Personal Finance Journal

Interesting article today from Yahoo Finance, This is Your Brain on Money. It basically features “five ways your brain can trick you into making financial blunders, and how to avoid them.” The information comes from Jason Zweig’s book Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.

There’s some pretty good, general advice for investors in the article. Although there is nothing specific on how to invest your money, it does highlight some of the basic problems we make when we try to wrap our brains around spending and investing.

As has been well documented just about everywhere, the Fed cut the funds rates last month to 4.75%. Opinion is mixed as to whether or not another rate cut is in our future, but they’re certainly not going up anytime soon. The Fed issued this half-point cut largely to quell fears within the credit markets and to alleviate some of the problems that the cheap money of the last few years has offered…i.e. see the sub-prime lending fiasco, et al.

So now, of course, we’re seeing interest rates fall in other areas as well. Unfortunately for home owners/buyers, a reduction in the Fed fund rate does not necessarily translate into reduced mortgage rates. There are certainly some rates that are tied to the Fed fund such as home equity lines of credit, adjustable car loans, business loans and more, but others, such as a fixed-rate first mortgage can go either up or down since they are determined by many different factors…one of which is inflation that just happens to usually go up when the Fed cuts rates.

One of the areas that does generally follow the Fed fund rate is with interest rates on high-yield savings accounts such as ING Direct and Emigrant Direct. Now, there isn’t a perfect correlation here, but generally these rates stick close to each other, and we’re seeing that now.

ING Direct dropped their interest rates to 4.30% a couple of weeks ago. Emigrant Direct held out a bit longer but finally succumbed recently and has dropped their rate to 4.75%. This drop was widely anticipated and one reason I suggested locking into some rates now in as you recession proof your portfolio. You can still get a rate over 5.00% if you shop around a little on a site like bankrate.com, but most of the biggies have all gone under that mark.

Make sure your investment portfolio is recession proof by following the tips provided here.

Every few years, the US economy seems to cycle around and take a turn for the worse. Oftentimes, these dips are small and the economy quickly recovers. Other times the downturn lasts a bit longer and we endure a recession. Recently, as the economy has been suffering due to the mortgage crisis and credit problems, there has been a lot of talk about another recession. Whether or not this plays out, you should be ready to make your investment portfolio solid and able to withstand an extended downturn.

Be Prepared. The first thing you really need to do before you look at the market and the economy for answers is to look at your own situation. Where can you trim expenses? Are you paying out a lot in interest through credit card debt and other loans. As the economy turns down, you need to position yourself to weather the storm. You can’t be prepared to make it through the lean times if you’re paying half your income towards interest debt and unnecessary incidentals. See this article for more advice on saving money for a financial emergency to get you started.

Limit Your Financial Exposure. You really want to start playing defense when a recession looms on the horizon. Don’t be aggressive with risky stocks or other high risk investments. Instead, put your money where it will be safe. You don’t have to drop it all into government bonds, but a few short-term bonds might be a good idea. Consider looking to invest in stocks from large companies with a solid financial history. These firms may also lose a bit in a touch economy, but they are certainly going to be more resilient than a small start-up in an unsteady industry.

Diversify your Holdings. Diversity in your financial portfolio is always a good idea, but when a recession hits it’s a necessity. You want to make sure your stock holdings cover a large range of industries, especially those less prone to cyclical moves. Industries that sell consumer staples or those that deal in health care tend to hold up in a slowdown. You want to avoid industries that focus on luxury items or discretionary spending goods. Ultimately, diversify your holds and be prepared to invest in some short-term bond, bank CDs, international stocks and other domestic, large-cap, dividend-paying stocks.

Lock in Your Rate. When the economy slows down, the Fed usually begins to bump down interest rates to revive things again. You don’t want to be stuck in a savings account where the interest rate continually falls. Instead, consider a 6 or 12 month CD that you purchase before the rates are dropped. You can also consider government agency bonds as they tend to pay at a fairly consistent, and relatively high, rate of return when others fall.

You may not be able to completely avoid losing a little money in a recession, but you can probably slow the bleeding and possibly avoid any loses at all. You simply have to have a little foresight and manage your investment portfolio accordingly.

The Rule Of 72 is a simple and quite common financial rule which simply states that your investment will double it’s initial amount every 72 periods that it is compounded. The formula is written like this: 72/r – where r equals the rate of return per period.

In other words, if you have an initial amount such as $1000 and you have a fixed rate of return rate of, say, 20% p.a. your initial $1000 will double itself in just over three and a half years eg. 72/20 = 3.6.

This example is a very simple calculation that assumes you use the effective rate of return.

This sort of financial equation is very handy to use when you need to compare investment opportunities or loans (such as home loans).

The Rule Of 72 is commonly used in all areas of personal finance and real estate investing and stock investing.

TreasuryDirect is a government owned website that allows you to purchase electronic securities directly from the United States Treasury. You can buy bonds, treasury bills, notes and Treasury Inflation-Protected Securities (TIPS).

The TreasuryDirect website was set-up a few years ago by the U.S. Department of the Treasury, Bureau of the Public Debt in order to streamline the process of buying government securities, and I must say, the TreasuryDirect website looks good and easy to navigate.

There is a lot of information available on their website, including a research center which allows you to get the information you need to base your investing decisions on.

Government bonds, for example, are generally very low risk since they are secured by the U.S. government (however, there is always some risk with any investment).

Bonds are a good way to hedge against an increase in interest rates because as interest rates rise, so do the interest rates offered on bonds. With interest rates tipped to increase for a while to come, bonds may be a good investment in this climate.

Go to TreasuryDirect.gov.

Many people today are looking for annuity help. The biggest challenge seems to be that most of the help is biased. What exactly do I mean? I mean that there is always a vested interest for the person who is helping you with your annuities. They are out to sell you something so you don’t know if they are doing it for your best interest or for theirs.

For instance, let’s say you were looking for a fixed annuity. If you work with an agent who has a bias towards variable annuities or gets paid more for selling variable annuities, you may end up with something that doesn’t fit your needs. Also, if you end up with a banker or financial advisor who does not do a good job at addressing your financial needs and concerns, you may end up with the investment of the day instead of the investment that’s right for you. And by the time you realize it, it may be too late.

So how do you get help with your annuity? First and foremost you must help yourself. What is really good is to take inventory of where you are currently and where you want to be. Look at your current investments and your goals. Take a snapshot of your financial situation. This may sound elementary but most people don’t do it. But the key is to do it before you seek help from an outside source.

Look, the reason is simple. The more you know going in, the better the chance that you will get what you want. Doing your financial homework is a critical piece of getting the right help. A good financial advisor will ask you to help him understand you so you can help him to help you. This is crucial to your financial future. Getting help with your annuity or your investments means helping yourself first.

The most important aspect of this comes at the time you need to make a financial decision about your annuities or your investments. If you know what you want, you will be able to figure out what you don’t want. For example, if you want safety of principal and the advisor offers you a variable annuity, you can easily say no because you know that won’t fit your goals. Also, the opposite is true. If you don’t know what you want, you may know what you don’t want and that may be a good place to start.

The bottom line is annuity and investment help begins with yourself. Understand your financial situation, your time frames, your needs for liquidity, and your goals. The specific investments and annuities you will use to accomplish your goals will come second. The more you help yourself, the more likely it is you will end up with the right annuity. Good luck and remember ignorance is not bliss.

Article by Tony Bahu of AnnuityMD.com.

A perfect financial advisor is ideally one who helps you make the right investment decisions, manages your finances and who imparts all the financial advices you may need from time to time. Continue reading »