Sucker!!!

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!

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.

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.

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.

They Treat You Like Children!

When my children started crawling around on the floor, they started playing with everything except their toys. Telling them to stop was not working. They were too young to punish. So I had to show them something else and try to get their mind off of the things that I did not want them to play with. I am sure my parents did the same to me when I was about 10 months old. I bet you parents had to do the same thing with your children and your parents did the same thing to you.

Did you know that this type of “physiological deflection” goes on in the investment business as well? I watched a financial analyst who specializes in the Bond Market on MSNBC recently. He was talking about the coming long bear market in bonds. I had to laugh because it reminded me of when I was trying to stop my children from playing with things that I did not want them to have. The analyst is correct in my view that a long bear market will come. The reason! The federal government is keeping interest rates low to restart the economy and put people back to work. But some day, they will have to raise interest rates to stop inflation from rising. This act will raise interest rates on bonds and bring down bond prices.

So you might ask, then why am I laughing at the financial analyst? The analyst was trying to tell you the public to take your money out of bond funds and place them into stock funds. Yes, bond fund prices will fall if what the analyst and I believe comes true. But you the public should not have your money in bond funds anyway. A large part of your investment profits in bond funds goes toward management fees to support the brokers, analysts, and their firms. You get what is left over. You switch to stock funds; you just jumped from one “gambling bookie” to another.

Investment firms and mutual funds make money off you if your investments go down and they make money off of you if your investments go up. When they go down you just pay them from your investment principle instead of your profits. So this analyst wants to deflect you into stock funds and away from stock and bonds.

As I said many times before, stocks are speculative. They are for speculators, not investors. Add mutual funds into the mix and you pay a monthly fee to the bookie to speculate in the stock market for you. Then you wonder why most people with IRAs lost 50% or more of their investment over the past 10 years. You also wonder why your investment firm can give large bonuses at the end of the year to their top employees. Going into a bond fund turns your investment instrument into a speculative instrument because you placed a bookie in the mix. You lose less in a bond fund but why lose your money at all?

Buy individual bonds and wait until they mature. It does not matter if the bond market is in a bull or bear market. All it means to you is in a bull market you can make more money than you can in a bear market. But you may only lose money if the company backing the bonds can’t pay you.

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Darnell L Williams invests primarily in his IRA and for the Darnell L Williams Foundation. He invests mostly in non-investment grade bonds (junk bonds). The established Investment Community claims that junk bonds are more speculative than stock investments or stock mutual funds.

Below are returns from investment indexes around the world. See how they compare to Darnell’s returns.

http://news.morningstar.com/index/indexReturn.html

Darnell’s returned in 2009 45.39% and 17.98% YTD in 2010. He advised one client starting in August 2009 to the end of March 2010 making 11.79% and YTD 2010, 3.93%. He advised a second client starting in August 2009 to the end of December 2009 making 24.81% and YTD 2010, 5.41%.

Now check your investments and see where you fall.

Options: The Next Level in Investing

From 1999 to the beginning of 2009, people have seen a hard time with their IRAs and other retirement accounts. If you were lucky like me, you lost in some years 3 to 5 percent but never gaining more than 17 percent in any given year. If you were like most people around the country, you lost at least 50 percent of your investments and can not afford to retire. If you followed my investment strategy from 2009 until now, you should be well on your way to recovery. In 2009, my rate of return was 45.39%. “Year to Date” for 2010 it is 14.10%.

If you recall, I suggested that you place part of your retirement money in Ford Motor Company Stock. My buy range was from $6.00 to $7.50 per share. I suggested that you let the stock double in price, $12.00 to $15.00 then sell half of your investment. That way you can take your initial investment out. At that point you would be “risk free” in this investment. For the remainder of your Ford Stock investment, all you have to do is check your stock for 10 to15 minutes every night to see if the trend of the stock is still up, the market is still on the up trend, the fundamentals of the company is still good, and if the trend for the auto industry is still generally on the up swing. If these fundamentals change then you know to sell the rest of your stock.

Now let’s take this investment strategy to the next level. Let’s say that you bought 200 shares of Ford Motor Stock at $6.00 per share (200 shares times $6 is $1,200). Following my investment strategy, you decide to sell 100 shares at $12 per share (100 shares time $12 is $12,000). You would be “risk free” after this transaction. Instead of selling the stock, how about “writing a call option” with a strike price of $13 per share at 11:20 AM on March 4, 2010. At that time, a March 10 Call with a Strike Price of $13 was asking 23 cents (1 Call times 100 shares times 23 cents is $23). The transaction may cost you $13 so you will only make $10. But $10 profit divided by $600 investment price is 1.67% and you still have the stock.

By writing or selling the option to someone will allow them to call away your stock at $13 per share until March 20, 2010 (Exploration Date). However, you locked in at least a selling price of $13 per share plus $10 for the option ( $13 times 100 shares plus $10 or $1,310). That is if someone exercises the right to call away your stock at $13. If your stock is not called by March 10, 2010, the option expires and you are free to write another option that will expire on the next expiration date that you take at the price that you set. You will collect more money for that “call.” Writing Covered Calls is a very conservative way to make a few more dollars on your investment. Your risk is that the company may go out of business or never recover from a price collapse. But remember, you have your original investment already!

We only looked at one conservative Stock Option Strategy for selling stocks that you already own. In-the-Money (ITM), Out-of-the-Money (OTM), and At-the-Money (ATM) Option Stategies can give you different amounts of cash based on market conditions and your investment commitment to the transaction. If you would like more information on options, go to this website http://www.optionsxpress.com/

Taxes Paid by your Investments

Double Your Money in One Year!

Back in March 2009, I gave a “buy” recommendation on Ford Motors Company Stock. I suggested that you, the speculator buy this for your IRA and for other accounts at or below $7.50 per share. I felt that below $7.50, your risk of capital would be very low. The stock sold for as low as $1.50 and is now selling for a recent price of $11.72. I also said to sell half your investment when the stock doubles. For example, if you bought 200 shares of stock at $6.00 on May 1, 2009, you would have $1,200 in this investment. If you sold 100 shares of your 200 shares for $1,200 ($12 per share), you would get your original investment back. Now your other 100 shares can maximize your profit at no risk to you.

Federal and Pennsylvania State Taxes

You ask, but what about my tax situation? If you are buying and selling stocks and bonds in your IRA account, your taxes are deferred to when you withdraw the money from your account. You can do that at age 59 ½ or later without penalty. Before you turn 59 ½ you pay a 10% penalty on any money withdrawn from your IRA account (special circumstances in the tax law excluded) plus you pay tax as income on the money. Over 59 ½, you pay taxes on the money withdrawn in the year of withdraw per the tax law at that time with no penalty.

What if I buy and sell in a Regular or Margin Account?

Let’s say that you sold 200 shares in less than one year and one day after purchase. For argument sake, let’s say you are in a 25% tax bracket ($33,950 to $82,250 if single. $67,900 to $137,050 if married filing jointly). You would pay $300 in federal taxes and $36.84 in Pa State Income taxes (Pa Rate 3.07%). ($1,200 times 25% equals $300 and $1,200 times 3.07% equals $36.84 that you have to pay). But if you wait until after one year and one day after buying the stock, you would have a long term gain. That means that you pay $60 to the IRS and $36.84 to the state. ($1,200 times 20% equals $240 because it is a long term gain. $240 times 25% equals $60 in federal taxes you have to pay. For you Pa. State tax it is the rate of 3.07% times $1,200 equals $36.84).

In our example, a long terms gain has you paying a total tax bill of $96.84 while a short term gain gives you a tax bill of $336.84. So the trick in a regular investment account is to try to sell your investments with a long term gain instead of a short term gain.

Let’s say that you did this transaction above and sold 100 shares in less than one year and one day after purchase. You invested $600 and you made $600. You would pay $150 in federal taxes and $18.42 in Pa State Income taxes (Pa Rate 3.07%). ($600 times 25% equals $150 and $600 times 3.07% equals $18.42 that you have to pay). That is a total of $168.42 on a $600 profit. But if you wait until after one year and one day after buying the stock, you would have a long term gain. That means that you pay $30 to the IRS and $18.42 to the state. ($600 times 20% equals $150 because it is a long term gain. $150 times 25% equals $30 in federal taxes you have to pay. For you Pa. State tax it is the rate of 3.07% times $1,200 equals $36.84). You pay a total of $66.84 in state and federal taxes on a $600 profit.

Tax information given by Joyce Hamburg is a Tax Associate of H&R Block, Uptown Shopping Plaza, Harrisburg, Pa. 17110, 717-238-4301.

Look for my investment information on Facebook. Search for Darnell L Williams.