Wednesday, October 8, 2008

How to Cure Obsessive-Compulsive 401(k) Checking

Author: Nick
Category: Money
Topics: , ,

comic 62 - retirement party

If you’re like me (you poor, depraved soul) then you’ve been checking your retirement accounts rather obsessively over the last few weeks thanks to headlines like “Dow Drops Below 10,000!” and “Is the Next Great Depression Right Around the Corner?” and “Lindsay Lohan Comes Out of the Closet.”

Some anecdotal evidence is suggesting that many people have lost 5-10% of the values of their retirement accounts in 2008. Others have been even less fortunate; some folks heavily invested in their own companies only to see them go under and take their nest eggs with them.

I’ve been moderately more fortunate than others as my own company’s stock is still in the vicinity of its all-time highs and is countering losses in the other parts of my 401(k). When I checked this morning, I confirmed that I’ve actually netted 13 big dollars on my investments this year. And that brings me to the point of today’s rant discussion: why am I obsessively checking my 401(k)? Is there something I think I can do about it by watching its value decline day by day? Perhaps my subconscious believes that by keeping a close eye on it, I can magically reverse its course.

Well, it’s time for me to come clean: today was the first day I’ve checked my 401(k) balance in over four months, and it’s at nearly the same value as it was four months ago. I realized early on that obsessively checking my 401(k)’s balance every day would only cause me needless worry. After all, I’m at least 35 years from the normal retirement age, and the balance of my 401(k) is relatively small enough that it’s hardly worth worrying about in the long run. If anything, I’ll only cause myself pointless stress checking it during this time of economic turmoil.

Unfortunately just about everyone I know has not been as successful in fending off the “401(k) OCD.” I frequently walk down the hallway at my work and see people logged on to our retirement account management website to check how their money is doing. And many of these are workers that are my age or younger! Even worse, there are those who have shifted most or all of their retirement funds to non-stock assets. If you wanted to sit on the sidelines while the market takes a nosedive, the time to do that was months ago! Now many of them will likely leave their 401(k)s parked in “safe” investments and will miss out on any rebound the market makes in the coming months and years.

Lucky for them and you, there are ways to fight 401(k) OCD. Talk to your doctor about prescription Cialis… oh, wait, that’s for an entirely different problem. Here are some ways you can keep yourself from obsessing over your retirement accounts that have worked for me:

  1. Lock yourself out of your accounts. Call the company which maintains your retirement accounts and change your access passwords. When they ask what you’d like to change them to, say “I don’t care. Pick something and don’t tell me.” Just make sure you have a way to unlock your account a few years down the road.
  2. Stop watching financial news. Call your cable provider and cancel CNN, MSNBC, and everything else that isn’t Cartoon Network and Playboy.
  3. Dump your company’s stock. If you still wanna stick in the stock market at this point, make sure your retirement accounts are diversified. Having 90% of your retirement wealth tied to the success or failure of your company is not diversified—it’s stupified.
  4. Make smarter investments. Perhaps when you first set up your 401(k), your friends told you which investments you should pursue. If your retirement account is down 30% this year, you may want to switch your investments around a bit to include a nicer variety of investments like commodities and foreign stocks. And also find new friends.
  5. Temporarily stop contributing to your accounts. This move probably only makes sense if you’re in the 50+ crowd. If you’re contributing $300 to your 401(k) each week, and your 401(k) in turn loses $3,000 a week, you may want to temporarily halt your contributions and stick your money into conventional savings. But if you’re young and/or your employer matches your contributions, you’ll need to do the math to see if contributing still makes sense.
  6. Mind your debts and cash savings. You’ll feel a lot better about your plummeting retirement account balance if your debt is also plummeting rapidly. Paying off debt quicker is one of the safest investments you can make because you’ll know exactly how much money you’re saving as you do it.
  7. Address the real financial issues in your life. Perhaps your obsessive 401(k) watching is merely a symptom of a much bigger personal fiscal problem. If you’re worried about your retirement funds drying up while you’re buying Mercedes and vacationing in Tahiti, then your priorities may be a little mixed up.

Follow those steps to relieve your retirement account stress and your 401(k) OCD should be cured in no time. And now that you have an extra 5 or 10 minutes a day that you aren’t watching your retirement funds crumble, you can put that time to good use by fortifying your house and stocking up on supplies for the coming Even Greater Depression.

Hmm, saying that probably didn’t do anything to ease anybody’s anxiety. Sorry!

Tuesday, September 11, 2007

Review Your “Options”: Calling and Putting

Author: Nick
Category: Money
Topics:

not pictured, turning left takes you to margaritaville

by Valerie March

To make money in the stock market, you don’t have to actually buy any stocks.

“Wait. Wha…?”

No, seriously, it’s true: there are things call stock options, which are simply contracts between a buyer and a seller that outline prices and time periods for buying or selling a security, most notably stocks.

It sounds too good to be true, but with stock options, you can often pay pennies on the dollar to make money on your favorite companies with two basic types of options, “calls” and “puts.”

If you’re sure a stock, index (think S&P 500 or the NASDAQ), or commodity is going up, you should purchase a call option. When you think a stock or security is going to fall, you should buy a put.

A call offers the right, but not the obligation, to buy a stock at a given price for a set period of time. Calls act very much like discount coupons for stocks that investors already like and want to own. Each options contract gives you the right to buy 100 shares under the terms of the option contract.

Let’s look at an example to see how you can make money on calls with hypothetical stock for the Fun Company, whose stock symbol is FUN. FUN is currently trading for $45. But, you think FUN is going way up, so you buy the FUN December $45 Calls, which are selling for $2. With this FUN call option, you’re betting that the Fun Company’s stock, also called the underlying, will climb above $45 before the option expires in December.

When FUN shoots up to say $50, the call option gives you the “option” (get it?) to buy FUN stock valued at $50 for only $45.

Or, if FUN does go up, but you don’t want to buy the stock, you also have the option to sell your FUN December $45 Calls anytime before they expire in December. By selling, you’re releasing your right to buy shares at the $45 strike price to another trader, but with FUN performing well, the value of the option will also increase and you will likely get a nice profit now that the calls are now worth, say $10.

Again, the cost of purchasing options is far less than buying the underlying stock. For the FUN December $45 Calls, which you bought for $2, you must multiply the $2 selling price by the 100 shares per contract: The total output is $200. If you were buying 100 shares of FUN stock, you would be out $4,500.

In addition to lower output, options allow investors to make money when the overall market, sectors or individual stocks fall, simply by using puts. That’s right—with put options, you can make money when stocks tank.

Puts offer the right, but not the obligation, to sell a stock at a given price for a set period of time. Again, each put option offers investors the right to sell 100 shares under the terms of the option contract.

When purchasing puts, you still want to see the value of the options go up, but at the same time, you want the stock to bomb bigger than Daddy Day Camp. Staying with the Fun Company example, if you think the $45 share price will go lower, you might buy the FUN December $40 Puts.

This would now give you the right to sell FUN stock at that $40 price—or, said simply, you’d have the right to put stock to the put-seller at $40 a share, even if FUN trades down to $35. Yes, the suckers would have to pay you nearly $5 per share more than the market value if you’re right!

And again, if you don’t want to take advantage of selling the stock, if the value of the options increases, you can sell your right to make that move by closing (selling) the option position. If your prediction about the direction of the stock and the option were right, you stand to profit either way.

There are endless ways to use options to profit in any kind of market without actually buying a single stock. Most importantly, options investing gives you, well, options and they’re great tools to profit in markets that are going up, down, or sideways.

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Valerie March works at a financial publisher and frequently goes up, down and sideways. She is currently trying to find new and interesting recipes for her abundance of zucchini. If you have any ideas (zucchini-related or otherwise), please leave a comment.

Monday, August 20, 2007

Grow Your Green

Author: Nick
Category: Money
Topics:

invest in pennies, small globes, and colorful pawns

We all know what we’d do if we won the lottery or had one day left to live or what tattoo we’d get if forced at gunpoint (the Tasmanian devil in a wrestling singlet. Don’t ask).

But what if you had a little money–not the life changing, tell your boss off kind of loot, but a couple of grand that you could really do something with–do you know where you’d invest it?

It’s a given that we’d all want to put it where it makes more money; but to get to that point, it takes a little self assessment about your financial needs, risk tolerances and goals. Otherwise, this fundamental question–and not having an answer for it–can cost you dearly.

Money Can’t Buy Love, But It Can Buy An RV

When my Mom passed away, we received a modest check from the life insurance. After funeral expenses and bills, my sisters and I were left with nearly $7,000 each. Now, granted, it wasn’t enough to retire on, but I decided that I would invest to see if I could change that.

This may or may not have been influenced by the fact that I had recently begun working with numerous financial advisers whose jobs were to give to people in exactly my position money advice–and invariably, the advice was always “invest.”

Got that? Not, “Buy a plasma TV” or “I totally must have a Coach purse!” If you want to grow your money, the only way is to invest.

But, there are just as many styles of investing as there are Coach purses: real estate, collectibles such as coins or stamps, new business ventures and precious metals, for example. These are less liquid securities, or investments that are harder to turn into cold, hard cash.

Given my $7,000 budget, none of these ideas were likely to lead me to my dream of retiring at 30, buying an RV and stopping at every tourist trap North America has to offer (first stop–the Corn Palace in South Dakota).

To get on the road, I needed to consider more liquid kinds of investing: stocks, bonds and mutual funds. In a pinch, these are relatively easy to convert to cash and are the kinds of securities that most people think of when they hear the word “invest.”

The Part Where I Call Mutual Funds “Sexy”

OK, so that still left me with three choices.

As a general rule, the closer you are to needing the money for conventional retirement, the more conservatively you should invest it. That said, as a spry 27-year-old who may or may not have a nipple piercing, I wanted to let it ride. (Yeah… may not. But I’m young yet.)

Bonds are about as conservative as it gets. There’s a reason that grandparents love to give them as gifts.

Bonds are basically loans to the U.S. government. Because the likelihood that you’ll get your money back is really high, the reward, or interest, is pretty low–generally somewhere around 4% to 5%. It varies, but you can make that amount in most savings accounts, so bonds get a big yawn.

Mutual funds are like big baskets of stocks, bonds and other types of (usually) conservative investments. Mutual funds are managed by dudes in suits who are like bouncers: they throw out any security that isn’t performing up to par and replace it with a stock or bond that is sure to “behave.”

A lot of more conservative investors like that kind of protection, but a system like that ensures that no one’s going to get up on the bar and start dancing–in other words, a part that’s not much fun for a young investor’s extra money. Most people invest in mutual funds via their 401(k)s or other retirement accounts through work, so they can have their place, but it’s generally not with speculative funds.

Don’t get me wrong–there are some sexy mutual funds focused on global economies and hot commodities, but by and large, they’re a little slower than most young professionals need outside of retirement plans.

To Market, To Market

So, that leaves the stock market. That seems easy enough. “It’s like a supermarket. I’ll just go shopping and pick out what I like.”

No. Bad. WRONG.

Just like any other major purchase, you need to do your research. Just because you love your Vonage wireless and think the service is awesome and the company is going to make a gazillion bucks does not mean you should run out and buy it.

Vonage’s value has dropped more than 50% since the beginning of 2007. The company is hemorrhaging money and ticking off investors left and right. The same may go for your favorite clothing, food, car, software or computer company.

Do your homework. It’s easy enough to look up a stock’s history on financial sites, such as Yahoo Finance, MSN, Market Watch or Google Finance.

If you don’t want to do the legwork, there are plenty of people on TV who love doing it for you. I can’t endorse any particular advisor but one guy whose name rhymes with “Slim Ramer” and is on CNBC is actually fairly entertaining to watch.

If you’d like more in-depth information, an unbiased non-profit organization, The American Association of Individual Investors (AAII), is a great place to start. A scant $29 membership fee will buy you access to all of the association’s objective advice for personal investing.

You can even subscribe to a financial advisory service where someone will tell you on a daily, weekly or monthly basis which stocks to buy and sell. These services can run anywhere from $50 a year to $5,000 annually, so just be sure the subscription cost doesn’t eat into your funds too much–most experts agree that financial advice shouldn’t cost more than 2% of your total available funds to start with.

If you have no idea where to begin looking for such a service (though doing an Internet search for “stock advisor” will generate a bunch of hits for you), there’s a great watch dog in The Hulbert Financial Advisor, which independently tracks most of the people out there who scream, “Hey! Pay me a lot to tell you how to invest your money!”

You can see each advisor’s latest returns in bi-annual issues of The Hulbert Financial Advisor, so you know whose track record is tops and who has flopped. (Although, like sports teams, financial advisors’ past performance is in no way indicative of future profit, so just keep that in mind, okay kids?)

To RV or Not To RV: That Is the Question

So, you may be wondering how I fared with my $7,000. I knew you were going to ask that. Well, I lost about half of the money, thanks to a lot of novice mistakes.

I tried too many strategies and listened to too many people instead of sticking with just one. You’ll go crazy trying to follow conflicting advice. I also entered into the market at a really bad time and, thanks to my impatience, I also left at a very bad time. But, those stories and lessons are for another time.

For now, take some time to reflect on how you would feel most comfortable investing your money if given the opportunity. And also, what time of year you’d visit the Corn Palace. I’m thinking the spring, provided I hit my retirement savings goal by then.

Come to think of it, it’s probably going to be closer to the fall. You know, I hear winter is actually a lovely time of year to visit South Dakota.

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Valerie March currently works for a financial publisher and has accumulated nearly three weeks of vacation. She is gladly accepting ideas for her North American exploration of the best (worst) tourist traps. If you have a suggested stop, leave it in the comments or contact her at www.valeriemarch.com.

Thursday, August 16, 2007

Taking Stock of Stock Options

Author: Nick
Category: Money
Topics: ,

uh-oh, duneim is down 4, sell sell sell

By Valerie March

For our parents, a job’s value was measured simply by the salary. Fortunately for us savvy, albeit a bit spoiled, future CEOs and presidents, we understand that having a “good” job means more than just having a good income.

Vacation time, tuition reimbursement, liberal health benefits, telecommuting, and two-ply toilet paper in the restrooms are all benefits that add toward your happiness at work. And don’t forget stock options–even though a lot of employees do.

It’s not surprising that most young professionals don’t know much, or anything, about stock options. Along with balancing a checkbook or how to change a tire, investing isn’t actively taught in school.

Deficits in the education system aside, many new professionals forgo taking advantage of their company’s stock option program simply because they don’t know what options are, how to use them, or the potential value they hold.

Just What Are Options?

Simply put, a stock option is an agreement that lets you purchase a set number of shares of a company’s stock at a specific price for a specific amount of time. Is that vague enough for you?

There are actually all sorts of options on all sorts of stocks, market indices (think the S&P 500 or Dow Jones Industrial Average) and commodity items, like oil, gold or even coffee–it’s sort of like betting on horses for guys (and gals) in suits.

To keep befuddlement at bay, for the purpose of this article and talking about stock options with regard to employment benefits, all you need to know is that if your company offers you a stock option, they are giving you an opportunity to buy their stock at a discount at some point in the future.

The goal is to motivate you to work harder and contribute to the company’s success so that its stock will increase in value, then you can cash in your options to buy the stock at a discount. After you buy the stock, you are certainly allowed to hold on to it, but most people simply turn around and sell their shares on the open stock market at the increased price for a profit.

Here’s a real world example mirroring how stock options work. Your parents gave you a beater car when you’re 14 years old. You work to repair, clean and paint the car, but you still can’t drive it until you’re 16. When you get your license, you’re able to drive; but at that point, you can either keep the car and put more work into it to increase the value, or you can sell the car and pocket the cash.

An Awesome Options Examples

Now, let’s look at an example of how stock options work for employees, so that if you’re ever offered them, you can do more than stand there and scratch your head.

You sign on for a new job with Awesome Company and Associates. Good for you!

Awesome Co. is a publicly traded company that uses the stock ticker symbol is AWE. (A ticker symbol simply contains one to five letters to identify a corresponding company’s shares for investors on the open market.) Shares of AWE are currently valued at $50 on the open stock market.

Your Awesome Boss says, “New Awesome employee, based on what our stock is currently worth, we’d like to offer you stock options with a $50 strike price (sometimes known as the “award,” “grant” or “exercise” price) and an expiration date of Jan. 15, 2011.”

The strike price simply indicates that any time before Jan. 15, 2011, you can theoretically cash in your stock options and buy your allotted AWE shares at $50, regardless of what they are actually worth on the open market. (Options expirations can occur in any month, and it will probably depend on your start date.)

Awesome Boss’ Master Plan is that you (and your co-worker drones) will work really hard to make Awesome Co. even more awesome. Investors will take note and start buying up AWE shares, thus driving its value skyward.

Awesome Boss hopes that you will ignore all of the really long, hard hours and stick it out for a couple of years so that you can cash in your options and make a nice profit for yourself because Awesome Boss hopes that, come Jan. 15, 2011, shares of AWE will have increased to, say, $80, thanks to your hard work.

Voila! Awesome Boss has simultaneously motivated you to work harder, while offering you a potential raise that won’t even come from the company’s wallet. Stock options are brilliant!

Well, at least for your company.

Are They Always the Best Option?

The main problem is that stock options are only valuable if, in fact, your company performs well and the stock value increases. If the stock price doesn’t grow much, or even declines, your stock options won’t be worth a toot.

Better said: Don’t bother accepting options if you think your company is a stinker. (But then, if you think your firm is a dog, what are you doing working there?)

By offering stock options, your employer also assumes that you plan to be at least marginally involved in investing. To cash in your stock options, you must have a broker–either a live person or an online account.

These days, online brokers are fairly inexpensive and easy to navigate, but most charge commission fees for every action to buy or sell options and stock. Also keep in mind that you will most likely be taxed on any profit that you make.

And what happens if you hate your job and no amount of stock options or flavored coffee creamers in the break room or casual Fridays is going to help that–can you cash in your options after your leave? Like most employee benefits, if you quit or get fired, your stock options are likely subject to certain limitations; each company is different, so be sure to find that out.

In the same vein, most companies require a “vesting period” before you can cash in on your options. During the vesting period, usually between three to five years, the company wants to ensure that you’re going to stick around and in”vest” in your job, so they prohibit you from cashing in on the stock options.

Don’t Let The Man Get One Over on You

Like anything that is potentially very lucrative, stock options require some work to reap the benefit. If you don’t plan to stay at the company for more than a year or so, it’s probably best not to bother, and only you know if you have the patience or interest to file the paperwork, open a brokerage account, and deal with the issues at tax time.

The truth is, many employers expect their workers to ignore their stock options. They know full well that most people won’t take the little time and effort required to reap their rewards.

Exercising your stock options is one small way you can stick it to The Man.

Or, like Dell employees, you can enroll in the stock options program and just hope your company screws up. Dell is currently under investigation for accounting no-nos, and its employees can’t cash in stock options right now, even if they wanted to. Thus, Dell will pay every eligible employee a nice sum to cover its mishap. Dude, you’re getting some cash.

But generally speaking, company accounting blunders notwithstanding, just like flex time or the company gym, how much you really benefit from stock options is up to you.

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Valerie March writes about trading options for a living, and enjoys her company’s large inventory of flavored coffee creamers. When Valerie’s not working for The Man, she’s busy as an aspiring singer/songwriter. You can check her out at www.valeriemarch.com.

Thursday, August 9, 2007

Watching A Penny Stock Spam Scam In Progress

Author: Nick
Category: Money
Topics: , , ,

omg up to 11 cents buy buy buy sell sell sell

My e-mail inbox just got about 50 copies of the following amazing offer:

LIVE FROM THE STREET!

Sym: (X X X X)
Price: .088

Announces the Opening of Two New Stores by
(X X X X) is pleased to announce that Puerto Rico 7, Inc. has opened two new stores. The stores are recorded as Pinero II and Borinquen Towers. Both locations were researched demographically to deliver above average sales due to high traffic streets and communities directly surrounding the stores. The Management team believes that the stores will each quickly reach an annualized run rate of 1.2 Million dollars of sales.

IMAGINE IF YOU HAD THE CHANCE TO BUY A WAL-MART FRANCHISE IN MEXICO RIGHT WHEN IT FIRST OPENED ITS DOORS THERE AND ALL YOU NEEDED WAS A SMALL STAKE TO GET IN.

Hurry, we see this stock starting to make the turn NOW.

I replaced the real stock symbol with XXXX, but if you’re eager to know the company, you can probably just check your own spam folder.

Out of curiosity and boredom, I’ll sometimes check these stocks on Google Finance to see how they’re doing and what news might have spawned the massive e-mailing campaign. Imagine my surprise when I saw this article at the top of the stock’s new ticker: Spam puts Prime Time in focus

The article explains the “news” which these penny stock spammers are using to hype the company: apparently another company it has an interest in just opened two new 7-Elevens in Puerto Rico.

That’s right. You’re going to be a millionaire by buying this stock right now because some other company somewhere opened two 7-Elevens.

The article also reveals how these penny stock spams usually play out: a few gullible investors fall for them and buy up shares, jacking up the price until the spammers end their campaign. But just before sending the last of their hundreds of millions of e-mails, the spammers sell all their shares, typically sending the stock price into freefall. The spammers sell high and walk away millionaires; a bunch of other unlucky folks lose a lot of money.

In case you were thinking of investing in these Mexican Wal-Marts (or Puerto Rican 7-Elevens, or whatever they are), just remember that somebody has to lose this game. Don’t think you can play these spam messages to your advantage either. It’s unlikely that you’ll be able to buy up enough of the stock yourself and sell it in time to avoid the spammers’ own sell-off. So unless you’re one of the spammers who created the game in the first place, you’d be wise not to play unless you want to lose.