the Options of the same Stock, just going in different directions (Call/Put). There is obviously an inverse mathematical relationship between Options of the same Stock in opposite directions.. but it's great for hedging because of behavioral trading. This allows for the (imperfections) in the Options pricing to serve as an already pocketed gain or (spread) between the up-downs of the two Options in the future. Since they Options are NOT perfectly priced against eachother, in addition to not responding perfectly against eachother in the market, You will be more likely to realize a consistent return from one of them.

This means that, You will be making MORE money from an option going one direction, than you will be losing from the option going the other direction.. this (spread) will lead to a gain. (Example, Option X (+50%) - Option Z (-30%) = 20% Gain).

Now, word of warning.. What i've explained about hedging is an oversimplification. You can't really start to talk about hedging unless you're going into the Math of it. Which is why, I urge you to NOT try it on your own, and use the aid of a CFA or other Investment Specialist.

How, lastly.. It's good you have a 401(k) set up, but is there any reason why you're not dumping in money reguardless the investment opportunities you see? It's a great tax shelter, and you should take advantage of it as much as possible, so even if you have no idea what to invest your money in, dump as much money as you can into your 401(k) each year; (by CAN, I mean comfortably live without & save for the future).

[IndiReloaded]

Now, word of warning.. What i've explained about hedging is an oversimplification. You can't really start to talk about hedging unless you're going into the Math of it. Which is why, I urge you to NOT try it on your own, and use the aid of a CFA or other Investment Specialist.

How, lastly.. It's good you have a 401(k) set up, but is there any reason why you're not dumping in money reguardless the investment opportunities you see? It's a great tax shelter, and you should take advantage of it as much as possible, so even if you have no idea what to invest your money in, dump as much money as you can into your 401(k) each year; (by CAN, I mean comfortably live without & save for the future).

Great info, thanks. But I know about hedging & hedge funds. Never been interested.

We *do* use our RRSPs. Its not so much for the investment, but for the tax shelter, as you say. We pay in enough to make sure we get $$$ *back*, which we then invest, rather than paying tax. Double benefit.

That's not really what I'm meaning, tho. We have a specific thing we want to invest/purchase stock in. There are 3 companies developing the tech, and its basically gonna be a race to see who wins. We want to invest a sum in each of the three; whichever one 'wins' will more than make up for the 'lost amounts', which we can claim as a deduction, as you know.

I want to know how to go about doing that (purchasing stocks). I've never done it directly. Should we get a broker? Can someone reasonably intelligent do this themselves? I have several months away from work (travel leave) coming up where I'll have time to monitor these investments closely, so I'd like to learn how asap.

[GrkScorp]

Well, go onto E-Trade or Scottrade or one of these online portfolio management sites. Open up an account, and you can start trading. Since you only want to purchase 3 stocks, it really won't cost you that much if you do it online.. as opposed to if you go through a broker. I remember my Broker used to charge me around $50 per trade, and for small amounts of stock, that was quite a Broker's fee to recover on every transaction.

Anyway, are these three firms in competition? If so, you might want to speak to a Broker about hedging. It's never a bad idea if that's the case. If you want to keep things simple and do it yourself.. just diversify. Here's an easy way to diversify.

Look at the (beta) of each company. If these companies are all micro-capital, then you should probably just get equal shares of all of them. If one company's beta stands out as (low, around or under 1) then hold no more than 20% in your portfolio. The reason is that you want a stable investment to balance the loss of any risky investment. Plus, if you are very certain that one of these three companies will take off and make up for the losses, then by all means.. go ahead and invest, because if your assumption is right.. the other three companies will take a hit, but the boom from the right one should be more than enough to offset any hit.

This is how venture capitalists make their money. Then invest in 100 different projects (movies, products, etc.) and out of the 99 unsuccessful ones, the (1) successful one not only covers the losses, but gives a noteworthy return aswell. In reality, not all 99 investments are losses, some are simply very modest gains, but nothing noteworthy. So, you're looking for the (1) noteworthy investment out of the bunch, and you have some information you want to act on, so go ahead.

Just be sure to diversify. If you have a 401(k) set up, chances are you're older than most people on LF, and you can't afford to take such high risk, so diversify, and be slightly conservative. Remember, an 8% return on average per year is GOOD (In the U.S.).

[IndiReloaded]

Well, go onto E-Trade or Scottrade or one of these online portfolio management sites. Open up an account, and you can start trading.

How safe is this? Don't mean to sound old, but what assurances do I have that I *actually* purchased stock? Versus my bank, which will charge a fee but I am reasonably sure is legit.

Anyway, are these three firms in competition? If so, you might want to speak to a Broker about hedging.

Yes, they are. Its basically a zero-sum game at this point. I reread your hedging post more carefully; I will look into it.

Thanks for the advice, GrkS.

[GrkScorp]

How safe is this? Don't mean to sound old, but what assurances do I have that I *actually* purchased stock? Versus my bank, which will charge a fee but I am reasonably sure is legit.

Well, E-Trade is secured by Pershing Co. I believe, so all transactions are guaranteed by Pershing to be accurate to (10 seconds) the latest.

On the other hand, Scottrade secures the transactions themselves and will never have a trade execute with more than (4 minute) lag.

What will ensure that the money is there? Well, I use E-Trade, and have had an account ever since my second semester in college, and it's still there.. lol.. i've never had any issue. Any time you want to cash out, you can simply wire all the money in the account to your Bank's account by punching in the Routing/Account numbers.. and within 3 days, all the cash in your E-Trade or Scottrade account will be transfered to your Bank's account.

Again, i'm not representing these two sites, or endorsing them in any way. If you want to be certain about this concern of yours, you should call the site you wish to use and ask to speak to someone who can answer your questions about this issue.

These are both HUGE sites, and used by 100,000's (hundreds of thousands) of investors around the U.S. alone. They have a name and reputation to maintain the same way your Bank does. So, you can be sure that they have the same credibility your Bank does.

Furthermore, these sites are NOT Banks in the traditional sense. They do not hold onto your money and then lend out funds. Instead they engage is (Spreading & Arbitrage). They take your money, (while it's sitting in Cash form on your account) and take advantage of Currency Volitility, realizing gains on (Buy/Sell) currency trades by the minute. In fact, when you agree to their terms, you will notice that you are also opening a Money Market Savings Account, paying a 5% APY. (Maybe it's 5.05% APY now). But that's what it does with your money, it pays you 5% APY to use it to trade and realize gains on currency, and it even converts some of the money it has to work with to New Zeland currency and places it in commercial savings accounts paying (12% APY!!!). The difference between what they earn and what they have to pay you (12%-5%), (7%) is their actual earnings. So, just imagine the millions of dollars sitting in the accounts, in cash form; (E-Trade earns 7% of your cash balance every year, just for holding onto your money!).

So believe me, because they want your money so bad, they'll make sure to keep you happy, and have you comming back. (Just one way they do that is by keeping stock trades low).