Here is the recent edition of reader questions. THANKS to all who sent questions. For the rest of you….please send me your questions and I will do my best to answer the ones I am legally allowed to answer in writing.
Not all questions can be answered. If the question involves a specific investment or your personal financial situation, a phone call is a better medium for us to use.
Why is Wall Street liquid? Why is there always a buyer/seller for stock? -Milton G.
One of the attractions of the stock market is the tremendous liquidity it provides. For most corporations, it is easy to buy or sell their stock. This is not the case for thinly traded stocks or penny stocks (typically stocks trading at less than $5 per share).
If an investor wants to sell stock of a company, there is almost always going to be a buyer. If a purchase of stock is the goal, someone will be on the other side of the trade to sell you their shares. The reason for this is the existence of a specialist. The New York Stock Exchange has specialists that “make a market” for each given stock. This person literally matches the buyers and the sellers for a particular stock. If there are more buyers, then this person sells shares out of their account to make up the difference. However, if there is panic selling, then the specialist will step forward to purchase the shares. In the case of a NASDAQ listed company, instead of having a person (specialist), everything is done online through institutions called “market makers” but they operate in a very similar manner.
There are exceptions to this as I listed above, but for the most part, this is why Wall Street is so liquid.*
If I have a 401(k) and my employer goes bankrupt, do I lose all of my money? -Many
In a word, no. Here is a well written article that explains why.
Basically, a 401(k) is a trust that is governed by ERISA (Employee Retirement Income Security Act). The assets of the company cannot be comingled with the assets inside the 401(k). Once your contributions are inside the plan, they can’t be affected by the financial condition of the company. If they match your contributions and have already deposited them into your account, they cannot pull those contributions out of your account.
Some folks like to quote Enron after I explain this. “All of the poor people at Enron lost all of their money once Enron went broke!” The only way this happened is if someone had all of their 401(k) invested in company stock…..then once the stock went to zero, so did the value of the 401(k). However, if an Enron employee had a diversified portfolio inside their 401(k), then they did not lost all of their money even though Enron went out of business.
This brings up another question I get quite a bit….
How much of my 401(k) should I invest in my company stock? -David D.
In some cases, it makes sense to own NO company stock. In other cases, a small allocation is not a problem. However, I preach a maximum of 10% and there is a good reason for that. When you work for a company, your paycheck comes from that company, your insurance benefits come from them, your pension (if you have one) is funded by the company…essentially every facet of your financial well being is tied to that company, so WHY invest even more of your life in that one company? I see that as tripling down with all of your financial chips and I do not recommend it.
Can I make my IRA a JRA (joint retirement account)? -Protecting the innocent
Many people have asked me some form of this question over the years. IRA stands for “INDIVIDUAL retirement arrangement,” not “individual retirement account,” but instead of arguing semantics with you, I will just point to the “I” in IRA….what does it say again?
Individual. This means it cannot be in joint name. Account holders have the right to name primary and contingent beneficiaries and the other person can be taken care of in that regard, but a second name CANNOT be added.
Can I use my child’s 529 money to help him buy a Tuba? -William R.
Qualified expenses are defined by the IRS in publication 970 as follows:
For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution. Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs.
Related expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.
As long as the tuba is NEEDED for your student’s education, then it will be considered a qualified expense and 529 funds can be used to purchase it. If your child is a music major, then one would assume that an instrument is required as part of their education. However, if your kid is a business major that plays in a rock band on the weekends, then I would NOT try to withdraw 529 funds to buy him a new Gibson Les Paul. Just saying.
How often do you look at my account? -James S.
I use a very similar group of investment options for almost every client that I acquire. Of course, the allocation will depend on the risk tolerance, but the investments themselves are very consistent. I do this so that I can review all accounts several times per week. If I am looking at an investor’s account that is moderately conservative, and I decide that I do not like how “investment X” is performing, then chances are that almost every client I have owns that same investment. My aggressive folks might own less of it, but they own it nonetheless.
Because of this finite investment universe, it allows me to review all accounts several times per week. So, to answer this specific question, I would guesstimate that I look at every individual account three times a week.
What is your account minimum? -Several people
I do not have an account minimum. My standard has always been that if it is “serious money” to the investor, then it is worth my time. This is subjective. $100,000 for Donald Trump would NOT be considered serious money. However, $3,000 from someone who only has $5,000 is, to me, very serious money.
My other account stipulation is that if someone becomes a “body part,” then their account is below my minimum. If they scream at me, insult me, call me names, etc….then I will immediately fire that client and send them a check for their entire account. Life is too short to deal with people like this. No matter how much money they have, I refuse to put up with people like that.
Thank you for reading, and please send in one of your own questions. You might just see your question end up in a future post!
Until next time…
* Stock investing involves risk including loss of principal.