Ask MAX: Investing $20 a month?
Katherine from California asks:
I’m 21 years old and interested in starting to invest $20 a month, what do you recommend?"
Most people don’t start investing until they have more money to invest. However, investing smaller amounts of money for a longer time period can be even more beneficial than investing larger amounts later in life.
It sounds impossible, but $20 invested today could be worth $500 when you hit 70 years old – and that’s using a fairly conservative growth rate below the historical stock market return.
Sadly, it can be difficult to invest small amounts of money. While you can always save in a bank account or even in a money market mutual fund, you’ll get a bigger bang for your buck in a lower fee mutual fund that invests in stocks. Mutual funds allow a small investor to invest in dozens of stocks for a reasonable fee.
Most good mutual funds require investors to fork over $2,500 to get started, although there are many good ones that require $1,000. Better for your situation, some waive the minimum if you agree to invest a small amount of money each month. ...read the rest of this article»
Fool’s Gold
One inalienable rule in the mutual fund business is that funds with hot track records bring in the most money. Like it or not, this is a business of performance chasing. But occasionally this law of past performance does not explain investor excitement over a particularly popular fund.
A good example is when Merrill Lynch brought in over a billion dollars into their new internet fund, which they launched in early 2000 – just in time to destroy investor’s money. There was no hot past performance, just clients of the broker who were hungry for Merrill’s expertise in an area that made other investors rich. In this case, the past performance of other funds in the category was enough to bring in investor money.
This year we are seeing another illogical success story in new fund launches, and this one is not even in a particularly hot category. ...read the rest of this article»
WaMu Sued
Washington Mutual is accused of steering investors into their own mutual funds when better alternatives were available:
A class-action lawsuit was filed today against Washington Mutual, alleging that it deceived investors by steering them to the bank's own portfolio of mutual funds which were less attractive than alternative funds.
The complaint alleges that Washington Mutual and its subsidiary companies had an undisclosed "preferred list" of funds, and issued misleading disclosures and omissions regarding a side agreement designed to improperly promote WM Financial Services to favor Washington Mutual's proprietary funds, and thereby drive sales, regardless of alternatives for their individual retail investors."
Who would have thought that some guy at the bank isn't looking out for your best interests?
Over the Hedge
The risk checklist for hedge fund investors keeps growing:
- Fabricated performance – check
- Manager runs off with fund capital – check
- Leveraged bets blow up because something that normally doesn’t happen in the market does – check
- Market neutral strategy turns out to be market spiral – check
- Buy on weakness philosophy turns out to be double down – check
- Manager turns out to be a complete nut – gulp!
According to regulators, a successful hedge fund manager tried to draw a slightly more disturbed individual out of the internet woodwork to attack his ex-girlfriend.
A wealthy New Canaan hedge fund manager posed as his former mistress and posted an Internet ad seeking someone to rape and abduct her, authorities said.
Albert Hsu, 43, who was arrested Friday, pretended he was the woman in an Internet ad that indicated she was a willing participant in a sexual fantasy, prosecutors said Monday.
The ad included the woman’s photograph, her home and work address, license plate number, which train she takes to work and which car she usually sits in, authorities said."
New Fund For Kids
Amazingly enough, some children would rather play Xbox 360 than learn about investing. The Monetta Family of Mutual Funds hopes to change that with the Young Investor Fund (MYIFX), a new no-loader geared toward the under-four-feet set.
When a child or teenager joins the fund, they are given an investment kit, which for children eight years old and younger includes an activity book, a CD with songs about money and a copy of the kid-friendly newsletter chock-full of jokes and other information that is intended to make it interesting to them.
Teenagers are offered a more sophisticated version of the kit and have the chance to enroll in a stock market game, in which they each receive $100,000 in "Monetta Bucks" that they have to use to construct a portfolio with any combination of stocks from the Dow Jones Industrial Average.
At the end of six weeks the first-prize winner gets to choose either a certificate for one share of stock or a $75 gift card to Best Buy. There are smaller gifts for other winners."
It would be great to get young people interested in money management, but from what I can remember about being a kid, I'd be interested in the 'CD with songs about money' and the activity book for all of 15 seconds before I turned my attention back to Viva Piñata.
Live a Little
A new study says that the Wall Street Industrial Complex is effectively scaring investors into saving more than they need for retirement, because the more money suckers like us invest, the more money mutual funds, brokers, and financial advisers make in fees.
The leader of this counterintuitive challenge is Larry Kotlikoff, a Boston University economics professor and co-author of "The Coming Generational Storm," an analysis of dire solutions necessary to cover future unfunded Social Security and Medicare benefits. His co-author is financial columnist Scott Burns of the Dallas Morning News. Kotlikoff's research says investors should focus on income while working to figure out retirement needs.
Saving too much? You bet. A New York Times review of Kotlikoff's numbers "showed that Fidelity's online calculators typically set the target of assets needed to cover spending in retirement 36.4% too high. Vanguard's was 53.1% too high. A calculator offered by TIAA-CREF, one of the largest managers of retirement savings, was 78%" higher than the calculations generated by Kotlikoff's ESPlanner.
As expected, they were quite defensive about this challenge. The Times says: "The financial-planning industry prefers to characterize itself as cautious. William Ebsworth, chief investment officer of Fidelity Investments' Strategic Advisers division, which runs retirement programs, said, 'We take a very conservative approach,' preferring to err on the side of having money left over at death rather than risk running out before then."
While their reaction is understandable, it's a diversion: They fail to deal with their own conflict of interest and motives in overstating assets needed in retirement.
So let's repeat it again: You are unnecessarily investing too much of your hard-earned money into too many assets for retirement. As a result, you're sacrificing too much of the present, under the highly questionable and misleading assumptions about piling up excessive savings for an uncertain future."
Taxing Issue
Here's a simple trick, via Morningstar, that can save you a bundle in taxes, and that a surprising number of investors don't do: put funds with potentially high capital gains distributions in your non-taxable retirement accounts like your IRA or 401(k), and put tax-efficient funds in your taxable accounts:
When a fund realizes capital gains by selling stocks or bonds at a profit or receives interest or dividends, any amount above the fund's expense ratio must be paid out to shareholders, who are then taxed on that income. Some funds are much better than others at shielding shareholders from taxable income and capital-gains payouts. And some investors make it a habit to steer clear of "tax-inefficient funds," those that pay out a substantial portion of each year's gain as taxable income.
When you're choosing a fund for an IRA, though, you can ignore this issue. The attraction of IRAs and other tax-sheltered accounts, of course, is that the profits aren't taxed right away. Instead, they compound until you actually withdraw the money from your account. Only then do you pay the tax. That means some funds you might avoid in a taxable account are suddenly back on the menu when you're investing in your IRA."
They list four example funds that are likely to issue above-average taxable gains distributions and hence would be good fits for your non-taxable accounts:
MAX on Fox News
MAXfunds co-founder Jonas Ferris chats with Neil Cavuto about the recent market turmoil. Not seen in this video is the off-camera high jinks where said co-founder debates who invented the ETF with a representative of the American Stock Exchange. Maybe somebody caught the scuffle on their cell phone camera and it will show up on YouTube. Ok probably not..
Market Drops, Fund Investors Run
Skittish mutual fund investors bailed out of mutual funds after last week's troubled waters:
Investors withdrew a net $2.39 billion from global equity mutual funds tracked by TrimTabs Investment Research in the week ended Thursday, a sharp reversal from the $2.73 billion that flowed into the funds during the previous week.
The decline came after the U.S. stock market on Tuesday suffered its biggest one-day point decline since immediately after the terror attacks of Sept. 11, 2001. The sell-off was triggered by a combination of factors, including a 9% decline in the Chinese stock market, persistent worry about U.S. subprime loans and the Japanese yen's sharp appreciation."
This year is looking like a classic example of misplaced fund investor enthusiasm. We saw one of the biggest months of inflows to stock funds in January – just in time to experience this week's drop.
Unlike past drops in stocks, this one started abroad. Of course, unlike previous bull markets, fund investors have been much more enamored with funds investing abroad than previous bull markets. It would not surprise us at all to see fund investors bail on funds in droves – perhaps $100 billion in a few weeks of withdrawals – if the global stock markets fall over 10% in the next few weeks. Much of our fund investing philosophy and metrics are based on avoiding the fund investing herd. We think investors should lighten up on stock funds when others are buying, and increase one's allocation when others are bailing out.
Ask MAX: Where do I start?
Matthew asks:
I’m 21 and in the U.S. Navy, currently serving on the ground in Iraq. I have saved about $2000 and I plan on saving and investing an additional $500 a month. I want an investment that will grow, but I don’t want a crazy amount of risk either. How should I invest? Thanks!"
I don’t claim to be the Amazing Kreskin, but allow me to look into the future and reveal to you this: you are going to be a terrifically successful investor, and you’ll retire fat, rich, and happy.
How do I know? Because you’re just 21 years old and you’re already building an investment portfolio, and because right off the bat you are being sensible about risk.
Starting early means that you have years upon years of compounding returns coming your way. The money you invest will make you money. Then you begin making money on the original investment plus the return you’ve made. As your investment grows, you’ll earn a return on a bigger and bigger pool of money.
The fact that you are concerned about risk at your age is equally impressive. Many investors a heck of a lot older than you still don’t realize that they need to consider both the upside and downside potential of an investment. You are quite right in wanting to build a growth-focused investment portfolio, but even aggressive investors should have some exposure to lower risk securities like government bonds. ...read the rest of this article»