This article first appeared on the WallStreetSelector.com website on June 2, 2013.
Various academic studies have indicated that asset allocation is more important than security selection, especially in times of greater volatility in the markets. However, according to Roger Ibbotson, writing about the importance of asset allocation in the March/April 2010 publication of the Financial Analyst Journal, about three-quarters of market gains or losses come from general (broad) market moves, rather than asset allocation or security selection. As a consequence, individual investors are turning more and more to index-based and/or sector-specific exchange traded funds (ETFs), rather than managed mutual funds or individual securities.
According to ETF Database, there are currently more than 1,400 exchange traded funds available, ranging from broad general market funds to highly specialized funds representing a single industry, country, commodity, or investment goal. You can pick ETFs which seek high dividends and/or interest payments, those focused solely on share appreciation, or those which seek both objectives. ETFs are available for bonds, commodities, real estate, or currencies. They are structured to move in concert with the index they track, exceed the index’s moves, or move in the opposite direction. The industry follows the advice popularized in the movie Field of Dreams: “If you build it, they will come.” And they have – to the tune of more than one million shares per day on average.
This article originally appeared on the WallStreetOasis.com website on June 13, 2013.
Congratulations, through hard work, intelligence, and attending the right schools, you’ve won a ticket to the greatest game of risk and reward in modern civilization. Your starting salary will be higher than your fellow graduates with the possibility of annual bonuses that equal two, three, or more times your base pay. That’s the good news.
The other side of the coin is long, long hours of tedious data analysis, endless reports, and tension-filled competition with your co-workers. You’ll live on the edge of physical exhaustion and adrenaline-fueled moments of intense activity, working 60- to 80-hour weeks, constantly on call the few moments you break free from your duties. Few of your fellow employees will be with the firm a half-decade hence, ground up and spit out by the ongoing, never-ending demands of high finance and escalating profit expectations.
While you may be one of the few that continues to build a career with your employer, the likelihood is that you’ll change jobs, even careers, a number of times during your work life. As a consequence, it’s prudent to build a financial base by developing spending and saving habits now that can serve you a lifetime. Regardless of your level of income, financial independence is possible only if you can distinguish between “wants” and “needs.”
As you begin your new tenancy on Wall Street, consider the following tips:
1. Choose an Affordable Living Space
Manhattan is one of the most expensive places to live in the world with the other four boroughs of New York City close behind. Fortunately, you are unlikely to have much time reveling in your apartment. A small one-bedroom apartment in Greenwich Village, Little Italy, or the Upper West Side can easily cost $3,000 a month or more, while a studio in the Financial District averages the same. Consider living with a roommate and sharing rent and utilities so that your housing costs average 30% or less of your net salary.
2. Find a Tailor
Appearance is critical in making first impressions, so how you dress – the clothes you wear and their fit – is important. Wall Street fashion has always been conservative, allowing to you to buy quality wear that rarely goes out of style. An initial, well-chosen wardrobe can serve you for years.
To start, you need two or three suits in basic colors like gray, charcoal, and navy blue. Avoid “flashy” trends and unusual colors. The fit is the most important element – a well-tailored $500 suit looks better than a $1,000 ill-fitting one. Basic dress shirts in blue and white can serve you well. Indulge your creative sense in ties, socks, and braces if necessary. Once you’ve purchased the basics, limit your clothing expense to less than 5% of your salary or $300 per month.
3. Learn to Cook
You won’t have much leisure time in your new career, so beware of falling into the habit of grabbing fast food whenever you’re not enjoying that rare evening out at an overpriced restaurant. Preparing fresh food and trying new cuisines is not only cheaper and better for you, but it can satisfy your creative urges and be the focus of a rare social evening with friends for much less than the cost of a typical evening out. The money you save by preparing a meal at home, even with good ingredients and a nice bottle of wine, is enough to pay the average monthly cost of a fitness club – a justifiable luxury which can help you work off the tensions of a busy day and keep the debilitating effects of a sedentary lifestyle at bay.
4. Maximize Your Allowable Taxable Deductions
As a Wall Street employee, you are in the top 5% of earners in the country, which means you’ll pay a high percentage of your income in taxes. It behooves you to take advantage of every legitimate credit or deduction available to you, including those employee benefit plans – group health, disability, and life insurance, as well as retirement plans and savings plans. Your share of the costs or contributions is usually deducted directly from your paycheck so you never have a sense of being deprived.
If you’re single with no responsibilities, you don’t need significant amounts of life insurance. However, you do need as much disability insurance as your employer provides, since disability is more probable than death. If possible, establish a Health Savings Account (HSA) with a high deductible-health plan, funding the maximum deductible each year. And if you’re not covered by an employer plan, maximize your annual IRA and Roth IRA contributions ($5,500 for 2013).
At bonus time, set aside an amount for investment at least as great as the percentage of taxes you’ll pay on that bonus, increasing your living standard no more than the remainder of the bonus. For example, if your bonus is $100,000 with $40,000 deducted for taxes, invest $40,000 and add the $20,000 to your budget for living expenses.
5. Set Up Automatic Payments for Recurring Bills
Paying expenses like rent, utilities, credit cards, and other regularly occurring expenses automatically frees you from missing a payment deadline due to your work schedule, and it allows you to take advantage of early pay discounts as well. Most banking software lets you – not the vendor – control the timing of your payments and the amounts you pay. It’s a good practice to never let any vendor or third-party have direct access to your private accounts.
For large purchases, use credit cards, especially for those expenses likely to be deductible as this creates an independent record and provides an intermediary in the event of a vendor dispute. Paying for large-ticket items with cash is rarely wise. Just be sure to pay off balances completely each month.
Final Thoughts
As a Wall Street financier, friends and acquaintances often overestimate how much money you actually make. As a consequence, you may feel pressured to meet their expectations of a lavish lifestyle, picking up dinner and drinks checks you can’t afford, or purchasing items to fit the image of a successful deal maker, trader, stockbroker, or analyst. Trying to fulfill others’ expectations is a sure and often-traveled path to a life in which you constantly chase a higher and higher income to cover past expenses. While it may be important to meet the lifestyle and appearance expectations of your employer and clients, you would be wise to resist the pressures of acquaintances, hangers-on, and others who have no “skin in the game” of your life.
This article originally appeared on Investopedia.com on March 14, 2013.
According to a 2012 Employee Benefit Research Institute poll, only one in seven Americans are confident that they will retire with enough money to live comfortably, even though one in three expect to work past the age of 65. The reason: Saving for retirement is increasingly difficult for families faced with the costs of rising healthcare, purchasing a home and sending children to college. In fact, a middle-income household is likely to spend almost $227,000 to raise just one child to 18 years of age, according to a 2011 article in CNNMoney, and that doesn’t include college expenses. The College Board reports that attending a four-year program averages between $22,000 and just over $43,000 per year. Include more than $20,000 per year in healthcare costs for a family of four (including the employer’s portion), and it’s easy to understand why the average American is frighteningly underprepared for retirement.
One obvious solution to this dilemma is to increase the investment return on what you do have saved. The results can be dramatic. For example, if you’re 45 years old and have $62,000 in an account earning 3%, it will grow to almost $112,000 by age 65 with no additional investment. However, if instead it earns 9%, that $62,000 will become a more impressive $347,500 over the same period of time. Striving to increase your investment return is a no-brainer if you want to have a more comfortable retirement, but pulling it off isn’t quite so clear-cut.
United States presidents since Richard Nixon have sought the development and implementation of a comprehensive energy policy without success. As a consequence, the country became heavily dependent upon foreign oil imports in the early 1970s. The first supply crisis occurred with the Arab Oil Embargo of 1973-1974, which, in his “Memoirs,” Henry Kissinger called the “worst crisis to the free world since World War II.”
American needs for energy, particularly petroleum, dictate our foreign policy and relations with other countries around the world. The fact that we are beholden to Middle East regimes, often unpopular in their own country, requires that we maintain a military presence in the region to protect our interest in the oil resources. This, in turn, has drawn us into numerous expensive and deadly police actions. And our efforts to democratize the countries are unsuccessful – perhaps because our motives remain suspect by the people living there.
Furthermore, our cost for foreign oil, approximately $1 billion per day in January 2012, slows our economy and wreaks havoc with our balance of payments. In short, our practice of paying billions of dollars to import oil, particularly to those nations that have been hostile to U.S. interests, has become untenable.
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