The lack of financial literacy in the US is appalling

Parent Cafe
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<p>^Taken from a comment on another thread.
So- assume I have already been admonished ;), that I am not asking for help with my kids college aid planning- but that I have minimal background in finance- minimal money to live on let alone to save- but am interested in learning more about markets- about how to research the funds that the 401K is invested in, without having my head explode & how to better manage it, so that we don’t keep losing money.</p>

<p>What are good sources of info?
What areas should I be looking into first?</p>

2

<p>Look first at the material that your 401(k) plan provides. It should explain, in very broad terms, the difference between a stock (aka equities) and bonds (aka fixed income). The former is riskier but has greater potential reward; the latter is less risky but can return less than equities in a boom market. </p>

<p>Most advisors recommend being more heavily weighted in equities when you’re young but shifting more into fixed income when you get older.</p>

<p>That’s it in a nutshell.</p>

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<p>the bigger the gains (or more recently, losses) the riskier the fund.</p>

<p>Bonds and government backed securities don’t lose value</p>

<p>I’m a tortoise when it comes to investing. Slow and steady wins for me. I am completely risk adverse. </p>

<p>As for picking stocks, go for companies that are things that people buy no matter what. Campbell’s soup, microsoft looks like a bargain.</p>

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<p>Go to Morningstar or Lipper to get a more in depth view of the funds.</p>

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<p>Many bonds can lose value, as well as bond funds, and mine have been the last year along with stocks. I had some money in a short-term bond fund for a home remodel coming up, and it did lose more than I expected.</p>

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<p>I didn’t realize that ^^. I just checked and mine is listed as “Government Securities Investment (G) Fund is invested in special issues of U.S. Treasury securities.” I guess I just assumed it was bonds</p>

<p><a href=“http://www.tsp.gov/rates/fundsheet-gfund.pdf[/url]”>http://www.tsp.gov/rates/fundsheet-gfund.pdf&lt;/a&gt;&lt;/p&gt;

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<p>The current value of a security is the highest price that someone else
is willing to pay for it. That includes government-backed securities.
When interest rates go up, the value of bonds decline. The reason for
this is that someone is offering a higher interest rate so that your
bond with a lower rate will go down in value.</p>

<p>I only took one course in Finance in undergrad but it was a useful one
in that it taught the students about how to value assets (stocks,
bonds, etc.) At the mutual fund level, you’re looking at things at
higher levels of abstraction like the manager, past performance,
balance of equities vs bonds, balance of types of equities, etc.</p>

<p>You’re unlikely to get to know much about the manager. I did meet a
money manager that was very successful and we had a long lunch talk
about what he does and how he got to where he was. He had a nice life
in that his investing work only took a few hours a day. He spent the
rest of the day meeting customers and company managers, doing radio
shows, etc. I think that the principals of the company spent a lot of
time playing golf.</p>

<p>When I look at a mutual fund, I like to take a look through the
holdings in the prospectus. A coworker asked me about why one of his
funds tanked a few weeks ago. He showed me the top ten holdings from a
website and they were all in treasuries which have done quite well.
So I went to my computer and looked around for a report of their
holdings. I couldn’t find one quickly so I looked at the top 25
holdings. There was Fannie and FHLB in the top 25 holdings. I suspect
other junk in there too if I could find the list of all of their
holdings. But that explanation was good enough for him.</p>

<p>Someone asked me about another mutual fund that had tanked much harder
than his other mutual fund. AIG was close to the top in its top
holdings. So mutual funds can be a trap too.</p>

<p>I also have two or three semesters of accounting and I wrote
accounting system software many years ago and found that the
accounting stuff can be useful for investing. It certainly helps in
reading company financial reports and in listening to company earnings
conference calls.</p>

<p>And this is why we have a lack of financial literacy: it’s a lot of
work to learn the fundamentals. So magazines and TV shows give you
elementary rubrics which amounts to “trust a professional; we’ll take
care of you.”</p>

<p>I have been looking for a free finance course online for the kids but
I haven’t found anything that I like. There is an interesting course
at Yale: Financial Markets with Professor Rober Shiller. I have the
videos on my hard disk and have watched a few of them and look forward
to watching the rest out of general interest.</p>

<p>[Financial</a> Markets — Open Yale Courses](<a href=“http://oyc.yale.edu/economics/financial-markets/]Financial”>http://oyc.yale.edu/economics/financial-markets/)</p>

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<p>what would you call this:</p>

<p>By law, the G Fund must be invested in nonmarketable U.S. Treasury securities specially issued to the TSP. The G Fund
investments are kept by electronic entries which do not involve any transaction costs to the TSP. The G Fund rate is set
once a month by the U.S. Treasury based on a statutorily prescribed formula (described below), and all G Fund investments
earn that interest rate for the month. (The G Fund rate is also used in other Government programs, such as the
Social Security and Medicare trust funds and the Civil Service
Retirement and Disability Fund.)
The Board invests the G Fund exclusively in short-term securities (with maturities ranging from 1 day to 4 days over holiday weekends), but the securities earn a long-term interest rate. Because the Federal Retirement Thrift Investment Board pursues its strategy of investing the G Fund in short-term securities, the value of G Fund securities does not fluctuate; only the interest rate changes. Thus, when the monthly G Fund interest rate goes up, G Fund earnings accrue faster; when the G Fund interest rate declines, G Fund earnings accrue more slowly.</p>

<p>Calculation of G Fund Rate — G Fund securities earn a statutory interest rate equal to the average market yield on outstanding
marketable U.S. Treasury securities with 4 or more years to maturity. The G Fund rate is calculated by the U.S.
Treasury as the weighted average yield of approximately 76 U.S. Treasury securities on the last day of the previous month. The yield of the security has a weight in the G Fund rate calculation based on the amount outstanding.
(The larger the dollar amount of a security outstanding, the larger its
weight in the calculation.) The Treasury securities used in the G Fund rate calculation have a weighted average maturity of approximately
11 years.
The G Fund Yield Advantage
— The G Fund rate
calculation described above, along with the Board’s policy
of investing exclusively in short-term maturities, results in a long-term rate being earned on short-term securities. Because
long-term interest rates are generally higher than short-term rates, G Fund securities usually earn a higher rate of return than do short-term marketable Treasury securities. In the chart above, the G Fund rate is compared with the rate of return on 3-month marketable Treasury securities
(T-bills). From January 1988 through December 2007, the G Fund
rate was, on average, 1.66 percentage points higher per year than the 3-month T-bill rate.
G Fund Yield Advantage
April 1987 – December 2007</p>

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<p>It looks like a great fund.</p>

<p>They are required to hold their bonds to maturity so they will always collect the interest.</p>

<p>The problem with normal money market funds is that customers can request redemptions. When this happens, the money market fund has to liquidate some of their bonds which may mean that they get a poor price for their holdings even though they would get the interest income if they held to maturity. The point is that they can’t always hold to maturity due to redemptions.</p>

<p>This fund appears to have some special relationship with the Treasury which means that they can buy instruments that others can’t normally get. If it’s all Treasuries and everything in the prospectus is true, then it looks like you have a great fund option. I’d love to have it myself.</p>

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<p>It is one of the choices for the federal government’s employees Thrift savings plan. I feel safe there.</p>

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<p>I don’t recommend buying individual stocks. I’d rather invest in a mutual fund that owns many different stocks, and leave the determination of which companies to invest in up to the professionals.</p>

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<p>You also need to look at the expense ratios of the funds that you invest in. Some funds charge a higher expense ratio, regardless of whether there is even a positive return. If you have a menu of choices for your plan, you can call your plan administrator or trustee to find out about secure options. For example when there was the money market debacle this fall, people started to ask what their money markets were invested in - treasuries, government agency notes, commercial paper (which caused a problem when firms went belly up). People put a lot of money in treasuries, even for a very low return, because they felt that these were the only things that were really and truly a sure thing (so long as the US govt keeps its promise to pay.)</p>

<p>It truly is a crazy time now. Even insurance companies which sold “safe investments” may become insolvent, and policy holders will be looking to state guaranty funds for their benefits.</p>

<p>Good luck.</p>

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<p>I don’t understand why individuals do the following. Buy short term treasuries instead of buying insured CDs. </p>

<p>Unless you expect to need the money at any time, why do this? The rates of cds are better.</p>

<p>Why are people buying treasuries that yield practically nothing?</p>

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<p>I also don’t get the treasury thing. Can somebody please explain the advantage of a short term treasury vs cd’s.</p>

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<p>CDs are only insured to $250K.</p>

<p>If you want the money in your brokerage account so that you can flip out of treasuries into stocks, you can. I think that it’s quite a bit harder with CDs.</p>

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<p>Well, you can buy more than 1 cd from more than 1 bank… :)</p>

<p>It is easier to sell treasuries and buy stocks with that money.</p>

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<p>“Well, you can buy more than 1 cd from more than 1 bank…”</p>

<p>That’s inconvenient. And I don’t think that I can do that in my 401K. But I haven’t really tried.</p>

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<p>If you have an account at Fidelity, you can buy cds from multiple banks. Schwab too.</p>

<p>I own cds in my Keogh. Best investments this year. :eek:.</p>

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<p>I think that you can buy more than 1 cd from a single bank depending on how you set it up - joint ownership etc.</p>

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<p>You can’t do joint ownership in a 401K.</p>