Welcome to my blog where I discuss money, investing, politics, and anything else import in the world. I find it surprising that most people in their 30s have very little knowledge or interest in these areas. Of course everyone is interested in money, but very few take the time or have the discipline to properly save and invest it for the future or short term. For those who at least have the interest, I'll write about my experiences and methods of investing, and hopefully give you a head start in investing.

Tuesday, January 29, 2008

Government Stimulus Package: The Senate Strikes Back

The battle has probably just begun, but as I predicted in my previous post on the Government Stimulus Package, the Senate is trying to shove additional spending packages and "help" for the unemployed. This will probably continue for two weeks (Feb. 15), so I will update this post as it becomes clearer but they have already mentioned:
  • Cutting the rebate to $500
  • Giving the rebate to all earners, wealthy, Social Security recipients
  • Extending unemployment benefits

What the Senators are forgetting is that this is not an aid package to workers and unemployed, which are at historical lows. This is supposed to stimulate the economy and I still disagree giving people money to spend will have lasting effects. It will show a bump but no long term effects. Stimulating businesses, expansion, and entrepreneurs have a much larger impact on the economy, although it may take a little longer to see its effect. It is becoming a money grab and we can't leave anyone else, lest we offend.

Bob Brinker MoneyTalk Commentary 1/26-1/27

Some of the more basic questions came up today on the show. These questions almost come up every week:

Pension: Annuity vs. Lump Sum

It almost always makes more sense to take the lump sum and invest it yourself. However, people always like the sound of "guaranteed" money for life. The call on Saturday had the following scenario: lump sum of $1,000,000 or $60,000 per year for life, indexed 3% for inflation. People often think the only risk is how long they will live, but while that is important, the return is equally important. This example shows a 6% return plus 3% indexing, so really about 7.8% return, however this return includes eroding your principle (since you never get that back). Time is a really important and interesting factor here. The longer you live, the more payout you get, but also the easier it is to beat the 7.8% return by investing a portion of that lump sum in stocks. The expected returns of equities over the long term is greater than 7.8% per year. In addition, you still have your original principle. In the annuity, all you get is the return, the principle is owned by the annuity company. More details:
  • You need to live at least 14 years to be paid back the $1M
  • There may be a tax concequence of receiving the lump vs. yearly, it all depends on your other income, but for sure the lump would be taxed at 35%
  • Even if you assumed a very conservative return of 5% on your lump sum, you would have to live 25 years before the annuity returned more. And over that long term I hope you would use a more aggressive approach with your lump sum.

High Inflation

Every week someone calls in to argue that they are seeing high inflation, no matter what the CPI is saying. And every week Bob gives them an ear full. Here is the problem: most people ignore the big and less frequent things and only concentrate on what they do often, buy food and gas. Of course these are seeing high inflation, energy is up 18.1% for the year, and food 5%. However, less frequently purchased items such as housing, apparel, recreation, and education are down or very low inflation. See the whole report here. The point is that despite the higher energy costs, the price of things like apparel are not increasing, in fact they are down -0.4%. This is because the higher costs for food and energy leave less money to buy extras, and thus less of a demand, this keeps the prices in check. If we had true inflation, all of these categories would be higher.

Government Stimulus Package

There were many ideas again on how to best stimulate the economy. Bob still prefers they lower the pay roll deduction on Social Security. He is right that it would be similar in that it does not help people of above a certain high income level, it would only delay slightly how long it takes them to max out the contribution. However, I think the Government thinks sending out a physical check is more tangible. Getting a little bit more money in every check doesn't necessarily make you go out and spend it, like a fat check in the mail would. He also fails to realize that doing what he suggests would give the middle class more than the poor. I might have to call in and explain this to him. For example:

  • If you earn $35,000 per year and they lowered the witholding from 6.2% to 3.2% you would save $35,000 x 3% = $1050
  • If you earn $50,000 x 3% = $1500

Yes, the person making $50,000 still contributes more to Social Security, but this is not the same as having everyone pay 6.2% and send a flat check of $600.

And for the dumb question of the day...
One caller asked about using options to buy stock from his employer at a price above market value. He was trying to justify exercising an option to buy at $47, when the current values was $43. I don't think he understood that those option are currently considered "out of the money" and worthless. There is absolutely no advantage or reason to use those options now. They do give him a ceiling on the maximum he'll ever have to pay for the stock and if the stock goes above $47 then he should exercise, when and only when he wants to sell the position or when the options are about to expire. If they are about to expire and they are equal to or below $47 then let them expire. Likewise, if you want to buy and hold the stock, don't do it until they will expire (unless you really want that dividend income). Bob understood this but seemed to toy with the guy a little and never gave him the straight answer.

Friday, January 25, 2008

Housing Crisis, Solution: Time

There are three basic categories of people feeling the effects of the housing recession.
  1. 1. The seller who can no longer sell his house for the price they think they deserve. Anybody can sell any house quickly if they lower the price enough, however people have been spoiled from skyrocketing prices and can't bare to face reality of what there property is really worth now.
  2. 2. The mortgage holder who can no longer afford their property. This is because they either took the gamble that they could refinance their house before an ARM kicked in, they thought they would have significantly larger incomes, they thought they would quickly be able to resell their house (speculators), or were too ignorant of finances to understand what they were doing (perhaps helped by fast talking/moving mortgage brokers).
  3. 3. Realtors, mortgage brokers, loan officers, and real estate investors who are no longer enjoying the income from large volumes of sales and new loans.

The good news for (1) above is that if you are selling and buying in the same area (or maybe in another area) you will enjoy lower purchase prices as well, so in many cases you will get a similar discount on the purchase, and it cancels one another out. In case (2) I really can't feel too sorry for those who took out loans that were larger than they can afford. They took a gamble and it is not paying off. Some people like to play on emotions and say people should be protected from getting kicked out of their homes, but in actuality these places should have never been their homes in the first place, otherwise they could afford their payments. Politicians, such as Hillary Clinton, want to help these people and have been proposing ridiculous solutions:

I have a plan - a moratorium on foreclosures for 90 days [and] freezing interest rates for five years, which I think we should do immediately,

And Edwards, not to be topped, has proposed a longer freeze of seven years. These plans at best are useless, at worst illegal. How can the government step in and re-write legally-binding contracts? A moratorium on foreclosures will merely postpone the inevitable. However, illegally forcing freezes on interest rates makes no sense. First, these are risky loans, and investors have purchased these notes (as you've probably noticed mortgages are sold and re-sold often) knowing the risks and expecting appropriate returns in return for the default rate. Second, this will only cause subsequent loans made by the banks to be abnormally high as they will need to recoup these costs, which will further drive down housing prices. The main reason housing prices appreciated so rapidly was the availability of cheap money. I defy you to find a time where prices rose and interest rates were high.

The only way to resolve the housing issues is time. The current interest rates are very low and still falling. Most likely there will be 15 year mortgages under 5% by the end of January for credit worthy investors. This is of course due to the Fed cutting rates to 3.5% and will probably drop soon to 3.25% or 3.0%. The last time rates were this low is May of 2005. This will help lower the reset rates on subprime loans and maybe prevent some of the foreclosures. But only time will help set the new equilibrium of housing prices, where the spread between bid and ask prices are $0.

While it feeds the pationate emotions of the desperate, the bleeding hearts, and voters to force a solution to save all the unfortunate people losing their homes, and it might make you a hero come election time, it doesn't allow the natural forces to correct inequities. People used to complain that house prices were so high and unaffordable, that was fueled by easy money, and now will be corrected at the expense of those who took the easy money, but never had the means to repay it.

Thursday, January 24, 2008

Government Stimulus Package

By now, everyone has seen the headlines: $600 tax rebate for every working person, $1200 per family, plus maybe $300 per child. This includes rebates to those who did not pay taxes, but at least earned $3000 (only a $300 rebate for them). They now are including an income limit of $75,000 per single person and $150,000 per couple, where the rebate will decrease, but no details on how or where it goes to $0. They say this is aimed at the "working" and middle class. So good news, if you make more the $150,000 combined income you are no longer middle class, but I guess considered rich! Of course, where I live $150,000 is not wealthy, not when a three bedroom house still costs a minimum $400,000.

Don't get too excited yet, as this agreement still has to be written up and passed by Congress. And already the Democrats want to tag on additional spending and Government programs, such as building roads. They are talking about trying to extend unemployment benefits and food stamps. From Charles Rangel, D-N.Y.,
I do not understand, and cannot accept, the resistance of President Bush and republican leaders to including an extension of unemployment benefits for those who are without work through no fault of their own,
Maybe because unemployment is not the problem. We are at historically low levels of unemployment. There are always going to be people unemployed. The stimulus needs to be focused on the problem areas in the economy. In truth, the most important part of the stimulus package may be tax breaks to companies and small businesses, which allows tax write-offs for 50 percent of the purchase price of plants and other capital equipment and permit small businesses to write off additional purchases of equipment. Giving people money to spend is a band aid. Giving businesses incentives to invest, be more productive and create jobs is a real stimulant to the economy. Although it is not clear this goes far enough to really help businesses, thus is the problem with compromise.
The Dems really want to hand out free money to the middle class and working class (like the rest of us don't work). Why? Because they make up the largest voting base for one. They are against helping out businesses. While the Republicans would like to use business to stimulate the economy, which is longer lasting. So we get a little of each, but probably not enough to amount to anything. It will be interesting to see how this changes when Congress gets a hold of it. Likely it will drag on for a while and be diluted and expanded before going to the President, who probably won't be able to veto it in an election year.

Tuesday, January 22, 2008

Bob Brinker MoneyTalk Commentary 1/19-1/20

Interesting discussions this week about energy issues, especially nuclear energy. Regular listeners to MoneyTalk would not be surprised to hear that Bob is a big supporter of nuclear energy. I've favored nuclear energy except for the waste problem. However according to Bob's guest, Dr. Bill Wattenberg, all the nuclear waste generated for a family of four over 20 years can fit in a shoe box. In addition, they now can recycle the waste and what would be left fits in a shot glass.

I did a little research on the subject, but I find it hard to get the truth. It seems that no source can agree on the facts. Greenpeace and the Sierra Club call nuclear energy too dangerous for the environment and unsafe. There is no doubt that both sides are overplaying fears or the technology. Our current energy production using coal, oil, and natural gas polute the environment way more than nuclear energy would. What is generated by nuclear energy is confined, unlike coal and oil that pollute the air. The "risk" of pollution from nuclear energy is very small (though not 0%), however, the risk from fossil fuels is 100%.

I tried to dig up some facts:
  • France gets 90% of it electricity from nuclear power plants
  • No CO2 emmisions from the nuclear power plants (however I have seen arguments that mining the uranium, creating rods, and transportation makes up for it)
  • The cost of nuclear energy is more or less than other sources, depending on who you listen to. Below is a table from the Nuclear Energy Institute:

Bob and his guest also argue that ethanol is a scam. Environmentalist and farmers love the idea of growing your own energy in the ground, however, opponents claim it costs too much money and energy to convert corn to ethanol. The amount of CO2 and other energy spent in the conversion process makes it a no better solution than oil. If it takes oil to make ethanol, then what is ethanol really buying us? The same argument is made against nuclear, but if you believe the table above, it just isn't true. Who to believe in all this?

Friday, January 18, 2008

Government Bail Out Part Deux

First it was the housing market. Now the broader economy. The Government is looking to bail out the slowing economy. President Bush is looking to eliminate the 10% tax bracket, which would save everyone that already owes taxes $800 a person. What the Government is saying with this:

  • They fear the economy won't recover on its own
  • The consumer's propensity to spend can save the economy
  • People are not expected to pay off debts or invest, but spend, spend, spend
  • Tax rates must be too high as they are willing to lower them
  • Lower taxes equals a stronger economy

And both the Democrats and Republicans seem to be behind this. Could this be because it is a election year? Interesting how the Democrats mostly want to raise taxes if elected, see my entry, but here agree they need to cut taxes temporarily to stimulate the economy. I don't particularly like the Government mailing out checks to help the economy, unless they are backing it with less spending to cover it. Unsurprisingly, the Democrats want to additionally increase spending plans such as repairs to highways and bridge to stimulate growth. Although, there is no doubt we need infrastructure repairs, it can't be paid for by temporary tax cuts. This is an attempt to pile on more spending, under the guise of helping the economy. I probably won't mind seeing my check in the mail, however fiscally irresponsible it may be.

Maximize 401(k) Employer Matching

Be sure to maximize your matching funds from your employer. Money from your employer is basically tax free money that you lose if you don’t properly configure your contribution amount for each paycheck. Typically, a company will match your contributions at some rate up to a percentage. For example, the company may match 50% of your contributions up to 12% of your pay. Or 100% of your contributions up to 6%. Both effectively paid a maximum of $7,750 for 2007 (and 2008). However, to collect that amount, you need to be sure of two things. As a minimum, you must at least contribute up to the matching amount, or 12% in the first example and 6% in the second. Second, you should only contribute over that minimum if you will not max out your yearly limit early. If you do over-contribute, it will reduce the amount you receive from your company matching. For example:

For someone who makes $150,000 and receive 50% match up to 12%:

(a) They should be contributing at 12% per month, but not any more. Since each month they would contribute $1500 and there company would match at $750. After 10.3 months they would be at $15,500 and have a company match of $7750. Maximum contributions for both.

(b) If instead they contributed more at 15%. Each month they would contribute $1875 and be matched $750 (since capped at matching upto 12%). After 8.27 months they would hit the maximum contributions of $15,500, but the match would only be $6200.

Bob Brinker MoneyTalk Commentary 1/12-1/13

The MoneyTalk On Demand sound output has been really low recently which means I can only listen in quiet places. Anyone else have this problem? Once again Bill Flanagan was hosting. Does Bob work anymore?

Again they were talking about return on rental properties. The caller was contemplating the value of only getting a 5% return on rent. He wasn't considering the appreciation. Rent is analogous to stock dividends, and appreciation, capital gains. You need to consider both portions. Bill Flanagan didn't really give the best advice saying "Real estate doesn't always go up, may you'd be better off investing in the stock market". He was really pushing him out of the rental property. However, the stock market doesn't always go up either, as we are frequently reminded. To compare both equally, you need to look at the expected return and volatility of both and see what makes sense for you.

Every week there are so many calls on Roth vs. Tradition IRA or Roth 401(k) vs. regular 401(k). As, Bill said, it is the choice of pay now or pay later. There is no real perfect answer to this question. If you are in a low tax bracket now, like 15%, it probably makes sense to invest in the Roth. But that still assumes that one, the rules won't change in the future, and two the tax brackets don't significantly change. It is entirely possible that in the distant future, taxes rules will change. Highly unlikely, but say we moved away from income taxes and created a national sales tax. Or say the tax brackets shifted lower. Then the Roth IRA was not the best choice. Financial planners are now advising that because of the uncertainty, you invest half of your retirement savings in Roth and half in the traditional IRA or 401(k). I still prefer to put everything in the regular 401(k). For one, I am not in the lowest bracket, and I would rather save now on taxes. Those savings translate into me having more to invest outside of the 401(k).

There was a caller who said he had $200,000 he could not lose. He wanted no risk. Bill correctly said he only had a few options, GNMA, Treasuries, and CDs. However, Bill missed an opportunity to really probe why he wanted "no risk" and what the money was need for. The caller went on to reveal he needs this when he retired in 15 years. With a 15 year time horizon, he really is missing out on a opportunity for much greater returns with relatively low risk of loss of principle. There are also risks of under investing, mainly that you will not keep up with inflation.

Wednesday, January 16, 2008

2008 Candidates: Taxes and Investing

I came across a pretty good summary from the Tax Policy Center of the presidential candidates' positions on taxes. The general summary, as would be expected, is that Republicans want to either maintain the current tax structure or cut taxes, while the Democrats want to raise taxes. This refelects that the Democrats want to increase spending and need a way to pay for it, although it is not clear that the tax increases they suggest will fully pay for the programs. Not all candidates have provided equal detail about their plans, which is probably a smart thing to do when you need to raise taxes. The Tax Policy Center provides a nifty excel spreadsheet of the candidates proposals. I summarize below and supplemented it with some additional information:

Hillary Clinton
  • Repeal tax cuts for the upper two brackets
  • No AMT plan
  • No capital gains plan
  • Keep Estate Tax at 2009 levels, $3.5M, and extend beyond 2011
  • Match savings plan contributions up to $1000 ($500 for income over $60,000)

John Edwards

  • Repeal tax cut to upper bracket (back to 39.6%)
  • No AMT plan
  • Raise the capital gains top rate to 28% (from 15%)
  • Estate Tax Exemption set to $4M

Barack Obama

  • Repeal tax cuts for the upper two brackets, no income tax for seniors making under $50,000
  • No AMT plan
  • Repeal tax cuts on capital gains and dividend (bring back 20% and 10% brackets)
  • Estate Tax Exemption set to $7M
  • Provides a number of new tax credits

Rudy Guiliani

  • Keep current income tax brackets and create an alternative F.A.S.T system
  • Index ATM to inflation
  • Lower capital gains and dividends tax to maximum of 10%
  • Eliminate all Estate Tax
  • Make a Bush tax cuts permanent, expand tax free savings accounts

Mike Huckabee

  • Eliminate all income tax and replace with a FairTax
  • National sales tax of 23%

John McCain

  • Keep the current income tax rates
  • Eliminate the AMT
  • Keep the current capital gains and dividend rate
  • No details on Estate Tax for 2011 (when current law resets Estate Tax exemption to $1M)
  • No tax on Internet and cell phones

Ron Paul

  • No income tax
  • Reduce capital gains and dividends
  • Fund government wholly on excise taxes and reduce government

Mitt Romney

  • Keep current income tax brackets
  • No AMT plan
  • Eliminate capital gains, dividends, and interest taxes for AGI below $200,000
  • Eliminate Estate Tax
  • Keep Bush tax cuts

So is this a case of the Republicans saying what people want to hear? Not really, it is just two different classic philosophies at work. The Dems want to provide more services such as universal health care and pay credits to the poor. While the Republicans look to stimulate growth through lower taxes and tax credits for health care. Research has shown that tax cuts don't necessarily drop tax revenues if the economy responds.

Personally, I wouldn't mind a slight increase in taxes if it was accompanied by sizable spending cuts. The Government has been stealing from the Social Security fund to pay for current and increased spending, using triple taxation (income, gains, and estate), and refusing to make obvious permanent fixes to AMT - like indexing to inflation. The AMT was intended to apply to the 155 wealthiest families that had been avoiding taxes. Now every year it threatens the middle class until temporary patches are applied. However, it is more likely that spending will increase, as it has the last 8 years regardless of the tax revenue, and outpace the tax revenue. Therefore, maybe a drastic change as advocated by Ron Paul or Mike Huckabee is necessary to change the behaviors of Congress. There is only one problem, Congress will never let it happen. They won't vote to change their own ways.

The only realistic changes are small baby steps and I have to say the most favorable realistic plan for the personal investor looks to be Mitt Romney's.

Tuesday, January 15, 2008

Are you ready to begin investing?

Many of my friends and colleagues at work, whether young or old, often ask for help investing, which normally means which fund to pick for the 401(k). Before you even get to the point of picking stocks and funds you need to make sure you are really ready. At least ask the following basic questions:
  • What is my outstanding debt?
  • What is the interest rate on my debt?
  • Do I have an emergency savings fund that is sufficiently funded?
  • Do I have any big purchases or expenses in the next 5 years?
  • How much am I contributing to my 401k or IRA fund?
Mathematically speaking, if you have outstanding debt with an interest rate that, after taxes, is greater than the expected return on your investments, then you should not begin investing. The one exception to that rule is you should still try to fund your 401(k) to the maximum employer matching amount. This is free money that you can never make back. In general, most mortgage rates and car loans are low enough that it make sense to carry them and invest, however, most credit card rates are not. Remember most school loans and mortgages are tax deductible so the effective rate will be less than the actual interest rate (interest rate X (1 - tax rate) gives after tax rate).

An emergency fund equal to your living expenses for at least 6 months should be in a high yielding savings or money market account, like INGdirect or the many similar. This can be built up while paying off debt, but should be in place before you begin to put money at risk.

If you plan to make a large purchase such as a house or car, make sure you are saving down payment money in a high yielding money market at a sufficient rate to get you there by the purchase date.

If you have all that covered and have money left to invest, now is when you have to decide why you are investing. As that will guide you to which is the best vehicle to use, 401(k), IRA, 529 plan, taxable account, etc. My opinion is that first priority is to make sure you will have enough money in retirement. This can be covered in many ways such as pensions, Social Security, or inheritance, to name a few. If it is not already covered, then you should try to max out (or contribute enough to meet your retirement goals) your 401(k), 403(b), IRA, or similar plan before investing for a child's college or investing in a taxable account. The reasoning is that money compounding tax free for retirement is a powerful thing. If you put it off or don't fully fund it your are missing out on many years of growth. Also, you can always get a loan or use a number of methods to pay for college, but you can't get a loan for retirement (Ok, maybe you could do a reverse mortgage, but still not the best plan).

So if you are executing a realistic retirement strategy, next on the priority list would be to invest for your children's education, if applicable. There are a number of tools online to calculate how much you will need and this is a huge topic on its own. I prefer using 529 plans and recommend dumping as much as you can into it early on, up to your tax limits ($60,000 per person for the first 5 years). Again this gives it a chance to grow tax free. The online tools can also estimate how much you need to contribute monthly.

Finally, if you have all the above taken care of, then you would consider investing in taxable accounts. Asset allocation and a range of other topics will follow. I'll get into how I chose to invest in these accounts and hopefully discuss with you your ideas.

Monday, January 14, 2008

Steroids and HGH likely a bigger problem in Hollywood

This post goes under the etc. category, but I couldn't help but comment. I've been saying to my friends for a while now that probably everyone in Hollywood and every male model probably uses or has used HGH and/or steroids. Considering all the competition to look great, how could they not be using something that keeps them lean and fit and employed? It has been pretty obvious for a while now, where it seems like everywhere you look there is some new buff B-list celebrity or model. It's not like they are ever going to drug test entertainers. Eight months ago Sylvester Stallone was busted with HGH in Australia and maybe Japan. Now a report out that many musicians are linked to it. I don't really think the average musician has the time or discipline to be sculpting the perfect body, but yet there is a disproportionate number of them in music videos. Now it seems even some women musicians like Mary J. Blige are in on it. Eventually it is going to become a big scandal in the entertainment world, but one with far less impact and consequences than in sports.

Sunday, January 13, 2008

Bob Brinker MoneyTalk Commentary 1/5/08-1/6/08

Bob spoke a lot about real estate this weekend. I think one interesting discussion point worth mentioning here is how to evaluate investing in rental properties vs. investing in mutual funds (or any other investment).

Bob said he likes to use cash on cash to calculate return. He didn't quite go into all the details and seemed to assume the property was payed off. Your total return is calculated by first estimating the starting value and final value of the equity in the property. Second, determine the yearly cash flow of the property, income - all expenses (mortgage, maintenance, insurance, taxes, etc.).

The return on equity for the year would simply be (final equity - starting equity)/(starting equity)=x
Note that the final equity would be a factor of appreciation and repayment of principle

The return on income would be (income - expenses)/(starting equity)=y

Total return = x + y

You can now compare the return to an investment in a mutual fund. This may seem pretty obvious, but the trap people often fall into when evaluating, is that they'll use their initial down payment on the property as a reference point. Since the purchase was highly leveraged, they'll look at the return on that down payment. In actuality, they should assume they would be swapping the cash value of the house (equity) for a mutual fund and comparing the return on that. Quite often one will find that the equity appreciation has outpaced the rental income and you can actually do much better cashing out and reinvesting in something else, especially if you factor in the management time involved with being a landlord.

The (Un) FairTax

The FairTax, as called by its supporters, is the solution supported by a number of the remaining Presidential candidates. In fact, it is not fair and really only benefits the poor and rich. While some aspects are interesting and it would probably save me some money on taxes, I can't support it as a real solution. It also has zero chance of being passed by Congress. From their website:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax -- administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

Kind of sounds great at first, doesn't it? Well, here are the bullet points and counter points

  • No taxes on income of any kind, instead it is replaced with a 23% consumption sales tax on new goods and services for personal use - no tax for businesses. So business purchases are exempt, sounds like a nightmare to enforce and book keep, not impossible but a big undertaking to implement. Also, hard to believe all the taxes collected from businesses can be eliminated and pushed to the consumer. Can the average consumer get used to paying 23% more for everything? There is a big psychological barrier here.
  • The prebate makes the FairTax progressive. The prebate is provided monthly to every worker with a Social Security number to offset necessities at a rate equal to the poverty income rate.
  • Retail prices no longer hide corporate taxes or their compliance costs, which drive up costs for those who can least afford to pay. So theoretically the consumption tax will be offset by the drop in prices. How long before a thriving black market springs up? I can see people flocking to buy goods from Canada and Mexico tax free.


The wealthy make out really well with this plan because this is a consumption plan. Typically the poor and middle class spend 100% of their income every month on goods and service, while the wealthier and upper middle class save and invest a portion of their income. The current 2007 tax schedule for an individual is:

Someone making an adjusted gross income (AGI) of $500,000 currently pays $154,074.25 or 30.8% in Federal income tax plus social security or 32%. Moving to the FairTax, they would only pay a maximum of 23%, but most likely would be at least saving and investing some portion of their income, say 50%. Their tax rate under the FairTax would only be 11.5%. Now the same calculation for the middle class, a family living off of AGI $65,000. For most families that is just enough to get by and they are not saving or investing any portion. For 2007, they pay $16,771 or 25.8%. Under the FairTax they will pay 23%, since they spend 100% of their income. So in this example, the poor pay 0% (because of the prebate), the middle class pay 23% minus the prebate and the wealthy pay 11.5% minus the prebate. Does this still seem fair?

The last evidence of unfairness is what about all the people who have utilized Roth IRAs, Roth 401k, 529 plans, etc.? They have already pre-paid the tax on their investments with the reward of withdrawing it tax free. Now they will again be taxed when they use it for purchases in retirement or for school. In fact, all retirement plans are made obsolete, as there will be no need for tax sheltered growth.

So who supports this? Of the candidates that are left:

Mike Huckabee

Ron Paul

The chances of a change in tax policy like this are worse than slim to none. Even if it mathematically made sense, the industry lobbyist for accountants and tax prepares would fight this like never before, as we're talking about eliminating an entire industry. Also, with very little support in Congress in either party, there is no way this would pass a vote.

By the way, I do like a few aspects of this proposal.

  • No tax on earnings, effectively taking the capital gains and tax on dividends to 0%
  • Only prebates for those with documented jobs and a Social Security number, remove the incentives for illegal immigrants
  • Eliminates the advantages of being "off the books"
  • Eliminates all estate planning issues, AMT, and many other types of taxes, but that is also why I find it unlikely to be fiscally feasible

Friday, January 11, 2008

Bob Brinker Commentary

I don't know why, but one of my favorite radio shows and podcasts to listen to is Bob Brinker on MoneyTalk, find the radio station nearest you. The podcast are not free however. I never miss a show, but I can't help but feel he and his guest hosts give out incorrect or not the best advice quite often. Mostly it is due to the fact that they don't fully grasp the question and are on the spot to answer live. In general, Bob preaches the long term index based investing philosophy that I follow. However, he also claims to be a market timer, which is in direct contradiction to many of his guests and recommended readings. But that is a topic for another day...

I want to try something here and comment each week on a few questions and answers and/or topics discussed on the show. Hopefully this will spark some lively discussions in the comments section.

Was 2007 really so bad for investors?

Now that 2007 is over, let's look at the year in review. To listen to some people discuss the economy and the markets, you would think it was a horrible year. In fact, you would think the last 8 years have been terrible, but anyone invested in the market knows that is not true. Focusing just on 2007 for now, here are the numbers:

S&P500: 3.53%
DJIA: 6.46%
Nasdaq: 9.63%
Wilson5000: 3.94%

Those numbers do not take into account revinvesting dividends and, if you did, the S&P500 had a total return of 5.49%. These are certainly not stellar returns, but nonetheless performed comparable to more conservative investments such as CDs and Treasuries.

There were two real issues in 2007 and that was the real estate market and volatility. If your only investments were in real estate, financial companies, or your house, then at least on paper, you are looking at losses. The S&P Financials were down over -20%. Likewise, the DJ Wilshire REIT Index was off -17%. Meanwhile, the energy and emerging markets sectors were the real winners up 32.38% and 42% respectively. You should have owned all of these as investors in Index Funds or ETFs.

Quicktip: if you are sick of increasing gas and energy costs, invest a little in the energy markets, at least as your bills go up, so does your investment

The volatility in 2007 meant it took a lot of courage to stay in the market amidst the wild swings. However, fighting the urge to bailout is the right move to make, as I will discuss in future posts.

Finally, inflation year over year for CPI core was 2.3% as of November (that excludes energy and food). CPI-U, which includes it all, was at 4.2%. The core inflation is what is usually quoted and used for your Social Security calculations.

So what do all these numbers mean?

  • First, if you were a diversified investor in the overall markets, you owned all of the good, bad, and ugly performing stocks, and came out ahead, which is what I will be pushing in future posts

  • We are reminded that Real Estate does not always go up and should only be a part of your investment strategy

  • By definition, we are not in a recession, as evidenced by moderate inflation, economic market growth, and GDP growth

I look forward in 2008 to discussing how we can ride out the volatility. We should be investing for the long term and ignoring the short term swings.

Thursday, January 10, 2008


Welcome to my blog where I'll discuss my opinions on money, investing, and even a little politics, or anything else important in the world. I look forward to having discussions on these topics with anyone interested.

I find it surprising that most people in my age group (30s) have very little knowledge or interest in these areas. Of course everyone is interested in money, but very few take the time or have the discipline to properly save and invest it for the future or short term. For those who at least have the interest, I'll write about my experiences and methods of investing, and hopefully give you a head start in investing.

I have always been interested in money and investing and have made it my full time hobby to learn everything there is, however, I am not a professional planner, CPA, or broker.

Upcoming topics:
Was 2007 really so bad for investors?
Where to begin with investing?
Investing vs. paying off the house
Just say no to annuities