The Amateur Financier

(As always, when it’s Tuesday, that means it’s time for another thrilling edition of Investing 101.  This week, we’re going to look at something a little bit different, in this case, value investing.  Rather than a single investment or set of investments, as with most of our Investing 101 columns, we’re going look at an entire investing philosophy.  Given the sheer amount of depth in this subject, there’s no way I can cover everything about value investing in one post, or for that matter, even in a week.  Although, this week will cover quite a bit of value investing basics; yesterday’s post on present and future value covered some of the calculations frequently used by value investors.  And now, more of the basics of value investing.)

Q: What is value investing?

A: That’s a rather broad question, and one that’s difficult to answer.  Value investing means different things to different people, and the variety of opinions sometimes leads to misunderstandings.  In a nutshell, value investing requires looking at the intrinsic value of a company, and buy stock in the company as if you were buying the company itself.

Q: As if I were buying the company?  What’s that supposed to mean?

A: Well, unlike technical investors or others who focus on stocks as entities separate from the underlying business, value investors evaluate the shares of stock they consider purchasing as, well, ’shares’ of the company they are considering.  As a result, they look closely at the issuing company, evaluating its present state and future prospects, trying to determine how much the company is worth.

Q: How do you do that?

A: The most basic idea behind value investing is to calculate the intrinsic value of the company.  By making some smart assumptions about how the earnings of the company will grow in the future, it’s possible to determine a reasonable estimate for how much the stock is worth in terms of future growth.  It requires you to make assumptions (based on carefully considered research) on the future growth and run several calculations based on those numbers.

Q: That sounds kind of complex; are there any easier ways to run these calculations?

A: There are numerous online calculators that can be used to run intrinsic value calculations.  One I particularly like comes from MoneyChimp.  Or, if you prefer a more home made touch, I produced my own intrinsic value spreadsheet, based on the calculations listed in Value Investing For Dummies.

Q: Wow, so all I do is plug numbers into these calculators, and they’ll tell whether I should buy these stocks or not?

A: In theory, yes.  In practice, all intrinsic value calculations require you to make assumptions about how much the company value will grow in the future.  As a result, the values you get are only as good as your assumptions.  If you do plenty of research and come up with good values, you’ll likely have results that come close to reality.  How you do that is the basis of value investing.

Hope that gives you a better understanding of value investing, as well as some tools to help you calculate the value of the stocks you in which you seek to invest.

• What Is Glass-Steagall And Why Should I Care About It?
• Investors In New Gold Rush
• 5 Stocks I Wish I Hadn't Bought
• Currency Market Introduction
• Best Canadian DRIPs For Your First Share

Which would you rather have, fifty dollars now or one hundred dollars in the future?

If someone approached you on the street and asked you this, there would probably be a lot of questions running through your mind, like ‘Why do you want to give me money?’ and ‘Just who are you, anyway?’  If the offer turns out to be genuine, though, another question should come up, ‘When in the future would I get the hundred dollars?’  The value of one hundred dollars to you in the future will depend on how long in the future you need to wait in order to receive it.  If you would get the hundred dollars next week, that’s a good deal; there aren’t any (legal, guaranteed) ways you could invest fifty dollars in order to double its value in seven days.

On the other hand, if you would receive the $100 in ten years, it would be a much wiser course to take the fifty dollars today.  Not only could you safely invest the $50 in a way that it will be worth more than $100 in the future (barring any badly timed downturns), but the one hundred future dollars will not have the same spending power due to the effects of inflation.

This is known as the time value of money; inflation and potential investment gains make the same nominal amount of money more valuable in when received or spent in the present compared to the future.  As a result, many financial advisers and planners will talk about future value, the worth of an investment after a set period of time has passed, and present value, the needed amount of money to invest currently to achieve that future value.  The equation relating these values is:

FV = PV*(1+i)^n

Where FV is future value, PV is present value, i is the interest rate (which could be the rate of return, the inflation rate, or debt interest, depending on the calculation), and n is the number of years between the present and future values.

Confused?  That’s understandable; let’s go through an example to see how all these numbers relate and show how we could calculate each of these values.  In our example, you’re about to inherit a lump sum of money from the estate of your great-uncle Mort.  After attending his funeral (and avoiding any completely unfunny comments about his name), you want to crunch some numbers to see if your inheritance alone will be enough to allow you to retire early in a few decades.  You want to be able to set the inheritance money aside, allowing it to grow, and not have to invest anything more to fund your retirement.

You’re currently twenty-five, and would like to retire when you turn fifty, with twenty-five times your current income in savings (adjusted for inflation).  That way, you think, you will be able to withdraw 4% each year, spend an (inflation-adjusted) amount equal to your current salary, and still have little chance of running low on money.  If you earned $40k last year, you’re shooting for a total retirement fund of $1,000k (an even one million dollars) in present value to completely replace your salary at a 4% withdrawal rate.  If you think there’s going to be a 4% inflation rate over the next few decades (a bit higher than the historic rate), the future value calculation will be:

FV = PV*(1+i)^n = $1,000k*(1+0.04)^25 = $1,000k*(2.772) = $2,772k

You will need $2,772k in order to replace your current income.  Now, let’s assume that in order to achieve this investment goal, you plan to invest in bonds and bond funds, which you expect to return at least 6% throughout the next two and a half decades.  We can rearrange our future value equation in order to determine what present investment value we need to get to this sum:

PV = FV/(1+i)^n = $2,772k/(1+0.06)^25 = $2,772k/4.292 = $646k

If good old Mort left you an inheritance of at least six hundred fifty thousand dollars, you’re sitting pretty; you can simply invest that money, and when you reach fifty, you can live off the proceeds without putting in another dollar towards your investments.  But, to continue our explanation of future value (as well as remind you not to depend on old relatives dying to fund your retirement), let’s assume you didn’t get quite that much; if your inheritance was only $400k, it would take longer to reach your goal.  To figure out how much longer, let’s solve the equation for n, using the same interest rate (be warned, we’re going to have to use natural logarithms to calculate n):

n = [ln(FV/PV)]/[ln(1+i)] = [ln($2,772k/$400k)]/[ln(1+0.06)] = [ln(6.93)]/[ln(1.06)] = 1.94/0.0583 = 33.2 years

If you’re willing to delay your retirement from fifty to fifty-eight, you can use your desired, very conservative investment plan, and still retire early by most people’s standards.  If you want to keep your retirement at age fifty, though, you could add some stocks to your portfolio and increase your expected returns.  To figure out just how much, we’ll solve for i in the final variation on our equation:

i = [(FV/PV)^(1/n)]-1 = [($2,772k/$400k)^(1/25)]-1 = [(6.93)^(0.04)]-1 = [1.081]-1 = 0.081 or 8.1%

Thus, to still build your money up fast enough to meet your retirement plans without adding more funds, you will need to average a return of 8.1% over twenty-five years.  You can probably achieve this level of return if you’re willing to add some stocks to your asset mix; it will be tough to get enough of a return with just bonds (without taking on significant risk with junk bonds or similar riskier bonds).  A good balanced fund will likely provide the level of return that you need.

Now of course, this is a simplified example, using only a single, large investment with compounding only once a year.  If you put in small amounts into your investments on a regular basis, the calculations get trickier.  Still, having an idea of what your investments will be worth when you cash them out or knowing what you need to invest in order to meet your goals is always a plus.

• Should Mutual Funds Be Moving Into Cash?
• The Best Types of Investment
• What To Do With All Your Extra Money
• Fixed-rate mortgage payments, inflation, and investing
• 16 Ways Not To Blow Your Tax Refund

One of the most common pieces of investing advice given by financial professionals, right behind using tax-advantaged accounts and dollar-cost averaging, is to diversify your holdings.  The argument is pretty simple: by holding a variety of investments, and multiple investments of each kind, you can ensure that one bad stock/bond/REIT/whatever you are holding will not do huge damage to your portfolio.

Of course, as with virtually every piece of investment advice, there are dissenting voices.  One noted one is Robert Kiyosaki, the author of Rich Dad, Poor Dad, who refers to diversification as ‘de-worse-ification’.  His main argument is that attempts to diversify cause people to simply buy blindly and pray that their holdings rise, rather than properly investing.

What’s the truth?  As with most financial debates, there are pluses and minuses to diversification.  In an attempt to counteract some of the prevalent wisdom, let’s start with the minuses:

1) Blunts the Top Performers – One of the biggest flaws with diversification is that, by holding tens, hundreds, or even thousands of individual investments, you aren’t able to benefit from the full growth of the top performers.  If you have a single stock that doubles in price over the course of a year, you will have nearly doubled your money (after expenses); if that stock is one of a thousand held in a mutual fund, the growth of that stock will be averaged with the gains (and possible loses) of all the other stocks, greatly diminishing your returns.

2) Leads to Overconfidence – Another problem with diversification is that it can lead to thinking, ‘if I have enough different holdings, there’s no way my portfolio can decline.’  Unfortunately, if 2008 taught us nothing else, it’s that even being diversified can’t always protect you; sometimes, all the investments within an asset class decline, and occasionally many asset classes are hit simultaneously.  There are limits to what diversification can do to protect your assets.

3) It’s Boring – The last problem is purely psychological; while holding a diverse group of mutual funds makes for a good investment strategy, it’s not the most exciting topic to discuss over cocktails.  The negative effects can extend beyond simply making you less popular at parties; if you are not interested and involved with your investments, you might not give your portfolio the proper scrutiny it deserves, and could end up with a portfolio that is far from your desired allocation or investments that are completely inappropriate for you.

So, there are some drawbacks to diversification.  Still, there must be reasons why nine out of ten (or more) financial advisers recommend diversification.  So, what are they?

1) Blunts the Low Performers – The inverse of the first disadvantage of diversification, which smooths out your returns in general.  While it decreases what you could get with a proper investment in a high performing security, it will also increase your returns over the worst performing assets in the class.  It also prevents the worry and trouble caused by bankruptcies; if the company that goes bankrupt is only one of the hundreds you are holding, the damage to your portfolio is likely to be minimal.

2) Makes Investing Easier – Another big advantage of trying to invest diversely is that, thanks to products like mutual funds and ETFs, it’s easy to find diversified investments that meet your asset allocation.  Plus, it’s usually is less trouble to track the performance of a few broadly invested funds than to individually track dozens of stocks or bonds.

3) Tends to be Cheaper – Interestingly enough, thanks again to mutual funds and ETFs, it actually is cheaper (usually) to get a highly diversified investment than a more concentrated one.  The abundance of no-load mutual funds and low cost brokerages makes it inexpensive to acquire and hold many diversified investment, whereas the commissions of acquiring even a small portfolio of individual stocks will add up quickly.

Given these relative benefits, what’s the best way to approach diversification?  My advice remains the same as when I discussed how to build an investment pyramid.  First, start by creating a set of broadly diversified investments; that way, you should have a good base to build on.  Then, once you are diversely invested, you can consider putting a portion of your money into individual stocks (say twenty to thirty percent of your overall assets).  This approach allows you to gain the benefits available with individual stocks, while avoiding many of the associated problems.  You can have your cake, and eat it too!

• Why My Emergency Fund is Not in Prosper.com Loans
• How To Determine Mutual Fund Holdings With Morningstar
• Weakon 305: Mutual Funds, Intermediate
• Money Market Funds Explained
• Buying and Selling Stocks 101

Well, it’s official. By the time you read this, I will be heading off to my last day of work at my current temp job.  It was fun, while it lasted, but with the swine flu epidemic in the past, there’s just not enough need for me at Sharp.  I like the people, I like the location, I even got into the work that I was doing, but alas, what is done is done, and hopefully, I can find something soon.

But not all my news is bad news; two weeks from now, I’m going to be moving out to the western side of Pennsylvania in order to live with my fiancée.  It should be wonderful, although I’m a bit nervous about how well it will go.  I just wish I had a decent job waiting for me out there; it’s going to be especially rough, going back to being unemployed.  Still, it does give me more flexibility, which is also a good thing.  And I’m optimistic that I can get something out there (or who knows, perhaps I can turn this blog into a full time gig).

So, enough about me; what do you think about me?  Just kidding, now it’s time to peek in on some of the other great bloggers I follow:

Cash for Clunkers: Is it Worth It? – My good friend My Life ROI discusses the government’s new Cash for Clunkers program.  It seems like an interesting idea, and if you are planning to get a new car anyway, it’s certainly worth considering.  As he notes, though, it’s only really valuable if your car is worth less than the voucher (either $3500 or $4500, depending on the gas mileage of the older car); otherwise, you should just sell your old car and put the proceeds toward the new one.

Beach Reading on Personal Finance - Mr. Tough Money Love shares a few of his summertime reading suggestions.  I especially support his recommendation of Dave Barry’s Money Secrets; it’s an absolutely hilarious book, and if you have the opportunity, you really should read it.  (It especially seems funny after lots of personal finance reading; Mr. Barry has the number of most financial gurus.)

12 Common IRA Mistakes to Avoid – Jeff Rose of GoodFinancialCents notes several mistakes that people frequently make when it comes to IRAs.  Most are pretty commonly mentioned, but Jeff raises some thoughts I never would have considered, including inheritance and trust issues of which I had never heard.

The Problem With Target Date Funds – Frank Curmudgeon of Bad Money Advice makes some interesting points concerning target-date funds, particularly as a default 401(k) investment.  He raises some good points, but seems to put too much blame on the government for first allowing target date funds as a default investment, then attempting to correct some of the problems that resulted with the recent downturn.  I think the government is just doing what it’s supposed to do, trying to respond to its citizens, and I hope a good compromise will be reached that improves retirement for the average person.

• 44 Ways to Ruin Your Financial Life By Age 30
• Trying A 'No Spending' Weekend.
• Sunday Conversation#9 - The Money Talks Edition?
• Getting a Life
• Can One Person Really Make A Difference?

(It’s another Tuesday here at the Amateur Financier, and that means one thing: Yep, it’s another thrilling round of Investing 101.  Today, following our recent trend into considering more complex investments, we’re going to look at the futures market, and determine how these futures could help your financial future.)

Q: So what are futures, anyway?

A: When talking about futures, you’re really discussing futures contracts, agreements where you set the price for a commodity or financial products (stocks, bonds, Treasuries, or any number of other investments) at some point in the future.  Let’s say you’re an oil producer, and are afraid that continuing financial shakiness world-wide might lead to falling oil prices.  You can sell a futures contract locking in the current price of oil for the shipment you will produce for September delivery.  This way, you can be certain of the price that will get for your product when it becomes available.  The buyer of the contract also gets the certainty of knowing exactly much the oil will cost.

Q: Sounds pretty good; but why is there such a large market for futures?

A: Well, let’s take a closer look at some possibilities for what can happen between now (June) and September for our example.  If prices fall, as you (the oil producer) expect, then you win; having sold the contract, you locked in your profits, and ensured you will get the desired amount of profit for your oil.  The holder of your contract, on the other hand, loses; he or she has an obligation to purchase your oil at the higher price.  If the holder tries to sell the contract, he or she would have to sell for less than the face value of the contract, to make it attractive to the purchaser.

But, that doesn’t have to be the case.  If oil prices rises, then you, as the contract writer, would have to deliver the oil at lower prices than the current market value.  In this case, the contract holder would win, and could profit in one of two ways: first, he or she could take delivery of your oil at less than market value, pocketing the difference between the amount he or she actually paid and the current cost of that oil.  Or, second, the contract could sell on the futures exchanges for more than the initial cost.

Because of the possibility that the contracts become more valuable, an extensive secondary market in futures has arisen, allowing you to buy or sell contracts, even if you have no intention of taking delivery of the underlying product.  Most people investing in future contracts, especially for raw materials, do so with the intention of making a profit by reselling the contract later, rather than getting the underlying product.

Q: So, why would I want to invest in future contracts?

A: There are several reasons to consider investing in futures.  First, if by chance you are a manufacturer or user of various industrial or agricultural raw materials, it can make sense to lock in your prices to guarantee your future profits or expenses.  This way, you can ensure your future profits and more easily plan out your financial future.

Or you could use futures as a means of speculation, similar to options.  In this way, you can benefit from the increased leverage offered by futures, allowing you to make bigger profits than by holding the underlying assets.  It’s another way to take advantage of leverage, if you so desire.

Q: Sounds good!  Any last comments?

A: As with any form of speculation, you need to be extraordinarily careful about how much you invest in the futures market.  Make sure you know exactly what you are doing before you invest any real money, and only make futures contracts a small part of your portfolio.  Unless you have need for a particular commodity for your business and are using the futures contracts to lock in the future costs, chances are that you don’t REALLY need to invest in futures, and should treat your future contracts very carefully.

That’s all for this week; hopefully, you’ve appreciated this introduction to futures contracts, and have an easier time understanding what futures investing is all about.

• 09/01 - ETF Trading - No Trades Today
• New Million Dollar Coin
• Eminem Dissing You..?
• Do You Have to be Thrifty?
• What Is Seasonal Investing And How Does It Work?

While watching a local news station, I came across a pretty interesting concept: an ID Score, which attempts to quantify your risk of having your identity stolen or your personal information misused.  The goal, as noted on the main site, is to give you an idea of how much you have to worry about having your identity stolen.  It’s a laudable goal, and the information provided about how to protect your identity is helpful and proper (although, the link provided to the FTC’s identity theft guide is probably the most helpful of all).

I do have a problem with My ID Score, though: when I attempted to get my ID score, I discovered that they would need my Social Security number to verify my identity.  Although the first page I came to claimed that giving my Social Security number was optional, attempting to get a score without giving it led to a page saying that my identity could not be verified with the information given, and that providing my SSN would help with identification.

This set off some pretty big warning signals in my head; one of the first pieces of advice on protecting your identity given out by almost every source is to not give out your Social Security number to any person or organization you don’t fully understand, especially online.  Given this, it seems rather ironic that a group promising to help you protect your security would want you to give out this sensitive info.  Add in the fact that this ID Score is still a new concept (unlike, say, a credit score) and not currently used by any groups to determine whether to give you money or hire you for a job, and the risk did not seem worth it.

As a result, I didn’t go through with getting my ID Score; instead, I’m simply going to go about protecting my credit on my own.  In addition to not giving out my Social Security number or other sensitive information in most cases, I’m always sure to check my credit reports regularly (I actually signed up to get my credit score monitored at MyFICO.com, but that’s something rather different), shred all my important personal documents, and closely watch my credit card statements for unusual activity.  I’ve considered getting a credit freeze, as well, although I’m not sure if that will provide a good level of protection for the inconvenience it would cause over the next few years as I potentially go back to school or buy a house.

So, I have to ask, has anyone tried to get their ID scores yet?  Do you have any good alternatives to this service that don’t require giving out personal information?  Are there any big ways to protect yourself from identity theft that I’ve missed?

• Top Ways To Benefit From Social Bookmarking
• New ID theft targets kids' SS numbers
• The Meaning of a Credit Score
• Giving is the Goal to Financial Freedom
• Improving a Credit Score

As a personal financial blogger and wannabe money nerd, I do my best to stay up to date with the financial media.  I flip to CNBC when I have some spare time, I try to read personal finance books, and I subscribe to three different personal finance/investing magazines.  These three magazines, Money, SmartMoney, and Kiplinger’s, are among the biggest names in personal finance media, and their influence leads to ripples almost everywhere.  (Among other things, I’ve previously been inspired to write blog entries off of information I’ve read in these magazines.)

I’ve been subscribing to all three of these magazines for at least three months, and have developed some thoughts on each of them.  I actually have taken to viewing each magazine sort of like a person, with their own talents, focuses, and personality.  Here’s how I view each one:

Money: I see money as a middle-aged, single woman with kids (a bit like my aunt, who actually introduced me to the magazine).  There’s not much of a focus on investing in Money, and when the subject does arise, the advice given is almost the same: invest in mutual funds, not individual stocks, choose index funds whenever possible, and dollar cost average your way into the investment using regularly contributions.

This advice doesn’t take up all the space in Money, though, which also covers topics like best ways to improve your house, tips on getting a new job (the July edition had a ten page special on makeovers for three eager job seekers), and how to talk to your kids about money.  In fact, helping your kids to get a better financial start is one of the most frequently reccurring topics covered by Money.  It also has a tendency to get deeper into the morals and ethics of money decisions than either of the other two magazines.  This last issue, for example, there’s an article about trying to do the right thing (financially) during a recession, from how to decide who to fire to what to do about friends who cause you to spend more of your money.

Overall, I think Money is my favorite of these magazines, but it might be a little broad for some people.  It provides good, solid advice, but don’t expect too much in the way of analysis of individual companies, for example.

SmartMoney: SmartMoney makes me think of the young, eager stockbroker characters you sometimes see on television and in the movies. It focuses primarily on stocks (as you might have assumed from something billed as ‘The Wall Street Journal Magazine’). One pretty typical feature is ‘Buy-Sell-Hold’, which looks at three stocks in the same field (for July, it was energy stocks) and lists one worth buying, one that should be sold, and one that can be held (for now). It does provide a great deal of good background information into the companies it covers, very much a value based investing approach.  On occasions where mutual funds are mentioned, they typically tend to be actively managed, rather than the index funds preferred by Money.

But SmartMoney isn’t just about stock picking.  They also do quite a bit of work looking into broader economic conditions and attempt to provide advice about what the market will likely do in the future.  It, more than either of the other two magazines, has been stressing the possibility of inflation as a result of the government spending to fight the recession, and giving recommendations to fight it, like investing in TIPS and commodities. Not bad advice, by any stretch.

I like the advice that SmartMoney gives, and especially the sharp contrast it offers compared to Money, but it’s not really the best for me. If you’re a more active investor, someone looking for deeper commentary about the companies you are considering, then SmartMoney would be a good choice for you.

Kiplinger’s Personal Finance : Kiplinger’s is choke-full of information on almost every page. The density of the information is impressive, but can make it a bit hard to read and digest everything. Kiplinger’s is very fond of recommending both stocks and mutual funds, in rather impressive numbers. Overall, it reminds me of the overly brainy kid in class, who would study up on everything and throw himself into every assignment.

Kiplinger’s also has a tendency to get into more complex investment strategies than either of the other two.  In one article in the July issue, it brought up the idea of buying put options (which allow you to sell your stock at a set price) as a way of hedging against falling prices.  The plan they suggest is pretty straight forward, as options trades go, but still a bit more tricky than the average person would care to try.

If you like your magazines heavy on the research and numbers and light on commentary, Kiplinger’s might be for you.  Some of the strategies and investment it discusses go beyond my comfort level, but the overall level of scholarship impresses me.  (It also seems to have fewer ads than either of the other two, which might be one reason it seems so packed with information.)

There you have it, my thumbnail reviews of three popular investment magazines. I hope, if you are trying to figure out which one to subscribe to, that this article has helped you learn more about each one.

• Personal Finances
• Personal Retirement Plan Investment Options
• Retirement: 10 years left, 0 savings - Money Magazine
• Why Index Funds are Bad Investments
• Geezeo Review

If you haven’t been completely obvious to the financial news this week (or to news in general), then you’re likely aware that on Wednesday, President Obama made an announcement about some rather sweeping changes to the nation’s financial system.  If you feel like reading up on the full list of proposals, you can read the government’s (88-page!) white paper on the subject, assuming you have the time and willingness.  If not, read on, for I shall give you a thumbnail sketch of some of the biggest points.  (With assistance from BusinessWeek)

First Proposal: Creating a Consumer Financial Protection Agency, in charge of regulating consumer financial products (credit cards, mortgages, bank accounts, etc.) with the goal of standardizing the products offered and increasing disclosure to consumers.

Pro: More disclosure from financial firms; easier comparison of financial products from diverse companies due to government standards; and an overall safer financial system.

Con: Stifled creativity on the part of financial firms when creating new products; and more difficulty for individual firms to make their products stand out.

My Take: In theory, I like the idea of a broader, overarching agency monitoring financial markets the same way that the FDA and other agencies monitor our food supplies.  In practice, I’m sure it’s going to take quite a bit of fine-tuning to adequately protect financial product consumers while allowing banks and other agencies to make a decent profit.  Given the current state of the economy and the regulatory system, I think it might be best to opt for regulation, even at the risk of over-regulation, and back off from there.

Second Proposal: Require that banks and mortgage companies that originate mortgages and other loans keep at least 5% of the assets should they securitize the loan (they’d have to ‘keep some skin in the game’).

Pro: Lenders are less likely to push risky loans when they could face financial consequences if the loan defaults; and it puts a de facto cap on the amount of leverage lenders can utilize (at twenty times the organization’s lending capital).

Con: Won’t neccessarily prevent excessive risk taking by lenders.

My Take: This proposal should do well in decreasing the number of lenders who take on great amounts of excess risk; suddenly, giving mortgages to dozens of subprime borrowers starts to seem like a bad idea if their defaults will have a direct negative influence on your bottom line.  The percent the originators are required to keep seems a bit low to me, but I suppose limiting their ability to sell loans and lend again too much would result in far fewer loans being issued, even to qualified applicants.  Five percent (and the twenty times leverage it potentially offers) seems like a good compromise.

Third Proposal: Appointing the Fed (that is, the Federal Reserve) to regulate systemic risk in the financial markets, backed by a council of other regulators chaired by the Treasury,.

Pro: Provides increased power to regulate the economy as a whole; allows the Fed to take the lead in decreasing systemic risks posed by events in the financial markets

Con: The Fed could end up being too powerful; worries that the Fed will fail to provide adequate oversight.

My Take: While it seems like a good idea to assign one organization to take point in providing regulation to the market, there are legitimate concerns about leaving that job in the hands of the Fed, especially as there is no direct Congressional oversight.  The key will be finding a compromise that minimizes the number of worried parties; the Obama proposal, for example, attempts to add more oversight to the Fed by giving some oversight of their actions to the Treasury.

Fourth Proposal: Adding increased oversight and funding requirements for derivatives trading.

Pro: Decrease the risk level in a fairly risky financial sector; add disclosure and standardization to credit default swaps and other complex derivatives.

Con: Push back from derivatives traders who are used to an environment of secrecy; difficulty in regulating the sometimes highly individualized trades.

My Take: This one is a tricky one, but necessary if we’re going to avoid a repeat of the last year.  Getting derivatives trades out into the open, ensuring that the traders have enough capital to back their trades, and understanding the level of risk involved is the only way to allow this trades to continue while preventing future financial collapses.

All of these proposals, of course, still need to be debated and approved; for the most part, though, I think they are a definite step in the right direction, and a good way to push the financial system back on track.

• Bernie Madoff, Fed Rate Cut: Thoughts about News Events
• Downloadable Guide To Toxic Chemicals Found In Flea Control Products.
• Finance Reform Is Coming, But What Will It Look Like?
• The Truth of Green Product Claims
• Finovate Startup 2009 Live Twitter

Recently, I needed to send money to a friend of mine.  Unfortunately, the easiest way I know to transfer money from one person to another, via Paypal, was not an option in this case; my intended recipient didn’t have a Paypal account.  I could have written out a paper check and sent it through the mail, or even gotten a money order from the post office, but both of those are rather inconvenient and will cost money (if only for the stamp to send them).  What do you do when you want the convenience of online money transfers with the ability to send money to someone who will not (or cannot) set up an online account to receive it?

My chosen solution: to use my ING checking account to send him a paper check!  It was surprisingly easy and quick, plus I was able to save money on the check/money order, envelope, and stamp.  It’s not a completely perfect solution; the check will take several business days to arrive, versus the one to two business days with a regularly mailed check.

Even with that caveat, it’s still helpful to know how your online accounts can be used to generate paper checks.  So, how do you do it?  Follow these simple steps:

1) Open an ING Electric Orange Checking account: Start by going to www.ingdirect.com, and clicking the ‘Open an Account’ button on the left-hand side:

Then, you’ll need to click on the link for an Electric Orange account:

This will bring up a pop-up window (you might have to temporarily disable your pop-up blocker or allow this particular pop-up in order to make it appear).  The rest of the application process will pretty easy; just be sure you have an offline checking account (with enough money to fund your new ING account) and that you have the account information handy.  It’s really a pretty easy site to navigate and create new accounts.

2) Enter your ING Direct checking account – Just click on the words ‘Electric Orange’ to access your checking account.  (I have a savings account with ING, as well as a linked Sharebuilder investment account; if you are opening your first ING account as you follow these instructions, that will be the only option available to you.):

3) Click on ‘Make a Payment’ – The large icon furthest to the left on the top of your account page will allow you to use your Electric Orange account to make various types of payments:

4) Select the Address Book option to add your intended recipient:

At this point, you will have to choose whether you are sending checks to a business or a person.  If you opt for adding a person to your address book, you can choose whether you want to be able to send paper checks, electronic checks, or both.  Depending on what information you have available, you might add one or both methods for the person in question:

Assuming you have the information needed to send them a paper check, we can proceed to the last step.

5) Click on ‘Send a Paper Check’ and fill in the needed information – Back under the ‘Make a Payment’ menu, select the ‘Send Paper Checks’ option:

From there, you will be presented with a virtual image of a check; simply fill in the needed details (the recipient, the amount, and any memo details):

After you click continue, all you will need to do is verify that the address to which you are sending the check is correct, and ta da, in only five short steps, you’ve used the internet to send an actual, paper check to someone.  Now the next time you want to send a birthday check to your Aunt Ida who thinks that computers are the tool of the devil, you have another weapon at your disposal!

• What to Consider When Opening a Checking Account
• Earning Money Online With Twitter+Clickbank!
• Free Money through ING Direct
• 5 Ideas To Make Extra Money At Home Online
• Get Paid For Online Surveys - Avoid Mistakes, Make Money

(It’s Tuesday again, and you know what that means!  Yes, yes, only three more weekdays until it’s time to party, but in addition to that, it’s time for another edition of Investing 101!  We’re getting a bit more exotic in our chosen investments, in this case, covering forex, which is really more speculation than investment…)

Q: What is forex?

A: Forex is short for foreign exchange, that is, the relative values of different currencies around the world.  When speculating in forex, you buy or sell pairs of currencies, attempting to determine how the exchange rate between the two will change.  For example, the US Dollar and the Euro are bought and sold in the currency pair EUR/USD.

If you think that the US dollar will fall compared to the Euro (so the EUR/USD ratio will rise), you can buy this pair and benefit from the dollar’s fall.  If you feel that the dollar will rise (decreasing the EUR/USD ratio) you can sell this pair instead, and make a profit when the ratio decreases.  There are ratios corresponding to numerous currency pairings, including all the major and many of the minor currencies around the planet.

Q: How did forex come into existence?

A:Forex was originally created for use by hedge funds and large corporations that do business in multiple currencies, allowing them to hedge against the possibility that the currency fluctuations will decrease the value of their foreign holdings.  If you are an American company and are afraid that rising exchange rates with the Euro will decrease your profits from your French sites, you can sell the EUR/USD currency pair to decrease the risk of losing money from such a fall.

Q: How can I fit forex into my portfolio?

A: Well, as mentioned before, forex trading is speculation, rather than an investment.  Don’t put your money into forex expecting to hold the currency pairs for a long period of time; if you aren’t planning to day trade, you probably should just avoid forex.  Plus, because the lot sizes for forex trading are so large (typically about $100,000), you usually need to take on a great deal of leverage, usually in range of 100 times as much as your own investment.  This means you will be potentially amplifying your gains, but also have the potential to lose more (much more) than you initially deposited.

Q: What else should I know about forex?

A: There are a few things you should consider doing in order to get yourself ready for forex trading.  (That is, assuming you still want to go into forex; as mentioned previously, there’s no pressing need.)  In order to get ready:

- Take some time to practice forex trading: Most forex trading companies will allow you to set up a practice account to test their platform.  Doing so, and taking many weeks, if not months to practice, will make you much more capable of doing well when you decide to speculate for real.

- Know how much you could conceivably lose: Given the high leverage levels, you can stand to lose a great deal of money.  While you are practicing, make sure to note how much money you lose when your trades go wrong.  Make sure you have enough money ready in your account to cover any loses above and beyond your initial investments.

- Keep the money you put into forex to a minimum: Be sure that when you put money into forex that it makes up only a small portion of the money you invest.  Because of the potential losses you can suffer, you need to be sure that you have only a small amount of your investment money put into forex trading.  I’d say no more than 10% of your portfolio should be used for speculating in forex (and probably much, much less, until you know exactly what you are doing).

That’s the short and quick version about forex trading; hopefully, this will help you to decide if this form of speculation is right for you.

• Forex Trading, What The Hype Is All About
• Read Useful Secrets About Forex Day Trading System
• Forex Is The Largest, International Stock Exchange Of Currency
• Find Important Information About How To Trade Currency
• Foreign Exchange Investor Education – Basic Terms Of Forex Investor Trading. Study Forex Trades