There have never been more stock and bond investment opportunities or information sources available than at the present, but deciding which stocks or bonds to buy has never been more difficult.
Equity mutual funds are an alternative to individual stocks and bonds, and they are an easy way to participate in the stock market. They enable the investor to diversify risk and obtain professional management.
The advantage of investing in mutual funds is that they automatically provide diversification.
Even with a small amount of money, investors can own shares of hundreds of stocks or bonds because mutual funds pool money from lots of small investors and a group of professional advisers invests the money in large portfolios with many securities—usually in the stock or bond markets.
There are specialized mutual funds that invest in automobiles, precious metals, utility companies, government securities, and so on, or general funds that cover almost any area in which investors would want to invest.
Keep in mind, though, that like stocks, there are risky funds with high yields and safe funds with lower yields. Although some investors invest short-term for specific reasons, such as accumulating funds for a down payment on a home, to be really successful in mutual fund investing, investors must be patient and use the fund as a long-term investment vehicle.
Mutual funds are both attractive and valuable to small investors. Since many mutual funds require as little as $100 or less to invest, investors’ risks are relatively small and are spread over a large base in the economy.
The number of mutual funds available has multiplied considerably during the past several years. This is mainly due to the fact that mutual funds sell well when they perform well and performances on good mutual funds over the past several years have averaged more than twice the prevailing interest rates.
However, past history is not always a good indication of what funds will do in the future. Since mutual funds are securities, trained analysts—registered brokers—are best qualified to review funds performances and compare them with current management philosophy, cash position, and market position to come up with reasonable projections of what funds could do in the future.
To choose a fund, investors should take the following steps.
1. Determine their goals. Decide if they are investing for the short term or the long term.
2. Use comparative fund listings to identify the best performers over the past 20-, 15-, 10-, and 5-year periods. Never rely on a one-year performance record when selecting mutual funds.
3. Research past fund performances against the Dow Jones industrial average and the Standard & Poor’s Index for the same years. Look at the record of funds that have done well in up markets and have conserved their capital in down markets. Choose performers that went down no more than the Dow in poor years.
4. Go to independent sources such as the annual review of mutual funds edition of Money magazine and Consumer Reports and compare fund performances.
5. All fund companies publish prospectuses showing current financial conditions of individual funds, including administrative costs. These prospectuses should clearly define secure (or low-risk) funds and growth (or speculative) funds.
In order to attract investors in this very competitive field, mutual funds now offer a variety of options. The following are the options most often compared.
When investing in funds, investors generally have the option of shifting or allocating their money into one or more areas within the company’s “family” of investments once or twice a year without penalty. This is now a common option offered by most mutual fund companies.
* Open-end versus closed-end funds. With open-end funds, investors have guarantees that the fund company will buy back shares at whatever market value they are worth at the time of the sale. This gives both liquidity and security.
* In a closed-end fund, there are a finite number of shares traded on the open market. They may sell for less than their underlying asset value if there is little demand. There is more risk with open-end funds when it comes time to take a profit, but the return could be more than the return closed-end funds provide.
* Load versus no-load funds. Load funds charge sales commissions up to 8.5 percent at the time they are purchased. No-loads do not. Both charge management fees. The records show that there is no performance difference between the two.
No-load or non-commission funds allow money to grow without service fees or commissions coming out of the initial investment. In addition, no-load funds normally do not carry penalties if investors decide to withdraw their money.
Look for funds with consistent management, with a family or a variety of in-house funds, and whose parent company is financially strong.
In addition look at the total net asset of funds. Smaller funds that are worth $500 million or less in total assets are likely to perform better than larger funds. Funds where there are huge fluctuations of assets may signal a problem.
Watch the redemption rate of funds. If funds have massive redemption, either management is having administration problems or the funds are having cash flow problems. In either case it may be wise to seek alternative investment options.
Millions of investors today put their money in mutual funds. If Christians decide to take this approach and let experts manage their money, they need to make sure they select a good fund. Many mutual funds look good on paper, but loads and fees can erode gains.
In addition, as Christians we need to understand that some mutual funds invest in areas that are questionable and in some that are blatantly anti-Christian, including pornography, liquor sales, and abortion clinics.
Christians should get prospectuses from mutual funds they’re considering and research the history of the funds to make sure the fund’s goals coincide with theirs.
Originally posted 12/15/2012.
Newscasts report daily that our economy is on a downward trend. People are losing their homes, highly-paid executives are losing their positions and having to settle for lower-paying jobs, food and energy costs continue to increase, and the list goes on.
While these facts are true, what we are experiencing is not new. In Jeremiah 29, the “weeping prophet” predicted long-term captivity. Israel would endure 70 years of hard labor before they would be allowed to return to their homeland. Let’s all hope and pray that our current economic downturn won’t last that long!
We have compiled a list of things you can do to survive or thrive in our current economy.
1. Learn to be content. (1 Timothy 6:6-9).
2. Pay your bills faithfully. Making your payments on or before the due date is a positive testimony to your creditors and a good example to your family/neighbors.
3.Prioritize your debt, making sure you don’t compromise your home or your transportation.
4. Negotiate with creditors as needed. Be proactive. Seek a meeting with them to make payment arrangements rather than waiting until you miss payments and they come looking for you.
5. Downsize if it puts you in a better cash position.
6. Pay extra whenever you can to accelerate payoff dates.
7. Have a garage sale to generate extra cash to pay down debt or to increase savings.
8. Work your way through the Crown Money Map.
9. Capitalize on your most valuable assets, your family.
10. Learn to garden, use fresh vegetables and fruit when in season, try a new recipe.
11. Cancel cable/satellite. Instead, read a book, play a table game, or share coffee with friends.
12. Explore bartering to save on outgoing expenses.
“A prudent man sees danger and takes refuge, but the simple keep going and suffer for it” (Proverbs 22:3).
Originally posted 12/2/2012.
While a lack of money can certainly create financial pressure, often such pressure is simply a result of attitude. If there is a right attitude toward money, freedom from financial bondage follows. God did not say that money and material things were problems; money is neither good nor bad. It is the use of money and the attitude toward money that is often a problem.
Jesus regularly warned His followers to guard their hearts against greed, ego, and pride, because Satan can control God’s people with these emotional tools. In the area of finances, God’s people are vulnerable. As such, we need to be encouraged to follow the necessary steps that will ensure money management according to God’s plan, thus assuring financial freedom.
God has designated the most difficult step, transfer of ownership, as the first step. Once this has been accomplished, all other steps will fall into place.
As Christians, God expects that all possessions be transferred to Him. Since we can’t literally place everything into His hands, this transfer becomes an act of faith. In essence, it means accepting the fact that God owns it all. Transferring ownership to God means that God owns all that we consider ours: clothes, car, home, family, income, debts, present, and future. Once ownership is transferred, God can begin to lead us out of debt and into financial freedom. We then become stewards and managers of what belongs to Him.
So, if God is the owner of everything in Christians’ lives, He can be trusted to change unhealthy spending habits (especially the abuse of credit cards) that cause debt, anxiety, and fear of the future. The key to maintaining this relationship is to understand properly the definition of stewardship.
A steward is someone who manages the property of another. As His stewards, we are responsible for managing His property in a way that will please Him. God will not force His will on us, but if we realize our responsibility and transfer everything to Him, He will keep His promise and provide for each and every need. The first step in achieving financial freedom is to realize that since God is in complete control, all that we are, do, have or ever will have must be transferred to Him.
There are many ways to get into debt but only one sure way to get out and stay out of debt: self-discipline.
Regardless of income, disciplined debt elimination is mandatory in order for a money management plan to function properly. Proverbs 27:12 says, “A prudent man sees evil and hides himself, the naive proceed and pay the penalty.”
Debt can best be eliminated by following these steps.
1. Transfer ownership of every possession to God. (Psalms 8:6, Deuteronomy 5:32-33)
2. Allow no more debt, including bank and personal loans, and cut up all credit cards if unable to pay them off each month. (Proverbs 24:3)
3. Develop a realistic balanced budget that will allow every creditor to receive as much as possible monthly. (Proverbs 16:9)
4. Start retiring the debt (Psalms 37:21, Proverbs 3:27-28), beginning with the smallest debt first. Once the smallest is paid off, put all the money on the next, and so on.
Generally speaking, if these steps are followed, the average family will be debt free in less than five years and the problem that caused the debt in the first place could very well have been corrected.
In order to stay out of debt, two steps need to be followed.
1. Develop a written plan of all expenditures in order of importance. Determine whether the expenditure or purchase is a need (basic necessities such as food, clothing, and housing), a want (things that make life easier, such as more expensive clothes, a VCR, or air conditioning), or a desire (more expensive wants, such as designer clothes, a new BMW, or a wide-screen TV).
2. Open a savings account and get in the habit of putting something into the savings account regularly, perhaps every week or every month. The amount of deposit is not nearly as important as the consistency in making a deposit. This savings can then be used for specific purchases or emergencies, rather than making these purchases on credit.
Every Christian needs to give something back to God as a testimony to God’s ownership. A tithe is the portion of our income that we give to God and to God’s work through our local church. It should be the first part. “Honor the Lord from your wealth and from the first of all your produce” (Proverbs 3:9). Tithe means “tenth.” This is the amount most Christians use as a guide for tithing, but it really should be just a starting point for our giving. It’s through sharing that God’s power in finances is brought into focus. “Now this I say, he who sows sparingly will also reap sparingly, and he who sows bountifully will also reap bountifully” (2 Corinthians 9:6).
In order to maintain true financial peace, we must recognize and accept that God’s provision—all that He gives—is what He has provided to direct our lives. Many Christians are under the impression that God directs financially only by an abundance of money. This is not necessarily true. Sometimes He directs by withholding financial abundance. As such, He expects His people to live on what He provides and not be pressured by the desire for riches and material possessions.
Christians seeking financial freedom must always be willing to put other people first. “Be hospitable to one another without complaint. As each one has received a special gift, employ it in serving one another as good stewards of the manifold grace of God” (1 Peter 4:9-10). It is not God’s plan for us to get ahead in the world at the expense of others. Their welfare must be considered. “Do not neglect doing good and sharing, for with such sacrifices God is pleased” (Hebrews 13:16).
Unfortunately, most Christians in America are self-indulgers, rarely passing up a want or a desire, much less a need. To achieve financial freedom, indulgences and the tendency to spend more than what can be afforded on things that are not needed must be avoided. Indulgence is greed. “But immorality or any impurity or greed must not even be named among you, as is proper among saints” (Ephesians 5:3).
Avoid impulse spending, get-rich-quick schemes, and other financial decisions made through intimidation. “The plans of the diligent lead surely to advantage, but everyone who is hasty comes surely to poverty” (Proverbs 21:5). The best way to avoid these traps is to pray about each purchase, each financial decision, and each opportunity that is intended to produce extra income—especially if the decision will affect the family’s financial welfare. “Rest in the Lord and wait patiently for Him; do not fret because of him who prospers in his way, because of the man who carries out wicked schemes” (Psalm 37:7).
Many Christians have an upside-down view of money. They feel that the money they have is theirs and that God’s money is the portion that they give to the church. God has a different view. As Lord, God, and King, He owns everything—including the money that we claim as our own. As such, He has clear ideas of how He wants His people to function and to make use of His possessions—ideas that result in financial freedom for His people, if they are followed step by step.
Originally posted 12/1/12.
Many sermons and teaching lessons that pastors present to their congregations do not apply to everyone. For example, lessons on the depravity of alcohol or drugs or the spiritually and emotionally harmful effects of adultery could apply to only a handful of attendees. However, everybody deals with money. It is the pastors’ responsibility to help their congregations learn God’s method of handling money.
There are a number of financial lessons on which pastors can concentrate, but four seem to be of more concern than others.
1. Warn them about buying on credit, cosigning, surety, and the financial pitfalls associated with borrowing.
2. Teach practical guidelines of money management. This includes showing people how to budget, tithe, save, and give in a manner pleasing to the Lord. Although pastors need to emphasize the importance of insurance, retirement planning, and will and estate preparation, this type of teaching should be done one-on-one, rather than in a congregational setting.
3. Provide premarital financial training. In America today one out of every two new marriages ends in divorce. The number one reason couples give for divorce is money or how money is handled. Premarital training that focuses on God’s principles of finance will likely prevent marital conflicts associated with finances that otherwise would be inevitable. Even in the ministry, the divorce rate is consistent with the national average. More than 47 percent of marriages in the ministry end in divorce. Of these, 72 percent list finances as the number one reason for the divorce, with only 6 percent claiming not to have more monthly debt than they have monthly income.
4. Teach financial management during a crisis or life change. Major changes in life, such as starting college; children leaving home; weddings; change of job; loss of a job; moving; retirement; and family crises, such as death of a loved one, prolonged sickness, accident, natural disaster, fire, and so on bring their own financial struggles. Pastors need to address how families can cope financially during these life-changing events. Subjects that pastors can include are borrowing, bankruptcy, elimination of assets, retirement planning, and saving.
The Bible never condemns the possession of goods and money, but it does speak against hoarding, coveting, selfishness, stealing, dishonesty, and mismanagement of finances. For a millennium, Satan has used financial pressures to enslave God’s people in debt and worry and to turn them away from God and from His principles of money management. God has placed pastors in a unique position to counterbalance this attack upon God’s people by encouraging them to teach God’s principles of finance as found in the Word of God.
Originally Posted December 1, 2012
by Rick Boxx of Integrity Resource Center.
“Do I pay staff, payroll taxes, or the vendor?” After staring at the checkbook it was obvious I could only do one of the three. This is a dilemma many business leaders have faced, but now the decision was mine.
Most business owners would say pay the employee first, payroll taxes second, vendor third. I doubt that many would have told me to pay the vendor first.
I chose what I believed to be the biblical way. I paid the vendor, then the taxes, and then the employee. Was it painful? You bet! Would I do it again? Yes. Let me tell you how I worked through this process.
The vendor’s invoice was for work performed almost two months earlier. The taxes owed were for the previous month’s payroll, and the staff payroll was for the last two weeks’ work. As I prayed and chewed on this problem, I knew there were some important principles to consider.
Number one was Proverbs 3:27-28, which says, “Do not withhold good from those to whom it is due, when it is in your power to do it. Do not say to your neighbor, ‘Go and come back, and tomorrow I will give it’ when you have it with you.”
Secondly, the Bible teaches not to withhold a man’s wages overnight, or in our day, pay him when the work is done. We are responsible for anyone who performs services for us, not just employees. Our vendors provide products and services on our behalf. The IRS is a vendor who represents the government and our employees.
Most business leaders would pay staff first because of their intimate knowledge of that person’s needs. The vendor’s needs, and the IRS’s needs are not any less important; it’s just that we don’t have to look at them everyday.
Accounts payable turnover is one gauge of how you are doing in paying vendors. Accounts payable divided by your annualized cost of goods sold multiplied by 365 days will give you a number that reflects how many days on average of accounts payable are outstanding. If your suppliers bill you on net 30-day terms, the hope is that the number will come in at 30 days or under.
When determining whom to pay, remember to remain impartial. God cares about all of the people you owe, so do what’s right, not what’s convenient.
Rick Boxx is the President of Integrity Resource Center (IRC), a nonprofit ministry providing biblically-based resources, training and counsel to business and ministry leaders. You can learn more about IRC by visiting their website or by emailing.
Originally posted 11/13/2012.
Savings bonds are loans to the government for a predetermined period of time (generally seven years or longer). They were designed primarily to help fund the U.S. war effort in World War II and were originally called war bonds. After the war, the bond program was continued and retitled U.S. savings bonds.
In essence, the U.S. savings bond program is a method by which the United States government, who usually lacks the amount of funds needed to meet existing obligations, can borrow from you, a resident in the United States, with a promise to repay the amount that was borrowed from you, with interest, after a certain number of years. U.S. savings bonds are the investments that make it possible for our government to run the huge budget deficits that make trade shortfalls an ever-present fact of American life.
Since U.S. savings bonds are obligations of the U.S. government, in that they are loans made directly to the government, they are considered to be as secure as the U.S. government. On a scale of 1 to 10, savings bonds might be given an income rate of 5, a growth rate of 0, and a risk of 1. Interest paid on savings bonds is exempt from state and local income taxes, and federal income taxation can be postponed until you cash your bond or until it stops earning interest in 30 years. In addition, lost, destroyed, or stolen bonds can be replaced.
Three types of U.S. savings bonds are offered, namely Series EE bonds, Series I bonds, and Series HH bonds. Series EE bonds are an appreciation-type security that is issued for terms totaling 30 years. The I bond was introduced in 1998 and is indexed for inflation. Series HH bonds are current income securities issued for terms totaling 20 years, consisting of a 10-year original maturity period and a 10-year extension. HH bonds are issued only in exchange for accrual bonds with redemption values totaling $500 or more.
Series EE bonds are purchased at half their face value or denomination. So, you would purchase a $100 Series EE bond for $50. I bonds are purchased at face value or denomination. So you would purchase a $100 I bond for $100. You can buy up to $15,000 ($30,000 face value) of Series EE bonds per year. You can buy up to $30,000 of I bonds per year. The limits are independent of each other, meaning you could buy up to $45,000 annually in bonds.
EE savings bonds are issued in denominations of $25 or more, with maturation periods of seven years or more. Savings bonds accumulate interest and pay the face amount (principal and interest) on redemption. The method by which savings bonds accumulate interest is not uniform, and if you cash them in between distributions periods (generally every six months) you will lose the undistributed interest. In other words, if you cash them in one day before the interest is distributed, you could forfeit six months of interest earnings.
Series EE bonds earn market-based rates that change every 6 months. There is no way to predict when a Series EE bond will reach its face value. I bonds are an accrual-type security. This means that interest is added to the bond monthly. The interest is paid when the bond is cashed. An I bond earns interest for as long as 30 years. The interest accrues on the first day of the month and is compounded semiannually. The earnings rate of an I bond is determined by a fixed rate of return plus a semiannual inflation rate. The fixed rate remains the same for the life of an I bond.
Both Series EE and I bonds can be cashed any time after 6 months. However, they could carry a significant interest penalty for early redemption. In fact, if you cash an I bond within the first five years, you will be penalized by losing three months worth of interest. On the other hand, if you do not cash your Series EE bond before the maturity date, you will be losing money because the bond will no longer be earning interest after the maturity date. In essence, the bond would represent a free loan to the federal government.
Because Series EE savings bonds are nonnegotiable registered securities, generally ownership cannot be transferred to anyone at will. However, they may be able to be transferred under unusual circumstances but with very rigid restrictions. In such cases, there would be considerable tax consequences at the time of transfer.
Series EE bonds or I bonds purchased in your name after 1989 can be used to pay for college tuition for your children or for you, and the interest may not be taxable. They have to have been issued while you were at least 24 years old and the exclusion is not available for taxpayers who file as Married Filing Separately. For full details concerning using bonds to pay for college tuition, contact your local office of the Internal Revenue Service and request IRS Publication 550 and IRS Form 8815.
If after purchasing a bond you decide you do not want it, you can apply for a refund of the purchase price only (you will receive no interest on the bond) by completing and signing Public Debt Form 2966. Send the completed form with the bond to the nearest Federal Reserve Bank that provides savings bond services.
Savings bonds are a contract evidencing a loan made to the United States. Bonds are a safe and secure way of saving, because they are backed by the full faith and credit of the United States. However, when considering investing in savings bonds you must take into account the many ways the government spends money. Whether promoting abortion, supporting artists who produce blasphemous or pornographic exhibits, or undermining traditional values through humanistic education and welfare programs, there is much for a Christian to be concerned about.
If you have any questions regarding U.S. savings bonds, or to obtain a free booklet from which you can determine the current value of your existing savings bonds, send a written request to the Bureau of Public Debt, Savings Bonds Operations Office, Parkersburg, WV 26106-1328 or contact them online at TreasuryDirect.gov.
Originally posted 11/7/12.
The primary reason people choose to refinance their home mortgages is because of low mortgage interest rates. However, before refinancing, they should be aware that sometimes they may end up paying more, not less, for a mortgage because lenders charge new types of fees, and loan arrangements can be complex.
If you’re planning to live in the house for more than five years and don’t expect a significant increase in your salary (cost of living increase or slightly more), moving from a higher interest rate to a lower one or changing from an adjustable interest rate to a fixed-interest-rate mortgage could be worth considering. The most popular mortgages are conventional fixed-rate 15 to 30 year loans.
For homeowners who aren’t planning to stay in their homes for more than five years or who can look forward to big salary increases, spending the money to refinance may not be the wisest choice.
If you are buying a home and do not plan to stay in the home for more than five years, you might want to consider an adjustable-interest-rate mortgage.
First-year payments on ARMs are generally much lower than conventional fixed-rate mortgages, as long as interest rates stay down. The fear that interest rates could rise, causing your monthly mortgage payments to rise, can be partially offset by taking an adjustable rate mortgage with annual and overall limits on interest rate increases. The most common interest rate limit offered by mortgage lenders is 2 percent annually with a maximum of 5 percent over the life of the ARM.
If you choose an ARM, make sure the limits are in writing and are spelled out clearly in the mortgage contract. In addition, check to see if there’s an interest floor. Some ARMs do not decrease if interest rates drop. Before signing the agreement, be sure mortgage rates will be reduced if interest rates drop.
Before refinancing, figure out exactly how much it is going to cost you. The advertised interest rate seldom tells the whole story. Additional charges and fees can raise the cost of refinancing to as much as 20 percent.
The biggest refinancing expense is prepaid interest, called discount points. It’s typical for discount points to be 1 to 3 percent of the requested loan amount, but they can go as high as 10 percent. When comparing interest rates, always include this cost. A low-interest loan with high points can easily cost more than a higher-interest-rate loan with lower points. Ideally, refinancing would cost 0 points.
The mortgage company’s refinancing fees can also be expensive. Some lenders charge a flat $250 to $700 for an application fee; others charge a percentage. Those that charge a percent of the loan generally charge between 2 and 4 percent. Therefore, a 2 percent application fee for a $100,000 loan would be $2,000. If the fee is nonrefundable, you stand to lose a substantial amount of money if the mortgage refinancing isn’t approved. In addition, closing costs can vary dramatically from one lender to another. Generally, lenders who charge closing costs charge from 2 to 10 percent of the value of the loan. If at all possible, do not roll these fees into the loan. By doing so, you will be paying for them over the duration of the loan. Pay for these fees out-of-pocket.
There are four primary issues about which you should get clarification before you agree to a refinancing contract.
1. Negative amortization of an adjustable loan can be devastating when you decide to sell the house. If your mortgage rates remain fixed but the interest rate rises, less of your monthly payment is used to pay off the principal. If rates rise a lot, the higher interest due is added to the principal. Then, when the house is sold, you might end up owing the mortgage company more than what was originally borrowed.
2. Change in mortgage collection company. If your mortgage company sells your loan to another lender, there’s a chance the new company will send a payment book automatically. So, you begin making payments to your new lender, instead of the originator of the loan. However, be sure the originator has “signed-off” or else you may be perceived as defaulting on the original loan. If you see any change in your mortgage processing, contact your originator immediately for an explanation in writing.
3. Private mortgage insurance. This insurance is generally required only when down payments of less than 20 percent are made on the property. Charges for this insurance are usually .5 to 2 percent initially and then .33 to 2 percent annually. To prevent this expense, be sure you are refinancing 80 percent or less of the appraised value of the house.
4. Prepayment penalties. This expense will show up when you sell your home. A prepayment penalty means that when you sell you will have to pay three to six months worth of interest before the deal is closed. If you have a prepayment penalty in your refinancing agreement and move in five years or less, all of your profits from the sale of the house could be dissolved by a prepayment penalty.
As interest rates continue to fall, many homeowners are becoming anxious to refinance their home mortgages in order to capitalize on the interest savings. However, before finalizing any refinancing agreement, be sure you know the total amount that you will be paying for the refinancing, how much the new mortgage will cost you monthly, and how much it will cost over the length of the loan.
Originally posted 10/26/2012.
It is important to realize that investing is not an exact science. Even though some seem to make money in whatever they invest, others seem to lose whenever they invest in anything.
The simplest, most straightforward method for evaluating any investment is the percentage of people who buy into it and get their money back.
The next rule of thumb is how many make returns above their investments. Generally, if investments make more money than they cost, they can be considered good investments. Most successful investors are what can be called hedged risk-takers. That means that they will take risks periodically if they can afford to, but they never take more risks than are considered necessary to accomplish their goals. Although there are investments that historically have reaped more financial rewards than financial disasters, many others are nothing more than bottomless pits that continually feed the never-quenched thirst of speculation. They seem always to promise great returns but seldom seem to deliver.
This article does not presume to give investment advice. Based on past performance, it merely points out and draws attention to what investments over the years have been most likely to produce financial gains and those that have been mostly likely to produce financial disappointments or losses. Although past performance does not necessarily guarantee the same showing for the future, it does provide a standard by which nonprofessional investors can judge whether an investment is historically financially safe or detrimental. So, based on the fact that these best and worst investments are not intended to be used as guidelines for developing investment strategies but, rather, are to be viewed as investment suggestions based on past performance, we submit the following investment options.
1. Residential housing. Without question, the best overall investment for the majority of Americans has been their homes. Residential housing has kept pace with inflation; in addition, it has appreciated on the average approximately 4 percent annually. A simple investment plan to follow is to make the ownership of your home your first investment priority.
2. Rental properties. It is often said that the thing you know best you do best. The majority of Americans know how to evaluate rental properties, particularly residential housing. Therefore, they are a logical investment. However, rental properties are not for everybody. Unless you have a strong personality and are willing to evict some nonpaying tenants from time to time, you need to avoid becoming a landlord. However, one of the attractive aspects of rental property is that the initial investment is not excessively large in many areas. In addition, once the property is rented the tenants pay off the mortgage for you.
3. Mutual funds. The whole concept of mutual funds is designed to attract the average investor. The pooling of a large number of small investors’ monies to buy a broad diversity of stocks and other securities is a simple way of spreading the risks. Mutual funds are good investments because (1) most allow small incremental investments, (2) they provide professional investment management, and (3) they allow great flexibility through the shifting of funds between a variety of investment assets.
4. Insurance products. With the dual benefit of insurance coverage plus higher yields, insurance products such as annuities and whole-life insurance have become viable products for long-term investors.
5. Company retirement plans. The investments available through a company retirement plan are the same as those you might choose personally. One major advantage with company-sponsored retirement plans is that usually the funds are tax deferred. Additionally, many companies offer matching funds based on a percentage of what you elect to invest yourself.
6. Government-backed securities. Government-backed investments are considered to be absolute security. Although they may not be the best performers, they are without a doubt the most secure.
1. Commodities speculation. Commodities trading is the buying and selling of materials for future delivery. It is extremely risky. Unless you have the understanding that everything you have worked for most of your life can be lost while you sleep and the thought of that possibility is irrelevant to you with regard to your life and lifestyle, don’t trade commodities.
2. Partnerships. The most common financial partnerships are limited partnerships, meaning that the contractual arrangement specifies a general partner and one or more limited partners. The intent is to limit the liability of the limited partners to their financial investments only. However, because of recaptured deferred taxes, seldom do investors recoup their initial investments in the length of time originally proposed, if ever.
3. Tax shelters. Tax shelters are used primarily to defer income taxes, rather than for any economic value they might have. Since the 1986 Tax Reform Act, tax shelters for the average investor have been curtailed. Generally, the only people who can be profitable in tax shelter investments are those who have a large amount of passive income, rather than earned income. So, for the average American worker, tax shelters are not recommended.
4. Precious metals. Most people who make any money at all on precious metals are those who sell them. Unless you have a lot of money that you can afford to lose, don’t invest in precious metals. Investing in precious metals is like taking a handful of money and throwing it into the wind and then hoping that some of it will eventually return to you, along with more money that others have thrown to the wind.
5. Gemstones. The diamond on your finger is not an investment; it’s a keepsake. Most novice gem speculators usually buy high and sell low. Gem investing is for those who have nerves of steel, the strong at heart, and the rich. Seldom do investors make any money in gems, unless they are one of a small group of international gem professionals or gem collectors.
6. Collectibles. Coins, stamps, books, porcelain, works of art, and other unique items can be good investments for knowledgeable buyers who take the time and effort to become proficient at their trade or for those who collect such items as a hobby or for leisure. However, for the average non-professional collectibles investor, the market is extremely limited and slow moving—neither worth the time nor the effort when compared to the limited financial rewards.
7. Stocks. Although the knowledgeable, professional investors can and do make money regularly on common stock, average investors are not equipped to speculate accurately on which stock will do well and which will not. If the average investor would invest in a common stock, leave it for 10 years, and not touch it, it probably would keep up with inflation and perhaps even gain 3 or 4 percent. Seldom do average investors do that. They generally try to move their investments from stock to stock in order to reap the maximum benefits. Since they are not professionals and their knowledge is limited, most end up making little and, in many cases, losing their initial investment.
Although we are not qualified to give professional investment advice, we can present information that suggests what have been the best and worst investment options, based on past performance. We are not suggesting that you invest in the best and avoid the worst. We only propose that you consider these findings (along with prayer and seeking counsel from a trusted investment professional) before you make your investment decisions.
Information for this article was taken from Larry Burkett’s Investing for the Future, Chapters 5 and 6, ChariotVictor, 1999.
Originally posted 10/22/2012
by Mark Biller for Sound Mind Investing
What determines the performance of your investment portfolio more than any other single factor? Most investors think it’s picking good stocks and stock funds. Certainly that can make a big difference, and that’s why we suggest using a proven strategy like Fund Upgrading to help make important buy/sell decisions. But as important as this is, it’s not the most influential. All the great stock funds in the world won’t have much impact on your portfolio if you only have 10% of it invested in stocks and the other 90% is in money market funds.
With that in mind, perhaps you can see why your most important investment decision is how much of your portfolio is allocated to stock-type investments and how much to fixed income securities like bonds. Academic studies over the years have established that as much as 90% of your long-term results can be traced to this fundamental allocation decision.
A portfolio’s stock-to-bond mix does more than dictate future returns—it also tells you a great deal about how those results are likely to be obtained.
It’s safe to say that the more bonds in your portfolio, the smoother the ride. By contrast, the higher your stock allocation, the more you can expect returns to come in a “two steps forward, one step back” fashion.
If owning stocks subjects you to greater swings in performance and produces losses more frequently, why use them at all? Because that’s where the biggest long-term gains are! The net effect of all those stock market ups and downs is greater overall returns. So, on the one hand, we have stocks, which are volatile but produce high returns. On the other we have bonds, which are relatively stable but produce lower returns. How should you go about combining them in a portfolio?
The key ingredient in this recipe is time. Over shorter periods, stock returns are much more variable. Maybe you’ll do great; maybe you’ll do poorly. Given a long time frame, however, you can be very confident that stocks will provide higher returns than bonds.
Here’s a good example to illustrate this point. Think about tossing a coin. You know that the probability of getting heads on any single toss is 50%. So if your goal is to get 50% heads, then what matters most to you is having a lot of tosses. If there are only going to be two tosses, you should be much less confident of getting 50% heads than if there are going to be ten tosses. With 100 or 1,000 tosses, your confidence should grow correspondingly that the long-term averages will emerge.
So it is with investing. The more years (“tosses”) you have ahead of you to invest, the more confident you can be that you’ll benefit from the higher average returns stocks have historically provided. The less years you have to invest, the more you need to protect against the possibility that the results over your shorter time period may not match the long-term averages.
That’s why it’s generally recommended that younger investors take advantage of the many “tosses” in their future by investing exclusively in stocks. They can afford to ignore the short-term ups and downs, while racking up the highest long-term returns possible. Later, as you move closer to retirement and the number of future tosses declines, it’s prudent to scale back the short-term risk of loss by gradually increasing the percentage of bonds held in the portfolio.
Volatility declines more quickly than returns do, meaning you can afford to add bonds for stability without reducing performance too drastically. This is why we advise readers who feel a need to temporarily lower their risk to make only small changes (rather than large adjustments) to their portfolios. Short-term risk can be reduced significantly just by moving one notch to the right, without dramatically lowering the long-term results you can expect.
Hopefully this article helps clarify the relationship between volatility and expected returns, and how the allocation of a portfolio is the primary driver of both. If you’re nearing the end of your investing time frame (whether for retirement, college, etc.), this information should give you confidence that you can keep growing your money at a reasonable rate even if you do the prudent thing and increase your bond holdings to reduce the chance of short-term losses. On the flip side, if you still have many years to invest, hopefully this will liberate you from worrying about what the market will do in the short-term as you ramp up your stock allocation to take advantage of the higher long-term returns stocks have historically provided.
Published since 1990, Sound Mind Investing is America’s best-selling financial newsletter written from a biblical perspective.
Originally posted 10/20/2012.
By Chuck Bentley
Many hoped to come away from the first presidential debate [of 2012] with renewed optimism for a solution to the fragile condition of our nation’s fiscal health. Unfortunately, I came away less optimistic.
Just as divorcing couples are notorious for finger pointing, politicians running for office (or those in office for that matter) are no less contentious. But perhaps it’s time to step away from the rancorous debate over debt—arguing about who spent first or more—and consider that our national addiction has now spread to even the most humble households.
Bill Gross of PIMCO may have put it best when he said that we’re a nation run by fiscal drunks. That should now be obvious to all. Less obvious, and possibly more troubling, is that this unbridled binge spending is now practiced by the least among us. The poor are getting poorer when measured by their debt.
A national crisis in spending beyond our means reaches from the White House to the home front. Recently, the Labor Department noted that the bottom fifth of Americans spent more than double their incomes (through things like credit cards, drawing from savings, and payday loans). In a healthy budget, debt payments should not be more than 5 percent of monthly spending. But the Economic Policy Institute reports that in 2010, about one-fourth of the poorest fifth of households were spending more than 40 percent of their income servicing debt.
The middle class isn’t doing much better, according to the American Payroll Association, which reports that people making less than $40,000 a year also spent more than they made, as did their elected leaders.
The infamous national debt only adds to this personal financial stress. Uncle Sam has saddled every American man, woman, and child with more than $51,000 in federal debt. That debt load is more than the average mean wage for Americans, reported as $45,230 in 2011 by the Bureau of Labor Statistics.
This is a dire picture for all of us. No cost of living increase and certainly no partisan quick fix can address this crisis.
“Since the economic recovery started in June 2009, household incomes are down 5.7 percent, the Sentier (Research) data show, and they are down more than 8 percent since Obama took office,” noted Investor’s Business Daily this month.
On the rise is poverty and unemployment:
“Earlier this month, the Census Bureau released its annual report showing that the number of people in poverty was nearly 3 million higher in 2011 than in 2009, an increase of 6 percent,” reported John Merline in Investor’s Business Daily. One result of such a shift is that 15 percent of Americans—a record high—are on food stamps.
The economy is flat-lining with little more than 1 percent growth with unemployment at more than 8 percent for more than 43 months. But for certain key groups the realities are much harsher.
“About 1.5 million, or 53.6 percent, of bachelor’s degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years,” reported The Associated Press. Too many graduates are moving back home to room with parents, finding that their dreams of a career can’t be realized … but that their student loan payments are still due.
Their cohorts returning home from military service aren’t doing any better. The Bureau of Labor Statistics in 2011 reported that the unemployment rate among veterans was 12.1 percent — a poor welcome for those who put their lives on the line for the nation.
The economy has not been creating enough jobs to address the demand from incoming workers. Nor will it anytime soon. A Business Roundtable survey released in the past week indicates that about 34 percent of U.S. CEOs plan to cut jobs in the U.S. over the next six months, up from 20 percent a quarter ago because of concerns over rising tax costs, in particular the fiscal cliff looming ahead in 2013.
To deal with its own money crunch problem, the federal government is set to impose a tax that will impact nearly 90 percent of Americans, according to the Tax Policy Center.
In a recent analysis, they reported: “The fiscal cliff threatens an unprecedented tax increase at year end. Taxes would rise by more than $500 billion in 2013 — an average of almost $3,500 per household — as almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000.” While politicians in Washington are struggling to address this coming crisis, it’s difficult to have much faith in their abilities to compromise before the financial ax falls.
For many Americans, struggling with reduced salaries and opportunity, increasing debt and higher costs for food and fuel, coming up with $2,000 more in taxes will be a real hardship. Conducting business as usual is a serious error in the face of the economic challenges we face.
Only those unfamiliar with the scope of these problems thinks we can continue our present economic course. For three years, the federal government has operated without a budget — that’s bad for America and just as catastrophic for families, who are following in Uncle Sam’s foolish footsteps.
Any good credit counselor will tell you to evaluate your income and spending, be sure they balance and live within your budget. Is it any wonder why we’ve lost our way?
On the whole, it’s a grim picture facing America. We need a change at the grass-roots level where, frankly, I have more hope for self-discipline than from our political leaders. Both sides of the political aisle have thus far shown themselves impotent to take substantial corrective measures.
Regardless of which candidate is elected president, after this election, it will be time for real bipartisan efforts to set a new course for America, because this current economy is a house of cards stacked far too high. But don’t hold your breath. Rather, be sure you’re facing your own financial challenges with sober judgment and taking appropriate measures without finger pointing or blaming someone else.
Originally posted 10/11/2012.
