All posts by Rob H

401k retirement plan- Quick glance

A 401k retirement plan allows employees to defer a part of their pay. That deferred amount is deducted from their paychecks and placed into the employer’s tax qualified plan. Federal income tax is not due on the deferred pay, or the plan’s earnings until the employee withdraws the funds from the plan. Here are the key factors:
  • It’s Employer-sponsored investment account- Your employer partners with a financial services company to administer your plan. That company then gives you a limited number of investment options
  • No income limits
  • No penalties for cashing out in retirement (10% penalty if withdrawn before 59 1/2)
  • Annual contribution: $17,500 (2013,2014)

401k retirement plans are the easiest way to save for retirement.  The limited investment choices are a good thing because it simplifies your investment decisions. The money is automatically taken out of your paycheck. If your employer offers a 401k retirement plan and you’re eligible, you should definitely contribute.  It’s never too late to start saving. If money is tight, then here’s a guide on how to budget, and save for retirement.

To conclude, work with a financial advisor and set clear financial goals. Make sure you have a yearly review of those goals, and adjust according to market trends and conditions. Happy investing!

U.S. Unemployment rate falls to 6.6%. Will interest rate rise?

Unemployment Rate-2014The Federal Reserve will probably have to return to more “traditional” policy-making now that the U.S. jobless rate has fallen to 6.6 percent, so close to the U.S. central bank’s existing 6.5-percent threshold for considering an interest-rate rise, a top Fed official said on Wednesday.

St. Louis Fed President James Bullard, speaking on a panel at the New York Stock Exchange, said the Fed will have to adjust its so-called forward guidance on monetary policy. He expects the Fed to drop its economic thresholds and have to “make more qualitative judgments” on when to tighten policy.

As it stands, the Fed has said it expects not to raise benchmark rates until well after the unemployment rate falls below 6.5 percent, especially if inflation remains below target.

Instead, Bullard said qualitative guidance on rates is the “natural thing to do” since it is how the Fed will make policy over coming decades, and it would allow the Fed to take into account “all encompassing” measures of the health of the labor market.

The idea accords with what new Fed Chair Janet Yellen said on Tuesday.

Testifying to U.S. lawmakers, Yellen stressed that broader measures, such as the number of part-time workers and the long-term unemployed, should be considered in assessing the overall labor market.

The Fed’s mandate is for maximum sustainable U.S. employment, and low and stable prices. Based on published projections, the Fed aims for an unemployment rate between 5.2 and 5.8 percent; it targets 2 percent inflation.

Cyclical vs Non-Cyclical Industry- what does that mean?

If you’re confused about the terminology you’re not alone: I was at first! Here are some definitions and guidlines

It’s a type of industry that is sensitive to the business cycles, such that revenues are generally higher in periods of economic prosperity, and lower in economic downturn. Cyclical stocks follow an upward trend when businesses and consumers are spending money.
Companies in cyclical industries can deal with volatility by implementing cuts to compensations and layoffs during bad times, and paying bonuses and hiring in good times. In good economic conditions, businesses expand, they buy new equipment and build new facilities. Moreover, people have more disposable income and therefore, more willing to spend money on vacations, air travel, purchasing cars, etc,.
The Cyclical Consumer Goods & Services economic sector consists of companies engaged in the production of automobiles, home building, household goods, textiles and apparel, as well as hotel, casino, leisure, media and retail operations and services. Cyclical industries also include companies that produce durable goods such as raw materials & heavy equipment, equipment sales & construction, steel manufacturing, airlines.
It’s a type of industry that is sort of immune to business cycles. Non-Cyclical Stocks or defensive stocks do well in economic downturns, since demand for their products and services continues regardless of the economy.  When the economy is growing, these stocks tend to lag behind, however during economic downturns; their steady returns may look good.Utilities-services  The Non-Cyclical Consumer Goods and Services economic sector consists of companies engaged in fishing and farming operations; the processing and production of food, beverages and tobacco; manufacturers of household and personal products; and providers of personal services, utilities. Everyone from consumers to businesses needs water, gas, and electricity…
Cyclical stocks represent those items and services for consumers and businesses that they buy when confidence in the economy is high.
Non-cyclical stocks represent those items and services for consumers and businesses that they can’t put off no matter what the state of the economy.
For investors wanting a more conservative posture, non-cyclical stocks – many of which also pay nice dividends – should make up part of your portfolio.
Understand this- relative safety comes with a price like missing growth opportunities in an up market.

Let’s talk Bond language (not 007!)

Bond Definition:

An instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, and sometimes monthly!). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond on the second market it becomes highly liquid.

Thus it’s a form of loan or IOU: the holder is the lender (creditor), the issuer is the borrower (debtor), and the coupon is the interest. They provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument.

Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are investors), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have absolute priority and will be repaid before stockholders (who are owners) in the event of bankruptcy. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are typically outstanding indefinitely. An exception is an irredeemable bond, such as CONSOL’s, which is a perpetuity, i.e. bonds with no maturity.


What to know about bonds:

  • Type- Bonds may be issued as either secured or unsecured. Secured bonds are backed by physical assets which revert to the bondholder if the company cannot honor its obligations. Unsecured are called debentures and are backed only by the faith and credit of the issuer; obviously more risky than secured bonds. If a company does claim bankruptcy, bondholders are given priority over stockholders to any recovered funds.
  • Maturity date- which is the day on which the issuer pays back your loan in full. This date can range typically between 3 and 10 years. In exchange for lending the company funds, the bond pays out interest (the coupon rate). These interest payments are generally made on a semi-annual basis, annual, quarterly, or even monthly.
  • PricesBond prices move inversely with prevailing interest rates.
    • When interest rates go up, bonds with lower interest rates will trade at a discount because investors can now buy them at higher rates.
    • When interest rates go down, bonds with higher interests will command a premium because they pay a better rate.
    • Ff interest rates rise when you already own a bond, you may miss out on the opportunity to buy the same bond for a higher rate of return. Also, the price of the bond will fall. This shouldn’t affect you If you’re intending to hold the bond until maturity. The only drawback is you will be earning less interest until it matures.
  • Risks– If a bond goes into default, investors may lose some or all of their principal. Although rare with investment-grade bonds, but it’s always a possibility.
  • The Yield is the rate of return received from investing in the bond. It usually refers either to
    • Current yield, or running yield, which is simply the annual interest payment divided by the current market price of the bond (often the clean price), or to
    • Yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity. It is equivalent to the internal rate of return of a bond.

Note- The stock market and bond market are inversely correlated; as one rises, the other falls.

Click Here to understand why choosing bonds is safe for any portfolio


What is Capital Gain? and Do I get taxed on it?

Capital gain is a profit that results from investing in a capital asset, such as stock, bond, or real estate. When you sell an asset for less than its purchase price, on the other hand, you incur a capital loss. Several factors determine the nature of your capital gain (or loss), including the type of asset and the duration of ownership.

The term capital gain is used to describe the profit earned from buying an investment or other asset at one price and selling it at a different, higher price. For instance, if you bought a real estate for $350,000 and sold it for $500,000, you would need to report total capital gains of $150,000 ($500,000 selling price – $350,000 cost basis = $300,000 capital gains profit).

Capital gain can be earned on stocks, bonds, mutual funds, works of art, real estate, or virtually anything else that can be considered an investment.

The Taxes on capital gain varies depending on:
1) type of investment,
2) length of time you held the investment, and
3) whether you plan to offset those gains by other capital losses.

How to Set Financial Goals

Everyone has financial dreams, but not everyone set goals to achieve them. This raises an important question: what is keeping you from acting on this? Simple answer: absolutely nothing. Don’t just hope someday you will have enough money for retirement- that’s not going to happen. This passive approach will be your financial nightmare; better get proactive and start setting some goals. Consider the following needs:Financial Goals

  • Steady source of income. This comes from your job, your business if you’re self-employed, or investments. Future income is the bedrock on which financial security is built.
  • Financial reserves. Unexpected things happen all the time – fridge stops working, water heater starts leaking, car breaks down. Just the other day, my washer stopped working all together. Not to mention if you have kids to support and send to college. And someday the hope to retire. These are expenses you have to provide for with savings and investments.
  • Life Insurance. Protect your family, your income, your health, and your possessions.

Even modest inflation will grind away at your financial reserves. To stay ahead of the cost of living, you have to be alert for opportunities to make your money grow. These things don’t come to you by accident. You have to go after them, and that means setting some goals.

The most important step toward financial security is to translate it into your own terms. What, exactly, are your personal financial goals? If you have trouble sorting them out, try classifying them as either wants or needs. Go a step further and add long-term or short-term to the description.

Do you know what is financial compounding?!

Financial compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Here’s an example:

Joe invests $5,000 in Apple.  After first year, the share price rises 20%; his investment is now worth: $6,000 ($5000 x 0.2 = $1,000).  Let’s say he holds that stock for another year. In year 2, shares appreciate again another 20%.  Now Joe’s investment of $6,000 grew to $7,200 ($6000 x 0.2 = $1,200).  Because the 20% appreciation was calculated against $6,000 in the second year. That’s an additional $200 compounded after 2 years.

Fact, $5,000 invested at 20% annually for 25 years would grow to $476,981.