You’ve no doubt heard about the harrowing ride investors took yesterday as the Dow took a 1,010 point nosedive and then recovered to close just 347 points down for the day. While there was no root cause of the dive, the riots in Greece following the Greek government’s approval of its portion of the European Union and International Monetary Fund bailout set the stage. While investors were already nervous, a “trading glitch” then sent investors running for the hills while high-frequency hedge funds, which use computers to trade at super high speed, appeared to pull back from the market as prices collapsed. These hedge funds have grown to account for a significant amount of trading volume, and their absence likely created a void into which prices fell. Some stocks fell briefly by 100% before recovering – prompting many to cry foul and blame the sell-off on a computer glitch.
While yesterday was no doubt a nerve wracking experience for traders on the floor, I felt even worse for the investors who had placed limit orders and implemented option strategies that were triggered by the sudden decline. And their misfortune is a lesson to us all in the dangers of placing automatic trading orders.
What are automatic trading orders?
Let’s face it – most of us are not day traders (although I wouldn’t mind the setup). We don’t spend all day watching the market with the phone in our hand ready to call our broker and yell, “Buy! Buy! Buy!” or “Sell! Sell! Sell!” Instead, technology has allowed us to set up “rules” that our broker (or rather his computer) can follow so that we get the best deal. The most common of these rules is the “limit order.”
A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. For example, if you want to buy the stock of a “hot” IPO that was initially offered at $9, but don’t want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. Your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled, but by using a limit order you also protect yourself from buying the stock at too high a price.
During today’s rollercoaster ride, the sell limit orders of thousands of investors were triggered as stocks plummeted – just as they were supposed to. If an investor had placed a limit order with his broker to sell his P&G shares if the price fell to $50, then that sell order would have been triggered as the stock tumbled to its low of $39.97. The investor lost money on the sale, but at least he didn’t loose it all.
The problem was, the decline in prices was mostly artificial and not due to a true market-side sell-off. That means that within minutes, the stock bounced back up. The investor in P&G not only lost money on the initial sale triggered from his limit order, but her lost even more money as the stock rebounded back to close at $60.76. To make matters even worse, if the investor had held the stock for a long time and had a gain, he would be hit with a tax bill on the profits.
The limit orders, put there by investors to protect themselves from losing too much money too fast, ended up hurting them.
What do we learn? Do we abandon all electronic trading? Do we leave stock trading to the day traders? The short answer is no.The long answer involves you sitting down in front of your portfolio and assessing whether your limit orders are a) appropriate b) too concentrated or c) even needed. If you’re in the market for the long haul, chances are a limit order won’t be much help because the market always comes back eventually. Selling off your stock next week due to a limit order will seem pretty silly when it climbs back up in 3 years.
Yesterday’s events simply emphasize the underlying investing principles that I, as well as many other finance professionals believe in: moderation, diversity, long-term, and common sense.
I never thought I would see a headline like this one. But earlier today CEO Michael Metter and CFO Steven Moskowitz were arrested and charged by the SEC for defrauding investors. Metter and Moskowitz are the top executives of SpongeTech Delivery Systems Inc. – a company that makes the SpongeBob SquarePants and other soap-filled bath sponges. The two were charged with conspiracy to commit securities fraud and obstruction of justice. Among other things, the SEC is claiming that the two:
- Created fictitious customers for fictitious sales – According to the SEC, for the nine months ended in February 2009, the five nonexistent customers constituted about 99 percent of SpongeTech’s revenue.
- As the SEC began its investigation, Metter and Moskowitz hired a consultant who began creating fake websites and contact information for the non-existent customers.
- Filed false SEC reports with fraudulent financial statements.
- Issued press releases stating how well the company was doing to pump up the penny stock- while at the same time illegally trading their own shares.
- Used the fictitious revenues to purchase ad space in stadiums across the country, then not paying for the space.
The executives denied any wrongdoing today, but with the list of evidence the SEC seems to have, it’s going to be tough to argue their way out of this one. If convicted, the two could face up to 5 years in prison as well as a host of fines. This case could also end up being the largest penny stock fraud ever. SpongeTech shares fell 83 percent to less than 1 cent today, compared to a high of 35 cents. This will definitely be an interesting case to watch.
With tax season mostly behind us (hopefully you at least filed for an extension) this is the perfect time for me to remind everyone to spend some time and re-evaluate their tax strategy for 2010. Trust me, there’s a reason that wealthy individuals spend more money on tax planning rather than preparation. Filling out a 1040 is the easy part.
That being said, one of the easiest ways to control your bill from Uncle Sam is to re-visit the number of exemptions you’ve elected on your W-4. If you’ve been consistently employed for the past few years chances are you haven’t bothered to revisit your W-4 exemptions since being hired. But with many employers allowing you to update your W-4 online there’s no excuse NOT to.
First, the basics. Your employer is going to withhold something from your paycheck based on standardized graduated withholdings set by the IRS. The IRS calculates this withholding based on what it thinks you will owe at the end of the year so that you’re not hit with a huge tax bill in April. In a perfect world the amount withheld from your paycheck each pay period would equal the amount of taxes due. At the end of the year the IRS wouldn’t owe you a dime in refunds and you wouldn’t owe Uncle Sam anything either.
The problem is that our tax situations are all different. You may have 12 kids, or you may donate $50,000 to your favorite charity this year. The IRS can’t predict these tax events for you – so you have to give the IRS a bit of help by filling out your W-4 correctly. For every exemption you take on your W-4, you decrease the amount withheld from your paycheck. If done correctly, you could end up with more cash in your pocket throughout the year. If done incorrectly, you’ll end up writing a check to the government. In either case, Uncle Sam will demand his pound of flesh.
Hopefully you now see why now is the perfect time to re-visit your W-4 exemptions. Based on the check you just wrote or received, you can adjust your exemptions so that you can improve your monthly cash flow. As I mentioned in an earlier post (How Many Deductions to Take on Your W-4) there are a few online calculators to help you determine what the appropriate number of exemptions is. However, if you don’t want to worry about the number of exemptions you can always write in an additional amount you’d like withheld.
Now please be sure NOT to base your decision based solely on your 2009 tax bill. Consider any significant tax events that will take place during 2010 as well. This would be things such as, but not limited to:
- New child
- New job
- Raise or other increase in salary
- Child no longer a dependent (i.e. gets married)
- Buying or selling a home
- Getting married or divorced
Now that you’re a little more educated about your W-4 go out there and take charge of your tax planning!
This book review is a long time coming! It’s been sitting on my desk for a long time, but a week of paternity leave has allowed me to finish it and put my thoughts about it down on paper (figuratively, of course).
Secrets of a Stingy Scoundrel: 100 Dirty Little Money-grubbing Secrets is written by Phil Villarreal and is available from Skyhorse Publishing. It’s laid out as a guide book – with even its small size tempting you to throw it in your backpack as you leave the house in the morning. However, don’t let its appearances fool you – the book is in no way a guide book to how you should actually save money. Well, not if you have morals at least.
The book contains a list of ideas that you and your college buddies would come up with after one too many drinks and someone asked the question, “dude… how many ways can we come up with to mooch off people?” It’s only in this intoxicated state that anyone would suggest tip #95: pouring the milk left over from your morning cereal back into the carton. After a few of these money-grubbing secrets you’ll quickly realize that this book is best reserved as a gag gift for your tight-wad friend, or for that awkward corporate white elephant gift exchange. Tip #21, dumpster-diving outside college dorms at the end of the semester, isn’t very practical for most people, but Phil’s description of the adventure will make you laugh. So will his idea to collect every coupon he can get his hand on (tip #9) in hopes that the 1/100th cash value of each one will one day add up to big bucks.
Now I must admit there are a few “rare gems” in the book that normal people may use. Tip #33 for example, describes some humorous tactics while negotiating with car dealers. We all know how much I hate car salesman, so I encourage the use of this gem as often as necessary. Tip #42 is also a good one – negotiating with your bank’s customer service rep to waive insanely high ATM or late fees (hint: threatening to close your account usually seals the deal).
So if you’re looking for some humorous bathroom reading or need to find the perfect gift for the roomate who just won’t chip in the $5 for cable because he “never watches TV” then go ahead and pick up the book. If you’re looking for serious financial advice and other money-saving tips, might I suggest a little gem called beancounterblog?
Did you know that printing and distributing local currency is completely legal? Under certain circumstances your local city could print its own currency – and because of the current economic conditions many are.
First, the rules:
- The currency can’t resemble a US dollar
- Only paper currency can be printed – no coins allowed
- Any income received in local currency must be taxed as if it were federal dollars
So who’s using these alternate currency systems? In the United States, there are already alternative currency systems in California, Wisconsin, Oregon, Pennsylvania, Michigan and Massachusetts.
Right about now you’re probably asking, why? Isn’t the green $20 bill in your pocket good enough? The point behind local currencies is to keep the currency within the community – forcing residents to spend the currency on local businesses instead of encroaching “big-box” stores such as Walmart or Target or even online retailers such as Amazon.com. The bills can usually be “bought” for around $.95, essentially giving holders an instant 5% discount on any purchases they make. When the time comes to pay that cable bill, however, the local currency can easily be exchanged back into “real” dollars.
While the purpose behind local currency might be a bit idealistic, running your own mini economy is not as easy as it looks. Just printing the right amount of local currency is a challenge. If you print too much currency, there’s the possibility of inflation. If you print too little, there are no economic advantages.
“They usually don’t hold up too well, or too long,” says Bert Ely, a banking analyst. “It’s something that applies only in simple and closed situations. It lacks the flexibility and geographic breadth that currency has.”
So what do you think? If your community offered a local currency, would you use it? If you were a merchant would you accept it?
There’s a concept in finance called “cost-benefit analysis” which involves calculating whether an item’s cost outweighs its benefit. For example, I spent 8 hours yesterday cleaning the apartment I just vacated. If I had bothered to perform a cost-benefit analysis, I would have asked myself whether or not the cost (8 hours of my time on my day off) was worth the benefit (a savings of about $150 of my deposit). Is my time worth $18.75 an hour? Or were those 8 hours worth more than spending time with friends or family? The answer, sadly, is probably not. But it brings up an interesting thought: how much time should we spend concerned with our personal finances.
If you wanted to, you could spend almost 24 hours a day worrying about your finances. You could build budgets, track stock movements, read personal finance books, and watch CNBC form the moment you woke up until the moment you slept. The truth is, there’s a lot of advice out there concerning money (including this blog) and there’s no way you can possibly learn everything there is to know. On the other hand, you can’t ignore money – it’s a part of our everyday life. So the question is, how much should you worry about money?
The answer, similar to most of my advice, is somewhere in the middle. And part of it has to do with your own self assessment of how important money is to you. In order to help you figure this out, try ranking the following items from 1 to 10 – 1 being the most important to you and 10 being the least:
- Immediate family
- Extended family
- Sports (watching or playing)
- Video Games
After some internal reflection, look at where money ends up in relation to other items on your list. If money is one of your top 3 choices, then I would assume that you are already faithfully checking your stock portfolio, 401(k) performance, and reading up on the latest and greatest personal finance topics. For those of you not as “obsessed” with your finances I would recommend setting aside at least one day each year to focus on your personal finances.
While your personal finance situation will most likely determine the kind of life you will lead (either now or in the future) don’t you think that dedicating at least 8-10 hours a year is worth it? This day of personal finance mastery is not meant for you to pay bills, but to go above and beyond your normal day-to-day financial activities. Take a day off work… use a holiday such as Labor Day (hint hint)… whatever you do make sure you have time to dedicate to this activity.
Suggestions for things to do include:
- Calling credit card companies to negotiate better rates.
- Updating your list of important financial information in case of emergency or death. Try something like this Financial Life Details (pdf) worksheet from Merrill Lynch.
- Update your will and/or trust documents. This may not seem “financial” in nature, but your will or trust has strong links to your financial portfolio.
- Organize your important financial documents, statements, or information for easy access on a day-to-day basis.
- Review your tax withholding amounts and re-examine whether or not you should change them.
- Consider setting up automatic withdrawals for savings, upcoming vacations, car repair, etc. using one of the popular online banks. (Personally I love the ING “sub-accounts” I can create to sock away money)
- Re-examine your insurance premiums and evaluate whether you are over or under-insured. It may be time to shop around for a new policy as well.
- If you haven’t done so lately, evaluate the returns in your investment portfolio and consider re-adjusting your mix in response to major life events or your current age.
- If appropriate, set up a 529 college savings plan (be sure to let relatives know they can contribute to it in lieu of presents).
The list could go on and on, but the important point is to set aside time to actually think about your current financial situation and evaluate how well you are accomplishing your goals. If you’re falling short, begin to research what you can do to improve. Do you need to ask for a raise? Cut back on spending? Move to a more affordable location? These are all questions you can ask yourself once you’ve taken the time to reflect on your personal finance situation – but are difficult to answer during your monthly bill-paying binge.
Here’s and iteresting video brought to you by Reason TV. It’s about the stock crash that Japan suffered in the late 80’s and how the current US economy mirrors that event, down to it’s reaction.
I wrote a couple months ago about Kevin Trudeau. I picked up his tome Debt Cures They Don’t Want You to Know About from the library out of morbid curiosity. I haven’t finished the book, but there’s one quote that’s just priceless. This quote sums up the book and the attitude Trudeau is selling with his book. He says:
“Most debt and credit books on the market today talk about how to cure debt by curbing your spending and ‘cutting out fat’. They make you think that it is something you did that created the wild debt problem.” (pg. 218)
That’s an interesting perspective. Never-mind your wild spending habits, because the credit card companies are out to get you. It’s not your fault at all. Granted there are people out there who have had some kind of trouble with a job loss or medical problems where their credit soars, but that’s not the majority and people are ultimately responsible for what happens to themselves. You are the gate keeper to your life and your money. It is absolutely misleading for Trudeau to say imply that you are not responsible for your debt and all the other books are wrong.
It’s not that I don’t think credit companies haven’t done shady things, but only you can protect your money. Debt cures should be about learning to manage your assets. Not everybody is in serious debt (mortgages and cars excepted), so they must have learned to control their spending and consciously chose what they want to buy. Trudeau also refers to the movie Maxed Out numerous times. While the movie is rather good, I think he abuses the stories in the film to make his case.
I will write more on the book once I have completed it. It’s not a total piece of trash, but I certainly wouldn’t recommend it.
We may be in an economic crisis at the moment, but there are still people who maintain a positive outlook. One of those people is Alex Tabarrok. Below is his speech from the TED (Technology Entertainment Design) Conference held this last February. His talk focuses on globalization and the positive effects it has had on other nations and why things will continue to get better. Though it clocks in at about 15:00, it’s well worth it.
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Karen Blumenthal wrote an interesting article in the Wall Street Journal August 25, 2009 entitled “How I Got Burned by Beanie Babies“. She relates her experience in the Beanie Baby hype to recent bubbles we’ve experienced. The article is not ground-breaking, but it deals with a lesson that never seems to sink in. The article can be summarized with this quote: “In a speculative environment, just about the only ones who profit are short-term traders.” It’s a tough lesson that is too often learned the hard way. There were a lot of people who thought that Beanie Babies would hold their value, enough to cover college for their kids. Turns out that’s only true today if the kids get a full-ride scholarship.
Blumenthal relates her experience with Beanie Babies to several bubbles and a little about how the hype builds. A lot of things are like that. One thing that comes to mind for me are sports cards. I remember collecting baseball and hockey cards thinking that someday my collection would be worth a lot of money. Unfortunately, cards don’t hold their value very well, speaking generally. Rookie cards tend to be the prized possession, but those aren’t even a guarantee. In 1991/2 I purchased an Ed Belfour* rookie card for $8.00. Apparently If I’d waited almost 20 years, I could get the card for $1.25** at Check Out My Cards. I can now pay for .5 nano-seconds of my kids college education. Even if I could sell the card for $8.00 today, I’d still technically be losing money because inflation.*** That’s not the only card that hasn’t turned out to be the gold mine I expected (I’ll touch on some of my other sports card investment fantasies in a future post). Granted, there are cards that hold their value and are worth the money, but they are rare and generally are at least 40 years old (They tend to have names like Mantle on them).
It all goes back to the quote above that short-term investors are the only ones to make the money. There’s no way to predict when a bubble will burst. Even when an expert nails it, it’s still just a guess, educated and informed as it may be and s/he may be wrong the next time around. I’m not saying you need to avoid the bubble entirely, just know that you need to get in and get out quick. My problem was I bought the hockey card at it’s peak. I don’t think the price went up much past $8.00. That’s why you need to know what you’re in for, because you may be left holding the bag (you’re lucky if that’s all you’re holding). That being said there may be instances that holding on may be worth it for the extreme long hual, but you still want to get in low. Once the real hype has already begun, it’s probably too late. You need to be able to hold on longer than the crash. Beanie Babies may be valuable again someday, along with my hockey card, but that may not be for another 100 years. Then there’s always inflation.
The key to not falling victim is to avoid the emotional rush. It’s not unlike the emotions that gamblers feel in the casino when they think they might just hit the big one. Honestly, I find it hard to feel completely sorry for people who lost in the housing bubble or a Madoff scheme. So many went in thinking they would make a killing and they should have known the risks (Those who returned money after making a killing with Madoff honestly deserve the Medal of Freedom). On top of that, they should have been aware that things were too good to be true. It’s that rush or emotional signal saying “you’re gonna make a killing” that hijacks the sensible center. BUYER BEWARE is the single greatest advice for anything. But I digress. I’ll close with another Blumenthal quote “If your investing horizon is too short to take the chance, you should avoid taking the risk.”
*At the time Belfour was a standout rookie goaltender for the Chicago Blackhawks. Many thought he would be the Wayne Gretzky of goal-tending.
**That’s 50% of the regular price even. The worst is I ended up with the very same card a week or two later in a pack.
***Today I’d have to sell the card for $12.65 to make a profit.
When traveling abroad, one thing you always need to look out for are the pick-pockets. Well, in London a new phenomenon has emerged called “Put-pockets”. Rather than stealing your wallet, these former pick-pockets are sneaking small amounts of cash into the pockets/bags of unsuspecting folks. It’s organized and the cops are aware of the plan. So, if a pick-pocket gets caught, can he try and claim he was really just a put-pocket?
Giving to charity is certainly noble, but is it always the best thing? Well it might not be if your selected charity doesn’t get much of your dollar to the mission you think you’re supporting. But how do you know how well a charity does in this regard? Try Give Well. They rate charities on their efficiency in supporting their stated mission.
Kiplinger’s Personal Finance has a nice article called 20 Ways to Waste Your Money. It’s an article that shows some ways to spend your money a little more wisely. Some of the ideas have been discussed on this blog, but I found some other excellent points as well. One point that was new to me was about using the dollar store. I tend to avoid those stores, but it’s actually a good place to get greeting cards of 1/7 of the regular price. I found the article good for all economic times, not just recessions.
A lot of businesses have been getting bailout money. One organization that won’t need any would be the Ayn Rand Institute. Apparently the financial crisis has led to a spike in the sales of Ayn Rand’s tome Atlas Shrugged. Be sure to pick up your copy today.
The Cato Institute recently released a text of a speech by Jeffrey Miron entitled “In Defense of Doing Nothing“ about the recent government bailouts. Miron is a fellow at the Cato Institute and a professor of economics at Harvard University. In his speech he makes the case that the bailout are the wrong course for solving the current economic problems and that the government caused more problems that greed run amok. He makes several good points and challenges the idea that the bailout is a no-brainer. It is a worthy read for anybody, whether you agree with the conclusions or not. The article is linked above.
I don’t know if it’s just me, but lately I think I see far more get-rich-quick schemes on TV. Dean Graziosi just came out with a special real estate book for a down market (you can only buy it off TV) and I’m starting to see more of Donald Trump selling his seminar. These programs offer a lot of promises, but they can’t guarantee much. I don’t have a get-rich-quick scheme, but I do know of some ways to get some extra money without exerting much effort. These won’t make you wealthy by any means, but it may take the edge off a little bit; maybe reward yourself with some ice cream or something. What follows are a few ways to make some extra pocket change. All you need is a computer and a little time.
Online Surveys: There are a myriad of companies that reward people for completing surveys. Most surveys take from 10 to 30 minutes to complete; the time varies based on the number of questions and how quickly you can navigate through the questionnaire. All you have to do is join a panel for one or more of the companies and you’ll start receiving surveys. Most companies will have you fill out a profile questionnaire so they can send you specifically targeted surveys. Each company rewards users differently from points to drawings to cash, and sometimes a mix of all three. One thing to remember is that you should never pay to join a panel. If a survey company is going to pay you money, there is no reason they should require money from you to join.
Because I used to work in the market research industry, finding this method of earning extra cash was pretty easy for me. The key is finding the good companies. Here are a few of the ones that I trust and that provide reasonable rewards:
Greenfield is the first panel I ever joined. My first experience was negative. I earned points for magazine subscriptions, the choices were lame, the magazines never came, and I kept getting charged for the subscription because of some auto-subscription deal. I’ve given Greenfield another chance and they are much better now. They’ve moved to giving cash for many surveys, plus entries into drawings for a larger cash prize. So far I’ve had no issues.
Survey Spot is the second panel I ever joined. Survey Spot has been the most consistent company in my experience. Like Greenfield they offer cash on some surveys and entries into drawings on all surveys (you can qualify for the drawings even if you are disqualified from the survey). I don’t have much hope for winning a drawing, so I tend to only do surveys if they specify a cash amount (usually between $2 and $5). I’ve never had any issues with this company.
E-Rewards is yet another company I use pretty regularly. I was introduced to them by somebody I knew who worked in market research and my experience has been pretty good. To join the panel you do need to have a membership with one of their sponsor companies; for example I was able to join because I have a Borders Rewards card. The rewards are essentially points, they call them dollars but you can only buy from their ‘catalog’ of goods. Most of the rewards are magazine subscriptions. Unlike my first experience, I actually get the magazines and they do not auto-renew. The selection changes, but for the most part it’s a good selection. There are various other rewards, like airline miles for a number of different airlines or borders bucks.
MyPoints: MyPoints is a glorified advertising company. You sign up and get points for reading email advertisements; all you have to do is click on a link to earn the points. I get about 5 emails a day and I just click on the link and build up points. You can also earn points by purchasing from a member site via the MyPoints website. The companies are reputable, like LL Bean, Barnes and Noble, and Old Navy to name a few. I don’t buy much online and it takes me about 6 months of checking my email to earn a $25 gift card. It’s not a big money maker, but the gift cards are easy presents for B-days and Christmas (nobody will ever know).
Mystery Shopping: I haven’t done any mystery shopping, but it is a legitimate business. The basic premise is a company pays you to patronize their business and evaluate the experience. You could be asked to visit a local McDonald’s and rate the service and food. You will paid enough to cover costs if you are required to make a purchase, and often something extra for your inconvenience ($10-$15). Mystery shopping has the potential of scams. Recently a scam was exposed where folks were being asked to wire money using Western Union. Any mystery shopping deal that promises high returns is a scam. Mystery shopping is not lucrative! It just takes the edge off a little.
Cha Cha: I was recently made aware of a company named Cha Cha. It’s basically a search service for folks looking for quick answers to questions, but they don’t have convenient internet access (usually somebody with a cell phone that can text). Cha Cha offers positions called Cha Cha Guides to look up the answers to the questions that come in. The pay isn’t a huge money maker ($.10 - .15 per response), but it’s consistent and is likely more interesting than a number of other options. Cha Cha provides an estimate that most people will make in the $5-9 per hour range.
You won’t be rolling in the dough or hangin’ with Donald Trump if you use these sources, but it will provide a little extra cash. With any simple task, the returns won’t be huge, but they’ll be legit. When high returns are promised, that should be a major red flag. Most of this work is low skill with many willing people; i.e. low demand (relatively speaking) - high supply. Smart Money has a nice little article on “work-from-home” scams that’s worth reading. While I use some of the companies above and have found success with them, it’s still important to do your own research to make sure that you are comfortable with the requirements. This is not an advertisement for any of the companies, just a starting point on where some extra cash can be made and legitimate sources.
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