Safe investing

 

Dear Bridget,
In the 70s, when I was in high school, I shared a Pinto with   
my sister.  She bought the gas, I bought the oil.  When the BP   
crisis hit, inspired by the exhilaration of getting the Pinto   
up to 60 mph with the windows open, I bought some shares.  I   
know it's a risky investment.

I'm wondering what I can buy on the conservative side to   
balance my wild freewheeling.   Maybe my angst is out of line,   
but I would like to buy something that will most assuredly   
maintain its value.  I'm not impressed with the interest rates   
offered by FDIC-insured cash accounts. I've heard some gold   
talk, but it seems like a big step into the back-alleys of   
commissions and swindlers.

I am a regular reader and follow your advice closely to   
maintain some savings.

Pinto Inspired


Dear Inspired,   
I love your reasoning for buying BP!

Pretty much all researchers, including Nobel-prize winners,   
conclude that you can't "beat the market."  In other words,
no   
one can reliably pick stocks that will make more money than the   
market
.  Still, some people have an emotional desire to pick   
stocks, and there's nothing wrong with that.  Just be smart.


I suggest that you hold your stocks in a separate "fun money"   
account. 
Don't let the account grow to over 10% of your total   
portfolio.  When the value of your "fun money" grows to over   
10% of your total portfolio, transfer some to your other   
accounts to bring it in line.

Never add money into your "fun money."  If it runs out, then   
you're stock picking days are over.  You're done.

For the other 90% of your money, design a well-diversified,   
tax-smart, low-cost portfolio.

Since you ask specifically about investments that are not   
risky,
I suggest US Treasuries known as "strips" as part of your portfolio.
You can buy these through your broker (like Schwab or Fidelity) or from US   
Treasury Direct.  Currently a buying a treasury strip that   
matures in 2026 costs approximately $5,470 and will pay   
$10,000 in 2026.  That's a yield of around 4%.

Any financial professional who earns money based on   
commissions will discourage you from this strategy.  
They   
earn little if any commission on US Treasuries.  "Oh, the   
yields are so low," is what I've heard.  In fact, treasuries   
protect you against deflation, because even if prices on   
everything start dropping, in 2026, you'll get your $10,000.   
Plus, the yields on treasuries always seem low.  You're buying   
them because they're safe and earn more than a CD, not to try   
to out-earn BP.  The yield seemed low when I bought US   
Treasury Strips in early 2008, but seemed brilliant a year   
later.

In fact, for clients and for myself, I build what is known as   
a treasury bond ladder for retirement.  The ladder is designed   
to have a set amount of treasuries maturing each year.  This   
creates what amounts to a guaranteed paycheck during   
retirement.

You also ask about gold. 
You don't invest in gold; you   
speculate on gold. 
Gold grows in value when someone else will   
speculate more wildly than you did when you bought it.  Some   
people want gold in case all hell breaks loose.  It makes them   
feel safe.  They like the option of being able to make a run   
for it with their gold stash.  I like feeling safe, too.

If you're in this camp,
you could use 1-2% of your portfolio   
"fun money" to buy some gold.
  Take physical custody of it;   
put it in your safe at home.  Buy enough to get you over the   
border, and remember the practicalities you are trying to plan   
for; small coins will probably work best.  You don't want to   
be stuck trying to get change for $1000 gold bars when the   
banks have closed.

To take the next step down this road, add the following to   
your safe:  guns, ammo, water, and copy of your favorite Mad   
Max movie.  If you can't watch Mel Gibson anymore, I thought   
The Book of Eli was okay and 2012 was even better.  However,   
none of these movies feature a post- apocalyptic gold   
standard.   According to them, if all hell breaks loose,   
you'll want guns, ammo, and perhaps a jet.

by Bridget Sullivan Mermel
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Don't Worry about Tax Hikes

Don't believe the hype on tax hikes. And certainly don't
spend precious energy worrying about them.

A Kate and Joe were in yesterday. They are professionals
raising four kids, who, between the two of them, make around
$350,000 a year.
They were bemoaning the fact that, according
to the media, their taxes are going to go up.


When we actually looked at their numbers, I had a different
prediction: their taxes won't go up.
How could this be?
Please excuse me while I get a bit tax-geeky (and
simultaneously simplify the tax code and the political system
for explanatory purposes.)

$15,000 of the $120,000 Kate and Joe pay in federal taxes is
the dreaded "Alternative Minimum Tax" or AMT.
While
Alternative Minimum Tax sounds appealing, it basically limits
the deductions of people who make between $200,000 and
$600,000 a year. It usually kicks in if you pay a lot in
property tax or state income tax and earn $200-600K. Most
people who are paying it don't know they're paying it and
don't care about the distinction between regular tax and AMT.
It's all the IRS to them.

However,
if regular tax rates rise, before Kate and Joe would
actually have to pay more, their AMT would have to go down to
zero.
For instance, if the top bracket goes from 35% to 39.6%
on people making over $250K, Kate and Joe's taxes would
theoretically increase 4.6% * 100,000 = $4600. Because they
pay $15,000 in AMT, this "tax increase" would mean they'd pay
$4600 less in AMT and $4600 more in regular tax. The net
effect of the "tax increase" would be zero.

Using my example, the tax increases that the experts are
predicting will have the biggest impact on folks making over
$600,000.
But Kate and Joe, and a lot of people like them,
shouldn't worry about tax increases.

That being said,
I might turn out to be wrong. Have you heard
the pundits peddling fear of tax increases admit that?

by Bridget Sullivan Mermel
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