Yesterday, I talked about having a part-time business. Not only can you provide a substantial income with a business, but you can also significantly reduce your income taxes. Now, I am not a tax professional, but I have been using business expenses deductions on my personal income tax return for almost 20 years.
First of all, the business must be in your name. If it is a separate entity or company, these deductions would apply to the corporate tax return. Many purchases and services paid for can be a business expense deduction. This means you can reduce your taxable income before the tax tables are applied. As a person filing a return, you taxes are largely based on your income. Most of your expenses have to come out of your own pocket after you earn the money.
All of this is filed on a Schedule C - Profit or Loss From Business IRS form. Here are just some of the expenses you can deduct - advertising, car or truck expenses, depreciation, insurance, professional and legal services, office expense, supplies, rent or lease of equipment, licenses, utilities, business travel, business meals, other miscellaneous expenses, and even allowances for the use of your home as an office. All of these legitimate expenses (be sure to follow the IRS rules for proper application) can reduce your business taxable income and ultimately your personal taxable income. Best of all, you get to use these goods and services while operating your business.
Keep in mind that this is not an excuse to go out and buy all the neat gadgets out there, for you are still getting only a 15-35% deduction (based on your tax bracket) for every dollar you spend.
Therefore, it is necessary to submit to the authorities, not only because of possible punishment but also because of conscience. This is also why you pay taxes, for the authorities are God's servants, who give their full time to governing. Give everyone what you owe him: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. Romans 13:5-7 (NIV)
If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com
Friday, November 30, 2007
Thursday, November 29, 2007
Part-Time Business
Yesterday, I discussed ways to increase your income through a part-time business. Most of the discussion was why those businesses don't yield a lot of income. Today, we will get into how the opposite can be true.
Part of the problem with MLM companies is that they forget about the true purposes and natures of a business. Those are to make money and turn a profit. To do this, you must have customers that want your product or service and you find a way to make it available to them. This is where marketing comes in. A successful business not only gets customers, but focuses on retaining customers to ensure longevity. Most MLMs have a horrible retention, or holding onto existing customers and getting repeat business. This is why many MLMs don't last beyond a few years. The really successful ones get their customers to tell others about their business. Word of mouth advertising is still the most effective.
Well, I already hit on one of the main keys - providing something the consumer wants. MLM companies promote their business through part-time distributors that have no idea how to identify what people want. When they don't connect with their potential customers, they give up and quit the business. In order to understand what others want, you first have to listen intently. How many people actually do this in our "me first" society?
Rather than unloading verbally all over someone about an opportunity, you must find a want or need that you can fulfill. Then when you are providing a solution to their desire or problem, they want to become a customer. If they get attached to the product or service emotionally, they will want to become a distributor. Now, you have multiple people combining their time and energy working toward the same thing. This is called leverage. The more leverage you have, the more and faster your income comes in. Each person is not working for you, but for him or herself. But you working together have common resources, support, and goals. This is very important when you hit obstacles or challenges.
Now, wouldn't it be great if people actually came to you and told you that they want your product or service? This is only possible if they know you can provide their solution. This can be done so many ways, but many involve a significant expense. Some do not. When the business is starting, look for low cost means such as a website or conference call number or results of satisfied customers. You can use these over and over again. If you don't leverage your time as well, your business will not grow very fast and will not likely survive.
The key points are to focus on others and leverage your resources. The successful MLM companies teach their distributors how to do this from day 1. Think of the things that you want. Is it likely that others will want those same things? Like time freedom, financial security, friends, travel opportunities, health, great lifestyle, etc. Effective marketing focuses on providing the things people want to the company or people that can provide them. Then, they come to you!
Another advantage of having a part-time business, you can begin learning about all the tax incentives businesses have that people do not. I will get more into this tomorrow.
Make it your ambition to lead a quiet life, to mind your own business and to work with your hands, just as we told you, so that your daily life may win the respect of outsiders and so that you will not be dependent on anybody. I Thessalonians 4:11-12
If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com
Part of the problem with MLM companies is that they forget about the true purposes and natures of a business. Those are to make money and turn a profit. To do this, you must have customers that want your product or service and you find a way to make it available to them. This is where marketing comes in. A successful business not only gets customers, but focuses on retaining customers to ensure longevity. Most MLMs have a horrible retention, or holding onto existing customers and getting repeat business. This is why many MLMs don't last beyond a few years. The really successful ones get their customers to tell others about their business. Word of mouth advertising is still the most effective.
Well, I already hit on one of the main keys - providing something the consumer wants. MLM companies promote their business through part-time distributors that have no idea how to identify what people want. When they don't connect with their potential customers, they give up and quit the business. In order to understand what others want, you first have to listen intently. How many people actually do this in our "me first" society?
Rather than unloading verbally all over someone about an opportunity, you must find a want or need that you can fulfill. Then when you are providing a solution to their desire or problem, they want to become a customer. If they get attached to the product or service emotionally, they will want to become a distributor. Now, you have multiple people combining their time and energy working toward the same thing. This is called leverage. The more leverage you have, the more and faster your income comes in. Each person is not working for you, but for him or herself. But you working together have common resources, support, and goals. This is very important when you hit obstacles or challenges.
Now, wouldn't it be great if people actually came to you and told you that they want your product or service? This is only possible if they know you can provide their solution. This can be done so many ways, but many involve a significant expense. Some do not. When the business is starting, look for low cost means such as a website or conference call number or results of satisfied customers. You can use these over and over again. If you don't leverage your time as well, your business will not grow very fast and will not likely survive.
The key points are to focus on others and leverage your resources. The successful MLM companies teach their distributors how to do this from day 1. Think of the things that you want. Is it likely that others will want those same things? Like time freedom, financial security, friends, travel opportunities, health, great lifestyle, etc. Effective marketing focuses on providing the things people want to the company or people that can provide them. Then, they come to you!
Another advantage of having a part-time business, you can begin learning about all the tax incentives businesses have that people do not. I will get more into this tomorrow.
Make it your ambition to lead a quiet life, to mind your own business and to work with your hands, just as we told you, so that your daily life may win the respect of outsiders and so that you will not be dependent on anybody. I Thessalonians 4:11-12
If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com
Wednesday, November 28, 2007
The Other Side of the Equation
The last couple days I have mentioned budgets and emergency funds. These are ways to control spending. However, that will only get you part of the way to financial freedom. And, it will only deal with the immediate present, not the longer term future.
Ultimately, you will have to look at ways to increase your income. This can be done countless ways, but all of them take time and especially effort. Most people are only familiar with one form of income, their job and the paycheck that comes with it. It regular and it's consistent, which is why most think it is secure. However, in uncertain times and frequent corporate layoffs, this can be very stressful and not secure at all.
Probably the most popular way people increase their income is with a part-time job. This can raise your income, but you are sacrificing most of your available time for usually a low wage. This will not make a big difference in the long term. A better avenue might be a part-time business. There are hundreds or even thousands of these available. They are known as MLM (multi-level marketing) or network marketing opportunities.
They primarily have a bad reputation for a variety of reasons. Most don't make any money in MLM and quit after buying hundreds or thousands of dollars of products that they won't or don't use. This is the "buy a lot and let in rot" scenario. They'll buy books, CDs, and tapes of how successful people built their businesses. The big problem with this is two fold. One, they are not you, and have different talents, work ethics, contacts, and other resources than you. Two, many of them make more money on the books, CDs, and tapes than on the real MLM business.
Many people also do not have experience selling or marketing items. They don't want to pester their family and friends about the latest "opportunity". Some do this and enter the NFL club (No Friends or family Left). Their friends cringe when they see you coming because there will be another pitch about something.
Many other MLMs are not legitimate businesses, but illegal Ponzi schemes. This is when participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell. This is illegal in most countries.
Well, tomorrow I will get into the secrets about how legitimate MLMs can make you a lot of money and how you can do it without pestering your friends.
Let no one deceive you with empty words, for because of such things God's wrath comes on those who are disobedient. Therefore do not be partners with them. Ephesians 5:6-7 (NIV)
If you have any comments or questions, please feel free to email me at the address below.
Email: DeltaInspire@panama-vo.com
Ultimately, you will have to look at ways to increase your income. This can be done countless ways, but all of them take time and especially effort. Most people are only familiar with one form of income, their job and the paycheck that comes with it. It regular and it's consistent, which is why most think it is secure. However, in uncertain times and frequent corporate layoffs, this can be very stressful and not secure at all.
Probably the most popular way people increase their income is with a part-time job. This can raise your income, but you are sacrificing most of your available time for usually a low wage. This will not make a big difference in the long term. A better avenue might be a part-time business. There are hundreds or even thousands of these available. They are known as MLM (multi-level marketing) or network marketing opportunities.
They primarily have a bad reputation for a variety of reasons. Most don't make any money in MLM and quit after buying hundreds or thousands of dollars of products that they won't or don't use. This is the "buy a lot and let in rot" scenario. They'll buy books, CDs, and tapes of how successful people built their businesses. The big problem with this is two fold. One, they are not you, and have different talents, work ethics, contacts, and other resources than you. Two, many of them make more money on the books, CDs, and tapes than on the real MLM business.
Many people also do not have experience selling or marketing items. They don't want to pester their family and friends about the latest "opportunity". Some do this and enter the NFL club (No Friends or family Left). Their friends cringe when they see you coming because there will be another pitch about something.
Many other MLMs are not legitimate businesses, but illegal Ponzi schemes. This is when participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell. This is illegal in most countries.
Well, tomorrow I will get into the secrets about how legitimate MLMs can make you a lot of money and how you can do it without pestering your friends.
Let no one deceive you with empty words, for because of such things God's wrath comes on those who are disobedient. Therefore do not be partners with them. Ephesians 5:6-7 (NIV)
If you have any comments or questions, please feel free to email me at the address below.
Email: DeltaInspire@panama-vo.com
Tuesday, November 27, 2007
Emergency Fund
Yesterday, I mentioned that an emergency fund can deal with unexpected expenses. But I did not explain it. An emergency fund is money set aside for an emergency. It can be at a bank, or a shoe box in your closet. Every month you set aside some amount, $25, $50, $100, etc, in this fund for unexpected circumstances. The key is to not take any money out unless it is truly an emergency. As the money builds up, don't be tempted to dip into it. This should be a scheduled item of your budget.
The ideal is to build up the emergency fund to 3 to 6 months worth of income. If you are contributing a small amount every month, this will take some time. Once it is built up and you didn't have any emergencies, you can take a portion and turn it into a new car fund or something similar. Don't be tempted to just spend it after all the time it took to build it up. This fund can really save you when unexpected occurrences such as car repairs, medical emergencies, hospital bills, etc.
The more you stick to your budget and emergency fund, the more money you will have available for the really important things in your life - your beliefs, your family, your home, vacations, etc. The simplest advice I can give with spending money is this priority list - 1-God, 2-family, 3-everything else. If you follow this, you will not have financial problems. This is even stated from the Bible reference below. A tithe is 10% of your income.
"Will a man rob God? Yet you rob me.
But you ask, 'How do we rob you?'
In tithes and offerings. You are under a curse—the whole nation of you—because you are robbing me. Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this," says the LORD Almighty, "and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it. I will prevent pests from devouring your crops, and the vines in your fields will not cast their fruit," says the LORD Almighty. "Then all the nations will call you blessed, for yours will be a delightful land," says the LORD Almighty. Malachi 3:8-12 (NIV)
If you have questions or comments, please feel free to email me at the address below.
Email: DeltaInspire@panama-vo.com
The ideal is to build up the emergency fund to 3 to 6 months worth of income. If you are contributing a small amount every month, this will take some time. Once it is built up and you didn't have any emergencies, you can take a portion and turn it into a new car fund or something similar. Don't be tempted to just spend it after all the time it took to build it up. This fund can really save you when unexpected occurrences such as car repairs, medical emergencies, hospital bills, etc.
The more you stick to your budget and emergency fund, the more money you will have available for the really important things in your life - your beliefs, your family, your home, vacations, etc. The simplest advice I can give with spending money is this priority list - 1-God, 2-family, 3-everything else. If you follow this, you will not have financial problems. This is even stated from the Bible reference below. A tithe is 10% of your income.
"Will a man rob God? Yet you rob me.
But you ask, 'How do we rob you?'
In tithes and offerings. You are under a curse—the whole nation of you—because you are robbing me. Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this," says the LORD Almighty, "and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it. I will prevent pests from devouring your crops, and the vines in your fields will not cast their fruit," says the LORD Almighty. "Then all the nations will call you blessed, for yours will be a delightful land," says the LORD Almighty. Malachi 3:8-12 (NIV)
If you have questions or comments, please feel free to email me at the address below.
Email: DeltaInspire@panama-vo.com
Monday, November 26, 2007
Budget
Last week I mentioned I would focus on solutions. The first place that people start to look for answers financially is usually the budget. The budget is a list of all planned expenses and revenues. The idea is to spend less than what comes in. Sounds simple, but life is not usually that simple.
One reason why a budget can be very effective is that it gets people to understand where the money is going. Many do not know where all their money goes. They know how much comes in from their paychecks, but the expenses continually go out day after day. At the end of the month, more went out that what came in. So, they use credit cards to purchase items, and have to pay in the future with an interest being charged after 30 days. This can be an effective tool to handle unexpected expenses; but after the interest starts, it gets very expensive. Many credit cards will charge 18% or more. Even the low introductory rates of 3.9% or similar, go up to 18-22% after 6 months usually. Always be sure to read the fine print on credit card applications.
Once people do track where their money goes, they can usually identify items purchased that they could probably do without. Unfortunately, the money has been spent and the bills have to be paid. Resourceful people can take lessons from the budget and their expense report to learn new habits and to limit the quick impulse purchases, such as a gourmet cup of coffee or candy bar. Once you curtail these impulse buys, more money is left for bills or savings.
As I mentioned, good habits can be formed like bad habits. If you repeat a good choice repetitively, it can become a habit. This is where the concept of opportunity costs comes in. Opportunity cost is the value of something given up by making a decision. In other words, if I purchase this now, I can not buy something else later on. If you intuitively apply this every time you make a purchase, you will make better purchases and spend less. You will be more aware of what you are spending and the value of other things you may have to give up because of this purchase.
Controlling your expenses is only a first step. Also, it will only deal with the immediate present. A budget will not give you much foresight in what is needed for the future. An emergency fund can help deal with unexpected expenses; but again, it will not cover significant changes in the future. Too often medical bills or layoffs or car repairs, etc. creep in on people unexpectedly that can not be handled by budgets or emergency funds.
When the expenses are cut as much as possible, you have to look at increasing revenue to solve the problem. We will discuss this more this week.
I referred to this before, but it bears repeating. Check out the parable of the minas in Luke 19.
And he called ten of his slaves, and gave them ten [a]minas and said to them, 'Do business with this until I come back.' Luke 19:13 (NASB) [a - a mina is equal to about 100 days wages]
If you have any comments or questions, please feel free to email me at the address below.
Email: DeltaInspire@panama-vo.com
One reason why a budget can be very effective is that it gets people to understand where the money is going. Many do not know where all their money goes. They know how much comes in from their paychecks, but the expenses continually go out day after day. At the end of the month, more went out that what came in. So, they use credit cards to purchase items, and have to pay in the future with an interest being charged after 30 days. This can be an effective tool to handle unexpected expenses; but after the interest starts, it gets very expensive. Many credit cards will charge 18% or more. Even the low introductory rates of 3.9% or similar, go up to 18-22% after 6 months usually. Always be sure to read the fine print on credit card applications.
Once people do track where their money goes, they can usually identify items purchased that they could probably do without. Unfortunately, the money has been spent and the bills have to be paid. Resourceful people can take lessons from the budget and their expense report to learn new habits and to limit the quick impulse purchases, such as a gourmet cup of coffee or candy bar. Once you curtail these impulse buys, more money is left for bills or savings.
As I mentioned, good habits can be formed like bad habits. If you repeat a good choice repetitively, it can become a habit. This is where the concept of opportunity costs comes in. Opportunity cost is the value of something given up by making a decision. In other words, if I purchase this now, I can not buy something else later on. If you intuitively apply this every time you make a purchase, you will make better purchases and spend less. You will be more aware of what you are spending and the value of other things you may have to give up because of this purchase.
Controlling your expenses is only a first step. Also, it will only deal with the immediate present. A budget will not give you much foresight in what is needed for the future. An emergency fund can help deal with unexpected expenses; but again, it will not cover significant changes in the future. Too often medical bills or layoffs or car repairs, etc. creep in on people unexpectedly that can not be handled by budgets or emergency funds.
When the expenses are cut as much as possible, you have to look at increasing revenue to solve the problem. We will discuss this more this week.
I referred to this before, but it bears repeating. Check out the parable of the minas in Luke 19.
And he called ten of his slaves, and gave them ten [a]minas and said to them, 'Do business with this until I come back.' Luke 19:13 (NASB) [a - a mina is equal to about 100 days wages]
If you have any comments or questions, please feel free to email me at the address below.
Email: DeltaInspire@panama-vo.com
Saturday, November 24, 2007
Family Time
Holidays are the usual time when families get together. It is the time to reflect back on the good times and the bad. But you always try to forget about the bad. Many times it is even comical to get "home" and see a sibling or parent that you haven't seen for a while and immediately pick up on the old habits or traits he or she has.
Habits are there for a reason. They are formed out of continued practice, over and over again. It is something that we are comfortable with, so we repeat it. Habit is defined as an acquired pattern of behavior that often occurs automatically. We repeat it so often that it happens without our thinking about it.
Good habits can be formed just like bad habits. If you repeat something often enough, it becomes a habit. You may have heard the saying "It takes 21 days to form a habit". Regardless of how long it takes, the repetition is the key.
This can also be applied to how we acquire and manage our money. I think this is part of the problem with most people and their dealings with money. They are not taught good financial habits in school, and many times not at home either; so they fall into credit card traps and the like. We are also so used to inflation being low or moderate, that when a change does occur in the economy, we don't notice it. We have been conditioned to ignore it because it has never been an issue for about 30 years.
For the last several weeks, I've been warning about future economic changes that will likely affect us all. Next week, I will focus more on solutions and actions that can be taken to lessen the impact and protect yourselves.
then if anyone hears the trumpet but does not take warning and the sword comes and takes his life, his blood will be on his own head. Since he heard the sound of the trumpet but did not take warning, his blood will be on his own head. If he had taken warning, he would have saved himself. Ezekiel 33:4-5 (NIV)
If you have any questions or comments, you can email me at the address below.
Email: DeltaInspire@panama-vo.com
Habits are there for a reason. They are formed out of continued practice, over and over again. It is something that we are comfortable with, so we repeat it. Habit is defined as an acquired pattern of behavior that often occurs automatically. We repeat it so often that it happens without our thinking about it.
Good habits can be formed just like bad habits. If you repeat something often enough, it becomes a habit. You may have heard the saying "It takes 21 days to form a habit". Regardless of how long it takes, the repetition is the key.
This can also be applied to how we acquire and manage our money. I think this is part of the problem with most people and their dealings with money. They are not taught good financial habits in school, and many times not at home either; so they fall into credit card traps and the like. We are also so used to inflation being low or moderate, that when a change does occur in the economy, we don't notice it. We have been conditioned to ignore it because it has never been an issue for about 30 years.
For the last several weeks, I've been warning about future economic changes that will likely affect us all. Next week, I will focus more on solutions and actions that can be taken to lessen the impact and protect yourselves.
then if anyone hears the trumpet but does not take warning and the sword comes and takes his life, his blood will be on his own head. Since he heard the sound of the trumpet but did not take warning, his blood will be on his own head. If he had taken warning, he would have saved himself. Ezekiel 33:4-5 (NIV)
If you have any questions or comments, you can email me at the address below.
Email: DeltaInspire@panama-vo.com
Friday, November 23, 2007
Black Friday
In the US, the day after Thanksgiving is known as Black Friday. This is the day usually that retailers finally get into the black, or start turning a profit for the year. It is one of the busiest shopping days of the year because of the huge incentives and discounts offered by stores to attract customers.
A couple weeks ago, I mentioned that this could play a critical role in the stability of the dollar. The dollar has continued to erode in value over the last couple months to record or at least multi decade lows against other world currencies such as the Euro, the Great British Pound, the Swiss Franc, the Japanese Yen, the Canadian and Australian dollars, etc. If the retail numbers at the beginning of the holiday shopping season are weak because of the uncertain economic times, this could send the dollar over the edge and plummet further.
If this happens, the Federal Reserve will likely to continue to lower interest rates to encourage further spending and keep the economy moving. This will escalate inflation, as mentioned earlier this week. If the downward spiral continues, at a pre-arranged time, the government will announce that they will replace the US dollar with a new currency, called the Amero, or the North American currency. This currency would be a common currency for the three major countries in North America, the US, Canada, and Mexico. The currency will be labeled as a solution to the currency woes and further enhance the trading among the three countries. What really has changed though? Do we have trading problems now with Mexico and Canada? No.
With using a different piece of paper to exchange goods and services, does this change the economics of families not able to pay their bills? Does this get people out of debt? Does this reduce the cost of their medications? Does this pay off their mortgages faster? Sadly no. Nothing will really have changed except the sovereignity of the US will be diminished. The supremacy of the US nation as a superpower will be displaced by a North American Union and the United Nations. This all leads to a world government, their ultimate goal.
Is this what we as citizens want? Do we care? Time will tell. Times, they are a changing, as the saying goes. Are we even noticing?
The quiet words of the wise are more to be heeded than the shouts of a ruler of fools. Ecclesiastes 9:17
A couple weeks ago, I mentioned that this could play a critical role in the stability of the dollar. The dollar has continued to erode in value over the last couple months to record or at least multi decade lows against other world currencies such as the Euro, the Great British Pound, the Swiss Franc, the Japanese Yen, the Canadian and Australian dollars, etc. If the retail numbers at the beginning of the holiday shopping season are weak because of the uncertain economic times, this could send the dollar over the edge and plummet further.
If this happens, the Federal Reserve will likely to continue to lower interest rates to encourage further spending and keep the economy moving. This will escalate inflation, as mentioned earlier this week. If the downward spiral continues, at a pre-arranged time, the government will announce that they will replace the US dollar with a new currency, called the Amero, or the North American currency. This currency would be a common currency for the three major countries in North America, the US, Canada, and Mexico. The currency will be labeled as a solution to the currency woes and further enhance the trading among the three countries. What really has changed though? Do we have trading problems now with Mexico and Canada? No.
With using a different piece of paper to exchange goods and services, does this change the economics of families not able to pay their bills? Does this get people out of debt? Does this reduce the cost of their medications? Does this pay off their mortgages faster? Sadly no. Nothing will really have changed except the sovereignity of the US will be diminished. The supremacy of the US nation as a superpower will be displaced by a North American Union and the United Nations. This all leads to a world government, their ultimate goal.
Is this what we as citizens want? Do we care? Time will tell. Times, they are a changing, as the saying goes. Are we even noticing?
The quiet words of the wise are more to be heeded than the shouts of a ruler of fools. Ecclesiastes 9:17
Thursday, November 22, 2007
Thanksgiving
Today is Thanksgiving in the US, so I will postpone discussion about inflation and the economy. I beg your pardon from any readers in Canada or other locales.
Thanksgiving is all about giving thanks to God for a bountiful harvest, even though most of us are not farmers anymore. As with most holidays, commercialization has taken over and now Thanksgiving is widely known as the kickoff for the Christmas shopping season. Friday morning, as early as 4am this year, stores are setting out their scores of deals to get people in to spend, spend, spend. This Friday, also known as Black Friday, are when stores typically get into the black, or positive territory for the first time of the year. Think about that. Nearly 11 full months of working 6 or 7 days a week to cover expenses, before you finally get to earn a profit for the store you are running. How would you like to own a store with that kind of profit potential?
So, this is the one last day to prepare for the busy shopping season. One last day to take a break, spend time with family, eat too much, be lazy in front of the TV watching football, or another favorite holiday tradition.
Do we really ever pause to think about all the gifts we've received? Are we really thankful for the family around us? There are many people out there that don't have a family. There's no turkey, stuffing, mashed potatoes, or pumpkin pie. There's no getting up the next morning while it's still dark out because they don't have a car, no money to buy gifts, and no friends to share the time with. Maybe, if it is close enough, there might be a special meal at the community center for the homeless that they can attend.
Do we ever think about the abundance we all have around us compared to some? What do we do with all the gifts we have? Do we value them, be thankful for them? Do we treat our blessings with respect and care? Do we share them with others?
So, what are you thankful for?
You will be made rich in every way so that you can be generous on every occasion, and through us your generosity will result in thanksgiving to God. II Corinthians 9:11 (NIV)
Thanksgiving is all about giving thanks to God for a bountiful harvest, even though most of us are not farmers anymore. As with most holidays, commercialization has taken over and now Thanksgiving is widely known as the kickoff for the Christmas shopping season. Friday morning, as early as 4am this year, stores are setting out their scores of deals to get people in to spend, spend, spend. This Friday, also known as Black Friday, are when stores typically get into the black, or positive territory for the first time of the year. Think about that. Nearly 11 full months of working 6 or 7 days a week to cover expenses, before you finally get to earn a profit for the store you are running. How would you like to own a store with that kind of profit potential?
So, this is the one last day to prepare for the busy shopping season. One last day to take a break, spend time with family, eat too much, be lazy in front of the TV watching football, or another favorite holiday tradition.
Do we really ever pause to think about all the gifts we've received? Are we really thankful for the family around us? There are many people out there that don't have a family. There's no turkey, stuffing, mashed potatoes, or pumpkin pie. There's no getting up the next morning while it's still dark out because they don't have a car, no money to buy gifts, and no friends to share the time with. Maybe, if it is close enough, there might be a special meal at the community center for the homeless that they can attend.
Do we ever think about the abundance we all have around us compared to some? What do we do with all the gifts we have? Do we value them, be thankful for them? Do we treat our blessings with respect and care? Do we share them with others?
So, what are you thankful for?
You will be made rich in every way so that you can be generous on every occasion, and through us your generosity will result in thanksgiving to God. II Corinthians 9:11 (NIV)
Wednesday, November 21, 2007
Inflation and the Money Supply
Yesterday, I discussed the effect of continued inflation, especially when it outpaces wage increases. When the two are in balance, you will get a steady rate of growth. This is the goal of our central bank, the Federal Reserve. They attempt to control the money supply available to banks and ultimately to the consumers by raising or lowering the discount rate (interest rate). This rate is the interest rate that banks can borrow from the federal reserve to keep their deposit requirements, usually 1/10th of their outstanding loans. The federal funds rate is closely tied to this and is set at the Federal Open Market Committee (FOMC) meetings. This rate is the interest rate private banking institutions lend federal funds to other depository institutions overnight to keep their deposit requirements. The FOMC usually follows whatever the Federal Reserve does.
What this all means, is that if the banks do not have money it can loan to consumers and businesses, there is less money that can be spent. This is called constricting the money supply. When less is spent, the economy slows. Conversely, when more is spent, the economy or speed at which money is spent increases. Available credit and cash is what businesses need to keep open and to draw customers.
When the sub-prime loan issue started happening in August, adjustable rate mortgages were going up and people who couldn't afford the increases started defaulting on their payments. The decrease of incoming funds to the banks started restricting what they could lend out. Private banks had to bail out smaller banks by lending federal funds to keep them open. Then the loans started going into foreclosure, and more money had to be loaned to keep the banks open. Still, thousands of people lost their homes.
This was really bad for our economy, but it was leading to something far worse. The Federal Reserve, dropped the discount rate by 1/2 of percent in their September meeting, a big drop. They had to create more credit to keep the money moving. They again lowered the discount rate another 1/4 percent in October. They were willing to risk inflation to keep the economy from completely stalling. The sudden influx of cash and credit spurred on inflation. With the increasing cost of gas and now consumer goods, everything started going up. As mentioned yesterday, when costs rise and wages don't keep up, the overall economic situation for the consumer decreases each year.
How long will you be able to keep your head above water? Can you do something about it?
My gifts are better than gold, even the purest gold,
my wages better than sterling silver! Proverbs 8:19 (NIV)
We will discuss inflation more and alternative solutions. Stay tuned ...
What this all means, is that if the banks do not have money it can loan to consumers and businesses, there is less money that can be spent. This is called constricting the money supply. When less is spent, the economy slows. Conversely, when more is spent, the economy or speed at which money is spent increases. Available credit and cash is what businesses need to keep open and to draw customers.
When the sub-prime loan issue started happening in August, adjustable rate mortgages were going up and people who couldn't afford the increases started defaulting on their payments. The decrease of incoming funds to the banks started restricting what they could lend out. Private banks had to bail out smaller banks by lending federal funds to keep them open. Then the loans started going into foreclosure, and more money had to be loaned to keep the banks open. Still, thousands of people lost their homes.
This was really bad for our economy, but it was leading to something far worse. The Federal Reserve, dropped the discount rate by 1/2 of percent in their September meeting, a big drop. They had to create more credit to keep the money moving. They again lowered the discount rate another 1/4 percent in October. They were willing to risk inflation to keep the economy from completely stalling. The sudden influx of cash and credit spurred on inflation. With the increasing cost of gas and now consumer goods, everything started going up. As mentioned yesterday, when costs rise and wages don't keep up, the overall economic situation for the consumer decreases each year.
How long will you be able to keep your head above water? Can you do something about it?
My gifts are better than gold, even the purest gold,
my wages better than sterling silver! Proverbs 8:19 (NIV)
We will discuss inflation more and alternative solutions. Stay tuned ...
Tuesday, November 20, 2007
The Net Effect of Inflation
Inflation is an increase in price levels of a pre-defined set of goods in an economy over a period of time. In other words, things will cost more. Inflation and the criteria that determine the causes, can keep a professor of economics busy for decades. However, I will attempt to simplify things a bit to get down to "brass tacks" as they say.
A number of key elements that go into the reported inflation rate is core inflation and the consumer price index. The consumer price index measures the price of a selection of goods purchased by a typical consumer. Core inflation is measures the same without the effect of food and energy. This is the problem I'm leading to. First, everyone has to eat, heat or cool their homes, purchase gas for their cars, etc. What is the value of a number that measures everything but? We all know that the price of gas has doubled in the last few years. What sense does it make to say that inflation has been steady at 2-3% per year? What a crock! The numbers you hear on the news will be whatever they want them to be. Another thing, who decides who a typical consumer is and what he or she buys?
The bottom line is that everything continues to costs more, quite a bit more because of the price of gas. Manufacturers and distributors have to charge more to get the products to markets because of the cost of fuel. Markets in turn charge more to make sure they stay in business and retain their profit levels.
What this all means to the consumer is simply this. If things costs more, say an average of 10% per year, but wages only go up an average of 3% per year; you have less money to buy the things you need which costs more. It's the same with investing. If you earn 6% on your mutual funds, but true inflation is 10%; you continue to lose money each year. The quick fix - credit cards! Buy now, pay later. Don't worry about it, just get it, you deserve it! This is the popular advertising message by stores and credit card companies alike. Is there no wonder the middle class is disappearing from this country? This can not continue indefinitely without consequences.
"Give careful thought to your ways. You have planted much, but have harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it." Haggai 1:5,6 (NIV)
There will be more about inflation this week of Thanksgiving. Stay tuned ...
A number of key elements that go into the reported inflation rate is core inflation and the consumer price index. The consumer price index measures the price of a selection of goods purchased by a typical consumer. Core inflation is measures the same without the effect of food and energy. This is the problem I'm leading to. First, everyone has to eat, heat or cool their homes, purchase gas for their cars, etc. What is the value of a number that measures everything but? We all know that the price of gas has doubled in the last few years. What sense does it make to say that inflation has been steady at 2-3% per year? What a crock! The numbers you hear on the news will be whatever they want them to be. Another thing, who decides who a typical consumer is and what he or she buys?
The bottom line is that everything continues to costs more, quite a bit more because of the price of gas. Manufacturers and distributors have to charge more to get the products to markets because of the cost of fuel. Markets in turn charge more to make sure they stay in business and retain their profit levels.
What this all means to the consumer is simply this. If things costs more, say an average of 10% per year, but wages only go up an average of 3% per year; you have less money to buy the things you need which costs more. It's the same with investing. If you earn 6% on your mutual funds, but true inflation is 10%; you continue to lose money each year. The quick fix - credit cards! Buy now, pay later. Don't worry about it, just get it, you deserve it! This is the popular advertising message by stores and credit card companies alike. Is there no wonder the middle class is disappearing from this country? This can not continue indefinitely without consequences.
"Give careful thought to your ways. You have planted much, but have harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it." Haggai 1:5,6 (NIV)
There will be more about inflation this week of Thanksgiving. Stay tuned ...
Monday, November 19, 2007
Rule of 72
Before I discuss the impacts of inflation, I need to lay the foundation of how interest works, particularly compound interest. Albert Einstein discovered the Rule of 72, which demonstrates approximately how long your money will take to double. He was quoted as saying "It is the greatest mathematical discovery of all time." Also credited to him are "Compound interest is the most powerful force in the universe" and "it is the 8th wonder of the world."
Here is how it works. You take the interest rate you are earning, divide that by 72, the result will be the number of years for your money to double. For example, say you earn 6% per year in your mutual fund. 72/6=12. Your money will double every 12 years.
When you invest, the rule of 72 works for you by growing your money. When you borrow, it works against you and you are mortgaging your future for the present. It will take you so much longer and cost far more to pay it in the future than it would now.
Below is a chart showing the results of $1000 invested at various interest rates and the growth occurring in various years ending in year 24.
Now, let's say you have $5000 instead of $1000 and look at the difference.
Look at the huge difference of $5000 versus $1000 in 24 years at 36% - $4 million versus $20 million! Or look at the difference between $5000 at 12% interest and 36% interest - $80,000 versus $20 million! Of course, if you start out with more, the bigger the numbers get.
Now imagine what the credit card companies are earning on your money when they are charging you 18% or more interest on your credit card debt. Imagine having to pay them that much by letting your credit cards get out of control.
Remember the parable of the ten minas in Luke 19.
Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest? Luke 19:23 (NIV)
and verse 26 ...
He replied, "I tell you that to everyone who has, more will be given, but as for the one who has nothing, even what he has will be taken away."
Here is how it works. You take the interest rate you are earning, divide that by 72, the result will be the number of years for your money to double. For example, say you earn 6% per year in your mutual fund. 72/6=12. Your money will double every 12 years.
When you invest, the rule of 72 works for you by growing your money. When you borrow, it works against you and you are mortgaging your future for the present. It will take you so much longer and cost far more to pay it in the future than it would now.
Below is a chart showing the results of $1000 invested at various interest rates and the growth occurring in various years ending in year 24.
| $1,000 | |||||||
| 3% | 6% | 9% | 12% | 18% | 24% | 36% | |
| yr 1 | |||||||
| yr 2 | $2,000 | ||||||
| yr 3 | $2,000 | ||||||
| yr 4 | $2,000 | $4,000 | |||||
| yr 5 | |||||||
| yr 6 | $2,000 | $4,000 | $8,000 | ||||
| yr 7 | |||||||
| yr 8 | $2,000 | $4,000 | $16,000 | ||||
| yr 9 | $8,000 | ||||||
| yr 10 | $32,000 | ||||||
| yr 11 | |||||||
| yr 12 | $2,000 | $4,000 | $8,000 | $16,000 | $64,000 | ||
| yr 13 | |||||||
| yr 14 | $128,000 | ||||||
| yr 15 | $32,000 | ||||||
| yr 16 | $4,000 | $16,000 | $256,000 | ||||
| yr 17 | |||||||
| yr 18 | $8,000 | $64,000 | $512,000 | ||||
| yr 19 | |||||||
| yr 20 | $20,000 | $1,024,000 | |||||
| yr 21 | $128,000 | ||||||
| yr 22 | $2,048,000 | ||||||
| yr 23 | |||||||
| yr 24 | $2,000 | $4,000 | $8,000 | $16,000 | $40,000 | $256,000 | $4,096,000 |
Now, let's say you have $5000 instead of $1000 and look at the difference.
| $5,000 | |||||||
| 3% | 6% | 9% | 12% | 18% | 24% | 36% | |
| yr 1 | |||||||
| yr 2 | $10,000 | ||||||
| yr 3 | $10,000 | ||||||
| yr 4 | $10,000 | $20,000 | |||||
| yr 5 | |||||||
| yr 6 | $10,000 | $20,000 | $40,000 | ||||
| yr 7 | |||||||
| yr 8 | $10,000 | $20,000 | $80,000 | ||||
| yr 9 | $40,000 | ||||||
| yr 10 | $160,000 | ||||||
| yr 11 | |||||||
| yr 12 | $10,000 | $20,000 | $40,000 | $80,000 | $320,000 | ||
| yr 13 | |||||||
| yr 14 | $640,000 | ||||||
| yr 15 | $160,000 | ||||||
| yr 16 | $20,000 | $80,000 | $1,280,000 | ||||
| yr 17 | |||||||
| yr 18 | $40,000 | $320,000 | $2,560,000 | ||||
| yr 19 | |||||||
| yr 20 | $160,000 | $5,120,000 | |||||
| yr 21 | $640,000 | ||||||
| yr 22 | $10,240,000 | ||||||
| yr 23 | |||||||
| yr 24 | $10,000 | $20,000 | $40,000 | $80,000 | $320,000 | $1,280,000 | $20,480,000 |
Look at the huge difference of $5000 versus $1000 in 24 years at 36% - $4 million versus $20 million! Or look at the difference between $5000 at 12% interest and 36% interest - $80,000 versus $20 million! Of course, if you start out with more, the bigger the numbers get.
Now imagine what the credit card companies are earning on your money when they are charging you 18% or more interest on your credit card debt. Imagine having to pay them that much by letting your credit cards get out of control.
Remember the parable of the ten minas in Luke 19.
Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest? Luke 19:23 (NIV)
and verse 26 ...
He replied, "I tell you that to everyone who has, more will be given, but as for the one who has nothing, even what he has will be taken away."
Saturday, November 17, 2007
Dante's Peak
I'm somewhat of a movie buff. Recently I saw Dante's Peak with Pierce Brosnan. He was a volcano expert called in to investigate a possible eruption of Dante's Peak. He saw a number of clues that would indicate a possible eruption and destruction of the nearby town. At first, he did not want to alarm anyone, but wanted more evidence to determine the possibility. As the evidence grew, he met with the city council to put the town on alert. Then his boss showed up and cautioned them against false alarms and the damage that it could do to their businesses. Of course conflict arose as his boss and he disagreed. For a week they did more tests with nothing to indicate an eruption. Then, just before the team pulled out to leave, the mountain started waking up and showing imminent signs of eruption.
Well, the lesson here is the same. This week, the US dollar index rebounded slightly to close at 75.79. Gold dropped to $785.40 per ounce from its high of over $840. Silver also dropped to $14.43 per ounce from over $15.50. This is a normal retracement, or market direction change of a trend. A trend does not continue in a straight line, but usually zigzags on its way. This is a very normal lull in the market as it 'catches it's breath'. This may continue for a week or two before continuing the current trend.
We are not looking at an eruption, but an implosion of the economy resulting from many factors. The sub prime crash is only one indicator. The declining real estate market, the eroding value of the dollar, the rising prices of more intrinsic precious metals are climbing such as gold and silver, and the continued rising price of oil. All of these are signs.
Now, to fast forward some. When you factor in Social Security facing insolvency within the next decade; and add in the imminent failure of MediCare and MediCaid coupled with the rising number of baby boomers retiring (or trying to), and inflation rising. All of these indicators are leading up to a 'perfect storm' developing. Never before have all of these factors come together at once.
He said to the crowd: "When you see a cloud rising in the west, immediately you say, 'It's going to rain,' and it does. And when the south wind blows, you say, 'It's going to be hot,' and it is. Hypocrites! You know how to interpret the appearance of the earth and the sky. How is it that you don't know how to interpret this present time? Luke 12:54-56 (NIV)
Next week, more will be discussed about the effects of inflation and its impact on growing wealth. Stay tuned ...
Well, the lesson here is the same. This week, the US dollar index rebounded slightly to close at 75.79. Gold dropped to $785.40 per ounce from its high of over $840. Silver also dropped to $14.43 per ounce from over $15.50. This is a normal retracement, or market direction change of a trend. A trend does not continue in a straight line, but usually zigzags on its way. This is a very normal lull in the market as it 'catches it's breath'. This may continue for a week or two before continuing the current trend.
We are not looking at an eruption, but an implosion of the economy resulting from many factors. The sub prime crash is only one indicator. The declining real estate market, the eroding value of the dollar, the rising prices of more intrinsic precious metals are climbing such as gold and silver, and the continued rising price of oil. All of these are signs.
Now, to fast forward some. When you factor in Social Security facing insolvency within the next decade; and add in the imminent failure of MediCare and MediCaid coupled with the rising number of baby boomers retiring (or trying to), and inflation rising. All of these indicators are leading up to a 'perfect storm' developing. Never before have all of these factors come together at once.
He said to the crowd: "When you see a cloud rising in the west, immediately you say, 'It's going to rain,' and it does. And when the south wind blows, you say, 'It's going to be hot,' and it is. Hypocrites! You know how to interpret the appearance of the earth and the sky. How is it that you don't know how to interpret this present time? Luke 12:54-56 (NIV)
Next week, more will be discussed about the effects of inflation and its impact on growing wealth. Stay tuned ...
Friday, November 16, 2007
Forex
Yesterday, I wrote about options which can be traded as well as owned like stocks and bonds. Trading itself has many facets, strategies, and markets. Trading has been around since the beginning of time.
You can settle among us; the land is open to you. Live in it, trade in it, and acquire property in it. Genesis 34:10
Today I will discuss forex, or foreign exchange of currency. Every country in the world uses their own version of fiat, or paper money. This money, essentially has no value except what the collective group of people that use it give it in exchange for goods and services. This is called legal tender. It is accepted by meer confidence that it has value. The liquidity or ease of conversion is the reason this is used world wide.
Everyday, foreign currencies are traded around the world, and fluctuate daily. This trading goes on 24 hours a day, 6 days a week. It begins 4pm EST Sunday and ends 4:30pm EST Friday. Some of this trading is result of countries trading back and forth for goods. For example, China sends a shipment of clothing to the US. In China, the yuan is the currency. This has to be converted to dollars for the transaction to be complete. Today, the yuan is equal to 0.1346 US dollars, or about 13 cents.
There are no commissions when currencies are traded. Instead, there is a spread, or difference between what the price of the currency is when bought (bid) or sold (ask). In our example, the yuan is being sold at 0.1350 instead of 0.1346. The 4 hundredths of a cent spread is kept by the broker for the exchange. This is charged for every lot (unit of currency, usually $10,000) traded.
The pip, or price interest point, is used to measure the smallest price change, usually 4 decimal places. In most cases with the US dollar, it is 1/100th of a cent. All forex trading is done in pairs, such as the EUR/USD or Euro versus the US dollar. It will measure how many US dollars it will take to buy one Euro. The Euro is the base currency (always on the left), and the USD is the quoted currency (on the right).
Speculation accounts for about 95% of all trading that takes place, over 2 trillion each day. The forex market is the largest in the world; larger that all stock markets, bond markets, and futures markets combined. Huge sums traded can also mean huge profits on very small price fluctuations. Experienced traders can profit as much as 1% to 10% per day. Leverage is the key. Some brokers offer as much as a 400:1 leverage on small accounts. Medium sized accounts will offer 100:1 leverage. So for every $100 you risk, you can control a $10,000 lot. For example, a one pip movement would equal $1. If the EUR/USD pair moves from $1.4600 to $1.4700, this would mean a 100 pip movement or $100. Now, multiple that by the number of lots traded such as 10, that would equal $1000.
Currency trading is very risky and should only be done with risk capital. This is money that the trader can afford to lose. However, as mentioned, experienced traders do very well and can make huge profits in a short period of time. As discussed in the Asset Allocation post, 10% of your portfolio could be put into higher risk investments. That 10% could double the returns of the whole portfolio.
You can settle among us; the land is open to you. Live in it, trade in it, and acquire property in it. Genesis 34:10
Today I will discuss forex, or foreign exchange of currency. Every country in the world uses their own version of fiat, or paper money. This money, essentially has no value except what the collective group of people that use it give it in exchange for goods and services. This is called legal tender. It is accepted by meer confidence that it has value. The liquidity or ease of conversion is the reason this is used world wide.
Everyday, foreign currencies are traded around the world, and fluctuate daily. This trading goes on 24 hours a day, 6 days a week. It begins 4pm EST Sunday and ends 4:30pm EST Friday. Some of this trading is result of countries trading back and forth for goods. For example, China sends a shipment of clothing to the US. In China, the yuan is the currency. This has to be converted to dollars for the transaction to be complete. Today, the yuan is equal to 0.1346 US dollars, or about 13 cents.
There are no commissions when currencies are traded. Instead, there is a spread, or difference between what the price of the currency is when bought (bid) or sold (ask). In our example, the yuan is being sold at 0.1350 instead of 0.1346. The 4 hundredths of a cent spread is kept by the broker for the exchange. This is charged for every lot (unit of currency, usually $10,000) traded.
The pip, or price interest point, is used to measure the smallest price change, usually 4 decimal places. In most cases with the US dollar, it is 1/100th of a cent. All forex trading is done in pairs, such as the EUR/USD or Euro versus the US dollar. It will measure how many US dollars it will take to buy one Euro. The Euro is the base currency (always on the left), and the USD is the quoted currency (on the right).
Speculation accounts for about 95% of all trading that takes place, over 2 trillion each day. The forex market is the largest in the world; larger that all stock markets, bond markets, and futures markets combined. Huge sums traded can also mean huge profits on very small price fluctuations. Experienced traders can profit as much as 1% to 10% per day. Leverage is the key. Some brokers offer as much as a 400:1 leverage on small accounts. Medium sized accounts will offer 100:1 leverage. So for every $100 you risk, you can control a $10,000 lot. For example, a one pip movement would equal $1. If the EUR/USD pair moves from $1.4600 to $1.4700, this would mean a 100 pip movement or $100. Now, multiple that by the number of lots traded such as 10, that would equal $1000.
Currency trading is very risky and should only be done with risk capital. This is money that the trader can afford to lose. However, as mentioned, experienced traders do very well and can make huge profits in a short period of time. As discussed in the Asset Allocation post, 10% of your portfolio could be put into higher risk investments. That 10% could double the returns of the whole portfolio.
Thursday, November 15, 2007
Options
An option, like a warrant, provides the right, but not the obligation to buy or sell a security (stocks, bonds, commodity, etc.) for a particular price. Options also have expiration dates. Most short term options will expire the third Friday of the month. A "call" option provides the right to buy a security. A "put" option provides the right to sell the security. The agreed upon price is called the "strike price".
The big advantage of options over actually buying or selling the security is leverage. You can control the buying or selling many more shares of stock for less cost. If the option expires, you lose nothing outside of what it cost to get into the option. If you sell an option, you can even make a premium if it expires unexercised.
Options, just like when buying or selling the security, has risks involved. If the price moves against you, you will lose money. So, like all investing, doing your homework and due diligence is important. Having a effective trading strategy that fits your style of trading is also imperative. There are hundreds of strategies and styles, so it does take time to become good at trading, regardless of the market. If you are using some automated trading tool, this reduces some of the risk, but even proven effective strategies may perform badly during certain market fluctuations.
So I turned my mind to understand, to investigate and to search out wisdom and the scheme of things and to understand the stupidity of wickedness and the madness of folly. Ecclesiastes 7:25
There will be more on alternative investment vehicles. Stay tuned ...
The big advantage of options over actually buying or selling the security is leverage. You can control the buying or selling many more shares of stock for less cost. If the option expires, you lose nothing outside of what it cost to get into the option. If you sell an option, you can even make a premium if it expires unexercised.
Options, just like when buying or selling the security, has risks involved. If the price moves against you, you will lose money. So, like all investing, doing your homework and due diligence is important. Having a effective trading strategy that fits your style of trading is also imperative. There are hundreds of strategies and styles, so it does take time to become good at trading, regardless of the market. If you are using some automated trading tool, this reduces some of the risk, but even proven effective strategies may perform badly during certain market fluctuations.
So I turned my mind to understand, to investigate and to search out wisdom and the scheme of things and to understand the stupidity of wickedness and the madness of folly. Ecclesiastes 7:25
There will be more on alternative investment vehicles. Stay tuned ...
Wednesday, November 14, 2007
Warrants
Warrants are another form of alternative investments. A warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is much higher than the stock price at time of issuance, for a period of years or to perpetuity. You might ask, why would you want the right to buy more stock at a higher price? Well, warrants are usually a throw in to sweeten a deal. They are essentially given away at the time of a transaction, with the possible expectation that the stock is worth substantially more in the future. With a warrant, the investor can redeem that warrant and buy additional stock for a lower amount.
For example, as part of a pre-ipo stock purchase of XYZ stock at $0.20 per share, the company offers 2 warrants for every share purchased at $0.50 per share good for 10 years. In 2007, the company goes public and the share start going up and reach $4.50 per share. With the warrant, the shareholder can now redeem the warrant at $0.50 per share, even though the market price is $4.50, a 900% gain. The shareholder can now hold or sell the share when he wants. Warrants, like stock options, can also be traded as an investment because they are transferable.
A journey of a thousand miles begins with one step. Always continue to add to your knowledge.
Information is not knowledge without action.
Knowledge creates choices.
Choices allow us to change our lives.
How long will you simple ones love your simple ways? How long will mockers delight in mockery and fools hate knowledge? Proverbs 1:22
More on alternative investments tomorrow. Stay tuned ...
For example, as part of a pre-ipo stock purchase of XYZ stock at $0.20 per share, the company offers 2 warrants for every share purchased at $0.50 per share good for 10 years. In 2007, the company goes public and the share start going up and reach $4.50 per share. With the warrant, the shareholder can now redeem the warrant at $0.50 per share, even though the market price is $4.50, a 900% gain. The shareholder can now hold or sell the share when he wants. Warrants, like stock options, can also be traded as an investment because they are transferable.
A journey of a thousand miles begins with one step. Always continue to add to your knowledge.
Information is not knowledge without action.
Knowledge creates choices.
Choices allow us to change our lives.
How long will you simple ones love your simple ways? How long will mockers delight in mockery and fools hate knowledge? Proverbs 1:22
More on alternative investments tomorrow. Stay tuned ...
Tuesday, November 13, 2007
Pre-IPOs
Perhaps the most common of alternative investments is pre-ipos. IPO is initial public offering. This is when investors provide capital to a private venture or company prior to the company going public. They use this capital to grow the company in one way or another. It could be to do further development on a new product, launch a new marketing campaign, or doing prerequisites prior to taking the company public, etc.
The company does not have to pay the capital back to the investor, but instead grants the new shareholders a right to future profits distributed by the company. That is only the first reason why they can be risky. However, if the plans come to fruition as the management plans, the returns can be huge - 10 times the amount invested, 30X, 50X, and sometimes 100X or more. This is why due diligence on the company, the management, the business plan, the marketing, etc. are so important. Would you have been one of the original investors in Microsoft, Starbucks, Google, PayPal, Yahoo, Fed Ex, et al? If you had, you would be a multimillionaire. Would you have had the stomach for the risk? Would you have had the insight? Would you be able to wait years for the return? However, keep in mind, for every one of these huge successes, there are probably hundreds or thousands that fail and never return anything.
Many of these plans also take anywhere from one to 10 years or so for the investor to see the returns. Some investors do not want to tie up their capital for that length of time. Some will look for pre-ipos that are very near going public so the wait for the return is not as long. If the company does go public, there may be wild swings in the market price on the initial days of trading. It sometimes is advisable to take profits on shares right away, sometimes it's better to hold for years. These are just some of the reasons why these investments can be risky.
As stated in the due diligence posts, it begins and ends with the management of the company. Management can make or break these investments, regardless of the industry, product, or timing. Do your homework. Get insights from others who are educated on the company and industry. Choose wisely. Be patient.
But the noble man makes noble plans, and by noble deeds he stands. Isaiah 32:8
There will be more on alternative investments this week. Stay tuned ...
The company does not have to pay the capital back to the investor, but instead grants the new shareholders a right to future profits distributed by the company. That is only the first reason why they can be risky. However, if the plans come to fruition as the management plans, the returns can be huge - 10 times the amount invested, 30X, 50X, and sometimes 100X or more. This is why due diligence on the company, the management, the business plan, the marketing, etc. are so important. Would you have been one of the original investors in Microsoft, Starbucks, Google, PayPal, Yahoo, Fed Ex, et al? If you had, you would be a multimillionaire. Would you have had the stomach for the risk? Would you have had the insight? Would you be able to wait years for the return? However, keep in mind, for every one of these huge successes, there are probably hundreds or thousands that fail and never return anything.
Many of these plans also take anywhere from one to 10 years or so for the investor to see the returns. Some investors do not want to tie up their capital for that length of time. Some will look for pre-ipos that are very near going public so the wait for the return is not as long. If the company does go public, there may be wild swings in the market price on the initial days of trading. It sometimes is advisable to take profits on shares right away, sometimes it's better to hold for years. These are just some of the reasons why these investments can be risky.
As stated in the due diligence posts, it begins and ends with the management of the company. Management can make or break these investments, regardless of the industry, product, or timing. Do your homework. Get insights from others who are educated on the company and industry. Choose wisely. Be patient.
But the noble man makes noble plans, and by noble deeds he stands. Isaiah 32:8
There will be more on alternative investments this week. Stay tuned ...
Monday, November 12, 2007
Accredited Investor
Before I get into alternative investments, I first have to explain a few things. First of all, access to some of these investments are very limited and also protected by law of who can invest. Typically, only accredited investors can invest in vehicles that have potentially the highest returns available. An accredited investor in the US is a person with a net worth in excess of $1 million and annual income greater than $200,000 per year or $300,000 per year if filing as a couple on IRS tax returns. Also, their income has to be consistent in the last two years and the expectation to continue in the present year. In Canada, the same applies except the net worth can not include their principle residence.
Why are the best investments reserved for the wealthy? A very good question. The standard answer is that it is for the protection of the investor, with higher returns the risk typically increases. The average person does not have the resources to risk their assets and have the sophistication to do proper due diligence to understand that risk. This is partially true. But if you can do the proper risk assessment and due diligence, why can you still not participate? The simple answer is, they don't want you to. It's part of the good ol' boys club where you have to be one of them (the wealthy) to get in. So much for the land of opportunity! These rules were instituted by the Securities Act of 1933, and are enforced by the Securities and Exchange Commission (SEC).
These rules apply to US and Canadian citizens. They do not apply to foreign investors or foreign citizens. Foreigners can invest in the US, make a ton of money, and not pay income taxes on the proceeds. Why? They are not subject to US laws. They are subject to the laws where they live or are domiciled (registered) in, in the case of a corporation or other legal entity. The US is the largest tax haven in the world, but not to its citizens. This is why they don't want you to know how to get access to these investments. They want your tax dollars.
So, what stops you from getting access to these investments through a foreign entity? Nothing, except the process or the contacts to do that. Your local CPA, lawyer, tax advisor, broker, financial advisor, or other legal professional are prohibited from telling you anything about these things because you are not eligible. Most of these professionals don't even know that these legal structures and international investments exist. The ones that cater to the wealthy know, and set up these structures to make their clients more money, and shelter the returns from taxes. Do you ever wonder why the Carnegies, Rockefellers, Kennedys, and Clintons, et al, never seem to pay anything in income tax? Because they don't own anything. Their foundations and international business corporations do everything, they just control them. And this is all perfectly legal.
Heed this warning ...
Woe to him who builds his realm by unjust gain to set his nest on high,
to escape the clutches of ruin!
You have plotted the ruin of many peoples, shaming your own house and forfeiting your life. Habakkuk 2:9-10
Why are the best investments reserved for the wealthy? A very good question. The standard answer is that it is for the protection of the investor, with higher returns the risk typically increases. The average person does not have the resources to risk their assets and have the sophistication to do proper due diligence to understand that risk. This is partially true. But if you can do the proper risk assessment and due diligence, why can you still not participate? The simple answer is, they don't want you to. It's part of the good ol' boys club where you have to be one of them (the wealthy) to get in. So much for the land of opportunity! These rules were instituted by the Securities Act of 1933, and are enforced by the Securities and Exchange Commission (SEC).
These rules apply to US and Canadian citizens. They do not apply to foreign investors or foreign citizens. Foreigners can invest in the US, make a ton of money, and not pay income taxes on the proceeds. Why? They are not subject to US laws. They are subject to the laws where they live or are domiciled (registered) in, in the case of a corporation or other legal entity. The US is the largest tax haven in the world, but not to its citizens. This is why they don't want you to know how to get access to these investments. They want your tax dollars.
So, what stops you from getting access to these investments through a foreign entity? Nothing, except the process or the contacts to do that. Your local CPA, lawyer, tax advisor, broker, financial advisor, or other legal professional are prohibited from telling you anything about these things because you are not eligible. Most of these professionals don't even know that these legal structures and international investments exist. The ones that cater to the wealthy know, and set up these structures to make their clients more money, and shelter the returns from taxes. Do you ever wonder why the Carnegies, Rockefellers, Kennedys, and Clintons, et al, never seem to pay anything in income tax? Because they don't own anything. Their foundations and international business corporations do everything, they just control them. And this is all perfectly legal.
Heed this warning ...
Woe to him who builds his realm by unjust gain to set his nest on high,
to escape the clutches of ruin!
You have plotted the ruin of many peoples, shaming your own house and forfeiting your life. Habakkuk 2:9-10
More on alternative investment vehicles this week. Stay tuned ...
Saturday, November 10, 2007
Watch the Road!
When driving, it is very important that you stay alert and pay attention to the road. The consequences are literally grave if you don't. In life, there is little difference. Last week, I pointed out that we are in some bumpy economic times to say the least. One week ago, the spot prices of gold and silver were $806.40 and $14.55 per ounce respectively. This week gold is $832.15 and silver is $15.47 per ounce. Gold increased 3.2% and silver increased 6.3%, in one week! The US dollar continued its slide against the major world currencies and fell to an historic low of 75.39, including a minor rebound on Friday. The price of oil rose again slightly at $95.98 per barrel. The effect at the gas pump has been a bump of about $0.25 per gallon in the last couple weeks.
Despite moves by the Federal Reserve to lower interest rates and increase the money supply, the value of the dollar continued its descent. Inflation will be the result. The Fed will likely lower rates again in their December meeting. Fed chairman, Ben Bernanke, said that the dollar's strength in the medium term would ultimately depend on the state of the U.S. economy, global trade, and ensuring that U.S. financial markets are open to foreign investment. My question is, who wants to invest in a commodity (the US dollar) that is nosediving? China renewed its economic warning to "take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies". China has 1.3 trillion US dollars in its treasuries and doesn't like the decline of its assets. This will likely continue the dollar's slide as China and other countries exchange their US securities for other, more stable investments.
As pointed out last week, the net affect of all of this could be a period of hyper-inflation. If there are other factors added to this such as a steep sell off on Wall Street, or another decline in real estate or the mortgage industry, we could begin a steep decline in our economy. The telling indicator will likely be this holiday season's sales reports. If US consumers don't spend at the stores, we will be looking at a spiraling recession in the coming months.
We must pay more careful attention, therefore, to what we have heard, so that we do not drift away. Hebrews 2:1
Sharp curve ahead, watch the road! Stay tuned ...
Despite moves by the Federal Reserve to lower interest rates and increase the money supply, the value of the dollar continued its descent. Inflation will be the result. The Fed will likely lower rates again in their December meeting. Fed chairman, Ben Bernanke, said that the dollar's strength in the medium term would ultimately depend on the state of the U.S. economy, global trade, and ensuring that U.S. financial markets are open to foreign investment. My question is, who wants to invest in a commodity (the US dollar) that is nosediving? China renewed its economic warning to "take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies". China has 1.3 trillion US dollars in its treasuries and doesn't like the decline of its assets. This will likely continue the dollar's slide as China and other countries exchange their US securities for other, more stable investments.
As pointed out last week, the net affect of all of this could be a period of hyper-inflation. If there are other factors added to this such as a steep sell off on Wall Street, or another decline in real estate or the mortgage industry, we could begin a steep decline in our economy. The telling indicator will likely be this holiday season's sales reports. If US consumers don't spend at the stores, we will be looking at a spiraling recession in the coming months.
We must pay more careful attention, therefore, to what we have heard, so that we do not drift away. Hebrews 2:1
Sharp curve ahead, watch the road! Stay tuned ...
Friday, November 9, 2007
Annuities
Annuities are probably the premier investment vehicle for the elderly. With a variety of styles, plans, payout schedules, and protection; the annuity can give seniors just what they are looking for. An annuity technically is an insurance contract that offers a death benefit to beneficiaries when the insured dies, but it is also an excellent way to preserve wealth already accumulated. Many annuities offer a step-up provision that if the value of the annuity goes up, a snap shot is taken of the account value (usually every year) and recorded. If the account value goes below that level and the insured dies, the beneficiaries still receive the top level of that previous snap shot.
There are also many way the retiree can take distributions without penalties and sometimes without tax consequences. Many plans offer distributions up to 10% of the value each year without surrender charges. You may also be able to take a fixed amount for life with any remainder of assets still going to your beneficiaries. As far as taxes are concerned, you only pay when distributions are made to you and are taxed on the capital gains of the account. If you select conservative investments of mutual funds, stocks, and bonds, the gains are usually low. Again, this vehicle is more about preservation of wealth than about growth.
Because of the many options available, an annuity is also one of the most expensive investment vehicles based on a variety of fees. There are management fees (called 12b-1 fees), surrender charges (that usually decline each year), and other miscellaneous fees connected to maintaining the accounts within the annuity. Be sure to check the annuity prospectus for all the details.
May integrity and uprightness protect me,
because my hope is in you. Psalms 25:21
Next week, alternative investment vehicles will be covered. Stay tuned ...
There are also many way the retiree can take distributions without penalties and sometimes without tax consequences. Many plans offer distributions up to 10% of the value each year without surrender charges. You may also be able to take a fixed amount for life with any remainder of assets still going to your beneficiaries. As far as taxes are concerned, you only pay when distributions are made to you and are taxed on the capital gains of the account. If you select conservative investments of mutual funds, stocks, and bonds, the gains are usually low. Again, this vehicle is more about preservation of wealth than about growth.
Because of the many options available, an annuity is also one of the most expensive investment vehicles based on a variety of fees. There are management fees (called 12b-1 fees), surrender charges (that usually decline each year), and other miscellaneous fees connected to maintaining the accounts within the annuity. Be sure to check the annuity prospectus for all the details.
May integrity and uprightness protect me,
because my hope is in you. Psalms 25:21
Next week, alternative investment vehicles will be covered. Stay tuned ...
Thursday, November 8, 2007
Mutual Funds
Mutual funds is where most people end up for their investments, either through their 401k plan from work or their IRA. They don't know much about investing, and this is probably the best return if you choose the right mutual funds. However, there are tens of thousands of mutual funds and over 40,000 stocks out there. There are also hundreds if not thousands of newsletters and investment reports. Who can make a good decision with those kinds of choices? Well, the place to start is www.morningstar.com. Most of the information is free and it's dependable. They are an independent rating agency that will review the essentials of companies and mutual fund managers. The top rating is 5 stars and the lowest is 1 star. Obviously, you would want to choose selections with the highest ratings.
Mutual funds offer people the easiest choice for diversifying their portfolio. The fund manager selects many different stocks, bonds, and money market instruments based on predetermined criteria specified in the prospectus. This document describes the mutual fund in detail, from management fees, withdrawal rules and surcharges, track record, fund manager history, financials, and selection criteria for investment selection. The style of investments are also important. There is a 9 square grid box that determines where the investments will be made. Along the side are large, medium, and small companies, along the bottom is value, blend, and growth. Some managers will select large value companies, some small growth companies. The key is to select some in a variety of styles to level out performance. Nearly every year, a different style offers the best return. You won't know ahead of time, so if you have much of the grid covered, and high rated funds, you ought to do pretty well. Good mutual funds will average 6-12% per year. Look for ones that perform consistently in their 1, 3, 5, and 10 year time periods. New funds are usually more risky because their track record are incomplete. Since the best returns vary from year to year, don't chase the area that did the best last year, because it likely won't repeat.
Turnover ratio is also important when selecting mutual funds. The turnover ratio measures how frequently stocks and bonds are sold within the year. The more transactions, the more taxable events and commission costs occur for the fund and subsequently lowers overall return. However, in down markets, the manager may be dumping underperforming stocks before the losses become too great.
The sector percentage is also relevant. If the percentage in one industry is high (over 20%) and the industry goes through a decline, the overall returns will be brought down. Again, the prospectus will outline the selection criteria.
If you leave your investments to others, make sure you do your homework. A little investigation and due diligence can make a huge difference over time.
The lips of the wise spread knowledge; not so the hearts of fools. Proverbs 15:7
More investment vehicles are coming. Stay tuned ...
Mutual funds offer people the easiest choice for diversifying their portfolio. The fund manager selects many different stocks, bonds, and money market instruments based on predetermined criteria specified in the prospectus. This document describes the mutual fund in detail, from management fees, withdrawal rules and surcharges, track record, fund manager history, financials, and selection criteria for investment selection. The style of investments are also important. There is a 9 square grid box that determines where the investments will be made. Along the side are large, medium, and small companies, along the bottom is value, blend, and growth. Some managers will select large value companies, some small growth companies. The key is to select some in a variety of styles to level out performance. Nearly every year, a different style offers the best return. You won't know ahead of time, so if you have much of the grid covered, and high rated funds, you ought to do pretty well. Good mutual funds will average 6-12% per year. Look for ones that perform consistently in their 1, 3, 5, and 10 year time periods. New funds are usually more risky because their track record are incomplete. Since the best returns vary from year to year, don't chase the area that did the best last year, because it likely won't repeat.
Turnover ratio is also important when selecting mutual funds. The turnover ratio measures how frequently stocks and bonds are sold within the year. The more transactions, the more taxable events and commission costs occur for the fund and subsequently lowers overall return. However, in down markets, the manager may be dumping underperforming stocks before the losses become too great.
The sector percentage is also relevant. If the percentage in one industry is high (over 20%) and the industry goes through a decline, the overall returns will be brought down. Again, the prospectus will outline the selection criteria.
If you leave your investments to others, make sure you do your homework. A little investigation and due diligence can make a huge difference over time.
The lips of the wise spread knowledge; not so the hearts of fools. Proverbs 15:7
More investment vehicles are coming. Stay tuned ...
Wednesday, November 7, 2007
CDs, T-bills, US gov securities
One other investment that people generally gets introduced to early in their life is CDs, or certificates of deposits. This is the common investment vehicle of banks. However, like life insurance, their returns are really low, usually 2-5%. Because of this, the joke with CDs is "certificates of depreciation". Again, once you factor in inflation and taxable interest, the returns are often negative for a "safe" investment.
Most people would get really angry to learn how much money banks make on this money deposited in CDs. First, banks are eligible to loan up to 10 times the amount deposited. These loans are part of the fractional reserve system (look up definition and example on wikipedia.org). When the loans are granted, the bank makes money in interest as the loans are paid back. Those payments are again lent out again on new loans. The cycle continues. This is how banks make money essentially out of nothing, because they are not putting up any collateral for the loans. As long as the loans don't default and there is not a huge demand for withdrawals, the money flows endlessly. When there is a huge demand for withdrawals, this is called a "run" on the bank or a bank panic. If that continues, banks eventually have to close. We haven't seen this in the US for over 70 years. Remember the savings and loan scandals of the late 80s? But, due to the dollar losing value worldwide and the recent sub-prime loan debacle, bank failures are likely again.
So, people might like the "safety" of US government securities, such as treasury bills (t-bills mature in less than 1 year), treasury notes (t-notes are from 2-10 years), treasury bonds, (t-bonds are 10-30 years), Treasury Inflation-Protected Securities are the inflation-indexed bonds (TIPS are in 5,10, & 20 year maturities), or savings bonds. The longer the maturity, the higher the yield. All of these are sold at a discount and yield their full value upon maturity. However, the returns are again very low, usually 2-6% per year. With inflation and taxable interest, you would be lucky to get a positive gain.
Both types of these vehicles have their place. For the elderly who are on a fixed income from Social Security or pensions, they have to rely on steady income to live. They are not likely to look for the value of their assets to grow, but to preserve whatever wealth they have accumulated. This is when these vehicles are appropriate.
Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this:
that wisdom preserves the life of its possessor. Ecclesiastes 7:12
More investment vehicles are coming. Stay tuned ...
Most people would get really angry to learn how much money banks make on this money deposited in CDs. First, banks are eligible to loan up to 10 times the amount deposited. These loans are part of the fractional reserve system (look up definition and example on wikipedia.org). When the loans are granted, the bank makes money in interest as the loans are paid back. Those payments are again lent out again on new loans. The cycle continues. This is how banks make money essentially out of nothing, because they are not putting up any collateral for the loans. As long as the loans don't default and there is not a huge demand for withdrawals, the money flows endlessly. When there is a huge demand for withdrawals, this is called a "run" on the bank or a bank panic. If that continues, banks eventually have to close. We haven't seen this in the US for over 70 years. Remember the savings and loan scandals of the late 80s? But, due to the dollar losing value worldwide and the recent sub-prime loan debacle, bank failures are likely again.
So, people might like the "safety" of US government securities, such as treasury bills (t-bills mature in less than 1 year), treasury notes (t-notes are from 2-10 years), treasury bonds, (t-bonds are 10-30 years), Treasury Inflation-Protected Securities are the inflation-indexed bonds (TIPS are in 5,10, & 20 year maturities), or savings bonds. The longer the maturity, the higher the yield. All of these are sold at a discount and yield their full value upon maturity. However, the returns are again very low, usually 2-6% per year. With inflation and taxable interest, you would be lucky to get a positive gain.
Both types of these vehicles have their place. For the elderly who are on a fixed income from Social Security or pensions, they have to rely on steady income to live. They are not likely to look for the value of their assets to grow, but to preserve whatever wealth they have accumulated. This is when these vehicles are appropriate.
Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this:
that wisdom preserves the life of its possessor. Ecclesiastes 7:12
More investment vehicles are coming. Stay tuned ...
Tuesday, November 6, 2007
Life Insurance
I thought I would begin where most people begin with investments - life insurance. First of all, life insurance is a very poor investment, with returns usually lower than the inflation rate. Second, it is designed for one thing - to make the insurance company money, a awful lot of money. Don't get me wrong, it has it's place. Speaking of which, the true purpose of life insurance is to replace the insured person's income if he/she were to die prematurely. If no one is dependent on your income, why do you need it?
There are all kinds of reasons insurance agents use to get people to buy life insurance. "It's forced savings"- true, but there are so many better ways to save money and get a higher return. "You care for your family if the unfortunate happens" - this is probably the most effective and the best reason for insurance, again if your family depends on your income. In this case, get the best coverage for the best price; term insurance, for at least the length of time until your kids are grown and out of the house. Whole life insurance, universal life, variable universal life, etc. all have a "savings" or "investment" element to them and are much more expensive. Again, the returns are generally lower. You get better investments outside of insurance, and better coverage with term if you don't combine the two. Also, with respect to term insurance, make sure it is not "accident only coverage". You may be involved in an accident and die two days later, the insurance company will likely deny the claim because you died in a hospital as result of injury complications, not from the accident.
Never get more coverage on a child or baby other than for funeral expenses. Again, you are not dependent on your child's income, which is usually none. College expenses can be saved for in better investment vehicles than insurance. Agents typically take advantage of people's inexperience in these matters and fear of the uncertain. If you take a little time to plan for the future, retirement, emergency funds, etc.; the uncertain is not so scary because you are prepared. You can begin by taking a small percentage of your budget for these things and have it build. Having a budget is another topic for another day.
Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. I Timothy 6:17
More investment vehicles reviewed in coming days. Stay tuned ...
There are all kinds of reasons insurance agents use to get people to buy life insurance. "It's forced savings"- true, but there are so many better ways to save money and get a higher return. "You care for your family if the unfortunate happens" - this is probably the most effective and the best reason for insurance, again if your family depends on your income. In this case, get the best coverage for the best price; term insurance, for at least the length of time until your kids are grown and out of the house. Whole life insurance, universal life, variable universal life, etc. all have a "savings" or "investment" element to them and are much more expensive. Again, the returns are generally lower. You get better investments outside of insurance, and better coverage with term if you don't combine the two. Also, with respect to term insurance, make sure it is not "accident only coverage". You may be involved in an accident and die two days later, the insurance company will likely deny the claim because you died in a hospital as result of injury complications, not from the accident.
Never get more coverage on a child or baby other than for funeral expenses. Again, you are not dependent on your child's income, which is usually none. College expenses can be saved for in better investment vehicles than insurance. Agents typically take advantage of people's inexperience in these matters and fear of the uncertain. If you take a little time to plan for the future, retirement, emergency funds, etc.; the uncertain is not so scary because you are prepared. You can begin by taking a small percentage of your budget for these things and have it build. Having a budget is another topic for another day.
Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. I Timothy 6:17
More investment vehicles reviewed in coming days. Stay tuned ...
Monday, November 5, 2007
Asset Allocation
Before we discuss investment vehicles, it is paramount to have a proper foundation. Asset allocation is a fancy way to say "don't have all your eggs in one basket". In other words, if something goes bad with one or two investments, you still have others that perform, not only to prevent you from losing everything, but to continually grow your nest egg.
Everyone will have a slightly different idea of what asset allocation is, because it is based on a person's risk tolerance and age. Generally, when you are older, you become more conservative because you have less time from when you need to draw on it and more wealth to lose. We discussed risk versus reward in a previous post. The best way to reduce risk is to understand the situation and calculate the possibility of loss. The lower the possibility of loss balanced with the opportunity for gain will determine what you are willing to risk.
To give you an idea what is a commonly accepted portfolio for medium risk and middle age, around 70% should be dedicated toward growth (stocks, equities), 20% toward income (bonds, real estate), and 10% toward aggressive growth (pre-ipo stocks, start-ups, penny stocks). A significant gain in the last category can double your return, but a lot of these don't return anything unless you really understand the risk and perform outstanding due diligence. And sometimes, you might get lucky.
It's also very important to understand cycles. Economies will vary significantly in cycles. Typically, stocks will do well on an overall basis for about 20 years, then will take a significant tumble. Commodities, such as gold and silver, will then do well for about 10 years, and then the cycle will repeat. Pay very close attention to these and find out what the markets are doing. An investment on the top of the cycle is the wrong time to buy. You want to buy low and sell high, or the reverse to maximize returns. This is tricky to identify exact times, so don't try to be perfect. Just be aware of the trend.
If you are wise, your wisdom will reward you;
if you are a mocker, you alone will suffer. Proverbs 9:12
There will be more on investment vehicles this week. Stay tuned ...
Everyone will have a slightly different idea of what asset allocation is, because it is based on a person's risk tolerance and age. Generally, when you are older, you become more conservative because you have less time from when you need to draw on it and more wealth to lose. We discussed risk versus reward in a previous post. The best way to reduce risk is to understand the situation and calculate the possibility of loss. The lower the possibility of loss balanced with the opportunity for gain will determine what you are willing to risk.
To give you an idea what is a commonly accepted portfolio for medium risk and middle age, around 70% should be dedicated toward growth (stocks, equities), 20% toward income (bonds, real estate), and 10% toward aggressive growth (pre-ipo stocks, start-ups, penny stocks). A significant gain in the last category can double your return, but a lot of these don't return anything unless you really understand the risk and perform outstanding due diligence. And sometimes, you might get lucky.
It's also very important to understand cycles. Economies will vary significantly in cycles. Typically, stocks will do well on an overall basis for about 20 years, then will take a significant tumble. Commodities, such as gold and silver, will then do well for about 10 years, and then the cycle will repeat. Pay very close attention to these and find out what the markets are doing. An investment on the top of the cycle is the wrong time to buy. You want to buy low and sell high, or the reverse to maximize returns. This is tricky to identify exact times, so don't try to be perfect. Just be aware of the trend.
If you are wise, your wisdom will reward you;
if you are a mocker, you alone will suffer. Proverbs 9:12
There will be more on investment vehicles this week. Stay tuned ...
Saturday, November 3, 2007
It's not too late
Saturday during fall is college football. Now, I'm not a huge fan, but occasionally I will see a game. Today there were two such games where the favorites were leading their perspective games, lost the lead in the 3rd quarter, but came back to win in the 4th quarter. Michigan was facing their in-state arch rival Michigan State who hadn't beaten them in 5 years, and Ohio State facing Wisconsin. What made the favorites, who both lost momentum in the game, re-find their winning edge? It's the drive of a champion, the will to overcome, the never say die attitude.
Well, the same perspective applies to the posts this week. Despite negative trends against the US dollar and inflation peering from around the corner, there are many routes to find a winning edge financially. Whether you are entering the first quarter of your life or the last quarter, it's not too late to change your direction and find a way to win.
Next week I will begin to lay out some options for those looking for answers. There are many financial vehicles. You have to first know what you like and need - a sports car when you are 75 may not be appropriate. Like wise, a horse drawn carriage with an old horse, may not get you to your far away destination.
Do not withhold good from those who deserve it,
when it is in your power to act.
Well, the same perspective applies to the posts this week. Despite negative trends against the US dollar and inflation peering from around the corner, there are many routes to find a winning edge financially. Whether you are entering the first quarter of your life or the last quarter, it's not too late to change your direction and find a way to win.
Next week I will begin to lay out some options for those looking for answers. There are many financial vehicles. You have to first know what you like and need - a sports car when you are 75 may not be appropriate. Like wise, a horse drawn carriage with an old horse, may not get you to your far away destination.
Do not withhold good from those who deserve it,
when it is in your power to act.
Do not say to your neighbor,
"Come back later; I'll give it tomorrow"—
when you now have it with you. Proverbs 3:27,28
Friday, November 2, 2007
Reading the Signs
Earlier this week, I discussed some current economic data regarding gold, silver, oil, and the US dollar. All of these continued their trends. At today's close, gold is $806.40, silver is $14.55, oil is $95.93 per barrel, and the US dollar index sank to 76.74 on Thursday's close. The Federal Reserve lowered interest rates another quarter point to 4.5% on Wednesday to bolster the money supply and keep the economy moving. This morning, even the 166,000 jobs increase on the US non farm payroll report, over double the forecast, did not stem the dollar slide. The foreign exchange rates for the Great British Pound, the Euro, the Swiss Franc were all at multi-decade highs against the US dollar.
What does all this mean? The US dollar is getting weaker and weaker, eroding purchasing power of all consumers, increasing the US trade deficit and sending more money out of the country and even less entering. All of this leads to increased pressure for inflation. Now, with the Fed lowering interest rates again this week, they are trying to increase the money supply which further increases inflationary pressures. They are willing to trade the risk of inflation for trying to salvage the weakening dollar. If their strategy does not work and the dollar continues to fall, we could begin a period of hyper-inflation, where prices increase dramatically in a short period of time. Gas prices will just be one of many things that will cost a lot more.
Set up road signs; put up guideposts. Take note of the highway, the road that you take. Jeremiah 31:21
The road up ahead curves ... stay tuned.
What does all this mean? The US dollar is getting weaker and weaker, eroding purchasing power of all consumers, increasing the US trade deficit and sending more money out of the country and even less entering. All of this leads to increased pressure for inflation. Now, with the Fed lowering interest rates again this week, they are trying to increase the money supply which further increases inflationary pressures. They are willing to trade the risk of inflation for trying to salvage the weakening dollar. If their strategy does not work and the dollar continues to fall, we could begin a period of hyper-inflation, where prices increase dramatically in a short period of time. Gas prices will just be one of many things that will cost a lot more.
Set up road signs; put up guideposts. Take note of the highway, the road that you take. Jeremiah 31:21
The road up ahead curves ... stay tuned.
Thursday, November 1, 2007
Due Diligence Continued
To continue on from yesterday about due diligence, management or leadership of the endeavor/business is just the first place to start. The next step is to find out everything possible about the industry. Is this a new product or service that never existed? Is there competition? What are the industry rates of returns for similar products or services? Is the new product or service protected legally in any way in terms of patents, trademarks, copyrights, etc.? What are the barriers to competition? How easy or difficult will it be for someone else to come in with a cheaper and better version?
Once that information is analyzed, the next step is to look at how that product or service will be brought to market for sale. Even the best ideas sometimes never make it to market successfully. First, is all the research and development needed for the product completed? Is more money needed for R&D? How long will it take before it is commercially available? Where or how will it be distributed to those markets? What profit percentages are given up to wholesale distributors, sales force, and special purchase incentives? What additional administrative and sales expenses are included? What is the impact on corporate taxes? Are there tax incentives available in the industry or for the product?
As you can see, this can become very involved. This is why it is extremely important that the management has the right people in place to make sure all of these critical elements are dealt with effeciently and also cost effective. Typically, investors will not have access to all of this information, so they will focus on the research on the leadership of the company and key details of the industry and market size. The remaining information may be contracted out for additional due diligence.
If this seems to be too difficult for the average person, you are right. That is why they are average. The wealthy have learned that these details are the reason for, not only how to create wealth, but to protect it when economic changes occur.
My, are there economic changes occurring now! Earlier this week I mentioned that gold was nearing an all time high, as is the price of oil, the dollar is weakening to record levels, etc. During times like these the wealthy are considering, if not moving, their assets from a depreciating asset to one that is appreciating. They are looking to grow the value of assets, not watch them erode.
Instruct a wise man and he will be wiser still;
teach a righteous man and he will add to his learning. Proverbs 9:9
There will be more ... stay tuned!
Once that information is analyzed, the next step is to look at how that product or service will be brought to market for sale. Even the best ideas sometimes never make it to market successfully. First, is all the research and development needed for the product completed? Is more money needed for R&D? How long will it take before it is commercially available? Where or how will it be distributed to those markets? What profit percentages are given up to wholesale distributors, sales force, and special purchase incentives? What additional administrative and sales expenses are included? What is the impact on corporate taxes? Are there tax incentives available in the industry or for the product?
As you can see, this can become very involved. This is why it is extremely important that the management has the right people in place to make sure all of these critical elements are dealt with effeciently and also cost effective. Typically, investors will not have access to all of this information, so they will focus on the research on the leadership of the company and key details of the industry and market size. The remaining information may be contracted out for additional due diligence.
If this seems to be too difficult for the average person, you are right. That is why they are average. The wealthy have learned that these details are the reason for, not only how to create wealth, but to protect it when economic changes occur.
My, are there economic changes occurring now! Earlier this week I mentioned that gold was nearing an all time high, as is the price of oil, the dollar is weakening to record levels, etc. During times like these the wealthy are considering, if not moving, their assets from a depreciating asset to one that is appreciating. They are looking to grow the value of assets, not watch them erode.
Instruct a wise man and he will be wiser still;
teach a righteous man and he will add to his learning. Proverbs 9:9
There will be more ... stay tuned!
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