Back in the day, when big banks had balance sheets that made them appear flush with cash and full of value, banks offered some of the best dividends. However, between the financial meltdown and TARP, financial institutions found it necessary to cut dividends. For many investors, though, the fact that some banks have made arrangements to repay TARP and move forward, hope has been rekindled for an increase in dividends. But it is probably not likely. Financial institutions probably won’t be able to offer the same kind of dividends for quite some time. Some of the factors that may make banks reluctant to raise their dividends include:

• Losses are still expected to mount for some financial institutions. Credit card charge-offs are increasing, and commercial real estate continues to fall in value. And foreclosures could still continue to cause problems.
• More regulation may be coming. Even with TARP and its requirements behind big banks, the President has proposed regulatory overhaul, and banks are wary of what it will entail, and concerned about how it might limit profitability.

However, it is possible — even likely — that, in the future, financial institutions will raise their dividends to some degree. But I doubt they will return to previous levels anytime that could be considered soon. It will take years before banks feel good enough about economic recovery to boost their dividends.

Image source: sxc.hu

One of the biggest concerns facing many Americans right now is retirement.

Looking at the damage done to retirement investment accounts, thanks to the financial crisis and the current bear market, some are looking for ways to encourage new options for retirees. Even for those with longer time frames until retirement, there is still fear. Even if retirement investment accounts recover and grow between now and retirement in 15 - 20 years, some are concerned that the next crash could pull the rug out from under them just as they retire.

Another problem revolves around the longer life expectencies that retirees are expected to have. Few people now will have enough in their retirement funds to last the 20 to 30 years that people will soon be expected to live after retiring.

Enter an ambitious new bill aimed at shoring up retirement.

In the House, the Retirement Security Needs Lifetime Pay Act (H.R. 2748) is being proposed. This bill would allow a tax break for those who take their retirement investment accounts and used them to buy a lifetime annuity. CNN Money offers a look at two of the main tax breaks offered in the bill:

1. You will be allowed to exclude 50% of annual annuity payouts from a non-qualified plan (one you invested after-tax dollars in) from taxable income. The annual maximum exclusion would be $10,000.
2. You will be allowed to exclude 25% of annual annuity payouts from a qualified plan (401(k), IRA and other tax-deferred accounts) from taxable income.

Additionally, there will also be incentives to purchase what is known as longevity insurance. This is actually another kind of annuity. You wait until you are much older — usually in your eighties — to start taking payments. As a result, the payouts are normally higher. And they would start about the time your retirement investment accounts may be running somewhat lower.

Whether or not this is the answer to the problem of investment-based retirement accounts remains to be seen. But it is clear that there are some definite concerns about the ability of Americans to have enough money throughout retirement. An annuity might be helpful. However, the downside to an annuity is that you trust the management of it someone else. I think I will need to consider the matter further (and see whether this bill makes it through and the tax breaks materialize) before deciding an annuity is right for me. So far, though, I am fairly content with my Roth IRA, which is funded largely with index funds.

Image source: Darren Hester via Flickr

Today, the Federal Reserve released its quarterly report on household wealth. According to MarketWatch, the report contained this information on net worth:

Household net worth fell at a 9.9% annual rate in the first three months of the year to $50.4 trillion, the lowest in more than four years. Net worth — assets minus liabilities — peaked at $64.4 trillion in the spring of 2007, the Fed said in its quarterly flow of funds report.

This is the 7th consecutive quarter that saw a decline in household wealth. While there are some bright spots in the report (more disposable income, lower credit card debt), the fact remains that many people are seeing their overall net worth decline. Home values are declining and investment portfolios are experiencing losses. Since many people have a great deal of their assets tied up in their homes, it is little surprise that the bursting of the real estate bubble has hit net worth. Additionally, with the losses to the stock market, the assets many had in their retirement accounts are dwindling. As I see it, there are two things you can do to reduce the psychological burdens that come with these losses:

1. View your primary residence as a purchase: Instead of thinking of your home as an investment, think of it as a long-term purchase. Consider the intangibles that come with your home (a yard for your kids, your own space, etc.).
2. Remember the long-term value of the stock market: Even though your retirement account may be suffering now, over time stocks gain overall. If you keep investing now, there is a good chance that in 10, 15, 0r 20 years, you will see significant gains.

This still doesn’t change the fact that your net worth may have fallen. However, if you stick with the sound personal finance fundamentals of reducing debt, building your savings, engaging in prudent investing and making your mortgage payments, your net worth will recover — and eventually thrive.

How has your net worth been affected by the recession?

image source: Wikimedia Commons

“…and I’m not going to take it anymore!”

That was pretty much the most entertaining part of last night’s “Unbroke” even on ABC. Samuel L. Jackson getting everyone to scream their defiance about being broke. I did like it on two levels — well, beyond the sheer entertainment value, of course:

1. It encouraged us to wake up to the problem and take responsibility.
2. The encouragement to take action and fix it.

I think that was the point of the whole special. However, I’m with SuburbanDollar on this one. He pointed out, on Twitter (#unbroketv) that Dave Ramsey’s Town Hall on Hope was better. While I don’t always agree with Dave Ramsey, he was all about the straight talk, and no patronizing. But, whatever it takes, I guess. As long as we as a society can overcome the inertia and do something about our collectively poor financial habits. At any rate, I only had one major beef: The focus on individual stocks.

For the love of heaven, what about index funds?

Like The Oblivious Investor, I’m enamored of index funds. They are low cost, don’t require management on my part, and, historically, over the long haul, they always grow. Unfortunately, no mention was made of them. And it wouldn’t have been hard to slip it in while they were talking about what an index is, or showing stock certificates of failed companies. In fact, I was struck by the incongruity of the fact that the show was talking about how the stock market goes up over time, and emphasizing the importance of individual stocks, while highlighting failed companies whose stock ended up being worthless — no matter how long you held on to it. It was the perfect opportunity to mention index-related investments.

“Funds” were sort of alluded to in a 401k segment that kind of went on too long and didn’t really offer any terribly useful information. They could have mentioned, briefly, a Roth option on the 401k, mentioned index funds at that point, or even talked a little bit about IRAs. Oh well. I guess on a basic level (which was what they were going for), the 401k is what people are most concerned about. And they did a decent enough job of trying to overcome the panic gripping many folks.

In the end, it was an entertaining hour, and it did cover some much-needed basics. Now comes the hard part: Actually getting back to the basics and putting sound money principles into action. I’m not sure that Unbroke will actually accomplish that. Although I will be interested to see what ratings the celeb-studded event did accomplish…

What did you think about Unbroke?

It used to be that we talked about risk in terms of whether or not you have the risk tolerance right now to handle the losses that come with higher risk investments. However, risk isn’t just about whether you can deal with the possibility of losing money. It also includes whether or not you are missing an important goal. It can also mean (as The Oblivious Investor points out) that you end up with lower returns than you expected.

When deciding on your risk tolerance, one of the factors you should include is what might happen if you get smaller returns than you expect, or what happens if you miss an important goal. This might change your asset allocation, as well as the various financial strategies that you employ to meet your goals.

When planning for the future, it is a good idea to lean to the conservative. If an investment shows annualized returns of 10%-12%, maybe you should guesstimate the returns for your purposes at 7%-8%. And don’t expect less risky investments (like bonds and cash) to offer more than 3%-4% — it’s even less right now in some cases. And be prepared for the eventuality that you might not even get that. It is also a good idea to have a back-up plan, just in case you don’t end up meeting your goal on time, and you need a little more time to make things work.

Not too long ago, I jumped on the P2P lending bandwagon, giving Lending Club a try. There are a number of P2P lending sites, allowing for variations that include microloans to the poverty-stricken and student loan P2P lending that focuses on helping students with college costs. And now, if Prosper has its way, it will be possible to for ordinary people to lend money to banks.

Of course, you sort of do that right now. When you put money into a CD or an interest bearing bank account, you are essentially lending the bank money. The bank pays you a yield (often small) for keeping the money there and lends the money to others at a much higher rate. With the new scheme introduced by Prosper, though, you could fund bank loans.

Here’s basically how the process would work:

1. The bank gives out a loan, as usual (the bank will have a limit of $25,000 for loans it wishes to list for funding).
2. After the bank has received three on-time payments, it can offer the loan for bid on Prosper.
3. Investors can partially fund the loan, as P2P lending generally works.

The idea is to provide a place where banks can sell their higher-quality loans. It is an interesting idea, providing a sort of secondary market for regular folks.

What do you think? Would you buy a loan from a bank?

image source: sxc.hu

I received two email questions this morning to this effect:

Do I need be concerned about swine flu? How will it affect my finances?

An interesting question. And probably one prompted by the fact that the financial press is talking about how the swine flu is sending stock markets around the world lower. However, in terms of affects on your personal finances, I’m not sure that this is something to get too panicked about.

As far as your stock market holdings go, you aren’t likely to do much worse than you have been in the last few months, even though the financial markets are in turmoil over swine flu. Besides, if you employ a long-term investing strategy, this will just be a blip on the market in 15 years. So your retirement account is likely safe. If you’re really into day trading, you might be able to make a little money by investing, short-term, in pharma stocks, which are set to spike as flu treatments go out. (I’m not an investment professional, though, nor am I fond of day trading. I’m just sticking with my regular investment plan — low cost funds, which I can buy a little more of now.)

Swine flu and your health insurance

The only real personal finance effects I see happening in the near future as a result of swine flu are likely to be such things as lost income due to missing work and an increase in your health insurance premium. If you end up with swine flu, and you visit the doctor, you will see that reflected next time your health insurance policy is up for renewal.

Right now, the CDC feels as though swine flu is being spread in a manner similar to other flu viruses. There aren’t many cases in the U.S. yet. You can protect yourself from swine flu by washing your hands frequently, and keeping them away from your face.

image source: Daylife

I loved this older clip from The Daily Show. Looking for investing ideas for these tough times? “Things you can eat” and “fire” are at the top of my list. After all, “gold is just a shiny metal”.

Happy Friday!

I’ve often said that I’m a boring investor. And I’m not alone. Mike Piper, The Oblivious Investor, is also a boring investor. He’s written an entire book, Oblivious Investing: Building Wealth by Ignoring the Noise on a simple buy-and-hold investing strategy that focuses on index funds. It’s not exciting, but you’re more likely to build enough long-term wealth than if you run around, trying to earn big-time returns in the short-term. The book is fairly short, only 113 pages. You can easily read it in an afternoon.

Oblivious Investing by Mike Piper

Oblivious Investing is set up as a parable. It follows the stock market exploits of Shannon as she learns how to engage in “oblivious investing” with the help of her Uncle Toby. Some of the dialogue in the book is kind of cheesy, but that doesn’t matter; the principles in the book are sound.

Piper takes the reader through an ordered approach to developing a long-term investing plan based on index funds. Each chapter starts with questions that will be answered, and ends with a succinct summary of the main point addressed. You learn how valuable investment planning skills such as:

• Figuring out your goals.
• Figuring out the timeframe you need to meet your goals.
• Understanding index funds.
• Why trying to time the market is a bad idea.
• Learning to ignore the “noise” around you.
• Understanding market fluctuation.
• Putting faith in long-term results, rather than focusing only on the short-term.
• The natures of volatility and risk — and why they are often confused.
• The all-inclusive “more”.

With the stock market in turmoil right now, Oblivious Investing comes at just the right time. The book is an appeal to think rationally and calmly about your investment strategy, and to prepare for the long term. At the back are a number of helpful, easy to understand charts that illustrate the points made throughout the book. Here are some of my favorite words of wisdom from Oblivious Investing:

“And the time frame for each goal isn’t form now until the time you start spending the money; it’s from now until the time you finish spending the money.”

“Perhaps we should call an action risky if it decreases your likelihood of meeting your financial goals.”

“Because I kept investing money during the entire time that the market went down, most of my shares were bought at fairly low prices. So now that the market has gone back up, my account balance is looking really good.”

And, finally, what this book is all about:

“Oblivious Investing is not about being uninformed. It’s about creating an intelligent investment plan and then consciuosly choosing to ignore anything that could trick you into giving up on it.”

One of the ways that you can earn passive income is through dividend investing. Companies that pay dividends actually pay out a portion of their profits to shareholders. If you invest in a company that pays dividends, you receive a dividend monthly, quarterly, semi-annually or yearly (depending on how the company does things). These dividends are paid out to shareholders, and are different from earnings from selling or trading stock in the company.

Dividends can be incorporated into a long-term plan for yielding wealth, as well as provide regular income. Indeed, there are some investors that invest solely in dividend paying stocks, watching their portfolios grow over time and receiving an income stream when dividends are paid out. There are some who manage this well enough that dividends provide a large portion of their income.

DRIPs

It is possible to compound the earnings you receive from dividends through programs known as dividend reinvestment plans (DRIPs). DRIPs are set up with some dividend paying companies who take your dividends and automatically reinvest with the company, buying more stock. I have some DRIPs in my Roth IRA. Every time a dividend is paid, it is automatically reinvested, allowing me to buy a couple extra shares of stock. It’s basically like getting free shares. And it’s a good way for me to automatically increase my investment.

For the most part, though, dividend investing isn’t going to result in immediate results. In this economy, you might disappointed (although there are some companies that have actually increased their dividends). Dividend investing — especially when you make use of DRIPs — are part of a long-term strategy. However, the cumulative effect can provide a reasonable passive income for those with the patience to make it work.

image credit: sxc.hu