Some months ago the Consumerist Commentary had a post that introduced faith shares. I have previously mentioned that I am yet to be convinced that faith based investing (in the strictest sense) is right for me at this time. That said, I respect anyone who feels convicted to show their faith in this way.

Different Types of Faith Based Investing Options

When I visited a faith based investing website, I was bewildered to see the breakdown of the types of shares:

• Baptist values
• Catholic values
• Christian values
• Lutheran values
• Methodist values

As a Christian, this makes me scratch my head. I don’t want to make this post a doctrinal post (as I know that can get ugly before you can even say Nebuchadnezzar). I understand that different Christian denominations have different doctrinal and theological beliefs. What I don’t understand, however, is why there needs to be so many denomination specific categories.

Would a Lutheran really be offended by holding a Christian values share? Would a Methodist violate their faith by investing in Lutheran values? I wonder which of these shares Jesus would buy?

I’ll be honest. I never knew that value shares were broken down into such intricate categories. As a result, it sort of turns me off from faith based investing even more.

The various options do highlight one point – it shows how murky the faith based investing waters can become. It shows how difficult it is to entrust others to make decisions according to your own faith.

What are your thoughts on the topic? Do you think the sub categories are good and healthy?

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The people are taking their stand, and one giant middle man is being removed – the bank.

Borrowing and lending has been part of human society for generations.  It was prevalent enough that God included some borrowing and lending guidelines in the books of the Old Testament law. 

Historically, the wealthy lent to those in need.  In our modern society, the banks have long since held the monopoly for extending credit.  That is until the emergency of the P2P lending movement.

What is P2P Lending?

P2P stands for People to People lending.  These companies provide a way for those who want to borrow money to connect with those who want to lend money. As a P2P lender, you will have the opportunity to find an individual who you think is a good candidate for a loan.  From there, you simply offer to loan that person anywhere from $25 up to their full loan amount.

The recent Plutus Awards nominated Kiva as the Best Peer-to-Peer or Social Lending Service.  Since I’ve never used Kiva, I feel more comfortable introducing your to Lending Club – a lending service I have used.

If you sign up for Lending Club using this link, you get a bonus $25 to start investing

What Are the Lending Club Requirements?

You can lend as much as you wish through; however, you can only borrow up to $25,000
• All interest rates are fixed.  Each loan will have an interest rate associated with it.  You, the lender, simply decide if that loan is worth that interest rate (based on the borrower’s credentials).
• Loan repayments will be monthly for a term of up to 3 years.
• The debt can be paid off early without any penalties.
• Your privacy is ensured for both parties.
• Borrowers need a FICO score of at least 660 and a debt to income ratio (minus your mortgage) that’s below 25%.
• Not all states can participate with Lending Club, so be sure you can participate based on your residence. 

What Risks are Involved?

There are essentially three:

1. Loan Repayment Default – an individual may borrow money and default on the payments.  Though Lending Club does have a debt collections process, there is no guarantee that you will get all your money repaid if someone defaults on one of your loans.
2. Lack of Diversification – the less money you invest, the more concentrated your risk will be.  Most people want to start off investing a hundred dollars which means they will invest in four loans.  This means if there is one default, their portfolio might drop by 25%.
3. Interest Rate Increase – when interest rates increase and you are locked into a loan with a lower interest rate, your loan becomes less valuable. 

How to Reduce the Lending Club Investing Risk

1. Lend only to the most qualified borrowers.  Once you sign up you will be able to search for a person to lend money to.  You set all the criteria including credit score and debt to income ratio.  The higher a person scores, the more trustworthy they are – of course the less returns you can also expect.
2. Diversify.  When extending credit, you must loan a minimum of $25 per person.  This way if you had $500 to invest, you could actually spread it over 20 different loans.

What are the average returns for Lending Club lenders?

Lending Club reports that their average annualized return is around 9-10%.  This number, of course, is no indication of how you can expect your investments to perform as it completely depends on the risk you assume. 

I would not invest any emergency funds as liquidity is not possible.  Remember, you are typically going to be committing the money for a 3 year period.

You could take a portion of money set aside for mid-term lengths (3-5 years) and invest in some Lending Club notes.  This would include money you are saving for a vacation in a few years, money that is for a vehicle purchase in the future, or money that is invested outside a taxable account.  Anything with a three year window or more. 

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In my post on using a Roth IRA to fund kids college, I noticed that a lot of my search traffic was actually wanting to know if the kids could open a Roth IRA – not the parents opening a Roth IRA for kids’ college.  To set things straight, I want to have a post that actually answers the question many folks seem to be asking.

On Thursdays I usually answer a reader’s questions (if you have a question, you can contact me), but today I thought I would answer this common search question …

Can Kids and Teens Open A Roth IRA?

How old does someone need to be to open a Roth IRA?

There is no age minimum for opening a Roth.  The requirement (as far as kids are concerned) is that contributions to a Roth IRA must be from eligible earned income, and contributions cannot exceed annual income.

Translation – if your kid does not earn any money, you cannot open and fund a Roth IRA for them.  However, if your kid has a part time job, she can contribute up to 100% (maximum of $5,000) of her income into the Roth.  Therefore, if she makes $2,000 per year, she cannot contribute more than $2,000 annually. 

Remember: Kids are still subject to the same contribution limits as adults.  So in 2010, a single person cannot contribute more than than $5,000 to a Roth IRA.

However, some brokerages, like Fidelity as an example, may require your child to be 18 years old.  In that case, you need to find a broker who will allow them to open an account.

Can I pay my son or daughter to do work for me so I can get them a Roth?

Due to IRS scrutiny, (and your own integrity) you cannot pay a child to do household chores.  Here are some guidelines:

1. If you are going to pay a child for services, it must be a job you would otherwise pay someone else to do.  The pay must be in line with a reasonable pay schedule, and there should be records kept. 
2. It is best if your son or daughter provides similar services to other clients.  If you are the sole client, the earnings are a lot more questionable (can you really prove it is work, not chores?). 
3. It should be a legitimate work situation.  As such, it would be inappropriate to pay your kid to clean his or her room just so they could use that money to contribute to a Roth. 
4. The payments should be reasonable considering the service rendered.  You can’t pay little Steve $3,000 to cut the grass.  However, if Steve has a lawn cutting business and records his hours and you pay him something in line with minimum wage, then this would satisfy IRS requirements.
5. Is your child old enough to deserve a wage?  Paying a six year old to ‘weed’ may be a questionable practice.  However, once a child is around 12+, they can probably start doing some legitimate work outside the scope of regular household chores.  Is someone else first willing to pay your child for their services?  If your neighbor won’t pay your kid to cut the grass, (because he or she is too young) then you probably shouldn’t either. 
6. Keep the relationship as professional as possible, as transparent as possible, and as legitimate as possible.  Exclude anything that would be considered ‘typical’ household work.

Be sure your child has a record book with who the work was done for, when it was done, and what he or she was paid.

Here are some more common Roth IRA kids questions.

Is a Roth IRA a Good Idea For Kids?

Absolutely.  With a Roth, the younger the better because Roth gains accumulate tax free.

The Roth is very flexible (as compared to other retirement options).  As an example, your kid could use, without fees, money saved in a Roth to help fund their own college.  In addition, your child can deduct up to $10,000 tax free when they buy their first home. 

In many ways, the Roth IRA can serve as a savings account for many different things. 

Remember, if your child wants to buy a car, they cannot use funds, (without paying a 10% penalty on gains) so they would need to do some other saving in a separate account.  Kids should be buying cars with cash because car loan payments are way too expensive. 

Do anyone have a child who has a Roth?  Do you think using a Roth for teens and younger kids is a good idea?

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Don’t time the markets because you’re probably not smart enough to time the markets. 

Sorry.  I guess I’m being a tad judgmental.  Let me simply say, I’m not smart enough to time the markets.  Neither are about a million other super intelligent people (unfortunately, most didn’t know it until it was too late).

Since your emotions are the greatest enemy of successful investing, you need a system and a structure in place to help you navigate the emotional waves of investing. 

Many people use a simple and effective strategy called dollar cost averaging.  This is a great way to start investing.  However, today I want to introduce you to another simple, yet effective, investing strategy called – value averaging.

Most importantly, value averaging has been shown to consistently provide better returns than dollar cost averaging. 

What is Value Averaging?

Value Averaging is an investing strategy where the amount you invest is determined by the current condition of the market.  This might sound like market timing, but instead it is a disciplined investment strategy that helps you purchase more shares when shares are lower.

When the market is strong, you will not put as much money into the market.  When the market is weak, you put more money into the market.

Value Averaging is based on the investment research done by Michael Edleson. 

How To Start A Value Averaging Investment Strategy

When you start value averaging, you will need to answer two important questions:

1. What is your total savings goal?  In other words, how much money do you want to have saved and by what date?
2. What rate of return can you reasonably expect? This illusive number should probably be between 8-10%.

Implement a Value Averaging Investment Strategy by Creating an Investing Path or Road Map

Now that you have your investing timeframe and dollar amount, you simply do reverse calculations to determine how much money you should save each year.  These yearly amounts make up your investing path.  This will be your personal investing plan. 

An Example:  Joe and Jill Investor

Joe and Jill investor want $30,000 in ten years.  Joe and Jill expect an average return of 8%.  Assuming an 8% rate of return they would need to invest $2,000 each year for the next 10 years.

Their investing road map would look like the following:

To simplify this example, let’s assume that Joe and Jill track their investing progress at the end of each year.

Joe and Jill At Year One

Let’s say at the end of year one the markets were really strong and their investments were up 15%

This means they would end the first year with $2,300 (($2000*.15)+$2000)).  Since, according to their ‘investing path’, they need a $2160 balance at the end of the first year, they should invest $1860 into the market and $140 into a high interest saving account. 

Summary at the start of year two:

Invested:  $4,160.00  / High interest saving account $140.00

If Joe and Jill get an 8% rate of return, they will be on track.  If it is less, they will fall behind their investing path.

Year two was a slow year and the markets only gained 6%.  Their investment ($2,300+$1,860 @ 6%) is now worth $4,409.60.  The total at the end of year two should be $4492.80.  They are officially behind their ‘investing path’.  Now they will need to add the full $2,000 contribution plus and extra $83.20 to help them get back on their ‘investing path’.

Summary at the start of year three:

Invested: $6409.60 / High interest checking account $56.80

On and on the cycle would go adding extra or adding less investment dollars into the market to help you keep on track to be sure you will reach your financial goal.

How often should you check your investing progress?

You can made this determination based on your own preferences.  It certainly does not need to be done more than once a month, but waiting more than once a year would be too long.  Some people prefer quarterly.  The more frequently it is done, the better. 

Value Averaging Investment Strategy Vs. Dollar Cost Averaging Investment Strategy

Advantages of Value Averaging

Value Averaging offers better returns than dollar cost averaging

With dollar cost averaging, you are always investing the same number of dollars each and every month (statement updated 5/3/10).  Value averaging forces you to buy less shares when the market is higher and more when it is lower.  Thus, it is an investment strategy that puts a structure to the old advice – buy low, sell high. 

I won’t rehash all the dry numbers, but if you are interested in the numbers, statistical evidence, or more information, you can download the following (free) pdf by Paul Marshall – A STATISTICAL COMPARISON OF VALUE AVERAGING VS. DOLLAR COST AVERAGING AND RANDOM INVESTMENT TECHNIQUES.

Disadvantages of Value Averaging

1. More work is involved. 

   While you can automate your payments with a dollar cost averaging plan, you cannot with value averaging.  Each month, quarter, or year, you will need to check your progress in comparison to the investing path.  You will then need to make the necessary adjustments.

2. Your investments might fall too far behind your investing plan.

   If you started value averaging at the start of 2008, by the end of the year rather than being up 8%, you would be down 35%.  You might not have the money necessary to buy enough shares to get your investments back to the anticipated amount determined by the investing plan.  If, however, you could have made up the difference, your value averaging would have paid off nicely.

3. The amount needed might be too hard to estimate.

   Let’s say you are a young person saving for retirement 40 years down the road.  There are so many retirement variables that it would be almost impossible to have an accurate value averaging plan.  However, the closer you are to your deadline, the more feasible your estimates become.

4. It is difficult to guess the right expected return.

   Will you get 6%, 8%, 10%, 12%?  If possible, the lower you estimate, the more likely you are to reach your intended goal.

While value averaging does have some disadvantages to dollar cost averaging, it should in the long term outperform a dollar cost averaging investing strategy.  It is a viable option for those who are disciplined and willing to do a little extra work. 

Do any of you use a value averaging investment strategy?  Is it worth the extra time involvement?  Does it sound like a good strategy to you?

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On Friday’s I answer a readers question.  If you want to ask a question you can contact me.  Recently a reader asked a very important and broad question – how do I start investing?

For many, the investing world is a maze of complexity.  But it does not need to be so intimidating.

In this post, I’m going to try and track back about 15 years ago to when I first invested in a mutual fund.  Knowing what I know now, what would I have done to start investing?

Education and knowledge

Time period: 2-4 months

Key topics to focus on: How does the stock market work?  What is a mutual fund?  What are mutual fund fees?  What is an index fund?  What are the risks associated with investing?

Before I invested a single penny in anything other than a bank CD or a high yield checking account, I would take a significant amount of time to learn general investing lessons.

Specifically, I would read The Total Money Makeover to be sure I was in the right place to be considering investing, and then I would read the Sound Mind Investing Handbook.  The SMI handbook is packed full of great introductory material to investing. If I can understand it, then you can understand it.  In this stage a subscription to the Sound Mind Investing Newsletter can also give you access to tons helpful investing information.

During the education and knowledge stage, I would also try and find where I am on the risk temperament scale and learn about my personal investing weaknesses.

Index Funds, Mutual Funds, Bonds, or Single Stocks

Time period: 2 weeks

In my retirement accounts, I own 100% mutual funds.  However, you will need to set the allocation based on your personal preferences.  The closer you are to retirement, the more important bonds become.

However, if I had to go back as a starting investor, I would go with Index funds.  When you are just starting out, index funds leave the least amount of room for regret.  At least you know you’ll never do much better or worse than the market.

Moreover, I’d avoid single stocks.

Decide between investment vehicles.

Time period 2 weeks

Key topics: What is the difference between a taxable and a non-taxable account?  Which is better for me: a Roth IRA or a Traditional IRA?  Does my employer offer a 401K match?

While there is going to be a lot of information to digest in a month, you should have a fair idea regarding your best investment vehicle.

Personally, I use a Roth IRA because I’m in a low tax bracket right now since I don’t make enough money.  There is a good possibility that I will be in a higher tax bracket at retirement, so I’ll pay the taxes now.

Find an online broker or financial advisor.

Time period: 2 weeks

I don’t use a financial advisor any more.  I fired my financial advisor because of the excessive fees.  That doesn’t mean financial advisors are bad, but I think as an investor who is educated, patient, and disciplined you can do a reasonable job selecting your own funds.  If you do prefer to find a financial advisor there is nothing wrong with that.

Key topics: Check out TD Ameritrade, Fidelity, Charles Schwab, Vanguard, and First trade.  Find out what their fees are for your investment vehicle (taxable or non-taxable account).  What are their funds’ annual operating expenses?  How much does it cost to buy and sell shares?  What is their customer service like?

Just set up a spreadsheet with all of these columns and visit their sites to see what they are offering in terms of pricing.

If you decide to go with index funds, you can just find a brokerage that offers the lowest transaction fees.  Vanguard is consistently mentioned as the best company in terms of ease of access, low fees, and product offerings.

Start today.

Time period: 1 day

At this point, you know what you need to know.  You’ll try and convince yourself that you don’t know what you are doing.  This may or may not be true.  However, at this point you can only learn the rest of the stuff by just doing it.

Decide how much money you will invest on a monthly basis and set up automatic payments.

Most online accounts will allow you to tell them the amount of money you want taken from a designated bank account to be used to purchase a designated amount of shares.

Automation is the key to the success of your financial plan. Here’s why I don’t time the market.  Are you smart enough to time the market?

To make things simple, I’d just have “x” number of dollars set to buy on the 1st of every month.

Dollar Cost Average.

If you follow the steps above, you are naturally doing this.  Make sure that you contribute the same amount of money and purchase shares regardless of the share price.

Change nothing for 3-5 years.

I think individual investors are the greatest enemy to a healthy investment portfolio.  If I had to go back, I’d get everything set up and pretty much ignore it.  You’ll learn some great investing discipline, and you’ll also learn at lot about your true investing risk temperament.

Ignore any financial news or advice.  Stay on your plan for 3-5 years.

Develop a personalized investing plan.

After investing for 3-5 years, you might decide to spice up your portfolio.  Perhaps you want to increase risk in order to get a better return.  With at least a few years of investing experience, you are in a better position to make some of those choices.  I would never, however, put an entire portfolio at risk.  Limit your exposure to 10-15%.  If you are young your retirement planning should just be about starting and learning.

Remember that a simple investing approach will do wonders over your lifetime if you just leave it alone.

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“If I exchange mutual funds do i still have to pay taxes?” Understanding the tax implications of your investments will help you appropriately structure your personal investing strategy in order to maximize your returns.

This post focuses on non-tax sheltered investments so it includes any regular (non categorized) investments.

What Are Capital Gains?

A capital gain is money you make from the sale of an investment (we will speak strictly of mutual funds in this post).

Let’s assume you invested $50,000 in a non-tax sheltered investment account.

That mutual fund grows to be worth $75,000 when you sell it.

You now have a capital gain of $25,000 ($75,000 – $50,000).

You must pay capital gains on this $25,000.

The capital gain rates vary depending on how long you own the mutual fund.

Short-Term Capital Gains Tax Rates

A short-term capital gain applies to investments that are held for less than one year.

Short term gains are currently taxed at your ordinary income tax rate (up to 35%).

For example, if you had $100 in short-term capital gains and you were in the 15% bracket, you would pay $15.00 in taxes. If, on the other hand, you were in the 35% bracket, you would pay $35.00.

Long-Term Capital Gains Tax Rates

A long-term capital gain refers to an investment that has been held for more than one year.

For tax payers in the 10%-15% bracket, there is no tax. That’s right – as of 2008, your rate is zero percent.

For tax payers in the 25%, 28%, 33%, and 35% brackets, the taxes paid on a longer term capital gain is 15%.

For example, if you were in the 35% bracket and you had a long-term capital gain of $100, you would pay $15.00.

As you can see, there are a lot of advantages to holding your investments over one year. Besides, not timing the market is a good investment strategy.

Important Tax Implications For Mutual Funds

1. You can pay capital gains even when you don’t sell a mutual fund. This is because within the mutual fund, stocks are beings purchased and sold. Even though you have not sold your mutual fund, the stock funds held by your mutual fund have been sold. You will have a tax liability for your portion of the capital gains based on the number of shares you have. The mutual fund company will send you a statement at the end of the year letting you know how much your capital gains are.
2. When a mutual fund receives a distribution, (like a dividend) you are responsible for your part. Since most mutual funds pay out distributions in December, you are often better off waiting until January. Here’s why. If you bought $1,000 worth of a share Dec. 1st, and then on Dec. 15th you received a short term gains distribution of $45. You are now liable to pay taxes on a $45 gain. If you waited until January you would not be responsible to pay taxes on the $45 gain.
3. You don’t make money with a mutual fund distribution. Consider the example from #2. You might think it is cool that you just got $45. However, if the share was worth $1.15 and they decided to pay out a .15 cent distribution per share, your share is now only worth $1. In other words, your money was shifted and transferred, but you didn’t make any money. It is not a wise tax move to try and get in before the distribution.
4. Your mutual fund company will send you a 1099-DIV. This form lets you know exactly how much tax liability you have for both short and long term capital gains.
5. Mutual funds that have higher turnover rates will likely be subject to more short term capital gains. The more money you make, the bigger this factor becomes. If you are in a high end taxation bracket, you might even consider something with less turnover like an index fund.
6. Your tax liability is not what you sell a share for minus what you bought it for. If you do not add the cost of the additional shares purchased and dividends, you will effectively be taxed twice. Because of the possible disadvantage, you may be better off not reinvesting your dividends (in non-tax sheltered accounts).

General Mutual Fund Information

• There are tax fee mutual funds.
• When feasible, always choose a tax sheltered or deferred account like a Roth IRA or Traditional IRA.
• If you do not receive your 1099, you should contact your broker or mutual fund company.
• Information can be verified or obtained directly from the IRS – www.irs.gov.

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Beware, financial geeks. You’re not going to like my answer to the question, “Should I pay off my mortgage or invest?“  Not to worry, I’ve since gone back and added the math analysis | should you pay off your mortgage?

I’m making a few assumptions as I begin this post.

Pay Off Mortgage or Invest?  Starting Assumptions

• If you’re asking this question, you’re in great financial shape.
• All your consumer debt is paid off.  If you have an auto loan, pay that off first before entertaining this question.  Your credit cards need to be paid off before this is anything to worry about.
• You are contributing a minimal or reasonable amount to retirement.  I’d put the minimal at 10% and reasonable at 15%.

Four Steps To Help You Know If You Should Pay Off My House Mortgage or Invest

With those assumptions in place, here is how I’d suggest you make this decision – invest or pay off the house mortgage.

Step #1 – Put all pens, papers, and calculators away.

Step #2 – Ask your husband or wife to join you on a walk

Step #3 – Ask each other this question – Would you rather pay off the house early or have extra money in investments?

Step #4 – Do whatever you feel like is the best choice, whatever you feel called to do, and whatever you think honors God.

Disclaimer: This approach is not transferable to other financial decisions.  If you are upside down in debt, do not make your financial decisions based on what you feel like.  This, instead, is a luxury offered only to those who are financially responsible and who have a proven track record for making wise financial decisions.

Why Paying Off the House Early is Not a Math Decision

One of the deadly sins of personal finance is the mindset that whatever makes more money is the best decision.

Instead, the best decision is the one that takes you further down the road according to your life goals.

My goal is not to accumulate as much money as possible.  Money is not the destination, but a vehicle to get me to where God wants me to be with my money.

For example, the decision to live debt free has more to do with the emotional impact than it does with the mathematics.  Interestingly, the math may drive the decision – you feel awful paying all that money (interest) to someone else.  That feeling of disgust will lead you to pay off your debt.  When the debt is paid off that feeling of disgust will be replaced with a feeling of satisfaction.  How you feel about your money is much more valuable than how much money you have.

Why I’m Paying Off My House Early

Here’s the thing.  I’d rather not lose x% of my money even if I could gain X% + 2.  What does that mean?  Let’s say you have a home loan at 6% and you feel confident that when everything clears (taxes, and fees) you can make 8% investing in the stock market.  Personally, I’d feel better knowing that I’m not paying someone $150 in interest every month, even if that means I miss out on the chance to make $170 in interest.

Does that make mathematical sense?  Nope. But, I don’t care.  I don’t like paying interest to other people so I’m going to deal with that first.  Later I may invest some of that money, but for now I get a bigger emotional payoff by paying off the house than I do by watching my investments grow in the market.

Are You Being A Good Steward If You Pay Off The House Early?

Is someone being a poor steward just because they don’t run the numbers?  I don’t think so.  God doesn’t require his children to be accountants, just to make him happy.  To be a steward is to responsibly use the resources you have.  If you are thinking about paying off your house early or doing extra investing you are a good steward.  Poor stewards don’t get to make these kinds of choices.

Well, there it is.  An entire post on paying off your home versus investing without a single mathematical equation.

Now, here’s how to pay off the mortgage early.

Photo by Okie Dan.

Any thoughts?

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The Bible has little to say directly in reference to investing.  Nevertheless, there are a lot of general biblical principles that can help guide the Christian investor. 

Investing can be a means of:

1. Faithfully using your resources (Mt. 25:14-30)
2. Ensuring the provisional needs of your family (1 Tim. 5:8).

Matthew 25:14-30 records the words of the well known Parable of the Talents. Of course, this discussion is much broader than the apparent discussion about handling money. Nevertheless, the foundational idea is that when we are entrusted with something from God.  God wants us to responsibly handle that which he has entrusted to us. 

We could apply this to anything from spiritual gifts to money.

How Much Investing Risk Should Christians Take?

Investing is an area where a person cannot enjoy successes without basic knowledge. Since our money has been entrusted by God, you should have a basic knowledge of the investing world. Dave Ramsey rightly advises, “Never invest in something you do not understand.”

Two Investing Dangers

The first is completely avoiding risk and thus avoiding any potential for positive gain. In the story of the talents the one man was chastised for burying his talent.  With inflation and devaluation you might just end up behind where you started.

The second danger is assuming too much risk which could result in a complete loss of what you have been entrusted.

The clear goal is to balance risk and reward and make decisions based on the likelihood of success.

While this one page overview will not allow me to expand, let me quickly say this is achieved (increase the likely hood of investing success) by properly diversifying (spreading investment out) and increasing your investing timeframe. The more properly diversified your account is and the longer your timeframe, the higher likelihood you have that you will meet your goals successfully.

It is essential for Christians to have proper investing boundaries.

The Sound Mind Investing Handbook proposes that we need boundaries because of impure motives, limited vision, powerful emotions, and flawed wisdom. Mechanical guidelines help keep us within the proper limitations.

Like each element in this biblical money tree, your purposes and intentions are tantamount to determining if your actions are biblical. Essentially, through investing you can take the little you have and maximize its earning opportunity in order to benefit God’s kingdom by placing the gains in service to God’s kingdom. Ultimately, Christians are not required to invest and some Christians may have legitimate reasons for not investing.

Nevertheless, do not allow ignorance be one of those reasons as ignorance can be solved by a little education. On the other hand, investing and investing gains can become such a focus that we do truly hunger and thirst for that more than we do righteousness (Mt. 5:6).

Invest it, monitor it, but do not obsess over it.

Do not wear yourself out to get rich; have the wisdom to show restraint. (Proverbs 23:4 NIV)

Photo by epicharmus.

FYI – I’m on vacation until Friday night (EST) so if you’re a first time commenter I will moderate comments at that point.  If you are a regular commenter, your comment will post immediately.

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What is Forex Trading?

It refers to the process of trading foreign currencies.  Forex is an abbreviation of the term ‘foreign exchange’.

How is Forex traded?

The market opens Sunday evening at 5 p.m. Eastern Standard Time and remains open until Friday at 5:00 p.m. EST.

Remember, in the world of forex you do not physically exchange currencies.  If you are looking to purchase actual (physical) cash in other currencies you will need to use another platform for purchasing foreign currency. 

To be clear, if you are going on vacation and need to buy Euro, you would not use the forex market (though that impacts your price) because you would not actually have the physical currency to spend on vacation.  This guide on the cheapest way to exchange foreign currencies will be more beneficial for your needs.  If you prefer to purchase physical currency, a platform like XE.com may be a better option.

How do you make money trading on the forex market?

The concept behind forex trading is relatively simple.  Purchase currencies that are increasing in value.  The stronger the value of your currency holdings, the more money you make.

Example:

You use $1000 USD (United States Dollar) to purchase 714.29 EUR (Euro).  The USD to EUR rate is 1.4.  In other words $1.40 USD will buy one EUR.

Assume that two months later the USD to EUR exchange rate is now 1.5.  You would still have 714.29 EUR, but that now only represents $666.66 because the value of the USD strengthened in comparison to the EUR.

If the currency you are holding becomes stronger, you make money.

Forex trading is all about how currencies move in relation to each other.  There is not a standard value against which a currency is measured.  The only way to know the value of your currency is in comparison to another.  At any given time one currency will be increasing in value as compared to one currency and decreasing in value as compared to another currency.

Why are their two sets of numbers (inverse) for each currency set?

At times you will see something like the following:

1.74 USD/GBP – This rate tells you how many USD (1.74) it will cost you to buy one GBP.

or

0.5730 GBP/USD – this rate tells you how many GBP (.5730) it will cost you to buy one USD.

How do I calculate how much of another currency one currency will purchase?

While all online platforms and calculators can make the calculations for you, the numbers are calculated as follows:

If EUR is worth, for example, 1.4 USD, you would get 7,142.86 EUR for 10,000 USD (10,000 ÷ 1.40 = 7,142.86)

Is Forex trading risky?

Yes.  Extremely.  The problem with Forex trading is that there are so many variables in place.  In my opinion, it is almost impossible for the average investor to know, understand, and interpret all those moving parts. 

The forex world is a volatile place to invest your money.

What factors influence the value of a currency?

Currencies move based on governmental policies, perceived strength of certain currencies, economic conditions of countries, export and import needs, trade deficits, stock market performance, interest rates and politics.

Why is trading forex becoming more popular?

Theoretically, there is money to be made every day – a lot of money.

Get online and scan your paper and you will notice that certain currencies have drastic increases and decreases.  This excites the average person into falsely concluding ‘if I had bought “x” currency when it was worth “y” then I’d be rich.  It appears simple, but it is not.

Can anyone participate in the forex trading market?

Yes.  With the development of technology you can sign up for your own forex investing account on the internet.

There are forex advisors who will try to help you identify currencies with potential.  This, however, is an extremely difficult thing to do because of the many factors that influence the value of a currency (see above).

Is forex investing a good way to protect yourself against a declining US dollar?

Theoretically, the answer is yes – as long as the value of dollar continues to decline.  That, however, is a question only speculators know.  There may be indicators, but there is no certainty as to the future direction of the USD.  Therefore, while it is a viable option, it is also a risky one.

How do I get started with Trading Forex?

If you decide Forex trading is ideal for you, find a good trading platform.  You could look at Zecco.com or review a list of possible trading platforms. 

Is the $50,000 practice currency trading account at Zecco.com a good idea?

Absolutely not.  This encourages you to experiment.  Not a bad idea, right?  The problem is that everyone who makes money (in the short term) will think they are prime material for forex trading.  Your ability to successfully invest $50,000 of play has no relationship to your ability to successfully manage your own money over a long period of time.

How much of your investment portfolio should be used in the forex market?

Because of the risk involved your forex exposure should not exceed 5-10% of your total portfolio.  One must also consider the amount of foreign stock or mutual fund holdings in their portfolio as these holdings are already moving somewhat in relationship to the forex market. 

For most people, the following five tips will help reduce your exposure to a declining dollar.

This post contains affiliate or advertising links – get more information.

Photo by rixbaby.

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Sound Mind Investing (SMI) Newsletter is America’s best selling financial newsletter written from a biblical perspective.

I have been an SMI subscriber for a year and a half and I have been very impressed with the quality of the material.  The articles are well written and very timely to current market conditions.  Since those who work with the newsletter are Christians I feel like the articles have already been filtered by Christians.

In fact, Mary Hunt’s comments at the introduction of the The Sound Mind Investing Handbook – A Step-By-Step Guide To Managing Your Money From A Biblical Perspective 5th Ed mirror my thoughts on both the SMI book and the SMI newsletter.  Mary Hunt writes:

In the same way that I’m not economist, I’m not exactly an investment wizard either.  That’s why I’m a huge fan of Austin Pryor, author of The Sound Mind Investing Handbook.  … Everything I know about investing I learned from Austin Pryor.

Today I want to introduce you to the SMI Newsletter.

The Sound Mind Investing Newsletter

Each 16 page newsletter is broken down into the following major sections / categories:

Cover Article – Here are the cover article titles for 2009

Is a College Education Still Worth the Investment?, The Richest Man in Babylon, Almost Too Good To Be True, How to Avoid Panic and Reduce Fear, Protecting Yourself Against “The Big One”, A Dollar in Danger Leads Many to Gold, Investing with Rising Inflation in View, Making Money From Home, Biblical Wisdom For Giving, and A Road Map For Investing in Gold.

Editorial – comments by Austin Pryor (founder of Sound Mind Investing)

Level One Article – addresses those who are working towards becoming debt free.

Level Two Article – addresses those who are in the process of building an emergency fund.

Level Three Article – addresses those who are venturing into the world of investing and who are setting aside money for retirement.

Level Four Article – addresses those who are dealing with an investment portfolio in excess of $25,000.

Recommended Funds: Each month SMI suggests mutual funds that are performing well against their peers.

Money Talk – deals with financial discussions in the news.

Looking Ahead – General financial planning suggestions.

Additional features, benefits, and products:

The Newsletter offers both a traditional print subscription or an online subscription.

Online members have access to a members only blog with investment news, 401(k) tools, several investing strategies, fund performance rankings, and more.  You will also have access to eight additional free special reports.

SMI describes their community boards:

With over 10,000 members, our message boards are a great resource for getting questions answered, gaining valuable input on financial issues and decisions of all types, and a place where you can share your knowledge on a particular topic or just offer an opinion on a recently written article or blog post.

There are many additional features and benefits to SMI, but I won’t take the time to introduce everything.  You can visit their site and get more details.

Web Membership: A Web Membership delivers each complete issue of the printed newsletter in electronic form. Plus Web Members get additional valuable benefits: early access to new issues, use of SMI’s 401(k) Fund Tracker, a monthly update of our Fund Performance Rankings, information on our Advanced Strategies, access to our content archives, Member’s Forums and Editors Blog, and more.

Why I first subscribed to the SMI Newsletter:

• After about a decade of investing through a financial advisor I was ready to have more direct control over my own investments.
• I am looking for investment, teaching, and education along with guidance.  SMI provides both some structure and flexibility to your investing plan.
• Superior investment Returns: When I was considering my investment options I went back and dug through my previous five years of investment performance.  In each and every account SMI Upgrading outperformed (at times significantly) my current investments.  This was not a short term streak, but each year over a five year period.

• Lower overall maintenance cost: When we made the change to following some of the SMI strategies we had two Roth IRA accounts, 1 ESA account (with one on the way), and a general funds account.  Each account came with its own layer of fees.  With SMI I paid for the newsletter and was able to handle all the investing by myself.
• Free Trial – Hey, I like for free trials.  During my two month free trial I downloaded every article for the last three years.  I have now read every word of every article and found the information extremely formative to my understanding of investing.  I don’t see the free trial as a current offering, but there is a 100% MONEY BACK GUARANTEE. You must be completely satisfied. If SMI doesn’t live up to your expectations for any reason, just cancel during the first three months and receive a full cash refund of the print subscription price, no questions asked. You risk absolutely nothing!*
• Appealing options for smaller accounts with a huge amount of diversification.  SMI has a mutual fund called SMIFX.  This mutual fund is different than most because it owns a batch of other mutual funds, not a batch of other stocks.  Thus, each SMIFX share represents ownership of at least 20 different mutual funds.  This was especially appealing for smaller ESA accounts.
• Because of my age, I was looking for a higher risk/reward component to add to my investing plan.  The SMI sector rotation strategy provided that missing ingredient in my investing plan.

*Updated: It is important that you personally verify to see if  the above offerings/benefits are still current offerings.    To verify information please visit the SMI website and contact them directly.

*Updated 2/3/2010 – I removed some information regarding TD Ameritrade that is no longer valid. 

Three reasons not to subscribe to SMI:

I would not subscribe to SMI if any one of the following applied:

• You feel that the Bible teaches Christians should practice faith based investing.
• If you are new to investing.  I’ll preface this by saying that subscribing might be a good decision, but at least for the first few years I would use an advisor who will give you some guidance.  If you want to learn more about investing and the market, then the newsletter subscription would be of value to you.
• You are paying off debt and do not plan to actively invest over the next few years.  Even though SMI does have an article that addresses those in this category, you would be better served focusing your time reading material like The Total Money Makeover: A Proven Plan for Financial Fitness or Debt Free Adventure.

Cost:

The Sound Mind Investing Newsletter costs $79.00 per year.  If you also want to add a web membership you will pay an additional $4.50 per month.

If you prefer to get just the web membership (you can download the newsletter online plus access to a ton of other information) the cost is $8.95 paid month by month.

Obviously for those who are comfortable with the Internet I recommend the web membership.

From the SMI website:

The average price of the financial newsletters featured in the authoritative Hulbert Guide to Investment Newsletters is $234 per year. Our Print Subscription + Web Membership costs just $133 per year making SMI an unbeatable bargain. Your total annual cost, including the web membership, is $100 less than typical investment newsletters.

I highly recommend the web membership as you will have access to three years of archived newsletters.  That is a ton of valuable resources for this already low price.

This post does contain affiliate links.  I have been a user, subscriber, fan, and promoter of the SMI team before they introduced their affiliate program.  You can read this post where I talk about why I fired my financial advisor.  In that post I explained that I subscribe to the SMI Newsletter.

Anyone else subscribe to the Sound Mind Investing Newsletter?  What do you think?

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