Money Beagle

First, I’d like to thank ‘Where Are We Now’ for including my post about the next steps the government should take in the 34th Money Hacks Carnival, and for doing a great job on the carnival this past week.

With that being said, I received a check for $2,700 today. I knew it was coming but I’m debating what to do with the money. I had stock invested in a company that was acquired in a cash transaction purchase. Essentially what that means is that the purchasing company pays a certain cash price per share for the outstanding shares of the company that they are acquiring. The alternative, which is also very common, would be where the purchasing company swaps stock, in which case I would have had the option to own stock in the buying company.

Because they did a stock transaction, I had no choice and today received a check for my shares, which totaled $2,700. I have a few options on what we’ve considered doing with this since we received word that the check would be coming:

1. Re-invest the money into the purchasing company - Basically this would accomplish what a stock swap purchase would have.
2. Re-invest into the stock market through our brokerage account - In a way, the timing of this couldn’t have been better. The purchase price was agreed upon about 4 months ago, and thus the share price was locked. I’m convinced that the share price of my shares would have been pummelled during the downturn, and they’d be worth a lot less than $2,700. In this case, one could make an argument that this would be good to re-invest in the stock market in some fashion.
3. Re-invest into the stock market through our Roth 401(k) retirement account - We have a good chunk set aside for retirement, but not as much as I’d like, so retirement investing could never hurt.
4. Use the money to pay off debt (student loans) - We’ve been focusing our attention on paying down my wife’s outstanding student loan balance. I had been considering selling the stock anyways even before the buyout was announced, as it hadn’t been a very well performing stock. This would be a good chunk of the student loan balance taken out at once.

I’m curious as to what anybody might think. We’re leaning toward paying the student loan down, as we’ve been concentrating efforts on reducing our debt load. Still, I’d be interested to hear if anybody has any other advice.

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I’m honored when I’m asked for advice.  A friend and former colleague of mine has asked for advice on several matters since finding out about Money Beagle, and I guess he liked my answers, because he sent me another question which I will post and answer here on the blog.  This is a topic that I had on my list to discuss anyways, so this is great timing.  It was a hot discussion item a few months ago, and I have a feeling will be again soon.

My friend is interested in First Solar, a company focused on solar energy which is based in Toledo, Ohio.  That happens to be close to where we live, and they’ve been getting press about expansion efforts that they’re currently undertaking.

My friend asked:

1.  I currently participate in my company 401(k) plan.  Can I invest in First Solar through my 401(k)?
2.  In your opinion, would investing in these alternative energies companies be a good idea?
3.  Is there a different company or possibly others that would be better to invest in?

Great questions!  Let’s see if I can’t help my friend out with the answers to his questions.

1.  I currently participate in my company 401(k) plan.  Can I invest in First Solar through my 401(k)?

Short answer: No.

Long answer: You would not be able to invest in that particular stock through your company 401(k).  You are limited to the offerings that are contained within the 401(k) program, which usually consist only of mutual funds, and sometimes the individual stock of the company that one works for

Theoretically, 401(k) plans are designed to offer a ‘market slice’ of various investment opportunities.  A typical company might offer a large-cap stock fund, a small-cap, a mid-cap, some international funds, a ‘total stock’ fund, some target date funds, some bond funds, a money market fund or two, and the company stock.  This is all designed to let the investor invest according to their personal taste.  By limiting the number of investments to choose from, it keeps the costs down.  Any company that runs a 401(k) is charged by the company that manages the 401(k), and by limiting the choices, it keeps costs down.

If you wanted to invest in First Solar, you would have to do so in a personal investment account.  If you wanted to earmark this as a retirement account, you would need to open an IRA (Individual Retirement Account).  Sites such as Ameritrade and E*Trade allow you to open traditional or Roth IRAs, and within those you are welcome to invest in nearly any mutual fund or stock that is traded on the major public indexes (subject to transaction fees of course).

If you were to open an IRA, you could either increase your retirement investing by continuing your current 401(k) contributions and supplementing that with contributions to your IRA, or you could reduce your 401(k) contributions and funnel the difference to your IRA to keep your retirement contributions the same.  Be careful when making this choice, because if your company matches your contribution through the 401(k), you’d lose out on the match for whatever portion you funneled over.  Obviously, the ideal situation in this case would be to supplement your current retirement contributions.

2.  In your opion, would investing in these alternative energies companies be a good idea?

My personal opinion is that alternative energy has great potential and could pay off handsomely if that potential is tapped.  Solar energy has great potential if some of the current barriers are overcome that currently exist.  The biggest such obstacle right now is that the cost of making the solar panels is very high due to some of the materials required.  I know that research to offset this effect is in place, and I believe that First Solar is one of many that is actively working in this area.  Still, you have to keep in mind that this research is not guaranteed to pay off, and also that even if it does, it might be another company that achieves the desired results first, which would give them an edge (and almost certainly better market performance).

You also must consider that solar (and other alternative energy) was the ‘flavor of the week’ four or five months ago when oil prices were over $120 a barrel.  Now that those prices have come down, I haven’t heard talk of alternative energy in quite a while.  This could be a good thing, because the stock price might actually reflect this pull-back, so that if the focus returned, the price might go back up.  On the other hand, if oil prices stayed down and we ‘forgot’ about alternative energy, this would potentially hurt First Solar and others.

My personal opinion (and please take it as that) is that oil prices will remain high enough in the long term so that alternative energy will gain attention and that there is opportunity in the market for solar (and other) energy companies to succeed.   Ultimately, you must decide for yourself whether you feel that the solar energy market has opportunities for rapid growth.

3.  Is there a different company or possibly others that would be better to invest in?

There are many solar energy companies out there.  First Solar is one that I am somewhat familiar with, as a friend of mine is from the Toledo area, and has thus brought to my attention the activities that you mentioned, such as their expansion.

Since you mentioned that their stock is something you’re considering as a retirement investmentt, I would share my personal philosophy on long-term retirement strategy.  I consider myself to be ‘conservatively aggressive’.  While this might seem to be a contradiction of sorts, let me explain.  I’ll actually start with the aggressive portion.

My definition of being aggressive in terms of investing means simply that you’re willing to take risks in order to gain a higher return.  This entails making investments in areas that generally tend to outperform the market during upswings.  So, as an example, an investment of this sort might return 10-15% a year then the market goes up 5% (as measured against the S&P 500) .  This is aggressive because there’s also more risk involved.  The risk is that when the market goes down, these types of investments tend to go down faster than the market as a whole.  With this being said you’re hoping (as history has shown) that the market goes up more than it goes down, and thus, you’ll be further ahead by the time you retire and need the money.

Now to the ‘conservative’ part of my position.  I’m conservative in two ways when it comes to retirement investing,

One, I do not advocate investing in individual stocks for retirement investing.  I recommend investing in mutual funds for retirement accounts.  Mutual funds offer diversification because of the fact that they’re invested in a number of stocks.   In this particular example, I would not advocate investing retirement funds into the stock you mentioned.  But, if you believe in the solar energy market, all hope is not lost!  There are mutual funds that are dedicated specifically to investing in this area  One example that a friend brought to my attention is the Claymore/MAC Global Solar Index fund.   If you look at their top holdings, you’ll see that First Solar is their top investment.  So, by investing in this particular fund, you would get invested in the company you mentioned, but you’d also get to be invested in many other solar energy companies as well.

My second point on being ‘conservative’ is that, when it comes to retirement, not only do I recommend investing in mutual funds, but I also recommend making sure those mutual funds are spread around.  Earlier, I mentioned some different type of mutual funds that a typical 401(k) plan offers.   I would make sure that you’re diversified within some of those categories.  I won’t go into the particular asset allocation that might go along with that as that is a topic for another post.  But, I’d recommend that you diversify your investments across several of those areas, and that a particular segment, such as solar energy, represent no more than 10% of your total retirement investment.

Summary

I’d first ask whether I truly felt that this was a growth area.  I’d so some research and make sure that I understood the risk.  It sounds as if you have an opinion in this area.

I’d look not just at the stock mentioned, but at a mutual fund that covers the area in question.  I’d look into the one I mentioned, or at others.  This would reduce your risk.

Read their prospectus.  Understand their goals.  Make sure you’re comfortable with all that.  Only then, would I invest.

If I were still comfortable, I’d total up everything I had toward retirement.  Many people have multiple 401(k) plans, money set aside for retirement not in a formal plan, and there could even be multiple IRAs.  I’d understand the total retirement monies available, and invest no more than 10% into the solar energy sector.

I know this post touched on a lot of areas, but I hope it helped.   If anybody else has any questions or comments or areas that I can help, please, send them along.

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As I had some running around to this afternoon after work, I didn’t get to watch the news, so imagine my surprise when I finally sat down to write a late blog post, and find that the stock market tanked another 5% today.

In one day.

What’s that? About 25% for the past week? Give it a rest, already!

I majored in Economics, so I have a fundamental understanding of the stock market. I get that supply and demand drives the prices, that if there’s more demand than supply, you’ll see the price go up. Conversely, if there is more supply than demand, the price declines. The price will adjust until supply equals demand.

So, the past few days there’s been more supply (i.e. sellers) than there is demand (i.e. buyers). I get that.

But, WHO are all these people offering up their securities to the point where 300 point drops, 500 point drops are the norm. Because that’s the part that I just don’t get.

Must be people like my friends and family, right? So I ask around to my friends and family. Nobody I know is selling off all their stuff.

Ah, well it’s other people in the workforce, right? Well, I’ve been listening in to people talk about the stock market and everybody is talking but people are overwhelmingly talking about ’sticking it out’.

Hmmm, how curious.

I read the financial experts in the WSJ and other financial sites, and they still maintain not to panic.

Ah, well it must be all my fellow bloggers, right?

Nope, foiled again. All the blogs I read talk about sticking it out, or even using times like this as buying opportunities since you can buy a lot more shares at the reduced price.

So, I’m still sitting here scratching my head. Maybe now we need to be asking ourselves who the people are driving these decisions, because so far as I can tell, they’re costing all of us lots and lots of money, but I just can’t seem to figure out who they are.

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Today was one of the worst days for the stock market that I can ever remember.  The markets went down 7-9% depending on what index you look at.  That’s a huge amount, and I know it will have an impact on our net worth, but we haven’t panicked. Although it’s hard, I recommend not panicking. Don’t turn a blind eye to your investments, but now is not the time to make sales based on emotion.

We are in the stock market for the long term. None of our investments are needed anytime soon, so the ups and downs now aren’t so important compared to the market in the long term.

I’ve been through years where the stock market has gone up 15-20%, so even though this is a year where it’s down over 20% so far, I still have faith that over the long term, things will be fine.

Fortunately for us, we’re young enough that we have plenty of years ahead to make up for the down times now. I really do feel that people who are retired or nearing retirement are probably feeling this harder.

The financial markets are always a roller coaster, and today proves that.  This is definitely a mess, but I believe for America, the spirit and ingenuity that made this country great will eventually come through and we will come out stronger.

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It’s all over the news that Gustav is headed towards the Gulf of Mexico and could impact New Orleans.  Yikes.  This would be the first major test for the city and its levees since Katrina.  I hope for the sake of everybody that the storm fizzles, but it may not.  If it does hit, everybody is hoping that they learned their lessons from Katrina, and that they are prepared in the form of stronger levees, improved evacuation, and more efficient response afterward.

The same theory holds for personal finance.  We all make mistakes and have things go wrong.  Sometimes the mistakes are small and easily recovered from.  Sometimes, though, they are major events that might have led to a Katrina-sized mess such as bankruptcy or foreclosure.  No matter the size, it’s important to learn from past mistakes when it comes to finance, as it will help your future planning and help avoiding future mistakes.  This can apply to so many things:

• Debt - If you got into debt, make sure you plan on how to get out of it, but also look at how you got into it in the first place.  This will help you avoid making the same mistake.
• Savings - If you got stung by an emergency, look at how to recover, but also understand what you might have done differently, and start acting on that before the next emergency hits.
• Investing - If you made poor investing decisions in the past, make sure you understand what happened so you don’t repeat the same mistake over and over

There are so many other things that this can apply to in the personal finance world, but it’s advice to always remember.