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Money Talk!

Sensible..

Warren Buffett Quotes

Few advises from Sage of Omaha, more like his investing principles. 
  • Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
  •  I always knew I was going to be rich. I don’t think I ever doubted it for a minute
  • Our favorite holding period is forever.
  • We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
  • A public-opinion poll is no substitute for thought
  • Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
  • Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
  • I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
  • In the business world, the rearview mirror is always clearer than the windshield.
  • Wide diversification is only required when investors do not understand what they are doing.
  • Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing
  • It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price

Emerging markets: Investment or Trade

International and emerging markets funds are the key contributors to the globalization of financial market and one of the main sources of capital inflow in the emerging markets. They demand investors patience for a high risk and a subsequent reward which comes with these high octane investments.

Not every market is alike, for example Russia offers excellent growth with great political risk and government intervention whereas China is mostly export driven economy and susceptible to a fall out in the global markets. It is quite common for them to fall 60% and than give a return of 100% next year. When global market suffers, like the one in 2008 most of the financial institutional investors will be quick to move money out of these market and thus exacerbating their decline. Here is a snapshot of these individual markets and possible investment options, if any:
  • Russia: Too much of political risk and uncertainty. ING Russia fund LETRX can be used for a very high risk/return investment. Note: LETRX is available as no Load in Schwab brokerage.
  • China & neighboring region: Best long term bet for growth and investment. Started from a low cost producer and exporter of myriad small and big items, now it is biggest financier of US treasuries. Investors like us can use FXI or MCHFX as a proxy to investment in china.
  • India: Good bet for long term investment, burgeoning educated middle class and self sustained economy provide enough fodder for growth. However Infrastructure and lack of commom amenities can put a damper on growth.  Investment vehicle for India: MINDX, IFN and PIN
  • Latin America: Commodity driven economy, too cyclical in nature. Great for a trade via FLATX, PRLAX and few ADR's trading in US like PBR, AMX etc.
  • Frontier Markets: I still don't call eastern Europe, Africa and middle east an emerging economy, they are frontier markets. Financial markets is still in nascent stage and offers little in terms of disclosure and account abilities. Hence it is better to avoid these markets all together or have no more than 2% of total portfolio. For 'us' retail investors, Fidelity - FEMEX and T Rowe Price - TRAMX offers some investment opportunities in these frontier markets.
Although emerging economies may be able to look forward to brighter opportunities and offer new areas of investment for foreign and developed economies, they need to consider the effects of an open economy on its citizens. Furthermore, investors need to determine the risks when considering investing into an Emerging markets. 

Part II - Coverdell, Rollover and IBonds

Coverdell Annual Contribution Limit: $2000

You may contribute up to $2,000 annually to a child's Coverdell ESA if your modified adjusted gross income MAGI is less than $95,000 as a single tax filer (or married filing separate), or $190,000 as a married couple filing jointly. The $2,000 maximum contribution limit is gradually reduced if your MAGI exceeds these limits.

All funds in the account must be distributed to the beneficiary within 30 days after his or her 30th B'day. If the assets in Coverdell account cannot be used by the designated beneficiary when he or she turns 30, then the funds in the account can be roll over to a another designated beneficiary who is qualified family member.

If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship. Hope and life time learning credits can be taken in the same year when tax free qualified distribution is taken from the plan.

Unless Congress acts, some Coverdell benefits expire after 2010.
  • K -12 expenses will no longer qualify.
  • With annual contribution limit reduce to $500 from $2000.
  • Withdrawals will not be tax-free in any year in which a Hope credit or Lifetime credit or Lifetime Learning credit is claimed for the beneficiary.

However as Coverdell can be roll over to any 529 Plans without any tax consequences, potential sunset of Coverdell doesn't look bad.

I-Bonds: I Bonds which are sold at face value and issued in either paper or electronic form, offers an alternative and more safer investment for future college tution. If used for college education, interest income is exempt from federal income tax. However there is no restriction on mandatory withdrawal for education etc. They can be purchased directly from treasury direct www.savingsbond.gov

Education cost is spiralling, not sure if I Bond can catch up. Probably equity is still better options for parent whose kids are still atleast 10 years away from college.

Credit Score 101

It's a score to measure how much you value financial responsibility. It is measure of how likely you are to pay, what you owe. Higher your credit score, lenders will be more willing to offer better rates. It is true from mortgage to car payments.

Credit score ranges from 300 to 850. Higher score represents less risk for a lender, hence favorable rates.

National average of score and rates for a loan of 300,000.[as of 5th May, 09]
Score        APR         Monthly payment
760-850   4.555%    $1,530
700-759   4.777%     $1,570
680-699   4.954%    $1,602
660-679   5.168%    $1,641
640-659   5.598%    $1,722
620-639   6.144%    $1,827

See how much financial responsibility helps with lower payments, effectively helping you in building wealth.

New Immigrants - How can I build my credit: If you are new to US whether from Canada, Europe or Asis you will need to build credit before lenders can offer bigger loans. 
  • Secure credit cards are a great place to start with. 
  • If your spouse has a good credit history, add yourself as a registered joint user on a card.
  • Departmental credit cards are easier to get, whether it is kohls or Target.
  • Get utility services in your name.
  • Be responsible from start, pay what you owe and preferably in full for credit cards.

Monitoring credit score and report: If this is that important for a financial well being, everyone should take care of continuously monitoring it for any fraudulent entry or identity theft. The federal Fair Credit Reporting Act (FCRA) requires that U.S. consumers be entitled to a free credit report each year. The government’s goal is to make sure that consumers stay informed, fight identity theft, and get fair treatment. 
For free credit report visit www.annualcreditreports.com

There are three commonly used Consumer Credit Reporting Agencies by lenders. 
  • Equifax
  • Experian
  • Transunion
If you apply for a car loan or a credit card, any one or more of these agencies will be used by your lender to see your credit worthiness. These credit agencies collect information from parties that have previously extended credit to you, such as a department store or a bank. All new enquiry also go in your credit report.

Some key credit score points:
  • Avoid over extending on credit available, this is a potential sign for a lender that you may default. 
  • Before any big purchase like house or a car, don't apply for new credits in last few months and cut down on credit taken. Try to pay off other debt first, before taking on these massive loans.
  • Credit is not bad, using it irresponsibly is. 
  • Pay bills on time, whether it is utility bill or loan payment.
  • Monitor your credit report and dispute if something is not true with the credit reporting bureau.
  • Protect your identity, never disclose personal information to others if not required.

Credit cards and Cashback

It all started few years back, buy $100 worth of stuffs and we will offer you $1 cashback. Every financial institution started offering different flavors of Rewards or Cashback credit card. Some like American express offer higher cashback once you reach some annual purchase threshold, whereas discover offers 5% on chosen category for few months with some upper limit and rest still on 1%.

I love having cashback credit card. Being paid to shop is great. Just remember to pay your balance off every month. So, "Which cards offers best cashback and other incentives"

Charles Schwab Visa Signature cards seems to be very promising. I applied and was approved online, will see how it works out for me. link to schwab card.

Key Benefits for me
  • No foreign exchange transaction fee. Other cards except capital one charge you around 3%
  • 2% Cash back on all purchases. No need to wait for some 5000 or x points for redemption. After every month cycle, 2% cashback is credited to your schwab brokerage account.
  • Benefits of Visa Signature card and no preset spending limits.
Fidelity retirement rewards card was close second, with same 2% cashback. However they are offering american express branded cards, with foreign transaction feee and redemption after 5000 points.

Commodities: Trade oil, copper & steel

Natural resources influence a significant portion of world economy. Our appetite for different commodities is ever increasing, plus with close to double digit growth in BRIC countries commodity prices are increasingly correlated to supply and demand. One thing to note here is "Supply is limited", so what happens to the prices? It doesn't take business degree or investment experience to figure out.

Look into Legendry investor "Jim Rogers" commodity index and you will see all it includes is agri, oil, metal & minerals. http://www.rogersrawmaterials.com/



One thing a common investor like me should always remember "Commodity trading is very volatile", probably suited for a very long term investment or a pure speculative play. Recently there was a news that owing to fall in copper prices, china is stockpiling copper for future construction and growth. Isn't it leading to volatility and prices become too sensitive to supply and economies health?

Lets start with how and what you can do to be part of this trade. 
  • Individual stocks: Starting from copper like Freeport copper and Southern copper to Steel stocks like US steel and Nucor. More contrarian investment can be in agricultural stocks like Agrium, Monsanto etc.
  • ETF: Starting from broad natural resources etc like GSG, RJI etc to concentrated commodity funds like DBA, DBC and yeah 'MOO' too.
  • Gold ETF: GLD & IAU are best with high trading volumes. If you like Gold and Silver together, than there is 'CEF', central fund of canada
  • Leveraged ETF: double short and long ETF for short term trading etc.
  • Mutual funds: Nearly all mutual fund houses offer a natural resources funds. Some are tied with stocks like FNARX, PRNEX & PSPFX, whereas some are tied with treasury & futures like PCRDX & RYMBX.
disclaimer: I own Freeport copper stock (FCX), PSPFX and PCRDX. 

Alternative energy: Next bubble or long term investment

A year back when oil prices were soaring, everyone from presidential candidates to average joe were talking about alternative energy and how to come up with less dependence on foreign oil. This lead to the boom in new funds and etf offering alternative energy investment.

Mortgage mess not only dragged entire stock market, each and every sector, it also pushed oil prices far below 2004 level. Now once more alternative energy and stocks are in back burner.
BUT, it may be one of the best times to wet your feet into this sector. There are bunch of offering starting from clean energy, alternative energy, solar, green, wind etc.

• The New Alternative Fund, Symbol NALFX, began 1982: investments in a variety of companies focusing on renewable energy sources, as well as interests in companies focusing on energy conservation and environmental protection

• The Guinness Atkinson Global Energy Fund, symbol GAAEX, began 2006: The fund invests in global companies that “derive more than 50 percent of their revenue from alternative energy or alternative energy technology.

PBW is a Power share ETF that holds companies in the "business of the advancement of cleaner energy and conservation

• The Winslow Green Solutions Fund, WGSLX. It expects to invest globally in companies of varying sizes that provide green solutions. Winslow defines green solutions as products or services that reduce resource consumption; decrease pollution such as climate-changing greenhouse gases, or contribute to natural and sustainable nutrition and health

Basics of life insurance

Life insurance offered by your employer usually is valid as long as you are employed with the same employer. Hence it is advisable to add an life insurance cover to supplement your employer offered insurance policy.

Life insurance can be either of following types
  • Term life insurance: It provides coverage for a limited period of time and at the expiration of policy insured can either drop the policy or pay annually increasing premium to continue the coverage. There is no cash value with a typical term life policy and term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
  • Whole life insurance: This on the other hand, combines a term policy with an investment components. The investment could be either in bonds, money market or stocks. Policy builds a cash value, against which you can borrow money later. Permanant life insurance coverage for as long as you live and continue to make premium payments.
  • Univeral life insurance: Life insurance which combines the low-cost protection of term insurance with a savings component that is invested in a tax-deferred account, the cash value of which may be available for a loan to the policyholder. Universal life was created to provide more flexibility than whole life by allowing the holder to shift money between the insurance and savings components of the policy. Additionally, the inner workings of the investment process are openly displayed to the holder, whereas details of whole life investments tend to be quite scarce
  • Variable universal life insurance: Name 'variable' here signifies the ability to invest the money in different form of investment vehicle. This life insurance policy along with insurance cover offers to build up the cash value. With a typical whole life policy, the death benefit is limited to the face amount specified in the policy, and at endowment age, the face amount is all that is paid out. Thus with either death or endowment, the insurance company keeps any cash value built up over the years. With a VUL policy, the death benefit is the face amount plus the build up of any cash value that occurs (beyond any amount being used to fund the current cost of insurance.)
Now comes the best part, For my personal insurance needs, I prefer the idea of separating investment from insurance. Insurance should just offer me the life cover at the cheapest rate, for cash value part, I can always use other investment vehicles.

Looking for an agent or a insurance company can be tricky and a time consuming process. Look for an insurance company which are stable and highly rated by A.M Best and Standard & Poor.

Top 10 Life Insurance Companies By Premiums (From the Insurance Information Institute):

Rank Revenue Assets
1 MetLife 53,150 $558,562
2 Prudential Financial 34,401 485,814
3 New York Life Insurance 29,280 179,621
4 TIAA-CREF 27,526 420,315
5 Mass Mutual Life Insurance 25,268 172,911
6 Northwestern Mutual 22,597 156,547
7 AFLAC 15,393 65,805
8 Genworth Financial 11,443 114,315
9 Principal Financial 10,907 154,520
10 Lincoln National 10,738 191,43


With the plethora of independent insurance agent, online agents etc looking for an agent can be trickier too, I've had a positive experience with select quote, If that helps they were prompt in service and not pushy with riders etc.


Here is the link to kiplinger article on how to get best rate on life insurance policy - Best Rate


Coverdell Education Savings Account

Coverdell Education Savings Account also called Coverdell IRA is used as a tax advantage investment vehicle for a child. Just like 529 plans, money can be taken out of these IRA without any tax implications if they are used for qualified educational expense. Biggest difference with 529 Plan is that, Coverdell can be used for primary and secondary education. They seem to offer more flexibility around investment choices, but with much less allowed annual contribution limit.

Mantra "Pay yourself first" is great for education savings. Automatic contribution depending upon how much one can contribute will certainly help in shaping a kid's future. Talk to your financial advisor for asset allocation and understand your risk tolerance, you don't want to lose money in a stock market meltdown when your kid is just few years away from college.

Link to IRS web site explaining in detail about coverdell IRA: http://www.irs.gov/publications/p970/ch07.html

Here is a sample list of Coverdell ESA custodian with fee and contribution limits. I've opened a Coverdell ESA in Schwab, due to low fee and better investment choices.
Source : http://SavingForCollege.com

ESA Sponsor
CustodianAccount FeeMinimum ContributionAccount Type
Gabelli FundsState Street Bank and TrustNoneNoneMutual Funds
Madison Mosaic FundsU.S. Bank NAWaived with automatic contributions (otherwise $12.50 - $25)$100 per month with auto contributionMutual Funds
Mairs and Power FundsU.S. Bank N.A.None$1,000Mutual Funds
JanusState Street Bank and TrustNone$1000, or $500 with a $100/mo automatic contributionMutual Funds
Oakmark FundsState Street Bank and Trust$5 installation and $7/year$500 per fundMutual Funds
TIAA-CREFState Street Bank and TrustNone$2,000Mutual Funds
T. Rowe PriceT. Rowe Price Trust Company$10/year, waived with $5,000 balance$1,000 per fund, or $50/mo. automatic contributionsMutual Funds
VanguardVanguard Fiduciary Trust Company$20 annually, waived with electronic access and delivery, and $25/fund fee for redemption within 3 years$2,000, or $1,000 in the Vanguard STAR FundMutual Funds
E*TradeNot DeterminedNone if electing online statements$1,000Discount Brokerage
ScottradeScottrade, Inc.None$500Discount Brokerage
TD AmeritradeAmeritrade, Inc.None$1,000Discount Brokerage
Charles Schwab & Co.Charles Schwab & Co. Inc.None ($20 if account balance is below $2,000)$2,000Discount Brokerage