Social Security Recipient Angry, Politician Pandering = Bonus for Seniors

What could be worse for incumbents in the House of Representative, who are trying to save their jobs, than the high unemployment numbers? How about angry seniors?

The large and powerful voting block of retired citizens are now feeling some pain. Maybe the unemployment and jobs market didn't bother them too much, since they are retired, but now that their two staples of retirement - their piggy bank of a house, and monthly Government stipend from the Social Security Administration - are under attack they will be looking for vengeance.

First the facts. For the second year in a row, there was no cost of living adjustment (COLA) in Social Security payments, for the simple reason that there has been no inflation since their last increase in 2009. They received a huge 5.8% increase in 2009, due largely to the soaring gas prices at the time. Those increases in prices were temporary, however the raise to Social Security recipients was permanent. When prices dropped (measure by Consumer Price Index (CPI)), such as energy and housing, they still kept their raise in 2010. In reality they should have seen a decrease in 2010 and then would have gotten another increase in 2011. However, the COLA formula does not allow for decreasing the payment so it stayed steady.

Cue in the all the local newscasts interviewing the elderly who are angry, sympathetic, and claim they could really use the extra money.

Cue in the politicians who don't want to lose votes. Immediately there was talk from Nancy Pelosi and others who want legislation to give seniors a one time bonus of $250 to make up for no raise. Does this sound like buying votes to anyone? This would, on average, amount to a 2% raise for Seniors.

What about the unemployed with 2 kids, shouldn't they get a raise? Surely they deserve it too? Where does it stop? We all wish there was more money to go around, but when times are tough, you can't have the Government spending our money to help out their favorite voters. There is legislation as to how and when there is a COLA, lets follow that. When the local, State, and Federal Governments are cutting jobs to save money, workers are laid off to pay for pensions of retired employees, and there is a gaping Federal budget deficit ($1.3 trillion in 2010 alone) there needs to be constraint.

The Government needs to get leaner until it can live within the tax revenues being generated, not finding new ways to spend money.

"The Social Network" Disappointment

"The Social Network" was somewhere between an interesting documentary and a boring dramedy. It appears I am the only one who thinks this.

I'll admit it, I am the only one who doesn't think The Social Network was a great movie. Every critic, every Yahoo user, gave it top marks. I found it interesting, but not particularly entertaining. I love documentaries, and it just had a good fictionalized documentary vibe to it - like something a step above what you might find on CNBC. However, it still seemed lacking as a truly entertaining movie. I was really expecting more since I have never seen such agreement by the critics.

My rating would be a C+. Any others out there share my view?

Profiting from Solar Energy on your Roof Part 1

It looks like it is finally possible to make some real money rather quickly by just installing solar panels on your roof. This summer has been hot and sunny to a fault, with very little rain on the east coast. We have only gotten about 3 days of rain since the beginning of June (till now middle of August). So while sitting outside sweating in my yard that has no shade, I had an idea that I should put all this sun to good use. I did a little research and it turns out where I live, NJ, is the most economical state to install solar panels. Bottom line is that the break even point is less than 4 years, and then after you can make about 26% annual return on your investment tax free for another 11 years.

There has not been some technical breakthrough, in fact this is the same solar technology used for 25 years. It is all due to tax breaks and Government programs. I wanted to share this opportunity with everyone interested in making a few dollars. We may as well take advantage of these programs and tax breaks:

1. 30% tax credit on the cost of the solar system and installation. There used to be a cap on the maximum amount but that was lifted in 2009.
   
2. Generation of Solar Renewable Energy Credits (SRECs). In New Jersey, the energy companies are forced to buy these credits back to avoid fines and penalties for not producing enough energy from renewable sources. Kind of like a mini CAP and Trade program.
3. No sales tax on purchase.
4. No property tax increase allowed, although the value of the house will increase.
5. No tax on income generated from solar energy.

The big advantage in NJ is #2 above, the SRECs. A marketplace was created for buying and selling energy credits, which you earn for every 1000 kilowatt hours generated, and is what allows you to break even in under 4 years. It should also be noted that things scale linearly, so no matter how big or small the system, the break even time is the same. The price I am paying is $5 per Watt, whether I get one panel or 100. So ideally you would want to get as large of a system as possible so you can earn as much money as possible.

There is a lot of details both economical and technical about this investment, but I wanted to start with the economics, since this is really the reason to do this. The fact that this it may help the environment is a side effect (and also arguable), but there is no arguing the economics. I plan on a number of blog postings as I go through the process (nothing has been installed yet).

Here are the raw numbers. Each panel produces about 230W and I am looking to put between 30 and 38 of these panels on my back roof facing south. The system will cost between $34,500 and $43,700. Every time I mention those numbers to people, their eyes pop out. However, think of it as an investment. You'll have your money back in four years and continue to earn a return on it for another 11 at roughly 26%. After the 11 years the return will drop to around 6.5%. The reason is you can only earn SRECs in NJ or 15 years. So continuing with the numbers, let's take the larger system. In the first year you will get back immediately 30% in your next tax filing, that's $13,110 (dropping the cost basis to $30,590). In addition, that system will generate about 10 SRECs a year for roughly $6,000. It was also estimated that I would save $2,000 a year on my electrical bills. So in the first year, I have practically paid off half the cost of the system. The remaining 3 years will generate about $24,000 and pay off the remainder. After that, it will continue to generate roughly $8,0oo in income, all tax free.

So now you can see why you would want as a big a system as you have roof space. If I were to double the size of the system, I could double my income. My system should generate about $88,000 profit over the first 15 years.

What you need to get started on this is a good site for installing solar panels: an unshaded area that points southwest. This is what limits you the most. Too much shade and you will not generate as much electricity and your effective cost per Watt will skyrocket. You also need investment capital. There are a number of financing possibilities and you don't need all the money on day 1, but you do need money to make money.

I will continue to blog on this topic as I go through installation and start generating electricity to see how well reality matches my estimates. At this point I am waiting on permits for the installation to begin, but should have it in place by end of August.

iPad, iHype, iFail

After all the built up hype, comments from Steve Jobs about this being a revolutionary product (and saying we would be surprised at how we interact with it? touch screen keyboard? wow), the iPad is disappointing. It turns out to be exactly what the original guesses were, a large iPod Touch, with a 3G option.

I have been reading the message boards and universally people seem disappointed. For every comment about loving it, there are ten saying "meh" or worse. The price turned out to be more reasonable, but the lack of a camera for me is the biggest set back.

I bought a netbook by ASUS (running linux) 1 year ago and it has more capabilities and a 10" screen for $384 at the time. It appears the iPad blows the Intel Atom based netbooks out of the water on shear speed, but...

• No camera, some predicted 2 even
• No Flash support in the browser, huge deficiency for a device this size competing with netbooks
• No multitasking, minor problem on a small device
• No usb or removable storage
• 4:3 ratio? Little old school

And how about those wild leaks at the 11th hour about HDTV, PVR, OLED? Nothing of the sort. I am sure most of my gripes above will be addressed in the next version, except for the USB and removable storage. So wait for the next version, as was the case for the iPhone, to get the one they should have made.

I am sure they will sell plenty of these, but realistically, who is the market for this? There will be those who buy everything Apple puts out, but really if you already have an iPhone or iPod Touch or something equivalent, you don't really need this. It is a little underwhelming for a netbook with the lack of a camera and Flash support, but they will capture some of that crowd, although I don't think it will be a large market share. So basically this is for someone looking to purchase their first iPod or upgrade from an old one.

This is not coming from an Apple hater, I am currently typing this on a recently purchased iMac. The Apple hype machine pulled out all the stops on this one and made Steve Jobs look like a seller of snake oil. They may have trouble the next time around getting the same attention for a new product, when they really do have something revolutionary to sell.

Where are the good jobs? I have some.

Seriously, unemployment is rising, the markets are down, but all is not lost. I have 4-5 well-paying jobs for educated college grads or those with more experience. I will try to do my part to help out this economy and at the same time I am in some desperate need of help.

These are for US citizens in the NJ area. I am looking for programmers, project managers, and electrical engineers with a background in wireless networks and networking in general. Experience in modeling and simulation preferred.

If this sounds like you, send me your resume, information, and desired salary range to: jobs.jdfournier@gmail.com.

Government Stimulus Package #2

This is not an efficient stimulus package. Obama and the rest of the democrats have already demonstrated to not know what they are doing with his recent comments saying something like “I don’t understand all these complaints about the spending in the stimulus package. What do you think a stimulus package is?” So he basically admits that he believes stimulus = government spending. Stimulus will cost the Government money, but it should not be in the form of welfare. Most of the spending is welfare one way or the other to specific industries and the problem is that is only a short term fix. The stimulus package should be incentivising people and companies to create jobs and invest. It should be cleaning up the financial issues weighing down companies, banks, and individuals, which would allow them to invest in new ideas, start companies, and buy houses.


There should be no spending on education, defense, and agriculture in a stimulus plan. These are all examples where congress is trying to funnel money to their constituents. These areas might need funding, but not as part of this bill. It should come out of the normal operating budget.


In addition, all stimulus should be effective in 2009, not 2010-2012, as much of it is. Giving everyone tax breaks that amounts up to $800 is another band aid that was tried last year with no long term success. Instead, cut taxes on companies and small businesses. Allow them to depreciate all equipment purchases in 2009. Provide tax relief on purchases of foreclosures and all house purchases, not just for first time home buyers. Develop a comprehensive energy plan that is more than just light bulbs. One idea I’ve heard mentioned is converting the government fleet of vehicles to natural gas. This would include mandating new purchases, and possibly retrofitting current ones. This would benefit car companies and local small businesses, clean up the emissions (60% less emissions), and lessen our dependence of oil. This would also fund infrastructure upgrades and eventually allow consumers to begin transitioning to this technology.

Those are just some ideas, but unfortunately with this many people working on the bill we can never get a efficient stimulus plan. Designing anything by committee just leads to too many compromises and a bloated price tag, as each side will concede on something to get their piece of the pie.

I contend that the stimulus package should not be aimed directly at providing people currently struggling with their bills, whether due to loss of their job or lower incomes. The reason being that the government cannot possibly provide those people with enough money to live on. Just look at how much it will cost to give those making under $70k, $800. Instead it has to be focused at the root causes of the current markets, namely the credit markets and housing, both of which are interconnected. Unfortunately, much of the blame for the problems in each are self-inflicted by the industries and the government. However, if we are to get better, we need to stop the finger pointing and worry about what can be done going forward. The financial market is so interconnected that it is not possible to be vengeful and only help out those companies that are deemed to be innocent in all this. There is also a lot of self-correcting that has to occur. The fact is that the previous strength of the economy was propped up by easy lending practices, low rates, and legislation and policies. This created a runaway industry, too much building, too much buying, too much wealth by homeowners, that used their new found equity to fund many other purchases. There is no doubt that if left up to free market forces the housing market will self correct, but the mechanism is painful. One major point of new regulation and stimulus is to prevent these huge swings of boom and bust, since the free market is just too volatile. However, the credit/banking markets can literally collapse if not backstopped by the government. All the efforts so far have been in form of loans or investments by the government and provided this helps, should be repaid. The country’s economy cannot survive without a viable banking system. If there is no reasonable credit available, there is no business or industry that can operate and be as prosperous as we have been over the last 50+ years. Small businesses need lines of credit to make payroll. All businesses use loans for major investments in equipment, other companies, and growth. This industry is so critical to our way of life that it needs to be the top priority and revived first and the rest will follow.

Please, no Auto Bailout

The Democrats made a clean sweep in elections and control the House, Senate, and Presidency. Now there are no checks and balances on what legislation they can pass. Already, there is talk of giving a way another stimulus package, bailing out the American auto manufacturers, and confiscating 401k accounts for a Government run pension-like program.

Now my worst fears of a socialist country are coming true. Clearly Obama won the election mostly due to the hate of the Bush administration, rather than his plans for the future. We know the Democrat elites have a love for Europe, but let's not turn this country into another France, where the Government protects everyone's jobs and ends up stifling innovation and economic growth. Nancy Pelosi and Harry Reid are calling for a loan package be issued to GM, Ford, and Chrysler to keep them in business. We can't start bailing out every industry. We need to allow them to sink or swim on their own. We have to allow the car companies to fix there own problems, by consolidating, reducing costs, and focusing their products to what the market wants.

Notice how the foreign car makers (who employ thousands of Americans) are having an off year, but are still making a profit. This is because they make a product that people want and can manufacture it at a low enough cost to be competitive. And they don't do this by having low paid workers in Japan or China. Toyata, Nissan, and Honda, have plants in Texas, Mississippi, and Alabama where they make cars for the US market. However, they don't have a history of bad deals and promises with the United Autoworkers (UAW).

The US companies have too many product lines, many that are unprofitable, and too many longterm pension and healthcare costs that are killing their bottomline. I heard Larry Kudlow say today that basically the US auto industry is a healthcare company that makes cars on the side. It may require that Ford, GM, and Chrysler file for bankruptcy, scale down operations, and emerge as a leaner, smaller, but profitable company. Likewise, the UAW may have to negotiate contracts that don't kill their own industry. If the Government bails them out, it will only be a temporary patch, that will re-occur over and over again.

Some may argue that if the banks were bailed out then why not a large industry like the auto industry. First, a strong banking and credit system is needed for any and all businesses to function and has world wide implications. No other industry has this far reaching effects. Second, there are alternatives and profitable car manufacturers, so if some were to disappear, it would not create all to fail, but rather strengthen the other businesses.

The airline industries have been going through a similar problem for years, it has caused consolidation, some to file bankruptcy, and new profitable competition to step up. Loaning money to a company like GM is not going to help them, as their problems are not a temporary shortfall of cash, but rather a fundamental business operations problem that won't go away without major changes to the business.

The College Fund

I recently had a little baby boy and started a college fund for him. My plan of attack is to put as much as possible in there for the next two years, at which time it should be close to being enough for in-state tuition for four years. Then I'll let it sit for the next 10 years invested in index funds. I'll re-evaluate around year 12 if it still is enough for in-state tuition and start making adjustments from there. So my priority of investing at this point is: 1) emergency fund, 2) retirement, 3) college.

Traditionally in the past, people have contributed to their son’s, grandchild’s, or nephew’s future education through Savings Bonds or with cash. We have instead established a 529 Plan account for the purposes of saving for college because it has many distinct advantages over traditional investments.

College Costs
College tuition has always been expensive and continues to rise at a higher rate than general inflation. On average, tuitions in 2007 increased over 6.6% at public institutions, 6.3% at private, and 4.2% at 2-year schools. A survey of the costs of local New Jersey schools, in the table below, shows the current formidable challenge of paying for college. It is unlikely that college tuition inflation rate will decrease in the future years, as there is no incentive for colleges to do so, as more and more people attend universities each year.

Investing for College
To combat the college inflation rate, a more aggressive approach is needed than simply socking away money for 18 years in a savings account or using low-yielding EE bonds. To at least keep up with inflation, a college fund needs to average a greater that 6% return. That can only be done by having exposures to equities, which although more volatile than savings bonds, have a history of providing an average annual return of over 9% over the last 15 years. Luckily, college for Jack is 18 years away and the long time horizon allows for a more aggressive approach, as time can be used to smooth out the ups and downs of the stock market.

Savings Bonds vs. 529 Plan
People have felt safe buying savings bonds because they are guaranteed to never lose money and have a face value double of the invested principle. However, the current savings bonds are also guaranteed to not keep up with inflation. EE bonds purchased today have an interest rate of 1.4% and a maturity date of 2028. In addition, the interest is not exempt from Federal income tax. On the other hand, the 529 plan allows one to invest in a number of diversified mutual funds, tax free (not tax deferred like 401(k) or IRAs), that can provide a much greater, although more volatile, return. They benefit from the tax free growth, as well as, tax free use when used for college expenses. In addition, the fund holdings can be very conservative in Government bond funds or more aggressive in all equities, such as a small cap fund, and shifted over time from aggressive to conservative funds very simply online. These are the primary reasons we chose to open a 529 Plan, which are offered separately by every state.

Our 529 Plan
New Jersey’s 529 Plan does not provide any significant incentives for residents, so we chose our plan based on finding the one with the lowest fees and best fund options. We opened with the state of the Nevada, which is administered by Vanguard, who is known for having low cost index funds in a large number of areas. They offer a total of 22 funds in many areas in the Nevada plan. The stock market has been very volatile the past few years, with small gains seen last year and significant losses this year. This coincidentally provides a good time to start our college fund, and since it has an eighteen year horizon, we can utilize the equity funds to provide a higher return. Jack’s College fund was established with an asset allocation as follows:

• Vanguard Total Stock Market Index Fund – This mirrors the complete US stock market including the large, small, and mid caps and provides the core holdings for the college fund. The US total stock market has seen about a 11% drop this year (as measured by the Wilshire 5000), but we expect the broad stock market to recover and provide respectable results over the next eighteen years around its historical average of 6-8%
• Vanguard Total International Stock Index Fund – This is a fund of funds that includes three international funds, the European Stock Index Fund, Pacific Stock Index Fund, and Emerging Markets Stock Index Fund and provides a very diversified international weighting. Much of the growth is expected to come in the emerging and Asian markets over the next few years and provides a good uncorrelated return to the US stock market.
• Vanguard Small Cap Index Fund - This index fund follows the small cap market and provides a heavier weighting of the faster growing small cap segment of the US stock market. This boosts the small cap representation already present in the Total Stock Market Index Fund.
• Vanguard Value Index Fund – This index fund follows value stocks in the US stock market, which includes those stocks whose are considered undervalued and have great potential for growth. Including this fund provides a small additional weighting to value stock.

Our asset allocation for 2008 is shown in the table below:

No bond funds were used in the allocation for two reasons. First, with eighteen years until funds will likely start to be drawn, there is no need to be conservative now, especially as college cost are increasing at over 6% and Treasury rates are low at 3%. Second, interest rates are expected to rise over the next few years in response to the low rates we have now, and expected increase in inflation. If interest rates do go up, it would follow that bond funds will see a drop in net asset value as their yields increase. If and when that happens it may be appropriate to buy into those funds to capture some of the increase yield.

Back online

I have been away for a few months, having had a baby boy at the end of June. I will start back up again now. I have started a new college fund and my first post will concentrate on that. In addition, I will update my investment progress. All in the next few posts.

Yes, CDs are still safe

Over and over again the ultra-conservative investor seems to ask the question on financial shows like MoneyTalk, "Are my CDs safe?". Especially when relating to banks or institutions that have been in the news such as Countrywide. Of course these troubled institutions are the ones with the best rates on deposits, since they are the most desperate for money. You know there is a real panick, when people start to question the riskiness of CDs.

The simple answer is make sure you are insured by the FDIC at the bank and sit back and relax. FDIC insurance covers deposit amounts up to$100,000 per person per bank. You can verify the bank has FDIC insurance by visiting http://www.fdic.gov/. If your bank does fail, its assets will either be taken over by another bank or you will be paid principal and interest by the FDIC in usually one day.

Stimulus Package Rebate Checks

The checks are on their way for those eligible for the Government's economic stimulus package. Here are the rules for how much you should be getting:

• If $0 to $300 in tax liabilities, but still earned at least $3000, you will get $300
• $301 to $600 tax liabilities, and greater than $3000 in earnings, you will get back an equal amount
• >$600 tax liabilities and earned <$75,000 you will get $600
• 5% decrease in benefits for any amount over $75,000 (or $150,000 for couples)

So, for every $1000 over the limit you lose $50, which means no rebate for those making $87,000+ (or $174,000+ for couples).

For some, the actual checks have been less than expected. I know of people who make well under $75,000 (more like around $19,000) who only received a $530 check (direct deposited). This is probably due to the first two bullets above. Since this is a rebate on taxes, it is limited to the amount of taxes actually paid, so if you paid less than the $600 last year, you will only get the amount back. The exception is that you can't get less than $300 if you have at least $3000 in income. This was put in to take care of seniors. Comment below if it seems like you are getting cheated out of the rebate. Call the IRS at 800-829-1040 if you run into problems and have your IRS letter that explains how they calculated the refund handy.

Bob Brinker Calls Bottom, Bullish

Bob Brinker, famous Marketimer newsletter author and radio host, is going on the record with calling the market bottom on March 10, 2008. He is bullish that, while we may be in a small recession and have had a nice little correction, we will seen new highs in early 2009. There is likely to continue to be high volatility in 2008, but a general postive trend. I find this interesting that he would be so bold to call this. I cannot pretend to be able to agree or disagree with his prediction, but I do agree that staying invested in a diversified portfolio that includes equities (100% of long term money in my case), and continuing to dollar cost average into index funds is a sound strategy for now. Trying to time the market is difficult, if not impossible. It may have been easy to get out on the way down (although I am sure very few got the top correct), but deciding when to get back in with all this volatility is near impossible. There has been great buying opportunities in 2008 and, if taken advantage of, will pay off nicely has the trend begins to climb back up.

Death to Income Tax?

To take from one, because it is thought his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, "to guarantee to everyone a free exercise of his industry and the fruits acquired by it. -Thomas Jefferson

Those are the words of Thomas Jefferson on the issue of income taxes. Something to think about now that most of us have filed our taxes for 2007. Our founding fathers and, in fact, our Constitution did not allow for the collection of income taxes. The Government was funded by excise taxes, tariffs on imports, and donations from the states. The states collected primarily property, flat taxes, or import taxes. The federal Government started using income taxes on and off through 1895 to fund wars. In 1895, the Supreme Court declared the income tax unconstitutional. It took an amendment in 1913 (the 16th) to the Constitution to firmly establish the income tax as a permanent fixture in the tax code.

The income tax rate has fluctuated throughout the years, reaching as high as 91% for the top bracket in 1964. After the recent Bush tax cuts, rates are currently more moderate than those times, but still higher than the Reagan years. Now, the rate looks to be in danger of again increasing, if a Democrat wins the Presidential election.

Many have called for elimination of the income tax as they are fed up with increases in spending and increases in other tax rates. The Social Security tax cap continues to go up every year (and will be eliminated if Obama has any say about it), state taxes are increasing, and basic necessities like food and fuel are seeing high inflation. Ron Paul has been the Internet cheer leader for calling for the elimination of income tax, and although has a strong cult following, could not mount any significant momentum in the Republican primaries. Still many call the income tax system unconstitutional (which it really isn't). Flat tax and "fair tax" supporters also have been vocal, but both plans result in lower taxes for the upper income brackets, and do not lower the already low middle class rates.

Therefore, the populists tactics of the candidates prevail with battle cries to help the middle class and tax the rich. As do promises of more Government programs to support and help the country, whether it be for universal health care or money for college. There will be no relief or reduction of taxes without large cuts in programs, adjustments to social security, and reduction in Government. But when was the last time a candidate won any office by promising to do less than his/her predecessor?

Moving on up!: Great time for a new house

Despite the subprime problems and real estate recession, or actually because of it, this is a great time to be looking at real estate - whether you want to upgrade or downgrade your house or invest in REITs. I've been dollar cost averaging into real estate mutual funds for a while now and, while it certainly lost money last year, this is a great time to buy at a dip. It may continue to be very volatile and even lose more money this year, but since stocks are forward looking, REITs may be poised to start recovering. However, it is even a better time to make a move with your personal residence.

This is something that I assumed I would be saving for a couple more years. But I recently came to the realization that I might as well look at purchasing now. I do have considerable equity in my current townhouse and I do have a decent amount saved for a downpayment. Moreover, it's a great time to buy or upgrade because it's a buyer's market and interest rates are low for those with really good credit. Usually low interest rates do not coincide with low house pirces and instead push prices higher. I could continue to save a few thousand each month and then in a couple of years I would have an even bigger downpayment, as my equity would also have grown. However, the other alternative is to buy cheap now and instead of saving that $1000 each month, put that directly into the house in the form of a higher mortgage payment. To put it in perspective, I am looking to go from approximately $350k to $450 - $550k house. At the same time I am looking at some slightly cheaper neighborhoods that get me more for my money. Since there is such a good choice of homes on the market, I am excited about what bargains can be found. You can really afford to make many low ball bids and get a good value in this market.

On the flips side, most homeowners are just looking at how much less their home is now worth. That doesn't bother me, as I have been in my current home almost 7 years and still have made considerable gains. I would much rather be trying to sell now at a discount and pickup a new house at an even better discount. It bothered me more when we had outrageous home prices the last couple of years.

So this may be a great time to upgrade if you

• live in a desirable area
• are willing to price your house at a discount that reflects current market conditions
• have great credit to qualify for a low rate
• have 20% of the purchase price for a downpayment

Having found some great properties in my area that would double my living space, I am very motivated to list my house. All I have to do is some minor repairs and touchups to get started. I'll keep you updated.

We're all paid what we're worth

I don't see, on average, how anyone is underpaid or overpaid in a free market, with the exception of those making minimum wage (who could be overpaid). In a free market professions are paid what they are worth to the employer and what the employee is willing to work for. Basic supply and demand. If it is really hard to find qualified people for a particular job, then the employer has to raise the wage until it becomes attractive for the employee. On an individual basis, it is true someone could be a bad value and normally things would self-correct and they are either fired or receive smaller raises. Unfortunately, if you throw in unions and tenure, that breaks the normal free market, and prevents individuals from being correctly compensated (whether more or less) according to their worth. However, professions on the whole are still governed by supply and demand.

That is why you see athletes and actors with large salaries. They a) make a lot of money for their employer and b) good ones are in very low supply. However, something like education is not a money making profession, but its value is set by what the tax payers are willing to pay for the service. Since there is no shortage of teachers who can do the job (compared to athletes who can throw 95 MPH fastballs) that wage can be held much lower. So whatever the current compensation for a profession, it has been set by the free market. Thus I find it hard to accept frequent comments about how certain profession are under or overpaid.

Bob Brinker MoneyTalk Commentary 3/22/08-3/23/08

Bill Flanagan took over this week. It was amazing to see the types of calls coming in these days and shows a lot about investor confidence. An inordinate amount of people are worried about CDs and brokerages. Even those with insured CDs are getting skittish. At the same time, the fixed income crowd is getting worried about their return dropping, due to the lowering of interest rates, and wondering how to get a better return "safely". Obviously there is no real way to remain at the same level of risk and get a better return, unless you were in some really bad investments.

I think the rest of the show was about his dislike of annuities, which I can't disagree with, but he never really gives the callers a chance to explain the specific terms and quickly shoots it down. I think it would be more effective to spend more time and go through the specifics to show why these are not as good as they seem. The subject probably deserves a series of posts, but the short of why annuities are no good:

• high expenses
• low returns
• fixed returns, rarely stay fixed
• high surrender charges
• main purpose is to provide tax advantages, which is of no use if bought within a 401k or IRA
• surrender charges on early withdrawals
• usually combines life insurance with investing, which is not synergistic
• pushed very hard by sales to the uninformed looking for safe investments because of the high commissions

One interesting call was for someone looking to transfer his 8,000 shares up AT&T into a more diversified mutual fund that had similar dividend payouts. Presumably this was because it made up a very large protion of his portfolio. This touches on a common misconception that you need income producing stocks to use the proceeds for expenses or to live off of in retirement. Bob Brinker tries to correct this point quite often, but Bill didn't mention it at all during this call. There really is no reason to limit yourself to dividend funds. You can just as easily sell positions periodically to generate the same income. So you can invest in growth stocks or index funds, both of which have low distributions (which makes them tax efficient), and still get the income you need by selling that 4% per year or withdrawing monthly. I think it must be more of a psychological issue to sell the stocks because it feels like you are losing something forever, but actually it doesn't matter how you pull the money out of your account, whether it is from dividends or capital gains.

Diversify: Stay away from individual stocks

Yes, the market overall is not doing great now, but it could be a lot worse if you had a lot of your money invested in some individual stocks like Countrywide or Bear Stearns. Try losing 90% or more on these stocks, instead of 9% on the market. That is why the general rule of thumb is to never have more than 4% of your money invested in a single company. Most investors understand the value of diversity, but still don't follow this rule for a number of reasons:

• they see stocks like Google, Microsoft, or Apple beating the market regularly and think these stocks are sure bets
• they think they know a lot about specific companies or industries and feel comfortable taking a gamble
• they see certain retail products everywhere and think the company must be doing well
• they work for the company and get discounts on stock purchases, pressured into buying, or free shares as bonuses

Despite any of these reasons, you should try to maintain diversity in your portfolio. This is even more critical if you own a lot of your company's stock, as your employment, retirement, and savings may all be tied to a single company. The moment things turn bad at the company, you could lose all three. For that reason, I would suggest holding even less than 4% of your company's stock. Sometimes it cannot be avoided, such as when you are awarded stock options or shares as compensation. However, if that is the case you should try to maintain diversity by doing the following:

• immediately exercise options when vested and sell the proceeds to maintain the 4% ratio
• do not invest your 401(k) in company stock based mutual funds
• resist enrolling in employee stock purchase plans (even if there is a discount) unless you can immediately liquidate. Avoid costly transaction fees by selling the shares only once or twice a year, reinvesting in diversified funds
• Balance your portfolio by purchasing enough other funds or stocks to keep that 4% ratio
• Elect to receive cash bonuses vs. stock or options, whenever possible

This applies equally, whether you are at a public or private company. I have had this situation come up many times at my job, which is privately owned, but does have shareholders. The problem with private companies is that there is no liquid market to sell shares and often there are strict rules as to when and how you can sell them back. I have been awarded bonuses in the form of shares for many years and have no choice in the matter. So I have avoided investing my own money in shares whenever possible. I haven't participated in stock offerings and I have elected to receive cash the one time the choice was offered. I know there can be a lot of pressure to buy company shares to show your committment, but I value my personal financial freedom and philosophy higher than making a good impression and I have had to explain that on more than one occasion.

The stock market has shown to go up over the long term, but individual stocks have not. Stock prices depend on companies constantly growing. It is not enough for a company to continue to make a steady profit every year, it has to continue to increase that profit. So rather than guess which company will continue to grow, keep a broad, diverse portfolio.

Bear Stearns bail out becomes buy out

It was only Friday that JP Morgan was helping to bail out Bear Stearns with the US Government's backing. Now it apparently has decided that it would be better to acquire the company for far less, just $236 million. Its only assets at this point are probably its office buildings and furniture, as its debts far outway any value of the company. The purchase price equivalent to $2 a share represents a discount of 93% from Friday's close, which itself was already down 47% from Thursday.

Bear Stearns got into liquidity problems when two hedge funds failed last summer and their bread and butter mortgage backed securities suffered huge losses. Banks can take a quick tumble when investors and the financial communites lose faith and begin to pull their money out or stop offering lines of credit, as the only real assets a bank holds are the loans it gives out and the only source of liquidity are investments people make in it. When those both turn sour, things can go bad real quick. Bear Stearns' share price dropped greater than 97% since last Monday's open.

Bear Stearns was less diversified than some of the other financial institutions, but there is no doubt the whole financial sector will feel the pain on Monday. Expect huge losses that drag down the whole market on Monday. This all but guarantees a rate cut of the Fed funds rate of 100 points this Tuesday, with rumors it could go as high as 200 points. It already cut the discount rate 25 points this weekend.

Bear Stearns is feeling the same pain as the investor who was too leveraged in real estate and didn't diversify their portfolio. Only the private citizen won't even be offered the $0.67 on the dollar Bear is getting.

Bob Brinker MoneyTalk Commentary 3/9-1/10

Bob called for a guaranteed 75 basis point rate cut on March 18, with a slight probability of higher. I wonder how that changes with the latest Fed actions. It looks like we still may get a 50 point cut, but we'll see.

Bob also gave 50% chance of being in a full blown recession, but thinks if it happens, it will only be for the first two quarters of 2008. His guest, Dan Ariely, author of Predictably Irrational, was quite interesting and talked about the psychology of things such as stealing, lying , cheating, and investing.

On Sunday, Bob's guest, Teresa Ghilardu, was an odd choice as she seemed to preach pension and annuity ideas contrary to his often repeated opinion. She was pro pension and annuity (when provided buy the company). In particular, she generalized to always take the annuity rather than the lump sum, when offered. I was waiting to see how long it would take for Bob to jump all over her. He actually tried to give her an out, by saying it was a case by case basis, but she wouldn't bite. She didn't really like giving the investment choices to the person, but wants them to trust in the pension.

Gut Check Time: Do you have what it takes?

So far 2008 has been a real test to see

• Who really believes in investing for the long term
• What your risk tolerance really is
• If you are diversified and trust your asset allocation

Listening to the weekend talk shows and talk around the office, all I hear are people questioning whether they should sell their stocks. However, selling now would be the opposite of what should be done. The time to sell was when you were at record highs, not now that they've pulled back 15%. If you still believe you are investing for the long term and you have a good diversified allocation, then this is the time to buy those beaten down stocks. We may still see some losses ahead, but since it is just as hard to predict a bottom as it is a top, this is a good time to start loading up again.

The only question in my mind is on the commodities front. Gold and oil are at all time highs. Corn is also close to 52 week highs. I have no doubt that oil will continue to do well, but I am not sure how much higher gold and corn will go. So if you have already made gains in these areas, it is time to rebalance your portfolio, if you haven't already.

Corrections like we are currently seeing cleanse the market of inflated prices and nervous investors. This generally keeps the markets healthy over the long term. Kind of like a controlled fire clearing the dead wood from a forest and being beneficial in the long run.

So I will continue to invest twice a month and maintain the faith in my asset allocation.