Joe's Money

With the recent run up in price for gold, silver, and many other commodities, you may be wondering where to score the deals for those precious metals.  I haven’t personally been buying too long, only a couple of years.  However, here are my experiences.

Apmex (Online Merchant)

A few years ago, I made my first silver bullion purchase from Apmex.com.  Little did I know, they cater more to large volume buyers as the only time you can get a decent price is if you are ordering 100+ ounces of silver at a time.  To some, that may not be that much, but I certainly couldn’t afford it.  On otp of the high premiums for low volume buyers, there are shipping fees, credit card fees, etc.  If you pay by check or money order, the credit card fees are obviously removed.

Final Say: Better for large volume buyers, no so much for the low volume.  Service is impecable.

eBay Auctions

Boy ohh boy, where do we start here?  In the past, deals were difficult to find, but were there.  With prices where they are now, this is not the case.  Lots of buyers have been bidding well past the normal premium prices as of late.  I did a little research and have found that most of these buyers fall into the category of simply being unfamiliar with their purchases.  Another group is folks that only buy an ounce or two at a time and are willing to pay a high premium.  The last and likely smallest group of folks paying these insane premiums are folks using reward programs like eBay bucks or eBay gift cards.  The discounts bring the actual paid price to a level consistent with other venues.

I have however heard that there are still respectable deals to be found in “junk” silver.

Final Say:  For well versed buyers, this is probably the last place you should try to strike a deal.  Individuals just looking for a piece or two of silver, this could be an ok route.

Local Coin Shows

Keep in mind my findings around local coin shows may not be what you experience, all markets can vary greatly depending on the amount of buyers and sellers.

Local coin shows around my area (Twin Cities Metro Area) tend to have some of the best prices around.  Silver eagles usually go for a much smaller premium than online sellers or eBay.  Eagles have almost always been available.  These are likely the most sought after silver bullion items available.  Generic silver bars or rounds can be difficult to find, especially in quantities.  However, premiums when you can find them, are very low, barely over spot price.

Other common selections from my local shows are the Australian Kookaburra round, the Chinese Panda round, and the Canadian Maple Leaf.  All of these coins have detailed, beautiful designs.

Final Say:  Likely the best prices around, no tax, get to work with folks from your own community, etc.  Possibly a limited selection.  Clearly the best choice as far as pricing goes.

Silver has been on a dominant run up over the last year or so.  However, the increases in price over the last few weeks have been unprecidented.  I have never seen such a large short term gain.

This morning, silver briefly opened up well above $48 an ounce before settling around $46.50 or so.

Individual investors generally pay a few dollars per ounce over spot for investment grade silver.  This could be pushing them towards the assumed resistance point of $50 per ounce and causing some resistance to purchase more.

In addition, the $50 per ounce price may also trigger some sell offs as well by both large and small investors alike.

In my personal opinion, silver and the commodity price rises as of late are caused largely by inflation fears so the rise in prices are to an extent justified.  I say to an extent because it would appear silver is rising at a significantly higher rate than most if not all other commodities including its close brother, gold.

Only time will tell if the wild silver rise is in line with current investors or if the market has been severly overbought.  Back in the 1980’s, silver also went on a intense rally reaching a high of approx. $50 per ounce.  We haven’t quite hit that yet.  Including inflation, we haven’t come close to matching the silver run up in the 80s.

It’s odd.  Every financial adviser I’ve ever encountered swears up and down that their actively managed fund will out perform index funds hands down.  However, statistics show otherwise.  Statistics show that index funds out perform managed funds 80% of the time.  On top of that, of the 20% of managed funds that do out perform the index funds, how is one supposed to know which managed funds, or more importantly, WHEN the managed funds will be in that top 20%.

Lets take a quick look at the differences between actively managed funds and index funds.

Actively Managed Funds

The name is pretty obvious with actively managed funds.  It simply means that there is an individual or group of individuals that watch your funds.  They buy and sell based on their professional expertise.  Expenses are typically much higher than index funds because someone is actually “watching” your money.  Fees can be 1.5% or even higher.

Index Funds

Index funds are simple.  Index funds have literally a spread of all stocks on the market.  A little of this, a little of that.  Index funds do not have anyone watching your money.  As the market fluctuates as a whole, so do these funds.  They are bench marked against some of the biggest indexes like the DOW, S&P 500, Nasdaq, and many more.  Fees for these funds can be as low as .02%.

After reading the difference of the two types of funds, you’re probably thinking you’ve got to be kidding me!  I can let this run on auto-pilot and do better than the professionals?  The short answer is yes, or at least 80% of the time.  Remember that even though 20% do out perform the index funds, it is nearly impossible to tell which funds will, and even more difficult, when they will.  Heck, even if you do win, the margin of difference is usually so low the fees eat up the rest of superior gains.

In a nutshell, stick to index funds for the long term.  These funds are available in any style, conservative, moderate, aggressive, you name it.  Keep in mind, you will be investing for 20, 30, or more years.  Stick with your plan.

Stocks are simply a piece of ownership in a company.  While usually not a very big chunk of ownership, you can own a piece of any publicly traded company for a small price.

Companies generally start out as private companies, mom and pop if you will, but on a larger scale of course.  At this phase, most investors (Average Joe’s) cannot buy into the company via a stock.  When the mom and pop company starts to grow and needs more capital (Cash!) to increase production or open more stores, they offer an IPO.  An IPO is an “Initial Public Offering.”  This is the first time a stock will be available for the company in question.

So why buy a stock?  Stocks, in general, are the fastest way to grow your investment.  In simple terms, if the company you own the stock in is doing well, the price of the stock goes up.  Of course there are many factors that go into the price being driven up or down.  The current state of the economy, expected future growth or shrinkage, industry trends, etc.  Over the stock market’s history, the average return is 11%.  Keep in mind that is over a very long period of time.  The last year or so has shown us that this is not constant and you should be prepared at any time for extreme losses if you are in higher risk stocks/mutual funds.

Ok, ok.  So this is probably the most worn out topic ever.  However, based on recent survey data, only about a third of the workforce that is offered a 401k, are enrolled and contributing to it.  This is a ridiculous statistic considering the average company match is 4%.  Think of it this way, if your boss asked you if you would like a 4% raise, would you take it?  I sure hope so.  If not close this web page, there is no hope for you.  All kidding aside, take a look at the numbers below to see how much FREE money you are missing.

The calculation is easy.  Take your earnings, before tax (Gross) and multiply it by the employer match.

Ex.  Current salary is $36,000 per year with a 5% employer match.

$36,000 * .05 (The employer 5% match) = $1800.  The total contribution is simply the employer match * 2.  The other half is what you need to contribute.  Hence the employer “match.”  So for this example, the total is $3600 per year total contribution.  Remember, this is FREE money.  All you have to do is contribute your portion first.

What investments does my 401k use?

Most 401k plans consist of mutual funds that target different objectives.  Most plans offer a little something for everyone.  Some funds are more conservative while others are much more aggressive.  The mutual funds offered are typically stock funds, bond funds, target funds, index funds, real estate funds, and more.

Stay tuned for more on how you can determine your risk tolerance and other factors on determining what funds you should invest in.

Another piece of recommended reading.  Rich Dad Poor Dad is a book about about the upbringing of a child with two father figures.  One, a well educated man, the other, uneducated.

The book compares the teachings of both men.  The book demonstrates how they both attempted to climb the financial latter and how they succeeded.

Definitely a good read, the book can be purchased for only $9.90 new on Amazon.  Otherwise, used copies start at $.01 + shipping.

The financial crisis hit individuals at all career levels.  The average 401k balance fell 30% to $45,500 from about $65,000.

The good news is, the recent rally has driven account balances back up to near pre-crisis balances.

The 401k hits affected everyone differently.  A 20 something that just started his of her career isn’t going ot be affected as much as someone nearing the retirement age.  Many people nearing retirement age didn’t have much focus on their retirement savings and never realocated to lower rusk securities.  This lack of action likely prevented many people from retiring as it was too late to correct the damage.

It also affected people in the middle age group.  Most of this group was also weighted heavily in stocks within their 401ks.

Unfortunately, many 401k contributors either lowered or stopped contributing all together when the markets started to drop.  While this seems like a good plan, generally 401k participants who continue to contribute at the same levels through down turns, make out better in the long run.  This is because you are able to but at a lower cost.  You get more shares for your money.  Over the last 100+ years, the market has made an average 11% return.  Based on statics, you can bet your accounts will grow again.  When you continue to contribute through a recession, your cost average per share goes down.  Example below.

You buy 100 shares of a stock or mutual fund for $10 each for a total of $1000.

You then buy another 100 shares or the same stock or mutual fund when the market is down.  Say the price is now $5 per share, or $500 total.

Your cost average is is now $7.50 per share.

Assuming the stock or mutual fund price continues to rise to say, $20 per share, you would have actually made more money on your investment by sticking in through the down trend.

Keep in mind that accounts like 401k are long term investment vehicles, usually 30 years or more.  Don’t let emotions drive your long term investment goals.  Stick with the facts.  The market on average, returns 11% per year.

Roth IRAs are great ways to save for retirement.  While your contributions are after tax money, they grow tax free, even when you withdrawal during retirement.

This the 2009 tax year, you can contribute up to $5,000 in your Roth IRA.  The greatest advantage of the Roth IRA is all gains are tax free.  You have complete tax free growth.  The only downside is, again, you contributions are your money after it has been taxed.  The contributions are not tax exempt like your 401k.

Since the Roth uses after tax dollars for contributions, this helps you diversify your portfolio since your 401k will be taxed upon withdrawal.  Since there is no way to tell what tax rates will be like when you retire, having both a 401k and a Roth IRA gives you the best of both worlds.

One of the other benefits of a Roth IRA is you do not need to distribute your account once you reach 70 1/2 years old.  The account can continue to grow if you don’t have a need to withdrawal the funds.  So in a nut shell, you can keep your money in the tax free growth account as long as you like.

With Roth IRAs, you can also withdrawal funds without penalty, but only your contributions apply.  Only gains are penalized for early withdrawal.  Also, the funds must be held for 5 years to be eligible for withdrawal.  Example:  You contribute $3,000 to your Roth IRA that grows to $3,500.  You can withdrawal up to $3,000 (You contribution) without penalty at any time, after 5 years have past.

Roth IRAs do have some eligibility requirements though.  In order to be eligible, your adjusted gross income must not exceed $105,000 and for married couples $166,000.

For 2009, the maximum IRA contribution is $5,000 unless you are over age 50.  If you are over age 50, you qualify for contributions of up to $6,000.

Well, it turns out no matter what income bracket you’re in, you probably still broke with negative net worth.

This book was a real eye opener for me.  It describes the perception and the reality of millionaires and how they got their millionaire status.  The truth is, the average millionaire is not driving a $100,000 sports car, or even a new car for that matter.  The folks driving the $100,0000 sports cars are usually just as worse off financially as the person making $8/hour if not worse.  They make more they spend more.  The doctors and lawyers may be book smart, but according to the author, they are decades behind on financial literacy.

Check it out, this is a good, inexpensive read!  Enjoy!

Link to purchase book – Used copies starting at only $.50

Certificates of deposit are sold by banks.  They are more widely known as CDs.  Typically, CDs are low risk but generally low returns.  CDs are great for keeping cash in a safe place where you won’t need it for months or years.  CDs carry a commitment.  You cannot withdraw the funs for a predetermined amount of time.  The duration varies quite a bit, anywhere from short term one month CDs up to 5 years is common.  Usually the longer the time frame required, the higher the interest is.  Unfortunately, if early withdraw is required, a penalty will likely be assessed.  All gains from CD accounts (unless in a IRA) are taxable.

CDs are very safe investments, about as safe as they get, in fact.  CDs are FDIC insured providing your bank is FDIC insured.  The predetermined rate the bank gives you is guaranteed.  If rates slide while you are in the CD, you are locked in at the original rate.  On the contrary, the same is true if rates rise.

Some common CD types are:

Traditional CD:  A predetermined interest rate is paid over the predetermined term, or length of time.  When the term is up, you can remove all funds plus interest or renew the CD at most current rate.

Bump Up CD:  Basically, these are the same as traditional CDs.  The only difference is you are allowed to contribute additional funds usually once, in addition to the opening amount.

Liquid CD:  This type of CD account allows you to withdraw funds before the maturity date.  Since you have more freedom, it comes with a cost, a lower interest rate.  The rate will still be higher than a typical money market account though.

In addition, most of the above accounts are available at your local branch or online.  I have found that online accounts usually have much better rates than local banks.

CDs are great investments.  For people nearing retirement, they are ideal due to their security.  CDs are guaranteed and will never lose money.  CDs can also be used for your emergency funds as well.  Simply pick a shorter term.  If needed, you can withdraw funds early, but the penalty will be assessed.  The penalty is usually a few months interest.  However, since this is your emergency fund and it should only be used for true emergencies, hopefully the interest has paid you far more than you will lose for early withdraw.