Covered Call
What Does Covered Call Mean?
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.
This is also known as a "buy-write".
Investopedia explains Covered Call...
For example, let's say that you own shares of the TSJ Sports Conglomerate and like its long-term prospects as well as its share price but feel in the shorter term the stock will likely trade relatively flat, perhaps within a few dollars of its current price of, say, $25. If you sell a call option on TSJ for $26, you earn the premium from the option sale but cap your upside. One of three scenarios is going to play out:
a) TSJ shares trade flat (below the $26 strike price) - the option will expire worthless and you keep the premium from the option. In this case, by using the buy-write strategy you have successfully outperformed the stock.
b) TSJ shares fall - the option expires worthless, you keep the premium, and again you outperform the stock.
c) TSJ shares rise above $26 - the option is exercised, and your upside is capped at $26, plus the option premium. In this case, if the stock price goes higher than $26, plus the premium, your buy-write strategy has underperformed the TSJ shares.
Synthetic Call
What Does Synthetic Call Mean?
An investment strategy that mimics the payoff of a call option. A synthetic call is created by purchasing the underlying asset, selling a bond and purchasing a put option. The strike price on the put option is equal to the face value of the bond, which serves as the exercise price of the synthetic call.
Investopedia explains Synthetic Call...
A synthetic call produces the same overall payoff as a call option. The synthetic call will finish in the money when the price of the underlying asset is greater than the face value of the sold bond at the time of expiration. It will be out-of-the-money when the value of the bond is greater than that of the underlying asset. When the synthetic call is in the money, the profit is the difference between the price of the underlying asset and the face value of the bond. If the call finishes out of the money, the put option absorbs the loss from the underlying asset, with the exercise price of the put paying for the bond.
Collar
What Does Collar Mean?
1. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option.
Also known as "hedge wrapper".
2. A general restriction on market activities.
Investopedia Says Icon
1. The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached.
2. An example is a circuit breaker which is meant to prevent extreme losses (or gains) once an index reaches a certain level.
Collars can protect you against massive losses, but they also prevent massive gains.
Wednesday, January 7, 2009
Wednesday, December 24, 2008
Mutual Fund Hedge Fund Target Risk Fund Fund Of Funds
What Does Mutual Fund Mean?
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Investopedia explains Mutual Fund...
One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.
What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Investopedia explains Hedge Fund...
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
What Does Target Risk Fund Mean?
A fund that attempts to expose its investors to a specified amount of risk. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund, to ensure that the level of risk isn’t greater or less than the fund's target amount of risk exposure.
Investopedia explains Target Risk Fund...
Target risk funds typically label themselves as "conservative", "moderate risk" or "aggressive" in terms of their risk exposure. Regardless of the label applied, the intent is to offer a relatively constant level of risk exposure to investors.
This allows investors who are considered highly risk averse to identify and select a fund of funds that has a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk exposure will not change substantially.
The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added service.
What Does Fund Of Funds Mean?
A mutual fund that invests in other mutual funds.
This method is sometimes known as "multi-management".
Investopedia explains Fund Of Funds...
A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund. However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds.
Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called "Acquired Fund Fees and Expenses" (AFFE).
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Investopedia explains Mutual Fund...
One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.
What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Investopedia explains Hedge Fund...
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
What Does Target Risk Fund Mean?
A fund that attempts to expose its investors to a specified amount of risk. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund, to ensure that the level of risk isn’t greater or less than the fund's target amount of risk exposure.
Investopedia explains Target Risk Fund...
Target risk funds typically label themselves as "conservative", "moderate risk" or "aggressive" in terms of their risk exposure. Regardless of the label applied, the intent is to offer a relatively constant level of risk exposure to investors.
This allows investors who are considered highly risk averse to identify and select a fund of funds that has a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk exposure will not change substantially.
The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added service.
What Does Fund Of Funds Mean?
A mutual fund that invests in other mutual funds.
This method is sometimes known as "multi-management".
Investopedia explains Fund Of Funds...
A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund. However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds.
Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called "Acquired Fund Fees and Expenses" (AFFE).
Thursday, December 18, 2008
HOW TO SAVE IN BAD TIMES
HOW TO SAVE IN BAD TIMES
Bad times are likely to bring deflation, and deflation can make you poorer, even drive you into bankruptcy. Or it can make you significantly richer. The choice is yours. One thing you can do that will make the biggest difference is saving! If you can’t save, deflation could hurt you. If you can save, deflation will help you reap some very nice benefits:
Benefit 1. Your savings will go a long way. When you do spend, you will get more for less.
Benefit 2. At the right time, you will be able to buy great investment bargains. The investment world will be like one giant clearance sale at a major department store.
Benefit 3. Income! Right now, interest rates are low. But even low interest rates are better than a high-interest expense. Moreover, if you wait for a time when bond markets have fallen and their yields have risen, you could lock in a relatively high rate for many years to come.
Benefit 4. Even if there is no deflation, you will sleep better at night knowing that you have a good cushion to fall back on in case of any unexpected event. And even if inflation heats up again, you can largely keep up with the inflation by keeping your savings in a money market mutual fund—your interest income is likely to go up more or less in synch with the inflation.
To reap these benefits, follow these steps:
Step 1. Figure out how much you can comfortably save each month. Many people aim too high, fail, and then give up. Better to aim low and then stick with it religiously.
Step 2. If at all possible, make sure that money is saved automatically. Your employer, your credit union, or your bank will provide additional information on how to set it up. However, make sure it is a safe institution. For a rating on almost any bank, visit www.weissratings.com; for a rating on a credit union, visit www.veribanc.com.
Step 3. If you cannot set up an auto-savings program, resolve to never spend a dime until after your monthly savings have been set aside. There is absolutely no expenditure (except basic necessities, of course), which is more important than savings. This has always been true. In bad or deflationary times, it’s not even an option. Unless you already have a substantial nest egg, you almost invariably have to do it.
Step 4. Let time work for you. You will be absolutely amazed at how much money you can accumulate just by putting the same small, comfortable amount away month after month. And that’s even without any interest. Once you add the interest, plus the interest on the interest, you will be even more amazed.
Bad times are likely to bring deflation, and deflation can make you poorer, even drive you into bankruptcy. Or it can make you significantly richer. The choice is yours. One thing you can do that will make the biggest difference is saving! If you can’t save, deflation could hurt you. If you can save, deflation will help you reap some very nice benefits:
Benefit 1. Your savings will go a long way. When you do spend, you will get more for less.
Benefit 2. At the right time, you will be able to buy great investment bargains. The investment world will be like one giant clearance sale at a major department store.
Benefit 3. Income! Right now, interest rates are low. But even low interest rates are better than a high-interest expense. Moreover, if you wait for a time when bond markets have fallen and their yields have risen, you could lock in a relatively high rate for many years to come.
Benefit 4. Even if there is no deflation, you will sleep better at night knowing that you have a good cushion to fall back on in case of any unexpected event. And even if inflation heats up again, you can largely keep up with the inflation by keeping your savings in a money market mutual fund—your interest income is likely to go up more or less in synch with the inflation.
To reap these benefits, follow these steps:
Step 1. Figure out how much you can comfortably save each month. Many people aim too high, fail, and then give up. Better to aim low and then stick with it religiously.
Step 2. If at all possible, make sure that money is saved automatically. Your employer, your credit union, or your bank will provide additional information on how to set it up. However, make sure it is a safe institution. For a rating on almost any bank, visit www.weissratings.com; for a rating on a credit union, visit www.veribanc.com.
Step 3. If you cannot set up an auto-savings program, resolve to never spend a dime until after your monthly savings have been set aside. There is absolutely no expenditure (except basic necessities, of course), which is more important than savings. This has always been true. In bad or deflationary times, it’s not even an option. Unless you already have a substantial nest egg, you almost invariably have to do it.
Step 4. Let time work for you. You will be absolutely amazed at how much money you can accumulate just by putting the same small, comfortable amount away month after month. And that’s even without any interest. Once you add the interest, plus the interest on the interest, you will be even more amazed.
HOW TO PROTECT YOUR JOB IN BAD TIMES
HOW TO PROTECT YOUR JOB IN BAD TIMES
The job cuts of 2002 were unusual for two reasons: (1) they took place when the economy was supposedly “recovering” and (2) they affected almost everyone in equal proportion—regardless of ethnic group, origin, gender, profession, job status,or income level. The same will probably be true in the future as well. To protect your job, follow these steps:
Step 1. Check the financial prospects of your company. If its shares are listed on a stock exchange, you can get a rating on the stock by checking with an independent rating agency. If you feel you can’t afford to spend a few dollars for the rating, you can also get a free risk rating from Risk Metrics (212-981-7475 or www.riskgrades.com).
Step 2. If your employer does not have shares listed on an exchange, ask for the latest financial statement. If your employer says it is confidential, you can acquire an independent report from Dun & Bradstreet (www.dnb.com).
Step 3. If your company has a weak risk rating or a poor report from Dun & Bradstreet, it’s not a good sign. It might do OK in good times, but your job—and possibly the entire company—may be vulnerable in bad times.
Step 4. Needless to say, to secure your income, there are two strategies you can follow:
Strategy A. Do your utmost to make yourself a valuable employee. Seek company-sponsored opportunities for learning new job skills. And even if none are available,
allocate at least an hour per day of your spare time to learn skills of value to the firm. With the Internet, you’d be amazed at how much you can learn for free or at
a very low cost. And if you do not have access to the Internet from home, free access is available at most public libraries. The librarian should be able to give you some excellent tips on the latest, best sites.
Strategy B. Do your utmost to continually stay on top of the job market. Visit www.monster.com and similar sites to take advantage of a wealth of free information on the most marketable job skills, tips on how to get a job, and updates on what’s going on in various industries. Also use these sites to keep your résumé posted on the Web as much as possible.
Step 5. Use the following guidelines to decide which strategy to pursue:
■ If the economy is strong and your company is low risk: Pursue Strategy A almost exclusively but continue to stay in touch with what’s going on in the job market. If
the economy is weak but the company seems to be low risk, pursue both strategies with equal energy.
■ If the economy is strong but the company is high risk, pursue both strategies with equal energy.
■ If the economy is weak and the risk is high, make Strategy B your first priority but do not neglect Strategy A, especially with respect to job skills. If you do change jobs, you will still need those as well. Don’t be afraid of what your employer might think or say about any job-search activities. Make it clear that you
always stay in touch with the job market no matter what,and if you have no intention of leaving, say so.
The job cuts of 2002 were unusual for two reasons: (1) they took place when the economy was supposedly “recovering” and (2) they affected almost everyone in equal proportion—regardless of ethnic group, origin, gender, profession, job status,or income level. The same will probably be true in the future as well. To protect your job, follow these steps:
Step 1. Check the financial prospects of your company. If its shares are listed on a stock exchange, you can get a rating on the stock by checking with an independent rating agency. If you feel you can’t afford to spend a few dollars for the rating, you can also get a free risk rating from Risk Metrics (212-981-7475 or www.riskgrades.com).
Step 2. If your employer does not have shares listed on an exchange, ask for the latest financial statement. If your employer says it is confidential, you can acquire an independent report from Dun & Bradstreet (www.dnb.com).
Step 3. If your company has a weak risk rating or a poor report from Dun & Bradstreet, it’s not a good sign. It might do OK in good times, but your job—and possibly the entire company—may be vulnerable in bad times.
Step 4. Needless to say, to secure your income, there are two strategies you can follow:
Strategy A. Do your utmost to make yourself a valuable employee. Seek company-sponsored opportunities for learning new job skills. And even if none are available,
allocate at least an hour per day of your spare time to learn skills of value to the firm. With the Internet, you’d be amazed at how much you can learn for free or at
a very low cost. And if you do not have access to the Internet from home, free access is available at most public libraries. The librarian should be able to give you some excellent tips on the latest, best sites.
Strategy B. Do your utmost to continually stay on top of the job market. Visit www.monster.com and similar sites to take advantage of a wealth of free information on the most marketable job skills, tips on how to get a job, and updates on what’s going on in various industries. Also use these sites to keep your résumé posted on the Web as much as possible.
Step 5. Use the following guidelines to decide which strategy to pursue:
■ If the economy is strong and your company is low risk: Pursue Strategy A almost exclusively but continue to stay in touch with what’s going on in the job market. If
the economy is weak but the company seems to be low risk, pursue both strategies with equal energy.
■ If the economy is strong but the company is high risk, pursue both strategies with equal energy.
■ If the economy is weak and the risk is high, make Strategy B your first priority but do not neglect Strategy A, especially with respect to job skills. If you do change jobs, you will still need those as well. Don’t be afraid of what your employer might think or say about any job-search activities. Make it clear that you
always stay in touch with the job market no matter what,and if you have no intention of leaving, say so.
HOW TO REDUCE DEBTS IN BAD TIMES
HOW TO REDUCE DEBTS IN BAD TIMES
Not all debt is bad. But it’s well known that debt can be a financial drug that is highly addictive. Yet banks mail tens of millions of unsolicited credit cards to American households every year, effectively putting free samples of this potential
narcotic into the hands of nearly everyone except the homeless. Mortgage companies make millions of unsolicited phone calls offering their “low-rate” mortgages. And even the Federal Reserve chairman himself, in testimony before Congress, urged Americans to spend and borrow more. The consequences are mind-boggling: The most personal bankruptcies in history. Countless divorces attributed to, or aggravated by, debt troubles. Many suicides. And that’s in relatively good times! In bad times, it’s worse. If your debt is already feeling burdensome, any loss in income that you may suffer can push you over the brink. And even if you feel your debt is currently manageable, a decline in the economy can suddenly make any debts loom far larger. Deflation (falling prices and incomes) can be especially painful: It makes all debts much harder to pay. If bad times or deflation strike your household, you may find yourself making only minimum payments on your credit card. You may notice that the balance of your checking account is running low—or running down completely—before the end of each month, and you’re drawing into savings to cover the shortfall. You could find yourself filling out applications for extra loans (more debt!) or borrowing from your retirement fund or life insurance policy. Act quickly to prevent these problems. If they are already happening, act even more quickly!If you have significant debts right now, you could be sleepwalking toward bankruptcy.Is bankruptcy an easy way out? No. It can be a lot tougher than you think. And if bankruptcy reform laws are enacted, tougher still. So if there ever was a time to eliminate your debt, this is it. Follow these steps:
Step 1: Declare your own personal war on debt. If debt has the potential to disrupt your life and cause your family serious grief, we assure you it is not your friend.
Focus your mental energy on reducing it.
Step 2: Attack your credit cards first. Get a pair of scissors. Put the scissors on your dining room table. Collect all credit cards in the household, including your own, your spouse’s, and those of anyone else for whom you’re financially responsible. Put them on the table too. Next, delight in that crisp “snip-snip-snip” sound as you cut them all in half. Enjoy the satisfaction of gathering them all together with one, clean sweeping motion of the hand. Watch with glee as they tumble neatly into the wastebasket.
Step 3: Attack your credit card statements next. Gather every last statement you have. If you don’t have all of them, don’t fret. You certainly will by the end of the
month. On the statement, find the annual percentage rate (APR). At the top of each statement, write down the APR in large numbers. Then, sort the statements with the largest APR at the top, the lowest at the bottom.
Step 4: Add up your minimum monthly payments. Let’s say it comes to $200. Isn’t it enough to just pay the minimum? No! Credit card companies deliberately require
very, very low minimum payments. Their agenda is to let you pile up as much debt as possible so they can earn as much interest as possible. How long would it take you to
pay off a credit card with minimum monthly payments alone? It’s a joke. Even with all your credit cards now in the trash, if you owe $2,000 on a 17 percent card, it could take you 24 years and cost you $979 in interest alone (on top of the $1,000 principal). So minimum payments are definitely not the way to go.
Step 5: Figure out how much you can pay over and above the total of all the minimum payments. Try to pay at least triple your minimum. So if your total is $200, that means your goal should be to squeeze at least another $600 out of your budget each month.
Step 6: Pay off the worst ones first! Use 100 percent of the extra $600 to pay off the credit card with the highest interest rate. If two or more cards have the same or
almost the same interest rate, send the extra $600 to the one that has the highest balance.
Step 7: Consider using your savings to get out of debt. The rate you’re paying is probably close to 10 times higher than the rate you’re earning! Not exactly a good deal.
Step 8: Avoid new credit cards. Period. Once you’ve kicked the credit card habit, don’t go back. If you need the convenience of a card, get a debit card. But ask your
bank to give you a true, pure debit card—not one that comes with a built-in credit card feature. If new ones come in the mail, trash them immediately.
Step 9: Start paying down any other personal loans you may have. If you’ve been able to get along with $600 less per month in spending money until now, and if your
circumstances don’t change, you should be able to stick with it. Use it to pay down any other personal loans you may have.
Step 10: Pay down your mortgage. Most people don’t realize that all you have to do is to write a larger check than normal, put it in the business reply envelope, and
send it to the mortgage company. They will automatically deduct the extra amount from your principal. So, continuing with the earlier example, if your regular mortgage payment is $1,000, write the mortgage company a check for $1,600 every month. You’d be surprised how much more quickly your mortgage will be paid off.
Not all debt is bad. But it’s well known that debt can be a financial drug that is highly addictive. Yet banks mail tens of millions of unsolicited credit cards to American households every year, effectively putting free samples of this potential
narcotic into the hands of nearly everyone except the homeless. Mortgage companies make millions of unsolicited phone calls offering their “low-rate” mortgages. And even the Federal Reserve chairman himself, in testimony before Congress, urged Americans to spend and borrow more. The consequences are mind-boggling: The most personal bankruptcies in history. Countless divorces attributed to, or aggravated by, debt troubles. Many suicides. And that’s in relatively good times! In bad times, it’s worse. If your debt is already feeling burdensome, any loss in income that you may suffer can push you over the brink. And even if you feel your debt is currently manageable, a decline in the economy can suddenly make any debts loom far larger. Deflation (falling prices and incomes) can be especially painful: It makes all debts much harder to pay. If bad times or deflation strike your household, you may find yourself making only minimum payments on your credit card. You may notice that the balance of your checking account is running low—or running down completely—before the end of each month, and you’re drawing into savings to cover the shortfall. You could find yourself filling out applications for extra loans (more debt!) or borrowing from your retirement fund or life insurance policy. Act quickly to prevent these problems. If they are already happening, act even more quickly!If you have significant debts right now, you could be sleepwalking toward bankruptcy.Is bankruptcy an easy way out? No. It can be a lot tougher than you think. And if bankruptcy reform laws are enacted, tougher still. So if there ever was a time to eliminate your debt, this is it. Follow these steps:
Step 1: Declare your own personal war on debt. If debt has the potential to disrupt your life and cause your family serious grief, we assure you it is not your friend.
Focus your mental energy on reducing it.
Step 2: Attack your credit cards first. Get a pair of scissors. Put the scissors on your dining room table. Collect all credit cards in the household, including your own, your spouse’s, and those of anyone else for whom you’re financially responsible. Put them on the table too. Next, delight in that crisp “snip-snip-snip” sound as you cut them all in half. Enjoy the satisfaction of gathering them all together with one, clean sweeping motion of the hand. Watch with glee as they tumble neatly into the wastebasket.
Step 3: Attack your credit card statements next. Gather every last statement you have. If you don’t have all of them, don’t fret. You certainly will by the end of the
month. On the statement, find the annual percentage rate (APR). At the top of each statement, write down the APR in large numbers. Then, sort the statements with the largest APR at the top, the lowest at the bottom.
Step 4: Add up your minimum monthly payments. Let’s say it comes to $200. Isn’t it enough to just pay the minimum? No! Credit card companies deliberately require
very, very low minimum payments. Their agenda is to let you pile up as much debt as possible so they can earn as much interest as possible. How long would it take you to
pay off a credit card with minimum monthly payments alone? It’s a joke. Even with all your credit cards now in the trash, if you owe $2,000 on a 17 percent card, it could take you 24 years and cost you $979 in interest alone (on top of the $1,000 principal). So minimum payments are definitely not the way to go.
Step 5: Figure out how much you can pay over and above the total of all the minimum payments. Try to pay at least triple your minimum. So if your total is $200, that means your goal should be to squeeze at least another $600 out of your budget each month.
Step 6: Pay off the worst ones first! Use 100 percent of the extra $600 to pay off the credit card with the highest interest rate. If two or more cards have the same or
almost the same interest rate, send the extra $600 to the one that has the highest balance.
Step 7: Consider using your savings to get out of debt. The rate you’re paying is probably close to 10 times higher than the rate you’re earning! Not exactly a good deal.
Step 8: Avoid new credit cards. Period. Once you’ve kicked the credit card habit, don’t go back. If you need the convenience of a card, get a debit card. But ask your
bank to give you a true, pure debit card—not one that comes with a built-in credit card feature. If new ones come in the mail, trash them immediately.
Step 9: Start paying down any other personal loans you may have. If you’ve been able to get along with $600 less per month in spending money until now, and if your
circumstances don’t change, you should be able to stick with it. Use it to pay down any other personal loans you may have.
Step 10: Pay down your mortgage. Most people don’t realize that all you have to do is to write a larger check than normal, put it in the business reply envelope, and
send it to the mortgage company. They will automatically deduct the extra amount from your principal. So, continuing with the earlier example, if your regular mortgage payment is $1,000, write the mortgage company a check for $1,600 every month. You’d be surprised how much more quickly your mortgage will be paid off.
Monday, December 15, 2008
9 Predictions For '09 In The Markets
Predictions: 9 For '09 In The Markets
Posted By:Patti Domm
Last year at this time, we happily said goodbye to 2007 with a naive hopefulness that 2008 would be better. The credit crisis would end, the economy would show its resilience, and stocks, well stocks, were supposed to go up. Instead, the credit crunch worsened, the government rescued (or didn't rescue) a series of financial institutions and stocks hit an 11-year low.
So much for year-end prognostications. It only makes sense to turn up the gloom factor on 2009 predictions, and hope for the best.
1. Manic Markets
Volatility in the stock market continues to be the norm as the New Year starts. But stocks could slip into a protracted, quiet period before ultimately moving slightly higher later in the year. Credit markets begin to heal but not before more market calamity and dislocations.
2. 'R' Word
Last year, nobody wanted to say it but it's now clear, the economy could be in full-blown recession for most of the year. Third quarter will hopefully be a turning point.
3. Jobs
Unemployment numbers get pretty bad. Look for a high of close to 10 percent by the end of the year, or greater depending on how the next fiscal stimulus package is dispersed.
4. Financial Institutions
More fail, more merge, and the government has a new group it helps in the first quarter. But by year end, look for some institutions try to shake loose their new government shareholder. Other will have the government riding along for a long time to come.
5. Housing
It's the starting point and end of the financial meltdown and unfortunately, it doesn't get better any time soon. By year end, it may start to seem like there's a faint light at the end of the tunnel, not a train. The first part of the year could be just ugly.
6. Washington
The government continues to find creative ways to jump into the inner workings of the financial markets and to save companies from themselves. By the spring, everyone agrees it's now a bad idea and there's been enough interference. In the first quarter, the government's role as shareholder starts to take shape, and we see just how much meddling regulators will do with the companies they oversee.
7. Foreign Affairs
Economic recovery and the functioning of the international banking system are dependant on the cooperation of world leaders and central banks. So far, there's been an unprecedented, far reaching level of cooperation. The challenge in 2009 will be how these forced allegiances perform under pressure. But because each country knows its survival depends on the whole planet thriving, they continue to work on a global solution.
8. Currency
The dollar holds its gains against the euro and other currencies. Risk aversion fades, pushing the yen higher.
9. Uncharted Territory
We hear that about a million and a half times when those who give out advice and make forecasts tell us they could not have predicted what the markets and economy would do next.
Posted By:Patti Domm
Last year at this time, we happily said goodbye to 2007 with a naive hopefulness that 2008 would be better. The credit crisis would end, the economy would show its resilience, and stocks, well stocks, were supposed to go up. Instead, the credit crunch worsened, the government rescued (or didn't rescue) a series of financial institutions and stocks hit an 11-year low.
So much for year-end prognostications. It only makes sense to turn up the gloom factor on 2009 predictions, and hope for the best.
1. Manic Markets
Volatility in the stock market continues to be the norm as the New Year starts. But stocks could slip into a protracted, quiet period before ultimately moving slightly higher later in the year. Credit markets begin to heal but not before more market calamity and dislocations.
2. 'R' Word
Last year, nobody wanted to say it but it's now clear, the economy could be in full-blown recession for most of the year. Third quarter will hopefully be a turning point.
3. Jobs
Unemployment numbers get pretty bad. Look for a high of close to 10 percent by the end of the year, or greater depending on how the next fiscal stimulus package is dispersed.
4. Financial Institutions
More fail, more merge, and the government has a new group it helps in the first quarter. But by year end, look for some institutions try to shake loose their new government shareholder. Other will have the government riding along for a long time to come.
5. Housing
It's the starting point and end of the financial meltdown and unfortunately, it doesn't get better any time soon. By year end, it may start to seem like there's a faint light at the end of the tunnel, not a train. The first part of the year could be just ugly.
6. Washington
The government continues to find creative ways to jump into the inner workings of the financial markets and to save companies from themselves. By the spring, everyone agrees it's now a bad idea and there's been enough interference. In the first quarter, the government's role as shareholder starts to take shape, and we see just how much meddling regulators will do with the companies they oversee.
7. Foreign Affairs
Economic recovery and the functioning of the international banking system are dependant on the cooperation of world leaders and central banks. So far, there's been an unprecedented, far reaching level of cooperation. The challenge in 2009 will be how these forced allegiances perform under pressure. But because each country knows its survival depends on the whole planet thriving, they continue to work on a global solution.
8. Currency
The dollar holds its gains against the euro and other currencies. Risk aversion fades, pushing the yen higher.
9. Uncharted Territory
We hear that about a million and a half times when those who give out advice and make forecasts tell us they could not have predicted what the markets and economy would do next.
Tuesday, December 9, 2008
Why Buffett's Buying Today
In the midst of economic chaos, Warren Buffett recently made a bold prediction. He said that now is the time to buy American stocks.
Of course, this call seems utterly insane. Banks are failing, the credit markets are deadlocked, unemployment is skyrocketing, and there's likely to be terrible news for months.
On the other hand, this is Warren Buffett, and he's made these sorts of predictions before.
1974: Stagflation
The years 1973 and 1974 were two very bad ones for the market. OPEC had started flexing its muscles, causing oil to quadruple. This resulted in a long recession, with inflation spiking to 12.3% in 1974, while real GDP growth fell by 0.5%. America experienced stagflation -- the ugly combination of a recession and high inflation rates -- and people were terrified. The situation was even worse in the United Kingdom, where the government was bailing out banks after real estate crashed. Over those two years, the S&P 500 plunged by 42%.
It was then, on Nov. 1, 1974, at the height of the pessimism, that Buffett made his first well-publicized bullish market call. He noted that he was well aware that the world was in a mess, but that stocks were simply too cheap. "If you're only worried about corporate profits, panic or depression, these things don't bother me at these prices."
To be totally clear, Buffett made one of the most direct predictions of his entire career: "Now is the time to invest and get rich." Buffett himself was buying shares of The Washington Post (NYSE: WPO) and advertising agency Interpublic (NYSE: IPG).
It worked out pretty well for him. The market jumped 32% in 1975, and another 19% the next year. Even today, the Dow Jones Industrial Average's 38% gain in 1975 stands up as its biggest increase since 1955.
1979: An oil crisis
That excellent performance was followed by two poor years. Once again, we were experiencing double-digit inflation and falling GDP growth. Again, we were going through an oil crisis, this one coming in the wake of the Iranian Revolution. As a result, when Buffett made his next call on Aug. 6, 1979, the Dow Jones Average was actually trading lower than it was at the end of 1975.
This time, Buffett noted that stocks were far more attractive than bonds. He believed that pension managers, who were piling into bonds yielding 9.5%, were investing using the rearview mirror. They were avoiding the equities that had recently lost them money. But Buffett recognized that the underlying businesses were actually performing well. A combination of falling stock prices and improving business fundamentals made stocks an attractive investment.
Buffett figured that stocks were probably offering long-term returns of 13% or better. He bought oil producer Hess (NYSE: HES), GEICO, and General Foods, which later became part of Kraft (NYSE: KFT).
This time, Buffett's timing wasn't perfect -- the S&P 500 fell a bit more over the next few months. But his long-term prediction was spot-on. During the 1980s, the S&P 500 rose 13% annually before dividends.
1999: The Internet bubble
In November 1999, during the height of the Internet bubble, Buffett made his only bearish call. At the time, the market was in a speculative fervor, with Internet stocks showing huge price increases seemingly every day. In the five years between 1995 and 1999, the S&P 500 tripled, with compound annual returns of 26%. Many considered Buffett a relic for refusing to buy into the technology boom.
Buffett, however, noted that, because of a combination of cheap initial valuations and falling interest rates, stocks had achieved unprecedented annual returns of 19% over a 17-year period. These results made investors unreasonably optimistic. New investors were expecting 10-year annual returns of 22.6%, while even experienced investors predicted 12.9%. But the huge boom was only supported by modest GDP growth, and therefore wasn't sustainable. So, Buffett expected about 4% real returns.
He continued to hold Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and M&T Bank (NYSE: MTB), though he noted in the 2004 annual report that he should have sold some of Berkshire Hathaway's overvalued holdings.
Buffett's bearish prediction proved optimistic. The market continued to rise for a few months, with the S&P 500 topping out 9% above where it was when Buffett made the call. But that was followed by a crash. Since his call, the S&P 500 has dropped by 39%, for average annual losses of about 5%, well below Buffett's estimates.
The Foolish bottom line
The common theme of all these predictions is that Buffett didn't care about short-term fears. He wasn't worried about stagflation in the 1970s, and he didn't buy into the unrealistic optimism of the late 1990s. Instead, he rationally valued stocks, and made the right long-term calls. His biggest mistake was the 4% number he threw out in 1999 -- long-term returns have been much worse than his bearish prediction.
But that prediction was too optimistic partly because stocks are so unreasonably cheap right now. And that's why Buffett's buying today.
Of course, this call seems utterly insane. Banks are failing, the credit markets are deadlocked, unemployment is skyrocketing, and there's likely to be terrible news for months.
On the other hand, this is Warren Buffett, and he's made these sorts of predictions before.
1974: Stagflation
The years 1973 and 1974 were two very bad ones for the market. OPEC had started flexing its muscles, causing oil to quadruple. This resulted in a long recession, with inflation spiking to 12.3% in 1974, while real GDP growth fell by 0.5%. America experienced stagflation -- the ugly combination of a recession and high inflation rates -- and people were terrified. The situation was even worse in the United Kingdom, where the government was bailing out banks after real estate crashed. Over those two years, the S&P 500 plunged by 42%.
It was then, on Nov. 1, 1974, at the height of the pessimism, that Buffett made his first well-publicized bullish market call. He noted that he was well aware that the world was in a mess, but that stocks were simply too cheap. "If you're only worried about corporate profits, panic or depression, these things don't bother me at these prices."
To be totally clear, Buffett made one of the most direct predictions of his entire career: "Now is the time to invest and get rich." Buffett himself was buying shares of The Washington Post (NYSE: WPO) and advertising agency Interpublic (NYSE: IPG).
It worked out pretty well for him. The market jumped 32% in 1975, and another 19% the next year. Even today, the Dow Jones Industrial Average's 38% gain in 1975 stands up as its biggest increase since 1955.
1979: An oil crisis
That excellent performance was followed by two poor years. Once again, we were experiencing double-digit inflation and falling GDP growth. Again, we were going through an oil crisis, this one coming in the wake of the Iranian Revolution. As a result, when Buffett made his next call on Aug. 6, 1979, the Dow Jones Average was actually trading lower than it was at the end of 1975.
This time, Buffett noted that stocks were far more attractive than bonds. He believed that pension managers, who were piling into bonds yielding 9.5%, were investing using the rearview mirror. They were avoiding the equities that had recently lost them money. But Buffett recognized that the underlying businesses were actually performing well. A combination of falling stock prices and improving business fundamentals made stocks an attractive investment.
Buffett figured that stocks were probably offering long-term returns of 13% or better. He bought oil producer Hess (NYSE: HES), GEICO, and General Foods, which later became part of Kraft (NYSE: KFT).
This time, Buffett's timing wasn't perfect -- the S&P 500 fell a bit more over the next few months. But his long-term prediction was spot-on. During the 1980s, the S&P 500 rose 13% annually before dividends.
1999: The Internet bubble
In November 1999, during the height of the Internet bubble, Buffett made his only bearish call. At the time, the market was in a speculative fervor, with Internet stocks showing huge price increases seemingly every day. In the five years between 1995 and 1999, the S&P 500 tripled, with compound annual returns of 26%. Many considered Buffett a relic for refusing to buy into the technology boom.
Buffett, however, noted that, because of a combination of cheap initial valuations and falling interest rates, stocks had achieved unprecedented annual returns of 19% over a 17-year period. These results made investors unreasonably optimistic. New investors were expecting 10-year annual returns of 22.6%, while even experienced investors predicted 12.9%. But the huge boom was only supported by modest GDP growth, and therefore wasn't sustainable. So, Buffett expected about 4% real returns.
He continued to hold Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and M&T Bank (NYSE: MTB), though he noted in the 2004 annual report that he should have sold some of Berkshire Hathaway's overvalued holdings.
Buffett's bearish prediction proved optimistic. The market continued to rise for a few months, with the S&P 500 topping out 9% above where it was when Buffett made the call. But that was followed by a crash. Since his call, the S&P 500 has dropped by 39%, for average annual losses of about 5%, well below Buffett's estimates.
The Foolish bottom line
The common theme of all these predictions is that Buffett didn't care about short-term fears. He wasn't worried about stagflation in the 1970s, and he didn't buy into the unrealistic optimism of the late 1990s. Instead, he rationally valued stocks, and made the right long-term calls. His biggest mistake was the 4% number he threw out in 1999 -- long-term returns have been much worse than his bearish prediction.
But that prediction was too optimistic partly because stocks are so unreasonably cheap right now. And that's why Buffett's buying today.
Saturday, December 6, 2008
7 product that are getting cheaper
Your financial ship is taking on water from all sides: a plunging stock market, alarming spikes in food costs and a home value that's headed in the wrong direction. Now, Congress is enlisting your help to bail out Wall Street as well.
Ready for some good news?
Preposterous though it may seem, we have identified seven islands of relief in this dark sea of economic uncertainty.
That's right -- seven categories of consumer goods and services in which prices have actually declined over the past decade.
The good news comes from the Bureau of Labor Statistics' Consumer Price Index, or CPI. The Federal Trade Commission coordinates with the Bureau of Labor Statistics, or BLS, to make sure the CPI reflects an apples-to-apples value comparison before adjusting for inflation.
An improvement in the quality of a product over time is an important factor in this calculation.
"When they examine, they try to correct for differences in the quality of products," says Tom Kelly, who used to work for the FTC and is now director of the Center for Business and Economic Research at Baylor University in Waco, Texas.
"So when you make comparisons, you're comparing two similar-quality products. If the price remains the same and the quality goes up, that effectively reduces the price."
Following are seven categories of goods and services that are comparatively cheaper today than they were 10 years ago. All figures are based on a BLS comparison of like products and services from August 1998 and August 2008.
Items That Have Grown Cheaper
1. Phone bargains: Can you hear me now?
Motormouths rejoice: The price of wireless telephone services dropped 31.6 percent during the past decade, while the price of long-distance telephone calls fell 23.1 percent.
Why the cell phone bargains?
"Cellular telephone service was a relatively new item 10 years ago," says Dan Ginsburg, BLS supervisory economist for the CPI services section. "Usually, items that come in with new technology start off higher priced, but as sophistication in delivering the service becomes greater and competing companies develop more high-tech solutions, the costs keep coming down. Competition helps keep the prices low."
You can thank competition for the long-distance savings, too.
Ginsburg credits the 1983 deregulation of telephone services that resulted in the "Baby Bells" for reducing the cost of long-distance calls.
"As competition crept into the market, it became much less expensive with newer technology to make long-distance calls, so the prices just came way down," he says. "Suddenly, the Sprints and MCIs and other companies were eligible for long-distance service. It worked the way they thought it would."
2. Electronics: Applause, applause
It's hardly news that the prices of personal electronics have dropped to what would have been garage-sale prices a decade ago. This is true of televisions (down 77.9 percent); computers (down 88.3 percent); audio equipment (down 39.3 percent); and videocassettes, video discs and other media, including rentals (down 20.4 percent).
"Televisions and audio equipment have benefited from technological change," Ginsburg says. "It became much less expensive to manufacture TV sets. With the advent of high-definition TV in more recent years, older televisions that couldn't capture high-definition TV became less valuable and the prices dropped, even though they were still being manufactured."
Increased competition and cheaper labor costs associated with overseas outsourcing played a big role in price declines. These factors, combined with new technology, helped lower the prices of other recreational electronics, including photography (down 19.3 percent) and musical instruments (down 4.1 percent).
"The switch from conventional film to electronic capturing of pictures, moving into an electronic rather than a chemical-based methodology, apparently had big savings," Ginsburg says.
What about those bargain-basement Fender Stratocasters?
"That's been affected a lot by competition," Kelly says. "Particularly, you're getting more standardized products like guitars, which are made in China and other countries."
3. Footwear: These boots were made for savings
The recent "Sex and the City" movie would have us think that every woman's closet is stuffed to overflowing with Manolo Blahnik and Jimmy Choo shoes.
Not so, says BLS apparel economist Nicole Shepler.
"I don't have any hard-and-fast data on that, but that is a very small part of what we price overall," she says. "So, I think that doesn't have much of an impact."
In fact, shoe prices have declined by 3.9 percent, thanks in large part to lower-cost foreign imports and the growth of discount outlets and big-box stores.
"You still have $200 Nikes," Shepler admits. "But I would hypothesize that that may be one of the reasons why footwear has not declined as much as some of the other clothing areas."
4. New vehicles: More features, fewer buyers
Kelly isn't afraid to state the obvious: "People are not buying cars."
Reduced demand tends to lower prices, as witnessed by the 6.6 percent drop in the price of new cars and trucks over the past decade.
Ginsburg says the automotive industry has tried to hedge consumer disinterest by using less expensive materials and boosting the features: cup holders, seat warmers, DVD players, backup cameras and the like.
Because the Consumer Price Index takes functionality into consideration, the CPI's decline in the price of new cars and trucks may in part reflect that increase in features and options.
"Motor vehicles are a relatively mature industry," Ginsburg says. "As technology improvements are brought out, we usually quality-adjust for those because they have certain value for the consumer.
"If you look at the actual price-page of the vehicle today versus 10 years ago, today's Chevy Impala is probably quite a bit more expensive but it also has quite a bit more safety features and enhancements that are deemed desirable by motorists. If you remove those quality aspects, the price difference falls quite a bit."
5. Toys: Not all fun and games
The good news for parents is that the price of toys has declined 44.4 percent over the past decade.
The bad news? In some cases, quality may have been sacrificed for profit, as witnessed by recent lead-based toy scandals.
"Most of your toys have been outsourced to other countries where labor costs are lower," Kelly says.
On the bright side, Ginsburg says the declining cost of electronics has helped drive down the price of playthings.
"Toys, games, hobbies and playground equipment are down," Ginsburg says. "I would think that's due to outsourcing and moving toward electronic devices that have become very inexpensive to produce."
6. Apparel: Dress for less
We may be struggling to fill the gas tank or feed the family, but we can take some solace in the fact that the cost to clothe the family has dropped 11 percent during the past decade.
Shepler theorizes that as a society, we have shifted our measure of fashion away from clothing and toward more ostentatious displays of bling, such as plasma TVs and iPhones.
"In a sense, electronics has replaced clothing as the fashionable item," she says. "It's about having the latest iPod or toy instead of apparel as reflecting status.
"The demand for clothing has certainly fallen as more and more shoppers are looking to electronics as being the fashionable item."
Lower-cost foreign imports and volume buying by discount and big-box stores have helped lower price tags. This is particularly true for the cost of boys and girls clothing, which has dropped 23.3 percent and 18.6 percent in 10 years, respectively.
"Children's apparel certainly declined a bit more, likely due to more shoppers going to discounters," Shepler says. "Outlet and big-box stores didn't exist to this extent 10 years ago."
But Ginsburg warns that the quality of those garments may not measure up.
"The length of life of a garment may be a quality factor, but it's not measurable without being able to have someone wear the garment for six months, then wear an American-made equivalent for six months and see the differences between how they wear," he says.
7. Watches: Time to save big
You may not be able to buy time as easily in a slowing economy, but you certainly can tell time for less. The cost of a timepiece fell 6.2 percent in the last decade.
Shepler says for every Rolex, there are hundreds of thousands of Timex watches that account for the Consumer Price Index figure.
"Watches are an item where you do get a little bit of the high-end goods but it's more going to focus on what shoppers are actually buying, which is going to be more of the less-expensive items, and those are going to be bought more at discounters," she says.
In fact, the price of watches, especially with the widespread adoption of digital inner workings, has declined to such a degree that many of us consider them disposable.
"Rolexes haven't really caught on with everybody; they're still buying the throwaway watches -- planned obsolescence," she says. "We would have some of those higher-end watches, but it's certainly not going to make up the bulk of our sample."
The Downside
Kelly says these seven relative bargains may actually exceed their CPI-estimated savings due to the recent bumpy ride of the U.S. dollar.
"If you look at the dollar, for a long time it was falling fairly rapidly, causing some of these prices to hold up a little," he says. "Now, the dollar is stabilizing in terms of its rate of decreasing. If the dollar goes up in value, it makes foreign-made goods cheaper; in other words, it lowers the price of foreign currency so importers can buy those items cheaper."
However, there's a downside to falling prices as well, Kelly says.
"When prices are falling, people will postpone buying," he says. "So you don't necessarily want deflation; you want disinflation.
"If you start having prices going down -- as in the housing market right now where housing prices are collapsing -- people say, 'Why should I buy a house now? It's obviously a buyer's market, I'll just wait a few more months and get something even better.'"
Such prudence will likely characterize consumer behavior as the economy slows, world markets struggle to stabilize and the effects of the Wall Street bailout on Main Street become clearer, Kelly says.
"You'll find that even more of those people who have money to spend are going to sit back and wait on the big-ticket items," he says. "Those are durable items that they've already got in hand but maybe don't have the latest high-def, 52-inch version of.
They're going to live with the one they have for six more months to get something better."
Copyrighted, Bankrate.com. All rights reserved.
Taken From finance.yahoo.com
Ready for some good news?
Preposterous though it may seem, we have identified seven islands of relief in this dark sea of economic uncertainty.
That's right -- seven categories of consumer goods and services in which prices have actually declined over the past decade.
The good news comes from the Bureau of Labor Statistics' Consumer Price Index, or CPI. The Federal Trade Commission coordinates with the Bureau of Labor Statistics, or BLS, to make sure the CPI reflects an apples-to-apples value comparison before adjusting for inflation.
An improvement in the quality of a product over time is an important factor in this calculation.
"When they examine, they try to correct for differences in the quality of products," says Tom Kelly, who used to work for the FTC and is now director of the Center for Business and Economic Research at Baylor University in Waco, Texas.
"So when you make comparisons, you're comparing two similar-quality products. If the price remains the same and the quality goes up, that effectively reduces the price."
Following are seven categories of goods and services that are comparatively cheaper today than they were 10 years ago. All figures are based on a BLS comparison of like products and services from August 1998 and August 2008.
Items That Have Grown Cheaper
1. Phone bargains: Can you hear me now?
Motormouths rejoice: The price of wireless telephone services dropped 31.6 percent during the past decade, while the price of long-distance telephone calls fell 23.1 percent.
Why the cell phone bargains?
"Cellular telephone service was a relatively new item 10 years ago," says Dan Ginsburg, BLS supervisory economist for the CPI services section. "Usually, items that come in with new technology start off higher priced, but as sophistication in delivering the service becomes greater and competing companies develop more high-tech solutions, the costs keep coming down. Competition helps keep the prices low."
You can thank competition for the long-distance savings, too.
Ginsburg credits the 1983 deregulation of telephone services that resulted in the "Baby Bells" for reducing the cost of long-distance calls.
"As competition crept into the market, it became much less expensive with newer technology to make long-distance calls, so the prices just came way down," he says. "Suddenly, the Sprints and MCIs and other companies were eligible for long-distance service. It worked the way they thought it would."
2. Electronics: Applause, applause
It's hardly news that the prices of personal electronics have dropped to what would have been garage-sale prices a decade ago. This is true of televisions (down 77.9 percent); computers (down 88.3 percent); audio equipment (down 39.3 percent); and videocassettes, video discs and other media, including rentals (down 20.4 percent).
"Televisions and audio equipment have benefited from technological change," Ginsburg says. "It became much less expensive to manufacture TV sets. With the advent of high-definition TV in more recent years, older televisions that couldn't capture high-definition TV became less valuable and the prices dropped, even though they were still being manufactured."
Increased competition and cheaper labor costs associated with overseas outsourcing played a big role in price declines. These factors, combined with new technology, helped lower the prices of other recreational electronics, including photography (down 19.3 percent) and musical instruments (down 4.1 percent).
"The switch from conventional film to electronic capturing of pictures, moving into an electronic rather than a chemical-based methodology, apparently had big savings," Ginsburg says.
What about those bargain-basement Fender Stratocasters?
"That's been affected a lot by competition," Kelly says. "Particularly, you're getting more standardized products like guitars, which are made in China and other countries."
3. Footwear: These boots were made for savings
The recent "Sex and the City" movie would have us think that every woman's closet is stuffed to overflowing with Manolo Blahnik and Jimmy Choo shoes.
Not so, says BLS apparel economist Nicole Shepler.
"I don't have any hard-and-fast data on that, but that is a very small part of what we price overall," she says. "So, I think that doesn't have much of an impact."
In fact, shoe prices have declined by 3.9 percent, thanks in large part to lower-cost foreign imports and the growth of discount outlets and big-box stores.
"You still have $200 Nikes," Shepler admits. "But I would hypothesize that that may be one of the reasons why footwear has not declined as much as some of the other clothing areas."
4. New vehicles: More features, fewer buyers
Kelly isn't afraid to state the obvious: "People are not buying cars."
Reduced demand tends to lower prices, as witnessed by the 6.6 percent drop in the price of new cars and trucks over the past decade.
Ginsburg says the automotive industry has tried to hedge consumer disinterest by using less expensive materials and boosting the features: cup holders, seat warmers, DVD players, backup cameras and the like.
Because the Consumer Price Index takes functionality into consideration, the CPI's decline in the price of new cars and trucks may in part reflect that increase in features and options.
"Motor vehicles are a relatively mature industry," Ginsburg says. "As technology improvements are brought out, we usually quality-adjust for those because they have certain value for the consumer.
"If you look at the actual price-page of the vehicle today versus 10 years ago, today's Chevy Impala is probably quite a bit more expensive but it also has quite a bit more safety features and enhancements that are deemed desirable by motorists. If you remove those quality aspects, the price difference falls quite a bit."
5. Toys: Not all fun and games
The good news for parents is that the price of toys has declined 44.4 percent over the past decade.
The bad news? In some cases, quality may have been sacrificed for profit, as witnessed by recent lead-based toy scandals.
"Most of your toys have been outsourced to other countries where labor costs are lower," Kelly says.
On the bright side, Ginsburg says the declining cost of electronics has helped drive down the price of playthings.
"Toys, games, hobbies and playground equipment are down," Ginsburg says. "I would think that's due to outsourcing and moving toward electronic devices that have become very inexpensive to produce."
6. Apparel: Dress for less
We may be struggling to fill the gas tank or feed the family, but we can take some solace in the fact that the cost to clothe the family has dropped 11 percent during the past decade.
Shepler theorizes that as a society, we have shifted our measure of fashion away from clothing and toward more ostentatious displays of bling, such as plasma TVs and iPhones.
"In a sense, electronics has replaced clothing as the fashionable item," she says. "It's about having the latest iPod or toy instead of apparel as reflecting status.
"The demand for clothing has certainly fallen as more and more shoppers are looking to electronics as being the fashionable item."
Lower-cost foreign imports and volume buying by discount and big-box stores have helped lower price tags. This is particularly true for the cost of boys and girls clothing, which has dropped 23.3 percent and 18.6 percent in 10 years, respectively.
"Children's apparel certainly declined a bit more, likely due to more shoppers going to discounters," Shepler says. "Outlet and big-box stores didn't exist to this extent 10 years ago."
But Ginsburg warns that the quality of those garments may not measure up.
"The length of life of a garment may be a quality factor, but it's not measurable without being able to have someone wear the garment for six months, then wear an American-made equivalent for six months and see the differences between how they wear," he says.
7. Watches: Time to save big
You may not be able to buy time as easily in a slowing economy, but you certainly can tell time for less. The cost of a timepiece fell 6.2 percent in the last decade.
Shepler says for every Rolex, there are hundreds of thousands of Timex watches that account for the Consumer Price Index figure.
"Watches are an item where you do get a little bit of the high-end goods but it's more going to focus on what shoppers are actually buying, which is going to be more of the less-expensive items, and those are going to be bought more at discounters," she says.
In fact, the price of watches, especially with the widespread adoption of digital inner workings, has declined to such a degree that many of us consider them disposable.
"Rolexes haven't really caught on with everybody; they're still buying the throwaway watches -- planned obsolescence," she says. "We would have some of those higher-end watches, but it's certainly not going to make up the bulk of our sample."
The Downside
Kelly says these seven relative bargains may actually exceed their CPI-estimated savings due to the recent bumpy ride of the U.S. dollar.
"If you look at the dollar, for a long time it was falling fairly rapidly, causing some of these prices to hold up a little," he says. "Now, the dollar is stabilizing in terms of its rate of decreasing. If the dollar goes up in value, it makes foreign-made goods cheaper; in other words, it lowers the price of foreign currency so importers can buy those items cheaper."
However, there's a downside to falling prices as well, Kelly says.
"When prices are falling, people will postpone buying," he says. "So you don't necessarily want deflation; you want disinflation.
"If you start having prices going down -- as in the housing market right now where housing prices are collapsing -- people say, 'Why should I buy a house now? It's obviously a buyer's market, I'll just wait a few more months and get something even better.'"
Such prudence will likely characterize consumer behavior as the economy slows, world markets struggle to stabilize and the effects of the Wall Street bailout on Main Street become clearer, Kelly says.
"You'll find that even more of those people who have money to spend are going to sit back and wait on the big-ticket items," he says. "Those are durable items that they've already got in hand but maybe don't have the latest high-def, 52-inch version of.
They're going to live with the one they have for six more months to get something better."
Copyrighted, Bankrate.com. All rights reserved.
Taken From finance.yahoo.com
Friday, December 5, 2008
Recession
What causes a recession?
According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales". More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.
Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt. (For more on this topic, see All About Inflation.)
In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession
Recession: What Does It Mean To Investors?
When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.
The Phases of the Business Cycle
In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.
Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.
Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.
Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.
Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.
Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.
To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.
Recession Versus Expansion
Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation.
The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:
Employment
Personal income
Sales volume in manufacturing and retail sectors
Industrial production>
By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion.
The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)
What Does this Mean for Investors?
Understanding the business cycle doesn't matter much unless it improves portfolio returns. What's an investor to do during recession? Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)
First, remember that a bear market does not mean there are no ways to make money. Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)
Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.
There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.
Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you. For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.
Conclusion
The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.
Taken From http://www.investopedia.com
According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales". More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.
Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt. (For more on this topic, see All About Inflation.)
In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession
Recession: What Does It Mean To Investors?
When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.
The Phases of the Business Cycle
In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.
Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.
Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.
Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.
Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.
Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.
To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.
Recession Versus Expansion
Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation.
The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:
Employment
Personal income
Sales volume in manufacturing and retail sectors
Industrial production>
By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion.
The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)
What Does this Mean for Investors?
Understanding the business cycle doesn't matter much unless it improves portfolio returns. What's an investor to do during recession? Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)
First, remember that a bear market does not mean there are no ways to make money. Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)
Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.
There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.
Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you. For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.
Conclusion
The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.
Taken From http://www.investopedia.com
Thursday, December 4, 2008
CRASH PROTECTION
If you cannot liquidate vulnerable stocks, consider these steps:
Step 1: Learn more about reverse index funds. If you put money in a typical stock market mutual fund, the managers will generally invest it in various stocks that
they pick, depending on their research and opinion of the market.Index mutual funds are more restricted. The managers’job is strictly to buy stocks or other instruments to match,as closely as possible, the performance of a particular stock market index, such as the Dow Jones Industrials, the S&P 500 or the Nasdaq 100. Reverse index mutual funds use the same principle—but in reverse. Instead of helping you make money when the market goes up, they are designed to help you make money when the market goes down. They invest a good portion of your money in safe instruments, such as Treasury bills, to generate interest income. Plus, they allocate a portion to investments, such as futures and options, that appreciate as the market goes down, balancing the exact quantities of these instruments so that
■ There is always enough cash and equivalent in the fund to cover any losses. You cannot lose more than you invest.
■ The fund matches the performance of the index in reverse. If the market goes down, you will make a profit; if the market goes up, you will incur a loss
Step 2: Evaluate your remaining stock portfolio. Is it almost entirely tech stocks? Or is it mostly blue-chip and other stocks, with just a small amount of techs?If you have blue-chip or other stocks that you can’t sell, consider placing a modest portion of your money into shares of the Rydex Ursa fund or quivalent. That way, if your stock portfolio is falling, your Ursa shares will be rising, helping to offset the loss.If you have a large portfolio of tech stocks that you can’t sell, you should buy shares in the Rydex Arktos fund. That way, even if your tech stocks fall still further, at least your Arktos shares will be rising, helping to offset the loss.
Step 3: Estimate your risk of loss. No one knows for sure whether the stock market is going up or down—let alone how much or how quickly. But based on recent history, it is not unreasonable to assume that a stock portfolio could fall 50 percent. If your portfolio is worth about $100,000 at
Step 4: Decide how much of that risk you want to protect yourself against. If you wanted to protect yourself against the entire amount, you’d have to invest about dollar for dollar in one of the reverse index funds. If that is too much, consider covering half your portfolio. Then, for every $1 of current value in your stock portfolio, you would simply put 50 cents of your money into the appropriate reverse index fund (see Step 1). Assuming that your stock portfolio is worth $100,000, you’d be investing about $50,000 in the fund.
Step 5: Raise the funds for your crash protection program. Where do you get the extra $50,000? You could take it from your cash assets. But if you did, you would in effect be moving money from a safe investment to a more aggressive investment. That may not be prudent. Instead, a prudent alternative is to liquidate at least enough from your remaining stock portfolio to finance this program.
The formula is simple: If you want a program that will protect you against half your risk, and you don’t want to take money from another source, you should liquidate one-third of your shares to generate the money.
Taken From Crash Profit - Martin Weiss
Step 1: Learn more about reverse index funds. If you put money in a typical stock market mutual fund, the managers will generally invest it in various stocks that
they pick, depending on their research and opinion of the market.Index mutual funds are more restricted. The managers’job is strictly to buy stocks or other instruments to match,as closely as possible, the performance of a particular stock market index, such as the Dow Jones Industrials, the S&P 500 or the Nasdaq 100. Reverse index mutual funds use the same principle—but in reverse. Instead of helping you make money when the market goes up, they are designed to help you make money when the market goes down. They invest a good portion of your money in safe instruments, such as Treasury bills, to generate interest income. Plus, they allocate a portion to investments, such as futures and options, that appreciate as the market goes down, balancing the exact quantities of these instruments so that
■ There is always enough cash and equivalent in the fund to cover any losses. You cannot lose more than you invest.
■ The fund matches the performance of the index in reverse. If the market goes down, you will make a profit; if the market goes up, you will incur a loss
Step 2: Evaluate your remaining stock portfolio. Is it almost entirely tech stocks? Or is it mostly blue-chip and other stocks, with just a small amount of techs?If you have blue-chip or other stocks that you can’t sell, consider placing a modest portion of your money into shares of the Rydex Ursa fund or quivalent. That way, if your stock portfolio is falling, your Ursa shares will be rising, helping to offset the loss.If you have a large portfolio of tech stocks that you can’t sell, you should buy shares in the Rydex Arktos fund. That way, even if your tech stocks fall still further, at least your Arktos shares will be rising, helping to offset the loss.
Step 3: Estimate your risk of loss. No one knows for sure whether the stock market is going up or down—let alone how much or how quickly. But based on recent history, it is not unreasonable to assume that a stock portfolio could fall 50 percent. If your portfolio is worth about $100,000 at
Step 4: Decide how much of that risk you want to protect yourself against. If you wanted to protect yourself against the entire amount, you’d have to invest about dollar for dollar in one of the reverse index funds. If that is too much, consider covering half your portfolio. Then, for every $1 of current value in your stock portfolio, you would simply put 50 cents of your money into the appropriate reverse index fund (see Step 1). Assuming that your stock portfolio is worth $100,000, you’d be investing about $50,000 in the fund.
Step 5: Raise the funds for your crash protection program. Where do you get the extra $50,000? You could take it from your cash assets. But if you did, you would in effect be moving money from a safe investment to a more aggressive investment. That may not be prudent. Instead, a prudent alternative is to liquidate at least enough from your remaining stock portfolio to finance this program.
The formula is simple: If you want a program that will protect you against half your risk, and you don’t want to take money from another source, you should liquidate one-third of your shares to generate the money.
Taken From Crash Profit - Martin Weiss
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