June 30, 2008, 6:00 am

Are commodities an asset class?

by: The Financial Blogger    Category: Investment, Market and Risk

In the past 1-2 years, commodities have changed a lot in the eyes of investors, both institutional and individuals. In the past, asset classes were generally either equity, fixed income (bonds), or fx. Commodities have been traded for a long time but it was generally a hedging market where buyers and sellers would go to insure the future price they would receive would not affect their operations too much. If a farmer wanted to be sure he wouldn’t be too affected by a fall in corn prices, he would go in the futures market and simply sell futures, so any loss on the price (on the sell of his crops) would be offset by his future. The other side of the trade was generally the company that was going to buy the product in a given period and wanted to insure price stability.

 


But recently, a lot of investors, mainly hedge funds at the start started investing in commodities taking bets on their rise, fall or even volatility. This has caused much debate in the governments and the US government is currently looking at legislation that would limit such “speculation” in the commodities markets.

Good thing or bad thing? Well, it’s a very heated debate and I could only give my opinion. Obviously the argument for those supporting such legislation is that current speculation is causing huge trouble around the world as prices of food and energy has risen far above the supply and demand. And it’s easy understanding their point. When you look at poor countries that spend 30-40% of their income on food, it’s easy to see how a 100% rise in the prices can be tragic. The solution is not easy and some countries (China for example) have tried to subsidize prices to help their populations afford the increasingly expensive oil. But long term, there’s no doubt that it cannot be maintained.

I still think that in the end, markets are efficient and if the rise is not warranted, prices will go back down sooner than later… The problem with this bubble compared to many others is the extent to which it impacts regular citizens whereas usually bubbles were investment bubbles and would mostly impact investors (i.e. not the poorest members of the society). And we also have to look at how it could be done practically. There’s already talk that if such legislation is put in place in the US, hedge funds and big pension funds will simply do their trading elsewhere such as in London, so is it really going to make a difference?

It will be a big debate, and one that we will watch with interest as the past few months have shown without any doubt that the fluctuations in the commodities markets have great impact in the everyday lives of each of us. In my next column, I’ll take a look at the different ways to play the commodities market.

 

 

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June 28, 2008, 6:00 am

Financial Ramblings

by: The Financial Blogger    Category: Financial Rambling

While you are reading those lines, I am writing my Personal Financial Planner (PFP) exam. This is a 10-15 pages case which you have 3h30 to resolve. You basically have to write down observations and recommendations for each of the 7 fields of financial planning. It is quite a challenge but I think I am ready for it. I’ve been studying quite hard during the last week and I feel comfortable now. So while I am writing a dozen pages of text, I’ll leave you with some weekend readings:


Money Ning wrote an interesting article about how much you really make when you save money. While saving money can be quite a pain, don’t forget that when you save a buck, it’s a buck after taxes and other contributions. Therefore, you are saving a lot more than a simple buck 🙂

 

Invest in India is telling us why Equity funds hold cash in their portfolio. The purpose of an equity funds is to be heavily invested in stocks so it can provide a good return. While liquidity is technically reducing the expected return of the portfolio, there are some reasons hidden behind fund managers investment strategies.

 

There is a great post about Risk management via insurance written by Brian Poncelet as a guest writer for Million Dollar Journey. While insurance is not my favorite topic, I must admit that there is a great deal of risk that can be reduced with insurance.

 

I found some funny pics from The Digerati Life who shows us what a market crash looks like. I recognized this kind of expression since I experienced the market crash feeling once… what a painful experience!

 

Mr. Cheap from Four Pillars wrote the a small guide about making $30 a month in passive income. With a title like that, it caught my attention right upfront! He also had the great idea of splitting them by poor/rich and no skills/skills categories.

 

The stock you are holding is decreasing its dividend? There are 3 ways to react to a dividend drop. The Dividend Guy is telling you what you could possibly do and why. I would personally re-evaluate the stock and find out why the company decided to decrease its dividend. Sometimes, you are better off sticking to your investment strategy!

 

 

 

 

Carnivals:

Carnival of Personal Finance

Carnival of Careers (Yipee! another Edtior’s Pick!)

Festival of Frugality

Carnival of Money Stories

 

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June 27, 2008, 6:00 am

You Are Lucky

by: The Financial Blogger    Category: Financial Rambling,Miscellaneous

While you are running among all those people, you start thinking about how you got there. You woke up at 5am on a regular basis to run outside regardless if it was raining or not. You endured the pain, you made sacrifices and there you are: you are running your first marathon. It appeared that your workout program was good enough to bring you to the competition level.



You end up first and while you are desperately taking your breath back, while you sweet like a pouring rain, while your heart is tearing down your t-shirt to get out of your body; someone get beside you and say ”You are lucky! You finished first!”.

Lucky? Yeah, LUCKY. I am sure that many of you hear that remark at least once in your life. It usually happens more when people think that you are doing well on the financial plan. “You were lucky to get that job” or “you were lucky since your parent backed you up during college” or even “you are lucky to have all of this, most people work hard their whole life and don’t have what it”. Lucky… really?

I personally think that there is no such thing as luck in life. Off course there are opportunities and you can benefit a great deal from them. However, opportunities are offered to everybody. It’s more a matter of recognizing them and benefit from them.

Some people will walk on their side of the sidewalk without even looking what is going on on the other side of the street. They work hard and they are honest, but they are walking with blindfold eyes. Those people use the word lucky a little to much.

While I am very far away from being rich, I think I am having a good start on the financial plan considering my age what I have accumulated so far. Some people have the guts to tell me I am lucky and that really frustrates me.

There is no such thing as working hard day after day, making sacrifices and being told that all that you have is not related to your efforts but you owe a big one to lady luck!

When I see a successful person, regardless in which field, I am not telling myself “oh boy, this one is lucky to be so good at what he does” but I am asking “I really wonder how he made it that far”.

Sorry for the rant of the day, but I really needed to write it down so I can feel better 😉 I don’t think there is a magic secret for success. In fact it is quite simple. Make a plan, work hard, don’t loose your objective and wish the best for you and for everybody around you. With this kind of attitude, you won’t need luck anyway 😉

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June 26, 2008, 6:00 am

How to Find a Good Financial Advisor Part1

by: The Financial Blogger    Category: Financial Planning,Personal Finance

I realized that there are more and more people trying to manager their finance by themselves. They think that they can do better than their bank, that they have been managing money since high school and that they already have a good pension plan anyway. While some people become really good at doing it (for some reasons, there are a lot of engineers doing it!), the majority of the population is driving blindly their portfolio thinking they roll on Wall Street where they are just about to hit a brick wall!

 

Financial Advisor

From time to time, I receive emails from readers asking me questions about their financial situation or about some wicked investment strategy designed by a financial consultant. I noticed one common thing; they have no clue if they can trust their financial advisor or not. I guess this is probably why several people are trying to manage their money on their own since we are surrounded by a bunch of financial clowns!

Being a financial planner myself, I tried to identify what makes a good financial consultant compared to the usual banker or the car salesman.

Honesty and integrity

This is probably one of the most important characteristics of anybody who has to manage your money. The problem is not that I don’t believe that most of them are not honest but too often they run into conflicts of interest.

One day, I was asked a very smart question: “How much do you get paid with this transaction?”. I think this question should be asked every time that you are about to do a financial transaction (especially when it is regarding the stock market and your investment portfolio).

We often think that honesty is coming from the trust we have into a person. This is completely wrong! Honesty is coming from the answers to your questions. The more questions you ask your financial consultant, the better idea of his level of integrity you will have. The world is full of bullshiter and the only way to discover them is to ask so many questions that they can’t lie anymore.

If your financial advisor smiles back at one of your questions and change subject, this is your clue that is not being honest and that you need to come back with more precise question in order to corner him.

This is obviously the first part of a long series of post about financial consultant. I will try from time to time to give you more information about how to find the right financial planner for your needs. Stay tuned!

 

 

Other post on this series:

 

How to find a good financial advisor part 1

How to find a good financial advisor part 2

How to find a good financial advisor part 3

How to find a good financial advisor part 4

 

image source: Ambergris

 

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June 25, 2008, 6:00 am

How Credit Cards Help You Pay Off Your Mortgage

by: The Financial Blogger    Category: Credit Rating & Credit Bureau,Pay off your Debts


Here is a guest post from Debbie Dragon. She is a writer for CreditorWeb.com where she writes about
credit cards, rewards programs and finances.

When most people think of credit cards, they cringe at the thought of paying high interest rates and finance charges. Who really wants to pay two or three times the cost of an item by making monthly payments? If the right credit card is used correctly, though, it can actually help you pay off your existing mortgage – or build up credits to help you pay for your future mortgage.

 



While not yet as common as the frequent flier rewards programs or the cash back rewards programs, there are an increasing number of credit card companies offering rewards in the form of rebates that are applied to the principal of your mortgage, and helps reduce what you owe. If you don’t have a mortgage yet, there are a handful of other cards that allow you to build up your credits by using the card, and then use them towards the purchase of a home.

Bank of America’s Home Advantage Credit Card offers one of the leading mortgage rewards programs. Using the credit card earns you points; and every 5,000 credit card reward points can be redeemed as a payment towards your mortgage principal.

For people who have not yet purchased a home, you might look into the Citi Home Rebate Platinum Select MasterCard. This card offers a high percentage cash back, in the form of rebates applied to a mortgage, of up to 6% of certain categories of purchases. For example, when you use the Citi Home Rebate Platinum Select MasterCard to pay for utility costs, 6% of those purchases made with the card will be credited to a statement on your account and later used to pay down a mortgage. Once you buy a home, you can continue to apply your rebates to the principal of the mortgage and pay it off faster.

The majority of mortgage amortization schedules look similar in that the first several years of monthly payments tend to be almost all interest payments, with only a small amount of the payment going towards the principal balance of the loan. If you were able to increase the principal payment each month, by double, you could pay off the mortgage in half the amount of time. This is why it’s possible that a small additional payment made on a mortgage regularly will work to reduce the amount you owe significantly.

When your credit card rewards program contributes your earned rebates to the principal of your mortgage, those rebates can actually save several months of payments and several thousand dollars in interest over the course of your mortgage. The Bank of America’s Home Advantage Card website indicates that paying $50 every three months to your mortgage through a credit card rebate program (or on your own) would save you four months on your loan term and over $3,300 in interest.

In order to make any credit card rewards program effective, you would want to use that card to make most of your monthly purchases and as your primary form of payment, while paying your balance off in full at the end of each month. When you pay the card off in full, you avoid interest and finance fees, but still earn the highest level of rewards possible to be applied to your mortgage and help you pay it off faster.

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