Monthly Archives: February 2012

What is the TSP?

The TSP stands for Thrift Savings Plan, and is a defined contribution plan for United States civil service employees and military personnel.  It is designed to resemble the 401k that many private sector employees partake in.

How The Plan Operates

The plan operates very similar to the 401k.  Employees that are eligible can contribute an amount per paycheck, or a percentage of their pay per year, into the account.

The account has a maximum employee contribution limit of $16,500 per year currently, with employees over 50 years old allowed to contribute an additional $5,500 “catch-up” contribution per year.

All contributions to the plan are tax deferred, meaning that the money invested in the plan is tax free until it is withdrawn.

Matching Contributions

Some federal employees are eligible to receive matching contributions from their agency.  This does not apply to members of the military.

Employees who are eligible for matching contributions will be matched dollar-for-dollar up to 3% of their base pay.  They are then matched 0.5% for contributions of 4% or 5% (for a total of 4%)

Some employees also qualify for an Agency Automatic Contribution of 1% of their base pay. This would bring the total potential match for an eligible employee to 5% of their base pay.

The match is not allowed for “catch-up” contributions.

 

Fund Choices

The TSP has 10 fund choices, 5 which are index funds and 5 which are lifecycle funds.  Employees may choose from any or all of the funds in which to invest their TSP, and may change their allocations at any time.

The five individual funds are: government securities fund, fixed income fund, common stock fund (essentially the S&P 500), small cap fund, and international fund.

The five lifecycle funds have the following target dates: income (for individuals currently receiving monthly payments), 2020, 2030, 2040, and 2050.

Similar to a 401k, participants can also take out a loan from the TSP program, although it is not advised.

What is an Alternative Investment

You may be very familiar with the most common types of investments: stocks, bonds, mutual funds, cash, and even property.  However, alternative investments are traditionally products outside the core: commodities, derivatives (futures and options), private equity, hedge funds, venture capital, and tangible assets (such as art, coins, or stamps).

The term alternative investment is generally a broad term, meaning anything outside of traditional equity products.  However, many of these products are also considered higher risk than traditional investments as well.

Common Characteristics

Since alternative investments seem to describe “everything else”, here are some common themes associated with them:

  • Usually have a low correlation with the stock market, which means they perform well when the stock market doesn’t
  • Many are illiquid, meaning that your capital is locked up and you can’t access it
  • Many don’t have ways to assess market value, such as tangible assets
  • Many don’t have much historical data to compare results to
  • Many usually have high costs of purchase involved, or require the investor to be accredited by the SEC

Considering Alternative Investments?

Given these characteristics, are you still considering alternative investments?  They could have a spot in your portfolio, but like any investment, it is essential to diversify.  These investments probably shouldn’t make up any more than 5% of a portfolio, if that.

Second, you should really only invest in tangible assets if you enjoy them as a collectible versus an investment.  Tangible assets require time, effort, and expertise, and as such should be viewed more as a hobby than an investment.

Finally, if you are considering derivative investments, ensure that you do you diligence first.  These are the most liquid of the alternative investments, but also carry substantial risk for loss.  Ensure that you understand options, futures, or commodities trading before you get started.

Alternative investments can be useful, and many people have profited from them.  Just be cautious, especially when you are getting started.

Image Source: http://www.aaii.com/

 

Could You Invest in a Business?

When we think about investments we often think about stocks, shares and different forms of bank accounts. But what about investing in a business? Could this prove to be one of the best ways to invest your money for a good return in the future?

What type of business should you invest in?

The majority of new businesses fail in the first five years, so it is vital to do your homework. This is true regardless of whether you are going to invest in someone else’s business or you are going to set up your own.

Ideally you should invest in a business you already know something about. Some people will automatically invest in a business they think is doing well. But if you do this and you have no prior knowledge of the business you might end up investing in something that is about to crash and burn. Knowledge is always very powerful, but it is particularly so when it comes to investing in a business idea.

More questions to answer

A good idea is not the only thing that will determine whether a business is successful or not. You must also think about how much to invest in the business, what your market is, how long before you will realize a profit and so on. If you have decided to run your own business you must consider whether you will run it part time, from home or from another location, or full time. As you can see this is not a quick investment to make. It’s not the same as running into your local bank and opening an account.

When it comes to investing in a business (or a business idea) there is no telling how much cash you will need to invest. You might be able to start a home based business online without investing anything at all. Conversely other businesses – perhaps those that require proper premises such as a store or a restaurant location for example – might need thousands of dollars before they can even open their doors.

Have realistic expectations

The whole idea of investing in a business is of course to get a decent return on that investment. You should first of all aim to get your money back, and then to receive an income from your investment for a long time to come.

But since many businesses don’t come into profit for a few years, you need to be realistic about how much income you can achieve and when you can achieve it by. Again this depends on the business; if you start up online with a shoestring budget and you do well, you could be looking at an income just one or two months after setting things up.

The main thing to remember here is to research any market you want to go into. Spending time on research is an investment in itself, and you may well see the advantages of this long into the future.

Have You Heard of Socially Responsible Investing

With the environment being at the forefront of many people’s minds, and environmental topics dominating the news, it comes as no surprise the environmental concerns would come to Wall Street.  As such, socially responsible investing has become a hot new trend on Wall Street, with several mutual fund companies offering products that meet this demand.

What is Socially Responsible Investing?

Socially Responsible Investing is an investment strategy which considers both the financial return and social good of the company.  In general, socially responsible investors encourage investing in companies that promote economic stewardship through their policies, have strong consumer protections, protect human rights, and promote social justice.

Socially responsible investors tend to avoid companies that are involved in resource extraction, alcohol production, gambling, weapons, and military production.

How Does It Work

In most cases, socially responsible investing focuses on screening stocks that meet the criteria listed above.  There are even mutual funds and ETFs that have already selected a basket of stocks that meet those criteria.

However, some socially conscious investors have recently taken socially responsible investing to a new level by promoting practices such as impact investing, shareholder advocacy, and community investing.  By being shareholder advocates, socially responsible investors seek to maintain strong policies at the companies, even at the expense of corporate profits.

Social investors focus on 4 main ways of investing:

  1. Stock Screening: Screening for investments while considering social and economic criteria
  2. Divestment: Removing stocks from a portfolio based on social reasons, not financial reasons
  3. Activism: Attempting to influence corporate behavior
  4. Positive Investing: Making investments in companies believed to have a positive social impact (usually through angel or venture funding)

Who’s Doing It

Socially responsible investing has become an important trend.  Over $3 trillion has been invested in socially responsible portfolios as of 2010, and that number continues to climb.  There are currently over 250 socially responsible mutual funds, and 26 ETFs that incorporate socially responsible investing tactics.

Image source: http://www.ethicalsuper.com.au/

 

Should You Invest in Facebook Stocks?

The news has been full of reports about the initial public offering (IPO) that has been filed by social networking site Facebook in recent days. Many people are now considering buying shares in the company to try and make a quick buck on the back of its success. But is it such a good idea?

Last year Facebook earned $3.7 billion in revenue

This is an impressive statistic on its own. But it also represents a massive increase of 88% compared to the previous year. The question is whether these figures should inspire people to invest in shares issued by the company or not.

Are IPOs worth investing in?

In truth there won’t be an opportunity for you to even consider investing in Facebook shares for some considerable time to come. Just under a third of the shares are owned by people working for Facebook, all of whom will benefit hugely in a financial sense by the IPO. But the rest are all spoken for as well, so there is little chance of buying Facebook shares in the immediate future.

Furthermore history tells us that there is an approximate fifty-fifty split between those IPOs that produce good returns and the ones that don’t produce any appreciative returns at all.

Do your homework

You can see then that there is never a sure thing when it comes to shares or IPOs. The mistake many people make is to jump straight on the bandwagon when shares like these become available. Facebook is a huge company to be sure; it is the biggest and most successful social networking company in the world.

But the landscape can change very quickly in this area. We only need to think back to the fate of MySpace to realize this. It was once a very successful social networking site but is now a shadow of its former self. It seems unlikely that the same fate could ever happen to Facebook, but then we may well have said the same thing about MySpace just a few short years ago.

No such thing as a sure thing

In truth if you are considering investing in Facebook shares at some point in the future, you should do your homework just as you would with any other investment. Consider all the facts and figures and make an informed choice about whether the share value (whatever it might be) is likely to appreciate still further during the time you will hold them for.

We would all like to have a slice of the Facebook pie. But in reality the only people who are almost certain to become millionaires or even billionaires off the back of the IPO are those who work for the company. The people who are most likely to lose out are those who invest in the hope that they will make a ‘guaranteed’ fortune – only to realize there is no such thing. There may well be those who buy Facebook shares in the future and make a profit – but they won’t have done it on a whim.

Image Source: http://facebook-ipo.net

Mutual Fund or ETF?

You may fully understand what a mutual fund is, and what an ETF is, but do you know which is better for your portfolio?  They are both very similar products, but differ in specific ways you should be aware of.

What is a Mutual Fund?

A mutual fund is a fund that invests in a basket of stocks or other investments.  They start with your cash, and managers use that cash to buy stocks.  They can be actively managed, or they can mirror an index (in which case the stocks in the fund are the stocks in the index).  Index mutual funds usually have fewer expenses, because you are generally not paying someone to make decisions.

When you own a mutual fund, you buy the NAV (net asset value), which is calculated at the end of the day.  So, you can only buy at one price once per day.  Mutual funds also have minimum investments, and sometimes fees to buy the funds.

What is an ETF?

An ETF is also a basket of stocks or other investments, but they usually only focus on an index.  There are several actively managed ETFs, but these are pretty rare.  Unlike mutual funds, ETFs prices are calculated every second, and investors can buy or sell just as often.

ETFs are made up of share baskets called creation units, which the ETF shareholders actually own shares of.  As a result, these baskets are what provide liquidity on the market every day, and as such, trade like stocks.

ETFs also don’t have minimum investment limits, which are usually in place on mutual funds.

Which Should You Choose?

For many investors, picking an ETF usually makes the most sense.  You usually want to have index funds anyway, and ETFs allow you to do this inexpensively.

ETFs also offer the advantage of trading as needed, so if you want to sell during market hours, you can, and your transaction will settle.

The main reason to choose a mutual fund is if you want a manager that is doing something outside of tracking an index.  Then it could make sense for you.

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