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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

Recommended Reading

Stop Worrying About Money - Invest in Your Work
101 Centavos - Stupid Interview Questions
The Wallet Doctor - Keep your Car from Eating your Cash

You are Wealthier than you Think

The median American household will earn roughly $2.5 million during their working life.  Married households will earn roughly $3.8 million.  Most people make more or less.  Others work longer or retire sooner.  The point is, Americans earn millions during their lifetimes and never become millionaires.

Don’t let that happen to you.

Source: US Census Bureau

Income is your Biggest Asset

Working Americans

Image by Phil Roeder

Most Americans believe their house is their biggest asset, but it’s not.  Their biggest asset is their income.  A person’s income is usually at least 10 times larger than the value of their house, if they even own a house.  The problem is that income comes in small periodic paychecks, instead of in one large sum.  So, workers see it in terms of hundreds or thousands of dollars, instead of millions.

Most people believe it’s virtually impossible to become a millionaire, but it’s really not that difficult.  Anyone who saves and invests at least 10% of their net income stands a really good chance.  Currently, 5.23 million Americans (1.67%) are millionaires and most earned and saved it themselves.  If 5 million Americans can become millionaires, you can too.

Step 1.  Work to increase your income.

Converting Income to Wealth

In its most basic form, accumulating wealth is as simple as saving money from your paycheck.  In fact, it’s so embarrassingly easy; I have no idea why more people won’t do it.  In the wealthiest nation that has ever existed on the face of planet Earth, the overwhelming majority of people won’t save even a small part of their very large paychecks.  They buy cigarettes, booze, shoes, clothes, jewelry, cars, houses, vacations and $5 coffee.  But, they never save a dime for themselves.  It’s incredibly sad for people to work so hard their entire lives and wind up broke.

Saving money is very easy, especially if you do it automatically.  Enroll in the 401K plan at work.  If you don’t have one, start an IRA.  Open a mutual fund account and setup the automatic monthly investment.  You can sign up online in minutes.  You don’t have to have a lot of money to start investing and you don’t have to be an expert.  Anyone can pick a good no-load index fund.  Investing doesn’t take much time and it’s fun to watch grow.  There really aren’t many valid excuses.   If you aren’t saving and investing, you are squandering your future.

Step 2.  Save money from every paycheck. Continue reading You are Wealthier than you Think

How to Maximize your Income

One of the harsh realities of the new millennium is a dearth of good-paying jobs, even for college grads.  It’s obvious middle-class jobs are quickly disappearing and being replaced by low-paying retail and service jobs.  Wage erosion is only going to get worse in the future.  Here is how to survive and get paid a living wage.

Career Tips for Millennials

Working Hamster in a Retail Window

Image by Ludovic Bertron

Have a Plan - The best advice I can give anyone who is starting out in life is to have a career plan.  Drifting through work life, changing jobs frequently or shifting careers aimlessly will almost certainly ensure you will underperform and be underpaid.  Choosing a sound career path, working towards the requirements for that career and demonstrating employment stability will almost certainly ensure you will have above average pay and opportunity.  It all starts with a plan and the follow through that meets your career goals.

Appear Employable – Nothing shouts minimum wage potential like visible tattoos and piercings.  I know they are becoming more acceptable to some people in society, but those people usually aren’t hiring managers.  In a professional environment, they aren’t very professional.  The same can be said for extreme clothing, hair, makeup or appearance.  Employers usually have a choice of many candidates and they often choose the ones who will fit in and work well with others.  Avoid any visual clues that can be used to disqualify you, before you even get your foot in the door.  If you have to be a rebel, keep the tats hidden.

Get Promoted – For many years I was a lowly Systems Analyst, while I dreamed of being an IT Manager.  I was certainly qualified for the job, but no one was going to hire me, because I didn’t have the title.  So, I got myself promoted, which changed everything.  Soon, employers and headhunters were calling me with offers for jobs I was previously considered unsuitable.  The truth is, only my title was unqualified.  I was more than ready and performed well in those jobs.

Upward Mobility – This ties into another critical factor in your career, working for companies with upward mobility.  It’s nearly impossible to get promoted from a dead end job at a stagnant company.  If you want to get ahead, you need to make sure you choose an employer that can provide career opportunities for you.

Continue reading How to Maximize your Income

How to Avoid Bad Financial Advice

I read a really sad story this week about Kevyn Ogawa, a young grocery store clerk who won the lottery in 2009.  He is now suing his financial advisors for selling him $100 million in life insurance policies, despite having no spouse, no children, no siblings and no clear need for the death benefit.  To make things even worse, the policies were placed in a trust and he wasn’t even the beneficiary.  So, the policies were essentially worthless to him.  Kevyn claimed these advisors, who were also attorneys and insurance agents, were paid $1 million in commissions, while he had to surrender the policies after paying almost $2 million in premiums.

Really bad financial advice is all too common.

Choose Financial Advisors Wisely

Choose your advisors carefully.

Image by US Army Africa

Novice investors often have no idea how financial advisors get paid and how it affects the investments the advisor recommends.  Financial advice isn’t free and investors have to pay for that advice, usually in the form of higher fees.

Most financial advisors are honest, hard-working professionals.  But, they are incentivized to sell investment products that have higher fees, because they pay higher commissions.  If your boss came to you an asked if you would rather make $30K or $100K, which would you choose?  It’s no different for financial advisors.  They have to make a living from providing financial advice and also bring in revenue for the company.  Their goals, and the goals of their firm, are often in direct conflict with the best interests of the investor.

If you were choosing your own investments, you would most likely choose the ones with the lowest fees and best performance.  It’s not that hard to pick a good no-load mutual fund and skip the advisor fees.  The same thing can happen when you hire a fee-only advisor to pick your investments.  You pay them directly, instead of the companies selling the investments.  They are incentivized to pick the best performing investments for their customers, so they can get more appointments and referrals.

The advice you receive is often influenced by the size of the commission.

Be Wary of Financial Firms

Financial firms provide many valuable services, such as creating mutual funds, providing brokerage accounts, underwriting IPOs and managing wealth.  They employ thousands of professionals to provide guidance, analysis and advice to customers.  Just remember they have a vested interest in capturing the maximum amount of revenue for the firm and most of that revenue comes directly from their customers.  It’s a conflict of interest that is difficult to ignore.

Some of the most prestigious firms and investment banks have recently gotten into a lot of trouble for some of their shenanigans.  One bank was caught comingling billions of dollars from their customer accounts with their own.  Another bank was caught advising customers to take a position on a trade and then took the opposing position to profit.  They often take unreasonable risks with leveraged trades and one bank recently lost billions on a single massive position.  A major derivatives broker used customer funds to cover their own losses then went bankrupt, losing the customers deposits.  Financial firms can provide a full array of valuable services.  But, these services can come at a steep cost to their customers.

Consider investing with a discount brokerage and no-load mutual funds.

Continue reading How to Avoid Bad Financial Advice