How To Avoid Investment Scams
By Sean Leviashvili | MainStreet.com

Even celebrities aren’t impervious to scams. Last week Mark Hoppus, current lead singer of Plus-44 and former bassist and singer of Blink 182, filed a lawsuit against Missicom LLC, alleging that the father/son business duo pocketed investments acquired from Hoppus and other “prominent, well-known figures.”

Hoppus invested $600,000 in Missicom LLC in 2003, believing it was going towards a venture to install automated checkout machines at McDonald’s (MCD) restaurants. The money’s whereabouts remain a mystery.

Hoppus’s case is far from unique. Each year approximately $40 million is lost to investment fraud, according to the North American Securities Administrative Association. (NASAA)

“People who get caught up in this are not stupid,” says Steve Weisman, author of The Truth About Avoid Scams. “Con artists are really just brilliant. They are the only criminals known as artists.”

If you find yourself a victim of investment fraud of any sort, it’s important to contact the Federal Trade Commission, Securities Exchange Commission, or local attorney general. But the best way to handle fraud is to take preventative measures.

Find An Advisor:

Before discussing an investment with any type of financial advisor, you should obtain some background information first. Organizations such as the U.S. Securities and Exchange Commission and FINRA, the Financial Industry Regulatory Authority, provide access to credentials and prior complaints about companies and advisors that can be viewed on line or directly. Records for financial advisors are considered public information and should be received for free, or in some cases, for a small fee. “You may first hear about an investment from someone you trust, maybe a fellow church member or friend,” suggests Weisman. “But when it comes to investments, don’t just trust your instincts, do your homework.” Affinity fraud occurs when scam artists seek out investors in non-financial organizations or affiliations like a P.T.A. or religious group, a place where they have likely already gained your trust.

Get The Right Tutor:

Even more important than conducting your own research is finding a knowledgeable tutor. “I’ve seen many clients who are intelligent people, but not sophisticated investors,” says Weisman. Upon researching an advisor and particular investment, seek help from a professional with no conflict of interest, like an attorney, accountant or professional financial planner who can help clarify the mysteries embedded in the fine print. “Most people won’t be able to read the forms (attached to investments) without falling asleep, let alone understand them.” While these services aren’t free, professionals can help you assess the hidden fees and expenses in investments like 401Ks and annuities.

Explore Your Options:

While conducting your research about the initial investment, its risks and returns, it’s important to keep your options open. “Never look into just one investment,” says Weisman. Doing the necessary homework will hopefully prevent you from falling prey to your emotions, which can sometimes be the driving force behind financial decisions. “When it comes to investments, if it sounds too good to be true, it probably is.”

Two Safe, Short-Term Investments
By Peter McDougall | MainStreet.com

In the quest for higher yields, many consumers ignore lower-yielding — but more secure — options like certificates of deposits and money market accounts.

Both of these short-term investments can be useful tools for investors looking for a safe place to park their money, while still earning a little something from their cash. But there are differences between the two options, and it’s important to understand what you are getting before you hand your money over to the bank.

In the spectrum of yields, CDs and MMAs are located somewhere between investing in the stock market (which is a pretty volatile place these days, and depositing it in a savings account (which is practically equivalent to stuffing it under your mattress, with the anemic interest rates currently offered on savings accounts).

If you have $5,000 to $10,000 that you want to keep close, CDs and MMAs offer a viable option. Both types of investment are insured by the Federal Deposit Insurance Corporation up to the $100,000 limit per depositor per insured institution. Unlike other investing options like mutual funds or equities, CDs and MMAs pretty much guarantee that you’ll walk away with more than your initial investment.

The main difference between these two types of deposit accounts lies in the access they offer to your money. CDs are less accessible, or liquid, because they require you to give your money to the bank for a set period of time — generally for intervals of six months, one year, two years and on, up to 10 years.

In exchange for not being able to touch your money before the maturation of your CD, the bank offers you a higher interest rate than it would for a MMA. And the longer the duration of your CD, the higher the interest rate the bank will offer.

Currently, the national average for interest rates on CDs hovers a little over 3% for six month CDs, and just over 4% for five year CDs. That’s a significant difference from what’s offered on MMAs, which currently sit at closer to 2.5%.

But with an MMA, you have easy access to your cash. The accounts require you to hold a minimum balance and to conduct a limited number of transactions per month.

You can deposit or withdraw money from an MMA much as you would a regular savings account — meaning you don’t face the steep penalties associated with accessing your CDs before maturity. (CD early-withdrawal penalties typically depend on the duration of the CD, but can leave you with less principal than you invested in the first place.)

Which one is right for you depends on how soon you need the money. If you aren’t likely to need it for a few years, your best bet may be to invest in CDs. You can set up a CD ladder, which is a series of CDs with different maturities. As each CD comes due, you can either use the money or invest it in a new CD. This way you’ll have a chance to access some of your money every six or 12 months, depending on the intervals you set up.

If you aren’t sure when you will need the money, or if there’s a good chance that you’ll need it within the next year, you may want to choose the MMA. The lower interest rate may be tough to swallow when you look at how little you have to show for your investment after the first year, but if you do end up needing that money, you’ll be happy not to have to pay the early withdrawal penalty on a CD.

To find out more about the interest rates on CDs and MMAs available from your local lenders, you can search by zip code on BankingMyWay.com.

Photo: Lisa Solonynko

“Simple is as simple does” said Forrest Gump some years ago. So what is “simple interest” and how does it compare with “compound interest”? This back to the basics article will give you the overview.

Simple interest rates are a different method to calculate rates of return. Simple rates are used in stocks, limited partnerships, and mutual funds. Unless stated otherwise, most mutual funds use simple interest rates.

With simple rates, your principal does not compound as illustrated in the Rule of 72. With simple rates the investor earns 100% each time the principal doubles. Check out this example from Left-Brain Finance for Right-Brain People, pg 24:

If you invest $1,000, then six years later sell the investment for $2,000, you made a $1,000 profit or 100% of your money.[...][T]he total profit divided by six (number of years) gives the annual yield of 16.7% (100 / 6 = 16.7%). Or, the profit per year, $167, can be divided by the principal, $1,000, to get the same, 16.7%.

The 16.7% simple yield used in this example is equivalent to a 12% compound yield. That is, in six years, $1,000 earning 12% compound interest grows to $2,000; and, in six years, $1,000 earning 16.7% simple rate of return also grows to $2,000.

Most investments calculate yields using the simple method. Be realistic making comparisons and don’t think the simple rate is always better because it is higher.

For more Forrest Gump-isms on making money, check out this blog entry, “The Forrest Gump Guide to Becoming a Gazillionaire”.

Let’s pause in our back to basics series to consider the power of baby steps. Are yours big enough?

You might not consider “baby steps” a milestone on the path to budgeting, investing, and saving. But, consider how many people give up on budgeting, investing, or saving. They claim it is too difficult, intimidating, or impossible. They give up.

Here’s the secret: small actions DO make a difference. Consider this example from “Eight Steps to Seven Figures” by Charles Carlson:

If you were to improve just .003 each day—that’s only three tenths of 1 percent, a very slight edge—and you kept that up for the next five years, here’s what would happen to you:

The first year you would improve 100 percent.
The second year you would improve 200 percent.
The third year you would improve 400 percent.
The fourth year you would be a better person by 800 percent.
By the end of year five—simply by improving three tenths of 1 percent a day—you will have magnified your value, your skills, and the results you accomplish 1,600 percent.

Yes, there is a financial parallel. Carlson provides an example which I’ll boil down to these two hypothetical situations:

Situation A
Invest $95/month
Annual return: 11.4%
Holding period: 20 years
Total amount at the end: $87,544

Situation B
Invest $100/month (just $5 more than Situation A)
Annual return: 11.5% (just 0.1% more than Situation A)
Holding period: 25 years (just 5 more than Situation A)
Total amount at the end: $173,659

The reward for those baby steps? $86,115.

Do not be discouraged by small amounts. Whatever small changes you’re making will add up. Keep making these small steps. They do add up!

How to Give Yourself a Second Stimulus Check
By Mellissa Seecharan | MainStreet.com

OK, who is up for more government gravy in the form a second stimulus check? We thought so. Of course the Yea’s that really matter might not get the deal done in timely manner, if ever.

In an attempt to bring the country out of its economic rut, Senate Majority Leader Harry Reid (D - Nev.) recently proposed a second stimulus check package. (Even candidate Barack Obama is in favor of cutting more government checks: He’s been detailing a $50 billion plan.) The trouble? Congress begins their recess August 8, and there are a stack of other issues that need to be dealt with first, leaving the potential stimulus check in limbo.

So instead of waiting around for Congress to pass another stimulus package, why not create your own stimulus check? Now is the perfect time to start saving and Consumer Reports gives MainStreet the lowdown on how you will be able to write yourself a $600 check by Labor Day.

Eat Smarter

Sometimes foregoing certain items can be hard, but it means a few extra dollars will be saved. Consider choosing generic over name brand. It’s the lower-cost brands that, according to the Department of Agriculture, can save a family of four an extra $190 during monthly trips to the supermarket. Need to save another $30 to $60? Cut back on eating out. Consumer Reports also recommends taking advantage of off-hour discounts and prix-fixed meals (and always ask for a doggy bag). Amount saved: $250.

Update Your Life Insurance

With life-insurance premiums decreasing, if you bought your policy way back in the 1990s, it’s time for a change. Example: A healthy 50-year-old would have paid $2,125 for a $500,000 20-year policy from Prudential (PRU) in 1998. Today, a 60-year-old man could pay $1,385 over the next 10 years. Not comfortable with getting a new policy? Then get healthy. It’s no secret the healthier you are the lower your premium will be, so get fit before purchasing a new policy. And if you are shopping for another policy, Consumer Reports suggests checking out www.accuquote.com and www.lifeinsurance.com. Amount saved: $110.

Re-Examine Your Car Insurance

Lots of factors determine how little or how much you pay for car insurance. A New Yorker’s insurance payment will vary from a Montana car owner, which makes shopping around for a new policy even more important. Compare premium quotes online by visiting sites like www.insweb.com or www.insurance.com. If you can’t find quotes in your state, then pick up the phone and call you local insurance branch. Amount saved: $65.

BBQ Cheaper with Charcoal

It’s summer time, which means barbecues are in full use. And with gas prices on the rise, the cost to fill up a propane tank is getting expensive. In short, it’s time to cut back on your grilling, or at least switch to cheaper charcoal. It costs around $30 to fill up a BBQ tank, depending on the size - tanks range in size from 5lbs to 20lbs. Filling only half of your tank will cut your propane expense in half. Websites like www.nextag.com and the Home Depot (HD) offer consumers BBQ tank help. Amount saved: $15.

Phase Out ATM Fees

Last year, banks collected $39 billion in account fees and penalties, according to the Federal Deposit Insurance Corp. Meanwhile, the American Bankers Association reports that 52% of consumers don’t pay a fee. Now for those stuck paying at least $28 per month, per household, Consumer Reports suggests using a large bank with lots of ATMs and shopping for “free checking and strictly adhere to provisions for a minimum balance.” Amount saved: $25.

Figure Out Your Phone Situation

Cell phones, pagers, landlines and phone cards cost the average family $90 a month. When shopping for phone service, check out everything from service providers to long distance carriers to your cable TV company. Consumer Reports editors warn cell phone users to manage their minutes: “Don’t buy more than you need if you rarely go over 900 minutes per month.” Amount saved: $35.

Make an Easy Tax-Friendly Fix

Retirement will be a lot sweeter if you up the amount of your current 401(k) contribution. Not to mention, the amount paid on your income tax will be cut. How does it work? If you put $500 into a 401(k), there will be a $50 to $175 reduction on your federal tax income, which of course, depends on your tax bracket. And what should you do now? “Invest your tax savings or use them to offset rising prices elsewhere.” Hello stimulus! Amount saved: $100.

Total Savings: $600.

(And you can save another forty-one cents if you don’t feel the need to mail yourself the check. Happy saving!)

Related:
* How the Tax Stimulus Can Stimulate Your Travel Plans
* Retailers Want Your Stimulus Check! Here’s a List of Five Big Store Deals
* Don’t Fall Victim to A Stimulus Check Scam

Word!
—
Jim Cramer: If I Were You, I’d Buy Stocks Now
by Jim Cramer | MainStreet.com

When I got started buying stocks in the late 1970s, people were incredibly negative about the stock market. Most had decided that the market was never going to come back.

It had been years since people made money, or at least it seemed so, and the Dow Jones Average was something that nobody talked about because it never did anything. It couldn’t. Business was too horrible, but more important, the darned stock market was just despised.

Well, I liked being contrary and I started buying. Why not? Stocks have been a great long-term asset.

And what happened?

I was early. A couple of years early!

But you know what? It was a total homerun in two years time. And I lost next to nothing in the interim, because stocks were so hated no one cared.

I always thought if I could ever get into the game again when stocks are that hated, then I would be thrilled.

Right now, stocks are that hated. How do I know? Because each week an organization, Investors Intelligence, polls important market letter writers – gurus — and asks them how they feel about stocks. Usually about half of the people like stocks — 50% bulls. That’s too many bulls. Not enough people who don’t like stocks to convert them into stock buyers.

Sometimes 55 % of the gurus like stocks. That’s just a danger zone. You have to sell and sell hard.

And then, on rare occasion, the percent of bulls falls to the low 30s. That means way too many people hate stocks, and you can buy without that much worry because so many people dislike the market. A number that small shows there are too many bears. Not enough people in; way too many out.

Right now, the new reading is 27% bulls. That’s the fewest number of bulls since 1994! Astounding. Fourteen years since this many people hated the market. And look at the run we had within a year after the negativity of 1994. Notice I didn’t say “beginning right then.” Like when I got involved when everyone hated the market, the market stayed hated for some time.

But then it exploded upward.

When I saw the latest number, 27% bulls, I said to myself: I wish I didn’t have a daily show that appeals to everyone who is in the market. I need to find people who have never been in or never got started or never bought a stock or never made a contribution to a 401(k) or an IRA. Those are the people who need to start and start now.

This number of bears is a clarion call, a total wakeup moment for those who are new, or young, or never been in. The call is this: “I am not calling a bottom, I am saying that when you buy when stocks are this hated and you stash them away, you will be rewarded.”

Most people reading this do not have the time or the inclination to research individual stocks. And around the globe markets are under pressure.

My suggestion? Great time to buy one of the mutual funds I recommend in my book Stay Mad for Life. They are all battle-tested for crummy markets. Or, for those who really want autopilot, Vanguard — where I keep my money — just launched a worldwide fund that buys stocks all over the globe. Given that things are bad all over, this might be another opportunity.

There are NO “no brainers” in this business. There are indices of sentiment that have never truly betrayed us. When everyone hates ‘em, find something to love. Main Street has turned on Wall Street. Walk the other way and take the turn to Wall Street.

But don’t count on the road being straight up.

Just remember though, it has ALREADY been straight down. No one can ever accuse you of getting in at the high!

A “back to the basics” series wouldn’t be complete without mention of 72 — not the year, but a simple calculation on how quickly your money will double and re-double. Here’s how Benjamin Franklin used the “rule of 72″ and you can, too.

You’ll recall that TIME is a huge factor in accumulating wealth. People who wait until their fifties to start investing will need to put away 14x (fourteen times!) more money each month than those in their twenties. The habit of putting small amounts aside every pay period is critical.

Secondly, you’ll remember that INFLATION will get us all, and so we need to consider our BREAK EVEN RATE OF RETURN and plan accordingly.

The Rule of 72 is a valuable tool to predict money growth on compound rates of return. This rule shows how many years are needed for a sum to double at various rates. Simply divide 72 by the rate of return (example: 6%). The answer tells you the number of years before your money doubles.

Examples:

$500 earning 6% doubles to $1,000 in twelve years (72/6 = 12). $500 earning 12% doubles in six years (72/12=6). What is the difference between compound and simple interest? Tune in tomorrow. But first, consider this example from “Left-Brain Finance for Right-Brain People” (page 23):

Benjamin Franklin understood compound interest. He left $5,000 to the city of Boston in 1791 with instructions that it should be left alone to compound for one hundred years. The $5,000 grew to $322,000 by 1891.

At that time the city decided to build a school with some of the money. They also followed Ben’s wishes and set aside $92,000 for another 100 years. By 1960, this fund had grown to $1,400,000!

Let’s hope the city of Boston had the foresight to put it away for another 100 years so that Mr. Franklin’s money can produce more gifts.

You probably won’t set aside your money for 100 years or more, unless you plan on being cryogenically frozen. You might, however, consider how compound interest will work for you and your heirs. Use the Rule of 72 to help you figure out how fast money will grow.

Yesterday in our “back to basics” series we focused on how to gain an overview of your financial health. We also explored why knowing your top three financial goals is critical to your success. Today we climb the so-called “Risk Pyramid” and highlight five investment purposes.

Like the U.S.D.A.’s Food Pyramid, a personal finance “Risk Pyramid” is open to debate and interpretation. Still, it’s handy to know what the experts recommend. I take this overview from Paula Ann Monroe’s excellent book, “Left-Brain Finance for Right-Brain People”, (Chapter 6).

Here’s the structure of Monroe’s version of a Personal Finance Risk Pyramid:

Foundation - Shore Up The Basics:
Property, Casualty, Liability Insurance (to protect your assets)
Healthy and Disability Insurance (to protect your health and also your income-earning potential)
Life Insurance
Emergency Fund (I like to call this the “Emergency Prevention Fund”)
Personal Residence
Specific Savings Goal or College Fund
Retirement Plans

Income
Bonds and Government Securities
Income Mutual Funds and Blue Chip Stocks

Growth and Income
Rental Real Estate
Mutual Funds and Limited Partnerships

Growth
Common stocks and Growth Mutual Funds
Growth Limited Partnerships (e.g., movie rights, commercial real estate), Hard Assets, (e.g., works of art, precious metals) and Land (you know what land is…)

So, from bottom (basics) to top (growth) these are the financial components that make up your personal finance “risk pyramid”. As you move toward the top the investments have more associated risk.

Yes, owning empty land is one form of “risky”. This is one example where folks disagree on risk pyramid structure. Sure, they aren’t making more empty land. Unlike other investments, land value is associated with uncontrolled nearby conditions. In contrast, an asset on that land (like a home) could always be sold off or insured for financial protection against an unforeseen event.

How do you evaluate all these different investments? It breaks down like this: look at each asset in the pyramid on these criteria. Compare what you find to your goals, your tolerance for risk, and your specific situation. Here are the things to consider:

Safety
Liquidity
Income
Tax Advantages
Growth Potential

If you’re a beginner, focus on strengthening the base of your financial risk pyramid. Educate yourself and get professional opinions before attempting more sophisticated investment strategies. Use Geezeo’s tools and social resources to make more informed choices.

Finally, and the most important: finding purpose in your investments is a head and heart activity. Use your head to evaluate and implement your investment strategy. Use your heart to determine why you want to improve your financial situation. Incorporate giving to others as part of your strategy and you’ll find true purpose to stay financially fit.

Climb that pyramid!

Cash in the tooth fillings and the old wedding rings. Time to invest in gold.

How does money vanish? Let us count the ways…Number one on the list — something that will get us all — is inflation.

Do you know how much a gallon of gasoline cost in 1962? Take a guess. Ready?

A gallon of gasoline cost 31 cents. Seventeen years later, in 1979, that same gallon of gas cost 79 cents. By 1997 that gallon cost $1.39. (Source: Left-Brain Finance for Right-Brain People, 41-42) Compared to today that all sounds remarkably inexpensive.

Here’s the rub: someday we’ll look back at today’s prices and think, “Gee, gas was at least reasonably priced!”.

The best laid financial plan can be ruined if inflation is not taken into consideration. Inflation is a slow and constant erosion on your purchasing power.

What is Inflation?

Inflation is rising prices due to increased spending of cash or credit. When prices rise but our production of goods and services (GNP) does not, inflation results.

Like inflammation in the body, it can grow, spread, and cause damage to the economy.

What Causes Inflation?

Any time more money buys the same supply, prices go up. Consequently, the dollar loses purchasing power.

To use a body analogy again: inflation is like inflammation around damaged cells or an infection. It is a reaction to an unwanted condition. Just like the body routinely fits inflammation with the aging process, the economy fights inflation as a naturally-occurring economic process.

Why Inflation Won’t End

We can’t stop inflation; we can only slow it down. Inflation compounds just like interest. For example, if inflation is 4% year (low), that still means prices will double every 18 years.

Inflation Isn’t All Bad

Inflation hurts those on fixed incomes. It can also diminish the value of your money.

Some ways inflation is good:

1. When inflation is high, debtors win and creditor lose. (Yay!) That’s because each year the debtor pays money back on a fixed loan, he’s repaying in dollars that have declined in value.

2. Sometimes inflation can help create wealth. In the past stocks and real estate have been excellent inflation hedges. It’s possible to earn enough with these investments to outpace inflation.

Bottom Line on Inflation

It’s your challenge to be on guard against inflation and plan accordingly. If not, you’ll see your purchasing power diminish and your savings decrease. Don’t put yourself in a position of having a fixed income in an economy where prices keep rising.

Related:
* Even Mild Inflation is Something to Fear
* Don’t Let Inflation and Taxes Erode Your Savings
* Make Sure Your Investments Beat Inflation