Money Basics – Truth in investing

Broadcast Date: December 18, 2012 Topic: Workman’s Comp Hosts: Steve and Cynthia Click the play button to listen to this show: The post Workman’s Comp appeared first on Money Basics.

Broadcast Date: December 17, 2012 Topic: Investing for the Future,With a Spin Hosts: Cynthia, Karen and Rich Click the play button to listen to this show: The post Investing for the Future,With a Spin appeared first on Money Basics.

Broadcast Date: December 14, 2012 Topic: Healthcare Costs & Living Longer Hosts: Steve and Cynthia Click the play button to listen to this show: The post Healthcare Costs & Living Longer appeared first on Money Basics.

Broadcast Date: December 13, 2012 Topic: Melcher & Prescott Hosts: Steve and Cynthia Click the play button to listen to this show: The post Melcher & Prescott appeared first on Money Basics.

Today’s Podcast is:  Why is asset Allocation So Confusing…Part 1 By Steven Albrecht Why is Asset Allocation So Confusing Part 1 The post Podcast: Why is Asset Allocation So Confusing appeared first on Money Basics.

What is strategic investing, and how does it differ from tactical investing? Strategic investing is investing for long-term needs. It looks at the world in terms of structures and institutions, and invests in those areas that respect property rights, the rule of law, and that allow capital to flow freely. It understands that small companies, troubled companies, and junior claims on cash flow are more risky, and so their returns are more volatile. But if the investor is able to wait long enough—sometimes decades—that volatility can turn into higher returns. Strategic investing works, but only if the investor lets it work.Tactical investing looks at things here-and-now and switches readily between companies, sectors, styles, and asset classes. It examines the current circumstances and situations as dispassionately as possible to choose which road to follow. Sometimes the well-travelled road is the best choice; sometimes a narrow, rocky path will be better. Tactical investors don’t care. Cash, bonds, real-estate, and stocks are all tools used to achieve higher returns. Tactical investing also works, but only if the investor makes it work. Both approaches have their strengths and weaknesses. Tactical investing tends to be expensive. Strategic investors need to be patient. Tactical investing necessitates volatile activity. Strategic investing focuses on volatile markets. Whether an investor wants to be tactical or strategic is both a matter of taste and resources. An investor who wants to be strategic but doesn’t have the time or perseverance to wait through the dark periods shouldn’t choose that route. Conversely, an investor who wants to minimize costs—research, transactions, custodial fees—shouldn’t try to be tactical. An investment approach needs to fit an investor’s mindset and resources like a hand in a glove. And a glove that doesn’t fit is best set aside. Prefer to listen to this post?  Click the play button belowgmu120725 Follow me on Twitter @tengdin     The post Strategy versus Tactics appeared first on Money Basics.

241 years ago, Lord Cornwallis surrendered to George Washington on the plains of Yorktown, Virginia. 10,000 British troops were captured, effectively ending the Revolutionary War. Tradition has it that during the formal surrender ceremonies, the British band played the ballad, “The World Turned Upside Down.” Has asset management turned upside down? The riskiest assets are deemed safe, and the safest are certifiably risky. Cash, considered the safest of safe havens, is losing value relative to inflation. Inflation has been running between 2 and 2 ½ percent, but since late 2008 cash has paid almost nothing. Short-term bonds of other AAA governments are trading at negative nominal yields. At the same time, investors are being encouraged to invest in stocks for their income stream, treating some high-dividend stocks as if they were variable-price bonds, and looking to high-yield debt and even emerging market debt as a safe haven against the political turmoil and long-term fiscal issues facing the US and other developed nations. After all, the populations and economies of the developing world are growing But high-yield debt can default, and emerging market nations can do irrational things, as recently happened when Argentina seized control of the an oil company to avoid an energy crisis—without compensating the owners. Political risk and default risk are real, despite interest rates insure a loss of purchasing power. Meanwhile, stocks are still the last link on the corporate cash-flow food chain. If anything happens with pension funding or tax payments raw material costs, those dividends—which aren’t contractual—could be cut. So the risk hierarchy—cash, bonds, stocks—hasn’t been inverted, and the rules of asset management haven’t been repealed. We’re living through an historic period of financial deleveraging and slow growth, in the midst of continued globalization and financial liberalization. The first rule of risk management is still to focus on the safe return of your money, not just the return on your money. Prefer to listen to this post?  Click the play button belowgmu120719Follow me on Twitter @tengdin The post Backwards Day appeared first on Money Basics.

Is the economy giving us a head-fake? Back in the Cretaceous Era, I played a little football. And one of the first moves I learned was a ball-carrier’s head fake. When approaching a defender, a ball-carrier will look and lean in one direction, then change at the last minute. If the defender has been watching the carrier’s head, he’ll be deceived and miss his tackle. For in 2010 and 2011, the economy gave investors a head-fake. Initial strength in employment and production faded over the summer, and by early fall recession fears were rampant. But then those fears failed to materialized, the economy continued to grow, and the market rallied into year-end, confounding the bears who had been convinced that the economy was about to roll over. Are we experiencing another head-fake now? Certainly there has been a raft of weak data lately—employment growth has been anemic, retail sales declined for three months in a row, and consumer sentiment remains weak. But the way to guard against a head-fake is to watch the runner’s hips, not his head. The way to avoid a head-fake in the economy is to watch what consumers are doing, not what they’re saying. And consumers are still spending. Yes, retail sales are lower, but a lot of that can be explained by lower gasoline prices and a hot summer that sends people to the beach rather than the malls. But home prices are actually going up for the first time in years; the portion of homes undergoing distressed sales is falling across the country; consumer credit is rising; and auto sales have been unexpectedly strong, in spite of a lackluster model year. It’s easy to be swayed by the doom-and-gloom talking heads, and forget that the economy is still growing, albeit slowly. Investors need to beware of the head-fake, invest with their heads, and watch the economy’s heart. Prefer to listen to this post?  Click the play button belowgmu120718Follow me on Twitter @tengdin   The post Changing Direction? appeared first on Money Basics.

Lost in the debate over how the looming fiscal cliff might affect taxes on the rich and cuts in defense spending is a little-followed portion of the Bush tax cuts: the child tax credit. Unless Congress renews the law, the $1000 refundable tax credit is scheduled to be cut in half at year-end. The child tax credit is one of those rare Washington accomplishments: a left-right compromise. Conservatives like the credit because it reduces taxes and supports families. Liberals have supported it because its benefits are progressive and provide aid to some of the most vulnerable populations. But in the hurly-burly of the budget debate, the child tax credit is mentioned as a major tax expenditure that adds to the deficit. According to the Joint Committee on Taxation, the combined cost of the child tax credit and the earned income tax credit comes to about $77 billion per year. That compares with $110 billion for the mortgage interest deduction and the exclusion of capital gains on principal residences, or $42 billion for the tax exemption on interest income from municipal bonds. It’s real money. And the credit has other, pernicious effects. Because the benefit phases out over time, it has the effect of increasing the effective marginal tax rate of people who receive it. Right now, for people earning between $15 and $40 thousand a year, if their income goes up $10 thousand, their net take-home pay only goes up between $1 and $2 thousand. That’s a powerful disincentive! And because of different rates for married couples versus singles, the credit creates a significant marriage penalty for moderate-income families. A working single mother who marries will lose a host of federal and state support payments, totaling up to $20 thousand. So some lawmakers want to scrap the credit altogether, removing the distortion and reducing the deficit at the same time. That would be a mistake. Our economy depends on having an expanding workforce, and raising children is expensive. Support from the tax code is modest, compared with the rest of the world. The child tax credit is worth saving. Let’s hope policymakers can cut the Gordian Knot of tax policy, and reduce how it warps our economic and social systems. Prefer to listen to this post?  Click the play button below gmu120717Follow me on Twitter @tengdin The post Child Tax Cliff appeared first on Money Basics.

Is our financial system too complex? With LIBOR scandals, commodity-broker fraud, and big bank bailouts still making the news, many people are saying, “Stop the financial system, I want to get out!” But exiting our current financial system just isn’t practical. Sure, you could move off the grid, raise your own wheat, and exit the cash economy, but that’s all you would do. Moving back to an 18th century lifestyle would mean moving back to an 18th century standard of living, where basic survival was a priority and pestilence and famine weren’t that uncommon. And 18th-century life wasn’t financially that simple, either. There were competing gold-based, silver-based, and paper currencies, some of which were “not worth a Continental.” The first Bank of the United States was a political hot-potato, dishing out equal parts scandal and graft. It gradually evolved into our modern central bank. And our current financial system isn’t so much a complex system as a highly interconnected one. We have local banks, global banks, brokers, insurance companies, mutual funds, and hedge funds all playing in the same sandbox. There isn’t enough hierarchy and modularity, so a few centralized players become “too big to fail” and a potential insolvency could threaten to pull down the entire financial infrastructure. That’s what TARP was all about. What we need is a modular system, where one sector’s failure wouldn’t threaten the others. That’s what we see in biological systems, where a broken bone doesn’t endanger our heart, or in education systems, where  problems in elementary schools are distinct from issues in community colleges or research universities. That’s what the proponents of a return to Glass-Steagall are getting at, even if their attempts to turn back the clock are misguided. A modular financial system could still be complex enough to handle the modern world, but would have subsystems whose failure wouldn’t endanger the others. Yes, our financial world is complex—always has been. But it could be safer. Prefer to listen to this post?  Click the play button below. gmu120716Follow Doug on Twitter @Tengdin The post Too Complex to Fail? appeared first on Money Basics.