The price of gold appears to hold a somewhat inverse relationship to the economy.  When times are good and the economy is rolling, the price of Gold goes down.  When times are bad and the economy is tanking, the price of Gold goes up.  Take the last few years for instance.  As the world’s economy has tanked, the price of gold has inversely risen significantly.  Why?  Because, whenever the economy tanks, the value of the dollar goes with it.  Now, stop to think what would happen if the dollar became worthless.  You couldn’t buy anything with that paper.  You’d be better off lighting a fire with it.  But Gold?  Gold is and always will be an in demand commodity.  No matter the value of the dollar, you can always trade gold!  So, as the economy tanks, more and more people begin buying gold.  They think of it as a sure-fire solid way to hold the value of their money as everybody else loses theirs.  If the economy tanks completely and the dollar becomes a fire starter, they’ll have something to buy stuff with.

So, worst case scenario, you’ve set yourself up and have something to trade.  But, much like the coins many of the gold hoarders buy, there’s a reverse side to this.  What if the economy recovers?  Those of you who are buying gold at $1100 and $1200 an ounce?  What happens when the economy comes back and the price of gold drops back down to something like $800 or $900?  Not so solid of an investment anymore, is it?

Now, let’s think on a grander scale.  There are an incredible number of people who are buying gold right now.  Celebrities everywhere are endorsing gold.  Regular joes like you and I are buying it up hoping to avoid the collapse of our economy.  And many of them will dump a large percentage of their investment portfolio into gold.  Maybe even their life savings.  If they lose 30% of their savings/portfolio, what do you think will happen?  The gold bubble will burst.  The price of gold will drop even further as people rush to sell off their holdings.  They’ll lose even more.

Is that the way it will go down?  Is Gold just another big bubble like the dot-coms and real estate?  I happen to think it might be.  I don’t think it will have nearly the effect that either of the previous bubble bursts had, but it could be a pretty rough few years while we recover.  What do you think?

Is Gold the Next Bubble? is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

By: Mariusz Skonieczny

Mariusz could have just as aptly named this book something like “The Beginners guide to the stock market” because that is what the book is; essentially.  He takes a very low level approach to the stock market in an attempt (I believe) to bring the chaos that is the everyday market to a much slower and easier to understand pace.

Even having read the book, and seen some of the examples he used, my mind is still having a hard time with it.  I’ve been so conditioned to see the stock market as this super-duper complex machine that only the smartest and best educated can even begin to understand.  And some of the elements of the stock market are that.  But, at it’s very core, the stock market is nothing more than an exchange for shares of companies.  The beginning of the book makes that abundantly clear.  It goes on from there, to explain some very simple concepts about earnings, e/p ratios, dividends, and stock price.

The book has a couple of failings, in my opinion.  One, it’s terribly short.  At 164 pages, it’s reminiscent of a “how-to” manual or very in depth brochure.  I also think that he took the concepts down to a too simple level.  I would like to believe that a company like Microsoft is similar to a lemonade stand, but I just can’t accept it.  Also, with as much explanation as he gives about the structure of business and the simpler indicators of a business’ health, it would have been nice to see him give a more in depth look at a few of the methods he uses for researching a company.  He very briefly mentions a few, like annual reports, but it would be nice to maybe have examples of where in an annual report to find the information we need and also what form it might take.

The book gives a beginner the tools to understanding the basics of the stock market and to begin investing on the markets simplest level.  And I think that was the goal of the book.  Mission accomplished.  I would have liked to see it have a bit more information on the back end of the stock research and selection process.

Disclaimer: I was given a copy of this book by the author for review purposes.  If you’d like a copy for yourself, you can pick it up at Amazon.  Or, there may be a giveaway here in the coming months, so you could wait for that as well.

Why are We so Clueless about the Stock Market is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

By J. Steve Miller

Occasionally, authors approach me to read and review their books.  I usually do so, happily.  I enjoy reading, and anytime I can get a book to read for free, it makes my wife happier.  It’s hard for her to argue about my getting more books when they are free.  So, that’s my disclaimer.  J. Steve Miller sent me a copy of this book to read.  He also sent me a copy to give away, which I will be doing in the coming weeks.  Both are autographed too!

So, on to the book.  I’ve never read a finance book that was written in the same way as this book was.  Most of them are so matter of fact that they are beyond dry.  I have to take toothpicks an prop my eyelids open to finish reading them. (I exaggerate, but you get the idea)  But, this book was actually fun to read.  I think the pivotal reason why is that it’s written in a conversational tone.  Very nearly like most of the fiction books you would read.  Instead of just spitting out the facts and information for us to chew through, Miller gives it to us with a story.

Now, I can’t say that it’s an award winning story by any means.  There’s only so much you can do with the topic, after all.  The basics of the story follow a group of high school students (the counterculture club) as they are taken under the mentoring wing of a teacher from their high school.  Over several weeks worth of breakfasts at “Hash Browns” diner, she teaches them some key tenets of personal finance like ways to save your money, smart investing principles, and also ways to enjoy your money once you have it working for you.  There’s several places where the dialogue makes it seem as if the students are the ones feeding the information to us, which breaks the story facade, but if you ignore those, the story is quite good.

Despite the few flaws in the story, I think Miller makes an excellent attempt at making personal finance easy to learn.  The book was great for me, but I think it would be even better as a tool for teaching high school aged children about finances.  I can’t say for sure if that’s what Miller intended, but I would guess it is.  I think it would make an excellent addition to the curriculum of a school.  It would hit a roadblock with some of the religious undertones, so you may have to just buy a copy and gift it to a high schooler you know.

You can pick a copy of it up at Amazon for $15.99.  (Or you can wait for the giveaway and try your chances there.)  For more information, (description, sample chapters, author interviews and reviews) see the press page here: http://jstevemiller.com/blog/?page_id=578

Enjoy Your Money! How to Make it, Save it, Invest it and Give it is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

But, if (and that’s a big if) you were able to time the market relatively well to know there was going to be a downturn, you could loan the money to yourself.  Because the money would not be in the account, it wouldn’t suffer from the loss of value in your investments.  And instead, you’d gain whatever the interest rate was that you loaned the money for.  Instead of a double digit loss, you could have a relatively decent gain.  In theory it could work.

In theory.  The catch here is that you would have to time the market correctly.  If you missed it by a day, you could cost yourself some money.  If you were totally wrong and the market rallied, you’d end up missing out on possible gains.  But, if it worked, it could work out pretty well.  In the end, the more I look at it, it’s really a form of gambling.  You’re gambling that you can time the market and save your money.

Gambling is never a safe bet when it comes to your retirement.  It’s always tempting though.  It’s important to remember that a fall like we had over the last few years almost always comes back up.  You haven’t really lost money so much as lost value.  There’s a big difference there.  And if you keep contributing, which you should, you’re buying the very same investments at a bargain price.  So, instead of trying to minimize your losses by pulling your money out, you should be increasing your investment to maximize your return when the account finally bounces back up.

401(k) Loans as Recession Insurance? is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

Now, let’s look at insurance companies.  We, as the insured, pay the insurance company our premiums in return for insurance against some sort of event.  With health insurance it’s against some sort of health event.  With car insurance, it’s against some sort of accident.  In any case, it’s a payment.  Or a return on the premium.  Very seldom will you actually come out with your entire investment.  What would happen if the premium payers dried up?  It would get more difficult for the insurance companies to pay any claims.

Where the key difference lies is that if you stop paying your premiums, they stop paying any claims for you.  Also, as a premium payer, you never really expect your money back unless you have a claim.  You’re paying for the “in case”, if it were to happen.  In a Ponzi, you’re investing your money specifically for the return.  You’re not going to stop investing as long as the returns are stable.  And a Ponzi only really dies when the new investors stop coming.  If new insured stopped coming to the insurance company, they would still have their current insured to collect premiums from.

So, no.  Insurance companies are not Ponzi Schemes.  But, it sure feels that way sometimes.

Photo Credit: Showmeone @ Flickr

Are Insurance Companies Just Big Ponzi Schemes? is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

In the process of paying off our debt and saving money, many of us will be faced with a moral or ethical dilemma.  Perhaps you bought a bunch of things at a department store and the teller didn’t notice that one of the items rang up for less than it was supposed to be.  Or maybe the teller only rang up one item when there were really two.  Many of us have been faced with just such a situation.  And many of us, in our struggle to reduce our spending and debt, probably didn’t say a thing.  I know I have.  And I felt guilty about it.  Morally, and ethically, we have a responsibility to pay the correct price for an item, and to pay for the correct amount of items.  Even though I admit to not doing anything, I do try to keep myself honest.  Ill gotten gains are gains you’re likely to lose.  Call it karma, or whatever you like, you’ll feel the reverberations of your acts.

Perhaps more-so than in paying off debt and saving money, ethical and moral dilemmas can arise after we’ve paid it all off.  Suddenly, we find ourselves with an abundance of spendable money that we can save or do what we want with.  It’s not earmarked for any debt, and we’ve already paid ourselves.  The situation has changed, but we still have a moral and ethical obligation to do what is right.  If you’re investing your money, do you invest in so-called “sin stocks”?  The stocks of cigarette and alcohol and other indiscretions.  Again, I know I have.  I am still a shareholder in the parent companies of both Marlboro and Camel.  I’ve owned others in the past.  Depending on how you feel about those companies, a ethical dilemma could come up.  As a generality, those companies have rather solid stock and usually pay dividends.  If you feel that those companies are responsible for cancer and death, can you ethically allow yourself to support them by becoming a share owner of that company?

As debtors, we all despise the credit card companies who charge double digit interest rates and hide fees around every corner.  Banks too.  As someone who can now invest money rather than paying those credit card companies and banks, deciding how we feel about those rates and fees can be another dilemma.  If you’re one of the lucky ones  whose state has allowed access to the peer-to-peer lending companies, you have the ability to invest in loans that carry rates that are very much the same as what a credit card company or bank would charge.  The table has turned.  If you were against it when you were paying the rates and fees, can you ethically charge them?  Morally, should you?

I think that many of us look too closely at the technical aspects of personal finance.  We study amortizations schedules and debt snowballs.  We talk endlessly about our retirement funds and the ways that we are going to build them up.  And, while it is there as an undercurrent, we sometimes fail to see the moral and ethical currents that run in the background.  And sometimes, we allow our technical expertise and know-how overcome our moral and ethical compasses in order to make our debt snowball roll a bit faster.

If you truly want to win at personal finance, you have to find your moral and ethical limits and remain steadfast in their direction.  We all fail to do that occasionally, but, as the old saying goes, you’ve got to get back up and try again.

Ethics and Morality in Personal Finance is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

Here’s the basics.  A CD Ladder typically is made of several 1 YR  CD’s whose maturity dates has been staggered such that a new one is maturing about every 3 months or so.  Depending on the variation, some may even have one maturing every month.  It’s all in how you stagger the CDs.  Because you have them staggered, your money is never completely locked away and you can always get to some of it every month or three months.  So, any non-emergency expenditure can be planned for and the money from the most recent maturing CD can be used to pay for the expenditure.  At some point, you replace the CD and all is back to where it was.

My problem with all of that is that if you split $10,000 over 4 CDs, you get 4 $2500 CDs.  If you split it over 12, you get 12 $833 CDs.  That’s great, but what if you need to spend more than that?  You have to cash more than one CD.  Or you have to wait even longer until more of the money is freed up.  It’s not a catastrophe.  But it’s inconvenient.  On top of all that, you’ll likely pay a penalty on any extra CDs that you decide to cash out.  Again, not a catastrophe.

The solution, as DR and I see it, is to take that $10,000 and dump it into a long term CD.  Say a 5 year CD.  Yes, if you need the money before that 5 years is up, you will still pay a penalty.  But, the penalty is generally something like 3 months interest.  So, as long as you’ve held the CD for longer than 3 months, the worst you can do is break even.  If you cash it out in less than 3 months, you either didn’t plan well in the first place or you really have an emergency and you probably won’t notice a few months interest.  The main advantage of this method is that all of your money is available to you at all times.  A secondary, but nearly as important advantage, is that the long term CDs generally pay higher interest.  So, if you leave the money for the full 5 years, you will have made significantly more interest than you would have with 4-12 1 YR CDs.

Rate examples (as of March 31, 2010)

• ING Direct: 1YR CD = 1%, 5 YR CD = 1.25%
• HSBC Advance: 1 YR CD = 0.40%, 4* YR CD =1.70%
• Ally: 1 YR CD = 1.54%, 5 YR CD = 2.99%

As you can see, there are some pretty significant differences in rates between a 1 year CD and a 5 year CD.  Ally only has a 60 day early withdrawal penalty.  HSBC only has a 30 day penalty.  ING has, by far, the worst penalties for early withdrawal.  Any CD over 12 months term will incur a 6 month penalty and any CD 12 months and under will incur a 3 month penalty. Looks like Ally is the place to go.

I think the strongest point for this type of CD investing is that I don’t like losing that extra interest because of a “maybe”.  Yes,  “maybe” I’ll need that money before that 5 years is up.  But, I may not need it at all.  And if that’s the case, I’d rather be earning the higher rate.  And if that “maybe” comes around?  Well, hopefully I’ll have had the CD long enough to override any penalty that comes with that.  At worst, with those examples above, I would only need to hold the CD for 6 months before it would be an even transaction.  Sure, I lose that interest.  But, again, that’s only a “maybe”.

Is CD Laddering Worth the Trouble? is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

Jim, from Bargaineering, wrote an article today about how risky peer-to-peer lending can be.  I completely agree.   But, he also made it sound like he thought that they should be avoided altogether.   And that I disagree with.

P2P lending is risky.  It’s just as risky as bank lending is for banks.  And look at the mess they found themselves in not too long ago.  But, as P2P lenders, we can learn a lesson from that.  First, you shouldn’t be investing your nest egg in anything this risky.  Once again, diversification is the key.  On a scale of risk, P2P lending lands somewhere on the risky side of stocks.  So, if you properly diversify, P2P should probably only make up about 2-5% of your portfolio. Also, the banks lent out way too much of their portfolios to way too many people that they really shouldn’t have.  If you’re careful about who you lend to, you should be able to significantly reduce the risk.  What that means is that you probably won’t be lending to to many people who will be paying 20% on their loans, and will be lending to more people who are paying in the 4-7% range.  That’s OK.

Why any at all?  Because the returns can be pretty good.  Depending on the model you take, your return can be in the 5% range.  The riskier loans you lend to, the higher the potential return.  Some of them are in the 20% range.   Of course, the caveat there is that those are also the most risky loans and the most likely to default.  And, much like in the banking world, if a borrower defaults on a loan, you will lose money.  You might manage to recover some of the money through collections, but it will only be a percent of what you lent out.

My advice?  (not that it’s worth much) Be cautious.  Don’t lend more than you can stand to lose, and keep the ratio of P2P investing pretty low in your diversified portfolio.  Do your research.  Lending to some 24 year old who is using the money to finance a class on real estate investing is probably not the best idea.  Chances are, that loan is headed for default.  On the other hand, lending to a mother/father of 3 who is going to use the money as a down payment on a house could be a safer loan.  In the comments of Jim’s post, he mentions that he doesn’t invest in anything that he doesn’t understand.  He doesn’t invest in options or futures because he doesn’t understand them either.  That’s a very valid point, but I think it really boils down to how much information you want.

I think if Jim wanted to, he could find all the information he wanted to learn how to use option and futures investing.  (note: I don’t understand them either and don’t invest in them.)  P2P lending is a bit of a different cookie though.  The bones of it are simple.  One person is lending money to another person.  In essence, as a lender, you are the bank.  Using the available data, you review the loan applications and decide on which ones have the least risk of default.  If you feel like taking on some riskier loans, you decide how risky and modify your acceptance practices to reflect.  Is there more to it than that?  Of course.  But, if you keep your wits and only dabble a little while you’re learning the ropes, you can learn all of the intricacies from trial and error while not losing your shirt.

As with anything, there is risk involved.  P2P lending has much more than most investing models.  If you are adverse to risk, you really should probably avoid it.  If not, get your feet wet.  And per the usual disclaimer, seek the advice of a professional before making any major decisions.

Update: It seems the original story that spawned all of this (here at The Big Money) caused a bit of a stir at Prosper.com headquarters.  They’re asking for a retraction and refuted the article with some of their own facts.

Yes, Peer-to-Peer Lending is Risky, But Not Cursed is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

I’m not sure if this will work, but here’s the referral link that they send in the email.  That should get you the $40.  If not, I can manually send the email from their system as well.

Lending Club Link for $40 for new referrals

As far as I know, I don’t get anything out of this, so I’m not trying to make a buck or anything.  (note that the Lending club banners on this site are affiliate links however, so I will earn a referral fee if you click through one of those.  But, I don’t think you’ll get the $40.)

Part of the reason that I’ve been tinkering with Lending Club is that they have a secondary market for the loans.  What that means is that I can bypass the restrictions on state of residence and actually invest in a few loans again.  I’m transferring the money that I transferred out of Prosper.com into my Lending Club account and giving the secondary market a try.

Lending Club Offering $40 to New Investors is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.

At the conclusion of their dancing with the SEC, I am no longer able to use their site.  You see, the state that I live in, no longer allows them to operate here.  I’m not sure exactly why.  All I know is that they are not allowing me to bid on loans because of the state that I live in.

So, today, I transferred all the available money in my Prosper account out to my checking at ING Direct, and will use it to pay for something else.  It’s sad really, but such is life.  I just find myself missing the ability to make use of such a great site.  I’ve looked into replacing it with a couple of other sites with similar programs, but each has the same restriction in regards to my state.

I still recommend the site if you can make use of it though.  Both for lenders and for borrowers.  It’s a great service and a great idea.

I Miss Prosper.com is a post from: Beating Broke, if you enjoy it, please visit us and subscribe to the Feed.