Kimmunications

Why Bonds Won't Cut It

Some of you know I went to the University of Colorado (go Buffs!), also known as CU, also known as "Ski-U". Freshman year, my ski days were in the triple digits, if that gives you any indication - and no, I wasn't on the ski team.

 

Back then, we could buy books of coupons good for discounts on food, lodging and lift passes at ski areas all over the state. At the time, I could ski the top notch areas, like Aspen or Vail, for less than $20 a day.

 

I started thinking about that last week while Jim and I were in Las Vegas. While we were there, I read an article that said one-day lift passes, at many of the big ski areas, are now approaching $100 - a day! This is why I believe inflation, not market losses, is the biggest threat to your wealth.

 

Since I was in college, back in the early 80's, the price of a lift ticket has gone up an average of about 6.5% per year. That is faster than the rate of inflation overall, which averages between 3.5% and 4% per year.

 

Now, imagine I was a college student living on a fixed income of $100 a month. Back in 1985, I was living large on $100 - I could ski anywhere, for an entire weekend, on less than that - gas, food and lodging included. (Granted, I wasn't staying at the Four Seasons, but still!)

 

Today, assuming my income wasn't being adjusted by at least the rate of inflation, I can barely afford a one-day lift pass. My income is unchanged, but my purchasing power is sharply diminished.

 

A friend of mine asked me why would anyone invest in stocks? She had all of her money in bonds paying 5%. There was almost no risk, and the income produced was enough to pay all of her bills … today! She thought, as long as she only took out the 5% each year, she could live indefinitely on that money. What she wasn't accounting for was … you guessed it, inflation.

 

So, let's see how much you really need to stay ahead of the inflation boogey monster. Suppose you spend 4% of the value of your portfolio each year, after tax. Assume a 25% marginal tax bracket and a 3.5% average annual rate of inflation. You would need a gross average annualized return of 10% ((4 + 3.5) / (1-.25)).

 

Over the last ten years, the U.S. bond market total return has been approximately 5.5%. Clearly a bond portfolio falls woefully short. Unless you are Warren Buffett - in other words, a billionaire with a reasonably modest standard of living - you are going to have generate something significantly higher than bond market returns in order to sustain a reasonable standard of living.

 

So, while we would all like to stop worrying about the markets ups and downs and retreat to the so-called "safe havens" offered by lower return investments, our reality requires us to do two things: 1) Move UP the risk-reward continuum toward higher risk - higher return investments sufficient to support a reasonable standard of living; and 2) Avoid the mistakes that cause investor return to be lower than investment return.

 

Not sure how to do that? Then I would invite you to one of our Snider Investment Method™ information sessions. 'Nuff said!

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Can you trade options in an IRA?

I did not hear it myself, but I am told Ric Edelman, a big-time money manager and radio talk show host, said in his 12/2/07 radio show that you cannot use options in an IRA account. This is according to one of my readers / listeners, so if I have this wrong, I apologize in advance. But I thought it was a good topic - regardless - because it is a myth that persists. Along with many myths about options, I might add.

 

A competitor of ours (who teaches covered calls) says in his marketing materials, "What we do is so safe, the IRS allows it in your IRA." I am not a lawyer, the SEC or the FTC, but I believe that is blatantly false and misleading advertising. And it is just as wrong as someone who says you cannot use options in an IRA.

 

The fact of the matter is it isn't up to the IRS whether or not you can trade options in your IRA account. It is a decision made individually by each IRA custodian. It is true, up until about five years ago, most brokerage firms did not allow options in an IRA and if they did, they only allowed covered calls. This is undoubtedly the basis of the myth.

 

Option trading has historically been limited in IRAs for three reasons: 1) lack of understanding of options by the retail investment community; 2) no financial incentive to allow options and 3) insufficient internal processes or controls for handing the option transactions in an IRA.

 

For the longest time, retail brokerage firms shunned options. Brokers never had to learn about options in any detail and mindlessly mouthed the conventional wisdom that options were risky. Tragically, some financial professionals still profess their ignorance to their clients when they repeat this mantra! For more on this, see "Lies Advisors Tell: Options Are Risky" and "Misconceptions About the Risks of Options."

 

Exchange traded options started out in a smoker's lounge of the Chicago Board of Trade in 1973. The first day's volume was 911 contracts! Last month alone (November, 2007), over 300 million option contracts changed hands. On an average day, over 14 million options are traded and on some days, the number exceeds 20 million.

 

Compared to stocks and bonds, options are relatively new, hence their slow acceptance rate. But today, options are one of the fastest growing segments. Brokerage firms, always looking to add new products to drive commissions, have been scurrying to catch up to the demand.

 

Newer firms that did not have legacy computer systems and catered to the more active trader, such as optionsXpress or Interactive Broker, were the first to create the systems allowing you to trade options in an IRA just as you would a taxable account. More recently, firms like E*Trade, Scwab and Fidelity have followed suit. The slowest firms to adapt have been, not surprisingly, the wirehouses - Merrill Lynch, A.G Edwards, and the like.

 

What the reader needs to know is: 1) Options can very definitely be traded in an IRA today, and not just covered calls - if you can't you just need to switch brokerage firms; 2) Options are not inherently risky or safe, any more than credit cards are inherently evil - it is all in how you use them that makes them one or the other; and 3) Options can be a very useful tool for creating income and managing risk in a portfolio, provided - and here is the big caveat - you know what you are doing.

 

If you have any other questions about investing your retirement funds, or what is true and what isn't, please give us a call at 866-952-0100. We would be happy to set the record straight.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The World Would Be a Better Place If There Were More Rich Women

That is the message of Kim Kiyosaki and I couldn't agree more. Kim asked me to be a guest on her PBS special, entitled Finding the Rich Woman In You. It is a fund-raiser for Channel 8 KAET in Phoenix and will air for the first time tonight, Thursday December 6 at 7:00 PM Phoenix time and again at 9:00 PM.

 

The show is an extension of Kim's book, Rich Woman, which we talked to her about, several times, on our radio show and podcasts. The TV show was aimed primarily at women because women have a special need when it comes to financial education. Some statistics from the show:

 

• 47% of women in the U.S. over the age of 50 are single - meaning most of these women have to take care of themselves financially
• After a divorce, a woman's standard of living drops an average of 73%
• In 2006, more women declared bankruptcy than graduated college
• Of the elderly living in poverty, 3 out of 4 are women - yet 80% of these women were not poor when their husbands were alive.
• The average age of a widow: 56 years old

 

That being said, the core messages we developed in the show are applicable to men and women alike and they should be familiar to any of my readers. They are:

 

• You are uniquely qualified to manage your own money. Why would you turn over your security to anyone else - whether it be a spouse or a financial expert?
• Becoming a successful investor is not difficult. Anyone can do it. It doesn't require hours and hours of work. The biggest hurdle is getting over the intimidation factor.
• Savvy investors do not view declining markets as a negative. A true investor, as opposed to a short-term speculator, is largely unaffected by market declines and more likely sees them as a buying opportunity. Who doesn't love a sale?
• Everyone is a genius in bull markets. It is the volatile or declining market where financial education really pays off and there is no better time to learn than now.
• And of course, cash flow investing makes far more sense for most people than capital appreciation investing.

 

One point we didn't talk about in the show, but that I would add, is that the difference between a successful investor and everyone else is the actions they take in times like these. Right now, a successful investor is avoiding the losses of capital that amateurs are taking, buying value, and setting themselves up to do even better when the market turns north again. Successful investors love these kind of markets. Amateurs fear them.

 

There were a million more things we could of talked about on the show. It was amazing how fast the time went. Some people even suggested we could do it as a weekly show because there was so much more ground to cover than what we got to.

 

For now, the show will only air in the Phoenix market but everyone involved is hopeful that it will be very successful - raising lots of money for KAET - and will then be picked up nationally. The goal for this show is to raise $100,000 locally for PBS. So for those of you in the Phoenix area, I would encourage you to tune in and pledge if you are so inclined to give money to a good cause. (I bet they would take your money even if you don't live in the Phoenix area.)

 

Why would you want to do that? I should mention that our 401(k) course, How To Turn Your 401(k) Into a Million Dollar Nest Egg, is included in the $125 and $365 pledge packages along with Kim's book (Kim Kiyosaki, not me - mine is still not finished!), their Cash Flow game and some other stuff. Our course alone sells for $297 on our web site and I know their Cash Flow game is $195. That is a great value in financial education in addition to supporting a good cause.

 

My involvement in the show was really a last minute thing. I understand Kim Kiyosaki and Richard Taylor have been working with PBS on this for months. They decided to add guests as a last minute idea and I got the call a couple days before Thanksgiving. We had dress rehearsal a week ago today, taped last Friday, and it goes on the air tonight!

 

The other two guests and I were, at one point, sitting in the front row of the studio audience while Kim was doing one of her stand-ups. When the cameras would stop, both Antoni, the hairstylist, and Kelli, the makeup artist, would walk over to us and fix a stray hair or add more powder to our faces. I heard one of the women behind me say to the person next to her, "Wouldn't it be fun to be fussed over like that?" Yeah … it really was!

 

I have been interviewed for TV before but I have never done an entire TV show, or seen how it is put together. I have to admit, I had a blast. And I love that it was for a good cause ... and aimed at an underserved market. Oprah, are you listening? My phone number is 214-245-5236!

 

UPDATE: (12/7/07) The show aired last night and did VERY well. It raised $60K for PBS Arizona - number one for this pledge drive! More than Wayne Dyer and 4X Suze Orman! Whoo Hoo! I am told it will re-air this Monday night, December 9th.

 

Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Individual performance depends on individual savings, investment time frame and market conditions. Diversification does not ensure a profit or protect against loss in a declining market. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.