Since you read personal finance blogs you probably watch Jim Cramer’s Mad Money.
Well, a couple of finance professors at Northeastern University sat down and analyzed Cramer’s picks. They concluded that acting on Cramer’s recommendations yielded an over 12% return between 2005 and 2007. This beat the S&P 500’s annualized 7.35% and the Russel 2000’s growth and value index annualized returns of 8.76% and 9.39%, respectively.
The story is all over the media and will undoubtedly increase Cramer’s audience and influence.
However, I wouldn’t accept the Northeastern University analysis without a big grain of salt. In 2007 Kramerwatch.org compared Cramer’s picks to a random coin flip algorithm, called “Leonard the Wonder Money”. They found that Cramer and the Monkey did about the same (1). Also, more damaging, Cramer was wrong about the disastrous bank decline last year. He is on record as having recommended both Wachovia and Bear Sterns before those institutions collapsed (1). In short, Cramer’s record has been spotty, despite what the latest analysis says. You might want to think twice about putting your faith in him when wealth building is your goal.
So I got a ride home with a friend the other day. Since he knew that I’m a bit of a finance buff, we started talking about his car loan – and ways to pay it off quickly.
Well, one way to pay off a car loan is by transferring it to a Home Equity Line of Credit (HELOC). There are some advantages and disadvantages of doing this.
1) HELOCs are cheaper. Right now the average national rate on a HELOC is 5.74%, where as the average rate on a 48 month car loan is 7.95%. So, all things being equal, you’d save about 2% on your interest costs at current rates.
2) HELOCs have a bit more flexibility. Car loans usually have terms of three to seven years. On the other hand, HELOCs allow you to pay back the terms of the loan over 10 to 15 years. This means that you’d have more flexibility with your payments if you went with a HELOC.
3) HELOCs are tax deductible. If you itemize on your taxes, you can deduct the interest you pay on the HELOC. On the other hand, car loans generally are not deductible. Of course, this is only going to help if you itemize. If you take the standard deduction, then it won’t matter.
Some downsides:
1) Debt. Taking on more debt is always a problem. Its depressing and it cuts into your cash flow. Generally speaking it probably makes the most sense to aggressively pay off the expensive car debt rather than applying for a HELOC to refinance it, even if the HELOC is less expensive and more flexible.
2) Decreased home equity. Real estate prices are declining, and adding the car loan to your line of credit can decrease the amount of equity available in your home. This could be a problem if you need to sell your house unexpectedly. You could become “underwater” on your mortgage if the home value decreases to the point that you owe more on your first mortgage and your HELOC than your property is worth.
Live frugally and build wealth is the best ways to pay down debt! Happy debt reduction!
The Telegraph is reporting that a New Zealand couple mistakenly received the equivalent of $10 million due to a bank error. They promptly withdrew the money and absconded (Telegraph).
Taken from American Thinker. The Chrysler Fallout is having real effects.
My name is George C. Joseph. I am the sole owner of Sunshine Dodge-Isuzu, a family owned and operated business in Melbourne, Florida. My family bought and paid for this automobile franchise 35 years ago in 1974. I am the second generation to manage this business.
We currently employ 50+ people and before the economic slowdown we employed over 70 local people. We are active in the community and the local chamber of commerce. We deal with several dozen local vendors on a day to day basis and many more during a month. All depend on our business for part of their livelihood. We are financially strong with great respect in the market place and community. We have strong local presence and stability.
I work every day the store is open, nine to ten hours a day. I know most of our customers and all our employees. Sunshine Dodge is my life.
On Thursday, May 14, 2009 I was notified that my Dodge franchise, that we purchased, will be taken away from my family on June 9, 2009 without compensation and given to another dealer at no cost to them. My new vehicle inventory consists of 125 vehicles with a financed balance of 3 million dollars. This inventory becomes impossible to sell with no factory incentives beyond June 9, 2009. Without the Dodge franchise we can no longer sell a new Dodge as “new,” nor will we be able to do any warranty service work. Additionally, my Dodge parts inventory, (approximately $300,000.) is virtually worthless without the ability to perform warranty service. There is no offer from Chrysler to buy back the vehicles or parts inventory.
Our facility was recently totally renovated at Chrysler’s insistence, incurring a multi-million dollar debt in the form of a mortgage at Sun Trust Bank.
HOW IN THE UNITED STATES OF AMERICA CAN THIS HAPPEN?
THIS IS A PRIVATE BUSINESS NOT A GOVERNMENT ENTITY
This is beyond imagination! My business is being stolen from me through NO FAULT OF OUR OWN. We did NOTHING wrong.
This atrocity will most likely force my family into bankruptcy. This will also cause our 50+ employees to be unemployed. How will they provide for their families? This is a total economic disaster.
HOW CAN THIS HAPPEN IN A FREE MARKET ECONOMY IN THE UNITED STATES OF AMERICA?
I beseech your help, and look forward to your reply. Thank you.
Sincerely,
George C. Joseph President & Owner Sunshine Dodge-Isuzu
Just a quick update. Today I pulled the trigger and bought about $3,300 of Vanguards Inflation Protected Securities Fund (VIPSX). Essentially VIPSX is Vanguard’s mutual fund that invests in inflation protected bonds. The fund holds about 20 billion in US treasury and agency products. Of these, the fund’s policy is to maintain 80% in inflation linked issues.
Its very conservative. Nearly 98% of the fund is invested in Treasury and US federal agency bonds at an average yield of 2.1%.
So, why would someone in their mid thirties invest in such an ultra-conservative fund? According to standard models, 30 somethings should be taking more risk. So why something so conservative. Well, several reasons:
1) Possible Future Inflation: It’s foolish to make predictions about the future, but persons interested in building wealth are at least obligated to try. Inflation is generally caused by the supply of money increasing faster than economic growth rates. All forecasts say that job losses will continue until the end of the year (Fed Res). These same forecasts also say that next year will likely be sluggish. Similarly, interest rates will probably remain low to stimulate the economy. So, this looks like a good combination for at least some inflation in the future. With this cash I’m not necesarily trying to build wealth as much as preserve it.
Also, the notion that some modest inflation is a good way out for the Federal deficit is coming into intellectual vogue (Bloomberg). That kind of thinking makes me want to run for the hills.
2) Diversification: Most of our money is in stocks and real estate (here). If there is anything the last nine months should have taught investors – its the importance of diversity. So, some bond holdings would help to spread things around a bit.
3) Capital protection: There has been a massive flight to less risky assets over the past few months, especially among high net worth investors (CG). Since VIPSX is invested in treasury bonds, its significantly less risky than other types of funds.
In contrast, the overall S&P 500 lost 40% last year. Since economics tends to run in cycles, it seems that the chances of losing money this year in the overall market are good. Who wants to run that kind of risk?
Good luck investing all. As always, please don’t hesitate to leave a comment or drop us a note!
Sometimes you read a news story and it hits you in the face like a brick.
Evidently Harvard economists Greg Mankiw and Kenneth Rogoff are advocating that the US central bank adopt a target inflation rate of 6%. Their rationale is that the US has taken on a huge amount of debt and they argue inflation will facilitate deleveraging by reducing the real value of debt and stimulate spending by removing peoples incentive to save.
Some excerpts from their Bloomberg article:
““I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
Such a strategy would be risky. An outlook for higher prices could spook foreign investors and send the dollar careening lower. The challenge would be to prevent inflation from returning to the above-10-percent levels that prevailed in the 1970s and took almost a decade and a recession to cure.
“Anybody who has been a central banker wouldn’t want to see inflation expectations become unhinged,” says Marvin Goodfriend, a former official at the Federal Reserve Bank of Richmond. “The Fed would have to create a recession to get its credibility back,” adds Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.” (Bloomberg).
This policy may seem like a good idea, but please don’t underestimate the impact inflation will have on your bottom line.
1) Your savings will lose value. Lets assume you’ve got $1,000 squirreled away. If inflation runs at 6% for only two years, then your thousand would only buy about $883.00. That’s $116 bucks, up in smoke. This makes the processes of savings and investment a great deal harder. This is important because saving is a first step to building any sort of real wealth.
2) Generally speaking if you have anything that generates a fixed income, you’ll lose out. For example, if you have a CD – the best current rates are a little over 2.5% – you’d effectively be losing 3.5% on your CD if inflation is at 6%. You’d get a similar situation if you held bonds or fixed payment annuities.
3) Cost of living adjustments lag behind inflation. In periods of high inflation your salary, pension or government benefits may get an adjustment to account for the reduced power of the dollar. However, the effects of inflation are immediate and usually adjustments lag behind this. So, you’d be stuck with higher prices.
So, the reason why these sorts of editorials are so maddening is that while inflation might have some beneficial effects for the economy, Joe and Jane average will get the monetary equivalent of a sharp stick in the eye. If inflation does increase it will require much frugal living regardless of your income, as well as an ability to increase your wealth at a faster pace.
If you want more from these guys, check out Greg Manikow’s blog or Ken Rogoff’s faculty profile.
Best,
James
Update1: If you want to profit from inflation, the Digerati Life has a good posting on 12 moves you can make to cope with rising interest rates (DL).
Being a university student, I sometimes get to revisit the works of classical philosophers. Well today I came across a wonderful gem by Aristotle – one of the great greek thinkers. If high interest credit cards were around in ancient Greece, Aristotle probably would have taken a dim view of them:
There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural.
Sometimes when a parent passes away, his children fight over the assets the parent has left behind. For example, I have some personal experience with this. My grandparents lived in Davis, California and were both lifetime cigarette smokers. At the tail end of their golden years, my grandparents developed lung cancer and passed away after a long, lingering and ultimately unsuccessful battle with the disease.
My aunt, who lived across town from my grandparents, took responsibility for caring for then during their dying process. She paid their bills, managed their care givers, visited them and made sure their house was in good repair. When they finally passed on, my aunt made much of the funeral arrangements as well.
Being that she lived in the same town as my grandparents, by default she was responsible for taking care of their assets, including the house. Unfortunately, my aunt was cheated by the contractor who was hired to renovate the house and get it ready to be sold and ultimately she had to sue the contractor.
The lawsuit ignited a number of long simmering disagreements between my aunt, my mother and my uncle. Unhappy with how things were being handled by my aunt, my mother and uncle drove to Davis to “get things moving”. This ment withdrawing the lawsuit, seizing control of the house and finally putting it on the market. This has complicated their already precarious relationship and now all three of them are hardly on speaking terms.
Now, what are the implications of this for personal finance? Generally speaking finance related conflict between siblings surrounding the death of parents is about much more than the actual money itself. It likely involves a complicated set of psychological factors related to history of the family. However, regardless of the deeper reasons for fighting, two things are clear.
1) An independent executor of the will should be established. This should be someone who is NOT a member of the family. Ideally a trusted attorney should fulfill this role.
Why someone independent? Because, the experience of death and disposing of assets leaves many with judgment subject to the whims of emotion. Also an independent executor can act as a scapegoat in case something goes amiss. For example, my family’s case, an independent executor would have allowed my family to direct their disagreement toward someone other than each other.
2) A will should be established before the death of the parent. This should spell out precisely what the parent’s wishes are prior to the parents death. The executor should merely execute the parent’s wishes as stated in the will. The worst thing that can happen after the passing of a loved one is a long, drawn-out fight over who gets what part of their wealth.
Not effectively planning to manage inheritance disbursement simply leaves too much potential for trouble.
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