Archive for the ‘Q&A’ Category

Nouriel Roubini Offering Free Access for Financial Crisis

Wednesday, October 1st, 2008

We advise you to sign up for RGE Monitor, run by Nouriel Roubini.

We aren’t economists, here at

We are investors, and we’re web developers; but we’re not economists.

For real economists, you usually have to pay.


One of the best economists in the world is Nouriel Roubini.

He is a professor of economics at New York University’s Stern School of Business, and he is highly sought after for his advice by think tanks and politicians.

He started talking about the U.S. national debt in the nineties. He started talking about the housing bubble in 2004. He started talking about the credit crunch in 2005.

He’s on top of things in a way that most of us, who work too many hours per week to adequately inform ourselves, can be.

His online service, RGE Monitor (short for Roubini Global Economic Monitor), is available at, and it contains a number of useful, if controversial, points of view about the current state of our economy.

Usually he offers his premium service for hundreds of dollars per year.

During this economic crisis, premium services at are free.

We are in no way affiliated with Nouriel Roubini or, and we only see this as a way to educate our readership in a way that we are not capable.

The legislation currently running through the U.S. Congress will need additional legislation to make it work for the long term. The Paulson Plan is a short-term solution, which will be ineffective come January 20, 2009, when we will have a new president and a new Congress.

It is of unequivocal importance that our citizens take the time to educate themselves about the oncoming economic crisis that this bill is prolonging (not avoiding, but prolonging).

The first step in educating yourself is getting acquainted with Nouriel Roubini’s ideas, particularly his HOME plan, which combines relief for lenders (banks, investors), as well as homeowners.

As web publishers, there are a lot of things we want our readership to do:
— Make good financial decisions about their futures and retirement
— Sign up for brokers we recommend
— Retire comfortably and early
— Protect their nest eggs so that they have something to pass on to the next generation

As citizens of the United States, however, we want our readership to educate themselves about the dangers of the credit markets that are looming beyond bad mortgages.

The crises we’re now experiencing are only symptoms of larger problems described by Mr. Roubini.

We do not make recommendations on stocks, or mutual funds. We just report what’s going on.

This is our first recommendation since our founding in early 2006:

Signup for now, while it’s free.

It is an unprecedented opportunity to educate yourself on the potential crises ahead, and an outline for how to protect yourself and your assets during these difficult times.

Are OTC Stocks Regulated By the SEC?

Thursday, January 25th, 2007

In a word, no.

The OTCBB is an unregulated system by which broker/dealers and market makers can quote current prices for securities (ticker suffix .ob) which are not listed on one of the major exchanges.

The National Association of Securities Dealers oversees the OTCBB, but it is not a part of the Nasdaq exchange, as penny stock scams sometimes imply.

The OTCBB does require its listed companies to file updated financial reports with the SEC. Many people confuse this with SEC regulation: they figure that since they have to file with the SEC, then they must be regulated. But simply filing something with the SEC does not mean the SEC will do anything with it. Rather, it is the OTCBB itself that requires this of its companies. Any OTCBB traded company that fails to comply with this will be de-listed from the service, and will then likely trade on another exchange, such as the pink sheets.
Companies listed on the pink sheets (ticker suffix .pk) are not required to file current reports, so finding reliable information on them is very difficult.

While it is true that some of the best performing stocks are OTC and pink sheets, they are very risky, since it is so difficult to adequately research their financial health.

Should You Rollover a 401(k) into an IRA?

Wednesday, January 17th, 2007

If you have ever left a job where you had a 401(k) you’ve asked this question. Depending on your circumstances, the answer may differ from case to case. While nothing beats advice from a professional who can evaluate your situation fully, here are some basic situations that may lead to the right decision.

Is your human resources department reliable and easy to communicate with?

This is the stickler that most people can answer with a resounding NO!

If you keep your 401(k) with a previous employer, it will typically be the human resources department at that company that you deal with whenever you want to make a change to the account. If they are approachable and easy to communicate with now, they will likely be so after you move on to your new employer.

If, however, they are hard to set an appointment with, incompetent or disinterested, or if you have burned any bridges with them, you won’t want to leave your money with them.

Are you satisfied with the options your 401(k) had?

This is different than, “Did the investments in your 401(k) do well.” Rather, you have to evaluate the different investment options available to you and determine if there will be enough variety to suit your needs in different circumstances. If you’re 27 and moving on to your second job, the stock funds you’re in may be perfectly suitable, but if the 401(k) doesn’t have adequate fixed income (bond) options, you may need to make changes as you get closer to retirement.

If the options available in your 401(k) were not adequate, it’s time to shop around for an IRA, where you’ll have more investment options.

Are you in dire need of money immediately?

Most investment advisers and financial planners do not consider this possibility, mainly because of the tax consequences and penalty, but there may be times when you need to cash in some of your 401(k). Sometimes things just don’t work out as planned.

If you find yourself suddenly unemployed, with a mortgage, car payment, rent, a family to feed (not to mention your own voracious appetite), and, to top it all off, you need a new suit for interviews, it may be appropriate to take some of that 401(k) and put it to good use until you get to that next rung on the ladder.

Obviously, it’s a last-ditch effort, and adjusting your lifestyle is the first in a long series of steps that you need to take to get back on solid financial footing. But remember, by cashing out a retirement account prematurely, you not only have to pay taxes on the proceeds, but also will be penalized 10% for the early withdrawal of funds.

If you do find yourself in this situation, do it cautiously, and make every effort to preserve as much as you can to rollover into a qualified plan once you are back on your feet, since you have 60 days from the withdrawal to rollover into an IRA.

Do you want to manage multiple accounts?
You can have as many retirement accounts as you want, but they will have different fees associated with them and different investment options available to them.

If you’re not interested in evaluating each account every six months, it may be best to consolidate your retirement savings into a single IRA or a(new employer’s) 401(k).

If you are going to rollover your funds…

The most important thing when rolling over into an IRA is to do it quickly: you have sixty days before the IRS considers it a withdrawal and, therefore, taxable and penalized.

FED Basics: What Does Slowing the Economy Mean?

Wednesday, January 17th, 2007

Every day you hear it, whether Ben Bernanke had the sniffles or whether one of the Fed governors made a statement about the economy: every investor is afraid that the Fed will act to “slow the economy.”

What exactly do journalists mean by this?

The Federal Reserve is charged with keeping inflation steady, and in order to do so they have control over two major interest rates: the Discount Rate and the Fed Funds Rate. Both are interest rates charged to banks for overnight loans.

The discount rate is the interest rate charged to banks toat loan funds directly from the Federal Reserve.

The Fed Funds Rate is the interest rate charged to banks that borrow from other banks at the Fed.

The Fed Funds Rate is the more important figure, since most banks would prefer to borrow from other banks than directly from the Fed.

While neither of these interest rates directly affect investors, they do affect banks and lending rates across the spectrum. If banks have higher interest for short-term lending, then that will trickle down to their customers having higher rates for lending as well.

The bottom line is, when these interest rates are low, then it is easier to borrow money. If the Fed acts to raise these rates, it is said to be “slowing the economy,” since it gets more expensive (harder) to borrow money as interest rates climb.

This higher interest rate leads to less borrowing and, hence, less spending and a general decrease in business transactions.

So, when some journalist frets about the Fed possibly “slowing the economy” or “Tightening the money supply” (another favorite), what they are really talking about is rising interest rates.

Are Losses in an IRA Account Taxable?

Wednesday, January 10th, 2007

Depends… This question is a bit confusing, so I’ll go over all possible scenarios that the user may have meant, and I’m going to separate this into two columns. This one will deal with losses in a Traditional IRA. The next column will deal with losses in a Roth IRA.

Q: Can you write off losses in an IRA?

A: No, not unless you’ve made non-deductible contributions to your IRA.

A Traditional IRA is tax deductible in the year that you invest the principal, and it is only taxed when you redeem (sell, or cash out). So, let’s say I invested $1,000 in an IRA in 2005 and the value has fallen to $700. I’ve already written off the $1,000 back in 2005, so I cannot make a second deduction now that I’ve lost money.

If I redeem my IRA and get the $700, then I will have to pay taxes (plus penalty, since I’m not of retirement age) on the $700. The $300 is gone, and it’s as if I never had it to begin with; I never paid taxes on it, so I can’t write it off.

Q: Do you pay taxes on losses in an IRA?

A: No.

Remember, a Traditional IRA is written off to begin with. So, you will only pay taxes on what you take out of the account.

Take the scenario above, where my $1,000 investment decreased to $700. I do not pay taxes on the $300 loss, I only pay taxes on what I take out (up to $700).

If you really want to dig deeper, here’s some light reading: IRS Publication 590: Individual Retirement Accounts (IRAs)

Can You Hold IRA Accounts With Different Companies?

Wednesday, January 10th, 2007

This is a question I recently got, and the answer is simple: yes, but the maximum annual IRA investment is a total (cumulative) amount, not per account. In other words, if you have four different IRAs with four different companies and your maximum IRA contribution is $4,000 for the year, you can only contribute $4,000 total, to all four accounts.
A more important question is: should you have different accounts?

Most investment advisors will tell you no, partly because it will be too difficult to manage, and partly because they want all of your money to be going to them and their funds.

While there is more to pay attention to when holding multiple accounts, there is usually little active management that goes on in an IRA. You open the account, buy the securities (usually mutual funds or money markets), and hold.

There isn’t really a lot of management with an IRA. Every year you’ll want to make sure your asset allocation is appropriate. You’ll add funds as you can.

The benefit of holding multiple accounts is no different than the benefit of holding different investments: diversification. Maybe one company is offering low fees but has a limited selection of mutual funds available. Another company may have slightly higher transaction costs but a wider variety of funds.

Sometimes, opening a new account is the only way to invest in a mutual fund you really would like to hold in an IRA. If your current broker (or 401(k), or SEP IRA, etc.) does not offer a particular fund, for example, you may have to open an account with another broker just to hold a fund in a tax-deferred account.

The downside is cost… maybe

Each company you have an account with will likely charge you a fee for management, but some discount brokers only charge for purchases and redemptions. As a result, you should have as few accounts as possible.

So, take a look at account fees and determine whether it’s worth it to pay each company the fees it is deducting from your bottom line.

The important thing is that you are satisfied with your investments and the way the management company reports your holdings, returns and losses.

What Are the Risks Involved with Investing in Bonds?

Wednesday, January 10th, 2007

Bonds are considered a low-risk investment vehicle and, therefore, offer a relatively modest rate of return. But there are risks involved that every investor should know about.

The two main risks that bond investors face are Default Risk and Interest Rate Risk.

Default Risk is the possibility that an issuer will not be able to meet the obligations of its bonds, namely, that it won’t have the money to pay its coupon (interest) or to repay the principal upon maturity. When an issuer defaults, investors will usually lose all or most of their investment.

Default risk is what determines the coupon, or interest rate, on a bond. A financially strong company with a history of meeting its obligations will issue bonds with a relatively low interest rate; conversely, a startup that has never reported profits and has defaulted on obligations in the past will issue bonds at a higher interest rate because there is a higher likelihood that it will default.

Diversification is the key to managing default risk. “Don’t put all your eggs in one basket,” is the applicable saying here. While credit reporting agencies like Moodys and Standard and Poors offer bond ratings that give investors an idea of the likelihood of default, no company is immune to the possibility: not Enron, not Argentina, not Ford, and not General Motors.

High yield bonds (junk bonds) should be kept to a minimum, unless your portfolio is extremely diverse and your investment style has a high risk for volatility, while investment-grade (highly rated) bonds should make up the majority of your bond portfolio. Government bonds should range across a wide spectrum of countries and governments. We all like the tax benefits of municipal bonds, but they have a much higher default risk than federally-issued Treasuries.

Also, pay attention to the duration of bonds. A short-term bond will have a lower risk of default than a long-term bond, since there is less time for an issuer to meet its obligations. As a result, short-term bonds will have a lower interest rate.

Interest Rate Risk is the risk that your investment will lose money because market interest rates have risen. Everyone talks about this every day in the financial press, and it’s how bond traders make their living. It is widely known that higher interest rates mean lower bond prices, but it is little understood.

Every time Fed Chairman Bernanke sneezes it affects the bond market, but few know exactly why.

So, here’s the lowdown:

When an investor buys a bond he or she is expecting a fixed rate of return for a specified period of time. Let’s say I buy a 20-year US Treasury bond for $10,000, and it has an annual coupon of 5%. From my $10,000 investment, I expect to get $500 a year (5% of $10,000) for the next 20 years, at which point I’ll get my $10,000 principal back.

Easy, right?

Well, if interest rates go up and the US Treasury now issues 20-year bonds for 10%, I made a bad investment. Now, my $10,000 investment could have bought a bond that yields $1,000 a year, twice as much as my piddling $500 annually. The result is that, if I were to sell my $10,000 bond, I would get less than half of my investment, since the same issuer (the US Treasury) is now issuing bonds at twice the interest rate.

This example is simplified and exaggerated. Treasuries don’t double their coupon overnight. Also, there is only one issuer in the example given above.

Imagine the scenario above played out across the entire bond universe: short-term, medium-term, long term; municipal, government, and corporate bonds; high-yield, emerging market, and investment-grade…

Throw oddballs like asset-backed securities, convertible bonds, and mortgage-backed securities and you can begin to see how interest rates affect the entire bond universe: when interest rates rise, bond prices fall. It’s that simple.

The only hedges against inflation risk are liquidity (cash) and hard assets. The ability to purchase bonds when interest rates are high is the important thing: new issues have a high interest rate, and the secondary market is depressed (think about that $10,000 bond I bought that could now be bought for $5,000).

There are other risks of bond investments, and I’ll go over them briefly.

Inflation Risk is the possibility that the coupon on your bond will not meet inflation. For instance, if inflation is 4% and your bond investment only returns 3%, you effectively lost 1% annually by investing.

Country Risk is the risk that a government bond will go into default because the issuing government is unstable or insolvent.

Call Risk, unique to callable bonds, is the risk that an issuer will call a bond, thereby canceling it, by repaying the principal before maturity.