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By Bob Moeller
WEAC Member Benefits
June 2008
Financial
Planning Seminars
Achieving
Financial Independence
Summer financial By Bob Moeller 1. Talk to your spouse (if married) about where you are financially. Review together your investments, debts, expenditure patterns, etc. In order to plan for your future you have to know where you are now. 2. Review debt carefully and resolve to pay down quickly any high-cost, non-deductible debt. You should have no ongoing high-cost credit card debt. Examine your first mortgage and home equity loan situation. Interest rates are fairly low, and it might be to your advantage to refinance, especially variable home equity loans. Be careful though. Make sure you understand any fees, closing costs, etc. 3. Plan on increasing your TSA, 401k (spouse) or ROTH investments when you get your raise this fall. For a discussion of choosing before-tax TSA or after-tax ROTH investments, see my March 2008 article on the WEAC Web site (see below). 4. Make sure you have no mortality expenses, no withdrawal penalties, no sales charges, and reasonable annual total costs (hopefully 1% per year or less) in your investments. 5. Do not invest in any products that build cash value with any life insurance company. Buy only term life if you need life insurance. Policies like universal life, variable adjustable life, etc. are not good deals. 6. If you have older children, encourage them to start thinking about investments. For example, you might volunteer to double any money they manage to put into a Roth IRA up to $1,000. It might be the beginning for them. Encourage them to pick out aggressive no-load mutual funds or individual stocks. |
By Bob Moeller
This is the last column for this school year, and normally I would use it to remind you of all the smart things you should do to help yourself financially. I am including an abbreviated version of dos and don’ts in the sidebar.
Here, I am going to present you with some new and different investments. This is so you will start to understand that the investment world is constantly changing. I am not necessarily recommending that you get involved in these investments, but you might find them worth exploring. They fall in the general category of “structured” investments.
Structured investments are put together by financial institutions, frequently have a fairly short life, and frankly it is not always clear just how the financial institution makes money on them, or how much they might make. Commissions are very low.
First is a category known as Reverse Convertibles. Typically these are set up in $1,000 units. One I bought into (just to test it out for this article), was put together by Lehman Bros. It deals with Federal National Mortgage or Fannie Mae (symbol FNM) stock. This is a huge, well-known company. The price was set as of April 25, 2008, FNM $30.93 per share. So, my $1,000 equates to 32.33 shares. The deal matures on October 30, 2008, or in six months. At the end of each month, I get interest paid to me at the rate of 25% per year. So over just six months, I will get 12.5% of my $1,000 investment. I get this no matter what. At the end of the six months, I get my $1,000 back or I get 32.33 shares if the stock has dropped more than 40%. Of course, if the stock goes down, I might take a loss if I get shares back. But, I am given substantial protection. I will get back my $1,000 plus interest unless the stock drops more than 40% at any time during the six months. My protection price is thus $18.56. So, unless the stock drops from $30.93 to a price below $18.57 in six months, I will simply earn 12.5% for six months on my investment.
Sounds weird, doesn’t it. But, putting it simply, I am guessing FNM will not go down more than 40% in six months, so I will just make a 25% annual rate on my money. Examples of other similar deals and the downside protection are: Wachovia Bank, interest rate 18% per year, downside protection 40%; and Monsanto, interest rate 14% per year, downside protection 40%.
Members, this is just to show you something new. I am not recommending you run out and do this. Still, if you invest in several different issues, it might be attractive. Eventually you might see exchange traded funds (ETFs) dealing in structured investments for you with a low expense charge.
Because you have a possibility of effectively buying shares, part of your interest is considered a put premium, resulting in more complicated tax filings. So for most, these would be better done in a self-directed IRA where there are no tax complications.
Next, you are probably aware that I do not recommend index annuities. The fees are too high, the withdrawal penalties are too long and too high, and they are way too complicated. You never get 100% of the gain over the period of time. However, a structured investment called a Principal Protected Note is much more attractive. You get 100% no loss guarantee, a much shorter time period (my example is 18 months instead of years and years) and a much easier to understand deal with no big fees and commissions, and participation in any index increase from beginning point to end point. Again, these sell in $1,000 units.
One I tried used the S&P 500 Index. It goes from April 25, 2008, to October 27, 2009, or 18 months. I am guaranteed I cannot lose money. I am committed for only 18 months. I would never buy it if I thought I would have to sell during 18 months, but I can sell it at market if I have to. When I bought, the index was 1397.8. At the close 18 months later, I get not 100 % of the entire gain, I get 125% of the entire gain during the 18 months beginning point to end point. So if it goes up 12%, I get a gain of 15%. So I cannot lose and I get 125% of the gain. Is there a “gotcha!” Yes. This deal is written that if at any point during the 18 months the index closes at a point more than 123.5% above the starting point, I get only my money back with no loss.
So I am betting that over 18 months, the S&P Index might go up, but not more than 23.5%. If it does go up more than 23.5%, I get all my money back. If it goes down, I get all my money back. If it goes up anywhere between 1% and 23.5%, I get 125% of the gain. I consider this a worthy speculation.
Again, while this is a no-risk deal, I am writing about it only to show you what’s new in investments. Why is it better than index annuities? The time is 18 months instead of many years. Your participation is from beginning point to end point with no annual “maximum gain” adjustments. It is easy to understand.
Finally, this is a pure loan deal called a Floating Rate Note. It sells in $1,000 units, with a JPMorgan obligation. You are guaranteed you will get back all your principal. Each month, you will be paid interest at the rate of 140% of the CPI increase in the 12-month period ending two months before. So, on May 28, they will determine the inflation rate between March 2007 and March 2008. They will pay 140% of that rate to you on June 30. On June 28, they determine inflation between April 2007 and April 2008, and pay you 140% of that rate to you on July 31(annualized of course), etc. These are longer term, maturing in May 2013, or five years. Summary: a safe way to earn 140% of the CPI increase on a rolling 12- month basis with no risk of principal. If you think inflation will increase over the next five years, this is a good no risk way to benefit. What is the worst thing that can happen? Inflation stays below 3% so you don’t earn as much as you might have with a five-year CD.
For more examples of structured investments, try
www.structuredinvestments.com.
Posted June 17, 2008