Why Pay 12b-1 Mutual Fund Fees?

Most funds no longer charge 12b-1 mutual fund fees but they are still around. These were originally permitted by the SEC to allow marketing to new investors.

These represent a small sales load that adds up over the years. The 12b-1 charges originally were used to pay fees for the distribution of funds by brokers. But they still persist even when brokers are not involved; they are ostensibly used for sales and marketing.

My suggestion: Avoid mutual funds that charge them. Those fees become significant deductions from your accumulated holdings over the years. (See the Earl J Weinreb NewsHole® comments.)

High Frequency Trading a Problem?

Small investors benefit from a reduction in trading costs, High-frequency trading helps, despite much of the notoriety it’s getting in the media and the SEC..

Among costs are the bid-ask spread. A wide spread means a mutual fund, for example, must pay significantly more to acquire a stock than it could sell it for.

High- frequency trading has reduced this cost by narrowing spreads, Generally, wide spreads are seen as inefficient, with buyers and sellers having difficulty agreeing on an accurate price. Narrow spreads mean the market is working better.

Another transaction cost arises from the fact that a fund's huge trades can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce "market-impact" cost by making it easier to break big trades into many little ones while transacting them very quickly,

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%. In addition, high-frequency trading helps bring out hidden liquidity. (See the Earl J Weinreb NewsHole® comments.)

Mutual Fund Fees Can Be Too High

I have written about the need to keep mutual fund costs low; Cost comparisons are the best method around for determining the best ones to choose.

Aside from seeking low management fees, avoid funds with special classes that charge sales commissions or “loads.” Though apparently small charges, they prove huge when taken into account over the years.

Some are imposed, or not, when advisers are involved. But I am completely against the use of advisers for most investors as their costs eventually prove higher than clients realize. (See the Earl J Weinreb NewsHole® comments.)

Making Credit Card BalanceTransfers Too Often

Should you transfer your current outstanding credit card balance to another card because of lower charges?

You may be easily tempted, especially if you have good credit, and those offers are frequently in the mail.

But remember, you may be hurting your credit score, should you take the bait too often

When you make lots of credit card transfers it appears you may be applying for fresh credit. That may hurt your credit card score (See the Earl J Weinreb NewsHole® comments.)

The Dollar Factor For Investing Overseas Instead of The U.S.

Investing overseas is done for investment diversification. The investor wants the benefits of growth opportunities globally. Those prospects may appear to be better to him than possible domestically.

But remember, currency moves are always involved. Will the dollar be getting stronger or weaker? If the dollar gets weaker, such investments become more valuable as translated currency works in favor of the U.S. investor. (Travel overseas becomes more expensive.)

However, should the dollar get stronger, the reverse is true. Investments become less valuable as translated currency works against the interests of the U.S. investor. (See the Earl J Weinreb NewsHole® comments.)

Maxing Out Credit Cards And Scores

Take down the maximum amount of credit your credit card permits, but it does not help your credit score. So do so only in an emergency.

It’s nice to know that your credit permits you a certain liberty, but don’t take extreme spending binges.

Of course, if you don’t use your card at all, or only occasionally, you may be dropped or the maximum available credit may be reduced.That’s because credit card companies are getting more sensitive about account activity.

Despite public misinformation, credit card companies do not do as well as it may appear. They have written off much bad debt. (See the Earl J Weinreb NewsHole® comments.)

Another Government Error: Allowing 401k Annuities

Annuities are already tax deferred. So why would the U.S. Treasury even consider their use in a tax-deferred retirement program?

Even with some modifications that add “target” fund securities investments tied to investor age with minimal investor attention required, we note an ironic twist.

Fixed-income annuities are directly hurt by inflation, inflation caused by the very Treasury suggesting and approving the measure. American investors will be severely hurt by cynical government promoting inflation. (See the Earl J Weinreb NewsHole® comments.

Mult-Billions Out of Thin Air

New issue pricing of securities as, for example, the social media, takes lots of imagination, hope and Wall Street hoopla, to go along with its media compliance.

There’s no reason for a new, fresh-behind-the-ears company, with ever-looming competitors, to be selling at astronomical multiples of sales or earnings.

I may be old fashioned: I had a profitable, expanding company selling at 5 times earnings despite 17 years without ever showing an operating loss.

But these are booming times, I guess, and anything goes.

For many on Wall Street, there is a lesson to be learned. In the meantime, a few hands-full of multi-billionaires are being minted literally out of thin air. (See the Earl J Weinreb NewsHole® comments.)

Enormous Government Debt And Your Investments

We have examples of what happens to personal stock investments if the economy of a country gets deeply into heavy debt: Take Greece, Spain, Portugal and Italy as only a few examples.

But Japan’s Nikkei 225 Index is a special illustration when debt becomes an extraordinary percentage of GDP, as it is quickly becoming in America.

The Nikkei has gone nowhere since January, 1989, flat. All the time interest rates have been set at zero by the Japanese government. Sounds familiar? (See the Earl J Weinreb NewsHole® comments.)

When Should You Choose to Take Your Social Security Benefits?

The age at which to choose receiving Social Security is often a crapshoot. There are many variables that complicate your options.

What you get monthly depends on your age when you are ready to choose. At age 70 you will get at least 75% more than what you would have received at age 62. At age 66 you get at least 33% more than at age 62. However, you have to live longer to make up for payments you have deferred. How good are your health and longevity prospects?

Then you have different possible tax treatment of benefits that may affect future benefits compared to how they affect more current benefits. (See the Earl J Weinreb NewsHole® comments.)

How Interest and Bond Values Are “Contrived”?

Investigations are underway on full scale of how bond traders and those setting interest rates have been contriving their markets.

These probes by the government can be grandiose but still iffy. The alleged procedures usually are applied to financial markets when there are no real or true market prices available. And they may produce government claims that can be hypocritical.

After all, the government depended on mark-to-market pricing during the recent subprime financial meltdown when no one really knew market values; a lack of liquidity made prices and values foggy.

At such times, you could only guess at value. So why start prosecution now, in a recession, about assumed bad pricing under vague conditions? (See the Earl J Weinreb NewsHole® comments.)

Bank Regulators Are Often Clueless

Bank regulators are a busy bunch these days, whether active in the U.S. or in Europe.

They differ only in their thinking of how bank assets can be used for proper capital and liquidity. But they’re equally in the dark about the importance of true diversification of bank assets, to avoid financial calamities.

It’s not the total amount of capital cushion but the non-dependency of the assets in the cushion.

And, most importantly, the way those assets are evaluated in illiquid markets. In other words: Never use mark-to-market accounting under such unstable conditions. (See the Earl J Weinreb NewsHole® comments.)

The Safe Investment Mirage?

Grasping for safe investments because of prevailing low interest returns can make for a mess if you’re not careful.

And that includes taking advice from much of the financial media. It results in unwise speculation, and unwise use of expensive advisers. I have gone over this repeatedly in past blogs.

All the while, many investors keep overlooking what actually prove to be safer, lower-grade, corporate bonds.

Overlooked because of ignorance of the subject and duration principles. Safer even after you consider potential corporate bond defaults. (See the Earl J Weinreb NewsHole® comments.)

The Volcker Rule and Common Sense

Investigations done independently have shown little evidence that investment trading by banks, particularly with derivatives, had much to do with the 2008-2009 financial meltdown problem.

Nevertheless, Dodd-Frank regulations have attacked this “problem” anyway with the so-called Volcker Rule, because it was suggested by the former Fed Reserve chairman. Exemptions are given for U.S. government debt.

Unfortunately, the limitation of a bank’s ability to trade its own and customer securities dries up liquidity. European banks are vehemently against the rule and will take their business away if necessary. (See the Earl J Weinreb NewsHole® comments.)

Social Media and Stock Information

It appears investors are getting a notion they can trade securities based on information they glean from social media sources. The logic they use is fine, to a point. There is information that appears relevant at first.

Releases from corporations are o.k. but they contain what the companies want you to know. That has always been available. More is not necessarily better.

Furthermore, the info is not for short-term trading, especially if being gathered at once for all the investment world to act on. No real advantages can come despite what you hear about the added info. (See the Earl J Weinreb NewsHole® comments.)

Consumer Finance Tips

The Dodd-Frank or Wall Street Reform and Consumer Protection Act law covers consumer protection.

Parts of the law have yet to go into effect; many that involve consumers are not yet clearly set so it isn’t yet clear how the consumer will benefit.

Consumer education was a major consideration but the question is still how Dodd-Frank will do this. There are about 150 pages of the Act that explains the creation of the Consumer Finance Protection Board (CFPB).

The board's chief function involves financial educational programs, and collecting, investigating and responding to consumer complaints. It’s to research consumer financial markets that affect consumers.

Also included is the mortgage disclosure form from a combination of suggestions from the Real Estate Settlement Procedures Act and the Truth in Lending Act, and existing laws.

True, consumers need help. From my experience, too many consumers are ignorant of basic finance, including the role of interest costs.

But I cannot see how this can be accomplished by consumer-oriented documents alone. It can be taught in schools early on.

Creating more informed consumers cannot be practically accomplished by regulators. (See the Earl J Weinreb NewsHole® comments.)

What makes a good securities trader?

Opinions vary from one and all, ivory-tower academe to the everyday market dabblers. Some even mention DNA and genetics as reasons why some appear to do better than others.

Still other observers attribute actual professional skills to seeming proficiency.

My opinion from being on the inside of Wall Street and having studied practically all the investment strategies and their discipline, or mostly lack of that necessity: The big payoff is really from being on the inside of Wall Street.

Yes, you must the job position and social contacts, which are part of the former advantage. And substantial funds for trading leverage. (See the Earl J Weinreb NewsHole® comments.)

Why Not Mutual Fund Indexes?

You are wasting your time looking for the best mutual fund managers.

Experience and research show that the best in any year are achieved mostly by chance.

In any category of mutual funds, only a small percentage of active managers beat the performance of indexes or unmanaged funds. Furthermore, those who distinguish themselves in any one year, generally cannot repeat their performance the next, or on any consistent basis.

A very isolated few managers can outperform indexes over the years, and if they do, it’s pure luck. ( See the Earl J Weinreb NewsHole® comments.)

Stimuli Against Recessions

The government’s stimulus programs have not worked. We know they have not produced needed jobs.

They’ve also done havoc to interest rates because of meddling. When left alone, interest rates usually adjust to supply and demand forces and adjust economic events. However, when government imposes stimulus proposals to raise credit and lift the economy, the system is disturbed and distorted.

This unbalances the economy and does the exact opposite of what has been intended.

Ludwig von Mises wrote fully about the phenomenon in the 1920s. However, the fashionable economist during the 1930s recession was John Maynard Keynes. He became the poster child of that recovery movement.

The Keynes pump-priming thesis that employed prolonged stimuli actually deepened, and helped induce the Great Depression. Nevertheless, it is the premise of the failed current policy. (See the Earl J Weinreb NewsHole® comments.)

Politics Affecting Bank Lending

There is political meddling and too strict bank supervision adding to the bank- lending confused picture.

Banks are not making sufficient loans to small business, even when they have the ability to do so. They make more money by borrowing cheaply from the Federal Reserve and investing in government bonds.

Commerce is in a slump. But many viable, thriving businesses, especially commercial real estate operations, are genuinely seeking loans from banks who have funds.

Yet, too many lenders are hesitant about extending loans they once more readily made. Regulations and looming taxes are the culprits. (See the Earl J Weinreb NewsHole® comments.)

Federal Reserve Wrong Actions

We make a habit of considering Federal Reserve actions responsible; they are often wrong. This has been proven by the decisions we have gotten in the past few years

We have to remember that economists are fallible, even when they direct the Federal Reserve.

In the more distant past as well, those in the Fed worried we may have deflation and therefore inflated the economy, and added too much currency. In fact the Fed, almost automatically, has been on the side of abetting inflation, in an attempt to prevent deflation.

Thus, the Fed has been the chief culprit causing the bubbles which invariably lead to busts and eventual recessions. (See the Earl J Weinreb NewsHole® comments.)

Small Bank Credit Shortages

Many smaller banks don’t have the sound loans on their books as bank examiners would like to see. They are under pressure to clean up their financials and/or add to basic capital.

But politicians in their area are putting pressure on bank examiners to allow these banks with questionable standing to make loans which ordinarily should not be made.

Still, banks are not making sufficient loans to small business even if they have the ability to do so, The truth is, they make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

So, there is a constant small business credit shortage.

One solution: Supervise banks independently of politics. Secondly, permit banks to make riskier small business loans and restrict their tendency to borrow cheaply and invest in government bonds.

It is also time to raise the cost of Fed money to banks, so the latter do what they are in business to do. (See the Earl J Weinreb NewsHole® comments.)

Stock Trading Advantages May Exist?

In rare instances, day trading advantages may actually exist.

As in positioning trades to time of day in Singapore, according to one study, All because of global time differences.

How long this will continue is problematic; it defies supply/demand balance logic. (See the Earl J Weinreb NewsHole® comments.)

Financial Community’s Herd Instincts

The financial community has herd instincts that override common sense.

Be aware of what is referred to as the Bandwagon Effect, the propensity of professionals following average investors to pursue the same line of thinking.

Follow also the work done by the 19th century French economist Frederic Bastiat, who said people see benefits but never the hidden costs. It is one of his lessons that goes beyond politics into the realm of investing. (See the Earl J Weinreb NewsHole® comments.)

Private Pensions Are At Risk

The S&P 500 Index stocks are currently returning about 2.2% but pensions assume earnings of around 8%. This is true of public pensions as well.

Bond returns are higher but the better-rated issues don’t offer much more returns than stock. And they may make up about half the pension investment portfolios. There are thus obvious, enormous shortfalls in pension obligations.

Corporations face deficits; many anticipate bankruptcy as a solution. (See the Earl J Weinreb NewsHole® comments.)

401(k) Costs Are Important

Finally, emphasis is being made by the Department of Labor on what ought to have been obvious in the past to the Securities and Exchange Commission as well.

401(k) costs are important. They will now be scrutinized and divulged more openly to employee-investors. (See the Earl J Weinreb NewsHole® comments.)

Really Too Big To Fail?

The big banks are bigger than ever because of new regulations.

The Dodd-Frank legislation has added influences that actually work to the to the detriment of small banks.

Dodd-Frank enhances the competitive positions of the truly big banks and enables them to expand faster. Where today, they are simply too big to fail. They would drag down the economy if they did. (See the Earl J Weinreb NewsHole® comments.)

Annuities Can Be Tricky

Annuity salesmen often compare the benefits of their product with risks of stocks and bonds. They mention the hazards of securities markets and possibilities of market loss. But they often overlook the downside of what they offer.

Annuities have negatives and are not for everyone. They have an insurance factor which may not be required. And if not, why pay for it?

Then there are annuity management fees, contrary to sales pitches and early termination charges. Moreover, the strength of the company is always important to consider.

The choice of fixed or variable annuities further complicates the picture. Fixed annuities have set returns which means the buyer has no protection from any future inflation. Variable annuities tie into securities markets but not as directly as you may want. (See the Earl J Weinreb NewsHole® comments.)

The Fed’s Causing a Continued Investor Disaster

The Federal Reserve is well on its way, continuing its

ongoing investor disaster.

They’re doing this by keeping official U.S. funds at zero cost, not even at the nominal 2% inflation rate. This makes it impossible for the public to get a decent return on FDIC insured funds in a bank. Most folks are lucky to earn 1%, well below inflation. (See the Earl J Weinreb NewsHole® comments.)