FAQ’s
Q: What is “Quantitative Easing (QE)”?
A: It is a fancy way of saying “printing money out of thin air.”
Q: What effect does Quantitative Easing have on our current economy?
A: Very little. It doesn’t create jobs. It doesn’t hold down inflation. Those are the two mandates of the FED. Makes you wonder why they did it.
Q: Why DID the FED print more money?
A: An increase in the supply of anything drives down the price. An increase in the supply of money drives down the value of the dollar. Therefore it takes more dollars to do something than it did before. “More dollars = higher price.” Since the price has gone up, it gives the illusion of growth. It also gives the illusion of increasing GDP. And there’s money to be made in banking and on Wall Street by manipulating that system. Notice how happy Wall Street was at the last QE announcement?
Q: If the value of the dollar is going down, meaning it will cost more to buy things, and the interest rate I can earn in a bank account is practically 0%, doesn’t QE adversely affect my savings account?
A: Yes. That’s why it is important to have a portion of your money invested in assets that pay a dividend, interest, royalty, etc. The value of an asset can be an illusion. But cash being earned in your account is tangible and spendable. You need to consult with a financial advisor to decide how much to invest in the market.
Q: As a private citizen, how can I affect the mess Washington DC is creating?
A: Continue to hold legislators accountable. It’s the only stick we have.
Q: Do you think we are headed for a double-dip, or a long malaise?
A: Realizing that none of us knows the future, there may be a double-dip. However, we are working off the premise that we are in for a stagnant market—or malaise—for several years.
Q: What is the basis for concluding that we could experience a malaise?
A: History has proven that when a country’s debt (sovereign debt) is 90% or greater than the Gross Domestic Product (GDP) of a country, economic growth stagnates. “President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020, the Congressional Budget Office reported [in March 2010].—Washington Times
Q: What is the solution to our problem?
A: America must reduce her debt and increase GDP.
Q: How can America increase GDP?
A: Stimulating small businesses, which supply two thirds of the nation’s jobs, will increase GDP. Higher taxes and fees suppresses hiring; thereby hastening the occurrence of debt being 90% of GDP. Adding government jobs does not increase GDP. What does a government job produce?
Q: How does America reduce her debt?
A: Her citizens must “reduce their reliance on Government” and express that desire clearly to her senators and representatives. More government debt will not rescue our economy. It will enslave us. That is not a political statement—it is a proven financial fact of life.
Q: How do you invest in a market that has little growth potential?
A: Invest for income. There’s a little more to it than that, but that is the overriding theme.
Q: Why does the market panic so easily?!
A: There are several factors:
- The market seldom does anything in moderation. The two forces at work are fear and greed — there is nothing moderate about either of those motivations.
- In addition, large institutional traders use sophisticated electronic trading systems. These systems are programmed to perform certain trades in milliseconds if particular market circumstances occur. If those conditions occur even briefly, the massive electronic trading is triggered, exaggerating the fear/greed impact.
- Markets panic the most in the face of the “unknown.” If traders don’t “know” the full impact of the subprime mortgage credit crisis, then the automatic reaction is to prepare for the worst.
- Markets also panic when they are “surprised.” That relates back to the “need to know.” When they are surprised, it dawns on traders that they didn’t “know” everything so they panic until perceived certainty sets in again. That’s when greed takes off.
Q: What is a hedge fund?
A: It’s like a mutual fund in that investors pool their money to buy certain financial instruments. Hedge funds, however, are usually only available as private offerings to accredited investors. They do not have to register with the SEC, nor are they required to make the types of public disclosures required of mutual funds. Some hedge funds are highly leveraged and have reacted dramatically during this last market upset.
Q: I have a Universal Life policy. I was told that it might not “last” until I die. How would I know?
A: If you have a Universal Life policy (sometimes called a Flexible Premium policy), you need to ask for an “In Force Illustration.” An In Force Illustration tells you how long your policy will remain in force based on current interest rates and your current premium amount. These are estimates, but they give you an idea of where you stand.
Q: My Universal Life policy “matures” at age 95. What if I live to be 96?
A: You will most likely receive any cash value at age 95 and not receive a “death benefit” at age 96. You should ask your agent or financial planner to help you find out what happens with your policy.
Q: If I’m nervous about my Universal Life policy, do I have any alternatives?
A: Yes. You may decide to increase the premium or reduce the death benefit. Or you may decide to exchange your current policy for permanent life insurance. Again, talk to your agent or financial planner to determine what is best for you.
Q: Is Universal Life “bad”?
A: No. You just need to be aware of exactly what you have. If you have taken a loan out on a Universal Life policy, or if you have reduced your premiums from the original amount, you really need to obtain an In Force Illustration. What you don’t know CAN hurt you, or your heirs. So be proactive. Consult your agent or financial advisor.
Q: Is there more than one way to measure whether a portfolio is successful?
A: Yes. Let’s think of your portfolio as being a goose. What makes a successful goose? If you want to fatten it up so you can eat it later, then you would be successful if you made your goose bigger and bigger. On the other hand you may not want to eat the goose. You may prefer to have your goose lay eggs that you can eat and/or use to raise more geese. Or you may want to fatten the goose while it is laying eggs. If that is the case, then you will be well served to judge the portfolio not solely by whether the stock price is getting fatter, but also by the value of the “eggs” the portfolio is generating.
Q: Is there any publicly traded investment that goes up in value continuously?
A: The values of investments in the publicly traded market go up and down. Nothing in nature is perfectly linear. And the market is a reflection not only of business statistics, but human nature. Fear and greed are the two driving forces in the market. Even investments that are growing do not grow in a straight line.
Q: Are mutual funds by their very nature safer than individual stocks?
A: What makes a mutual fund “safe” depends on what individual stocks the mutual fund buys. Some mutual funds invest in blue chip stocks, some in junk bonds, some in real estate, etc. Just because it is a mutual fund does not mean that it is immune to the ups and downs of the market. If you have a portfolio of several individual stocks, you in essence have your own mutual fund.
Q: When people say “the market,” what do they mean?
A: That’s a good question because it could mean several different things. Most often quoted for “the market” is the Dow Jones Industrial Average (DJIA). It consists of 30 of the largest domestic companies. When it was first introduced in 1896, it had only 12 stocks. Of the 12 original stocks, only GE remains today. Technically it’s not just an average of the stock prices. Other factors are included in the calculation. However, it is a widely accepted benchmark of the market at large.
Q: How did the DJIA gain such widespread acceptance and use?
A: In 1882, Edward David Jones, Charles Dow and Charles Bergstresser formed Dow, Jones and Company. The flagship publication of this company is none other than the renowned Wall Street Journal, which began in 1889. Mr. Dow was the first editor of The Wall Street Journal, writing many articles about investment theory.
Q: Is the DJIA the only index?
A: No. The 4 most common other indexes are the S&P 500 (based on 500 stocks), the Wilshire 5000 (a broader representation of the market), the Russell 2000 (represents small cap stocks), the EAFE (Europe, Australia and Far East stocks). There are others as well. When comparing personal returns to “the market,” it is important to compare them to the appropriate index.
Q: What is a Qualified Dividend?
A: It is a dividend that “qualifies” for a better tax rate. For example, if your marginal tax rate is 33%, qualified dividends are taxed at 15%. For the dividend to be qualified it must be paid from a US company, or qualifying foreign company and you must own the stock for a required holding period.
Q: Does every company pay dividends?
A: No. A company may need all its resources to reinvest in the company itself as it grows and expands, and therefore will not pay dividends. Established companies with good cashflow, often do pay dividends.
Q: What is the dividend “ex-date”?
A: A company will announce that shareholders who own shares of their stock on a certain date (the “record date”) will receive a dividend. The “ex-date” is 2 trading days before the record date. It takes 3 trading days for a trade to “settle”, or change ownership. So if you buy a stock on the ex-date, you will not be the owner as of the record date. If you buy the stock on the ex-date you will not receive the dividend.
Q: What if I sell my stock AFTER the record date, but before the dividend is paid?
A: You will still get the dividend. You just must own the stock on the record date.
Q: What is an Exchange Traded Fund (ETF)?
A: An ETF is similar to a mutual fund in that “the fund” is comprised of individual stock holdings. The stocks in an ETF usually mirror, or closely resemble those in certain indexes. However, as its name implies, ETF shares trade on the stock exchange throughout the day, whereas mutual funds shares do not. ETF fees are usually lower than mutual fund fees, and turnover is often lower. There is not an “initial minimum investment amount” for an ETF as there usually is for a mutual fund, nor are there any “back-end” surrender charges for selling ETF shares as there are for selling certain mutual fund shares. However, if you are making small investments along, mutual funds allow you to buy partial shares, whereas EFTs do not.
Q: What is a Preferred Stock?
A: A Preferred Stock is “preferred” is because (1) dividends have to be paid to preferred stock shareholders before common stock shareholders can receive theirs and (2) in the event a company liquidates, preferred stock shareholders are paid ahead of common stock shareholders. A preferred stock has a “par value” (usually $25). The issuing company has the right to “call” (buy back) the preferred stock at par. So it’s best to pay less than $25 a share. Most preferred stocks also have a credit rating that indicates a company’s ability to pay its stated dividends. Dividends from many preferred stocks qualify for the 15% maximum tax rate.
Q: What is FINRA?
A: FINRA is the Financial Industry Regulatory Authority. It is the largest independent regulator for all securities firms doing business in the United States. It oversees nearly 4,540 brokerage firms, 163,675 branch offices and 631,725 registered securities representatives. See www.finra.org.
Q: What do the initials SIPC mean?
A: SIPC stands for Securities Investor Protection Corporation. It is the “safety net” for investors if the brokerage house declares bankruptcy. It does NOT protect investors from the normal ups and downs of the market. See www.sipc.org.
Q: What do the initials SEC stand for?
A: SEC stands for Securities and Exchange Commission. The SEC is a small federal agency with huge responsibilities over the securities markets. It oversees FINRA and the SIPC among many other functions. See www.sec.gov.
Q: What does it mean when a stock is held in “street name”?
A: It means the stock is registered with the issuer in the name of the brokerage firm—not your name. Your name is recorded as the owner on the books of the brokerage firm. That is often referred to as being in “book-entry” form. So instead of issuing a stock certificate, the brokerage firm issues regular statements documenting your holdings.
Q: What if I want to have the actual paper certificate?
A: If you purchase securities through a brokerage firm, you can request that the actual paper certificate be sent to you. You might have to pay a small fee for that service. Don’t keep your certificates in such a “safe place” that you can’t find them again though. It will cost you to replace the certificates, and you will need them when you decide to sell. However, more and more firms are no longer issuing paper certificates.
Q: How are my securities held that I purchase directly from the issuing company?
A: Usually your ownership is recorded at the company in “book-entry” form—meaning the record of ownership is on the company “books” rather than on a paper certificate. Having your securities in book-entry form is a convenient way to buy, sell and transfer your securities. You should receive a “Confirmation” notice whenever you buy, sell or transfer.
Q: I have heard that you can now have a ROTH 401(k). Is that true?
A: Yes, it is legally permissible. But not every 401K plan is making the option available.
Q: How does a ROTH 401(k) work?
A: As the employee, you can choose to make after-tax contributions to the ROTH portion of the 401(k). Any employer contributions, however, will go to the “traditional” portion of the 401(k). So you’ll have, in essence, two 401(k)’s combined. This complicated bookkeeping is why some 401(k) plans have not adopted the ROTH portion yet.
Q: As a sole proprietor, am I able to have a 401(k)??
A: Yes. They are generally referred to as Individual or Solo 401(k)’s. They have many advantages to small business owners. If you have any employees, you cannot take advantage of the Individual 401(k), however.
Q: Can my Individual 401(k) be self-directed?
A: Yes. That alternative is available. We have set up several.
Q: I have placed my “family living trust” as the primary beneficiary to my 401(k). Does it make a difference that my beneficiary isn’t a human being?
A: Yes, it makes a difference. The IRS says that when the beneficiary isn’t a human being, then the distribution must be completed over a 5-year period.
Q: What would happen if my spouse were the sole beneficiary instead of the trust?
A: Your spouse could roll the money from your 401K into his/her own IRA. It would remain tax deferred. Then the spouse has choices as to how to take distributions, including taking it out over his/her lifespan. That option is not available if the 401(k) money goes to the family trust.
Q: So making a family trust a beneficiary is wrong, right?
A: Not necessarily. As long as something is legal and moral, the only thing that makes it “right” or “wrong” is whether it is the appropriate method to get you the results you want. This is an extremely complicated issue. It is best to review your situation with your attorney and CPA.
