How Does a 401(k) Compare With Other Retirement Plans?
There are several types of retirement plans that employers can provide, but 401(k)s are one of the most popular. Other employer-sponsored retirement plans include SIMPLEs, SEPs, and various kinds of defined benefit plans. SIMPLE IRAs are sometimes called SIMPLE 401(k)s, because they operate under the same laws as Safe Harbor 401(k)s. They both are primarily employee-funded, and have rigid standards for employer contributions. Continue reading...
What is the Difference Between a Thrift Savings Plan and Other Retirement Plans?
The main difference is that the TSP is only for Federal employees. A Thrift Savings Plan is essentially a 401(k) for employees of the federal government. It functions in the same ways and is subject to the same limitations. The contribution limits and catch-up limits are the same, as well as the employer contribution limit. The plan actually has lower fees than most 401(k)s, so that’s one difference. The investment options are fairly limited, but not much more than regular 401(k)s. There are basically 5 index funds to choose from and then a series of target-date funds that blend the index funds. Continue reading...
What is the Head-and-Shoulders Top (Bearish) Pattern?
The Head-and-Shoulders Top pattern forms when a pair is testing new highs on an uptrend, but fails to retest its highest high and break upward. Mounting selling pressure takes over each time a pair approaches its high. The pattern forms with a center peak (the Head, labeled 3) and left and right Shoulders (1, 5). Eventually the pair stops testing highs and reverses trend into a decline. Consider selling the pair short before it declines or buying a put option to benefit from the price decline. To improve success chances, wait for a confirmation move: allow the price to break below the Neckline level (2, 4), which is calculated as the average of the two lows between the Head and the Shoulders. To estimate an exit, calculate the pattern height by taking the price difference between the Head (3) and the Neckline price (4), and subtract that from the Neckline price level/breakout price level. Continue reading...
What is a Rate Swap?
A rate swap is the exchange of cash flows on underlying principals which are not exchanged. It is an over-the-counter contract between two institutions to trade the cash flows on two comparable principal amounts, but not to exchange the actual principal amounts. Institutions might prefer this arrangement because they only have access to floating interest rates or are overweight in them and would prefer to have some fixed rate interest cash flow, or vice versa. These swaps might occur between banks on opposite sides of the world to take advantage of rates elsewhere or to simply diversify their risks. Continue reading...
What is the FHFA?
The Federal Housing Finance Association is the Conservator of Fannie Mae and Freddie Mac since the 2008 meltdown. The FHFA was established as an independent government entity to oversee the secondary mortgage market. The FHFA is a regulatory agency which took over for the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight (OFHEO). It was created in 2008 by the Housing and Economic Recovery Act (HERA), and it oversees the operations of Freddie Mac, Fannie Mae, and the 11 federal home loan (FHL) banks. If you’ll recall, Fannie Mae and Freddie Mac provide liquidity to banks and transfer risk from them by buying their mortgage cash flows from them. Continue reading...
What are Federal Tax Brackets?
Income taxation in the United States is done by assigning different tax rates to each specific range of income. Generally the lower income amounts will correspond to lower percentage toward federal income tax than higher income amounts. This is called a progressive tax and is frequently misunderstood. Many people mistakenly think that if they “fall into” a specific tax bracket based on their income that they will owe that higher tax rate that corresponds to the bracket on all of their income. Continue reading...
What is market discipline?
Market discipline is a term which describes the restraint implicitly required of financial services companies in order to remain solvent and financially strong in the face of market pressure instead of regulatory pressure. The markets can sometimes make a ruling on which companies were conducting their business according to prudent and ethical guidelines, without the need of an SEC audit or the intervention of any other regulatory agency. The companies that weren’t will lose their customers and go bankrupt, in no particular order. Continue reading...
What is Convertible Preferred Stock?
A convertible preferred stock is one that gives the owner the option to convert shares to common stock, usually by a predetermined date. The shareholder usually has control over when to convert the shares, but in some cases there are provisions that allow the company to force conversion. An investor may choose to do this conversion if they believe the company has high upside potential, and they want common stock exposure which would allow them to participate more in market gains. Continue reading...
What are realistic expectations for my portfolio performance?
Realistically, you should not plan on getting more than about 10% average per year over the long term for a portfolio of diversified equity exposure and you should really plan on getting less than that to be on the safe side. Everybody wants to have a portfolio that outperforms the market when the markets are rising and does not lose money when the markets are falling. We have a secret for you – it’s not possible. Continue reading...
What are Profitability Ratios?
Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...