Investment Advisor or Salesperson?

Ask your investment advisor to show you evidence of investment expertise in the form of performance history. While past performance is not a guarantee of future results, it’s virtually the only thing that exists as tangible proof of a manager’s ability. If the advisor does not have performance to show you, then you’re probably talking to a financial salesperson not an investment manager and you need to move on.

Susan

IRA Mistakes

There's a great article by Kelly Greene in today's Wall Street Journal (www.wsj.com) entitled "How Retirees Are Blowing Their Nest Eggs."  It details mistakes that every IRA owner or beneficiary should be aware of in maintaining an IRA account.  The article touches on designating beneficiaries, transferring IRA's, receiving distributions, inheriting an IRA and costly mistakes routinely made not only by investors, but also by financial professionals.  You should check it out.

Susan

Hedge Funds and Performance Fees

Another hedge fund announced its intention to shut down after having experienced significant losses.  The firm's announcement created the impression that it was closing in order to protect further investor losses but there may be a less honorable reason for the closure.  The real motive is more likely tied to the fact that hedge funds are usually dependent upon positive investment returns to generate performance fees - the really lucrative part of hedge fund compensation.  Having dug itself into a major performance hole, the firm recognized that it would not qualify for a performance fee until it recouped the significant losses. 

It was in the interest of the hedge fund and not its investors to simply shut down.  After all, had it stayed open and kept investors' funds at work, investors stood to earn a positive return and the poor hedge fund manager would have been entitled only to its management fee. - - Boo Hoo!

I'm sure the managers will start a new fund soon so they can begin at square one. And these are the folks that Greenspan thinks shouldn't be regulated like the rest of us.

Susan

Real Estate Revisited

I was on a local phone-in television show recently dealing with general issues relating to money, credit and investing. That day, I spoke with several people who had general money questions and was taken with how many saw buying real estate as a magic solution to a myriad of financial problems. One woman had no savings, significant credit card debt and wanted to know if she should buy real estate as a way out of her situation.

These people were spurred on by two of my fellow panelists in the business of selling real estate or mortgages. The lender was promoting low or no-down payment and interest only loans and, unbeknownst to the producer, had a paid infomercial run during the broadcast.

I left the studio that day even more deeply concerned about how many will be hurt if the rapid rise in real estate comes to a precipitous end. Certainly those who buy homes that they can afford to carry over the long-term will be alright. But those who chase real estate using risky financing techniques are dependent on being able to sell the asset for a quick profit. Those individuals may find themselves unable to meet their debt service and ultimately default.

It strikes me as odd that investors are attracted to investment assets, in this case real estate, solely by virtue of and, after a period in which, the asset has appreciated rapidly. That's the time to sell from my perspective.

Susan

I'm back

Hello bloggers - you know who you are.
How many of you are still holding onto a stock you purchased for a higher price in hopes that it will get back to what you paid for it?

Susan

vacation

I'm on vacation and my only connection is a slow dial-up. I'll respond to comments but won't create any new posts until back on a high-speed connection, next Monday. See you then. Susan

Bonds and Interest Rates

Bond prices tend to move in the opposite direction of interest rates. If prevailing interest rates rise, bond prices fall; conversely, if rates fall, bond prices rise.

Here is why that happens. Bonds are usually issued in increments of $1000 which is known as the face value of the bond. The bond carries a stated interest rate, or coupon rate, which is the amount of interest that will be paid to you by the bond issuer every year until the bond comes due on the maturity date.

Think of it this way: five years ago, you lent your brother $1000 for 10 years. You and he agreed that he’d pay you 5% interest each year, or $50 dollars (5% of $1000) for allowing him to use your money and, at the end of the ten years, he’ll give you your original $1000 back. Your brother signed a promissory note, which you hold, detailing the agreed upon terms, including face value ($1000), maturity date (6/08/2010) and coupon interest rate (5%). Every 6 months he pays you $25 or one-half of the annual interest and, if all goes well, he’ll pay you $1000 on June 8, 2010.

When a corporation needs to borrow money, one way it does so is by selling bonds to investors. XYZ Corp. takes your money and issues you a bond which is just like the promissory note issued by your brother. XYZ uses the money for its purposes and, in exchange, it agrees to pay you interest and give you all your money back when the bond comes due.

Easy so far? Well, here’s where it gets a little bit tricky. Your bond, unlike your brother’s promissory note, is “marked to the market.” Simply put, that means its market value fluctuates and you’ll see that fluctuating price on your brokerage statements each month. Remember, the face value never changes and you are assured of getting your $10,000 back at maturity, (except in cases of bankruptcy), no matter what happens to the market value between now and then.

As an example, let’s say that five years ago, you had $10,000 earmarked for bonds. You were convinced that XYZ Corp was creditworthy so you bought ten of the XYZ Corp 5% due 06/08/2010. You’ve been getting your $500 per year (5% of $10,000) and it’s been be paid to you in two installments of $250 each, every 6 months on December 8^th and June 8^th.

Let’s say that today’s interest rates are closer to 4% and that, after holding the bond for several years, you need to sell it because you need the money for other things. The bond doesn’t come due for five more years so you’ll have to sell your bond to another investor. Others should be interested in buying the bond from you since its carries a 5% coupon rate and new five year bonds are being issued with a 4% coupon. If someone buys the bond from you, they’ll get the $500 interest payment each year.

What will they pay for your bond? You may get as much as $10,450 for the same bond you bought for $10,000.

Here’s how the math works. With prevailing rates in our example at 4%, a new buyer finds value in paying you any amount less than $10,450. The $500 annual interest payment the buyer gets each year $100 more than current rates. Since the bond is now a five year bond the buyer recievces an additional $100 for five years. The bond pricing formula takes into consideration the time value of money, pricing the bod at 104.50 rather than 105 even.

Of course, the inverse would be true as well. If prevailing rates were higher when you bought your bond then they are at the time you try to sell it, then you’ll get less for your bond than you paid for it. Let’s say prevailing rates are now 6%. A buyer’s breakeven would then be $9575 and she would be willing to pay you only that much or less for your bond with a 5% coupon.

Susan

Remember, this blog is unedited so don’t bust me on the grammar or spelling.

Martha and Walmart and socially responsible investing.

When I examined socially responsible mutual funds, I found that none screened companies for inclusion based solely on their promotion of women's equality. Some claimed to screen for gender but those claims appeared overstated. One fund claims to invest in "public companies that advance the social and economic status of women in the workplace." Digging a bit deeper, it is clear that the important screening criteria are environmental not gender-based.

I've urged the leaders of the women's movement to develop gender-based screening criteria. One obstacle to those efforts is that few companies compile the data by gender alone, compiling the data instead using the broader category of women and minorities.

Martha Burk attended the Walmart shareholders meeting last week and complained that only two of the companies fourteen board members are women. She also pressed the company to reveal the gender and race of stock option grantees. I applaud her efforts and hope she continues to press companies for that information. We'll need it to truly screen companies based upon their treatment of women.

Susan

Are Mutual Funds For You?

Mutual funds may be a suitable alternative for investors with small sums of money to invest because funds pool the investments of many investors, effectively giving each mutual fund shareholder an interest in the whole pool and creating valuable diversification. 

Investors with more significant assets to invest, however, have to consider the significant drawbacks to investing in funds.  First and foremost, in buying a mutual fund you are granting authority to make critical investment decisions on your behalf to individuals you'll never know and, perhaps more importantly, will never know you or your investment needs.

In addition, investors usually consider a fund’s historic track record as evidence of the fund manager’s expertise.  But few if any investors check to see if the same person or team responsible for the historic track record is now managing the fund.

There is also the issue of costs and expenses. Funds have expenses buried in them and that comes out of your return. I spoke to a prospective client recently who owned funds which had outrageous expense ratios of 2.6%.  Fund companies use that money to market their funds to future investors.  Do you really want your investment dollars to pay for the mutual fund company's costs of attracting new investors?  Should your portfolio pay costs of printing the fund company's brochures and postage? Did the person selling you the fund get paid a commission?  If so, that may be buried in the expense ratio, too.

Another downside is that these pools of money are so large that the portfolio managers are forced to hold many more companies than they otherwise would if purely investment considerations were driving the process. Because of that, there is often overlap in the stocks owned by separate mutual fund portfolios.  You thought owning several funds meant you were diversified, but in reality you unwittingly hold many of the same stocks across several of your mutual fund portfolios.

The bottom line is that funds are comprised of either stocks or bonds (or some funky derivative of the same.) Someone’s got to make reasonable decisions about which particular stocks or bonds or poised to do well.  It might as well be you or at least someone who knows you and your needs.

 

Why allow someone you don’t know to have such an important role in your financial security?

 

Susan

 

Oh, Please!

President Bush has nominated a "pro-business" candidate to head up the SEC. Give me a break. 

From my perspective, "pro-business" is synonymous with taking the heat off an entrenched and indignant Wall Street, angered because first NY US Attorney, Eliot Spitzer and then finally the SEC had the audacity to look into the lying, cheating and stealing that has become accepted Wall Street practice.  I saw Spitzer speak at a National Press Club breakfast last winter. In one of his highly publicized cases, Spitzer successfully prosecuted a star stock analyst and his big Wall street firm for issuing glowing "buy" opinions on a certain stock when in private emails the analyst derided the same stock. At the breakfast, Spitzer recounted how in his first meeting with the targets of his investigation,  lawyers did not say what he had come to expect defense lawyers to say, namely, that their clients didn't do what he alleged they did.  Instead, Spitzer said the lawyers said that everybody was doing it and that they had powerful friends.

This debate suggesting that Wall Street is struggling under the weight of too much regulation is a "red herring."  Investors need to really look at the nature of the wrongdoing caught up in enforcement actions thus far.  They were really bad deeds and not even close to gray area stuff. It was the kind of outright stealing that is just dead wrong.  And, what makes this worse, it was done by people who are already extremely wealthy, overcompensated masters of the universe who just felt they had the unfettered power to do as they please because nobody would look or, even if they did, have the nerve to stare them down.

Susan

Blog me back.  You must have a financial question or concern.  How about this?  I'd like to hear from anyone that owns a stock or fund and refuses to sell it simply because you paid more for it than it's worth now.  Give it up - you know who you are!

Blind Acceptance?

Hey,

Welcome to StopStealingMyDough.com, a blog devoted to educating investors, particularly women investors about financial stuff.

I’ve been managing money since 1985 first as a retail stock broker, then at a big trust department and since 1995, in a firm I co-founded. You might best think of my role as that of portfolio manager. It’s with that perspective that I’ve come to understand that no matter how well educated, intelligent, wealthy or hardworking, investors (women and men alike) tend to make the same kind of mistakes over and over. It’s the craziest juxtaposition of incredible anxiety about money on the one hand with blind acceptance on the other.

Wall Street has taught investors to value what is good for Wall Street without question and those firms depend on you leaving your brain at the door when it comes to investing. The fact is, you can know what’s necessary to make the right choices and I’m here to help- you just have to agree to engage your brain. It’s not rocket science. In fact, I’m guessing that when I point out fundamental concepts, you’ll say to yourself, “duh.”

Women investors have the same issues as men; it’s just that women have now become a sought after Wall Street conquest, heightening the likelihood that you’ll get caught up in a bad financial relationship. Apparently some guys caught on that women have money, are smart, make decisions and – guess what, have been underserved by an industry founded and managed by men.

When Martha Burk protested the Augusta National Country Club’s failure to admit women, she and I discussed at length, the fact that some of the most prominent Wall Street firms represented at Augusta had specifically targeted women investors through dedicated affinity marketing efforts and specially created subsidiaries. So, in addition to covering general investing stuff, I’m going to vent periodically about Wall Street and firms targeting women like Citigroup’s Women and Company.

Here are some topics I know we’ll cover in coming months:

How does your money person get paid?

Socially Responsible Investing

Women’s Equity Fund?

Mutual Funds or not?

How to build my own portfolio

Wall Street catering to women investors

It’s the whole portfolio that counts

Individual Stocks and Stock Sectors

International Stocks

Exchange-traded funds

There are a lot of others, but I’ve got to run. Please send me your ideas, comments and questions and we’ll address them one by one.

One Housekeeping Note: Maybe you picked up on this already – I’m not a writer and this blog is not edited. So excuse the grammar and spelling and that kind of stuff.

Susan