Raising Kids to Invest


River1I first got interested in investing from watching my father.  Each day he would copy down the closing prices for his stocks from The Wall street Journal onto a sheet of graph paper.  He would then graph the prices for his stocks on another sheet of paper.  Really, he probably didn’t need to do this, especially every day, but it helped him to keep track of how his stocks were doing.I started asking him about investing when I was probably ten or eleven.  When I was twelve, I decided that I wanted to buy some shares of something with the $250 or so I had in my savings account.  He helped me select a stock using Value Line Investment Survey (a product I still use today).  We chose to invest in Tucson Electric Power, a utility that supplied the Tucson, Arizona area.  He then called his broker and bought me 15 shares at $15 each.  I was very excited.

Because it was a small order, I probably paid $30 in commissions on my $225 order.  Because I didn’t have a regular investment account, I also ended up getting the certificate for the shares in the mail, which I kept in my dresser drawer.  Looking back, I probably should have kept it in my parent’s safe deposit box, but it was neat to look at the certificate, embossed with what was probably some Greek god holding lightning bolts in his hand.  The real interesting thing was that I ended up going to college in Tucson, so the power company in which I’d held shares for all of those years became the company I paid for electricity.

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The company did really well for a while, spinning off a company called “Alamito” that also did well.  I put the shares on the dividend reinvestment which also allowed me to send in some cash periodically to buy more shares without paying a commission.   After a while, however, a scandal broke involving the company and Alimito, at which point the shares fell like a rock, probably down to about what I had paid for them six years before.  I held on until the bitter end, however, and the company did recover quite a bit and actually paid out a lot in dividends, probably more than my original purchase several times over.  Eventually they were bought out by another company and I had to surrender my shares a year or two ago.

Today my son is interested in investing as well.  He owns some shares or Home Depot that we bought for him using some money my sister gave us for that purpose.  My daughter is less interested in investing, although she is younger.  We also bought her some shares of Pacific Sunwear when she was born, but unfortunately the company went bankrupt after years of great growth.

With both of them we have also started investing in Vanguard mutual funds, using money that we have received from relatives for their birth, baptism, and so on.  I have also contributed additional money to these accounts from time-to-time, which is easy and inexpensive to do even with small amounts with a mutual fund.  One thing I like to do is to match whatever they wish to contribute.  These have actually done well, growing quite a bit from the original investment.

Because we have not sold any shares and because they are invested in index mutual funds that do not trade very often and therefore do not generate much in the way of dividends or capital gains, we have not needed to file taxes for them yet.  This may change as their accounts continue to grow.  One disadvantage is that while I would like to sell some shares and buy another fund to provide a little more diversification, doing so would probably trigger the need to file another return.  Of course, their return would be fairly simple, so I may just bite the bullet and sell some shares soon.

Another thing I wish that I had done was to buy the same fund for both of them.  I bought my son shares of the Vanguard Mid-Cap Fund, and my daughter shares of the Small-Cap Fund.  Because the Small-Cap has done a little better than the Mid-Cap, she is catching up to him even though she has been investing for less time.  Even though this is just by chance, it seems a little unfair. (Of course, his Home Depot shares have done well while her Pacific Sunware stock went bankrupt.)  This is another reason I’m thinking of selling some shares and diversifying so that they’ll have equal investments and I won’t need to worry about one doing better than the other.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What You Need to Know About a Fed Rate Increase


Ocean

“Don’t fight the Fed.”

Or so the old Wall Street saying goes.   This refers to the Federal Reserve, the conglomeration of bank executives who hold a huge amount of power over the US economy and its money supply.  Think of the Federal Reserve as controlling a huge valve that supplies all of the water to your town.  If they open the valve up farther, there is lots of water and things are good.  If they close the valve down, you open the tap and nothing comes out.

Now this is a really, really long line with a big delay.  They may start to close the valve today, but it may be six months to a year before the water starts to slow.  Likewise, they may open the valve wide, but it may be six months before the water starts to flow faster (kind of like when you looked into a garden hose as a kid, then got sprayed in the face when the water finally made it to you).

Instead of water, the Federal Reserve control money, or more specifically, loans.

                                                   

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If the Federal reserve opens up the spigot, banks have lots of money to lend, so businesses can get easy loans and expand.  If they close things down, then loans dry up and businesses start to close down factories and lay off workers.  Just like our example with the valve, the effect is not instantaneous – it takes a while for the effects to move their way through the economy and start to effect businesses.  This makes sense since it takes a while for enough businesses to apply for loans that they start to use up the available cash when the Fed shuts things down, and it takes a while for banks to decide its safe to ramp-up lending when the Fed opens things up.

The Fed has three primary tools that they can control.  The first is the rate of loans, which they control by adjusting the rate banks charge each other for overnight loans, or the rate at which the banks can borrow directly from the Fed.  The second lever they have is because there is a requirement the Fed has on banks on how much money they must have in their “vaults” in reserve.  The fed can force banks to buy federal reserve notes from them, which locks up cash, or they can buy reserve notes back from the banks, putting cash into their vaults that they can then lend out. For the third lever, they can simply reduce the requirement for the amount of cash banks need to keep in their vaults and increase the money supply that way.

                                               
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For the last several years, basically during the entire previous Presidency, the Federal Reserve has kept interest rates as low as possible and flooded the economy with cash.  So many other factors were preventing companies from growing and expanding, however, that the economy didn’t expand anyway; therefore, the Federal Reserve kept rates very low for a long period for time.  This caused bond prices to rise initially, then stock prices to rise later as inflation started to appear.  Now, with taxes expected to drop and regulations expected to be reduced, the economy is finally starting to ramp up.  This has caused the Federal reserve to look at raising rates for the first time in a long while in order to try to keep the economy from getting overheated and inflation from getting too high.

So for many reading these words, this may be the first time you’ve seen the Federal reserve doing anything but keeping rates low.  The question then becomes:

What effect will this have on your stocks and bonds?

Expect bond prices to fall as rates rise.   This is because rising rates cause bank assets like CDs and money market funds to pay more (finally some good news for savers), which means that people won’t buy bonds unless the price is low enough to make the effective interest rate paid worth the added risk when compared to bank assets.  Stocks will also probably fall at first as well as people worry that raising rates will cause the economic expansion to slow.

So what should you, the small investor do?  If you are investing for a long period of time, like five, ten, or twenty years, don’t worry about it.  The Federal Reserve will eventually lower rates again and any losses you see here will be recovered.  If you think the Fed will raise rates and you pull your money out, but they decide to wait, or if the economy churns along anyway despite the actions of the Fed, you’ll miss out.  You don’t want to miss out on a big rally by being on the sidelines.    If you want to do anything, pile up some cash by working and saving more and be ready to put it into the market over the next six months to a year should the Fed cause a bit of a dip in prices.

Likewise, if you’re investing in bonds for long-term income, don’t worry.  Bond prices may dip, but you’ll be paid face value on the bonds if you hold them for long enough for them to mature.  And again, when the Fed lowers rates in the future, prices will go back up, so no worries.

If you’re a short-term investor, maybe looking to retire in a few years, you should also do the same thing you should do regardless of what the Fed is doing:

If you’re within a few years of needing the money, you should be moving money you really, really need to cash assets.

If you really need the money in a few years, the only place to have it is in cash.  If bond prices go down, making bond yields go up, you could then buy in when you start retirement to generate income with the cash you’ve raised.  If prices stay up because the Federal Reserve decides not to act, you’ll then have the cash you need for initial living expenses without needing to sell your stocks and bonds in a hurry.  Don’t fight the Fed, but don’t let your guesses about what the Fed might do in the future and the effect on the markets drive your strategy.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Love Letter to the American Press


Mushrooms

Dear American Press,

You have always been an important part of my life.  From a young age I remember sitting at the breakfast bar in our house, reading through the local newspaper.  When I was younger still, I remember that they brightly colored Sunday comics were always anticipated and savored each week.  Through my teens I watched the local and national news each night.  Your anchors and reporters became uncles and aunts to me who would visit each night to tell about things happening around town, around the nation, and around the world.  I particularly remember being impressed by the local weather man, Stu Tracy, who would throw up the suns and rain symbols that would magnetically stick to the map.  I never understood how he would remember just where each symbol would go and was disappointed when he stopped creating the map real-time, instead having it setup before the forecast.

In college I made the decision to spend an hour each day in a particular chair in the student union and pour through the Wall Street Journal, cover-to-cover, as well as Barrons on the day it came out.  I also remember the start of CNN and ’round-the-clock coverage during the first Gulf War.  How amazing it was to be able to be there in Baghdad as the American bombs were falling.  I remember the chill in the air as Saddam Hussein fired scuds at American troops and Israeli cities that could be filled with chemical agents, never knowing where one might land.

              

Yes, I have loved you for all of my life.  But to truly love someone also means to be truthful when that person is making bad decisions that are hurting her.  To act like things were just fine when someone you love it tearing herself apart is not love, but enabling.  Having someone speak up may bring about anger and resentment, sometimes causing an irreconcilable split in the relationship.  It would be far easier to stay silent and not bring up difficult issues, but that would not be love.  God says to treat others as we would like to be treated; that should go doubly for someone we love.  If I were destroying my life, I would want someone to tell me.  So here goes….

Your reporting is full of incomplete and biased information – even some flat-out lies at times – and that is causing people to not trust you anymore.

OK – there it is.  Right out on-the-table.  I know that you think that people are generally ignorant and even dull, such that they would not know that you were trying to manipulate them through the facts you tell and the ones you leave out, the words you choose, and even the stories you choose to cover and those you don’t.  But they are seeing right through you and it is causing them to turn away.   They don’t want to be around you because you’re trying to get them to believe an alternative reality and then to act accordingly.  You want them to think that nationalized health care is a great thing, while they see the premiums rise and their doctor networks shrink.  You want them to believe that higher taxes, government programs, and strong regulations are the road to happiness for the middle and poverty class, but they have seen jobs disappear, wages stagnate or decline, and poverty increase as these things have come to pass.

Bottom line:  They no longer feel like they can trust you.

          

Need a little Honesty?  It’s such a lonely word.

And you see, trust is everything for you.  People don’t buy your papers or watch your newscasts because they like your witty writing and snappy graphics.  They don’t give a couple of hours of their valuable time each day to watch the evening news and read the morning paper because they want to be told what they should think, particularly when there are such clear holes in that thinking.  They do so because they have a need to know the truth about things for which they can not discover the facts themselves.  They cannot go to Iraq or Afghanistan and see the conditions and the interaction between the local people and American troops.  They cannot spend all day in Washington D.C. and see if their representatives are passing laws with which they agree and spending the people’s money wisely.  They cannot go to the police stations across the country and see if laws are being enforced fairly and effectively, if certain cities are safe or dangerous, and if government agencies are being run efficiently.  The desperately need someone to do this for them so that they then have the information that they need to make the right decisions.  

You are supposed to be the one who finds out the truth for them.

This is why your prevarication, equivocation, replacement of opponent viewpoints with straw man arguments, and manipulation of the facts is so damaging in your relationship with them.  If your product is truth, “All the news that is fit to print,” as one of your publications says, then damaging that trust is the worst possible thing that you could do to them.  They can tolerate mistakes, but they cannot tolerate lies and distortion.  There are plenty of more interesting things they could watch on TV for entertainment or tabloids they could find in the checkout line if they want to read great fictional stories.  They go to you for the truth, but you have let them down time and again, and they know it. 

                   

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Right now, I see that you are shaking your head.  You say that you may stretch things from time-to-time, but your overall purpose is to guide people to a bigger truth and the way you see the world, so changing things around once in a while or selectively leaving some things out that would just confuse people is justifiable.  And that is a big part of the problem.

You lack so much diversity of thought, since all of your employees coming from places where only one point-of-view was allowed, that you don’t even know that you are seeing the world through terribly distorting lenses.

People – evil people who want to seize control in America by centralizing power in a large government – have gone into the universities, then even the high school and grade schools, and filled them with people who all have the mindset that big government is good and socialism (and even communism) are better than free enterprise and capitalism.  The education you received did not include all of the facts, plus it included a lot of unverified conjectures.  If anyone questioned what was presented as facts, they were chastised and humiliated by the teacher and their peers.  People who initially didn’t believe in socialism either dropped out of the major or were made to change their minds.  They may have seen the inconsistencies, but they felt it was for the greater good that they just go along.  And so they came out of the classrooms and went into the newsrooms unable to objectively examine the facts.  They were sent with a mission to convince the readers and viewers that the orthodoxy they were taught in their schools is the right one.  

They became propagandists rather than journalists, even if they did not realize it.

Even once your journalists enter their careers, they continue to shelter themselves from other opinions.  Your newsrooms are echo chambers where everyone agrees with what they say, and your employees live in cities where everyone feels the same.  They are so sheltered that they come to think that their opinions are those of the average American.  They also think that they are far smarter than most people.  That everyone else has the intellect of a child compared to them.  Smart people think the way they do – anyone else is either ignorant or trying to take advantage of the foolish.  Hmm….  They are so convinced that they know better that even when they are proven wrong, such as in the last election when they were sure which candidate would win and the other did, they think there must be some sort of mistake.  Or some boogeyman like the Russians changed things.

          

And another thing….

Referring to the land occupying 90% of the United States as “fly over country” and thinking that those who live there are unimportant isn’t a good way to keep readers and viewers.

Now before you say that they watched and they read and they listened just fine before the internet came along and took their attention, let me counter.  You are right that fewer people are reading your newspapers and watching your evening news casts because of the internet, but it is not because the internet is more exciting or convenient.  If that were the case, people would be flocking to your online content as they stopped getting a daily paper.  But they aren’t, are they?  And no, it isn’t because of right-wing propaganda from talk radio and Fox News either, although both of those sources are part of your problem. 

Alternative news sources like the internet, Fox news, and talk radio are providing the facts that you are leaving out.

They are also providing alternative viewpoints and explanations.  They are giving different reasons why things may happen as they do.  They give different predictions about the effects of policies and government actions.  They also provide logical explanations for their predictions and assessments, rather than just focusing on people’s emotions or dictating how people should feel and what they should do.  They don’t just provide conjecture, using a snooty voice to make their listeners think they need to think the same way or they are stupid.  “Obviously, trickle down economics don’t work.”  “Even a fool should know that raising tax rates brings in more money for the government.”    The alternative news sources are resonating with the hearts of people because those who have worked a real job, built something, or had the real experience of trying to raise a family can tell logical explanations and ideas from, well, what they’re stepping in sometimes in fly over country.

So, it is with great sadness that I now need to tell you that I’m leaving. I no longer want you to show up on my doorstep in the morning.  I won’t be there with you before dinner or at night before going to bed.  I won’t waste my time listening to what you have to say, because I cannot trust what you are telling me and I have better things to do.  I also will not be telling you what I have to say, by writing letters to your editors, since doing so only helps you continue on your destructive course and gives you hope that continuing along the same path will eventual lead you to a better place.

No, it is better to step away and let you hit rock bottom, for it is often only by hitting rock bottom that people decide that they need to change.  I wish you best of luck.

Take care of yourself, because I won’t be there until you change your ways.

With great sadness, love,

SI

Got a comment?  Please use the form below to let me know what you think.  Please also leave a comment or contact me via vtsioriginal@yahoo.com if you’ve got an investing question you’d like to see featured.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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