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

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

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

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

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

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

There are a lot in interesting articles out there with current finance topics, but here is one that I found.  See what you think, and how it makes you think about your investing for the next couple of years.

http://biz.yahoo.com/bizwk/080818/aug2008db20080815021990.html

In response to a comment today I would like to give a quick summary of Institutional Mutual funds and how they differ from “investor”, “retail” or “open” mutual funds.   What we will see is that the differences are quite small.  But, the differences instead highlight that the two types of funds are intended for different investors instead of a real difference in a fund.

For those who have not heard of institutional funds, lets take the following example, two investors.  One investor (investor A) is very wealthy and has 1,000,000 dollars to invest.  The second investor (investor B) is solidly in the middle class, and would like to invest 2,000 dollars.  As we have talked about before, mutual funds have an annual expense amount (fees that are paid to management company).  If both investors paid a 1% fee, Investor A would pay 10,000 dollars, while investor B would pay 20 dollars.  From a purely practical perspective, the management company has about the same overhead and administrative cost for both the investors, so investor A is paying a lot for the same service that investor B is paying 20 dollars.  So, instead, investor A would rather pay less, and probably shop around to find a better deal.  Now switching sides, a fund management company would rather have one person invest one million than 50,000 people invest 2,000.  So you give the big investor a little bit of a break (they are  still paying a lot if you charge them 0.8% instead of 1%), and you also encourage other big investors to invest with you.

These are the two main differences.  Institutional funds have higher minimum investment amounts (over 10,000 or 100,000), and slightly lower fees, while retail accounts have lower minimum investments (2,000 or less) and slightly higher fees.  The funds are invested in the same stock/ bonds, so there is no difference.

That said, many of you may have institutional funds and don’t even know it.  Many employer 401k plans utilize institutional funds (Each month they combine all the employees amounts and invest one large lump sum into the institutional fund). So be thankful that you are saving money on your fund fees.

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!

To kick off this topic, i would like to mention that there is one main target audience for this blog, that is “non-finance” people. That means that while many others may enjoy reading, i really want to reach those who have questions and who do not have formal instruction through a class of finance or have the opportunity to work in a finance/ money / investing field. An idea that was requested was a section called “conversational finance”. Similar to a class in Spanish or French by the same title, conversational finance will be for those who at a backyard barbecue or picnic or conversation at work want to follow or participate in a conversation that is taking place about investing or houses or debt. With the idea that you will at least be able to follow along if someone else is talking about any of these topics. That said, please give me questions or “theories” that you would like explained, and ill do my best.

Since i was at a barbecue this last weekend, i thought i would go ahead and throw out the first topic that came up… Housing. You may have noticed that its a popular topic these days, and let me give you some of the key players in the housing economy and the key drivers of the growth and decline cycle of the last several years.

Key Players:
Banks (those who actually loan the money)
Government (in charge of setting interest rates – see previous post on interest rates, and also federal oversight of the housing agencies and housing policies)
Housing Agencies (eg. Freddie Mac and Fannie Mae – federally chartered private organizations that create liquidity in the housing market by buying mortgages from banks)
MBS – or Mortgage Backed Securities (Investments that are purchased in a fashion similar to bonds, that receive cashflows [money or interest payments] from payments made on underlying loans)

So, not to be too complicated, let us stop there, but here is the quick cycle for a home buyer (we will call him Bob, and the flow of his mortgage loan).

Bob walks into his bank and wants to buy a house. He fills out the application and then the bank approves him for a loan, and then he goes and buys a house. Bob then every month pays his bank his mortgage payment. The bank may hold the title to Bob’s house, or sell it to Freddie Mac. If Freddie Mac buys the loan, then they pay Bob’s bank, and then Bob’s bank gives another loan (to Sue this time). Now, Freddie Mac by doing this over and over will get a lot of loans, and they are able to “pool them” [combine] and then sell the underlying cashflows (Bob is still paying every month), to investors. This investment structure is called a Mortgage Backed Security. So a mutual fund or pension fund will buy this MBS as an investment, and every month will receive some of the cash that is paid from Bob.

The risk is for the investor, that Bob does not pay his mortgage, but the real trouble happens when all of Bob’s friends and neighbors do not pay their mortgage, because there is a margin of safety in MBS transactions, and the problem today is that more and more of Bob’s neighbors are not paying their mortgages and the margin of safety on these investments is very low or does not exist anymore.

I realize that everyone may not be in a mood to talk about stocks these days (they are down from the beginning of the year), and if you are like me, you try not to look at your investments but then decide to take a peek and realize that its not looking good.

But, what I have been thinking about is the importance keeping a rational perspective in this environment (where the market may not act rationally all the time).  I’ll suggest what that means to me right now, as I walk through what I personally have been thinking as I talk to others who either want to invest or want to know when to invest.

If you are trying to time the market highs and lows- historically speaking (the last two years) we are at a low point.  It may not be the lowest point we get, just keep that in mind as you think about investing – there is always some risk.

If you are not trying to time the market highs and lows (and unless you are an economic expert – or can tell the future) this is probably your best option.  The key term here is dollar cost averaging.  Dollar cost averaging is a term used to describe the technique of investing on a regular basis (every month for instance).  The advantage of dollar cost averaging and investing on a regular basis is that your purchase price is “smoothed out”.  Under this situation, you don’t have to worry if the market is going down or up, all you have to do is remind yourself that you are investing for the long term and keep investing.  This strategy takes emotion out of trading ETFs or mutual funds that you think are good for the long term BUT may experience some short-term price changes (also known as volatility).  And history (80+ years or so) is on your side as mutual funds/ ETFs that track indexes over that time have been great (on the whole).

So, is now a great time to take advantage of the low prices (keeping in mind that you have a long term perspective).  Or, maybe its a good time to think about starting a regular investment program.