Wednesday, June 29, 2011

Smartest 401(k) Book You'll Ever Read: Maximize Your Retirement Savings...the Smart Way! (Review)

Dan Solin, author of The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals, has just applied his ability to simplify the often complex world of investing to the realm of the ubiquitous 401K plan.

This latest book, Smartest 401(k) Book You'll Ever Read: Maximize Your Retirement Savings...the Smart Way!, provides an excellent introduction to traps and pitfalls of the corporate retirement vehicle in just under 250 pages. That alone is a remarkable feat, given the often tome-like volumes of investment advice out there.

This is book that every new employee should read if their employer provides a 401k plan. Here's why...




The pitfalls of 401k plans

It will come as no surprise to experienced investors, or those who take an active role in their 401k plans that the fees on some funds can be outright absurd. Solin spends quite a bit of time describing and making the case that exorbitant fees of some 401k plans make those plans worse than useless.

This book should open your eyes to why the concept of a tax deferred retirement plan is a wonderful thing, and why so many 401k plans fall short on implementation.

Fear and uncertainty about taxation

One of the weaker parts of the book is when Solin raises fears about the possibility that 401(k) contributions could become taxed in future. He points to cases in the past where congress has enacted retro-active tax hikes.

My biggest problem with this line of thinking is that he advocates using IRA and Roth IRA plans in place of 401k plans through much of the book, but there's nothing to prevent congress from taxing those plans in the future either, so he offers this bit of fear and uncertainty about the future with no realy solution or action to minimize this risk.


Solutions

What makes this book so good is that Solin not only lays out the pitfalls and mine fields of many 401k plans, be he also provides some basic roadmaps for navigating around those trouble spots.

He offers practical solutions for what to do when the funds offered in your 401k plan are loaded with fees, or when they are perennial poor performers.

He offers simple ways to make better choices in plans with a mix of good and bad funds and he tells the reader which kinds of funds to avoid.

Conclusion

Solin often rails against high fees and poor disclosure of 401k plans. He has a very good point - for some 401k plans.

The problem is that his criticism of 401k plans is often presented as though it is true of all plans, and this is simply not the case. There actually are some very good 401k plans out there, and they are not all run by greedy leeches, trying to suck your financial future dry.

Some certainly are, but not all. I think this book should serve as a starting point to get those employees unfamiliar with the 401k deferred retirement plan more involved. It can give them the information to make the decision on their own about their individual 401k plan.

Aside from his view that the majority of 401k plans are run by greedy and incompetent fund managers he also exhibits the companion view that most investors are incapable of picking good funds regardless of whether it's in an IRA or 401k.

This for me was one of the weaker aspects of the book, because it is coupled with his promotion of DFA index funds. The problem here is that he works for Dimensional Fund Advisors, so after pointing to conflicts of interest in 401k plans he then engages in his own conflict of interest by promoting his company's index funds.

That doesn't make it a bad book, but in my mind it keeps it from being a great book.

Despite its shortcomings,Smartest 401(k) Book You'll Ever Read: Maximize Your Retirement Savings...the Smart Way!is a recommended read for anyone who is new to the 401k world, or who just wants to get a better handle on how to get the most out of their 401k plan the right way.

Thursday, June 23, 2011

EU Should Give Greece the Boot; Investors Should Buy Euro?

Not surprisingly, Greece is back in the news lately. I say not surprising because nothing has been done to solve the problem. Simply using bailouts to try and wallpaper over the fact that Greece can't pay its debt does nothing to solve the problem. In fact, it only serves to punish responsible countries, like Germany, and reward the irresponsible, like Greece.

More and more pundits are calling for the EU to simply give Greece the boot, take it off the Euro and let it deal with its mess. This seems the likely course of action, since retaining countries like Greece will only bring the Euro down and create resentment in those nations of the EU left to pay for Greece's recklessness.

Jon Najarian, the co-founder of OptionMonster.com, is one such pundit who says that if the EU would expel Greece and leave it to deal with the fallout of its socialist policies, the Euro would see a very real benefit. Doing so would also send a message to any other would be PIIGs, that they got themselves into their mess, they need to get themselves out.

Would the EU ever take this step? It's too soon to tell, but there don't appear to be many other options.

This should at least be food for thought for any would be Euro traders out there.

Wednesday, June 22, 2011

Forex Explained - Forex vs. Stock Market (Infographic)

Here's an interesting visual break down of Forex and how the Forex Market compare with the Stock Market.





(photo courtesy of http://www.cmsfx.com/en/infographic/)

Tuesday, June 14, 2011

The Perfect Storm is Brewing for Global Economic Meltdown... or is it Just a Lot of Hot Air?

I stumbled on this article from the Daily Ticker at Yahoo! the other day in which the hosts discuss Nouriel Roubini's latest case for global meltdown.

Here are the NYU Professor's latest four horsemen of the economic apocalypse:

  • Reckless spending by the U.S. government (state and federal)
  • Potential Chinese slowdown
  • The Euro-debt bomb (A.K.A.: Greece)
  • Continued stagnation in Japan.

Roubini apparently gives the odds in this way:

  • 33% Recession
  • 33% "anemic growth"
  • 33% "accelerated growth"

I'm personally a little confused on his basis for such a large chance of accelerated growth. I'm no economist, but I'll play one here... ;-)


Every economic indicator is currently pointing toward either recession, or stagflation. The so-called government stimulus is running out, and taking the illusion of economic growth with it. States are out of money and finally beginning to cut costs. The Federal government is now in its second year without any budget, and its 3rd straight year of $1.5 TRILLION deficits.

Greece is America if America fails to scale back the size of government and the entitlement society - soon. The U.S. entitlement society has not reached the epidemic proportion it has in Greece, and so austerity measures can still work, but if we wait too long we will be in the same position Greece is in now - dead man walking.

Austerity measures in Greece are shrinking the GDP because too much of their GDP is built on unsustainable public sector employment. In short, no one is creating any wealth! They simply take money from the private sector to pay for public sector wages and benefits. That house of cards needs top fall before anything can be fixed. Instead, the world gets lies.



Here's a video of the DailyTicker hosts discussing this:

Monday, June 6, 2011

The Social Media Bubble (infographic)

With recent talk of the social networking IPO boom brought about by IPO's and IPO bus about companies like Link'dIn, Twitter, Facebook, Groupon and more I thought it would be a good time to share this infographic showing the over-the-top valuations of many social media companies, and how they got there.





I leave any prognostication as to whether this is the dot COM bubble 2.0 to the reader (and the comment section below ;-) )

Wednesday, June 1, 2011

Insider behavior during corrections speaks volumes.

As you are likely aware, May was the worst month for stocks since last August. Most of the media attention has been on that old saw about "sell in May and go away" being proven, but there may be something more significant to glean from this.


On the upside for instance, this change in direction provides investors with an opportunity to see what company insiders really believe about the future potential of their company.

It's times like these that we see whether insiders panic and sell into a decline, or if they are confident enough to hold or even buy more shares.

Obviously, buying into the decline is the most bullish sentiment an insider can have, because it shows they are so confident of the prospects of their company's future that they believe they are buying low. Holding during a decline is at worst a neutral sentiment, but if others are selling it may prove more bullish in comparison.

Of course, selling into a decline is a vote against the future of the company and hence, not a good sign.

Insider action now, and what it means

Argus Research publishes the Vickers Weekly Insider Report, which serves as a ratio of the number of shares sold by insiders to the number of share purchased by insiders.

The week of the most recent bull market's high that ratio was nearly 6 to 1. In other words, just before the market started to turn insiders as a whole were selling nearly 6 shares for every 1 share purchased.

The most recent ratio has dropped to about 3 to 1.

While the ratio has become less bearish, it's not necessarily a bullish sentiment either. Insiders are still selling more shares than they are buying, but the rate seems to be leveling off.

Why it may not be that important

Seeing a sell-to-buy ratio of nearly 6 to 1 at the recent peak may lead investors to think that it's a screaming "sell!" indicator, but not so fast. The average ratio for the last 40 years has been above 1, meaning that insiders usually sell more shares than they buy. This is largely due to the part that stock options awarded as compensation play in the act. Put simply, the acquisition of stock options does not factor into the ratio, only the selling of those options does.

As the tax rate on bonuses began to rise in the 80's and 90's, companies began to favor stock options as a means of rewards to provide an incentive for their employees. This has caused the insider sell-to-buy ratio to skew even further toward the selling.

In fact, according to some "experts", like Nejat Seyhun of the University of Michigan, the modern "normal" level of this ratio may be close to 6 to 1, meaning what looked like a screaming "sell!" a few weeks ago may have just been a normal market ratio.

The lesson here is that there is no magic bullet indicator that will tell you when the market is going to turn, but you can add the Vickers Weekly Insider Report's insider sell to buy ratio to your collection of indicators to watch. When taken with many other indicators, it may help to give you a warning when things might be likely to change.