anyway, all im trying to say is compounding works both ways - if your investment loses value, your return is also negatively compounded.
that's why the compounding as espoused in the op is misleading. it seems to suggest that investment compounding is identical to savings account compounding, which it certainly is not.
finally, as far as i know, most companies do not pay dividends.
Except in your second example who on Earth would ever list that as a 6% growth rate. Anyone in finance would list it as a 5% growth rate.
so did i just do the math wrong (6% growth over 5 years (first example) vs. 0% growth in the first 4 years + 30% growth in the 5th year (second example))? don't those both equate to an average of 6% growth over 5 years? i honestly don't know - i thought the numbers we look at are the percentage numbers, not the dollars numbers.
besides, the original point still stands about compounding (i think), which is if your investment loses value, then the return is negatively compounded. which is totally different from savings accounts, where negative compounding does not exist.
Actually, it has nothing to do with negative returns, it's just math. Similar to the way that if you want to maximize the area in a rectangle with a given perimeter, you make all the sides equal, if you want to maximize return on an investment where the sum of all the annual rates is given, you make all the annual rates equal. To see this, compare to 1,1,1,1,26 or 0,0,0,0,30 and see that they are also less than 6,6,6,6,6.
However, you shouldn't be worrying about this or using it as a reason to prefer savings accounts to less stable investment options, because it is already factored in when stating the average return of an investment. Any reputable source will not look at:
add -10,10,-10,10,30 and divide by 5. They will compute the rate that, if all years were equal, would have led to the return observed. Now, as you mentioned, you can't know that beforehand, you only know a forecast. The correct way to take that into account when making your decision is to note it as risk which we already know about. To list it as an additional downside to more risky investments is disingenuous.
Also:
finally, as far as i know, most companies do not pay dividends.
Cite this. You may be correct or not, but the fact remains that thousands (millions?) of companies do pay dividends, so you need to know about them.
I actually find dividends to be fairly common, though that depends on sector. Just looking at stocks that I personally own/have owned: Johnson & Johnson, Sony, Microsoft, and Activision Blizzard all pay dividends. Plus, of course, the S&P 500 Index distributes dividends.
Vrtra Theory on
Are you a Software Engineer living in Seattle? HBO is hiring, message me.
Forgive me if this is fuzzy, but this was a while ago and I wasn't clear on the concept.
There are funds that have a stated purpose of doubling the returns(positive or negative) of the S&P 500 for example. I was looking at one such fund and I believe it had a historical beta(don't know the period calculated) 1.99 or something, meaning it was extremely close to its stated goal of providing two times the variation of the S&P.
What I don't understand is how a fund could so accurately match that goal, versus an index fund which I think would just purchase all 500 stocks on the S&P and maintain a duplicate of the S&P. The former, in a very long-term view, seems remarkably valuable, providing ~14%(or whatever double the S&P is) in the long-term.
It'd be one thing to see a mutual fund with some more narrow goal that got lucky, but if a normal S&P fund is a safe 7% long-term return, and these doubling funds match the S&P so well, it seems like a ridiculously good 20-40 year investment. I believe these are futures-based on investment funds, I just don't understand how they'd be so accurate.
Forgive me if this is fuzzy, but this was a while ago and I wasn't clear on the concept.
There are funds that have a stated purpose of doubling the returns(positive or negative) of the S&P 500 for example. I was looking at one such fund and I believe it had a historical beta(don't know the period calculated) 1.99 or something, meaning it was extremely close to its stated goal of providing two times the variation of the S&P.
What I don't understand is how a fund could so accurately match that goal, versus an index fund which I think would just purchase all 500 stocks on the S&P and maintain a duplicate of the S&P. The former, in a very long-term view, seems remarkably valuable, providing ~14%(or whatever double the S&P is) in the long-term.
It'd be one thing to see a mutual fund with some more narrow goal that got lucky, but if a normal S&P fund is a safe 7% long-term return, and these doubling funds match the S&P so well, it seems like a ridiculously good 20-40 year investment. I believe these are futures-based on investment funds, I just don't understand how they'd be so accurate.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
Yea. If things were easy to figure out we'd all have lazer-jet-packs by now.
It seems that economic theory is always one step behind whatever the market is doing. The housing bubble caught a lot of people by surprise (obviously, if they saw it, they wouldn't have made it into a bubble) and the next-round of economic theory and political legislation will prevent that kind of thing from happening again.
But who know what the next thing is?
Some people are saying that the US is in a "debt bubble," with the government and consumers so heavily leveraged out on their credit. Are they right? I don't know.
China might be in a property-bubble of it's own. Because it pegs the value of it's currency artifically low, it means that Chinese buy more Chinese goods, like land. Which bids up the price. Will it go too high?
There's risk everywhere if you look for it. The mortgage-backed securities were supposed to be very safe.
Forgive me if this is fuzzy, but this was a while ago and I wasn't clear on the concept.
There are funds that have a stated purpose of doubling the returns(positive or negative) of the S&P 500 for example. I was looking at one such fund and I believe it had a historical beta(don't know the period calculated) 1.99 or something, meaning it was extremely close to its stated goal of providing two times the variation of the S&P.
What I don't understand is how a fund could so accurately match that goal, versus an index fund which I think would just purchase all 500 stocks on the S&P and maintain a duplicate of the S&P. The former, in a very long-term view, seems remarkably valuable, providing ~14%(or whatever double the S&P is) in the long-term.
It'd be one thing to see a mutual fund with some more narrow goal that got lucky, but if a normal S&P fund is a safe 7% long-term return, and these doubling funds match the S&P so well, it seems like a ridiculously good 20-40 year investment. I believe these are futures-based on investment funds, I just don't understand how they'd be so accurate.
They are an index fund that's levered up 2:1. You're trading risk for return.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
The degree to which the fund seemed to match the S&P at least seems to indicate it could continue to match the S&P. Now, the S&P, despite having a historical return of 7% or so for the last 60 years, could certainly fail miserably to meet that in the next 20 or 30 years, but I wonder how likely that is excluding calamity.
So, assuming that it's reasonable to invest in S&P funds for the long-term because they are so much more diversified than smaller funds, and as a result they are more reliable, would it not still be extremely profitable to invest a sizeable portion of your portfolio in one of these 2x S&P funds for its relative reliability?
I guess what I'm saying is, rather than investing in a small cap fund, or a managed fund with a historical return of 14%(or 15% if expense ratio was 1% higher), why not invest in a fund with a 14% return that so closely matches the well-diversified S&P500?
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
Yea. If things were easy to figure out we'd all have lazer-jet-packs by now.
It seems that economic theory is always one step behind whatever the market is doing. The housing bubble caught a lot of people by surprise (obviously, if they saw it, they wouldn't have made it into a bubble) and the next-round of economic theory and political legislation will prevent that kind of thing from happening again.
But who know what the next thing is?
Some people are saying that the US is in a "debt bubble," with the government and consumers so heavily leveraged out on their credit. Are they right? I don't know.
China might be in a property-bubble of it's own. Because it pegs the value of it's currency artifically low, it means that Chinese buy more Chinese goods, like land. Which bids up the price. Will it go too high?
There's risk everywhere if you look for it. The mortgage-backed securities were supposed to be very safe.
The housing bubble was in large part a debt bubble itself, since it was inflated by tons of lousy mortgages and speculative investors using obscene amounts of leverage. A lot of the pain in the aftermath is due to the deleveraging, where people are puking up stuff left and right selling at firesale prices to try to cover their debts, and a large number of homeowners and investors were outright defaulting. The government debt has been pumped up to try to offset the massive collapse in private debt, with mixed results and potentially problematic consequences down the line when the bill comes due.
You're right to talk about China with a potential property bubble because a lot of their cities have property values that are sky high in relation to the incomes of the inhabitants, we're talking bubble levels at least as bad as the US and maybe reaching those of Japan a few decades back. Supposedly they have very heavy restrictions on capital and investments, which means that a lot of their available domestic funds have been shunted into real estate. That might end up being messy for their banks, which are largely government run. China's mechanism for manipulating their currency to make it artificially cheap has been to vacuum up US Treasuries with their large trade surplus, but that may shift in the other direction as they have been pressured quite a bit to float their exchange rate more and with the US economy in the poop the trade imbalance has lessened a bit.
The mortgage back security stuff was rubber stamped as safe, but a good portion of that was the ratings agencies not knowing what the hell they were doing and being pressured by the big banks to mark their crap as good. It goes to show how little you can trust others to do your research for you.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
The degree to which the fund seemed to match the S&P at least seems to indicate it could continue to match the S&P.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
The degree to which the fund seemed to match the S&P at least seems to indicate it could continue to match the S&P.
It really doesn't indicate anything.
Would the degree to which my Vanguard S&P 500 index fund matches the S&P not indicate investing methodology? It does everything the S&P does. There's essentially no fear that the index fund will diverge from the S&P itself, all the risk lies in the stocks that compose the S&P.
I don't know how these other fund types work, but I have a suspicion, by looking at their past results, that their investing methodology might be similar.
Indexing is a very different process than actively managing a portfolio. It is a lot easier to match the performance of the index since the index provides a nice blueprint. A cheat-sheet if you will.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
The degree to which the fund seemed to match the S&P at least seems to indicate it could continue to match the S&P. Now, the S&P, despite having a historical return of 7% or so for the last 60 years, could certainly fail miserably to meet that in the next 20 or 30 years, but I wonder how likely that is excluding calamity.
So, assuming that it's reasonable to invest in S&P funds for the long-term because they are so much more diversified than smaller funds, and as a result they are more reliable, would it not still be extremely profitable to invest a sizeable portion of your portfolio in one of these 2x S&P funds for its relative reliability?
I guess what I'm saying is, rather than investing in a small cap fund, or a managed fund with a historical return of 14%(or 15% if expense ratio was 1% higher), why not invest in a fund with a 14% return that so closely matches the well-diversified S&P500?
If it is a leveraged fund, that means that they are doing some sort of borrowing to amplify the investment, and you are amplifying the risk. So if it goes up, you get a huge return, but if it goes down you lose your shirt and if it stays steady you slowly bleed to death on the expenses.
Leverage in mortgages is a similar concept: say you only put 20% down on a $100k house (you pay $20k down), then borrow the rest. If it goes up to being worth a $120k house the next day and somehow you can sell it right away you would double your money on the down payment. However, if the house goes down to be worth less than $80k then you'll owe more than your house is worth and the value on your down payment will be fully wiped out. If the house stays steady at being worth $100k and you hold on to it, then you'll simply be out the interest on your loan. Now imagine people putting much less down, even to the point of having no money down and you get a picture of how much leverage can amplify the risk in investments.
So sure, if you lever up with debt you can make some big returns, but IT IS IN NO WAY SAFE. You are explicitly exposing yourself to higher risk to seek higher returns. And the problem is if too many people load up on way too much leverage all the way across the board and push prices sky high, then you get yourself a bubble where it is just a matter of time until a collapse.
Edit: Here's a Motley Fool article talking about leveraged funds from 2007: http://www.fool.com/investing/mutual-funds/2007/01/03/using-leveraged-funds.aspx . Note the date, this is pre-2008 financial meltdown. And sometimes leveraged funds have unexpected behavior too, where it won't simply be like owning (or on the flip side shorting) extra versions of the index.
Savant on
0
Options
YamiNoSenshiA point called ZIn the complex planeRegistered Userregular
We've got a 30 year mortgage on our condo. We don't plan on staying here for the full term. We'll probably move to a house in 5~7 years or so, depending on the market and how much we save. Is it worth putting any extra money towards the principle? I know it can seriously cut down on the length of the mortgage and interest, but if we'll be getting a new mortgage in 5 years, am I just giving them an interest free loan in a way?
No, you are paying down a loan at your mortgages interest rate. It's the same as any other debt reduction.
Here is what you need to compare:
1. Your opportunity cost of capital (i.e. how many %, after tax!, could my money be earning elsewhere).
2. Your mortgage's interest rate, net of how much of it you can deduct off your taxes.
If 1 > 2, don't prepay. Put the money into your next bet investment choice instead.
If 2 > 1, prepay as much as you can.
I forget, how do you calculate the effective interest rate of a loan when you can deduct some/all of the interest on your taxes?
Edit2: So the mortgage is effectively 4% and my lady's student loan is 3.5%. From looking at the Vanguard stuff, it seems reasonable that we'll be able to exceed that in returns, at least by a little bit.
Hey! So, current finance thread, what's up with buying bonds? You've got these dollars, right, and you want to turn a portion of them into bonds. So you what? Like buy individual bonds? Bond funds?
Say you don't give two shits about risk and you're all bonds for life for a quarter of your monies? Long term bond fund? Short term? What's up smarties?
Older question, but there are a couple of different approaches for bonds depending upon what you want to do and what sorts of risks you want to expose yourself to.
For fixed rate bonds, they will pay a fixed coupon rate on the face or par value of the bond until maturity, in which they pay back the par value. So if you have a $100 par value bond with a 5% annual coupon and 5 years until maturity, it will pay $5 every year until it matures and then additionally pays back the $100. The price of the bond is determined by the present value of the future cash flows at the market determined rate of interest (aka the yield). Or conversely, the market determined price of the bond determines the interest rate by the discounting of cash flows of a bond. What does that mean in English? Basically, consider each of the coupon payments and redemption payments separately, and figure out how much you would need to save now at the market's interest rate for it to appreciate until you receive each payment when it's due. Then add all of the present values of the payments together, and you get the price of the bond. One quick thing to notice about this is that the coupon rate can and does vary from the market determined yield, and if the coupon rate is above the yield the bond will be priced at a premium above the par value, and conversely if the coupon rate is below the yield the bond will be priced at a discount.
One of the main risks of bonds is interest rate risk. For a fixed rate bond, the interest rate or yield is inversely related with the price of the bond, as at a higher interest rate it will take less money at the present value to appreciate to the value of the future cash flows. Conversely, a decrease in interest rates will increase the market price of a bond. Longer term bonds are exposed to more interest rate risk than shorter term bonds are, and a long term bond's current price will fluctuate more for the same amount of parallel change in interest rates than that of a short term bond. One class of metrics for approximating this fluctuation is Bond Duration. The duration metrics are based on partial derivatives of the price of a bond with respect to yield, which in practical terms means you can approximate the change in price of the bond in the face of a small change in interest rates. Wikipedia's example is thus: a 15-year bond with a duration of 7 would fall approximately 7% in value if the interest rate increased by 1% per annum.
The second main risk is default, where the counterparty will fail to meet the obligations of paying some or all of the payments of the bond. If you have a bond with a company or government that goes bankrupt, you could lose some or all of the money you used to buy it depending upon how the bankruptcy proceedings go. US government bonds, aka Treasuries, are considered to have more or less the lowest risk of default. The category of investment grade bonds is those considered to have a low risk of default, while the high yield or "junk bond" category denotes those believed to have a higher risk of default.
Typically, bonds with higher risk will have the market demand a higher interest rate and lower market price. Longer term bonds typically (but not always!) have a higher yield than shorter term bonds of the same type, and junk bonds typically have a higher yield than investment grade bonds.
There are other potential sources of risk too. There's the risk of inflation, such that the currency that the bond is denoted in could devalue such that the real rate of return is less than the nominal rate. Additionally, some bonds can be called early, such that the issuing party pays back the par value immediately and cancels future coupon payments. For a discount bond this is typically a good thing for the bondholder, but a call on a premium bond can lead to an outright and immediate loss for the bondholder. Also, you can buy bonds in foreign currencies (which might be attractive if they have higher yield), but then you expose yourself to exchange rate risks and can gain or lose value depending upon whether your home currency weakens or strengthens with respect to the foreign currency. Additionally for obscure bonds there may be liquidity risk, where there isn't a market to easily sell back a bond if so desired prior to maturity, or you might have to take a big price hit to sell it back.
Ok, so with that brief overview of the basics of bonds, what do you do to jump in? You can buy bonds directly on issuing if so desired, and for many bonds you can buy or sell them on secondary markets. For example, the US federal government has it's own website called Treasury Direct where you can buy bonds from them, and brokerages often allow you to trade in bonds, though you may have to pay a commission. Additionally, there are bond mutual funds and ETFs that will invest in a smattering of different bonds from different sources and/or maturities depending upon the type of fund. The upside of those is you can get some built in diversification of bonds and with some mutual funds you can get some management. The downside of those is that there will be expenses on the funds which will lower your take home yield, and they may not be set up with your precise desired bond risk and timeframe in mind. As a disclosure I recently bought into a short term investment grade bond ETF, which appears to mulch some of the returns on maturing bonds to reinvest in new ones, and pays out the of the rest of the returns as dividends.
You'll want to determine what's right for you with bonds either on your own with research or with some professional help. Long term fixed rate bonds might give nice looking rates of return relative to the short term stuff, but run the risk of locking yourself in to a lower rate of return or outright lose some value if interest rates go up soon. Junk bonds or stuff like Greek bonds may look like they are giving nice rates of return too, but you are taking your life in your hands because you probably don't know if they'll turn belly up or not. One other final thing to mention is municipal bonds, which can potentially give tax deductible returns, which may be enticing depending upon your personal tax situation.
Savant on
0
Options
firewaterwordSatchitanandaPais Vasco to San FranciscoRegistered Userregular
edited April 2010
Savant you are the man like whoa. I'm going to read all that then probably thank you again.
Edit2: So the mortgage is effectively 4% and my lady's student loan is 3.5%. From looking at the Vanguard stuff, it seems reasonable that we'll be able to exceed that in returns, at least by a little bit.
This is complicated.
Watch out! That calculator assumes you can itemize, dollar for dollar, every bit of interest paid. In my personal situation, all my deductions don't even amount to the standard deduction I take instead.
I.e. I cannot deduct any mortgage interest and so my pre-tax rate is my post-tax rate.
enc0re on
0
Options
YamiNoSenshiA point called ZIn the complex planeRegistered Userregular
Edit2: So the mortgage is effectively 4% and my lady's student loan is 3.5%. From looking at the Vanguard stuff, it seems reasonable that we'll be able to exceed that in returns, at least by a little bit.
This is complicated.
Watch out! That calculator assumes you can itemize, dollar for dollar, every bit of interest paid. In my personal situation, all my deductions don't even amount to the standard deduction I take instead.
I.e. I cannot deduct any mortgage interest and so my pre-tax rate is my post-tax rate.
Combined with NJ property taxes and not getting married until next year, itemizing knocks the standard out of the park, since we lump it all onto one tax form. Hers, since she can claim the student loan stuff as well. I'll have to do it again next year when we get married. I also checked against the IRS site and we're within the ranges to deduct all the interest.
seriously shit is tight, I know, but you can do it!
I don't quite understand - you work for a contractor that has placed you? Like a long term temp thing? This is becoming a thing for the jobs thread. . .
There's a jobs thread? :shock:I don't get out of D&D/Multiplayer... much, but maybe I ought to.
Is there? The only thing I remember was one drifting off topic with too much mothergoosing about bootstraps to be useful, and that was like a month ago
Spoit on
0
Options
YamiNoSenshiA point called ZIn the complex planeRegistered Userregular
seriously shit is tight, I know, but you can do it!
I don't quite understand - you work for a contractor that has placed you? Like a long term temp thing? This is becoming a thing for the jobs thread. . .
There's a jobs thread? :shock:I don't get out of D&D/Multiplayer... much, but maybe I ought to.
Is there? The only thing I remember was one drifting off topic with too much mothergoosing about bootstraps to be useful, and that was like a month ago
One other final thing to mention is municipal bonds, which can potentially give tax deductible returns, which may be enticing depending upon your personal tax situation.
How might these work with an IRA? For traditional, would there be no benefit, and with a Roth you could claim a deduction or exemption?
Kiyosaki is the typical self-help type. Failed at business but made a fortune selling financial advice.
John Reed on the other hand is the Real Deal (TM) for those of you who want to get into real estate.
I don't know. I think this one is special. This guy advises committing tax fraud for christ's sake! He tells you to write off car expenses, health club memberships, vacations.... oh, he also says "have rich friends so they can give you inside tips on their companies!" then several pages later "I'm not saying do it illegally of course." Oh, is there a legal way to do insider info trading, Robert? Is that how you got rich? Good to know.
There is something call inflation... and 1 million when you are at 15 probably won't buy you the same thing as 1 million by the time you hit 65. Granted inflation is at a controllable level right now but assuming an inflation rate of 8% , your one million by the time you hit 65 will equate to excately $21,321.23 50 years ago.
Finding 8% return after tax is pretty hard actually. Long term 30 year government bonds might have that rate but again if interest rate goes up in the future you are completely screwed.
8% inflation? What country do you live in exactly? Certainly not the USA.
Protein Shakes on
0
Options
YamiNoSenshiA point called ZIn the complex planeRegistered Userregular
edited April 2010
Yes, money depreciates. But you need to save for the future, especially retirement. And the message is still the same: Start saving earlier and you'll have more money come retirement. And returns less than inflation are still better than letting the money sit there and getting 0%.
There is something call inflation... and 1 million when you are at 15 probably won't buy you the same thing as 1 million by the time you hit 65. Granted inflation is at a controllable level right now but assuming an inflation rate of 8% , your one million by the time you hit 65 will equate to excately $21,321.23 50 years ago.
Finding 8% return after tax is pretty hard actually. Long term 30 year government bonds might have that rate but again if interest rate goes up in the future you are completely screwed.
I don't get why people are getting so hung up on inflation. Yes, inflation matters, but it doesn't alter the overall savings rationale that much. At best it just alters the amount of time to reach $X in savings.
The real rate of return of the S&P500 over the last 50 or so years averaged out at 6.8%. You can of course evaluate different slices to arrive at differing rates, but the core idea remains the same; starting retirement savings as early as possible is beneficial due to compounding.
It should also be noted that investing in the stock market acts as a somewhat natural inflation hedge.
Not trying to be a silly goose here, but that's why I said "tiny bit" misleading. Obviously investing your cash prevents it's value to be eroded away and I don't have the figures here to see what was the average inflation rate for the past few decades. It should ofcourse be way less then 8%.
All I'm trying to say is that that 1 million that you think you are going to get when you hit retirement won't be as much as you think it is. Hell, 1 million dollars isn't even that big of a deal now.
Inflation is really low right now due to the economic downturn, but it may go up quite a bit some time down the line. It's not something that's fixed and we don't know for sure what it will be ahead of time.
However, in terms of investing inflation should be mainly considered as lowering the real rate of return below the nominal rate of return, as the effect is a exponential with a negative exponent on the real value of your money. That's the most straightforward way to try to work with it.
Savant on
0
Options
JohnnyCacheStarting DefensePlace at the tableRegistered Userregular
Kiyosaki is the typical self-help type. Failed at business but made a fortune selling financial advice.
John Reed on the other hand is the Real Deal (TM) for those of you who want to get into real estate.
I don't know. I think this one is special. This guy advises committing tax fraud for christ's sake! He tells you to write off car expenses, health club memberships, vacations.... oh, he also says "have rich friends so they can give you inside tips on their companies!" then several pages later "I'm not saying do it illegally of course." Oh, is there a legal way to do insider info trading, Robert? Is that how you got rich? Good to know.
IANAL but :
You pretty much have to own stock already, or be an inner circle employee of a traded company, or somehow otherwise have access to genuinely proprietary, non-public information, to commit insider trading. A buddy telling you he's having a good sales year so you buy some? Probably not insider trading. He knows he's going to have a bad year, so he sells his options early? Insider trading. You're doing a news story on the guy and you turn up information on his company and use it in the market? Maybe insider trading.
Kiyosaki is the typical self-help type. Failed at business but made a fortune selling financial advice.
John Reed on the other hand is the Real Deal (TM) for those of you who want to get into real estate.
I don't know. I think this one is special. This guy advises committing tax fraud for christ's sake! He tells you to write off car expenses, health club memberships, vacations.... oh, he also says "have rich friends so they can give you inside tips on their companies!" then several pages later "I'm not saying do it illegally of course." Oh, is there a legal way to do insider info trading, Robert? Is that how you got rich? Good to know.
IANAL but :
You pretty much have to own stock already, or be an inner circle employee of a traded company, or somehow otherwise have access to genuinely proprietary, non-public information, to commit insider trading. A buddy telling you he's having a good sales year so you buy some? Probably not insider trading. He knows he's going to have a bad year, so he sells his options early? Insider trading. You're doing a news story on the guy and you turn up information on his company and use it in the market? Maybe insider trading.
Yeah I'd be very careful of that (IANAL either). Any information you have that is not available to the general public that would make it smart to invest in the company is likely a breach of insider trading, even if you are not an employee of the company and just got it from a friend. Anything "material" and "nonpublic" - "something that a reasonable investor would deem as important" - would put you at risk
So. As I mentioned, my financial picture at the moment is pretty awesome except for the horrible situation with my house, that being it is worth approximately -60k. Because of this, I can't sell the thing. Since I'm staying, I want to make it nicer, but to that I need a loan to pay for some stuff (a new kitchen), but I can't get a loan because I have no equity in my house.
Does anyone know of a bank that does Home Improvement loans? And by that I don't mean what every bank in the world advertises as HI loans - Wells, USBank, Chase, Citi, etc. all off them, but they're really just Home Equity loans.
Why don't banks let me secure a loan with my 401k...
Oh, wow. I bet my 401k is worth more than my house now. The hell.
I don't really want to disrail this thread, but is there a Financial regulation reform thread in DnD? I tried searching, but didn't see one
There've been old threads about the financial meltdown (I started one of them a long time ago when Bear Stearns went down), but I don't think there is a recent one about the reforms being debated right now.
Shameless plug for Mint. I have switched all my spending to credit cards* and it tracks expenses, nicely categorized, based on the online logins. It also has budgeting functionality. That website has made a huge positive difference in my personal finances.
*Schwab Bank Invest First and Citi Forward if anyone is curious.
Holy crap this thing is awesome.
I'm gonna be playing with this thing for weeks.
Either that or you've just robbed me blind like a Nigerian lottery. If so, kudos to you and this elaborate scheme.
Posts
so did i just do the math wrong (6% growth over 5 years (first example) vs. 0% growth in the first 4 years + 30% growth in the 5th year (second example))? don't those both equate to an average of 6% growth over 5 years? i honestly don't know - i thought the numbers we look at are the percentage numbers, not the dollars numbers.
besides, the original point still stands about compounding (i think), which is if your investment loses value, then the return is negatively compounded. which is totally different from savings accounts, where negative compounding does not exist.
However, you shouldn't be worrying about this or using it as a reason to prefer savings accounts to less stable investment options, because it is already factored in when stating the average return of an investment. Any reputable source will not look at:
add -10,10,-10,10,30 and divide by 5. They will compute the rate that, if all years were equal, would have led to the return observed. Now, as you mentioned, you can't know that beforehand, you only know a forecast. The correct way to take that into account when making your decision is to note it as risk which we already know about. To list it as an additional downside to more risky investments is disingenuous.
Also:
Cite this. You may be correct or not, but the fact remains that thousands (millions?) of companies do pay dividends, so you need to know about them.
There are funds that have a stated purpose of doubling the returns(positive or negative) of the S&P 500 for example. I was looking at one such fund and I believe it had a historical beta(don't know the period calculated) 1.99 or something, meaning it was extremely close to its stated goal of providing two times the variation of the S&P.
What I don't understand is how a fund could so accurately match that goal, versus an index fund which I think would just purchase all 500 stocks on the S&P and maintain a duplicate of the S&P. The former, in a very long-term view, seems remarkably valuable, providing ~14%(or whatever double the S&P is) in the long-term.
It'd be one thing to see a mutual fund with some more narrow goal that got lucky, but if a normal S&P fund is a safe 7% long-term return, and these doubling funds match the S&P so well, it seems like a ridiculously good 20-40 year investment. I believe these are futures-based on investment funds, I just don't understand how they'd be so accurate.
The thing you have to understand is that past performance is not indicative of future performance. A stock can do amazingly well for a few years - or maybe even 10 years - and you still would not be able to tell how it will do next year.
Yea. If things were easy to figure out we'd all have lazer-jet-packs by now.
It seems that economic theory is always one step behind whatever the market is doing. The housing bubble caught a lot of people by surprise (obviously, if they saw it, they wouldn't have made it into a bubble) and the next-round of economic theory and political legislation will prevent that kind of thing from happening again.
But who know what the next thing is?
Some people are saying that the US is in a "debt bubble," with the government and consumers so heavily leveraged out on their credit. Are they right? I don't know.
China might be in a property-bubble of it's own. Because it pegs the value of it's currency artifically low, it means that Chinese buy more Chinese goods, like land. Which bids up the price. Will it go too high?
There's risk everywhere if you look for it. The mortgage-backed securities were supposed to be very safe.
They are an index fund that's levered up 2:1. You're trading risk for return.
The degree to which the fund seemed to match the S&P at least seems to indicate it could continue to match the S&P. Now, the S&P, despite having a historical return of 7% or so for the last 60 years, could certainly fail miserably to meet that in the next 20 or 30 years, but I wonder how likely that is excluding calamity.
So, assuming that it's reasonable to invest in S&P funds for the long-term because they are so much more diversified than smaller funds, and as a result they are more reliable, would it not still be extremely profitable to invest a sizeable portion of your portfolio in one of these 2x S&P funds for its relative reliability?
I guess what I'm saying is, rather than investing in a small cap fund, or a managed fund with a historical return of 14%(or 15% if expense ratio was 1% higher), why not invest in a fund with a 14% return that so closely matches the well-diversified S&P500?
The housing bubble was in large part a debt bubble itself, since it was inflated by tons of lousy mortgages and speculative investors using obscene amounts of leverage. A lot of the pain in the aftermath is due to the deleveraging, where people are puking up stuff left and right selling at firesale prices to try to cover their debts, and a large number of homeowners and investors were outright defaulting. The government debt has been pumped up to try to offset the massive collapse in private debt, with mixed results and potentially problematic consequences down the line when the bill comes due.
You're right to talk about China with a potential property bubble because a lot of their cities have property values that are sky high in relation to the incomes of the inhabitants, we're talking bubble levels at least as bad as the US and maybe reaching those of Japan a few decades back. Supposedly they have very heavy restrictions on capital and investments, which means that a lot of their available domestic funds have been shunted into real estate. That might end up being messy for their banks, which are largely government run. China's mechanism for manipulating their currency to make it artificially cheap has been to vacuum up US Treasuries with their large trade surplus, but that may shift in the other direction as they have been pressured quite a bit to float their exchange rate more and with the US economy in the poop the trade imbalance has lessened a bit.
The mortgage back security stuff was rubber stamped as safe, but a good portion of that was the ratings agencies not knowing what the hell they were doing and being pressured by the big banks to mark their crap as good. It goes to show how little you can trust others to do your research for you.
It really doesn't indicate anything.
Would the degree to which my Vanguard S&P 500 index fund matches the S&P not indicate investing methodology? It does everything the S&P does. There's essentially no fear that the index fund will diverge from the S&P itself, all the risk lies in the stocks that compose the S&P.
I don't know how these other fund types work, but I have a suspicion, by looking at their past results, that their investing methodology might be similar.
If it is a leveraged fund, that means that they are doing some sort of borrowing to amplify the investment, and you are amplifying the risk. So if it goes up, you get a huge return, but if it goes down you lose your shirt and if it stays steady you slowly bleed to death on the expenses.
Leverage in mortgages is a similar concept: say you only put 20% down on a $100k house (you pay $20k down), then borrow the rest. If it goes up to being worth a $120k house the next day and somehow you can sell it right away you would double your money on the down payment. However, if the house goes down to be worth less than $80k then you'll owe more than your house is worth and the value on your down payment will be fully wiped out. If the house stays steady at being worth $100k and you hold on to it, then you'll simply be out the interest on your loan. Now imagine people putting much less down, even to the point of having no money down and you get a picture of how much leverage can amplify the risk in investments.
So sure, if you lever up with debt you can make some big returns, but IT IS IN NO WAY SAFE. You are explicitly exposing yourself to higher risk to seek higher returns. And the problem is if too many people load up on way too much leverage all the way across the board and push prices sky high, then you get yourself a bubble where it is just a matter of time until a collapse.
Edit: Here's a Motley Fool article talking about leveraged funds from 2007: http://www.fool.com/investing/mutual-funds/2007/01/03/using-leveraged-funds.aspx . Note the date, this is pre-2008 financial meltdown. And sometimes leveraged funds have unexpected behavior too, where it won't simply be like owning (or on the flip side shorting) extra versions of the index.
I forget, how do you calculate the effective interest rate of a loan when you can deduct some/all of the interest on your taxes?
Edit: Nevermind. http://www.dinkytown.net/java/MortgageTaxes.html
Edit2: So the mortgage is effectively 4% and my lady's student loan is 3.5%. From looking at the Vanguard stuff, it seems reasonable that we'll be able to exceed that in returns, at least by a little bit.
This is complicated.
Older question, but there are a couple of different approaches for bonds depending upon what you want to do and what sorts of risks you want to expose yourself to.
For fixed rate bonds, they will pay a fixed coupon rate on the face or par value of the bond until maturity, in which they pay back the par value. So if you have a $100 par value bond with a 5% annual coupon and 5 years until maturity, it will pay $5 every year until it matures and then additionally pays back the $100. The price of the bond is determined by the present value of the future cash flows at the market determined rate of interest (aka the yield). Or conversely, the market determined price of the bond determines the interest rate by the discounting of cash flows of a bond. What does that mean in English? Basically, consider each of the coupon payments and redemption payments separately, and figure out how much you would need to save now at the market's interest rate for it to appreciate until you receive each payment when it's due. Then add all of the present values of the payments together, and you get the price of the bond. One quick thing to notice about this is that the coupon rate can and does vary from the market determined yield, and if the coupon rate is above the yield the bond will be priced at a premium above the par value, and conversely if the coupon rate is below the yield the bond will be priced at a discount.
One of the main risks of bonds is interest rate risk. For a fixed rate bond, the interest rate or yield is inversely related with the price of the bond, as at a higher interest rate it will take less money at the present value to appreciate to the value of the future cash flows. Conversely, a decrease in interest rates will increase the market price of a bond. Longer term bonds are exposed to more interest rate risk than shorter term bonds are, and a long term bond's current price will fluctuate more for the same amount of parallel change in interest rates than that of a short term bond. One class of metrics for approximating this fluctuation is Bond Duration. The duration metrics are based on partial derivatives of the price of a bond with respect to yield, which in practical terms means you can approximate the change in price of the bond in the face of a small change in interest rates. Wikipedia's example is thus: a 15-year bond with a duration of 7 would fall approximately 7% in value if the interest rate increased by 1% per annum.
The second main risk is default, where the counterparty will fail to meet the obligations of paying some or all of the payments of the bond. If you have a bond with a company or government that goes bankrupt, you could lose some or all of the money you used to buy it depending upon how the bankruptcy proceedings go. US government bonds, aka Treasuries, are considered to have more or less the lowest risk of default. The category of investment grade bonds is those considered to have a low risk of default, while the high yield or "junk bond" category denotes those believed to have a higher risk of default.
Typically, bonds with higher risk will have the market demand a higher interest rate and lower market price. Longer term bonds typically (but not always!) have a higher yield than shorter term bonds of the same type, and junk bonds typically have a higher yield than investment grade bonds.
There are other potential sources of risk too. There's the risk of inflation, such that the currency that the bond is denoted in could devalue such that the real rate of return is less than the nominal rate. Additionally, some bonds can be called early, such that the issuing party pays back the par value immediately and cancels future coupon payments. For a discount bond this is typically a good thing for the bondholder, but a call on a premium bond can lead to an outright and immediate loss for the bondholder. Also, you can buy bonds in foreign currencies (which might be attractive if they have higher yield), but then you expose yourself to exchange rate risks and can gain or lose value depending upon whether your home currency weakens or strengthens with respect to the foreign currency. Additionally for obscure bonds there may be liquidity risk, where there isn't a market to easily sell back a bond if so desired prior to maturity, or you might have to take a big price hit to sell it back.
Ok, so with that brief overview of the basics of bonds, what do you do to jump in? You can buy bonds directly on issuing if so desired, and for many bonds you can buy or sell them on secondary markets. For example, the US federal government has it's own website called Treasury Direct where you can buy bonds from them, and brokerages often allow you to trade in bonds, though you may have to pay a commission. Additionally, there are bond mutual funds and ETFs that will invest in a smattering of different bonds from different sources and/or maturities depending upon the type of fund. The upside of those is you can get some built in diversification of bonds and with some mutual funds you can get some management. The downside of those is that there will be expenses on the funds which will lower your take home yield, and they may not be set up with your precise desired bond risk and timeframe in mind. As a disclosure I recently bought into a short term investment grade bond ETF, which appears to mulch some of the returns on maturing bonds to reinvest in new ones, and pays out the of the rest of the returns as dividends.
You'll want to determine what's right for you with bonds either on your own with research or with some professional help. Long term fixed rate bonds might give nice looking rates of return relative to the short term stuff, but run the risk of locking yourself in to a lower rate of return or outright lose some value if interest rates go up soon. Junk bonds or stuff like Greek bonds may look like they are giving nice rates of return too, but you are taking your life in your hands because you probably don't know if they'll turn belly up or not. One other final thing to mention is municipal bonds, which can potentially give tax deductible returns, which may be enticing depending upon your personal tax situation.
Watch out! That calculator assumes you can itemize, dollar for dollar, every bit of interest paid. In my personal situation, all my deductions don't even amount to the standard deduction I take instead.
I.e. I cannot deduct any mortgage interest and so my pre-tax rate is my post-tax rate.
Combined with NJ property taxes and not getting married until next year, itemizing knocks the standard out of the park, since we lump it all onto one tax form. Hers, since she can claim the student loan stuff as well. I'll have to do it again next year when we get married. I also checked against the IRS site and we're within the ranges to deduct all the interest.
Is there? The only thing I remember was one drifting off topic with too much mothergoosing about bootstraps to be useful, and that was like a month ago
SE++ has one: http://forums.penny-arcade.com/showthread.php?t=116406
If nothing else, the OP has a picture of a red panda.
http://www.johntreed.com/Kiyosaki.html
How might these work with an IRA? For traditional, would there be no benefit, and with a Roth you could claim a deduction or exemption?
Kiyosaki is the typical self-help type. Failed at business but made a fortune selling financial advice.
John Reed on the other hand is the Real Deal (TM) for those of you who want to get into real estate.
I don't know. I think this one is special. This guy advises committing tax fraud for christ's sake! He tells you to write off car expenses, health club memberships, vacations.... oh, he also says "have rich friends so they can give you inside tips on their companies!" then several pages later "I'm not saying do it illegally of course." Oh, is there a legal way to do insider info trading, Robert? Is that how you got rich? Good to know.
Code:
Age Investment Needed
15 $21,321.23
20 $31,327.88
25 $46,030.93
30 $67,634.54
35 $99,377.33
40 $146,017.90
45 $214,548.21
50 $315,241.70
55 $463,193.49
60 $680,583.20
There is something call inflation... and 1 million when you are at 15 probably won't buy you the same thing as 1 million by the time you hit 65. Granted inflation is at a controllable level right now but assuming an inflation rate of 8% , your one million by the time you hit 65 will equate to excately $21,321.23 50 years ago.
Finding 8% return after tax is pretty hard actually. Long term 30 year government bonds might have that rate but again if interest rate goes up in the future you are completely screwed.
I don't get why people are getting so hung up on inflation. Yes, inflation matters, but it doesn't alter the overall savings rationale that much. At best it just alters the amount of time to reach $X in savings.
The real rate of return of the S&P500 over the last 50 or so years averaged out at 6.8%. You can of course evaluate different slices to arrive at differing rates, but the core idea remains the same; starting retirement savings as early as possible is beneficial due to compounding.
It should also be noted that investing in the stock market acts as a somewhat natural inflation hedge.
All I'm trying to say is that that 1 million that you think you are going to get when you hit retirement won't be as much as you think it is. Hell, 1 million dollars isn't even that big of a deal now.
However, in terms of investing inflation should be mainly considered as lowering the real rate of return below the nominal rate of return, as the effect is a exponential with a negative exponent on the real value of your money. That's the most straightforward way to try to work with it.
IANAL but :
You pretty much have to own stock already, or be an inner circle employee of a traded company, or somehow otherwise have access to genuinely proprietary, non-public information, to commit insider trading. A buddy telling you he's having a good sales year so you buy some? Probably not insider trading. He knows he's going to have a bad year, so he sells his options early? Insider trading. You're doing a news story on the guy and you turn up information on his company and use it in the market? Maybe insider trading.
I host a podcast about movies.
QEDMF xbl: PantsB G+
Does anyone know of a bank that does Home Improvement loans? And by that I don't mean what every bank in the world advertises as HI loans - Wells, USBank, Chase, Citi, etc. all off them, but they're really just Home Equity loans.
Why don't banks let me secure a loan with my 401k...
Oh, wow. I bet my 401k is worth more than my house now. The hell.
There've been old threads about the financial meltdown (I started one of them a long time ago when Bear Stearns went down), but I don't think there is a recent one about the reforms being debated right now.
Holy crap this thing is awesome.
I'm gonna be playing with this thing for weeks.
Either that or you've just robbed me blind like a Nigerian lottery. If so, kudos to you and this elaborate scheme.