Archive for the ‘Savings and Investing’ Category

“How To” Videos from FINRA

The FINRA Investor Education Foundation has developed a series of short “how-to” videos on subjects ranging from budgeting to credit to learning how to spot investment scams.

How To Build a Budget shows you how to establish spending priorities so you can create and maintain a workable budget.

How to Control your Credit teaches some simple ways to control your spending and pay down your balances.

How to Spot Investment Scams in 6 Simple Steps identifies the red flags of investment fraud and instructs on how to check the legitimacy of an investment product or professional.

More videos are in the works and are coming soon.


What is hiding in your 401k?

New rules from the labor department require employers to tell you exactly how much your 401K plan is costing you in fees over and beyond the costs for investment management.

Until now, even employers as plan sponsors have found it difficult to know how much they are charged for administrative services by investment providers, often mutual fund companies. These fees – legal, accounting, recordkeeping – are usually paid for with employees’ funds.

Most employees aren’t even aware of these costs, but they range from .28% to 1.38% annually, according to a survey by Deloitte/Investment Company Institute cited in the New York Times article, The Curtain Opens on 401k Fees.

With such information readily available, employers can now try to renegotiate their401K contracts, and employees can select the lowest cost investment choices.

The drip-drip-drip of fees adds up. According to the U.S. News and World Report article, How to Take Advantage of 401k Fee Disclosures:

“A Towers Watson analysis of target-date funds, the most common default 401K investment, found that most target date fund owners lose 30 percent or more of their potential retirement income to fees.  That works out to be between five and 15 years’ worth of retirement income that is deducted from a 401k account over a worker’s lifetime.”

Be a Smart Investor

Joshua S. Grinspoon,  Attorney, U.S. Securities and Exchange Commission, Boston Regional Office, spoke on Investment Fraud and How to Avoid It at our May 16, 2012 Financial Literacy at the Library event.

Mr. Grinspoon began by introducing a primer on the basic financial instruments:

  • Stocks – owning stock is like having a piece of a company;  you share in the revenue and are eligible to vote on corporate matters.  Generally considered a risky investment because the company could fail to make money or could commit fraudulent acts.  An extreme example is of the 1929 stock market crash.  It took until 1954 for the market to return to its pre-depression value. Risk cannot be completely eliminated but can be minimized by researching the company and diversifying stock ownership among several companies, industries and geographical locations.
  • Bonds – are long-term debt instruments issued by companies (corporate bonds) and governments (municipal bonds) with a fixed interest rate.  They are riskier than people realize.  If the institution goes bankrupt, the bond will not be repaid and both bond income and principal will be lost.  Further, their value is tied to prevailing interest rates.  If rates go up, the value of the bond decreases and will be difficult to sell. If the investor has no plans to sell the bond, then the interest rate volatility is not a great concern.
  • Mutual Funds – are a basket of stocks alone or with bonds, normally diversified both by industry and geographically.  Theoretically, this makes them less risky, but one still needs to be careful.  In some downturns, all asset classes can lose value, as they did in 2007.  Mutual Funds often require fees, perhaps 1% to 1 1/2% per year plus load fees.
  • CDs – are bank deposits.  If invested with an FDIC member institution in amounts lower than the covered maximum (currently $250,000 per depositor, per insured bank, for each account ownership category), they are a low risk investment. Although the principal is insured against loss, the interest rate can be lower than the inflation rate, resulting in a net decrease in economic value.

When employing a Broker who will act as your conduit to the market, be sure to research the Broker’s credentials.

  • Begin by looking them up on the FINRA Broker Check.  You may also want to check their status with the Massachusetts Securities Division  or the Massachusetts Attorney General.
  • Ask about their commission structure.  Is there a financial incentive for recommending a particular investment?
  • Ask for references.
  • Ask if they have frequently switched companies.
  • Be wary of unsolicited offers and attractive glossy mailers.
  • Be wary of “Senior Advisors”

Other important tips:

  • Don’t invest too much in any one stock.
  • Don’t lose sight of your investments – Periodically review your portfolio.
  • Brokers have a responsibility to put you in “suitable” investments

Remember the Basic Rule of Finance: If you don’t understand the investment, avoid it.

Tax Refund Opportunities

So, you’ve filed your taxes and you’re waiting for your refund.  Now comes the pleasant task of deciding how best to use it.

Many people treat a tax refund as found money, akin to lottery winnings.  But don’t forget that it was money deducted from your paycheck all year long and now you have it back.

If you would prefer more now/less later, ask your personnel department for a W-4 form to lower the number of withholding credits.

The U.S. Treasury wants you to consider buying savings bonds with your refund and  has launched a campaign to encourage people.  Since January 1, 2012, savings bonds are no longer available for purchase at financial institutions.  To purchase bonds, ask your tax preparer or visit recommends using this year’s refund to improve your overall finances. Here are 10 suggestions:

  1. lower or pay off credit card debt
  2.  add to your emergency fund
  3. add to your retirement savings
  4.  invest in stocks in your savings outside of retirement funds
  5.  buy flood or personal liability insurance
  6.  fund your child’s education through a 529 account
  7.  open a Roth IRA for your child even if he or she only has small babysitting or yard work income
  8.  save for your vacation now instead of charging it credit cards during your trip
  9. make home improvements that add value to your house
  10.  donate to a non-profit and get a charitable tax deduction.

For details and a W-4 calculator, go to or see Ten Smart Uses for your Tax Refund.

Stocks, Bonds and More!

David P. Simon, Stanton Professor of Finance, Bentley University, provided our audience with an introduction to securities and financial markets at the February 15, 2012 Financial Literacy at the Library event.

The major markets (money, bond and stock) and Mutual Funds were explained  along with their specific risk and return characteristics.

Money market: Treasury Bills are extremely safe but offer the lowest return.  Certificates of Deposit are issued by banks and Commercial Paper is issued by highly-rated companies.

Bonds: Treasury, Corporate and Municipal are the three main types.  Typically, bond prices fluctuate as interest rates rise and fall.  As prevailing interest rates increase, bond prices decrease, and vise versa.

Treasuries have little default risk (even with the recent ratings downgrade), but long-term bonds have substantial interest rate risk.

Corporate Bonds come in a wide spectrum of risk, from AAA “investment grade” to “high yield or junk” bonds which carry a significantly higher default risk.

Municipal Bonds are issued by state and local governments and normally are exempt from Federal taxes, an important feature when considering the after-tax return.

Common Stock:  represents a piece of ownership in a corporation and are valued on the basis of current earnings, expected future earnings and dividends.  The most common metric used in stock evaluation is the price/earnings ratio.

Mutual Funds:  may be actively or passively managed.  Active management requires deep knowledge of the markets and the ability to select undervalued securities.  Funds that are actively managed tend to charge higher fees. Funds under passive management (index funds) normally offer a highly diversified portfolio with broad exposure among asset classes.  Fees are generally lower as they are not selling market expertise.

The Take Away:

  • Higher returns come from taking on higher risk
  • Diversification is extremely important for lowering risk
  • Investments in passive or index funds often do as well as actively managed funds because of the lower fees

Simon said “Diversification is the only free lunch available in finance”.

Free S & P Investment Outlook Webinar

Standard & Poor’s is hosting a free webinar on Tuesday, February 14 at 11:00 am (EST).

The one-hour session is an S & P Capital IQ Behavioral Finance Conversation which  features  “Global Investment Outlook and Investor Behaviors to Watch”.

Q and A session will follow the presentation.

To pre-register, click here.

America Saves Week: February 19-26

This year, American Saves Week  is scheduled for February 19-26.  The annual national campaign aims to help people improve their personal financial health.

As saving money is often a difficult, America Saves Week provides assistance through online activities, resources and tips.

Over 1000 organizations are offering useful information.  Learn more from the  America Saves Week website.

Sponsor American Savings Education Council explains:

“Most Americans are not saving adequately for retirement, and most lower-income households do not have adequate emergency savings for unexpected expenditures like a car repair.  But with more societal encouragement and support, more Americans will be persuaded to build wealth, not debt.”

One way to get started is by Assessing your Savings Progress and answering questions about your savings patterns. An example:

Do you have sufficient emergency savings to pay for unexpected expenses like car repairs and medical treatment?

More comprehensive tools are available at the InChargeEducation Foundation’s Mind Your Finance program.

For inspiration, read one of the many Savers Stories.