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Friday, October 28, 2011

How to Invest if you are Worried about Losing Money




These days, many are tired of the crazy gyrations of the stock market, and worried about losing their savings.  How do you invest your money and still sleep at night?

This article gives the most common options for investing hard earned but frightened dollars, ranked from worst to best.


5.  High-Interest Savings Accounts

Worried investors love the idea of savings accounts because they are guaranteed by the government (up to limits), because the money can be taken out anytime, and because you don’t have to make any future decisions – just leave the money there.  However, savings accounts always pay far less than the rate of inflation – usually 3% less.  For example, if the rate of your high-interest savings account is 1.5%, the inflation rate for the same period is probably 4.5%.  So, you are actually losing 3% of your purchasing power for every year you keep your money in the account.

If you invest $50,000 in a savings account and keep it there for 2 years, you appear to have $51,511.  But in fact, the purchasing power of your money is now worth only $47,045.

No one should leave money in a savings account unless it is for a few weeks or less.


4.  Guaranteed Mutual Funds

Guaranteed mutual funds are a relatively new concept.  You buy a mutual fund today that has a “maturity date” of, say, 10 years later.  As long as you hold the mutual fund until the maturity date, your principle is guaranteed!  Even if the market crashes you can’t lose your principle.  Sounds great, except that the issuer (typically a bank) can change the nature of the fund at any time.

Say, for example, you buy a guaranteed fund full of stocks and then the market drops.  The bank can remove all risk for itself by changing the holdings of the fund from stocks to safe but low-paying government bonds.  After the change, there is no hope for you to make any substantial amount of money.  You can hold this now ultra-safe fund for 10 years and get your principle back, or sell it and lose money.

In short, guaranteed funds tend to charge higher fees for their “protection, ” then screw their investors anyway.


3.  GICs

Guaranteed Investment Certificates are extremely popular because they pay more than savings accounts and feature two beautiful words – “guaranteed” and “investment.”  Some people love rate shopping for GICs, and pride themselves on getting the best rate.  Professionals consider people who buy GICs as long-term investments foolish.  That’s because GICs are designed to give rates close to the rate of inflation but not exceeding it (see option 1, Savings accounts).  So, the only thing that is guaranteed is that you will slowly lose money.

GICs are excellent for elderly clients who are unable or unwilling to understand any other type of investment.


2.  Index-Linked GICs

The best way to explain an index-linked GIC is to give an example.  Say you buy a 5-year S&P 500 index-linked GIC.  Over 5 years, the return of your GIC will be half that of the stock market, as measured by the S&P 500 (500 large US companies).   So, if the stock market goes up 25% in five years, you will get 12.5%.  If the stock market goes up 80%, you will get 40% and so on.  If the market drops, you will get your principle back.

Index-linked GICs are a great way to play the stock market for those who are too skittish to invest directly.


1.  Short-Term Bond Funds

When you buy a short-term bond fund, you are lending your money to large and reliable companies and the government, who in turn pay you interest.  Because the money is leant over a short period of time, there is little danger that a company’s fortunes will change, rendering them unable to pay you back.  And, because each bond fund holds so many companies, you don’t really need to worry even if a couple of companies do go bankrupt.  Since the bonds are short-term, you won’t lose money due to changes in interest rates (long-term bond prices go down when interest rates go up).   Finally (and importantly), short-term bond funds always beat the rate of inflation. 

For these reasons and more, short-term bond index funds are great investments.  Do not confuse short-term bond funds with more risky high-yield bond funds, long-term bond funds, or real estate bond funds.  Note that although short-term bond funds are very safe, they are not guaranteed by either the bank or the government – they are subject to the good credit of the companies in the fund.

Short-term bond funds include:
VCSH - Vanguard Short Corporate Bond Index ETF
SCPB - SPDR Barclays Capital Short Term Corporate Bond ETF
BSV – Vanguard Short-Term Bond ETF (mix of corporate and government)


So there you have it – five common ways to invest without losing your shirt, the final two of which I highly recommend.

Investing safely is a solid first step to investing, but far from the last.  To be a superior investor, you really shouldn’t be worried about money at all (something that is far easier said than done).  Ironically, the more worried you are about losing money, the more likely you are to do something silly and lose money.  For those who know they have not mastered their fear of loss, please note that I wrote a book specifically for the purpose: The Intelligent Investor’s Mind.  The link can be found at the top right of this page.

Good luck and happy investing!

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"The first rule of investing is don't lose money; the second rule is don't forget Rule #1."

Warren Buffett

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Monday, October 24, 2011

Donald Trump Says US a "Laughingstock"



I love the Donald!

Today on CNBC, Donald Trump asserted that the reason the US is not successful is because big bullies like China, India, OPEC and Columbia (huh?) are destroying the US economy.  And, unless these bullies are squashed, the US can “never be rich again.”  To give greater emphasis to this statement, the Donald added, “Never ever.”

Regarding stock market investing, the Donald enlightened us with this unique strategy: “I’m not a big stock guy, but I bought quite a bit of stock in different companies, and, you know, I think at some point it should go up.”

Words of wisdom, to be sure.
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See also:
Trump or Palin for President

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“You can have one man say [in a mouse-like voice], ‘We’re gonna tax you 25 percent,' and I can say ‘Listen you motherfuckers, we’re gonna tax you 25 percent.' You’ve said the same exact thing, but it’s a different message.”

Donald Trump, April 2011, explaining how to deal with the Chinese.

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The Chinese Economy - Quite a Grim Situation



As readers of The Frost Report know, it is my belief that the Chinese economy is a sinking ship bound with incredibly large anchors.

Due to crafty government intervention, the carnage has been delayed for a remarkably long time, and continues to defy gravity to an amazing extent.  Nevertheless, the craft is now sinking below the waterline.

What always amazes me about the Chinese government is that - completely unlike the cryptic Federal Reserve in the US – they are remarkably honest and straightforward regarding economic issues.  For example, they famously call the real estate market “the housing bubble.”  They say that the large volume of private loans (issued to businesses who couldn’t get loans from banks) is a “severe threat to the Chinese economy.”

This week added some new examples of brazen honesty.  The Chinese Ministry of Commerce said that China’s slowing exports and growing imports are “quite a grim situation.”  Imagine Ben Bernanke saying that!  In regard to real estate, several sources - including the National Bureau of Statistics - noted that housing prices are falling in many major cities, and that the situation will probably worsen since the homes are still largely unaffordable!

Whoever loses all their wealth in this debacle (and there will be many) cannot say they have not been warned - over and over.

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"We'll unswervingly stick to controlling the property market without changing the direction or loosening the policies."

Zhang Ping, head of the National Development and Reform Commission, Aug 2011

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See also:
August sees property prices fall in China

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Tuesday, October 11, 2011

Occupy Wall Street - Come Join Us!


Wall Street's famous bull - from a rare angle


If you ask the Occupation Wall Street protesters what they want (and many people have), you get a mixed bag of replies.

Some want changes to the educational system to improve “fairness” in America.  Others want oil companies to stop fracking (opening cracks in wells to improve oil flow, which may damage groundwater if done incorrectly).  Still others want an end to high-frequency trading and an alternative minimum tax for corporations (I agree with these two).  Many just want America to get “back to Jesus” or work together for a better tomorrow.

Yet, I believe the real reason the number of OWS protesters has swelled in recent days is because it is becoming the best party in 40 years.

Between protests, the OWS hipsters enjoy free haircuts, share melons and avocados, play bongos and accordions, have Micheal Jackson singalongs, trade hemp jewelry and eat discount delivery pizza.  Occupy Wall Street is now the biggest, hippest love-in since Woodstock.

If I were in downtown NY right now, I would definitely stop by.  I might even make a speech or two – something about giving your banker a hug, or that bankers need love too.  But alas, someone beat me to it.  In the live video feed, I saw one of Goldman Sachs’ traders hanging out in the crowd, drinking a beer.

Come join us on Wall Street!


PS - Watch out for the brown acid!
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See also:


"A "bad trip" is easily caused by an expectation or fear of ill effects, which may later be blamed on "bad acid". This legend was made famous at the 1969 Woodstock festival, when concert-goers were warned to stay away from "the brown acid", which was allegedly bad."

from Wikipedia

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Thursday, October 6, 2011

An Ode to Steve Jobs


MASTER OF CREATIVITY

As you have no doubt heard by now, Steve Jobs of Apple Computer passed away this Wednesday.

Many obituaries have already been written about Jobs by writers far better than I.  So, this short ode is about one remarkable aspect of the man: his creativity.

Famously, Steve Jobs is a university dropout.  This fact has been used to insinuate that higher education is worthless, yet it really tells only half of the story .  Jobs didn't actually drop out of university: he created his own.

Tired of attending classes for which he had no interest, the young Steve Jobs dropped out of formal college and began attending classes he wasn't actually enrolled in.  Many of the courses - such as typefaces and calligraphy - were "useless" to him at the time, but would become fundamentally important later when designing the Apple Macintosh computer.

In North America, we have a tendency to disdain anything that is less than 100% and immediately useful.  Statistics is a useful course; philosophy is not.  Carpentry is a useful course; art history is not.  Steve Jobs understood the importance of "pure learning" and the way it expands the mind, enhances creativity, and almost invariably becomes useful at some point in the future.

Steve Jobs, we will miss your genius.

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How to Live before you Die: Steve Jobs




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Monday, October 3, 2011

Dear Workers of America


Actually, it IS your fault.

Barack Obama was raked over the coals this week (at least on Fox news) for suggesting that the US is not as competitive as it used to be, and that Americans are becoming complacent about their #1 position in the world.

What is interesting about Obama’s comment is that so many people agree that the US is not as competitive as it used to be, yet refuse to believe that they personally have anything to do with the situation.

I know many Chinese parents whose children are enrolled in soccer camp, take swimming lessons and piano lessons, have math tutoring, and yet still have time to meet their friends for several “playdates” per week – after finishing their homework, of course.  They have this much free time because they are only allowed to watch 2-3 hours of television per week, with another 1-2 hours per week to surf the Internet or play video games.  In contrast, I also know many American families whose children do almost nothing except watch television and play computer games.

The above is merely anecdotal evidence, of course, and doesn’t prove a thing.  But can we really call the average American family “motivated and driven to succeed?”

To find out if you are part of the problem or exempt from scorn, ask yourself the following questions:

1)      Do you watch 3 hours or more of television per day?  How about your children?

2)      How many books have you read in the last month?

3)      Do you currently have 3-6 months of emergency savings in cash, in case of injury, unemployment, or other unforeseen disasters?  If not, why not?

4)      Do you have trouble saving money?  If so, what have you recently done to drastically reduce your spending or increase your income (or both).  Or, do you just complain that bills are hard to pay but do nothing about it?

5)      During the last few years, have you purchased items like recreation vehicles, sports equipment, home decorations, electronics etc. on credit that you did not pay back at the end of the month?  Why?

6)      Have you been with your company for five years or longer?  If so, have you recently upgraded your skills/taken training courses etc on your own time?  Have you expanded your skill set to improve your employability outside your currently industry?

7)      Do you hate your job?    If so, what have you done to change careers or companies?  Have you updated your resume and practiced your interview skills?  How many jobs have you applied for?

In street interviews, website comments, and in social media, it is apparent that many Americans believe things will never get better: that they will always be unemployed, never get out of debt etc.   The more healthy reaction, of course, would be to say, “Wow, I was really stupid to rack up all that debt on my credit cards and house.  Now I’m going to have to study and train and work three times as hard.”

Of course, self-analysis is a difficult process and most people avoid it.  So, just continue to believe you are unemployed because of the President of the United States.


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People who are unable to motivate themselves must be content with mediocrity, no matter how impressive their other talents."

Andrew Carnegie

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see also:







Market of Sad Pandas

Today’s front-page headlines:

Think the Economy's Bad? 'You Haven't Seen Anything': CNBC, US

Shares fall of Greek deficit fear: BBC News – Business, UK

Markets take a turn for the worse: Financial Post, Canada

Wall Street drops as Greece overshadows ISM data: Delhi Business Standard, India


Is it just me, or is this constant vacillation between panic and complacency getting a bit tedious? I mean, seriously, it's been going on for 3 years now.

Everyone who reads this blog knows that the Chinese market is overbuilt and due to crash. Everyone knows that Greece is in trouble, and that European countries supporting Eastern European countries will suffer contagion. Everyone knows that the US economy is still in the tank, and although holding its own (and I would argue, poised for a comeback) will nonetheless remain there for some time. None of this is news. And yet, people are“reacting” to this news by selling their stocks - again.

Not that I am complaining, exactly. I love it when people sell their stocks at low prices, because I like to buy them. Canadian resource companies are my current favorite, since the chart for virtually every one of them has the shape of an inverted ‘V.”

No, this does not mean that I am suddenly one of those chart-wielding soothsayers who use terms like “reverse head and shoulders formation” or other such nonsense. It just means that no entire sector of a profitable industry deserves to be priced so low. Of course, this was one of my predictions in a previous article (The Fortune Teller), and I am now taking full advantage.

As one wonderfully sarcastic writer commented on a financial site today: “I would recommend you panic.”

Panic and fear are an intelligent investor’s best friends, as long as you watch but do not partake.  Don’t be a sad panda.
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"One must not let oneself be overwhelmed by sadness."

Jackie Kennedy

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From www.urbandictionary.com

Sad Panda, noun:

An unhappy, disappointed person. The phrase can be traced back to an episode of the cartoon South Park, in which the "Sexual Harassment Panda" teaches the children what is and isn't sexual harassment.
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