Novel Investor • Page 9 of 13 • Compounding investing wisdom...

All Index Funds Are NOT Created Equal

August 2, 2012

·

Jon

All index funds are created equal. That’s what many fund families want you to believe. But it can’t be further from the truth. The difference is big enough, it could force some passive investors to actually do some work.

Unfortunately we might want to put some time into researching index funds before investing in them. It seems that not all index funds are created equal.

Specifically, similar index funds are not equal when it comes to performance. Which really doesn’t make sense. Aren’t they supposed to track the same index? Invest in the same stocks and/or bonds? Have the same annual performance results? Continue Reading…
Happy Hour: STOCK Act Loophole & The Dream Team

July 27, 2012

·

Jon

Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.

STOCK Act Loophole

The STOCK Act or Stop Trading On Congressional Knowledge Act was passed as an effort to reestablish trust in the government. The law was set to end the chance members of Congress and other government employees could profit from nonpublic information. Which it did, but the STOCK Act has one tiny, little loophole.

The Act doesn’t include spouses and children. Basically a Senator can find out some juicy information and tell their spouse or children who can then trade on the information. Or better yet, access their spouses accounts and just trade themselves. This is all thanks to a last-minute rewrite of the law. At least they were looking out for number one. Continue Reading…
Risk Basics: Understanding Interest Rate Risk

July 26, 2012

·

Jon

The last few years we’ve seen historically low-interest rates and a rising concern over interest rate risk. These low rates have been great for borrows looking for low-cost loans. On the other side, it’s been tough on savers forced into short-term fixed income assets while they wait for rates to rise.

It’s not a great combination for those looking to invest in fixed income assets. All we can do is avoid or reduce the risks we take when dealing with changing interest rates. The best way to digest it all is to understand interest rate risk, its effect on different assets, and how to mange it all.

What Is Interest Rate Risk?

Interest rate risk is the risk inherent with loans, bonds and other interest bearing assets. It’s due to the movement in interest rates over time. The simple version is seen with bond prices and yields. As interest rates rise, bond prices fall and vice versa.

While bonds have a fixed interest rate, real interest rates are constantly changing. This is where interest rate risk presents itself. When rates move too much in one direction it has a significant impact on bond prices. Continue Reading…
What Is A REIT?

July 24, 2012

·

Jon

One of the most popular investments in the past few years have been REITs, or real estate investment trusts. If you’ve ever been to an outlet mall, it was probably owned by a real estate investment trust. It’s just one way for investors to get into real estate without buying property.

Back in 1960, Congress passed a law allowing real estate investment trusts. REITs, for the most part, are traded just like stocks. This allowed the average investor access to large, income generating real estate investments with only a small amount of capital. But there are some unique tax differences every investor should be aware of before buying.

What Is A REIT?

The SEC defines a REIT as a company that owns and/or operates income-producing real estate or real estate-related assets. Continue Reading…
Happy Hour: PF Olympics and Water Cafe

July 20, 2012

·

Jon

Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.

PF Olympics

GoBankingRates.com is holding the Personal Finance Olympics. Always one for a good competition, we entered our How to Compare Online Brokers article. So we could use some votes. The contest runs till July 29, which is more than enough time to head over, check it and show some support. Thanks!

Water Cafe

Seems a new water café is drawing outrage in New York. The new concept will sell purified New York tap water for $2.50 per 16 oz. I’ve never had NYC tap water, so I can’t opine on its greatness or not. Is the outrage a pride thing? It’s somehow ruining an institution by purifying already great water. Nope. It’s that someone is selling tap water to the public after it’s been purified. Haven’t Coca-Cola and Pepsi been doing this for years with purified bottle water. For anyone interested, the new café does deliver by the gallon. Continue Reading…
CD Rates Beating Treasury Rates

July 19, 2012

·

Jon

Do you want to earn more than the current 5 year or 10 year Treasury bonds without giving up the safety they offer? Or maybe you just want a way to start saving without taking on the risks of the market. With treasury rates at all time lows, CD rates are a safe second option offering more flexibility and backed by the FDIC.

CD Rates Offer Flexibility

We’ve come a long way since the 30 year Treasury rate was above 5%. The last time was 2007. It’s been a year since the 30 year was above 4%. Today its hovering at a pitiful 2.59%, at or below the inflation rate. Not a great way to make money.

With interest rate risk (the heart of the bond price and yield dilemma) this high, it’s not worth it. When rates start rising, you’ll lose money if you sell the bond and if you hold it to maturity you’ll miss out on higher rates. Of course, it’d be even worse with a bond fund which will just lose value as rates rise. Continue Reading…