CD, Help PowaySeller :)

[saiine]

Looking for advice on saving/investing my money right now. I don’t own any real estate and am not about to dump my money in it just yet.

I have a few thousand I’d like to pull from savings and dump into a CD or perhaps IRA, just looking for some basic rule of thumbs / advice. I’m 26 and anxvariety’s post made a lot of sense in terms of saving. Although I do save, I have yet to make my money work for me.

Appreciate the help.

[an]

I wouldn’t use IRA as a vehicle if you plan to use that money anytime soon. Only put $ in IRA if you plan to leave it in there till you retire, i.e. 59.5 yrs of age. Personally, I don’t really like CD right now either. With the online banking such as GMAC giving you 4.75% and your $ is totally liquid, there’s no need to tie it up in a CD for maybe .25% more. That’s why I’m doing now. All my $ are in GMAC making 4.75%. I can buy a house with that money at anytime and I don’t have to worry about penalty.

[saiine]

This is exactly the information an uneducated 26 year old like myself needs to know. I appreciate it asianautica.

[powayseller]

Good find! GMAC’s Money Market is FDIC insured and pays 4.75% APY. Their CD pays 5.35%, but I think it is for 5 years.

I opened a CD at World Savings, 4 months, 5.11% APR. It is the highest in the country, but I have to lock up my money for 4 months. If you like the 24/7 access, you only give up .35% for GMAC. For me, I earn several hundred dollars a year more at World Savings, so I go with the highest rate. I will not need my money for 3-5 years. For asianautica, it is more important to have 24/7 access, so he found a very good rate for his needs.

The advice I give is very general. I do not feel comfortable giving you specific advice, because I do not know your tax situation. For example, a few months ago when I met with my CPA, he told me to do a Roth IRA instead of a regular IRA.

That said, there are several options for cash. You can buy Treasury notes from treasurydirect website. As long as you get a 90-day, or 6 month, and hold until expiration, you will not lose any principal. If you sell before maturity and the interest rates have gone up, your note is worth less.

Money markets are another option, but many are not FDIC insured, and may hold mortgage backed securities and short term corporate debt, and could be at risk if Fannie Mae becomes insolvent. I fully expect Fannie Mae to become insolvent in the next 3 years, but the government will bail them out, so look for either a tax increase or more dollar printed, probably $300 billion, to pay for it. My brother who has studied this more, said if 3% of Fannie Mae’s loans become insolvent, they become insolvent too and it would set off a derivatives and banking crisis. The government would quickly step in to avoid a banking crisis. Nonetheless, I would rather avoid that whole scenario, because who knows how it all finishes? And it’s not hard to imagine that 3% of loans will become insolvent in the next few years.

[an]

Glad to help out another 26 year old :-). I’m 26 myself.

[davelj]

This is in desperate need of clarification:

“My brother who has studied this more, said if 3% of Fannie Mae’s loans become insolvent, they become insolvent too and it would set off a derivatives and banking crisis.”

Fannie Mae is levered about 33 to 1, such that if 3% of its loans are “charged off” then its equity will evaporate (and it will be insolvent). Hopefully that’s what your brother meant. Mortgages don’t become insolvent; they become “delinquent” and eventually go into “foreclosure.” Insolvency relates to businesses and individuals, not mortgages.

Now, the only way Fannie Mae’s equity disappears is if 10% or more of its loans move into foreclosure AND a third of the foreclosure balances get charged off. Highly unlikely even considering today’s craziness. (But we could still see a derivatives crisis related to Fannie even if it remains solvent.)

Now, dont’ get me wrong, I’m very bearish on Fannie Mae’s equity and long-term debt. But there’s no way that the government or investors will let Fannie Mae disappear – it will survive via new equity and debt if it runs into serious trouble, which brings us to Fannie’s short-term debt, which is held by lots of money market funds…

If you look at Fannie’s balance sheet, you’ll see over $900 billion of long-term debt (plus its equity) that lies below the short-term debt in terms of liquidation preference. Consequently, you can be very bearish on Fannie’s equity and long-term debt and still be bullish on its short-term debt. Bottom line: I wouldn’t worry about money market funds with Fannie’s short-term paper… but I’d be very worried about owning its equity.

[Doofrat]

saiine,

It’s great that your 26 and looking to save and or invest your money. Since you’re asking for advice, here’s my two cents worth: my advice for you is to be more aggressive at a young age and place your money in something other than a CD, or use a ratio to decide how much to place in conservative investments such as CDs, and how much to place in the market. For a young person, 75% aggressive and 25% conservative would probably be as conservative a ratio as I would go. The problem with CDs is that the money you place in one is barely outpacing inflation. Of course, the problem with stocks is that you could lose your money. If you diversify and choose wisely, you shouldn’t have to worry about losing alot in the stock market, and over your working life, you’ll probably get much better returns. Even if you begin investing just before a major market downturn, at 26, you’ll have years and years to make it up.

Pick up Benjamin Graham’s book, The Intelligent Investor and read chapters 8 and 20 first.

It’s only $12. Warren Buffet read it when he was just 19 and still thinks it’s the best book on investing ever written.

I wish I had first read that book at 26 instead of at 34.

Personally, my wife and I invest every dime we save by renting instead of owning.

[Doofrat]

[powayseller]

doofrat, now is not the time to be in the stock market. The stock market is poised for a major correction. All the investor services to which I subscribe recommend a 100% cash position. When Warren Buffett started investing, his returns were 14% annually. They’ve reduced 2% per year, and now it’s at 6%. As he says, it’s harder these days to find good bargains.

Historically, the stock market returned x%, depending on the time frame you choose you can make this number look big or small.

Those of us in cash are waiting on the sidelines for a good buying opportunity.

I sold most of my stocks last month, and am 95% in cash.

It’s true that my 5% CD is not outpacing inflation, but if I lose 25% in the stock market, I am even worse off.

Just curious – where is your money now?

[rockclimber]

Don’t follow all this advice…

Unless you have first paid off all your credit card debt, and then saved enough cash to weather a job-loss (6-12 mo., I prefer 12) then work toward paying cash for any depreciating assets (like a car).

For the cash reserved for job-loss… it does not need to be your full salary since during that time you won’t be paying taxes, etc. I like having a CD ladder for that purpose (just google CD ladder if you don’t know what it is)

After that, this stuff is good advice. Especially the tip on reading, The Intelligent Investor.

Some of us don’t think we can predict the future as well as others. This fact becomes the cornerstone of our investment strategy… the future cannot be predicted, thus we need a method of investment that does not depend on our ability to read the tea-leaves.

[powayseller]

You don’t need to read tea leaves to know the stock market is overvalued. Just read Barry Ritholtz (hedge fund manager) who writes The Big Picture, Bill Fleckenstein, Warren Buffett, Irwin Yamamoto, economist Joseph Elliott. The only people pitching stocks now are the ones who make money off you buying stocks, whether they go up or down.

Interesting, isn’t it? Wall Street makes money off you, even if the mutual fund goes down. Brokers get paid for your trades, not how profitable they were.

rockclimber makes good points about having debt paid off, but it’s also helpful to have some cash or credit line around in case of job loss. Your 6 month job loss reserve could be held in CD. Again, it’s best to check with an accountant for your personal situation, as I mentioned above. A good rate, a guy with very low overhead, is Michael Gallon in El Cajon.

If you want to get into some trading in this down market, check out Chris J’s site. He’s a disciplined bond futures trader, who takes a position only if all his technical indicators are in his favor. Since I’ve been following his trades, he made one very profitable trade on 5/19, and no trades since. His service tells you to buy the bond the next day, if certain parameters are met. After that mid-May trade, those parameters were not met, so he did not trade. He’s more like a week-trader than a day-trader. His method has worked, and he is up 50% this year. I am going to set up a futures account with some extra money I have, that I could afford to lose, and do these trades. The futures account is in Treasury notes, but you take some of that money to make the trade. There is a stop loss, so you cannot ever lose your entire trade. My husband looked into this also, and told me I could do this.

But again, something like this is for people who have extra money to invest. The only reason I can even think of something like this is from the money I made selling my house. I would not use my emergency fund or borrow against my home or stock accounts for investing in anything, no matter how good it sounds.

You can also check out Zeal. I subscribe to the Newsletter (monthly, for long term investors), and not to the weekly Speculator. The latter is for short-term traders. I purchased shares of a lead mining company recommended in their May newsletter. These people spend all day scouting out the best deals, and in the May newsletter, they had that one mining company, so I put some extra cash, that I could afford to lose, in that.

There is no easy ride in investing. If you want to make money investing, you’ve got to take the time to educate yourself. When you buy a car, a house, you must take time to drive around to look at cars and houses, learn about financing options, how to spot a good deal, do inspections. Unfortunately, many people don’t want to take the same amount of time to figure out their investments.

They find it difficult to understand the markets, so they tune out. They hand their money over to their company’s retirement fund, and trust the right choices were offered. They invest in the mutual fund, believing Wall Street propaganda that this is all too complicated, and only mutual fund managers can figure this out. They convince you to take big risks in the market, and ride out the lulls. Well, ask people in 2000 how well that philosophy served them. If you can think for yourself, you can outdo the crowd, by getting out of stocks when they are overvalued, and getting in when they are undervalued.

Let me give you an example. Back in 2000, when everyone was buying tech stocks, I could see we were in a highly speculative bubble. I loaded up on Vanguard index funds, favoring the small caps and overseas funds. They had been the laggards, and I knew that these things are cyclical. I did not lose money in the tech stock crash. Only because I used common sense and did not follow the crowd, and exited overvalued positions.

When the stock market has fallen off its high (and the corrections have started last week and are continuing, but expect a few dead cat bounces) then get back in.

Anyone investing needs to do at least some research. If you’re not willing to do that, you’re basically gambling, not investing.

There is no such thing as a risk-free ride. I am losing money in my 5% CD, to inflation. Stocks are even riskier. Remember 1987? Remember 2000-2001? Stocks are just now getting back to the prices they were 5 years ago. Not a very good ride, in my opinion.

It’s too bad that most young people have been brainwashed by Wall Street mutual funds to think that stocks are the best investment. It’s only good for the mutual funds, who earn billions each year, managing your money. Not good for you!

[privatebanker]

Saiine,

I’ve read a lot of the recommendations that people have been giving you which is very nice but they didn’t ask you what your objective is here.

I think your best bet would be to meet with a financial advisor/planner. This is the last place that you would want to receive investment advice. No one here knows your total situation and could be subject for the advice they have given thus far. Get advice from a professional, you’ll be glad you did.

[powayseller]

Agreed. An alternative to those who don’t want to pay for advice, is to read a lot.

What advice will a financial advisor give you? The name of a mutual fund to get into? Encourage you to get into the commodities market? If anyone here has met with an advisor, I’d be curious to know.

Once I met with an advisor, and he recommended we get disability insurance. The premiums ran about 5% of our salary, so we took the chance on not needing it. Instead, we put the money into mutual funds, and it was a better move than throwing it away on disability. We figured if my husband became disabled, I would work. Besides, with a desk job, you’d need to be pretty messed up to not be able to work. A life insurance salesman talked us in to a whole life policy. That was a bad mistake, but we fell for it. I once fell for a financial advisor’s Franklin Templeton Funds. She was pushing them, because she earned 5% on all the money I put in. That’s called a load fund. I had that same fund since 1986, and kept waiting to recoup the losses it had early on. It still hasn’t.

If you get a financial advisor, make sure it’s fee-only. Make sure he gives you his rate of return on his recommendations over the last 20 years. How did he do in the previous bear markets? If he doesn’t have 20 years in the market, get someone else; don’t be his guinea pig. Most people are afraid to ask for a track record. If you don’t ask, you could end up with a guy whose a great salesman, but a lousy investor.

Ask your advisor which asset classes he recommends. Don’t get a guy who only recommends stocks and bonds. You need someone who knows when is the right time to buy real estate and commodities.

My big mistake is that I was brainwashed by the Wall Street marketing ploy of investing for the long haul in stocks, dollar cost averaging, keeping my money in even during down times. Well, because of that sh*tty advice, I missed out on the real estate boom. I missed out on buying gold when it was still $300/oz. Where were the supposed experts then?

Ask this financial advisor if he was recommending people buy gold back when it was $300/oz, and real estate to flip in 1999. If not, he’s not worth the money!

As you can see, I am very skeptical of financial advisors.

If anyone can give me the name of a financial advisor who meets the above criteria, I will eat my words, and I will go speak to him and pay him myself. Does anyone that smart even exist?

I figure if no one is smarter than me, has a better track record than beating the S&P500 index fund, I can do it on my own. Then I have only myself to blame if it doesn’t work out.

I read in the paper today that investors lost billions of dollars in the stock market in the past week. I lost zilch.

Anyone listening to the advice of a financial advisor probably was in the stock market and lost money.

[saiine]

Once again, this message board is a great resource. Everyone, thank you for your thorough replies and great advices.

You all pointed out something I have yet to do, which is locate a financial planner. I’ll do some research on this and report back. Poway Seller, I understand all your points, and sometimes have to re-read your posts 3 or 4 times because they are so full of great information.

I never thought about CD’s keeping up with inflation. I just simply thought at 4.95%, it’s better then .40% in a traditional savings account.

In other words, I looked at a CD as just a better place to put my money for the next year until I realize what I want to do. Perhaps I’ll only earn a few hundred in that year at 4.95%, but that is a few gallons of gas isn’t it? 😉

I need to do some thinking about personal goals as someone else had brought up. I approached this post with a “I need to save, and help me do it” attitude. You all have pointed out I probably should ask myself WHY I want to save, and how much I want to save, and what do I want to do with that savings, and when. These are all valid points I need to think about.

It’s great that there are like minded 26 year olds on this message board as well.

Has anyone ever thought about a Piggington User group? I can donate my Brother in Law’s resteraunt for a place to get some food and discuss / share and learn. It’s right off Santa Fe Drive in Encinitas.

Thanks much, as always.

[Anonymous]

Chris Johnston

Just to make a few comments about investing in general.

First, it is possible to time the market, but it is not for the average person to run around trying to do it. Anyone who reads my blog saw the post of 5/10 warning of a bearish pattern in stocks. Obviously, this “timed” the market pretty well. However, I have been studying the markets for 20 years. I was not always as adept at moving in and out, as I am now.

People always say things cannot be done when it is really they who are incapable of doing them. There are people out there with track records of doing this well. The big money funds are always pounding the table about not timing the market. I also addressed this on my blog with a table exposing the fallacy is this nonsense.

This does not mean getting into an emotional frenzy about doomsday and selling everything and hiding in a hole. It also does not mean throwing caution to the wind on a hot stock tip and barging in with both barrels loaded. That is not timing, that is being emotional. Rarely will that type of action be rewarded.

Timing requires a complete separation of emotion from investing. It also requires alot of research and experience. Above all, it requires discipline. This is no easy task. I have made thousands of trades and still at some times get a little ticked at a loss. It is just human nature.

The post about defining your investment strategy was excellent. Also, identify your tolerance for risk. Then determine how do diversify your risk across your total portfolio.

Clearing any debt is always the best first choice. Once that is done then some of these other suggestions make sense. There is a time and place for cash/cd’s/t-bills. The biggest mistake I see people make is getting into a frenzy over having to have their money in the latest greatest fad.

They chase the momentum money, right at a time when the momentum is fading. Real Estate is a perfect example of this. Gold at $725 was another. I warned against buying it there on my blog, and here it is at $643.50 as I write this.

For those of you who like stocks, there is a strong cyclical tendency for a rally in the fall to occur. I will be watching other things in my model to tell me if the green light is on when fall gets here.

Good luck to people in their 20’s. I wish I had the smarts to ask the questions you are asking. I was too busy being a blockhead!

[Author]

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