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Life is Getting a Lot More Expensive

I’m constantly telling my kids how I moved out at 19, worked my own way through college and saved up for and bought a house.  I am very proud of this and hoped to set an example for them to follow.  The really bad news for my kids and others in their 20s is that it’s getting a lot harder to live the American dream.

Student Debt is Stifling

The Graduates

Image by Sakeeb Sabakka

Anyone who is attending college or has recently graduated is painfully aware of the absurd cost.  Even local state college tuition is unaffordable to middle class students, without taking out some pretty hefty loans.

The total amount of student loans now exceeds $1.1 trillion and 66% of students with a 4-year degree now graduate with some student loans.  The average amount per student is now over $30,000.  Student debt has almost quadrupled in the past decade and this falls heaviest on minority and low-income students.

Wages are Stagnant

Wages have been essentially flat for the lowest 70% of workers for the past decade and have declined for the lowest 20%.  Wages are way up for CEOs and the other top 5% of wage earners.  Productivity is way up and corporations are making record profits.  But, they are taking care of their shareholders, instead of their employees.  This trend will continue, so employees need to look for high paying fields and entrepreneurial types may consider starting a business.

Source: Business Insider

Housing Prices are Up

Housing prices across the U.S. rose an average of 10.9% in 2013 and are headed higher this year.  In many parts of the country buying a house is nearly impossible for couples in their 20s.  Combined with student loan debt and stagnant wages, most couples will be lucky to be able to afford a house in their 30s.  Buying a house has always been the next obvious step for young couples.  But, many are starting to consider it an expensive hassle.  That’s a shame, because living in a paid off house makes retirement considerably more comfortable.

Source: Kiplinger

Median Savings is Zero

The typical American isn’t saving anything for the future right now, despite having plenty of income left over after paying their bills.  People are simply choosing to spend all of their discretionary income, instead of saving some.  This is a sad reality, where people are choosing to live paycheck-to-paycheck, instead of saving to get ahead.  Saving in your 20s is one of the keys to a prosperous future.  Waiting until your 30s makes it much more difficult to build a nest egg.

Source: Fox Business

Retirement is Expensive

Anyone who is 20 years old right now could need to save $7 million in order to retire and this would only allow an annual withdrawal of $43,600 in today’s dollars.  That is a mind-boggling amount of money to save, for retirement with a median income.  My original retirement goal in the 90s was to save a million dollars, but I have since decided to at least double that amount.  People in their 20s need to save a lot more and may not get to retire until well into their 70s.

Source: Yahoo Finance

The Bottom Line

The bottom line is that it’s getting much harder to earn a living wage and prosper in the working class.  Those without a plan may join the growing millions of working poor.  In order to succeed, you need work towards a higher income, manage finances wisely, save for the future and invest to outpace inflation.

“Success is liking yourself, liking what you do and liking how you do it.”

- Maya Angelou

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Should you Sell your Stocks in May?

It’s the most treacherous time of the year for stock market investors, the dreaded month of May.  This is the time of year when the stock market most often tanks and heads into the summer doldrums.  Most investors will ride it out and take it on the chin, while others will attempt to beat the market by timing it.

Why is May so Bad for Investors?

Your Stock Fortune

Image by Bran Sorem

It’s a well known fact to most traders that the stock market underperforms in the summer months.

According to the Stock Trader’s Almanac, the Dow Jones Industrial Average has risen over 7% on average from November through April, but only 0.3% from May to October.  However, that’s just an average and some summers have been disastrous.

To be fair to May, it’s not usually that bad of a month for the stock market.  The worst month is September and most of the biggest losses come later in the summer.  May is just the start of the flat market season, so it gets all of the attention.  The average S&P drop for May since 1929 is only -0.1%.

Why I am Staying the Course

After trading commissions and tax liabilities, it doesn’t make much sense for me to sell my stocks, in order to avoid a 0.1% drop.  I may put some trailing stops on some of my larger gaining stocks, but I won’t be liquidating my portfolio to run for cover.  Typically, summer is a time when I add to my investments and look for stocks that have been beaten down.  It’s a better season for buying than for selling.

The Bottom Line

The bottom line is that timing the stock market is a fool’s errand.  If you have substantial investments, it could be a good time to take a more conservative position.  It could also be a good time to buy some great stocks at a low price.

“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor -the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”

- William Bernstein

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The Great American Money Grab

With 10,000 baby boomers reaching retirement age every day, there is a scramble to grab a share of the largest money transfer in American history.  Retirees are moving their balances out of the 401k accounts of their former employers and are looking for a safe place to stash their retirement savings.

Every bank, investment house and insurance company wants a piece of this pie.

It’s a Huge Amount of Money

Money Grab

Image by TaxCredits.net

Trillions of dollars will be transferred from 401k and 403b plans over the next 10 years and much of it will be reinvested.  Trillions more will be withdrawn from IRA accounts and there is more money invested in IRAs than 401k and 403b plans combined.  Because of the MRD (Minimum Required Distributions) requirement of an IRA account, people will have to withdraw the money, whether they want to or not.  Starting at age 70 1/2, retirees will have to withdraw a percentage of their IRA balance each year.  The MRD starts around 4% and goes up each year.

Salespeople are Standing By

There are a lot of commercials on TV lately, with retirees flying gliders, buying vineyards and jetting off to Paris.  If you have saved quite a nest egg, you may be contacted by a Wealth Manager.  Wealthy retirees are the Holy Grail for banks and financial companies, who are masters of following the money.  The more assets you have, the more they manage and the more they get paid.

There are also a lot of commercials on TV showing people who have lived to be over 100.  These commercials are put out by companies selling annuities.  Annuities are a fabulous opportunity, for the investment company.  Unfortunately, they aren’t always such a great investment for investors.  Unless you do live to be over 100, you will be much better served by asset based investments.

Retirees are Confused

Some of the people I know who are facing retirement are confused about their investment options.  Often, they have already been contacted by people looking to manage their transition.  Or, they have been steered towards investments by their existing 401k company, as they try to leave.  In any case, the advice they receive is rarely unbiased or in their best interests.  The laws are complex and the penalties steep for making a mistake.  It’s no wonder why they are anxious.

Continue reading The Great American Money Grab

My Take on High Frequency Trading

Just in case you haven’t watched the financial news lately, everyone is up in arms about High Frequency Trading.  HFT is employed by financial firms with superfast computers, who can execute stock trades much faster than retail investors.  With sophisticated HFT algorithms, they can predict orders and then buy and resell shares to the retail investor at a markup.  Some people call this Front-Running and others call it a Skim.  Either way, I call it ripping off investors.

The Cat is Finally out of the Bag

Flash Boys

Flash Boys by Michael Lewis

I have been warning my readers about superfast trading since August of 2011 and again in December of 2011.  But, nobody listens to a small-time blogger like me.

The book Flash Boys by Michael Lewis has created a big controversy this week and is currently the #1 Best Seller on Amazon.  Lewis exposes the unfair practice of HFT and the firms who are preying on investors.  He has been on a whirl wind media tour promoting the book and this has been a catalyst for many to finally call for an end to HFT.  Even Jim Cramer, an unapologetic Wall Street insider, devoted a whole section of his show to rail against it.

Predictably, the financial firms profiting from HFT have viciously attacked Michael Lewis on TV and in the media.  They are making easy millions and are not going to let a rogue author derail their gravy train.  But, the cat is out of the bag and there is no conscionable way to defend HFT.  In the past few days, I have heard and read all kinds of arguments to defend HFT, but how can they justify the outright skimming of investor’s trades?  They can’t.  These arguments are a merely a distraction from the real issues of an unfair playing field and the exploitation of investors.

Why You Should Care

You may be wondering why should you care?  Maybe, you don’t even invest in stocks.  You should care because your 401K, pension and mutual funds do and you are getting ripped off indirectly.  As if the fees and MERs aren’t high enough, now there is a level of pure parasites, siphoning off your profits.  Unlike the fund and 401K companies, they don’t create, manage or add value to your investments.  They just take a cut from the transactions, because they can.  Everyone has known about High Frequency Trading for years, but no one has lifted a finger to stop it.

Around 50% of all recent trades are HFT, so this is a very large problem.  With this type of volume, there is a very real potential for future Flash Crashes and other volatility problems.  A rogue algorithm could create all kinds of problems for the markets.  At the very least, it may discourage investors from investing in the stock market, because they perceive it is rigged.  In my opinion, it is rigged.

Continue reading My Take on High Frequency Trading

Why You Need a Financial Plan

I read an interesting article over on Main Street.com where they claim half of the financial planners don’t have a financial plan for themselves.  So, how are you supposed to trust someone with a plan for your money, when they don’t have a plan for their own?  Either they are completely incompetent, they don’t believe it’s that important or they aren’t even investing for their own futures.

Here is the sad truth.  Many of the financial planners are thinly disguised salesmen for the financial services industry.  They may have planning titles and credentials, but their primary objective is generating sales and commissions.

Planning & Investing are Easy

Financial Plan

Image by Reyner Media

You don’t need an “expert” to show you a bunch of charts and graphs to create a basic financial plan.  You don’t need to pay high fees and commissions to pick a good investment.  Basic planning and investing are way easier than most of the things you do already and you can do both today, if you really feel like it.

I keep a list of all of my goals (financial, health, career, etc.) on a single page and review them monthly.  I have had this list of goals since 1992 and most have already been accomplished, so I have to create new goals.  I keep my investments very simple as well.  I have a discount brokerage account and six mutual funds.  I can total them up or track their performance in minutes.  Anyone could do this and the payoff is huge.

Three-Step Plan  (Reposted from 2008)

1. Goals - Make a short list of goals you are planning to achieve.  For me, my original goals were to buy a house, accumulate wealth and prepare for retirement.  Later, as I became a family man, I started college funds for my kids.  Start with your goals in mind and the direction becomes obvious.

2. Commitment - Goals and plans are worthless without action.  Step two is to make a commitment to your financial plan.  You need to decide how much you will invest and how much you will spend for debt reduction.  My recommendations are to save 10% and pay 20% toward debt.  But, everyone’s budget is different.  Start with whatever amounts you are comfortable with and increase them as your finances allow.

3. Investment - Picking investments is easy once you have goals and an investment amount.  My recommendation for new investors is a no-load mutual fund.  Pick a fund with low expenses and a good long-term track record.  If you have trouble choosing, pick an index fund.  The reason I like mutual funds is because they are convenient for making automatic monthly investments.  You can also use a brokerage account or ShareBuilder, if you would prefer to invest directly in stocks or ETFs.  I don’t recommend savings accounts, savings bonds or CDs for long-term investors, because they won’t keep pace with inflation.

The Bottom Line

The bottom line is that it’s nearly impossible to hit a goal you don’t have yet, so create some.  Without a plan, you have nothing to guide you and keep you on track, so make one.  After that, it only takes the commitment to succeed.

“Financial fitness is not pipe dream or a state of mind it’s a reality if you are willing to pursue it and embrace it.” - Will Robinson

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