Mary Williams Walsh reported in the New York Times On August 8, 2006, that in 2003, a whistle-blower forced San Diego to reveal that it had been shortchanging its city workers’ pension fund for years, setting off a wave of lawsuits, investigations and eventually criminal indictments. The mayor ended up resigning under a cloud. With the city’s books a shambles, San Diego remains barred from raising money by selling bonds. Cut off from a vital source of cash, it has fallen behind on its maintenance of streets, storm drains and public buildings. Potholes are proliferating and beaches are closed because of sewage spills. This sounds like the problems that Harrisburg, Pa. is having with its finances. Only in Harrisburg, law enforcement is asleep at their post and the voters had to take things into their own hands.
Ms. Walsh also reported that retirees are still being paid, but a portion of their benefits is in doubt because of continuing legal challenges. And the city still has to figure out how to close the $1.4 billion shortfall in its pension fund.
The State of Pennsylvania has the same large shortfall in its pension fund according to AFSCME Council 13 who represents Pennsylvania State employees. They also went on to tell its members recently that Pennsylvania teachers have the same problem with their pension fund. The New York Times went on to say that New Jersey, Illinois, Colorado, along with several other states and local governments have the same problem as San Diego did, but without the crippling scandal — at least not yet. By one estimate, state and local governments owe their current and future retirees roughly $375 billion more than they have committed to their pension funds.
http://latrobefinancialmanagement.com/Research/Pensions/Public%20Pension%20Plans%20Face%20Billions%20in.pdf
Click on the above link and read the full New York Times Story. They wrote this in 2006. Now with the 2008 – 2009 Bear Market and the spring 2010 Correction, the problem is much worse.
As I said before, you have to pay attention to your pension fund and how it is run. You also have to run your own IRA instead of using mutual funds. The Dow is down “Year to Date” 2.79%. Fund managers only try to do as well as the Dow. I am having the worst time in the market then I had in a long time. I am up “Year to Date” 17.68%. That is down from my peak on April 27, 2010 of 20.73%. I am crying all the way to the bank!
Monday, May 31, 2010
Wednesday, May 12, 2010
Capital Invested Vs. Risk to Capital
We talked a little about investing and taking risk. With the “Big Hiccup” that happened in the stock market from May 3 to May 7, some people lost everything that they made “year to date.” Other people, like me lost very little ground for the week. It comes down to the type of investment strategy that you created for your portfolio. You may say that you have no investment strategy, you just buy what someone tells you or you just buy what sounds good. What you don’t realize is that you create an investment strategy whether you want to or not. The strategy created allows you to “benefit or not” in up markets and allows you to get “messed up,” accepting the risk in bad markets.
Ninety-five percent of my portfolio is in junk bonds. About 4% is in stock and “Closed End” Bond Mutual Funds, and about 1% is in cash. The 1% means that I am fully invested in something all the time. When new money comes into my account from interest or dividends, the money is reinvested back usually into other junk bonds. I purchase some stocks or sometimes but rarely “Closed End” Bond Mutual Funds. They also give dividends. These dividends are reinvested into Junk Bonds. This is how I maximize my profits over the years and minimize my risk to capital and inflation. Depending on how much risk I want to take, I may invest in Junk Bonds with less than 4 years maturity (little capital, inflation, interest rate, and market risk) or Junk Bonds with a maturity greater than 4 years (more capital, inflation, interest rate, and market risk). The further you go out on maturity, the more inflation, interest rate, capital, and market risk you take.
Bonds must be paid according to the bond indenture. If they don’t pay, the bond trustee will force the company into Chapter 11 bankruptcy. Since bonds get paid before stock in bankruptcy they are safer than stock.
Some people will buy 95% stock, stock or bond mutual funds, 4% or less individual bonds, and have very little cash. These people maximize their profit potential but also maximize their risk to capital. They do well in bull markets but get “killed” in bear markets. In mix markets they go no place with very little return for their risk taking.
So you think that having 95% in cash is a better idea than stocks or bonds? Here you will minimize profits but you will maximize risk due to inflation. If inflation is running 4% per year and you only receive 3% interest in CDs, high investment grade bonds, or in your bank account, you will lose 1% to inflation every year. If you would buy a “KFW Frankfurt/Main 1.125% of 02/24/2012” Corporate Bonds for $999.87, you would make 1.132% per year interest and get $1,000 on 02/24/2012. This bond is rated “AAA.” You can’t get any better than that. With inflation running at 2%, you would lose .875% in purchasing power per year.
I can remember working for $390 per month. With that, I bought a new car and a house with money left over. Today that will not pay my utilities or most people’s rent. This is what inflation will do to you. But you will minimize your risk to capital. Too bad, your capital will not buy much for you in the future. This is why you have to make your capital grow using investments for the long term.
Ninety-five percent of my portfolio is in junk bonds. About 4% is in stock and “Closed End” Bond Mutual Funds, and about 1% is in cash. The 1% means that I am fully invested in something all the time. When new money comes into my account from interest or dividends, the money is reinvested back usually into other junk bonds. I purchase some stocks or sometimes but rarely “Closed End” Bond Mutual Funds. They also give dividends. These dividends are reinvested into Junk Bonds. This is how I maximize my profits over the years and minimize my risk to capital and inflation. Depending on how much risk I want to take, I may invest in Junk Bonds with less than 4 years maturity (little capital, inflation, interest rate, and market risk) or Junk Bonds with a maturity greater than 4 years (more capital, inflation, interest rate, and market risk). The further you go out on maturity, the more inflation, interest rate, capital, and market risk you take.
Bonds must be paid according to the bond indenture. If they don’t pay, the bond trustee will force the company into Chapter 11 bankruptcy. Since bonds get paid before stock in bankruptcy they are safer than stock.
Some people will buy 95% stock, stock or bond mutual funds, 4% or less individual bonds, and have very little cash. These people maximize their profit potential but also maximize their risk to capital. They do well in bull markets but get “killed” in bear markets. In mix markets they go no place with very little return for their risk taking.
So you think that having 95% in cash is a better idea than stocks or bonds? Here you will minimize profits but you will maximize risk due to inflation. If inflation is running 4% per year and you only receive 3% interest in CDs, high investment grade bonds, or in your bank account, you will lose 1% to inflation every year. If you would buy a “KFW Frankfurt/Main 1.125% of 02/24/2012” Corporate Bonds for $999.87, you would make 1.132% per year interest and get $1,000 on 02/24/2012. This bond is rated “AAA.” You can’t get any better than that. With inflation running at 2%, you would lose .875% in purchasing power per year.
I can remember working for $390 per month. With that, I bought a new car and a house with money left over. Today that will not pay my utilities or most people’s rent. This is what inflation will do to you. But you will minimize your risk to capital. Too bad, your capital will not buy much for you in the future. This is why you have to make your capital grow using investments for the long term.
Tuesday, May 11, 2010
IRAs Vs. The Company or Government Plans
When I started working for a living 40 years ago, companies and governments gave very good retirement plans to employees. That was the time when you started working for a government or company and 45 years later you retired from that company or government. That practice stopped in the 1980s when the heads of companies started shipping our jobs to other countries. But the City, County, State, and Federal Governments still had good retirement plans. However, next came the downsizing of governments because we had less people making good money. So the big taxes were not rolling in to maintain governments. The politicians started doing away with retirement programs.
Today, more and more companies and governments are turning to programs design to have employees save for retirement with an outside investment or mutual fund company. No longer will the employer give matching funds to the employee. This is the big pay cut that many people have taken without knowing it.
Not only have employees taken a big pay cut but they also have switched from a guaranteed retirement account to a self directed retirement account that is not insured in most cases. Employers introduced employees to Investment Advisors who represent banks, investment firms, or insurance companies. They act as advisors but really represent the interest of their firm. In reality, they act as “bookie” for the employee. With the “bookie” come various hidden fees for the advisor, the mutual funds, and the firm they represents. The “bookie” gets paid no matter if the employee makes money or not.
This is why employees must consider using such plans or go outside their employer and set up IRA plans where you the investing employee can buy individual stocks and bonds, directing your own investment strategy. The overall idea is to cut down on fees that you pay to firms and make the most money off your money. This is what you must weight when deciding to use your employer’s plan or your own plan. You need time to build up enough money to live on once you retire. Reducing expenses and starting early is the only way to do that for most people.
Today, more and more companies and governments are turning to programs design to have employees save for retirement with an outside investment or mutual fund company. No longer will the employer give matching funds to the employee. This is the big pay cut that many people have taken without knowing it.
Not only have employees taken a big pay cut but they also have switched from a guaranteed retirement account to a self directed retirement account that is not insured in most cases. Employers introduced employees to Investment Advisors who represent banks, investment firms, or insurance companies. They act as advisors but really represent the interest of their firm. In reality, they act as “bookie” for the employee. With the “bookie” come various hidden fees for the advisor, the mutual funds, and the firm they represents. The “bookie” gets paid no matter if the employee makes money or not.
This is why employees must consider using such plans or go outside their employer and set up IRA plans where you the investing employee can buy individual stocks and bonds, directing your own investment strategy. The overall idea is to cut down on fees that you pay to firms and make the most money off your money. This is what you must weight when deciding to use your employer’s plan or your own plan. You need time to build up enough money to live on once you retire. Reducing expenses and starting early is the only way to do that for most people.
Monday, May 10, 2010
The Big Hiccup
The stock market was already falling last week when on Thursday, May 6, 2010, the market did a free fall of 1,000 points on the Dow Jones Industrial Average for about 20 minutes before recovering with a loss for the day of almost 400 points. That drop rattled investors worldwide because they have never seen that happen before. Some people claim that it was a trader who typed in a “Sell Order” for one Billion shares instead of one Million in a Procter and Gamble’s trade. Some say that it was a lack of “Buy Orders” for almost two minutes in Procter and Gamble’s stock. Others say that it was an imbalance of orders between the NYSE and NASDAQ in Procter and Gamble’s orders. The fact of the matter is that no one really knows what happened. But they will come out with some excuse to settle the fears of the financial community.
Congress, the SEC, and the Treasury Department are in the middle of a major rewrite of the Securities Industry Laws. Senator Charles Schumer, Democrat from New York will probably get his way, calling for new system wide circuit breakers to prevent such a “Free Fall” in individual stocks from triggering “Exchange Landslides” again.
It is situations like these that make my investment strategy look good. I tell investors to minimize risk while maximizing profits by using non-investment grade Corporate Bonds as the major percentage of their portfolio. My portfolio is made up of 95% Junk Bonds, 4% Stock, and 1% Cash. Between May 1 and May 8, my portfolio fell from 20.05% YTD Profits to 17.54% YTD Profits or down 2.51%. The Dow was down 5.71% for the week, 11,008.61 to 10,380.43. For the year, I was still up 17.54% while the Dow was down .46% YTD.
That means that people who had all their money in the stock market went no place or lost money in the last 5 months while I gained. The reason, I minimize my losses by keeping a high percentage of my portfolio in Junk Bonds. Most people try to make a killing in the stock market by speculating or gambling with mutual funds (stocks or bond funds) and with individual stocks with nearly 100% of their money. This is why they have poor results.
It does not matter if you invest in stock funds or bond funds. They are both speculative because they do not mature like bonds. The maturity is what makes individual Corporate Bonds safe because either the underlying company goes out of business or they pay you. Even if they go out of business, you still have first pick of the assets when it is sold off and the cash distributed.
Congress, the SEC, and the Treasury Department are in the middle of a major rewrite of the Securities Industry Laws. Senator Charles Schumer, Democrat from New York will probably get his way, calling for new system wide circuit breakers to prevent such a “Free Fall” in individual stocks from triggering “Exchange Landslides” again.
It is situations like these that make my investment strategy look good. I tell investors to minimize risk while maximizing profits by using non-investment grade Corporate Bonds as the major percentage of their portfolio. My portfolio is made up of 95% Junk Bonds, 4% Stock, and 1% Cash. Between May 1 and May 8, my portfolio fell from 20.05% YTD Profits to 17.54% YTD Profits or down 2.51%. The Dow was down 5.71% for the week, 11,008.61 to 10,380.43. For the year, I was still up 17.54% while the Dow was down .46% YTD.
That means that people who had all their money in the stock market went no place or lost money in the last 5 months while I gained. The reason, I minimize my losses by keeping a high percentage of my portfolio in Junk Bonds. Most people try to make a killing in the stock market by speculating or gambling with mutual funds (stocks or bond funds) and with individual stocks with nearly 100% of their money. This is why they have poor results.
It does not matter if you invest in stock funds or bond funds. They are both speculative because they do not mature like bonds. The maturity is what makes individual Corporate Bonds safe because either the underlying company goes out of business or they pay you. Even if they go out of business, you still have first pick of the assets when it is sold off and the cash distributed.
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