Politics and Investing

During the last presidential campaign, one thing that came up that bothered me was a statement by one candidate that he was going to close the loophole for companies to ship jobs overseas, in order to save job.  (Sounds good right, who wouldn’t want to save jobs? – except of course his opponent… who is obviously boneheaded!)

After a little research earlier, i found that this “loophole” that was mentioned is purely because the US has one of the higher corporate tax rates of all the countries, so if a US company pays taxes at a lower rate in another country for a good or service that they sell in that other country they have found a loophole.

Just today, I was reading this article from PricewaterhouseCoopers on the implications of the president’s proposal to close this loophole, and a bit of a discussion on if it is a good idea and how the proposed plan would affect US companies (and consequently your investing decisions). The article is called “10 minutes on…”, so its a pretty quick read.

pwc-10minutes-tax-increases.pdf

So, besides the article content which i wanted to highlight, its also a reminder to question politicians when they promise something that sounds so good, before you jump on the euphoric wagon.

For other “10 minute” articles by PwC click the following link.

http://www.pwc.com/extweb/pwcpublications.nsf/docid/62BD6CCECDE0D12D852573E0000C623B

Stock Analysis Example

I was reading a few articles today, and found this one (specifically since it is about Corning Inc. (GLW) which is a holding of mine), but i thought the investment process and things to consider while investing was a good example for those who may be new to investing.  Keep this in mind when things get better…

http://www.forbes.com/2008/11/20/corning-uniphase-bookham-pf-ii-in_pm_1120soapbox_inl.html?partner=yahootix

Peter Schiff video

Check out the video, its funny and sad at the same time.

http://www.campaignforliberty.com/blog.php?view=4354

When?

Not that anyone needs me to tell them what to do, many times people are curious as to what to do with investing, and they ask my opinion.

My opinion after thinking hard over the past few weeks is that depending on your time horizon and risk appetite, (please read that again) I think that now could be a great time to invest in the stock market.  And personally for me over the next couple of weeks, ill be looking for a chance to buy more stocks.  I haven’t yet decided on what form that will take, if ill buy a us mutual fund or an international mutual fund, or buy individual stocks that I have been following.  But, the point is for my time horizon (several years) and risk appetite (4 on a scale of 5, 5 being most risky), there are plenty of companies that are worth owning and who are valuable, especially when you can buy them for so cheap now.  The panic has created an opportunity.

Now here are the risks, so consider yourself properly warned.  We are not in a normal time right now, and we may not have a normal recession ahead of us.   There are a lot of uncertainties about unemployment, house prices, the consequences of the debt held by countries and individuals. How bad will it get, and will we use this opportunity to be smarter.  The market still has the potential to go down, and we still have the potential to experience lots and lots of volatility.  Also, you’ll notice that i am not pointing to any facts or stock valuation evidence.  My conclusion is not a rational fact based opinion, I am instead looking at the emotions and mood of investors and the public and the potential for future.

moneyclamps

Present Value

I have a basic financial concept to share today.  The concept is Present Value (PV) and its brother, Future Value (FV).  I think everyone has a basic inkling of this concept, they just may not apply it to their decisions in a conscious way.

The best way to illustrate the concept is thinking of a friend that wants to borrow money.  Lets say your friend wants to borrow 100 dollars (assume no risk).  What if your friend says that he will pay you back next week, what if he says that he will pay you back in 2 years?

At this point there is another concept that is important to discuss, opportunity cost (the benefit that you give up by making a choice).  In this case, you give up the use of this 100 dollars for 2 years, you are giving up the opportunity to use the 100 dollars now.  If you are saving up for something, you will now have to put that on hold.  If the delay is only one week, its not as of big deal, as if it was 2 years.

Getting back to our topic, would you rather have 100 dollars today, or in 2 years?  If you said today, then you have illustrated present value.  The value today is greater than the same amount in the future.  Now what about 100 dollars today or 150 dollars in 2 years?  Now are you be willing to wait for 2 years?  What this proves is that timing of cash receipts affects the value today.  If you invest 100 dollars today, your hope is that next year you will have more, so if you invest at 10%, you would say that the future value of my 100 dollars is 110 dollars.  The present value of 110 dollars in the future (at 10%) is 100 dollars.  Here is the math behind that.  100 (PV) * (1 + 10%) = 110 (FV).

The implications of future value is not limited to your lending / investing, but also taxes and how you spend your money (because of the opportunity cost).  Because of the investment growth and time, the future value of money today is quite great.  Going back to our math, lets say that you invest 1,000 dollars today, and you are 30 years old.  When you are 65, assuming a return of 0% (spending today), 5%, 8% and 10%, here are the results.

1000 * (1.00)^35(years) = 1,000 dollars (or an old computer, really old).

1000 * (1.05)^35(years) = 5,516 dollars

1000 * (1.08)^35(years) = 14,785 dollars

1000 * (1.10)^35(years) = 28,102 dollars

Which would you rather have? This is a stupid question, but really, what would you give up to get it?  It’s why investment fees are so important to consider, and making sure that money you spend today is worth it to you.

moneyclamps

Financial Links

There are many financial calculators out there in my opinion you have to know about the underlying assumptions for them to be of any use.  So, I have an idea, I am going to give you a link to the Harris Financial Group site that has more options of financial calculators than you probably have time. My wish would be that you would go to the site, use a few of the calculators, and then let me know the questions you have (eg. what pre-tax return do I expect on my IRA investments? or what is inflation?) As an added bonus, there is even a Financial IQ test. See below for the link.

http://www.harrisfinancialgroupinc.com/index.cfm?type=C&source=calc_hdr.cfm

Also, as long as I am submitting links. I found this interesting page (see below) on the Key Bank website, that has a lot of information on buying a house, the process and different types of mortgage products.  Hope that you enjoy.

https://www.key.com/html/MOL-10.html

Thanks for reading this moneyclamps post!

Types of Mortgage Loans

Types of Mortgage Loans.

There has been a lot of talk in the popular media about mortgages and subprime mortgages. But what about all the different kinds of mortgages out there. The best way to avoid the problem we have here is with a little common sense and a little information about what different financial products mean. I have seen several stories recently where an “innocent house owner” all of a sudden has a loan on their house that they “didn’t understand”. I asked myself, why would that be, and the answer that came back was there are a lot of details to keep track of, and not everyone spends time learning about all the different types. Just like i don’t spend much time learning about the different types of ballet slippers (i lump them all into one group – ballet slippers), which I am sure someone could set me straight on this.

Now back to the topic at hand.

We will start with my favorite type of loan the 2/28 Adjustable Rate Mortgage.

Why is it my favorite, well, there are several reasons… but none of them are financial. And here i would like to make my first point (one financial instrument may be one persons favorite, but it doesn’t mean that it will be your favorite). For instance, the 2/28 loan may be great for the bank or for your neighbor who has a special situation.

So, what kind of mortgage should I get then you ask. Well, let’s first define a few of the main types. And then, I’ll assume that you have had your fill for today. First type is fixed, and like the name, the interest rate and consequently the payment you make over the life stays the same.

Second type is adjustable. This one, the interest rate adjusts with an index, so if the index goes up, your loan payment goes up. Now let’s look at a third type, the Interest Only, these have the lowest initial payment, but as a result, you do not pay any principal (amount you borrow does not decrease), for a period of time. Like I said at the beginning, maybe you know these concepts, but its clear that lots of people do not based on the surprises we hear about in the media.

Next time we will look at interest rates, and why they go up and down.