Tuesday, December 28, 2010

The Best Investment I made this Holiday Season.

No, I didn’t buy gold, and I didn’t buy a hot penny stock that shot up 233% in the last few months. I invested in an experience that I expect will pay dividends for years to come. It’s long been said that money can’t buy happiness, but as some recent studies have found - it depends on how you spend it!

A recent study from the Journal of Consumer Psychology found, investing in experiences is more rewarding than buying “things.” That study was mainly focused on people who spent money on activities or experiences, like going out to dinner or a movie, and those who spent money on materialistic consumption like phones, cameras or clothes. But the same holds true for stocks (To a point). I mean, investing in an appreciating asset is certainly better than sinking your money into the latest consumer electronic gadget or the new fashion of clothing, but it’s still ultimately materialistic and may not making you as happy as you think.

People invest in assets (stocks, bonds, gold, etc..) to make money. They ultimately want their money to grow, but to what end? To be happy? To be secure?

Security is important, but it does not bring happiness alone. Likewise with simply expanding your portfolio. True happiness it seems is based on what you do with that money, rather than how much of it you have. And so it is that I proclaim my best investment of 2010 to be the Christmas tree hunt with my family.

Some of my best childhood memories are from Christmas time with my family. I had a pretty normal childhood, - some ups and some downs but nothing too extreme. And nestled in the middle of those ups and downs are many happy memories of Christmas. Not just the gift getting, but the feeling of family, companionship and love.

Now as a father, I’m enjoying holiday traditions from the other angle. I’m not only building those memories for my children but for me as well, though this time around I’m the parent and not the child. My wife and I are now in our 6th year of parenting and the holiday magic has grown with each successive year.

Sure things don’t always go right. Two years ago, our truck got stuck in the mud at the Christmas tree farm and it took over an hour and much help from good Samaritans to get free. The year before that we brought our tree home only to find that the bottom branches that needed to be trimmed to fit in the stand left the bottom 3rd of the tree bare. It looked ridiculous and top-heavy. But we still talk about those years and while they were miserable experiences at the time, they brought us closer together and we can laugh about it now.

In short, doing things makes us happier than buying things.

People who spend money on experiences have less feelings of inferior social comparison - meaning that people who buy the latest “thing” may feel good until they see someone else has a newer, faster or better “thing” than they do. Experiences are personal, and so they aren’t as easy to compare and less likely to feel failed in comparison.

Tuesday, December 14, 2010

Are Bond Yields and Interest Rates finally signaling Inflation?

The spectre of inflation has been on every investors lips since the Fed has opened the spigot on their fire hose, pumping liquidity into the market hoping to stave off deflation. But up until now, there really hasn't been the prosperity crushing inflation that pundits have been expecting.

But here are a couple of recent articles that may hint that the time is near for inflation’s return.

First, there’s this piece from Yahoo!’s Tech Ticker which gives a good explanation and background to how rates rise, and what they mean for consumers.

It touches on how the Fed can only directly control the immediate term rates - that is, the rate at which banks can borrow money - and how that indirectly influences short-term interest rates. For example, if banks can borrow money from the Fed at 0.125%, then they can offer lower rates to consumers on loan (in theory), and if the Fed raises their rate, banks would likely raise their rates to keep their profit margin.

But the Fed doesn’t control long term rates, and that’s what the article focuses on most. Essentially, since the Fed is printing money like mad, bond investors are finally getting around to demanding a higher rate of return on the long -term debt. That means rising 30-year mortgage rates and rising yield on the 30 year treasuries.

Which brings us to the second article. This one, titled If Yields Hit this Level, Watch Out for Inflation, is from CNBC. It’s all about the 30-year U.S. Bond rate and how it’s rise to a yield of over 4.7% would likely portend the age of inflation so many media pundits have been warning about.

Time will tell when inflation returns, I just hope we have the leaders in place to do what’s needed to tame it when it does. I don’t believe we’re in for the kind of hyperinflation that would end our civilization as we’ve known it, but I’d hate to see inflation come back so fast that it gets out of control and we’re back to 70’s levels.

Thursday, December 9, 2010

Why Buy Gold?

Gold is clearly all the rage these days - and not just for investors. Denizens of the suburbs are having frequent “gold parties” the way past generations had Tupperware parties. By way of personal experience, I stopped at a farming town for lunch recently (I was passing through on my way to another destination) and ate at a local diner. The decor was more or less what you’d expect for a rural diner except for the ubiquitous “We Buy Gold!” signs posted on nearly every wall and both sides of the front door. It seems the proprietor of this fine dining establishment was also in the gold biz.

Gold has long been considered an excellent hedge against inflation. It tends to zig when stocks zag, and it does increase in value when paper currency declines as we have seen over the past few years. Much of the increase in the price of gold has also been attributed to the fear of a large degree of inflation down the road due to the reckless sending in Washington D.C. since the economic crisis began in 2008.

All of this makes sense, but why buy gold bullion or coins instead of a gold ETF?

You could buy a gold ETF or stock in gold (or precious metals) mining companies and receive the same benefit from rising price and protection against inflation as owning physical gold. In fact, I would argue that it will be easier to sell so called paper assets than hard assets when the price of gold starts falling. I’d wager that the diner proudly advertising “we buy gold” will take down those signs when the price trend of gold reverses, but a mining company will still have an underlying business with assets and value.

It seems to me that there are two general categories of gold buyers:

  1. The investor who is looking to diversify or capture some of the gains in the rise of commodities in general or gold in particular.
  2. The post-Armageddonist who sees a future in which the economic system we’ve grown accustomed to over the last few hundred years is going to collapse in on itself, leaving a world where paper money is worthless in its wake.

Ammo is the currency of the future.
In the post-apocalypse of the 2nd type of buyer, "things" once again become important as the world resorts to a bartering system and who doesn’t love the shinny metal that’s captivated humanity for millennia?

My problem with that group is that often times the future they fear is more likely to feature ammunition as its currency than a metal that’s nice to look at but has few practical applications.

Propagating this survivalist, dystopian view of the future in this current environment of fear and economic uncertainty helps sell gold coins and gold bullion, but would you really be any better off than owning an ETF?

Is it more likely that if the world economies are going to collapse it will be just enough that gold is still important and not so much that basic survival becomes the imperative? Or is it more likely we will see double digit inflation and a weak dollar?

I’m speaking of likely doom-and-gloom outcomes here, it’s also entirely possible we’ll see a moderately weak dollar, and inflation somewhat higher than average but well below that of weimar Germany in the 1930’s. all scenarios are possible, but the one in which gold becomes the primary currency of choice and stocks are worthless seems less than likely.

All the same, I'm off to stock up on ammo for my glock. ;-)

Tuesday, December 7, 2010

After Hours Investing Featured in the The Wealth Builder Carnival #18!

My blog post about Rosland Capital, Gold Coins, IRAs and ETFs. Oh My! was featured in the 18th carnival at My Wealth Builder, and I couldn't be happier!

I just wanted to issue a public thank you to them for inclusion and suggest that you check out the carnival since it has many other interesting post on these topics  (and more!):

  • Interviewing
  • Insurance
  • Retiring
  • Saving
  • Frugal living
  • Taxes
  • (and of course) Investing!

Links to this post

Thursday, December 2, 2010

Rosland Capital, Gold Coins, IRAs and ETFs. Oh My!

I keep hearing radio commercials and seeing television commercials for Rosland Capital Gold investments...

Gold coins!
Gold in your IRA!
Gold dust to sprinkle on your krusty-o's for breakfast!

I love goooold!
Ok, I made that last one up. But it seems like gold is the new .com or the new mortgage backed security or maybe it's here to stay. No one can answer that question for sure, and anyone who says they can is selling something, but here are some things to think about concerning gold as an investment.

Gold in your IRA.

The Tax Payer Relief Act of 1997 made it possible to add precious metals (like gold) to your IRA account. It's a great idea - in moderation. I mean, diversification is  a good thing but anyone putting a majority of their portfolio in gold is insane (in my opinion). Gold typically goes in the opposite direction of stocks, but these days are anything but typical and any more than 5-10% of your portfolio is far too risky.

ETF, bullion or coins?

Anyone can invest in a gold ETF in a standard IRA. You can invest in an ETF that tracks the price of gold, like the SPDR Gold Shares (GLD), or an ETF that holds mining stocks, like Market Vectors Gold Miners ETF (GDX). But not all IRA accounts offer the option to hold Gold bullion and coins, although I suspect many more do now than 10 years ago. This is where  companies like Rosland Capital have traditionally found their niche.

Many brokers didn't bother much with precious metals a decade ago since their wasn't as much demand compared with stocks and there are extra regulatory considerations when offering gold in IRAs. For instance, gold coins must be at least 99.5% pure gold to be approved by the IRS for use in IRAs. They also have to be branded as legal tender. The only gold coins that currently qualify for IRAs are the Canadian Gold Maple Leaf , the Perth Mint Lunar series and Kangaroo-Nuggets from Australia, the Austrian Philharmonics and of course the American Gold Eagle featured so prominently in that Rosland Capital commercial.

Whether you invest in mining company stock or bullion or coins, there is risk involved. It's just different for each kind.

The price of gold per ounce, 1973-2010
For instance, investing in mining company stock carries the same risk as investing in any stock. Gold coins and bullion carry the risk that the value of gold will decline below the investor's purchase price, but unlike a company stock gold will never become entirely worthless.

Another factor to consider when investing in gold is fees, as FMF points out. To be fair, he's talking more about liquidating your physical gold stash than your IRA holdings, but unloading the metal may be more difficult than unloading a stock if things turn around and there are more sellers than buyers.

Everyone has an opinion on investing in gold. Leave yours in the comments. :)