Wednesday, December 1, 2010
What is unemployment insurance? As Congress currently debates whether to extend unemployment benefits to the 2 million or so people who still depend on them, it's a good idea to reflect on what these benefits really are, and who really gains from them.
Firstly, I am all for unemployment insurance. I think it's a necessary function of a large economy like that of the United States to install mechanisms meant to stabilize society in the event of a downturn. There's no doubt that some people abuse the system and disregard work even when it is available, but most use unemployment properly until they find gainful employment somewhere else.
However, while an individual benefits from unemployment for the 26 weeks or longer he is is on the program, I submit that the real beneficiary in this circumstance is his mortgage holder or landlord.
For most people, their first expense every month is either the rent or the mortgage payment. Next comes food, utilities, car and health insurance, debt repayment, and entertainment. For someone who's unemployed, the situation obviously doesn't change. One of life's cruel little truths is you still must pay your bills whether you have the money to do so or not. So the person cuts back on spending as much as possible, maybe eliminates things like health insurance, certain services, and becomes a miser with the food budget. You'd be surprised at the control you can leverage over many things, but one thing that's hard, if not impossible to change, is the rent or mortgage.
Sometimes you can remortgage a home or reorganize a loan of some kind, and even work with your landlord on rent. But usually, employed or not, your rent and mortgage remain constant.
This is where unemployment offers its greatest benefit. By allowing you to continue paying your mortgage, your bank's ledger book remains balanced. Stop paying your mortgage and eventually you go into foreclosure. Well, this affects more than you, the homeowner. It affects the bank's balance sheet, and possibly drives down the value of surrounding homes. No one wants to purchase a home in an area littered with foreclosure signs.
Therefore, unemployment insurance is basically a stabilization mechanism created to assist the national banking system through economic turbulence.
Basically, social welfare is bank welfare. Banks are the ones who stand to gain the most from unemployment, because they are usually the ones to get paid first by someone who receives UI benefits.
I don't say all this to be cynical. I just want to point out the big picture. If there were no unemployment insurance, then when people lost their jobs they'd risk losing their homes, also. Even if you saved six months worth of expenses, there's no guarantee you'll find a job at the end of that time or that you won't be able to counter some other sudden expense from popping up. The fact is, UI helps soften the blow, but it's meant to keep the mortgage industry stable.
Imagine if we had no unemployment benefits. Every time this country saw an economic downturn, you'd also see a wave of people lose their homes. That would upturn the banking system. Mortgage defaults, foreclosures, property seizures, you name it. It would be utter catastrophe every 5 to 7 years, which is the average time between recessions.
For better or worse, the banks are the heart of the economy. When enough people default on their loan obligations, this heart undergoes a cardiac arrest. Then we see what happened in the 1980s and 90s with the Savings and Loan crises, and the September 2008 meltdown. I don't even need to point out that those crises brought about real hardship and undermined the whole economic system.
So, as Congress dithers with whether to extend these benefits, it's important to understand the role UI plays in society. In many ways, it's a small cog that helps keep the big cogs from crashing onto our heads.
Tuesday, November 23, 2010
Think about it. If you make $36,000 a year, that's about $3000 a month before taxes. Six months of savings would equal $18,000. While it would no doubt would be nice to have $18k just sitting around, providing some peace of mind, that amount could be put to better use. In fact, merely putting away such a large amount and letting it sit in a savings account may actually be counter-productive.
For the purpose of this article, I'm using the term "saving" as a means to invest money. You should always have an emergency fund set up. But is saving your money a viable investment choice as a means to increase your portfolio?
More than likely you, like everyone else, will have to invest in the common CDs and money markets you see advertised at banks local and nationwide. For the latest rates on one year CDs, let's check out Bankrate.com's latest rankings.
As of today, the highest rate is 1.32% through a bank called Ally, with no minimum deposit. If you were to invest $1000 at that rate, you would earn $13.20 in one year. That's hardly enough to buy a ticket to an evening movie, much less in IMAX or 3-D. If you for any reason have to withdraw your money early from the CD, you would no doubt incur a fee that would wipe out any earnings you make on that $1000.
However, that $13.20 is really just an illusion when you factor in inflation. Here's why. Thus far in 2010, inflation has actually been historically low. It began at 2.63% in January and dipped as low as 1.05% in June. Average it out and it sits around 2.00% This means that really you're losing at the least, .68% of that $1000 by sticking it in a CD. So just by opening up a supposed "safe" investment like a CD or money market, you lose around $6.80. The most you could hope to keep in one year is $993.20, assuming there aren't also fees associated with opening up your new account, and based on an average of 2.00% inflation for the year. Inflation tends to average higher--like in-between 2-3%--so think of the loss of $6.80 as a minimum.
Well, obviously if you're losing money in an investment, it's not worth it, is it? Even if you count "peace of mind" as the highest virtue, and you just like your money sitting safe in a CD or savings account, ultimately you're going backward.
But how can this be? Aren't CDs and savings accounts the "safest" ways to invest your money? That's what we were always told since the time we were kids. ING Direct, the popular online bank and brokerage (which I use) is famous for its "Save your money" marketing campaign. Well, I'm sure that's worked great for ING, but has it worked for its customers? Currently, ING offers a 1.10% APY on its Orange savings account. That's pitifully low, far lower than 1.32% offered by Ally, and that one isn't good either.
Unfortunately, the days of "a penny saved is a penny earned" are long gone. The Fed, acting in conjunction with other national banks, has gone out of its way to turf out the conscious, safe investor. They have done this to spur borrowing both in home mortgages and credit cards. The goal here, of course, is to get you into as much debt as possible. Now saving your money is actually a losing strategy, and you are pretty much forced into investing in Wall Street or other, riskier methods. This amounts to a redistribution scheme of staggering scale. Your money is practically being vacuumed out of your pocket and handed to the big banks. Meanwhile, the government stands by and does nothing, as usual.
Well, there's no point in getting cynical. The more you keep yourself aware of what's going on, the better equipped you will be to act wisely when it comes to financial matters. When it comes to saving money, it's okay to invest in a CD. Just understand that in all likelihood, you are gradually losing money by doing so. However, on occasion some banks offer one time rates for first-time customers. You might even be able to lock in a rate that will keep you above the inflation line. Generally these rates come from local banks, so be sure to check your paper or local listings for any deals.
So, is it worth saving your money? No. At least, not for the purpose of straight investment. It's good to have some liquid reserves stashed away for use at a moment's notice, but just saving is clearly not the way to get ahead financially.
I would even go a step further and say this: CDs amount to a service you pay for to provide you the comforting illusion that your money is safe. They are cleverly designed ploys that do little more than keep the value of your money static (and even that they don't do well).
Here's some key highlights to remember about saving:
- Saving might give you peace of mind, but it ultimately makes you lose money.
- Inflation generally eats up whatever "gains" you make through interest.
- The big banks want you in debt and have ramped up borrowing through low interest rates.
- Check your local banks for deals. You just might find a diamond in the rough.
Monday, November 22, 2010
There is, of course, a downside to this often dazzling style. Big plays means big risks. This brings me to two relatively recent purchases: American Capital Agency Corp., and Apollo Investment Corp. I grouped them together for this post for two reasons. 1.) They are similar companies both in size and scope, and 2.) I bought them primarily for the dividends.
AINV currently offers a 10.40% dividend, while AGNC gives out a whopping 19.60%. Why the big payout? Well, in AGNC's case, it principally invests in REITs and other kinds of mortgage-related securities. You know, the little things that all but destroyed the world economy two years ago. It carries with it a staggering degree of risk, and for this it pays out a nice dividend.
But does that make it worth it? Well, ask Joe Montana and Jerry Rice whether the Immaculate Reception was ultimately worth it. Sometimes it pays to make bolder, riskier moves down the field in hopes for faster results.
I only own a few shares in AGNC, but its last dividend payout was $1.40. Even if you only own one share, you would get your trading fee back in probably less than one year, satisfying the Big Rule I mentioned earlier. From then on, you could count on receiving a nice dividend every quarter, which would help offset other trading fees you might accrue from other purchases.
It may seem small and inconsequential, but if there's a way to make your trading cost-free, why wouldn't you do it? You don't need to acquire too many stocks like AGNC, and in fact I wouldn't recommend that, but they do help give you a little cash cushion to pad out your account. Sometimes it can take years to see any real returns on an investment, so it's nice to get a stock that can give you a quick spurt of results.
But, if risk to you is more desirable than a last minute touchdown that wins the game, than a stock like AGNC may be perfect. What would, say, a $1000 worth of this 2008-founded company, do for you?
$1000 divided by today's stock price of about $29 would give you 34 shares. 34 shares times $1.40 nets you $47.60 next quarter, provided the dividend payout remains the same. What would $47.60 do every three months? Pay your cable bill, maybe even a utility bill or two. Not bad for a $1000 investment. I doubt you could find a better investment for such a small amount of money. But remember, a long pass down field only looks great when it gives YOU more yardage. Just ask Brett Favre after he threw that memorable interception in last year's NFC Conference Championship:
Saturday, November 20, 2010
I have to admit something. I don't really trust mutual funds. Yeah, I know that there are many reputable funds out there that produce good, solid growth quarter after quarter. I have an "Aggressive Growth" mutual fund in my 401(k) account. I don't discount their value as a means to invest without having to get too involved in picking your own stocks. For many investors, mutual funds are the auto equivalent of driving an automatic versus a manual.
Which is perfectly fine. However, for my own IRA account, I prefer picking my own stocks. It could be just that I like the control of my own destiny, or just plain stubbornness. Whatever quirk about my personality it is, it has made me view mutual funds as just investment pandora's boxes--no telling what might fly out of there at any moment.
Where does AT&T fit into all this? Well, if you're looking for a good, safe stock to park your money in a time when even giants like GM, Lehman Brothers, WaMu, and Morgan Stanley have all but evaporated or become shells of their former selves, the telecommunications giant is practically a no-brainer.
Some highlights about Ma Bell:
- A market cap of $167.37 billion.
- An average stock price of about $30 over the last five years, with a high peak of $42 and a low of $22. Considering all the market chaos just since 2008, that's damn stable.
- Near universal influence. It's like the Wal-Mart of telecommunications.
- A dividend yield of 6.00%
However, what makes the dividends so attractive is that they pay enough to offset trading charges in brokerage account. I use Share Builder for both my IRA and individual stock account. For both accounts I have them set to make automatic monthly stock purchases at $4 per trade. This seems low, but after awhile it can start to add up. But if you have a stock like AT&T that pays out a good dividend, your trading fees are severely minimized. This leads me to my Big Rule regarding buying dividend stocks, courtesy of the Attention Arrow:
Always buy enough stock in a company so that your trading fee is completely paid for within one year.
For example, in order for the dividends in AT&T to pay for your trading fees, you would need to purchase about 10 shares in the company. Ten shares will net you $4.30 in your first dividend payout. If it costs $4 to make the trade, then in one quarter your investment has paid for itself.
But let's say you only bought 3 shares. That would be $1.29 in earnings the next quarter, and $5.16 for the year. It'll take longer to satisfy the Big Rule obviously, but you'll get there just the same in one year. Of course, that's given AT&T continues to pay out a dividend, and that it remains at the current level. The next quarterly dividend could always be higher or lower, or even nonexistent, as I discovered the hard way with my BP stock.
Once your dividends have paid for your transaction fee, from then on any money you make from them is yours minus any applicable taxes.
Why the focus on transaction fees? For this reason: As an amateur, poor investor, you are far more prone to seeing your profits eaten up by brokerage fees than the big guys on Wall Street. You must always keep in mind that the ballers in Manhattan are playing with a stacked deck in their favor. They own fancy software and million dollar computers that trade their shares millions of times a day. They have millions of dollars to spend. Most importantly, they have the time to wait around for an investment to accrue big profits. That's what big money and access give you in the financial world.
You and me, however, are very small fish that can get eaten up by trading fees. Big brokerage firms like ShareBuilder, Ameritrade, and E-Trade, love charging small fry big fees. That's how they make their money in addition to making loans if they are banks as well as brokerage houses.
The way around big trading fees is making investments in things that will pay you back early enough so that you start making money as soon as possible. You can't predict the ups and downs of the stock market, but you can at least put your money to good use in stable firms. This is why AT&T was the very first stock I purchased in 2009 when I was setting up my IRA.
So, to review, here are some things to know:
- Always keep your transaction fees in mind and remember the Big Rule
- Buying stocks for the dividend is a good way to make easy, passive income. Just remember that it's still risky no matter the size or value of the company.
- A good, "safety" stock (like AT&T) can buttress your portfolio in the event of a big downturn or if you're other investments don't pan out as planned. I know that even if my other stocks disappoint, at least I have AT&T's dividends to look forward to.
- Getting quarterly dividends is fun, watching your stock rise little by little at the same time makes it even better.
Friday, November 19, 2010
If you're one of those types that recognizes common stock ticker symbols immediately, you're probably thinking, "Oh, you're one of the suckers that got blasted during the BP oil spill." And you, of course would be right.
I purchased several shares of British Petroleum back in late 2009 for nearly $60. The stock closed today at $42.03. Even though I only own a few shares, it was a tough loss to see my investment literally bled right into the Gulf of Mexico. I am glad the U.S. Government took the initiative to fine BP by making them create a $20 billion clean-up fund. I would have gone a step farther and probably taken over the entire company, shareholders be damned. BP's carelessness with the Deep Water Horizon will harm the ecosystem of the Gulf for generations, not to mention destroy the livelihoods of thousands of fishermen and women that depend on the marine life.
However, there's no use crying over spilled oil. My rationale for buying BP was primarily for the dividends. At the time, BP wa spaying out close to a 7.00% yield every quarter like clockwork. It's last payout was $.84 a share, but since then has ceased paying out dividends due to its financial commitments to the Gulf.
Eighty-four cents a share. Not bad even if it costs $60 for the opportunity. If you were to buy, say, just five shares for $300, you'd receive $4.2 every quarter, and $16.80 annually. I know that seems pretty low, but not when you compare it with other investment products. Take CDs, for instance. According to bankrate.com, the top interest rate for a one year CD with no minimum deposit has an APY of 1.32%. At that rate, your $300 would stand to gain $3.96 at the end of the term of the CD. $3.96. That wouldn't even pay for a gallon of gas in some areas of the country.
In any event, BP's been tough on my portfolio. But since it's $27 a share bottom in late June, it has slowly risen to its current price at $43. It may take a few years until it reaches back to its previous normal price of around $60 and pays out a dividend, but I'm hopeful it will do so.
So, a few quick things I learned buying a big oil stock:
- Be ready to take risk, even on something big and secure like Big Oil.
- Be capable of weathering a big downturn due to random events (in this case, an oil spill)
- Don't just buy for the dividend, buy for the long haul.
- Don't panic, even in a big downturn.
This is the very first post of my very first finance blog, and I thought I would give a brief summary of what I want to share with you. I know it seems like a personal finance blog is pretty self-explanatory--I post my stocks and stuff and you look at it--but I think there's an opportunity to do more.
Given the fragile state of the economy for the poor and middle-class, it's frustrating to watch stock shows and look at the big, finance blogs. They all seem to be catered to the already wealthy or at least those that soon will be. There doesn't seem to be much of a market for lower income stock investors like myself. This doesn't mean that there are no opportunities for people like myself (and maybe people like you), it just means we have to be savvier than the big guys. We have to play it smarter than the rest because we can't afford to lose. Losing a few hundred here or there means something to me. Hell, even losing $10 on something dumb can burn me for a day or so.
This blog is where I intend to answer this question:
Is it possible for an amateur investor to build a sustainable portfolio with a small amount of cash, that's capable of severely easing the financial burdens of everyday life?
In other words, can a poor guy like myself live off passive income?
As I search for an answer to that question, here are some things I intend to cover on my blog:
1.) My personal stocks - This should be obvious enough. These stocks will include what I have in my individual and IRA accounts.
2.) Stock advice - I am an amateur investor, so whatever I post in this category will be things I learn along the way that can hopefully help others. I realize I have a lot to learn about finance, (although I'm not a complete beginner), so if you notice something in my reasoning that's completely screwy, or you just want to chime in about whatever, please do so.
3.) Finance articles/how to/rants - I have a very inquisitive mind and a bubbling cauldron of opinions regarding all things money-related, and this blog will be where I explore the latest news and happenings in economics.
4.) Funny stories and mistakes - I am not ashamed to admit that I've made my share of mistakes in investing. Hopefully you can get some laughs from my misfortunes, and maybe even learns something at the same time.
Over the next few weeks I'll detail my current portfolio, and explain how I intend to go about making it bigger in the future. Thanks for stopping by. I hope you add 'Watch My Wealth' to your listing of finance blogs.