September 2009

TradeKing “$50 Signing Bonus” Promotion

Update: This promotion has now ended.

I don’t often mention promotions on the blog, but I thought I’d share this one because it’s for a company my wife and I actually use: TradeKing. (You can see my TradeKing review here.)

As of now through the end of the month, if you open a TradeKing account and fund it with a minimum of $2,500, you’ll receive a $50 bonus. Obviously, $50 isn’t a huge sum, but if you were already looking to open an IRA or regular brokerage account, a little free money doesn’t hurt.

Important note: Apparently you have to click on one of the special promotional links in order to get the bonus. (For RSS subscribers: The links are javascript, so you’ll probably have to click through to the post to see them.) Like this one:

Or this one:

Full disclosure: If you click through from one of my links and open an account, I receive a commission. (Though it’s not as big as your $50 bonus. )

September 30, 2009 0 comments

Reasons Not to Roll Over a 401k

As I mentioned recently, after leaving a job, the best route is almost always to roll over your 401(k) into an IRA. There are, however, a few specific situations in which it doesn’t make sense to rollover a 401(k)–or other employer sponsored retirement plan–after leaving your job.

Are You Between Ages 55 and 59½?

If you are “separated from service” (i.e., you quit, were laid off, etc.) at age 55 or later, distributions from your 401(k) will not be subject to the 10% additional tax that normally comes with retirement account distributions before age 59½.

As a result, if:

You are 55 or older when you leave your job, and
You plan to retire prior to age 59½

…then it may make sense to keep your money in your employer-sponsored plan rather than rolling it over.

Have a Lawsuit in Your Near Future?

From what I’ve read, assets in an employer-sponsored retirement plan receive better protection than assets in an IRA in the event of a civil lawsuit against you. As a result, if you foresee a possible lawsuit in your future, it may be wise to hold off on rolling over your 401(k) until such concerns have passed.

(Full disclosure: I couldn’t be less of an expert on this particular topic, so please be sure to check with someone more qualified than myself–an attorney, for instance.)

Does Your 401(k) Include Employer Stock?

If your 401(k) includes employer stock that has significantly appreciated in value from the time you purchased it, you’d do well to speak with an accountant before rolling over your 401(k). Why? Because the “Net Unrealized Appreciation” rules may allow you to take that stock and move it into a taxable account while rolling the rest of the account into an IRA.

Why would such a maneuver be beneficial? Because if you roll the stock into a taxable account, when you sell it, the gain will be subject to long-term capital gain rates. In contrast, if you roll the stock into an IRA, when you eventually withdraw the money from the IRA, the entire amount will be counted as ordinary income, and will be taxed according to your ordinary income tax bracket at the time of withdrawal.

But In Most Cases…

As you can see, the situations in which it makes sense to not rollover a 401(k) are quite specific. For the overwhelming majority of investors, the answer is “Roll it over, and get it done sooner rather than later.”

September 30, 2009 2 comments

Historical Stock Market Returns

A bit of a different post today: I wanted to share a spreadsheet that I maintain, which includes a good deal of data regarding historical stock and bond returns (in the U.S.).

Click here to download the spreadsheet.

Historical Return Data Included:

If, for example, you wanted to know any of the following, you could find it in the spreadsheet:

The return of the U.S. stock market for each calendar year from 1928-2008.
The nominal return for stocks or 10-year T-Bonds for any 3-year, 5-year, 10-year, 25-year, or 30-year period between 1928 and 2008.
The inflation-adjusted version of #2 above.
How you would have fared if you’d been dollar-cost-averaging into the market across any 10-year period from 1928-2008.
The standard deviation of stock or bond market returns over 1-year, 3-year, 5-year, 10-year, 20-year, and 30-year periods from 1928-2008.
Changes in gold prices each year from 1900-2008.

Credits

My thanks go to the following people/organizations for the underlying data:

Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU,
The Federal Reserve Bank of St. Louis, and
Kitco Precious Metals.

Other Notes

I’m not perfect, and the data might not be either. If, after downloading the spreadsheet, you have any questions or see any errors in any of my calculations, please let me know.

Lastly, please remember that past performance is exactly that: past performance, not to be confused with future performance.

Enjoy.

September 29, 2009 4 comments

Supply, Demand, and Stocks

In my experience, supply and demand aren’t explicitly discussed very often when talking about investing. But changes in demand for a stock–or, more relevant to index investors, demand for stocks in general–are of tremendous importance.

Over any period, the return from the stock market is determined by three factors:

Changes in the market’s P/E ratio,
Earnings growth, and
Dividend payments.

And the first of those factors–the market’s P/E ratio–can be thought of as a measure of demand for stocks. The more people there are who are interested in owning stocks, the higher the market price for each dollar of earnings.

Supply and Demand Over Short Periods

Over short periods, changes in demand (and thus P/E ratios) are the dominant factor in market movements.

When investors get scared, demand for stocks drops. The (relatively) modest positive return from dividends and earnings growth gets absolutely crushed by the effect of the P/E decline.
When stocks become trendy/sexy (think late 90s), demand increases, causing market returns far beyond the fundamental return earned by the underlying companies.

Supply and Demand Over Long Periods

Shifts in demand can play a significant role in determining long-term market returns as well. (It is worth noting, however, that their significance relative to dividends and earnings growth is far smaller over long periods than over short periods.)

For example, as Frank from Bad Money Advice recently reminded us, the mainstream acceptance of stocks as a worthwhile investment coupled with the rise of the mutual fund fueled an increase in demand that resulted in fantastic market returns from the 60s through the 90s. He notes,

“The stock market of today is not the same as the market of fifty years ago. It’s role in the economy and in our culture has massively increased. That change brought on a secular rise in the valuation of the market. And that rise is unlikely to be repeated over the next fifty years.”

Demand for Stocks in the Future

For the last several years, many people have been predicting that the market’s returns will be suppressed over the next few decades as the Baby Boom generation moves through retirement, slowly but steadily selling off their assets (and decreasing aggregate demand for stocks in the process).

Others–like Jeremy Siegel in The Future for Investors–argue that increasing investment demand from developing economies (particularly China and India) will make up for the reduced demand from U.S. investors.

How You Can Benefit

It’s only natural to try and surmise a way to benefit from such demand shifts. But I’d caution against getting too clever.

Unless you can foresee a big demographic/demand shift prior to the rest of the market figuring it out, there’s really not much you can do. As with other attempts to beat the market based on any particular piece of data: If it’s obvious, it’s worthless.

September 28, 2009 3 comments

Building Income and Tax Diversification: Weekend Reading

Happy Friday, everybody. Of course, with it being the one-year anniversary of the Lehman failure, numerous articles have been written in the last couple weeks about lessons we’ve learned over the last year.

My two favorites are from Bad Money Advice:

My other favorites from this week:

Investing Articles

Forget Wealth. Build Income to Retire Comfortably from MoneyNing
How to Invest when You Don’t Have Much Money from Amateur Asset Allocator
7 Ways to Profit from Other People’s Folly (guest post at Monevator from Tim of the Psy-Fi Blog)
Tax Diversification (my guest post from earlier this week at Moolanomy)

Blog Carnivals

Money Hacks Carnival hosted by Cash Money Life
Festival of Stocks hosted by Kuber Khana
Carnival of Financial Planning hosted by The Intelligent Speculator

Thanks to each of you for reading.

September 25, 2009 0 comments

Investing Made Simple Now Available on Amazon

As of today, Investing Made Simple is available on Amazon. Of course, as promised, it will still be available as a free download through the end of the month.

A Favor to Ask:

If you downloaded the book and found it to be helpful, I’d be super appreciative if you took 3-4 minutes to click over to Amazon and write a short, 2-sentence review explaining what you liked about it.

Of course, there’s no obligation to do this. The idea was to release the book free, not “free with a catch.”

September 24, 2009 2 comments

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