In my previous blog, "Peak Oil and Investing - Part I - Retirement Funds" I discussed the pros and cons of retirement funds as they relate to peak oil. All of the analysis is made under the assumption that peak oil will affect us in the immediate future and that we will need access to as many funds as possible to adapt and survive in a world of peak oil. If you don't believe that this is the case, then it is probably best to continue investing in your retirement account as everyone else recommends.
The quick summary is that it is always worth it to contribute to a 401(k) when your employer matches your contribution. The benefits of contributing to a Roth IRA are not as clear and the level of contribution in this account should be determined on how big of an impact you believe peak oil will be.
Because I believe that peak oil will make significant changes and I want to be best prepared, I want to keep the majority of my assets liquid and accessible at any time.
Liquid Assets
The alternative to retirement accounts is to keep your assets liquid in cash, stocks, CD's (Certificate of Deposit), and savings, checking, and high yield money market accounts. With the exception of CD's and bonds, you can have these assets converted into cash and in your hands in less than a week. Even CD's and bonds can be sold, but because the prices can fluctuate, it is possible to lose money on the investment.
Taxes
All earnings made in the investment vehicles outlined below (with the exception of muni bonds) are subject to federal, state and local income tax. Any income earned from these sources will be taxed at your marginal tax rate.
Muni bonds are "triple tax free" because it is exempt from federal, state, and local income tax. Stocks or funds that are held for less than one year are taxed at your marginal tax rate, but for funds held over a year, the rate is only 15% for federal tax brackets 25% and higher.
Taxes are only paid when your stocks are sold. However, if you own a fund or a stock pays dividends, it is possible that you will have to pay taxes even if you did not sell a fund or stock in that year.
Stocks
With stocks it is possible to invest in many different companies and sectors of the economy. I will not go into specifics in this blog about where an investor should put his/her money. That topic will be addressed in my next blog. However, I will mention again, as I wrote in Adding Values to Your Investment: FTSE 4Good Index and Socially Responsible Invseting: Can it Beat a Traditional Mutual Fund, that a sound investing strategy is to buy index funds which cover a broad segment of the market.
It may be possible to make money fast with the next "killer stock". But as shown in The Bogleheads' Guide to Investing by Taylor Larimore and A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition by Burton Malkiel have shown, index funds will almost always beat actively managed funds. Most stocks can be sold and then
CD's
A CD (Certificate of Deposit) can be purchased at virtually any lending institution. The way it works is that you pay a bank to buy a CD with a fixed interest rate. The interest rates will depend on the length of the CD and the lending institution. The CD's will pay the fixed amount of interest at a specified time interval and at the end of maturity the bank pays back the lender the original purchase price of the CD.
Currently the market is not terribly great for CD's. The Federal Reserve interest rate cuts have decreased the interest rate on CD's and it is often better to put your money into a High Yield Money Market Account. See Bankaholic's CD Rates.
Bonds
There are a variety of bonds out there, but I will focus on a specific subset of bonds, the municipal bond. Bonds are essentially an I.O.U. to the company or municipality you are buying it from which allows them to raise capital for projects. They will then pay you a rate as stated on the bond (typically twice or 12 times a year). When the bond matures (ages usually range from 1-30 years) you then are paid back the value of the bond.
Bonds are good ways to guarantee a stable income over a period of time. However, traditionally, stocks have beaten bonds in the long run. There have been periods in history (such as the 1980's) where high interest rates caused bonds to beat out the stock market.
Municipal bonds are important because they are "triple tax free". This means they are exempt from federal, state, and local income tax. For people in higher tax brackets (25%+) and/or people who live in states with income taxes, municipal bonds can be a great way to have tax free earnings. Typically the interest rate on munis are lower, but if your income tax rate is high, it is often beneficial to invest in munis.
Money Market Accounts
Although the Federal Reserve interest rate cuts have drastically lowered the interest rate in money market accounts, this is still a great place to put funds you need within a week. If you open an account with Washington Mutual, Ing Direct, or ETrade, you can get interest rates in the 3-4% rate, which can be better than many CD's.
One risk with money market accounts is that the bank can at anytime and without notice, change your rate of interest. My rates at Capital One went from 5.00% to 3.25% within a period of 3 months because of the rate cutes. It looks though, that the rates will still stay above 3% and this is a good place to park your money if you think you'll need access to it in the near future. If the rates continue to decline, it would be wise to look towards CD's as a more stable source of income. See Bankaholic's Money Market Rates
Checking/Savings
These accounts typically have low (if any) interest rates for the deposits. Usually the rate is well under 1.0%. Thus, these should only be used to access cash through an ATM or to pay for purchases. Money should be transfered from money market accounts on an as-needed basis to cover the appropriate expenses.
My Thoughts
I have discussed the major retirement accounts and liquid assets and I hope that you have a better understand of how each type of investment vehicle works. I have decided to invest primarily in the Vanguard California Long Term Tax Exempt Bond Fund and the Vanguard Target Retirement 2040 Fund (See Adding Values to Your Investment: FTSE 4Good Index for more information). I also have a 6 month emergency fund set aside in case a major emergency occurred. This money is currently in a Washington Mutual Online Savings account that yields 4.0% APY.
In my next article I will discuss the types of stocks and commodities that you should consider. Oil or solar ? Wheat or corn? Financial or technology? Dollar or Euro? I will look at not only how peak oil will affect the market, but how fractional reserve and the unstable lending practices of the past 7 years affect investment decisions.
by Taylor Larimore and 
by Burton Malkiel have shown, index funds will almost always beat actively managed funds. Most stocks can be sold and then- Peak Oil and Investing - Part I - Retirement Accounts
- The Party's Over - Richard Heinberg: Book Review
- Peak Oil: Are we on our way down?
- Shell CEO Virtually Admits to Peak Oil
- Energyville Part I: How Will you Power it?
- Energyville Part II: The Discussion
- The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century - James Howard Kunstler
- The Party's Over: Oil, War And The Fate Of Industrial Societies - Richard Heinberg
Review - PowerDown - Richard Heinberg
- James Howard Kunstler
- Richard HeinbergRecommended Movies:
No comments:
Post a Comment