When –and why—to Cash Out Your 401k

by Lynn B. Johnson on July 25, 2013

401k401(k) plans are a great vehicle for saving for retirement. Typically, an employee can choose to allow an employer to contribute a portion of his or her salary to the plan. Some employers might even match those contributions. The 401(k) contributions are invested in funds that might include money-market, mutual, or bond funds.

You are not taxed on 401(k) funds until you withdraw money from your plan. And, while it is your money, there are consequences to withdrawing money from your 401(k) before you reach age 59 and ½.

Just in time for 5/29: 529 College Savings Plans

by Lynn B. Johnson on May 29, 2013

529 Savings PlansDuring the past 10 years, the cost of tuition and room and board at 4-year public universities has risen by nearly 49%. To offset this sticker shock, simple investments specifically designated for college planning are a good way to go. A Section 529 college savings plan allows you to save for the upcoming higher-education expenses of a beneficiary of your choosing.

When the beneficiary withdraws funds from 529 plans for qualified education expenses, those withdrawals remain free from federal income tax. Such qualified expenses include:

Hey Investors, You Up for a Dip in a Dark Pool?

by Odysseas Papadimitriou on January 31, 2013

They’re three of the most tried-and-true, commonplace expressions:  1) Look before you leap; 2) Don’t swim within 30 minutes of eating; and 3) Buy Low, Sell high.

While decidedly trite, we were raised on such sayings, and they typically don’t lead us astray.  But do they hold true in the post-Great Recession world of finance, which is marked by things like “shadow banking,” “floating-rate demand notes,” and “dark pools” that are not only unclear to most consumers, but could also get you in over your head and ultimately eat your lunch if you aren’t careful?  That remains to be seen.

CD Rates on Steroids (and With Some Risk, Of Course)

by Odysseas Papadimitriou on January 23, 2013

corporate bondIt can be difficult to find an investment vehicle that gives you a safe, yet lucrative return on your deposit these days.  Rates on savings accounts, Money Market Accounts (MMAs), and Certificates of Deposit (CDs) have remained low since the Great Recession began; the stock market is doing its best Yo-Yo impression; and commodities like gold have left many scratching their heads.

That’s why private-label corporate bonds – more commonly known as floating-rate demand notes – might seem so attractive.

AIG Shareholders Give U.S. Taxpayers the Middle Finger (And Other Unbelievably True Stories from the Week in News)

by John Kiernan on January 9, 2013

AIG shareholder suitHold on – is this the news, a dream, or some sort of Oscar Wilde-type satire?  That’s along the lines of what I was thinking last night while watching Anderson Cooper and Erin Burnett report a pair of stories seemingly straight out of The Twilight Zone or Ripley’s Believe it or Not.

I mean, could AIG actually be SUING the U.S. government (as well as you, me, and every other taxpayer by extension)?  Are U.S. politics really so flawed that rape is actually LEGAL in California if the victim is single and the perpetrator impersonates her boyfriend?

Next Man (Or Woman) Up: New Fed Chairman Will Face Long, Hard Road

by John Kiernan on August 29, 2012

federal reserve sealA couple of things occurred to me while watching coverage of the Republican National Convention this week (I’m an Independent, if you’re wondering): 1) What would Will McEvoy make of all this? and 2) The impending election season means forthcoming political turnover, and that could have a significant effect on our finances.

Quickly, I answered that first question for myself (he’d probably yell at everybody) and moved on to my second notion. Soon thereafter I realized that elected officials aren’t the only ones that will have some measure of control over our wallets in the near future. I mean, has anyone thought about the role Ben Bernanke’s successor will play in shaping financial policy as the next chairman of the Federal Reserve, an appointed position.

How Does Europe Solve its Debt Crisis?

by Odysseas Papadimitriou on November 29, 2011

Whether you are well-versed in international economics or not, you’re probably aware that Europe is having substantial problems. You’re also likely familiar with the resulting worldwide ripple effects: uncertainty amongst investors, fears of a global double-dip recession, and widespread political upheaval, just to name a few. Of course, there are a number of prominent theories for how to solve Europe’s debt crisis, but given the depth and complexity of the problem, none is perfect and each requires tough choices to be made. People – not just in Europe, but around the world – need hope, however. We need a plan, a sense that these economic issues are finite and not permanently debilitating. So, with that being said, what say we take a quick look at four different courses of action that Eurozone governments can take, the pros and cons of each, and which will provide the most long-term benefit without causing short-term chaos.

Option 1: Economically sound European countries pay down southern debt
This plan would involve countries like Germany, the Netherlands, and Finland using savings, tax revenue, and export surpluses to help pay down the debts of southern neighbors like Greece, Portugal and Italy until they are at manageable levels. Such an approach is logical in the sense that the economies of European Union (EU) nations are interconnected, and the default of one or more countries would have negative repercussions for others.

Money Market Funds vs. Money Market Accounts

by John Kiernan on August 5, 2011

money market accounts and money market fundsDespite their similar names, money market accounts and money market funds are most certainly not the same thing. So let’s take a look at both to clear up whatever confusion might exist and provide insight into which will best suit your particular needs.

Money Market Accounts
A money market account, also known as a “money market deposit account,” is essentially a savings account. Money market accounts tend to pay more in interest than standard savings accounts and have higher minimum balance requirements but are interest-bearing bank accounts at their core, typically allow for limited check writing and debit card use, and most importantly, are explicitly insured by the FDIC—usually for up to $250,000.

Shareholders Don’t Want Board Members, Who Cares?

by Odysseas Papadimitriou on July 29, 2011

Board RoomImagine for a second a U.S. president loses an election, decides he’s just not ready to give up his power yet, and concludes that he’ll remain president for another four years, whether the American people want him or not. How do you think that would go over with the voters? Not so well, I would guess. In fact, he might have to board up the White House’s doors and windows to deal with the resulting revolt.

Well, if you think about it, that’s essentially what’s going on right now with the board of directors system in this country. According to Business Week, more than 200 board members at public U.S. companies over the past three years have received less than 50% of the shareholder vote at elections, yet all but a few retained their seats. Two-thirds of the S&P 1,500 doesn’t even require that board members garner the approval of a majority of shareholders in order to keep their positions. But how could that possibly be?

Why Dollar Cost Averaging is an Effective Investment Strategy

by John Kiernan on March 17, 2011

dollar cost averagingAll investors should have a system they use to approach investing. The ultimate goal of this system is to help the investor effectively make consistent investing decisions without being tossed to and fro by market conditions.

People who suffer the greatest investing losses are those who are constantly getting in and out of ‘hot’ stocks and those who buy and sell according to the dips and spikes of the market. Not only is this approach less-than-profitable, it is also stressful and time consuming.

Roth IRA

by Odysseas Papadimitriou on January 12, 2011

roth-ira-retirementSometimes when individuals start using ‘financial talk’, some of the rest of us get lost in the dust. Phrases like “401(k), 503(b), Traditional IRA, and Roth IRA” sound like another language. As a result, many people are overwhelmed by the many options, and so they choose a terrible alternative – to do nothing.

This is not a strategy I recommend. Instead, slowly wade through all the options and make an informed choice. When it comes to saving for retirement, any choice is better than doing nothing.

Mutual Fund Advantages Over Single Stock Purchases

by Guest on December 6, 2010

DilemmaWe probably all know someone who was just learning how to start investing, and in the process he bought a hot stock.  That stock skyrocketed through the roof, and now everyone you know is trying to get a share in that stock.

However, for every stock investing success story, you’re likely to find a hundred who lost BIG TIME.  For most new investors, mutual fund investing is a much better route than single stock investing.

How to Buy and Sell ETF’s Without Paying Trading Fees

by John Kiernan on November 10, 2010

free-etfWhat is an ETF?

ETF stands for Exchange Traded Fund.  The closest relative of the ETF is a mutual fund or the index fund.  Each mutual fund, index fund, and ETF includes a sum of funds contributed by different investors.

There are different categories and types of ETF’s.  There are actively managed ETF’s (like mutual funds) where people buy and sell stocks in order to get the best returns according to the goals of the specific ETF.  There are also passive ETF’s (like index funds) where many shares are purchased in line with a market index so you will get the average return of the index.  Actively managed ETF’s seek to beat the market (with the possibility of lagging the market returns).  Passive funds are satisfied simply to mirror the market returns.  In addition, there are sector ETF’s that track a certain sector of the market.  Let’s assume you think that gold will perform well.  You could buy an ETF that focuses on the gold market or even other precious metals.

Nobel Economist Predicts Further Collapse

by Brian Johnson on February 18, 2010

Nobel Prize-winning economist and Columbia Business School professor, Joseph Stiglitz argues in this interview that we are headed for another collapse.  His arguments are sound and should be listened to.

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Corporate Democracy

by Odysseas Papadimitriou on January 21, 2010

dictatorIn an article printed in The New York Times last November, Andrew Ross Sorkin addressed the issue of corporate governance by exploring the proposed takeover of the British confectioner’s company Cadbury by the American company Kraft.  The article explains that because British Boards of Directors act, essentially, in an advisory capacity, the decision to sell the company is based on the shareholder’s desires.

Since the article was written the takeover of Cadbury by Kraft has been complicated by various developments, but the issues discussed by Sorkin still hold.  Sorkin used the proposed takeover as an opportunity to discuss the differences between the power of corporate governance in England and in America.  In the British system, shareholders have much more control over the future of their investments, while in the American system, much of the control of the company is ceded to a Board of Directors and so takeovers, like that of Cadbury by Kraft, generally require the Board’s blessing to move ahead.

Parrallels Between Now and The Great Depression

by Brian Johnson on November 19, 2009

great-depression-dow-jonesRecently, I came across an article on Yahoo Finance detailing the similarities between our current economic market and the market of the 1929.  The author of the article, Simon Maierhofer, did a great job of summing up the ways our current economic crisis is paralleling the historical Great Depression and how our economic forecasters ought to rely more on history to help manage their expectations of buying opportunities and economic recovery.  I felt that Maierhofer’s observations were worth some commentary here at Wallet Blog and I wanted also an opportunity to point our readers over to his article for their own edification.

One of the key points that Maierhofer made that I found particularly interesting was his point that during both time periods, the economic devastation was preceded by extreme optimism, that no one (or very few experts anyway) seemed to see the imminent collapse on the horizon.  It was also interesting to me that both economic disasters seemed to be preempted by the collapse of a real estate bubble.  I, for one, had never numbered a housing boom as one of the causes of the Great Depression.  Maierhofer also points out that one of the most striking similarities between the market then and now is that trouble seems to be across the entire economy and not simply located in a few kinds of sectors.

Geithner lacks the judgement to do bailouts

by Odysseas Papadimitriou on November 18, 2009

GeithnerIf Treasury Secretary Timothy Geithner doesn’t know how to get appropriately compensated for the loans / bailouts that he keeps approving on behalf of the United States Government then he shouldn’t be giving out these loans at all.  His mismanagement of these negotiations is wasting our money.

For instance last year, when Geithner, then operating through the New York Fed, decided to bailout AIG, the ailing insurance giant was already in negotiations with banks that would have retired their Credit Default Swaps with AIG paying 40 cents on the dollar.  Once Geithner took over the negotiations, he instructed AIG to pay 100 cents on the dollar.  The flubbed negotiations cost American taxpayers at least $19 billion (i.e. 60% of the $32.5 billion that AIG paid to retire the swaps).

Stocks are Overvalued

by Brian Johnson on October 13, 2009

A while back we wrote a piece describing the basic problems with Bullish opinions currently circulating about the end of the recession.  In that article, we showed the various continued symptoms of our nation’s economic problems and the signs that we are still in a very real recession, even if abstract economic terminology currently suggests otherwise.  Recently, I came across the following graph in an article by Henry Blodget, and I think that it shows further evidence that the stock market is already overvalued and the bulls are wrong about their predictions.

 pe-chart1

The SEC Can Not Fix Broken Governance - Shareholders Can

by Odysseas Papadimitriou on September 28, 2009

share-holdersAll along it has been our contention at Wallet Blog, that the board of director’s system for American public companies is in need of significant repair.  Specifically, its problem is that shareholders lack the ability to control who serves on the board of directors of their own companies at any point in time.

Lately, we have seen more and more stories in the financial news telling us that the various boards of directors of American public companies have acted in ways that are either suspicious, irresponsible, or just plain illegal.  With each such story, we see the SEC attempting to curb the corporate excesses one problem at a time.  In a recent story, the SEC has begun investigating the role of consulting firms in setting salaries for CEOs.  Specifically, the question is whether recommendations about CEO pay packages are compromised when the same consulting firm hired by the board also provides other services to the company? In other words, are these consulting companies providing generous recommendations to the board about the CEOs pay packages in order to keep the CEO happy and minimize the chances that the CEO replaces them with another consulting firm for all the other services that they provide?

Shareholders Are Helpless in Controling Their Companies - Judge Agrees

by Brian Johnson on September 22, 2009

helplessRecently, a judge denied Bank of America’s attempt to settle with the SEC for $33 million dollars under accusations that the Bank presented false information to its shareholders about Merrill Lynch employee compensation packages.  The judge reasoned that the $33 million would end up being paid by shareholders, effectively forcing them to pay a bill twice which they should have never had to pay at all.  While we agree with the decision we clearly can not continue operating in a manner where shareholders are helpless in running their own companies.

Does it not seem odd that the owners of the company are not responsible for hiring corrupt or incompetent management or for allowing that corruption to continue?  Unfortunately, the reality with the current Board of Directors system is that shareholders cannot be responsible because they have very little power to decide who will sit on that board or to quickly remove board members when their attitudes or behaviors work against the shareholder interests.  If shareholders could have ousted Ken Lewis at any point in time, then they should have been responsible for any wrongdoings under his leadership. 

The Bulls Are Wrong About Our Economic Recovery

by Odysseas Papadimitriou on September 10, 2009

RecessionThe bulls are pointing to the end of a recession and a robust recovery ahead for the American economy.  Their optimism is based on a definition of the recession, in economic terms.  For economists, a recession ends when the economy ends its negative growth.   These terms, however, are theoretical.  In practice, a robust recovery must parallel a robust recovery at the American household level, which is unlikely to happen for a number of reasons: 

  • The Unemployment rate:  We hear a good deal of optimism coming from economists concerning the fact that the unemployment rate is slowing, but we ought to remember that it isn’t actually going down, but continues to rise.  According to the Associated Press, we are at the worst unemployment crisis since 1983 and economists are predicting the unemployment rate to peak above 10% by the middle of next year. 
  • State Deficits:  We are suffering huge deficits at the state level which the Federal Stimulus package can not correct.  This means additional job losses for state employees.
  • Unemployment Insurance:  Not only is America facing a dangerously high unemployment rate, but the unemployment level in this country has been high for so long that benefits are now running out.  We are in a situation far worse than simply having people who are out of work; they are out of work, have few prospects for new jobs, and are receiving no income.
  • Continuing Bank Failures:  Despite the federal government’s intervention, we continue to see banks fail.  The number of banks on the FDIC’s “Problem List” (banks in danger of failing) has gone from 305 to 416 at the end of June ’09.  Some analysts are afraid that the FDIC will go into the red by the end of this year.
  • Continuing Credit Crunch:  In these uncertain times, credit markets continue to be very tight.  Because of the continuing failure of the nation’s banks, regulators and bank executive remain cautious, which means less credit availability.  Companies who need to deal with debts that are coming to maturity are likely to find less opportunity to refinance.  As a result, we can expect more corporate bankruptcies and more job losses.   
     

Many economists are calling for more stimulus money by the federal government, but it is clear that what the country really needs is smarter spending.  We desperately need to make investments with government funds that will deliver strong returns on the nation’s money, and thus, we believe that the federal government ought to invest in new technologies that will turn America’s trade deficits into strong surpluses. It is precisely for that reason that this is the right time for a ‘Manhattan Project’ on energy independence.

Buy Treasury Inflation-Protected Securities (TIPS)

by Brian Johnson on August 4, 2009

wb_chartGiven the recent economic upheavals, as well as the unprecedented manner by which the government is handling these dilemmas, a lot of people are worried about what inflation will do to our savings and investments.  One option that investors have to safeguard against inflation is to put money into Treasure Inflation-Protected Securities or TIPS.

Basically, the principal investment for TIPS is adjusted by the Consumer Price Index (measures inflation) + A Fixed Yield that is unique for each TIPS (recently it has been around 2%).  This means that your investment primarily rises or falls along with inflation.   To use a simplified example, if you put in $100 in a TIPS that has a 2% ‘Fixed Yield’ and the nation goes through 5% of inflation in a year, then the value of the TIPS will raise from $100 to $105 over that year (as a result of the 5% inflation)+ 2% of $105 to a total value of  $107.1. 

No More Economic Bubbles - Let's Focus on Fundamentals

by Odysseas Papadimitriou on July 23, 2009

economic-bubbleOur country’s economy has been operating from bubble to bubble.  From 1996 until 2000, we were in a tech bubble.  Our faith in the financial potential of the dot com industry was boundless, though it ultimately proved ill placed.  From 2000 until 2006, we were in a housing bubble which, when it burst, laid the foundations for the current recession.  During these periods, the country placed its economic hopes on new, seemingly plentiful, frontiers that promised new means by which to make money.  Older values were made to seem, by comparison, out of touch and out of date.  As a result, we, as a nation, allowed ourselves to slip further and further away from the fundamentals necessary for a healthy economy.

Now, we stand on a precipice.  We could create another of these economic bubbles to put our financial hopes into – an option as illusory as ever – or we could find some way to return to the fundamentals that have, historically, made our nation’s economy strong.  Over the last decade, we allowed our exports to slip and made our economy deeply reliant on imports from the rest of the world.  We have let the trade deficit grow too wide without finding new products or new technologies to export, and as a result have found ourselves without a significant industry to insure future success in the global economy.

AIG Acts as Conduit. Taxpayers Get Nothing.

by Odysseas Papadimitriou on July 17, 2009

AIG BankruptMy point, in the past, has been that if America had allowed AIG to go into prepackaged bankruptcy, as we are doing with Chrysler and GM, we would have been in a better position to deal with the money AIG owes through Credit Default Swaps (CDS) because we could have negotiated payback for those positioned to collect on AIG’s obligations.  AIG owed money, we bailed them out to save the economy, and the result is that AIG paid off a lot of its obligations, and we, as taxpayers, now own billions of dollars of nearly worthless AIG stock. 

For the ones that are still not convinced, let us look at Goldman Sachs and its position concerning AIG.  AIG  paid out $13 billion bailout money to cover its CDS obligations to Goldman Sachs.  Actually, taxpayers paid Goldman Sachs, AIG just acted as a conduit.  The $13 billion was incredibly good for Goldman Sachs whose stock has since risen, but not nearly as good for AIG whose stock is perpetually on the verge of tanking.  However, the major problem here is that taxpayers paid AIG to pay off Goldman Sachs.  The result is that taxpayers own AIG stock (on the verge of collapse), and own no stock in Goldman Sachs (which is on the road to recovery).  Moreover, because CDSs are still unregulated, Goldman Sachs stands to make about $30 billion if AIG does, eventually, go bankrupt because of the CDSs they’ve taken out on that eventuality.  It is possible that other companies have similar CDSs bought against AIG, but since, remarkably, there still is no system of market regulation set up for CDSs, we can’t know for sure.

Companies That are Too Big To Fail Should Not Exist

by Odysseas Papadimitriou on July 1, 2009

too-big-to-failThis recession has been characterized by the presence of companies that are so vast and influential that their failure actually endangers the American economy.  The names of these companies, GM, Chrysler, AIG, Citibank, Bank of America, and so on, are all too familiar to us from their prominent place in news stories about economic disaster.  In order to prevent systemic economic collapse, America has resorted to bailouts and political bankruptcy,  essentially changing the “rules of the game” in order not to have these failing companies take our economy down with them.  What is clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing as compared to the damage caused by their collapse.  Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free market principles in which companies compete with each other.  If one fails, other and presumably better companies take its place.  Thus, the market evolves so as to better meet consumer demands.  Companies fail in a free market economy because they are unable to compete with stronger business models.  Moreover, they should be allowed to fail in these circumstances so that better business models can take their market share.

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