Last week I visited my local branch of Bank of America where I saw a large poster advertising "high rates" on CD IRAs - a high rate being an APY of 3.3%. On their website, BoA says that this product is for "People who want to take the guess work out of investing while enjoying the peace of mind of a steady high yield return." My take on the issue is that unless you are in your 60s and are approaching your retirement years, investing in a CD IRA strike me as a really bad idea. Even in such cases, investing your long term savings in a CD is a dangerous game.
When investing for retirement, many folks worry about taking excessive risk. They are concerned that their investments will tank and that they will lose their retirement savings at a time when they are unable to work. However, reality is that with a long investment horizon, the biggest investment risk one can take is to invest in a way that will not allow your investments to outpace inflation.
While in recent years inflation has been relatively benign, there have been a number of periods historically where the U.S. has seen considerably faster price increases. Check out this chart on Wikipedia. But forget historical inflationary break-outs, at 3.3% APY the yield BoA is offering does not even keep pace with the current pace of expected inflation. This means that while you are thinking you are saving for retirement by contributing to this so-called high-yield CD IRA, the money you are putting aside purchases less and less every year.
Although it may be counter-intuitive for some, if you are planning to save for retirement (or for another long term goal, for that matter), investing in a well balanced portfolio of index funds, which includes both stocks and bonds, is a much safer way to go. Inflation is the quiet killer of low yield "safe" portfolios. Don't be fooled.
I have written in the past about how to build a portfolio, if you are interested take a look at this topic in more detail (or simply select the "investing" category in the left column on this page).
Friday, August 08, 2008
Thursday, August 07, 2008
The Typical Stock Investor Loses Money?
Check out this post on The Digerati Life, analyzing a recent report on the success of the typical stock investor - an average return of just 3.9% over the 20 year period between 1986 and 2005 and that's for an equity mutual fund investor (not the crazy day-trader next door)! If the report is correct, most people would do better to stick their money into a bond fund and possibly even a CD and forget about it.
I must say, the results surprise me, even though I have long known that most active investors underperform the market. Hey, that's what I keep telling you folks: (i) diversify; (ii) invest in index funds; (iii) minimize your costs (e.g. fund expense ratios); and (iv) don't trade.
Is it going to take an act of god to teach people that they are not Warren Buffett and that their chances of beating the market are just not that good?!
Incidentally, check out the latest Carnival of Personal Finance on the Squawkfox where my angry post on the recent housing bill is also included.
I must say, the results surprise me, even though I have long known that most active investors underperform the market. Hey, that's what I keep telling you folks: (i) diversify; (ii) invest in index funds; (iii) minimize your costs (e.g. fund expense ratios); and (iv) don't trade.
Is it going to take an act of god to teach people that they are not Warren Buffett and that their chances of beating the market are just not that good?!
Incidentally, check out the latest Carnival of Personal Finance on the Squawkfox where my angry post on the recent housing bill is also included.
Wednesday, August 06, 2008
A Stronger Dollar and Your Portfolio
The Economist magazine published its annual Big Mac index in its July 24 issue. The Big Mac index lists the price of a McDonald's Big Mac in numerous countries around the world, in Dollar terms. Since the ingredients in a Big Mac are supposedly identical in all geographies, the index tells you something about the cost of living AND about the strength of the local currency. Theoretically, if each foreign currency is valued "correctly", the purchasing power of a Dollar - when taking into account the exchage rate - should be the same wherever you go. This theory is known as Purchasing Power Parity.
Without wasting more time discussing the economic theory - which I am not qualified to do anyway - The Economist came to some interesting conclusions regarding the strength of the Dollar based on this most recent edition of the Index: the Euro is over valued by about 50% (with a Big Mac costing $5.34 compared to $3.57 in the U.S.); the British Pound, Canadian Dollar and Swiss Frank are also over valued. However, the Japanese Yen is under valued by about 27% ($2.62 for one of them healthy burgers), and although The Economist gives some caveats with respect to the Chinese currency, that too may be substantially under valued. The Argentinian and Australian currencies appear to be about fairly valued according to this measure.
If you accept the Big Mac Index as a valid piece of economic data, there are some interesting implications for your optimal investment strategy. As the Euro soared in recent years, returns on investments in European companies were helped by the swing in exchange rates towards the Euro. However, if the Euro really is this over valued, this trend may reverse sharply in the future. For the opposite reason, investments in Japan and China might not be a bad idea.
The Economist also points out that while Turkey and Brazil offer high interest rates to investors (16.75% and 13%, respectively) the Big Mac Index suggests that such high interest rates are not sufficient to off-set the exchange rate risk of these potentially over valued currencies.
Me? I just enjoy talking about these things and reading about world economics. I don't intend to make any adjustments to our portfolio strategy. However, given the recent declines in U.S. markets, I will be investing in U.S. stocks for the next few months to put our portfolio back into balance. If exchange rates play in our favor, all the better.
Without wasting more time discussing the economic theory - which I am not qualified to do anyway - The Economist came to some interesting conclusions regarding the strength of the Dollar based on this most recent edition of the Index: the Euro is over valued by about 50% (with a Big Mac costing $5.34 compared to $3.57 in the U.S.); the British Pound, Canadian Dollar and Swiss Frank are also over valued. However, the Japanese Yen is under valued by about 27% ($2.62 for one of them healthy burgers), and although The Economist gives some caveats with respect to the Chinese currency, that too may be substantially under valued. The Argentinian and Australian currencies appear to be about fairly valued according to this measure.
If you accept the Big Mac Index as a valid piece of economic data, there are some interesting implications for your optimal investment strategy. As the Euro soared in recent years, returns on investments in European companies were helped by the swing in exchange rates towards the Euro. However, if the Euro really is this over valued, this trend may reverse sharply in the future. For the opposite reason, investments in Japan and China might not be a bad idea.
The Economist also points out that while Turkey and Brazil offer high interest rates to investors (16.75% and 13%, respectively) the Big Mac Index suggests that such high interest rates are not sufficient to off-set the exchange rate risk of these potentially over valued currencies.
Me? I just enjoy talking about these things and reading about world economics. I don't intend to make any adjustments to our portfolio strategy. However, given the recent declines in U.S. markets, I will be investing in U.S. stocks for the next few months to put our portfolio back into balance. If exchange rates play in our favor, all the better.
Monday, August 04, 2008
Career Strategy: Every Meeting is Job Interview
One of the best ways to improve your long term career potential is to become known as a top notch professional in your industry and beyond. One of the best ways to develop such a reputation is to treat every professional meeting you attend as a job interview - in a way it is. Someone that you meet today may be your future boss, colleague or reference. Here are a few tips on how to make a good impression:
1. Be Prepared - when you go to a business meeting, be it with a customer, with a vendor, or with a service provider be prepared. Know what the meeting is about and what you are trying to achieve. Spend a few minutes before the meeting to get your bearings. Understand what you are trying to achieve and what the other party is expecting, and try to meet those expectations. If you are well prepared for the meeting and appear professional, your counterpart will notice.
2. Be Professional - remember the last time you went to a meeting and the other party was late, condescending, arrogant or simply wasted your time? Well, try not to do that to others. Here's a great tip: sales people prefer a fast "no" to a long, drawn-out and pointless engagement. Being frank, honest and to the point is the way to go.
3. Dress the Part - sorry to break it to you, but there really is no such thing as "casual Friday". If you are going to work, always dress the part. It's not a bad idea to be just slightly over dressed. I don't suggest that you wear a suit if everyone else in your office is wearing jeans, but wearing slacks and polo shirt wouldn't be a bad idea.
Even though I work for a high-tech start-up in Silicon Valley and most folks in my office wear jeans to work, I always dress on the high-end of business casual. You never know when you will unexpectedly run into an important visitor, an executive or customer, in the office or while you are out to lunch. I cannot tell you how many times I have been pulled into an important meeting on days when I was expecting no business meetings to happen. Similarly, I couldn't tell you how many times some of my fellow executives, wearing less than appropriate attire were unexpectedly called into a meeting with a potential investor, board member or customer. My point is: you just never know and folks notice and remember.
A simple rule of thumb I suggest: dress like your manager's manager. You get the idea.
4. Follow Up - Have you ever been to a business meeting where you agreed to do something for your counterpart but never actually got around to doing it? Did it ever happen to you? Last week I had an important business meeting and my counterpart promised to send me some follow-up materials. He never did, even after I sent him an reminder e-mail. Here's the right way to do it: during your meeting take a list of action items. When you are done... follow up. You want to establish a reputation? Always do what you say you will do, and do it fast. As always, the key to success is surpassing expectations.
5. Stay in Touch - always carry your business cards with you. On your way to the movies? There is always room for a couple of cards in your wallet. Just recently, I ran into a potential business contact at a family wedding. The more people get your card, the more people know about you, the better the chances that opportunity will find you. After you meet someone, send them a brief e-mail noting your contact information for future reference.
For a related topic, see my previous post titled Your Colleagues, Your Assets. You might also want to check out my recent post about Getting Noticed by Employers. Another excellent post on the subject was written by Brandt of Wealth and Wisdom - check it out.
1. Be Prepared - when you go to a business meeting, be it with a customer, with a vendor, or with a service provider be prepared. Know what the meeting is about and what you are trying to achieve. Spend a few minutes before the meeting to get your bearings. Understand what you are trying to achieve and what the other party is expecting, and try to meet those expectations. If you are well prepared for the meeting and appear professional, your counterpart will notice.
2. Be Professional - remember the last time you went to a meeting and the other party was late, condescending, arrogant or simply wasted your time? Well, try not to do that to others. Here's a great tip: sales people prefer a fast "no" to a long, drawn-out and pointless engagement. Being frank, honest and to the point is the way to go.
3. Dress the Part - sorry to break it to you, but there really is no such thing as "casual Friday". If you are going to work, always dress the part. It's not a bad idea to be just slightly over dressed. I don't suggest that you wear a suit if everyone else in your office is wearing jeans, but wearing slacks and polo shirt wouldn't be a bad idea.
Even though I work for a high-tech start-up in Silicon Valley and most folks in my office wear jeans to work, I always dress on the high-end of business casual. You never know when you will unexpectedly run into an important visitor, an executive or customer, in the office or while you are out to lunch. I cannot tell you how many times I have been pulled into an important meeting on days when I was expecting no business meetings to happen. Similarly, I couldn't tell you how many times some of my fellow executives, wearing less than appropriate attire were unexpectedly called into a meeting with a potential investor, board member or customer. My point is: you just never know and folks notice and remember.
A simple rule of thumb I suggest: dress like your manager's manager. You get the idea.
4. Follow Up - Have you ever been to a business meeting where you agreed to do something for your counterpart but never actually got around to doing it? Did it ever happen to you? Last week I had an important business meeting and my counterpart promised to send me some follow-up materials. He never did, even after I sent him an reminder e-mail. Here's the right way to do it: during your meeting take a list of action items. When you are done... follow up. You want to establish a reputation? Always do what you say you will do, and do it fast. As always, the key to success is surpassing expectations.
5. Stay in Touch - always carry your business cards with you. On your way to the movies? There is always room for a couple of cards in your wallet. Just recently, I ran into a potential business contact at a family wedding. The more people get your card, the more people know about you, the better the chances that opportunity will find you. After you meet someone, send them a brief e-mail noting your contact information for future reference.
For a related topic, see my previous post titled Your Colleagues, Your Assets. You might also want to check out my recent post about Getting Noticed by Employers. Another excellent post on the subject was written by Brandt of Wealth and Wisdom - check it out.
Friday, August 01, 2008
Got my Raise Plus More
As I was happy to report last month, I was recently promoted to Vice President in my company, and true to his word my CEO last week discussed my compensation with the Board of Directors. The Board gave me a 13% raise - which is substantial given that my responsibilities haven't really changed with the new title and that I have only been with the company for less than 5 months.
Even more important than the cash compensation, the Board has decided to double my equity stake in the company, so if the company is successful and goes public or is acquired, my stock options will be worth a substantial amount of money.
If you recall, I joined this start-up back in March on the hopes of taking an aggressive forward step in my career. So far, the bet seems to be paying off nicely. I am regularly meeting with some of the most prominent executives and investors in my industry. I have developed a very good relationship with the CEO - who has recently called me his "right hand man" - and I have been given a great deal of responsibility and influence. We have many formidable challenges ahead of us, but if my company is able to raise enough money to execute on its long term business plan we will be very successful and if so, I will have taken a very big step forward in my career.
Even more important than the cash compensation, the Board has decided to double my equity stake in the company, so if the company is successful and goes public or is acquired, my stock options will be worth a substantial amount of money.
If you recall, I joined this start-up back in March on the hopes of taking an aggressive forward step in my career. So far, the bet seems to be paying off nicely. I am regularly meeting with some of the most prominent executives and investors in my industry. I have developed a very good relationship with the CEO - who has recently called me his "right hand man" - and I have been given a great deal of responsibility and influence. We have many formidable challenges ahead of us, but if my company is able to raise enough money to execute on its long term business plan we will be very successful and if so, I will have taken a very big step forward in my career.
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