January 14, 2010

Government Regulation vs. Financial Innovation

Mary Schapiro, chairwoman of the SEC, admits before a US Financial Crisis Panel that the [SEC] cannot keep up with the "cleverness" or innovation of the financial industry in terms of regulation.

This is huge – which means that the savviness of the large banking institutions is way ahead of regulation.  This has led us to the financial demise we are currently in today – and this is why laws and taxes are now being suggested for the larger institutions to protect the American economy.  And possibly prevent any future bailouts for these institutions that take extreme risks – and cause a seismic economic meltdown in the process.

Most mutual funds (such as your 401K) can only invest in AAA rated securities/bonds, as required by the SEC, that are supposed to give you a good return in our portfolio so that we may have a “decent” retirement.  However, to get around this requirement and be able to reap the profits from investing in riskier securities, mutual funds would loan money to other funds such as hedge funds – which have no SEC requirement in the type of securities they invest in.

What moves should the SEC, FDIC, FBI, FINRA, and any other regulatory agency implement to prevent or at least mitigate the risks involved between banking institutions and investors (you and me), without harming the innovativeness of the American economy?

January 13, 2010

Just 2 quick thoughts of mine...

The American economy is a very sound and powerful one – thanks to bright individuals we have made it through great depressions and great recessions.  Lessons learned from the Great Depression of the 1930s are well known by Ben Bernanke and Paul Volcker of the Obama administration, which helped to prevent another great collapse of the American economy that led to the Great Depression.

In summary, before the Great Depression of the 1930s, the easy access of credit for corporations and over leveraging by banks was allowed in support of a strong economy and big business for America.  Eventually, this easy access to credit and bank leveraging caused a catastrophic quake in the American economy.  As this market collapsed, the money supply was severely decreased due to a now credit crisis and the lack of spending as fearful domestic and foreign investors began to withdraw their savings and investments out of American banks.  Eventually banking institutions, large and small, did not have enough cash in their vaults to satisfy every withdrawal request as people wanted to pull their life savings from the banks.  As a result, it is estimated between 9000-10000 banks failed during the Great Depression.  Because there wasn’t a deposit insurance company (FDIC) around – if the bank was to fail then you lost all of your money.

In 2007, (the credit era as I like to call it) the same economic behaviors that were in place pre-1930s were set to lead our economy back to the Great Depression again.  But this time around, we knew how to somewhat prevent such a disaster from repeating.  Notwithstanding deficits being alarmingly high – as well as unemployment – optimism remains high for a strong economic recovery.  Hopefully, as regulators debate on Capitol Hill about whose to blame for this economic downturn, the Obama administration will set the bar to prevent a 3rd recession from occuring in our lifetime.

Don’t let the economy, or even your employer, dictate your ability to create or have wealth for you or your family.

Don’t rely solely on your 401K for your retirement.

Do educate yourself as much as possible when it concerns your health, your wealth, and your career.

Plan for an early retirement – you dnt have to wait until 67.

 My second thought…

The internet has allowed for many entrepreneurs to come to the surface and offer better solutions to problems, or satisfy a demand, moreso than a corporation could.  Armed with a better balance sheet, more tax credits, and a thirst for innovation allows for first time and experienced entrepreneurs to come to the scene and also reap huge profits in the face of an economic downturn.

If you do not want to try your hand at entrepreneurship, then think innovatorship.  Where your innovative ideas create royalties for you as you let someone else take the relms of marketing, manufacturing, and selling your ideas and pay you a percentage of all sales.  Think how rich the inventor of the Snuggie has become…or how history will be made for African Americans through the upcoming and redesigned release of 500thousand.com this February.

This is America – success can be achieved by those who work for it and for those who work smarter and think harder.  Think outside the box.  What problem can you solve?  What demand can you meet? Can you do something better than someone else?

No success happens overnight…at least not usually…so give yourself some time and get out there and make a name for yourself.


January 7, 2010

Get a Roth 401K plan...or else.

If you're going to work for someone - then make sure you're getting the best deal possible when it comes to your retirement options.  Most employers already offer some type of traditional 401k plan for their employees as required by the government (some of these basic 401k plans have limited investment options).  But not enough employers offer a Roth 401K - maybe because their lazy or just don't know about the benefits offered by a Roth 401K - and they will not offer it unless their employees get together and demand it.

The Roth 401K offers tax free growth and can be withdrawn tax free because it is funded with your after-tax dollars.  This is an awesome opportunity for you to take advantage of a legal tax shelter for your hard-earned retirement money.  Given our federal debt levels are rising to never before seen amounts due to corporate bailouts, war, excessive government spending, and a potential universal healthcare policy...Congress will be forced to eventually raise taxes to get control of these debts.  If your money is in a traditional 401K plan, or traditional IRA plan, then your retirement savings will be subject to this inevitable increase in taxes.

However, if your money is in a Roth 401K plan - you do not have to worry about any future increase in taxes.  Unlike the traditional 401K plan in which you must take minimum distributions at 70 1/2 yrs (IRS forces you to eventually take distributions with a traditional 401k so that they can get a tax bill out of you), however, the Roth 401K allows you to keep the money forever or pass it on to your kids or other family members...and your heirs can take the distributions tax free.

As if this information wasn't enough reason to convert to a Roth 401K - the Roth 401k allows one to save even more money at their retirement age than a traditional 401k will allow.  It is estimated that a Roth 401k gives you an additional $4,312 in retirement savings versus a traditional 401k according to CBS MoneyWatch.