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Not so long ago, debt was only used for major purchases, such as a home, college education, or new car. But now we also use debt to pay for everything from vacations to furniture to clothing to entertainment to weekly groceries. The easy availability of credit is convenient, but can make it easy to exceed your ability to pay. If you're serious about increasing your wealth, take steps to keep debt under control.
Consumer debt includes credit card balances, auto loans, and other types of consumer loans. Interest paid on these loans is no longer deductible on your tax return, generally making it expensive for financing purchases. Despite that, consumer debt is increasing significantly.
Average consumer debt payments as a percentage of disposable income now hover 17% (Source: American Bankruptcy Institute, March 1998).
To find out where you stand with consumer debt, make a list of all your debts and monthly payments, listing the debts from highest to lowest interest rates. Then calculate your debt ratio by dividing your monthly payments (excluding your mortgage payment) by your monthly net income. The general rule of thumb is that your debt ration should not exceed 10% to 15% of your net income, with many lenders viewing 20% as the absolute maximum. Consider some of the following strategies to help reduce your consumer debt:
While mortgage debt is typically considered good debt, that does not mean that you shouldn't look for ways to reduce its cost. Keep in mind that interest rates on mortgages and home-equity loans are typically lower than other consumer loan options. Also, interest paid on up to $1,000,000 of mortgage debt and $100,000 of home-equity debt is deductible on your tax return.
Thus, you probably don't want to use funds to prepay your mortgage until you have paid your other debts off. Some strategies to consider for your mortgage debt include:
Your net worth equals your assets less your liabilities. Most people concentrate on increasing assets, but decreasing debt, especially debt with high interest rates, is also an effective strategy to help you increase your net worth. Please call 1-800-878-4036 if you'd like help reducing your debt.
After a stock is initially issued to the public, its shares are traded in the secondary market on the stock exchanges, the NASDAQ Stock Market, or the over-the-counter market.
Only securities specifically listed on an exchange can trade on that exchange. Stock exchanges conduct trades in a specific physical location. Prices are set through auction markets, with stocks sold to the highest bidder and bought at the lowest offer. When an order to buy or sell is placed with a broker, those instructions are transmitted electronically to the exchange floor. A floor broker for that firm receives the order and takes it to the trading post where the stock trades. Brokers representing buyers and sellers of that stock are gathered around the specialist. After checking out prevailing prices, the floor broker executes the order with the specialist or another floor broker at the best possible price. The specialist typically buys and sells shares when there are no other buyers or sellers. When the transaction is completed, the price is reported on the ticker. Confirmation and details of the trade are sent by computer to the brokerage firm, which notifies the investor.
To have its shares trade on an exchange, a company must meet the exchange's listing requirements, which vary by exchange. The requirements generally set limits for the following items:
There are two national stock exchanges and several regional exchanges. Perhaps the best known stock exchange is the New York Stock Exchange (NYSE), which lists over 3,100 companies (Source: NYSE, 1998). The American Stock Exchange (AMEX) lists over 700 companies (Source: AMEX, 1998). Listing requirements for the AMEX are less stringent than those for the NYSE, thus attracting smaller firms. Regional exchanges include the Chicago Stock Exchange, the Pacific Stock Exchange in Los Angeles, the Philadelphia Stock Exchange, the Cincinnati Stock Exchange, and the Boston Stock Exchange. These exchanges were originally organized to trade local interest stocks, but now also trade some stocks listed on the NYSE and AMEX.
THE NASDAQ STOCK MARKET
The NASDAQ Stock Market does not conduct trades in a specific physical location but is a computer-based trading system. Approximately 5,400 companies are listed on this market (Source: NASDAQ Stock Market, 1998). Buyers and sellers set prices through a negotiated market. Orders are sent to the trading desk within the brokerage firm, where the trader shops among that stock's market makers for the highest bid price for sell orders or the lowest ask price for buy orders. Market makers are firms that buy and sell a stock out of their own inventories. Firms can execute trades from their own inventory as long as the stock is not offered at a better price by another market maker.
Stocks traded on the NASDAQ Stock Market are divided into two groups: national market issues and small cap issues. The criteria to be listed in the small-cap issues are significantly less stringent than those for the national market issues.
As of October 30, 1998, the National Association of Securities Dealers (NASD) and the AMEX officially joined forces, bringing the NASDAQ Stock Market and the AMEX together under one corporate identity. However, the two markets will continue to operate independently.
THE OVER-THE-COUNTER MARKET
Several thousand stocks trade in the over-the-counter market. Prices are published daily on "pink sheets" by the National Quotations Bureau. The pink sheets list the company's name, the last reported price, and the name of the brokerage firm that makes a market in the stock. The market maker must be contacted to obtain current price information, as well as the execute orders.
A stock split simply increases the number of outstanding shares, while decreasing earnings per share and stock price per share. For instance, in a two-for-one split, each shareholder receives an additional share of stock for each share owned. The stock price after the split equals half the price before the split. So, an investor with 100 shares of stock with a price of $100 per share would own 200 shares with a price of $50 per share after a two-for-one split. The total value of the investor's holdings remains the same before and after the split. Two-for-one splits are the most common, but a company can use any combination. Companies typically split their stock when the share price reaches a high level because they believe that investors prefer lower share prices. They feel that lowering the share price will benefit stockholders by making the stock appealing to a broader range of investors.
A company can also declare a reverse stock split to increase the price of its stock. In a reverse stock split, the company exchanges more shares of stock for fewer shares. For instance, in a five-for-one reverse split, five shares could be replaced by one share. Companies may want to increase their stock prices to discourage small investors who are costly to service or to attract institutional investors who won't purchase stocks below a certain price level.
How you allocate your investments impacts the ultimate size of your nest egg and thus how much you can withdraw annually. Some pointers to consider when you review your asset allocation include:
If you'd like help with your retirement assets, please call.1-800-878-4036
As many investors have realized lately, it is not always easy to stay calm in the midst of wild market swings. However, the nature of the market is such that it will go up and down, and we need to learn to remain calm during this volatility. Here are several points to help us keep our focus.
TAKE A LOOK AT YOUR FINANCIAL PLAN. Remember when we set up this plan? We spent time discussing your needs, goals for the future and risk tolerance to construct a plan that would help you get where you need to be. Your investment portfolio is structured to help you have the resources to meet those financial goals, such as paying for a child's college education or funding your retirement. So, unless your goals have changed, this is probably still the way you want your money invested.
DON'T PAY ATTENTION TO THE HEADLINES. You may hear dramatic stories on the news that predict doom and gloom or make you want to sell everything, but don't listen. Your emotions should not control your investments. Instead, make sure you have a properly diversified portfolio and stick with it for the long term. If you are not comfortable with the degree of risk in your portfolio, please call us 1-800-878-4036 and we can adjust it.
SET SPECIFIC REQUIREMENTS FOR BUYING OR SELLING STOCK. A volatile market provides several options for stockholders: buy, sell, or hold. Although you don't want to be scared into selling, at times it may be wise to sell some of your stock or to buy more. I can help you decide when a purchase or sale might make sense, as well as monitor your stock investments.
Of course, if you ever need advice or reassurance, please feel free to call us 1-800-878-4036. A volatile market is a difficult time and we want to help you through it.
STEPS FOR GLOBAL INVESTING
If you want to start investing in international investments, consider a systematic approach such as:
1. DECIDE WHAT PERCENTAGE OF YOUR PORTFOLIO TO ALLOCATE TO INTERNATIONAL INVESTMENTS. Your international investment portfolio should be one component of your overall asset allocation plan. What percentage you allocate to global investments will depend on several factors, such as your risk tolerance, time horizon for investing, and comfort level with foreign investments.
2. MONITOR INTERNATIONAL MARKETS. Before investing in global investments, select a few areas of the world that you feel show investment promise. Become familiar with stock markets and economic and political events affecting those areas. Many business publications now devote significant coverage to international markets.
3. FAMILIARIZE YOURSELF WITH THE INVESTMENT OPTIONS AVAILABLE. There are numerous investment vehicles in the international arena as well as many methods to implement an investment strategy. Understand the basic choices so you can make informed decisions about which alternatives are most suitable for you.
4. UNDERSTAND THE RISKS INVOLVED IN INTERNATIONAL INVESTING. In addition to the risk, associated with domestic investing, international investing has unique risks, such as currency fluctuations, political and social changes, and greater share price volatility. International investing may not be for everyone.
5. REVIEW SPECIFIC INVESTMENTS. Once you have decided how much to allocate to this area and have become familiar with international markets and the alternatives available, you are ready to start investigating specific investment opportunities.
6. MONITOR YOUR INVESTMENTS. You should periodically review your international investments, along with your other investments, to ensure that conditions at that company or in that country have not changed drastically. If you'd like help with your investments, please call 1-800-878-4036.
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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