Archive for January, 2009

Jan26

GrandCentral Forgot to Renew Their Certificate

It seems GrandCentral, the Google owned phone number consolidation service, has failed to renew their security certificate.  According to the Firefox connection message displayed when I tried to login, the certificate expired yesterday afternoon.  Maybe they renewed it but the configuration hasn’t hit the server yet?!?

GrandCentral Certificate Expires

GrandCentral Certificate Expires

January appears to be a rough month for the internet behemoth.  Last January, around the same time (January 23rd actually), someone at Google failed to renew the Google.de domain which brought it down for several hours after someone else registered it.

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Jan24

Guaranteed Money

Ok, so the title may be a little misleading but let me explain.  I was reading February’s issue of Money magazine and it has a great article by The Mole titled “A Guarantee, Without High Fees” that essentially outlines how to create your own equity-indexed-ish annuity (ish meaning like).  Of course, this method doesn’t come with the annuity’s annual fees or surrender charges if you pull out early.  However, you should know that you will face some penalties for the CD portion of your investment if you withdraw it early.

Not sure what an Equity-Indexed Annuity is?  Check out this description from the Securities and Exchange Commission:

An equity-indexed annuity is a special type of contract between you and an insurance company. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Now that we’ve got that taken care of let’s get into things.  We’re going to be splitting our investment dollars between a Certificate of Deposit (CD) and a stock market index fund.  I’ll leave the fund decision up to you but you want to make sure it’s low cost.  Keep in mind that purchasing through your IRA gives you the benefit of a tax break.

For all three scenarios, we’ll assume that we have a 10-year investment timeline with an initial investment amount of $10,000.

After some searching around the internet I found a 10-year Capital One CD that was yielding 4.25%.  Not a bad rate given the current economic climate but see my note below – toward the end of the post.  For the index fund portion of our investment we’re going to assume an annual 6% return.  I know last years tremendous losses may have you laughing at that assumption but keep in mind we’re investing long-term and investors typically make back the bulk of their bear market losses in the first year of a bull market.  I’m no economist, but I don’t see the current financial crisis lasting through our 10-year example.

Scenario 1:

We’re risk averse and want to insure that we have, at the very least, our initial $10,000 when we’re done.  For those of you that are reading along at home, this is the same scenario that Money walks through.  I’m just using more recent yields and including a couple additional scenarios.

Here’s our game plan – invest $6,600 in the CD and $3,400 in our index fund.  To determine how much we need to invest in our CD today to guarantee our target minimum is met we run a present-value calculation.  Money recommends the calculators at moneychimp.com which I hadn’t used before today but they’re actually pretty good (here’s a direct link – bypass homepage).

In 10 years, provided the index fund we chose hasn’t lost 100% we’ll have somewhere north of the $10,000 we started with.  If the fund doesn’t increase or decrease at all we’ll have roughly $13,400 (CD + initial index fund value) and if it achieves the 6% annual return we assumed we’ll have about $16,000.  It doesn’t make us the next Warren Buffett but not bad for minimizing our potential loss.

Scenario 2:

In this scenario we’re going to continue with the risk averse theme but make sure we earn something for our time.  We want a guaranteed payout of $12,000.  We have to have some growth otherwise it’s just not worth the effort.

The higher guarantee means that we have to put more in our CD which means less in our index fund.  Less money at a higher yield (6% versus 4.25%) means lower potential on the upside.  I think you may be surprised how little the difference is though.  Here are the numbers…

Stash $7,950 in our CD and toss the remaining $2,050 into the index fund.

If our fund loses everything we still walk away with $12,000 in 10 years.  If the fund doesn’t do anything we’re going to get $14,050 back which is a few hundred more bucks than in the previous scenario.  However, as I said earlier, we’ve got less money earning a potentially higher yield.  This means our potential take away if our 6% annual return is met is $15,650…a few hundred bucks less than in the Scenario 1.

Scenario 3:

Last one, I promise!

We’re young, we know it and we’ve got plenty of time to make up some losses so we’re more willing to take on some risk.  Let’s say we’re willing to take a potential loss of $2,000 in search of a higher payday.

In order to guarantee our $8,000 we throw $5,300 in our CD and $4,700 in our index fund.

We now have $8,000 guaranteed but we’re in an index fund so the chance of it losing 100% is slim.  If our fund doesn’t do jack over the next 10 years we’ll come clean with around $12,700.  But, if our index fund returns 6% like we’re hoping, we take $16,400 straight to the bank (read: to another investment opportunity).

It’s only a few hundred bucks more than our previous examples so is it worth the added risk?  Well, that’s up to you and your personal investment style.  Investments by nature are risky but they’re a necessary evil if you want to build that nest-egg.  You should sit down with your financial advisor and decide what works best for your situation.  On a somewhat related rant, I’m against all financial advisor’s unless they charge a flat fee – typically hourly.  I think advisor’s that make commission on sales is a recipe for disaster.

One thing to keep in mind is that the CDs I discuss in this post are fixed yields which means if interest rates go up, you’re stuck earning a 4.25% yield until maturity.  There are techniques you can employ such as staggering CD purchases but they carry risks of their own.  For example, rates could go down which means future CD purchases could drop you below your target guaranteed minimum.  They do have some benefits though, if interest rates go up you could achieve a higher guaranteed minimum and it also allows you to maintain a certain threshold of liquidity.

I couldn’t find the article on Money’s website but I’ll try to keep my eyes peeled so that I can link to it.  If you happen to have the February issue on hand…it’s on page 35.  It really was a very interesting article.

Disclaimer: I am not a financial advisor and offer no warranty – implicit or explicit – to the investment approaches or thoughts outlined in this, or any other post on NathanHJones.com.  I am simply expanding on thoughts, experimenting with numbers and generally thinking outloud.

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