Traditional and Roth IRA’s

Traditional and Roth IRA’s
The theories discussed stem from The Truth About Retirement Plans and IRAs by Ric Edelman

Individual Retirement Accounts (IRAs)

This article will highlight two individual retirement vehicles, the Traditional and Roth IRA.
Both accounts are offered by the Federal government as means to help lower and middle class individuals better prepare for their future. Annual contribution limits are set by the IRS. Surprising annual contribution limits is around a 10% year tax penalty administered by the IRS until the excess is removed Check the Internal Revenue Service website or consult a professional if your are unsure of personal finance strategies.

 

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Pump and Dump Schemes Collide with Twitter

Big Money Mike and his bullish online persona epitomize the modern day pump and dump scheme.

About a week ago I stumbled across @BigMoneyMike6 on Twitter. I quietly chuckled to myself reading the ridiculous antics and irrational promises. I assumed Big Money Mike must surely be a well documented scam artist. There is no way his 2 million followers actually buy into his picks. Or as he calls them, “The King Kong Alerts”.

A Google search left me thoroughly disappointed. Most links were to his Twitter page or past picks. I found only one website denouncing him as a pump and dump scheme. Seeing an opportunity and also being afraid people might actually buy into his picks, I decided to sign up for Big Money Mike’s email list. I am now a member of #TEAMBILLIONAIRE.

The day after signing up, I received one of the poorly written emails I’ve yet read.

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Passive vs Active Management

Overview of Key Terms

Index funds attempt to closely mirror performance of the total market or market sector with passive management. Actively managed funds attempt to outperform a market after accounting for expenses. Fund managers charge for their management, and in turn raise the gross expense ratio of the fund. Actively managed funds tend to have considerably higher expense ratios than passive index funds. We’ll break down why it matters.

Active vs Passive Management

Consider a higher expense ratio as compensation for a hedge fund, mutual fund, pension fund managers etc. professional savvy. We would assume fund managers who have spent years studying markets, would have an edge over the layman investor. In theory their expertise should allow opportunity to outperform standard market growth. Historical evidence have shown this simply isn’t true.

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Market Tracking Funds and Horse Racing…?

A prevailing theory for stock market success is low-cost, passive index investing is the best bet over a time horizon of a lifetime. A metaphor used to envision this theory is one of a racetrack.

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A Day at the Races

Allow me to draw the comparison of markets to a horse track. The physical tracks which the Belmont Stakes, Preakness, or Kentucky Derby are held.

For the layman, betting on horses its more or less a crap shoot. One could study genetics, past performances, jockey reputation, or even simply judge how virulent the horse looked as it entered the stadium. But we are also blissfully ignorant of many factors influencing outcomes. A jockey may be using the race as a training run, adapting a new race style or a horse may be slightly injured etc. The point is the managers/stake-holders on the other side of the table have more information available.

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Mortgages for the Holistic Investor

Key Terms

Amortization: is the crossover from paying a higher percentage of monthly payments for interest to a higher percentage of monthly payments going to the principal*.

Mortgage: debt backed by real estate as collateral

Mortgages = bad debt?

Traditional wisdom dictates debt is bad, and we should get rid of it as quickly as possible. However when understood and structured correctly certain forms of debt can become asset-like. The following will rationalize why a long, expensive mortgage can be a sound financial decision. Although it is not justification to purchase a home out of your price range.

First let’s clarify if you would like to avoid bank loans and interest payments altogether, paying the entire value of a home in cash is the ideal option. In reality not many individuals can afford such a luxury and a bank loan is the natural alternative.

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The 8th Wonder of the World: Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

Key Terms

Compound Interest: Interest calculated on the initial principal and on the accumulated interest from previous periods.

Principal: The original amount invested or borrowed, separate from earnings or interest.

Time-Value of Money: A core financial tenet inferring money available in the present is worth more than an equal amount in the future because of potential earnings over time. Essentially this means putting a $10,000 away today is worth more than putting away $10,000 in five years.

The Time-Value of Compound Interest

First we’ll examine simple interest or a scenario in which only the principal earns interest. Let’s say a bank exists offering 10% interest. For simplicity, let’s also imagine we invest $1,000 over 5 years.
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Dollar-Cost Averaging Theory

Key Terms

Dollar-Cost Averaging: Strategy of buying a fixed dollar amount for an investment on a consistent schedule, regardless of price. The strategy is meant to reduce the potential risk of market volatility.

Equity: A stock or any other security representing ownership.

The Constant Dollar Plan or Dollar-Cost Averaging

Let’s make the assumption you, as an investor, are 100% sure what equity you would like to purchase. We’ll call it Stock A. Now you have two options.

    1) A lump sum investment. Simply buying as much of the equity you can at once. You plan to invest $10,000 and do so with one large trade.
    2) Buying the equity in portions over a set time-frame. An example would be deciding to buy $1,000 worth of Stock A each month, for ten consecutive months.

In scenario two, you invest the same dollar value (total investment being $10,000) but spread the trades out over ten months. Over the ten month time span, Stock A’s price will likely change in value. Regardless of price fluctuations a $1,000 worth will be bought each month.

Let’s say Stock A posts higher earnings than expected, therefore increases in value during month three. But by month five, the stock crashes due to unforeseen circumstances. During month three you will have bought less shares and during month five you will buy many more shares.

Given this scenario let’s compare lump sum investing and dollar-cost averaging. For simplicity, Stock A only pays a single dividend a year and is not distributed during the time frame being examined.

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Mission

Market Tracking Funds is a resource dedicated to financial literacy, specifically for 20-30 year olds and new investors. We strive to provide consistent, high value content for our users. Started in late March of 2015, we are just beginning our journey and hope to exceed user expectations in a way that creates continued loyalty.

Our ultimate goal is to provide an user-intuitive website with content of value. Therefore, all feedback, positive or negative is encouraged and greatly appreciated. Enjoy the site.

“An investment in knowledge pays the best interest.” – Benjamin Franklin